SPECIAL PROBLEMS IN THE CONSTRUCTION LOAN WORKOUT by Stanley P. Sklar Bell, Boyd & Lloyd, LLC

THE CONSTRUCTION PROCESS - BASICS FOR THE LENDER.

Introduction.

Too often, the construction lender treats the construction loan as it would treat any other commercial loan, without anyone with significant background in the vagaries of the construction industry, ready to "pull the plug" should the loan become "out of balance." No construction loan should be undertaken by a lender without a clear understanding of the industry, the participants, the legal effect of loan and non-loan related documents, and the customs usually encountered in construction relationships.

The initial point to start is with the non-loan documents. For the reasons set forth below, every lender should review and approve the format of the construction contracts and subcontracts, since, in the event of a default by the owner or the general contractor, it may wish to utilize the same contractor (in the event of owner default) and subcontractors (in the event of a general contractor default) to complete the project. This avoids delays resulting from having to re-bid the entire project or have the contract renegotiated to the lender's detriment. The lender must ask itself, at a minimum, the following questions:

1. If changes in concept or plan occur, is it to be consulted to determine

the adequacy of the loan balance for completion of the project?

2. In the event of construction delays (which appear to be endemic in

the construction process), are there sufficient funds to pay for cost

overruns customarily associated with delays?

3. To what extent should the lender participate in the construction

process beyond the customary role of a secured creditor?

The construction contract is most critical since it establishes not only the duties and responsibilities of each party, but their goals too; i.e., the need of the general contractor or construction manager to make a reasonable profit on the project, the need of the owner to rely upon the project being completed on time and within budget, and assurance to the lender that the project will be completed in a good and workmanlike manner. The multitude of contracts available range from the American Institute of Architects (AIA) forms, the Associated General Contractors (AGC),

American Subcontractors Associations (ASA), Engineers Joint Contracts Documents Committee

(EJCDC) and other professional groups, each with their respective constituency to protect. Failure to have a lending officer or legal counsel familiar with the forms and their inherent biases will ultimately result in chaos to the lender if the project is in trouble or there is a default.

Once the contract between the owner and general contractor is executed, the general contractor then contracts with many different subcontractors who will do much of the day-to-day construction. Each subcontractor will in turn contract with its own material suppliers.

Lenders should be aware that, too often, general contractors are carried away by an

"adversarial(?)" relationship between themselves and subcontractors and insert "murder clauses" in their contracts. These clauses contain language, so onerous in obligation and so open to potential conflict, that they invite litigation by their very terms: unrealistic scheduling, which cannot reasonably be performed on a timely basis, is imposed by the owner on the general contractor, who then imposes the time limit upon each subcontractor; procedures for change orders are so

2 complicated and difficult to implement that, rather than seek the change order, the subcontractor is tempted to cut corners on the base contract; lack of provisions for equitable adjustments which take into account the truly unforeseen condition or event and prevent a fair adjustment to the contract price; and, finally, liquidated damages or period clauses imposed on the contractor for its failure to achieve the impossible.

Parties to the Construction Contract.

Who are the parties with whom the lender will come into contact from time to time? Each lender must have a clear understanding of the parties and their roles in the construction process.

Owner--The person or entity which owns the project. Generally, however, the Owner without construction experience will employ a construction manager while the Owner with some construction experience will often employ a general contractor to perform the actual construction functions. The general contractor will represent the Owner's interest at the job site; but note, it will not represent the lender.

Architect(s)--The person or entity licensed by the state to practice architecture. If the architect is employed by the Owner to design the project, it is referred to as the Owner's architect. If the terms of employment agreement so provide, the Owner's architect will also supervise the construction of the project on behalf of the Owner, in order to assure that construction is in accordance with the plans and specifications prepared by the Architect and approved by the Owner and Contractor.

The Inspecting Architect is the person or entity engaged by the lender to independently

3 check and verify that the progress of construction conforms to the plans, specifications and Contract

Documents in order to permit construction loan payments to the contractor. His responsibility is not to the Owner but to the lender, to assure the lender that the lender is paying for true construction costs and not "dreams."

Contractor/subcontractors--The general contractor is the person or entity who has been employed directly by the Owner to build or coordinate construction of the project in accordance with the plans, specifications and other contract documents. This General or Prime Contractor has the overall responsibility of construction of the job as opposed to the Subcontractor who is a person or entity engaged by the Contractor to perform a specific portion of the work, such as plumbing, excavation, heating, ventilating, and air conditioning.

Construction manager--The person or entity that performs the planning, advisory and supervisory functions that would otherwise be divided among the Architect, Owner and General Contractor is the Construction Manager. He is the agent of the Owner and can legally bind the owner to his acts.

Lenders should note this distinction between the Construction manager and the general contractor, as it will become significant when dealing with mechanics' lien claimants.

The Contract Forms (AIA)

Among the most frequently used contracts are those published by and available from the

American Institute of Architects (AIA). The most current forms are those dated 1987 and all prior editions should be discarded since the forms are a totally integrated set of documents which must be

4 used as such. Although there are many sets of documents, they are all interlinked to permit their use in an orderly and cohesive manner. The exception is AIA A401, which is the Contractor-

Subcontractor Agreement and which contains its own set of general conditions.1

No discussion of these agreements would be complete without reference to the General

Conditions (AIA Form A201) which contain the detailed provisions regarding the multitude of concerns occurring during the construction process. An area of concern to lenders deals with contractor defaults and the lenders ability to continue the project by providing at 5.4.1 for the conditional assignment of all subcontracts to the owner. Thus the project may proceed despite a general contractor default using the existing subcontractors and their subcontracts. However, it should be noted that 2.2.1 requires an owner, upon the contractor's request, to furnish satisfactory evidence that there are sufficient funds available to complete construction and to furnish sufficient information to the contractor to permit it to perfect its claim for mechanics' liens.

Lenders should carefully review Article 7 dealing with change orders since it now creates two new formats: The customary written change order signed by owner, architect and contractor

(but not the lender), 7.2.1, and the Construction Change Directive signed by the owner and architect, but not the contractor, 7.3.6. Lenders should consider modifying these provisions to provide that all change orders must also be approved by it in writing to assure the lender that changes will not cause the loan to go out of balance (whatever that means).

With regard to claims procedures, a significant change has been made under Article 4. As a result, any claims which, in the authors' opinion, would include claims for extras, must be submitted to the architect within 21 days of the occurrence, and, with the exception of perfecting mechanics' lien claims, no litigation or arbitration may be commenced until the architect renders a

5 decision or takes no action within a specified period of time.

To avoid front-end loading by general contractors, under 9.3.1 all requisitions from subcontractors and material suppliers must be part of the contractor's request for payment.

As to hazardous materials, it is now the duty of the owner to provide a hazard-free environment if polychloride byphenyls (PCB) or asbestos is found on the premises (see 10.1.2).

This permits the contractor to stop work until a hazard-free working environment is created.

Finally, if the owner refuses or fails to show evidence of its ability to pay, the contractor may terminate the contract.

