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Illinois Supreme Court Reverses Third Circuit and Weighs in on the Lienability of Pre-Development Engineering Services
by Erin E. Krejci
On September 23, 2015, the Illinois Supreme Court heard argument in Christopher B. Burke Engineering, Ltd. v. Heritage Bank of Central Illinois — a hotly contested debate over the lienability of pre-development engineering services. On November 19, 2015, the Illinois Supreme Court rendered its opinion and provided some much needed guidance on two key mechanic’s lien issues: (1) the appropriate inquiry for the lienability of “non-sticks and bricks” engineering services; and (2) factors to consider when interpreting the phrase “knowingly permitted” in the context of contracts entered into with non-owners of the property at issue.
The Factual Background
The dispute centers around the services provided by Christopher B. Burke Engineering, Ltd. (“Burke”). Burke performed pre-development engineering work between April 2008 and March 2009 on certain real property pursuant to a contract with Glen W. Harkins and Carol Harkins (the “Harkins”). According to deposition testimony, the Harkins intended to develop the property into a residential subdivision and engaged Burke to, among other things, plan sewers and roads and prepare a final plat for the purpose of preparing the property for residential development.
Notably, at the time of the contract, the property at issue was not owned by the Harkins. Instead, the property was owned by Carol Schenk (“Schenk”). In her deposition, Schenk admitted that prior to selling the real property to the Harkins, the Harkins informed her that Burke would be performing engineering work on the property.
Burke conducted various pre-development engineering work on the property and was eventually instructed to discontinue its work by the Harkins. Though one house was built on the property, the Harkins decided not to pursue the residential development as planned — citing the declining economy as the driving force behind the decision.
The Mechanic’s Lien Foreclosure Complaint
Due to non-payment, Burke recorded a mechanic’s lien on the property. On October 29, 2009, Burke filed a complaint to foreclose its mechanic’s lien. In addition to the Harkins, Burke named additional defendants, including Heritage Bank, which provided the Harkins with the financing to purchase the property in exchange for a mortgage interest, and Donald and Ann Allison (the “Allisons”), the purchasers of the one completed house on the property.
Burke had quite the fight on its hands. First, the Allisons filed a motion to dismiss Burke’s complaint, arguing that Burke’s lien contained an inadequate legal description. The circuit court granted dismissal and Burke appealed. On appeal, the Third District held that a question of fact existed with regard to the adequacy of the legal description contained in Burke’s lien, reversed the dismissal and remanded the matter for further proceedings. Following remand, the Allisons entered into a settlement with Burke.
After the Third District’s remand, the Harkins filed for bankruptcy protection. The settlement with the Allisons and the Harkins’ bankruptcy filing left Heritage Bank as the lone remaining defendant.
Heritage Bank launched its own challenge to Burke’s complaint. Heritage Bank filed a motion for summary judgment arguing that Burke’s lien was invalid because: (1) the owner of the property at the time of the contract did not knowingly permit Burke’s work; and (2) the services rendered by Burke did not “improve” the property. The circuit court granted Heritage Bank’s motion, stating that “the uncontroverted facts show that there was not an improvement to the land and there was no encouragement or inducement by the landowner whatsoever.”
The “Lienability” Appeal To The Third Circuit
Burke again appealed to the Third Circuit. The Third Circuit affirmed the circuit court’s grant of summary judgment, stating that its review of the record reveals “no error in the circuit court’s finding that [Burke] failed to establish that its work improved the property at issue.”
Justice Lytton issued a lengthy dissent wherein he concluded that majority’s decision was in error. Justice Lytton first noted the purpose of the Illinois Mechanic’s Lien Act (the “Act”): to protect those who, in good faith, furnish material or labor for the improvement of real property. Second, Justice Lytton challenged the majority’s assessment of lienability, finding that the appropriate inquiry is whether the services were provided “for the purpose of improving” the subject property. Crowen v. Meyer, 342 Ill. 46 (1930). Lytton’s most pointed argument was that the majority’s conclusion renders meaningless the Illinois legislature’s 1951 amendment that specifically allows for liens for the performance of services by “professional engineers”.
The Illinois Supreme Court Oral Argument
On May 27, 2015, the Supreme Court of Illinois granted Burke’s petition for leave to appeal. On September 23, 2015, the Court heard oral argument.
Burke’s arguments before the Illinois Supreme Court largely tracked Justice Lytton’s dissent. Specifically, Burke argued that the trial court and the Third Circuit’s decisions “effectively eviscerate” the mechanic’s lien protections specifically granted to design professionals by the Act. Burke highlighted that under the Act, “an architect, structural engineer, professional engineer, land surveyor or property manager” who performs “any services or incur[s] any expense” for or on a tract of land for the purpose of improving the tract of land is entitled to a lien.
Burke further argued that the lower court applied the wrong “test” of lienability. Burke asserted that the trial court and Third Circuit improperly hinged their respective analyses on the concept of “improvement” to the land — when the focus should have been whether the services that Burke provided were “for the purpose of” improving the property. Burke relied heavily on Crowen v. Meyer, wherein the court ruled that the language of the Act “gives to the architect a lien for services rendered for the purpose of improving property” and that the architect was entitled to a lien for the plans and specifications he prepared for a building that was never constructed. Id. Burke argued that the Crowen test is the only test that makes sense for “non-sticks and bricks” service providers like professional engineers, land surveyors and property managers who are not always involved in traditional “improvements” under the Act, like the raising or lowering of a physical structure.