For a more detailed analysis of the AIA documents, you should see the papers published by the American Bar Association Section of Real Property, Probate and Trust Law program on Design and Construction Contracts, New Forms -- New Realities, 1987.

The Construction Contract--Selected Problem Areas For Lenders

The contract documents.

The base contract will always refer to, and incorporate into the base contract between

Owner and Contractor, the plans, specifications, bid documents, shop drawings, addenda prior to and during the actual construction, as well as all modifications to the contract. The latter should be of critical concern to the lender. Further, all contract documents should be signed and identified by the parties, and lenders should have a fully executed set in their file, initialed and dated by the parties or their duly authorized agents, prior to the commencement of construction.

The scope of the work.

6 The parties, including the lender, must have a clear understanding of the scope of work required by the contract. Vague and indefinite terms defining the scope of work are an invitation to litigation. Particularly troublesome are fast track projects where the work begins prior to the completion of a full set of plans and specifications. Such projects require very careful monitoring by the lender's architect.

Plans and specifications.

If AIA contracts are used, the drawings (plans) and specifications are, by definition, a part of the contract documents which constitute the contract between the parties.

If a contract refers to plans and specifications and expressly makes them a part of the contract, the plans are deemed to be incorporated by reference as though they were physically attached to the contract itself.

Time of commencement and completion.

Commencement and completion dates are critical, not only to the owner, but to the lender, too. Final completion is the event which indicates that the interim lender has fulfilled its obligation and turns over the risk of re-payment of the loan to the end lender, who has purchased a completed project.

Construction contracts should always contain precise commencement and completion dates.

In the absence of a written contract or in the absence of express time deadlines in a written contract, the courts will impose an obligation to perform the contract within a reasonable time.

7 When a construction project is not completed within the period called for in the contract, a frequent question is whether or not the phrase "time is of the essence" affects the time for performance of the contract, thus preparing the way for a claim for delay damages by the injured party, whether it be owner or contractor. The general rule appears to be that, time is not ordinarily of the essence in a building contract, unless the contract explicitly so states, or unless the circumstances and conduct of the parties indicate that such was the intent of the parties at the time the contract was executed.

The contract sum.

The contract sum sets forth the owners financial obligation and should be expressly agreed upon unless the contract is a Cost Plus or Time and Materials or Unit Price contract. In the event of the latter, the lender should approach the project with concern as it may ultimately pay more for the completed project than originally estimated. Since the lender relies upon the contract sums to determine the extent of the risk it is prepared to assume, the amounts should be realistic and based upon bona-fide bids to assure their accuracy.

If a construction contract does not contain a definite price agreed upon by the parties prior to the construction, the lender faces the risk that a court may infer that the price for the materials is the reasonable cash market value, and the price for the labor is that which similar contractors customarily receive for similar work.

8

Payments under the contract.

The contract should explicitly provide for a payment schedule approved by the lender. This enables the owner to determine the extent of construction financing required and permits the lender to schedule its commitments to assure the contractor and owner that payments will be made on a timely basis to the general contractor, allowing it to make payments to its employees and subcontractors. It is, however, customary for the lender to provide for the lender's architect to certify that the contractor's work has been completed in accordance with the contract documents, and the owner is thus obligated to pay the contractor to that time, based upon the percentage of work completed to that date.

In addition, many lenders are seriously considering as an alternative method of disbursing progress payments the concept of direct disbursement to subcontractors to assure payment and avoid the filing of mechanics' lien claims. The Appendix contains a publication of the American

Subcontractors Association explaining the process in greater detail.

In the absence of a specific contractual clause, it is generally held that the contractor is entitled to final payment when the construction project is substantially completed.

AIA Document A201, General Conditions, defines substantial completion as existing when the construction is sufficiently complete, so that owner can occupy or utilize the work or designated portion thereof for the use for which it is intended. Thus, if the owner benefits from its use of the project, it should be responsible for payment.

The final payment, as well as the retained percentages, are not due until all conditions of the contract are met; i.e. substantial completion, and submission by the contractor to the architect or

9 owner and the lender an affidavit, under oath, that all payroll and materials and equipment invoices have been paid, as well as all receipts, releases, and mechanics' lien waivers of all subcontractors and materialmen on the project and, of course, completion of any remedial or punch list work required. No lender should ever pay any amount due under the contract to the contractor until these documents have been provided. Failure to require such documents can result in the loss of defenses to the mechanics' lien claims of subcontractors, who may claim that they have not been paid by the general contractor.

A common practice in the construction industry is "retention," whereby the owner and lender will withhold a fixed percentage of each progress payment, usually ten percent, pending satisfactory completion of the entire project by the contractor. The purpose of retention is to ensure the owner and lender that the contractor will correct any deficiencies discovered prior to or within a specific period following completion of construction, i.e. remedial work.

BASIC PRINCIPLES OF SURETYSHIP

A Surety Bond is a three-party agreement by and among the surety, the obligee and the principal. In a simple construction setting, the obligee is usually the owner to whom the obligation runs. The bond principal is generally the contractor with responsibility for completing the project.

The surety is an insurance company who executes and issues the bond at the request of the principal.

The three types of construction bonds furnished by surety are a bid bond, performance bond and labor and material payment bond. The obligee obtains these bonds to provide assurance throughout the construction process that its contract will be entered into and completed in

10 accordance with the plans and specifications and that all persons furnishing materials and/or labor will be paid. Because of the nature of its obligation, the surety is generally a silent party to the construction process and hopefully not called upon to act. If the bond principal fails to perform its obligation, the surety's responsibilities under the bonds are triggered. If the surety is required to respond by way of performance or payment, it has a common law right to seek reimbursement from its principal for all expenditures. Moreover, in exchange for furnishing the bonds the surety obtains a premium as well as an Indemnity Agreement. The Indemnity Agreement is always executed by the bond principal (corporate indemnitor) and usually by several individuals associated with the corporation as well as their wives (individual indemnitors). The agreement gives the surety an additional contractual cause of action against one or more corporate or individual indemnitors. The liability of such individual indemnitors affords further insurance for the surety, inasmuch as these people are liable up to and including the extent of their personal assets.

The penal amount of the bond usually corresponds with the original contract price. The amount of the bond, almost without exception, represents the maximum extent of the surety's liability to the obligee.

PERFORMANCE BONDS

Performance bonds used in conjunction with public projects are required by statute.

Federally financed construction projects require performance bonds pursuant to the Miller Act,2 .

State and local improvements also require performance bonds.3 These statutes govern the terms of a performance bond furnished on a public job. Certain language is included within the bond form

11 in accordance with the statute regardless of whether it appears on the face of the instrument. On a private construction project, the obligee is free to dictate the terms of the bond in order to satisfy its particular needs. In reality, the language contained in statutory and private bonds is generally very similar.

When a default has been declared by an owner, the surety generally has little or no information regarding the nature of the default or status of the construction project. It must conduct an immediate investigation and obtain as much information as possible from all concerned parties.

It is at this stage of the surety's involvement that it is asked to make the most important decisions.

These decisions will dictate the surety's future course of conduct and ultimate exposure under the bond. Ironically, the surety has the least amount of information available at this stage of the decision making process. Therefore, there is no substitute for experience on behalf of the claims representative and practitioner.

Assuming the obligee's declaration of default is proper, several options become available to the surety in terms of fulfilling its obligations under the performance bond. The goal of the surety is to determine the cost of curing the default with an eye towards fixing its liability and minimizing its exposure.

MEASURE OF DAMAGES

A surety's liability to the owner under the performance bond is usually equal to the difference between the cost of completion less the remaining contract balances and retainage.

However, as a general rule the performance bond surety is liable to the obligee for damages for

12 delay to the same extent as is its principal under the bonded contract.4 Under this general rule, courts have allowed an obligee to collect for liquidated damages, delay damages, architects, engineers and attorneys' fees, loss rentals, loss of use, and interest.5

EARLY WARNING SIGNALS OF THE DEFAULT -- THE TROUBLED CONTRACTOR

Introduction

Much has been written and said about the defaulting mortgagee, but little is said about the mortgagee whose default is caused by the defaulting contractor. For example, how can the lender protect itself where the contractor causes the default of the owner/mortgagee due to delays in completion, or failure to orderly schedule project construction causing subcontractors to be unable to order the specially fabricated material, or where the contractor fails to pay its subcontractors on a timely basis causing them to fail to meet their financial obligations? It is easier to deal with the default caused by the loan being "out of balance," since it is usually a matter of mathematical calculation. [Although it is also clear that the manner of such calculation is generally a matter of dispute.] But what signals are present which the alert lender can spot during the course of construction long before the contractors default throws the entire project into disarray, confusion and possible termination?

Some of the causes can be cost overruns caused by unrealistic bids by the contractor, reliance of the contractor on unrealistic bids by subcontractors, or the inability of contractors to properly bid due to vague plans prepared because the project is a fast track project where bids are based upon certain assumptions which may prove to be in error when more detailed plans are eventually prepared. It is not only the developer who may be guilty of wrongfully diverting

13 mortgage funds, but also the general contractor who is so thinly capitalized that it is using funds payable on your project to cover payments on other projects where payments may be delayed.

Some contractors tend to front-end-load their draw requests by drawing down funds in excess of labor performed or material furnished and basing their overhead and profit percentage on the phantom work or materials, thus taking out more than they have earned. Too often, lenders fail to realize that not only can their borrowers go into bankruptcy, but so too can the contractor and subcontractors who wait for payments that fail to materialize on a timely basis.

Lenders Analysis of the Project in Default

The first point to explore is what is the stage of construction (whether it is the borrower or contractor in default)? In other words, what is the stage of completion? Is it partial? That is, is it in a state that prospective users have to be informed that the project is so far from completion that they must seek an alternative site? Is it substantially complete -- that is, with some accelerated work will the project be available with moderate, though not fatal, delays? The second area of concern is whether work is continuing or whether subcontractors already stung by delayed payments have engaged in slowdowns, marshalling their employees to other projects but not quite reaching the point where they will terminate their contracts.

At the same time the lender is determining the activity at the job site, it should be making a title search to determine if any mechanics' liens have been recorded against the property. In this instance, a working knowledge of the local mechanics' lien act is critical. Each state has its own mechanics' lien act and from that act the lender will be able to determine priorities, effectiveness of compliance with perfection requirements and, equally important, whether there are sufficient funds

14 available both to complete the project and pay lien claimants who may be necessary for the completion of the project.

The lenders architect should be consulted at this stage as to the conformity of the work in place to plans and specifications, as well as the status of change orders relating to proper changes, extras based upon changes not contemplated, disputed extras where the architect and the contractor

(if the extra is claimed by a subcontractor) claim that the work is with the scope of work as defined by the contract documents, plans and specifications.

The lender will have to take this preliminary information and determine the cost to complete the project, which would include the cost of remedial work as well as work which is to be completed, and if there are any funds available for unpaid subcontractors who have liened the project.

It is also at this stage that the lender looks to potential third party assistance. For example, with regard to mechanics' lien claims, lenders will usually have requested interim certifications of their mortgage priority over lien claims and, therefore, any mechanics' lien claim should immediately be tendered to the title company for defense. This is the time to deal with the early underwriting decision as to whether or not the project should have been bonded in the first place.

Developers do not like to pay for the bond premium since it is a soft cost that does not add to the value of the project. However, if the decision had been made at the time of underwriting the loan to have the general contractor bond the project and major subcontractors bond their portion of the project, this is the time to serve notices on the bonding companies that the project is in trouble. One note of caution deals with the reliability of the bonding company and the lenders due diligence at the time of the commitment. Was the bonding company authorized and licensed to do business in

15 the jurisdiction at the time the bond was issued and at the time of the default? Beware of the Grand

Cayman Island Surety, Fidelity and Reliable Company which only has a post office box and no local office. Further, be extremely cautious where the bonding company is a subsidiary of the general contractor and is not financially viable in its own right.

It is not unusual for the surety to deny a portion of the claim by claiming that the delay was not the fault of the contractor but the developer, who was using its own forces to do a portion of the work such as site development; or the failure of the developer's architect to approve shop drawings on a timely basis, thus causing the delay; or misrepresenting site conditions to the contractors; or other similar defenses.

U.C.C. Considerations

Under 2-702(2), a material supplier may have the right to reclaim materials which it has sold to an insolvent buyer on credit. However, it also clear that the materials must not have been incorporated into the project. The material supplier may reclaim the goods by making demand on the contractor within 10 days of receipt of the goods by the contractor. Such a remedy may be illusory since most material suppliers sell on open account and 10 days, while appropriate in other commercial settings, does not work well in construction. Of course, the 10-day requirement can be waived if there was a written representation of solvency by the general contractor or subcontractor to the material supplier . . . a good protection for the material supplier, but something which is rarely, if ever, used by the supplier credit manager.

AN OVERVIEW OF MECHANICS' LIENS FOR LENDERS

16 Nature Of The Mechanics' Lien

One of the most effective means a subcontractor has to protect itself from non-payment is to file a mechanics' lien upon the property on which it has performed work. This mechanics' lien is a claim or charge on the real property for the payment of a debt incurred by the contractor to the subcontractor for work performed by the subcontractor.6 In the event the subcontractor is not paid, the debt will be satisfied by distributing the proceeds from the sale of the secured property through judicial proceedings.

The mechanics' lien is purely statutory in nature, and was unknown at common law.7 Since it is only by virtue of legislative authority that a subcontractor may acquire and enforce a mechanics' lien on property, it is critical to comply with the statutory requirements of the local act. Deviation means failure.

Enforcement of the mechanics' lien is based upon certain equitable principles. A court must weigh (1) the benefit accruing to the property by reason of the subcontractor's work; (2) the detriment to the subcontractor performing the work; (3) the concomitant increase in the property's value resulting from the foregoing; and (4) the equitable principle that one should not benefit from the labor of another without paying for that benefit.8 The statutory right which secures payment for the subcontractor's performance by a mechanics' lien upon the owner's land or the improvement thereon does so without the requirement of privity of contract.9 Generally, a contractual relationship is required to permit one party to sue another for breach of contract.10 In the construction setting, however, there is no direct contract between the owner and the subcontractor.