Heritage Bank argued that the lower courts appropriately evaluated whether or not Burke’s services constituted an “improvement” to the land. Heritage Bank asserted a technical argument — focusing on the punctuation in section 1(b) of the Act. Specifically, Heritage Bank noted the use of semicolons in the following excerpt of section 1(b) of the Act:
; or raise or lower any house thereon or remove any house thereto, or remove any house or other structure therefrom, or perform any services or incur any expense as an architect, structural engineer, professional engineer, land surveyor or property manager in, for or on a lot or tract of land for any such purpose;
770 ILCS 60/1(b). Heritage Bank argued that the punctuation in section 1(b) requires professional engineers to demonstrate an actual improvement to the property — something akin to the raising or lowering of a structure in the traditional “sticks and bricks” sense. Notably, the Court asked Heritage Bank to explain how it’s “raising or lowering” of a structure argument could be reconciled with the Act’s specific grant of lien rights to property managers and land surveyors. The Court asked how a property manager, land surveyor or plat-preparing-engineer could ever obtain lien protections under the interpretation suggested by Heritage Bank. In response, Heritage Bank repeatedly argued that “strict construction” required a strict interpretation of the technical language and punctuation in section 1(b) as drafted.
With respect to the “knowingly permitted” issue, Burke argued that Schenk herself testified that she was on notice of the Harkins’ contract with Burke. Burke claimed that Schenk’s failure to object to Burke’s provision of services means that she “knowingly permitted” Burke’s work. Heritage Bank argued that Schenk’s general awareness does not rise to the level of “knowingly permitted” under the Act. The Court commented about the seemingly minimal level of Schenk’s contract awareness.
The Illinois Supreme Court’s Ruling
On November 19, 2015, the Illinois Supreme Court reversed the ruling of the Third Circuit and remanded the case to resolve unanswered material questions of fact.
Reviewing de novo, the Court noted that the propriety of summary judgment turned on the court’s interpretation of section 1 of the Act. The Court held that the lower courts’ grant of summary judgment was in error because it was based on the mistaken conclusion that Burke’s lien was invalid because Burke’s services did not result in a physical improvement to the property or calculable increase in the property’s value. Specifically, the Court stated:
…this conclusion ignores the fact that the statute provides a lien of a professional’s services result in an improvement or if the services are completed for the purpose of improving the property.
2015 IL 118955, ¶ 12.
The Court held that a physical improvement to the property or calculable increase in the property’s value is not required in order for a professional engineer to secure a lien. Echoing Justice Lytton, the Court cited to Crowen — precedent which confirms that section 1 of the Act gives a design professional a lien for services rendered “for purposes of improving” property. The Illinois Supreme Court found that there was no reason to depart from this well-established rule.
The Court characterized the strict physical improvement interpretation as absurd and illogical because professional engineers, surveyors and property managers often do not have occasion to “raise or lower” a structure. The Court further characterized such an interpretation as contrary to the principles of legislative intent because it effectively nullifies the amendment that specifically added professional engineers, surveyors and property managers to the Act. Though the Court acknowledged that the amendments to the Act may have included “minor” punctuation changes, it ultimately found that the overarching intent of the amendments was to expand the availability of mechanic’s liens, not limit them.
With this backdrop, the Court overturned the grant of summary judgment and found that Burke’s services were done for the purpose of improving the subject property and, therefore, lienable under the Act.
The Court then turned to the interpretation of the “knowingly permitted” phrase in the Act. The Court noted that the circuit court’s analysis of this phrase was improperly limited to whether or not the owner accepted a benefit. The Court cautioned that though the acceptance of a benefit is one way to show that a property owner knowingly permitted a party to contract regarding her property — it is not the only way.
The Court opined that a logical assessment of the phrase is whether the owner knew of the contract and failed to object. The Court stopped short of deciding the issue, noting that the record was not clear as to whether Schenk knew that Burke’s work commenced before the closing date; whether Schenk knew what Burke was expected to do under the contract; or whether Schenk had or would have had an opportunity to object. The Court remanded this issue to the lower court to determine whether Schenk knowingly permitted Harkins to enter into the contract pursuant to the Court’s guidance.
Conclusion
The Illinois Supreme Court’s opinion provides some much needed clarity with respect to the rights of engineering professionals (and those similarly situated) under the Act. This ruling not only sets forth the appropriate inquiry, it seems to confirm that such professionals are not subject to the whims of the parties with whom they contract, who may decide to complete the project or not. Further, this ruling seemingly confirms that such professionals will not be foreclosed from lien rights by virtue of the “non-sticks and bricks” services they provide.
The Court’s decision, however, is not limited to the reinforcement of protections afforded to professional engineers and those similarly situated. It also provides a strong caution to owners. Though the Illinois Supreme Court did not definitively rule on the “knowingly permitted” issue, the Court seemingly puts an onus on owners to be proactive when aware of pre-sale contractual arrangements.