Mechanics' lien statutes obviate the need for privity of contract, and permit a subcontractor to enforce its rights against an owner's property.11

17 Today, each state has its own particular mechanics' lien statute. Each state's statute has its own method for protecting subcontractors by giving them a secure and immovable interest in property to protect their right to payment. The prudent practitioner must always analyze the statutory framework of his or her own jurisdiction, to assure perfection of the lien rights as provided by each state's Act.

What Property Is Subject To The Lien

Owner.

There are numerous interests in land subject to a mechanics' lien. The first is an owner's private property interests. An owner is defined as a person who has any estate or interest in property, which interest is assignable, transferable or conveyable.12 An owner may also be any person who has any legal or equitable interest in property.13 Finally, an owner may be any person for whose immediate benefit is made the building, erection or improvement. A person contracting to furnish labor or materials for the improvement of property is often charged with the responsibility for determining the ownership interest in the property of the person with whom he contracts.14

The mechanics' lien is limited to the legally recognized interest in the subject property of the person who permitted or authorized the contract upon which the lien is based, or for whom the work is performed.15 A contract with the authorized agent of the owner generally binds the owner to that contract.16 In order for the agent's contract to be binding upon the principal owner, however, the agent must be acting within the scope of the agent's authority.17 If the agent acts outside of his or her authority, the act of the unauthorized agent must be subsequently ratified by the owner in

18 order to subject the principal's land to a mechanics' lien.18

A landowner's consent to improvements is not always a basis for a mechanics' lien on the property.19 The consent must be a consent that indicates an agreement that the owner will be liable for the materials or labor.20

Lessee.

A lessee's leasehold interest is subject to a mechanics' lien claim.21 A lessor, as legal owner of land, may subject his or her property interest to a mechanics' lien for improvements for which he, she or the lessee has contracted. With regard to the latter, the mere existence of a lessor-lessee relationship will not subject the lessor to liability for improvements ordered by the lessee.22 There must be some affirmative act of consent by the lessor, such as a lease provision requiring the lessee to make improvements Id., or knowledge of the improvements being made by the lessor, or where the lessor benefits from the lessee's improvements.23

In determining whether the landlord has consented to construction on the leased premises, courts will examine the terms of the lease for the landlord's consent as a part of the landlord-tenant relationship. For example, if as noted above, the lease requires tenant improvements and other work to be done by the tenant, the landlord is said to have impliedly consented to any contracts between the tenant and contractors which further the performance of the work.24 When a lease does not require a tenant to make any improvements, or where the lease states that any improvements made by the tenant are the tenant's responsibility alone, without any participation whatsoever by lessor, the landlord's interest may not be charged with a lien based upon implied consent.25

In some jurisdictions, the lessor's property interest will be subject to a mechanics' lien if the

19 lessor has actual knowledge that the tenant has contracted for an improvement, and the landlord thereafter fails to file a "Notice of Non-Responsibility." If an owner "knowingly permits" a tenant to enter into a contract for improvement to the property, and accepts the benefits of the improvement the lessor is bound by this contract.26

It is important to note that even if the only interest subject to the lien is that of the tenant, a lien claimant may foreclose the lien on the leasehold interest of the tenant and bring an action for a money judgment against the lessor on the basis of quasi-contract or the theory of unjust enrichment, subject to the lessors defense of lack of privity of contract.27

Co-Owner.

The interest of co-owners in the property is also subject to a lien claim. If a co-owner of real estate authorizes an improvement on the property, and his or her interest is insufficient to satisfy the lien, the interest of the other co-owners may be subject to the unpaid balance.28 The mere knowledge, however, of a co-owner that another co-owner is improving the property is usually not sufficient to subject his or her interest to a mechanics' lien.29 Co-ownership without additional elements, such as the existence of an agency relationship, is usually not sufficient to subject the co-owner's interest to the lien.30 Additionally, the relationship of child and parent does not, of itself, create an agency relationship, without additional facts beyond the mere knowledge or acquiescence of the owner.31

Jurisdictions differ regarding whether a lien will be permitted against the entire fee estate of a husband and wife, under a contract with only one spouse.32 The mere existence of a spousal relationship, like the parent and child relationship, is generally insufficient to impose a lien on the

20 entire jointly owned property. The foregoing is a concept which the Commissioners on Uniform

State Laws chose to ignore. Often, a court will look for additional facts, such as a joint business venture operated from the premises, to imply an agency relationship between the spouses.33

Condominium Owner.

A condominium ownership presents some significant problems, however, for the mechanics' lien claimant due to the multiplicity of ownership under "one roof." Courts have determined that is inequitable to force a single unit owner to bear the burden of payment of a mechanics' lien for an improvement which benefits an entire condominium project. Generally, the lien must be allocated between all unit owners benefiting from the project.34 Based upon the numerous notices which are required of the subcontractor, there is strong doubt about the practical effectiveness of a claim on common element work in a condominium.

Equitable Estate.

A party's equitable estate or interest in the subject real estate is subject to a mechanics' lien.

Restrictions, however, which are specifically expressed in trust agreements are often honored by courts, as long as the trustee contracting for the work has the power to contract on behalf of the estate or the beneficiaries under the trust.35

While a tenant with a life estate may subject his or her life estate to a mechanics' lien, the life tenant cannot create a mechanics' lien on the reversion or remainder interest, unless the holder of the reversionary or remainder interest has agreed to the contract.36

21 Homestead.

A party's homestead interest in real property is also subject to a mechanics' lien.37

Generally, however, a mechanics' lien will not be enforced against a homestead interest absent a written contract.38 Moreover, statutory and constitutional provisions regarding mechanics' liens on homestead property vary from state to state.39

What Is Lienable

Since all mechanics' liens are statutory, the specific improvements which give rise to a claim depend upon the terms of each state's statute. In general, any labor or material used in improving, erecting, constructing, completing or altering any "building" or "structure" is lienable.40

In determining the foregoing, courts look for an improvement to the property, a benefit to the owner, or enhancement to the value of the property.41

Buildings.

A "building," within the meaning of a mechanics' lien act, has been defined as an edifice constructed for use or convenience, which is attached to the land, such as a house, shop or building structure, which is of a substantial and permanent character, rather than temporary or transitional.

Many statutes augment the definition of the term "building" by using the phrase "building or improvement," the latter including any work or materials furnished which permanently improves the land;42 as well as streets, curbs, sewer lines, gas and other utilities.43

When statutes do not specifically state that repairs or alterations to an old building are lienable, liens have attached for such work under the theory that the repair or alteration constituted

22 an improvement.44 Some statutes even permit liens to attach to buildings or improvements when the repair improves the primary structure by only a minimum percentage. Under such statutes, the definition of "building" must be carefully analyzed to determine the lienability of work performed on portions of the building, such as a specific segment of a shopping center.45

Structures.

A "structure" may be something joined together, built or constructed. It is impossible to enumerate all the structures to which a mechanics' lien may attach, but some statutes specify the most common structures, and include all others in the generic term "appurtenances."46 In general, the term "appurtenance" describes detached structures that may be built as adjuncts to a building.

Sheds, fences, walks, water wells, and screens for doors and windows have been deemed to be appurtenances.

Often, disputes arise as to whether a structure is a fixture and part of the realty, or personal property and, therefore, not lienable. Courts will look to the intent of the parties, the means by which the fixture is attached to realty and, lastly, whether the fixture is adapted to, and necessary for, the purposes for which the premises is devoted.47

When a structure or improvement is involved, the majority of mechanics' lien statutes state that only the specific property upon which the work is actually performed is subject to the lien.48

The fact that two lots are used by one business entity is insufficient for a lien to attach to both lots where the lots are separated by a city street and materials are delivered to only one lot.49 It should be noted, however, that the extent of the specific property to which a lien attaches is often a matter of dispute. It is often held that the lien will extend to the entire lot, not merely the specific area

23 where the construction occurred.50 This is usually based upon work performed on the specific portion, or that the work was performed pursuant to a single contract for the entire lot. Id. Some states permit a lien to attach to as much of the land around the improvement as is reasonably necessary for the operation or use of the improvement.51

Services And Materials.

As to what constitutes lienable services or materials, the applicable statute of each state is the practitioner's primary guide. It is clear that only if the services or materials come within the provisions of the statute are they considered lienable. Most courts have held that for the work or materials to be lienable, they must have actually become a component or integral part of the improvement itself.52 Some courts tend to broadly construe the types of services or materials which contribute to, though do not become an integral part of, the improvement to be lienable.53 Such a distinction is critical since some courts have held that combining lienable and non-lienable items together voids the entire lien claim.54

Most statutes confer lien rights for repairs to the improvement. The rationale is that the materials furnished or services rendered were closely associated with that which was to become permanently attached to or integrated into the improvement during the course of construction of a new building. Courts draw a distinction between that which goes into the construction of a new building, that which goes into the construction of an existing building such as rehabilitation work, and those repairs to damaged work or damaged materials of an existing building upon which no new construction is being performed.55

In addition to permitting liens for work performed on easement areas, liens have been

24 permitted for improvements not directly situated on the site, which have a clear physical and beneficial connection thereto, such as the construction of sewers and water pipes.56 The rationale is that though the improvement was not physically on the owner's site, it so benefitted the property that a lien should attach to the property.

Materials delivered to the job site generally constitute a lienable item, whether or not used in the actual construction of the building.57 A rebuttable presumption is raised that delivery to the job site presumes eventual incorporation, unless the owner can prove otherwise.58 Some statutes, however, actually require proof not only of delivery, but of eventual incorporation in the construction.59

The requirement of delivery to the job site may be waived by statutory language, or in those instances where the owner or owner's agent directs delivery of the material to another site to be stored for use at a later time.60 Some statutes have entirely rejected the requirement of delivery to the premises. Some states recognize the mechanics' lien for specially fabricated materials, even though the materials were never used in or delivered to the job site.61 There should be a distinction between specially ordered materials, which may be usable elsewhere, and specially fabricated materials, which can be used on only a specific project. The latter, since they are not readily adaptable for use in another project, are considered lienable under some statutes. Modular units erected off site have been held to be lienable.62

Equipment.

Some statutes authorize a mechanics' lien on behalf of equipment lessors for the rental value of equipment used in construction.63 Other statutes require that the lessor actually perform the

25 labor required in conjunction with the use of the equipment, and not merely lease the equipment to the user who then furnishes its own labor to use the equipment.64

Another factor to consider is whether the material associated with rental equipment has been consumed in the construction of the project. If so, a lien may exist as the material then actually becomes an integral part of the improvement.65 Leasing costs for heavy equipment or equipment which is usable on other projects will not be lienable.66

Courts have permitted a lien for materials employed in temporary processes which can be used elsewhere or are destroyed in the course of construction, such as lumber used to construct forms for concrete work, and which is, therefore, removed for use elsewhere.67 Generally, however, in the absence of statutory authority to the contrary, fuel consumed by machines is not lienable.68 The rationale is that the fuel is not directly used in the process of construction, but is merely incidental thereto.

Demolition And Removal.

The general rule, absent statutory language to the contrary, is that removal or demolition of the improvement is not lienable.69 Those courts that have provided relief for demolition reason that construction may necessarily include demolition of an existing structure before another can be built.

These courts liberally interpret the provision to the statute to permit a lien.

Some statutes may expressly provide for a lien in favor of one who "landscapes, excavates, fills or clears land", or for "grading, seeding, sodding, or planting for landscaping purposes."70

Traditional landscaping services, however, such as mowing or maintenance, especially where the work is held not to be an integral part of the construction, is not lienable.71 The rationale for such a

26 position would appear to be the continuing nature of the service, which has no fixed time of completion upon which to commence the running of a limitations period. Furthermore, such services do not fit within the recognized concept of construction services which give rise to a lien.

Miscellaneous.

Home office overhead, insurance, taxes, and profit are not, by themselves, lienable.72 When included in the total contract price or when they constitute part of the reasonable value of labor furnished, however, they are lienable.73

Finally, an area of growing concern is that of claims for union contributions due from a defunct subcontractor on behalf of its employees. Although there is case law to support lienability by a broad reading of statutory language that ". . . all compensation to be paid . . ." includes such benefits, the trend appears to be to the contrary.74 An owner's liability is based upon the state's mechanics' lien act, and not upon a collective bargaining agreement to which the owner is not a party.75 The collective bargaining agreement has been held not to be a "contract" within the mechanics' lien act for improving real property,76 and, therefore, unpaid fringe benefits did not come within the definitions of "value of labor done" as defined under the mechanics' lien act.77

Waivers Of Lien

Although the right to enforce a mechanics' lien is a statutory privilege, such right to claim a lien may be waived.78 A waiver is legally defined as the voluntary, intentional relinquishment of a known right, claim or privilege. It is a voluntary and conscious decision on a specific course of action. Often, the issue for the court to determine in questions of waiver is limited to a

27 determination of the intention, either express or implied, of the parties involved.

Waiver of a subcontractor's claim for lien may arise during the course of contract negotiations. An owner may include a waiver of lien provision in the construction contract between itself and the general contractor. Such a waiver provision is referred to as a "No Lien" contract. If the contract contains this clear and unambiguous language, and complies with the statute of a particular state, it may well be held valid.79 A subcontractor's contract with the general contractor, which incorporates by reference the contract between the general contractor and the owner, subjects the subcontractor to a "No Lien" contract.80 Many states, however, specifically prohibit such "No

Lien" contracts.81

Although a mechanics' lien may be waived by implication, such waiver must be determined from the circumstances of each case based upon the conduct of the parties. An implied waiver may occur when a material supplier or subcontractor acts in a manner which is prejudicial to the equitable rights of others, or when it would be unjust to allow the enforcement of a lien in a court of equity, as where the subcontractor endorses a joint payee check or repossesses material which the subcontractor had delivered to the site.82 Where a claimant attempts to assert a lien for the material, the removal of material has been held to have waived any right to enforce a lien because of the inconsistency of the claimant's actions.83

Most courts hold that the taking of other collateral security does not constitute a discharge or waiver of a lien. The rationale is that a contractor does not waive or forfeit its right to a mechanics' lien by accepting a promissory note for the amount due it, unless the parties specifically agree that the promissory note will extinguish the lien between them.84 The taking of such a note is additional security for the debt, which does not affect the lien on the property.85

28 Most cases dealing with the acceptance of promissory notes as additional security emphasize that there will be no waiver of lien if the maturity date on the note falls within the time for filing the lien. The courts rationalize this position by holding that the acceptance of a note which will mature before the time limit for filing the lien is not a waiver unless that is the express intent of the parties, since time remains to perfect the lien claim if the note should be in default.

A number of cases have held that the taking of additional or different security, such as a guarantee agreement by a mechanics' lien claimant, will not destroy an existing or potential claim for a mechanics' lien. A conflict of authorities, however, exists concerning the taking of a mortgage or trust deed by the claimant from the debtor to secure the debt which will then cause the property to be subject to a mortgage lien instead of a mechanics' lien. In some states, a subcontractor, by taking a mortgage on the property to secure the debt, waives its right to a statutory mechanics' lien.

Most courts, however, merely view mortgages and deeds of trust as additional forms of collateral security, and will treat them in exactly the same manner as any other form of additional security.86

The retention of title to materials which have been furnished may be treated as another form of collateral security. This should not endanger the claimant's right to a mechanics' lien.

A waiver need not encompass the entire work performed by the contractor. When receiving partial payments, the waiver may be limited, restricted or a partial waiver of lien. Caution must be exercised when using partial waiver forms, because it has been held that a partial waiver of lien concerning the real property was construed to include a release of mechanics' lien on funds due or to become due from the owner to the contractor, and from the contractor to the subcontractor who furnished materials.87 A waiver of a mechanics' lien will be considered "partial" when the words

"which may hereafter accrue" are stricken from the form making the waiver inapplicable to material

29 supplied thereafter. Language in a contract waiving "all liens we have or might have" has been held to be sufficient to waive all liens.

A waiver must be examined carefully to determine whether it is a partial waiver waiving rights to a lien ". . . to the date hereof . . . ," or ". . . to the amount received hereunder . . . ," or a final waiver waiving rights to a lien accruing ". . . to the date hereof or which may accrue any time hereafter. . . ."

A party will not be allowed to profit from a fraud committed by it upon an unsuspecting victim. Where the evidence clearly shows that a subcontractor relied upon a contractor's or owner's false representation that lien waivers were necessary in order to conclude the financial arrangements, the waivers obtained by the contractor or owner are held to be void.88 The nature of the fraud involved must be chargeable to the person for whose benefit the waiver was made. The requirements for the fraud are much the same as in other areas of the law, namely, the conduct must have been intended to deceive a reasonably prudent person, and the defrauded party must have acted in reliance upon the fraud, without knowledge of the real facts and to its detriment.89

Finally, a waiver of lien should be distinguished from a release of lien. A waiver of lien is a notice to all persons involved in the premises that no lien will be filed by that particular subcontractor. A release of lien is tendered to expunge the recorded claim for lien from the public record after satisfactory payment has been received by the claimant. Once a claim for lien is released, it cannot thereafter be revived, absent an express agreement by those whose interests are adversely affected, or by statutory language permitting such revival.90

Competing Lien Interests

30 Generally, a lien existing on property before a mechanics' lien has attached to the property has priority over the mechanics' lien claim.91 A lien created after a mechanics' lien has attached to the property is generally subordinate to the mechanics' lien.92

Depending upon the jurisdiction, a properly filed lien may effectively attach as of: (1) the time the lien is actually perfected, filed or served; (2) the date the contract for the improvement is entered into; (3) the time the labor or material was first furnished; or, (4) the commencement of the improvement without regard to who first furnished materials or labor.93 Additionally, to retain priority over a subsequently filed lien, a mechanics' lien claim must be duly perfected and enforced within the statutory period.

Mortgages.

If the claim for lien is recorded prior to the time the mortgage is executed and recorded, the mechanics' lien claim will be superior to the mortgage.94 Where, however, the claimant fails to perfect the lien pursuant to statute, it will be subordinated to a validly recorded mortgage.95

It has been held that a mortgage which was recorded after the contract was entered into between the owner and the contractor was inferior and subject to the mechanics' lien claim, even though the labor was not performed or the materials furnished until after the mortgage became a lien on the property.96

Under other state's statutes, the date the construction contract is executed is immaterial in determining priorities, as between the lien claimant and mortgagee. In such states, a mechanics' lien attaches at the time the claimant commences labor or furnishes materials.97 Even in such an instance, however, the burden may be on the mortgagee to show it exercised due diligence to

31 protect its interest, such as visiting the site and examining it to determine if work commenced. The failure to exercise such diligence may result in the mortgagee losing its priority to the lien claimant.98 This is an attempt by the court to shift the risk to the mortgagee, who may be better able to protect itself by site inspections, payment controls or obtaining proper waivers from potential claimants.99

Jurisdictions also differ on the issue of when a mortgage attaches. Some jurisdictions hold that a mortgage attaches when it is recorded. Other jurisdictions hold that a mortgage lien does not attach until such time as money is actually advanced under the terms of the mortgage.

Other jurisdictions deal with competing priorities by creating the concept of

"enhancement."100 If the contract for the improvement is made after the mortgage is recorded, the mortgagee is preferred only in proportion to the value of the property at the time the contract is made. The mechanics' lien is preferred in proportion to the value of improvements furnished, which forms the basis for the lien.

Judgment Creditors.

A mechanics' lien which attaches prior to the date of a judgment may be entitled to priority over that judgment lien.101 Priority between a mechanics' lien claimant and a judgment creditor of the owner is generally decided by the same principles that govern priority between a mechanics' lien claimant and a mortgagee. That is, a judgment is not a lien on the premises until a Memorandum of

Judgment is recorded with the recorder of deeds or similar office in the county where the property is located. Any mechanics' lien existing prior to that date has priority over the unrecorded judgment lien. Under some statutes, however, a mechanics' lien attaches to real estate as against creditors

32 without notice, only from the time of the recording of the notice of Claim for Lien. The notice must be filed within the time prescribed by the statute.102

Tax Liens.

A mechanics' lien is also given priority against a prior tax indebtedness if the mechanics' lien arises and is perfected before the Internal Revenue Service files a Notice of Tax Lien.103 In addition to this general priority, the tax code gives a superiority to mechanics' lien claimants for repairs or improvement to a personal residence having four or less dwelling units occupied by the owner of the residence, if the contract price for the entire repair or improvement is $1,000 or less.104

Generally, any federal lien priority issue is governed by federal law which will follow the common rule of "first in time is first in right" unless there is a specific statute to the contrary.105

DEALING WITH CONSTRUCTION LOAN DEFAULTS

Introduction

When a default occurs in a construction loan, the construction lender is under great pressure to act quickly and effectively. Two factors become critical: First, the necessity for completion of the improvement on the secured property to avoid the risk of losing access to the fundamental sources of loan repayment to the interim lender, such as a permanent lender, pre-construction commitment sales or pre-construction leases; secondly, a loan workout, as the term is used here, refers to the course by of action which the construction lender attempts to resolve a construction loan default without resorting to litigation.

33 Non-Judicial Workouts

Lender considerations upon default.

While it usually is evident when an actual construction loan default occurs, there are also certain "red flags" or warning signals which should alert the construction lender well in advance of the possibility that a default is about to occur. For example, when construction fails to progress in accordance with the time schedule established by the construction contract, loan agreement or construction schedule established by the owner, architect and contractor; cost overruns occurring in certain categories, or where they are pervasive; when mechanics' liens are filed by subcontractors claiming they have not been paid despite loan disbursements to the general contractor; when contractors or subcontractors are routinely replaced on the project without any justification; or when the borrower fails to comply on a routine basis with lender's requests for information and lender's draw procedures. All of the foregoing give ample warning that a default is in the making.

The lender should immediately determine the precise status of the loan contract and the progress of construction, and analyze why a default has occurred or will occur. Oral modifications of the construction loan agreement should be avoided by officers or representatives of the lender as it could have an adverse impact upon the lender's right to demand strict compliance with the loan documents.

All parties who may have a stake in working out the construction loan should be clearly identified, and the lender's rights and obligations as against these parties should be determined.

These parties include the title insurer; any bonding company or surety; the permanent or take out lender; contractors, materialmen, architects; engineers; prospective or actual tenants; junior

34 lienholders; prospective project purchasers; partners of the borrower (including limited partners); and other creditors of the borrower.

The lender should determine whether the project as originally projected is still viable and assess whether or not the borrower will be cooperative in attempting to work out the construction loan default and the lender should determine precisely who in the lender's organization will be responsible for dealing with the borrower and the project in default.

Determining the lender's appropriate remedy.

Several alternatives are available to the lender in the face of a construction loan default: whether or not to take non-judicial direct possession of the project from the borrower or to immediately initiate mortgage foreclosure proceedings.

The reasons for the construction loan default often will determine whether foreclosure should be initiated. If the reasons are related to the borrower's financial weakness, his inability to properly manage the project or the borrower's honesty, a foreclosure is appropriate. If problems have occurred which are beyond the control of the borrower, such as supply problems, sales problems or general economic conditions, a non-judicial workout rather than a judicial foreclosure may be the best course of action.

Completion of construction is always the paramount consideration since there rarely is a buyer willing or available to purchase a partially completed project for a price approaching the balance of the loan.

Initiation of foreclosure proceedings may void the permanent commitment to refinance the project and this alternative should be considered only after an analysis of the take-out commitment.

35 Further, contractors and subcontractors may be reluctant to continue in the event of a foreclosure and will no doubt immediately file their mechanics' lien claims. Foreclosure will also increase the likelihood of a borrower filing for protection under the Federal Bankruptcy Act and staying all judicial proceedings, which includes judicial foreclosures.

A consensual workout may be an agreement under which the lender and borrower cooperate to modify or restructure the construction loan, or in a non-adversarial manner complete a judicial foreclosure or where the borrower tenders a deed in lieu of foreclosure to the lender. All of the foregoing avoid the expense and delay of protracted litigation. The construction lender may determine that a modification of the construction loan, without a foreclosure, is an appropriate course of action where a prudent borrower has run into difficulties with the project beyond his control, such as economic problems, technical problems or material or labor problems. However, this requires a determination by the lender that the construction project remains economically viable with the modified loan, and that the borrower can complete construction of the project expeditiously.

In utilizing the consensual takeover approach, care must be taken to avoid loss of priority of the lien of the construction loan mortgage. Junior lienholders may have to consent to material modifications of the construction loan, or the construction lender will risk loss of its priority as to them. If the lender agrees to make additional loan advances beyond the amount of the original loan principal, it may be that these optional advances only have priority from the date of the advance, and not from the date of the original construction loan.

Care should be taken since material modification of a loan agreement may exonerate guarantors and others secondarily liable upon the loan and whenever possible the consent of these

36 parties to a modification should be obtained.

The lender and borrower may agree that the lender should take title to the defaulted construction project without foreclosure proceedings. This may occur where the borrower is unwilling or unable to complete construction, given the changed circumstances, and where the lender determines that its loss may be minimized by completing the project either by itself, or through an agent.

Deeds in lieu of foreclosure as an alternative to foreclosure proceedings.

Due to the expense and time involved in a mortgage foreclosure, the mortgagee may reach an agreement with the mortgagor regarding the default and ultimate disposition of the property without the necessity of foreclosure proceedings. The Deed in Lieu of a Foreclosure is an agreement reached between mortgagor and mortgagee wherein the mortgagor agrees to convey the property directly to the mortgagee and the mortgagee agrees to terminate the debt under the note and mortgage.106 The benefit to the mortgagee is that it will have title to the premises in fee simple without the fear of title impediments or redemption rights of the mortgagor. The benefit to the mortgagor is that it need not fear a deficiency judgment nor be subject to the payment of costs and attorneys' fees in the event of foreclosure proceedings.

Judicial Remedies Upon Default

The right of foreclosure

The conditions precedent to any mortgage foreclosure action are governed by the terms of the mortgage or trust deed and these conditions precedent must be complied with in order to permit

37 the right to foreclose to accrue to the mortgagee.

The method of enforcing the performance by the mortgagee against the mortgagor by judicial means is a foreclosure action. Such a proceeding is an equitable action, and brought in a chancery court rather than a law court.107

Ordinarily, the proceeding is not an in personam proceeding, but an in rem proceeding, as it is fundamentally a proceeding against the property itself seeking to bar rights of redemption to that property by certain parties.

Dealing With the Construction Mortgagor's Defenses

General considerations.

Clearly, any defense, whether legal or equitable, which shows the mortgagee is not entitled to foreclose the mortgage may be raised as a defense by the mortgagor. Further any defense which could be raised against the mortgagee, could, absent statutory authority to the contrary, be raised against the mortgagee's assignee or transferee, i.e., want of or failure of consideration, fraud, misrepresentation. Many defenses arise due to poor training of the mortgagees personnel whose ill- timed actions create the factual circumstances upon which the defense will be raised.

Joint ventures.

A defense raised with a commercial loan is that the mortgagee, having exerted a significant control over the secured property, or by participating in the profits of venture, i.e., an override, is not a mortgagee but in fact a joint venturer with the mortgagee.108

38

Failure of consideration.

Failure of consideration is not particularly troublesome as a defense, since the proceeds of the mortgage have been disbursed and the mortgagors have thus benefitted from the mortgage.

Further, the default complained of occurs after payment of the proceeds by the mortgagee and the default of the mortgagor occurs some time later in the transaction during the repayment process.109

Waiver of performance.

Waiver of the prompt payment provision of the mortgage is the most troublesome defense, as the "waiver", if it occurs, does so as a result of a clerical activity by the mortgagee's employees in the course of the transaction.110

Duress, unconscionability and fraud.

Duress, economic duress or unconscionability are among the more creative but least troublesome of the mortgagor's defenses.

Duress is the condition where one is induced by a wrongful act or threat of another to act under circumstances which deprive him of the exercise of his free will, and may not only be wrongful, but may be criminal, tortious and may even be wrongful in a moral sense,111 and have dire economic consequences.112 The defense of fraud is unavailable to avoid the legal effect of a written instrument where the complainant could have discovered the fraud by reading the instrument.113

The concept of "unconscionability" arises from the Uniform Commercial Code, Chapter 26,

39 Section 2-302, Ill. Rev. Stat. which typically applies to personal property rather than real estate transactions. However, it has been applied to leases,114 and in some foreclosure actions.115

Estoppel.

The failure of the mortgagee to properly advise mortgagor of the delinquency or to continue construction despite the borrowers default was raised by the mortgagor who claimed the mortgagee was estopped or barred, was rejected by the cases of Prudential Savings & Loan v. Nadler,116 and

Illinois Valley Savings v. McPeake.117

Negligent disbursement of construction funds.

In the case of Childers v. Central Belmont Constr. Inc.,118 an owner recovered from a construction lender for gross negligence in the disbursement of construction funds. The court held the lender to a duty which required it to investigate the validity of the general contractor's affidavit

(similar to the 5 affidavit required under the Illinois Mechanics' Lien Act), before disbursing funds. Similarly, where the lender disbursed funds despite numerous mechanics' lien claims, it was held to be liable to the owner.119

However, see Bescor, Inc. v. C T & T,120 and Beaver v. Union Nat'l Bank,121 which refused to permit third party beneficiary recovery by subcontractors against the construction escrowee absent an existing contractual duty to the subcontractor.

Construction Mortgages and Bankruptcy Proceedings

Dealing with the automatic stay.

40 Upon the filing of bankruptcy petition by a debtor all property in which the debtor holds a legal or equitable interest, becomes property of the bankruptcy estate.122 Further, upon filing the petitions, a stay becomes effective under 11 U.S.C. Section 362 to prohibit the continuation or commencement of proceedings against the debtor. The effect of this "automatic stay" is to enjoin all enforcement actions against the debtor, including enforcement of liens, such as mechanics' liens or mortgage liens, and may even extend the redemption period if a foreclosure sale has already occurred. The automatic stay under 362(c) continues until the property is no longer property of the estate and the case is closed or dismissed or the debtor discharged. The proper way to proceed to seek relief from the stay order is to request relief from the stay under 362(d).

A cautionary note as to the sanctions under 362(h), which provide a remedy for an individual who is injured by any willful violation of the Automatic Stay. Damages, including actual loss, costs, attorneys fees and where appropriate, punitive damages are recoverable by the injured debtor.

How then does the mortgagee proceed when faced with bankruptcy of the mortgagor? If the mortgagor has filed bankruptcy, the mortgagee must seek leave of the Bankruptcy Court for relief from the stay order to permit it to file mortgage foreclosure proceedings in the state court or, if unsuccessful, enforce its rights to the secured property in the Bankruptcy Court. Relief from the stay is critical, as any proceeding in State Court without such relief is an exercise in futility as the

Bankruptcy Court may nullify such proceedings or even worse hold the mortgagee in contempt for violating the Stay Order.

If an appraisal indicates that the debtor has little or no equity in the property, you may usually be able to persuade the bankruptcy court to permit the mortgagee to proceed with the

41 mortgage foreclosure in state court. Since the trustee has no asset of value, i.e. no equity in the property, it should consent to proceeding outside of bankruptcy.

42 APPENDIX

General Contractor's Letter

Last National Bank Chicago, Ill.

Re: Premises: One South Wacker Drive

Improvements: 50 Story Building

Borrower: Honest Owner

Loan No.: 123461973

Gentlemen:

We are the General Contractor for the Improvements. In consideration of your loan to the

Borrower made to finance the construction of the Improvements, we agree that in the event of default by the Borrower under any of the loan documents, we shall, at your request, continue performance under our agreement with the Borrower on your behalf, provided that we shall be reimbursed in accordance with the terms of said agreement for all work, labor and materials rendered on your behalf.

We further agree that we shall not perform work pursuant to any Change Order which will result in a change in the contract price set forth in said, nor pursuant to any such agreement in excess of the Change Order Amount, nor pursuant to any such Change Order which, together with the aggregate of Change Orders theretofore executed between the Borrower and us, excluding those

43 theretofore specifically approved by you, will result in an increase or decrease in such price in excess of the Aggregate Change Order Amount, unless in either case we shall have received your specific approval of such Change Order. In the event we fail to secure your specific approval of such Change Order, we shall deem said agreement to be unmodified by such Change Order.

Very truly yours, General Contractor

By:______Authorized Agents/Officers

(Courtesy of Forum Committee on the Construction Industry, American Bar Association)

44 Assignment of Contractors' Contracts

THIS ASSIGNMENT ("Assignment) is made and entered into as of June 26, 1986, by the undersigned Last National Bank, not personally, but as Trustee under Trust Agreement dated June

26, 1986, and known as Trust No. 00-0000-00 (the "Trustee"), whose mailing address is 100 South

LaSalle Street, Chicago, Illinois 60603, and Honest Owner, an Illinois Limited Partnership, which own(s) all of the beneficial interest under the Trust Agreement with the Trustee (the "Beneficiary" whether one or more), whose mailing address is 1111 North Avenue Valley, Oak Brook, Illinois

60521, to and for the benefit of Last Mortgage Company, a Delaware corporation and its successors or assigns (the "Lender"), whose mailing address is 500 North LaSalle Street, Chicago, Illinois

60603. Beneficiary and Trustee are collectively referred to herein as the "Assignor."

At the request of Assignor, Lender has agreed to lend or cause to be lent to Trustee the sum of Thirty Million and 00/100 Dollars ($30,000,000.00) (the "Loan"), to provide funds for constructing and/or remodeling on certain real estate situated in the City of Chicago, County of

Cook, State of Illinois, a 50-story office building (the "Project"), to consist of vacant office space, lobbies and other amenities and to also construct an enclosed parking deck, together with related on-site and off-site improvements, all in accordance with final plans specification (the "Plans and

Specifications") prepared by Helmet Wright/Wrong Architects, Inc., bearing Job Number XYZ-000 and heretofore submitted and approved by to Lender.

NOW THEREFORE, in consideration the mutual covenant herein contained and the good and valuable consideration of the parties hereto agree as follows:

A. In order to induce Lender to make, as additional security for, the Loan and for all

45 obligations of Assignor and each of them under all documents at any time given to lender to secure the Loan, Assignor hereby assigns to Lender, subject to the terms and conditions hereinafter set forth, all right, title and interest of Assignor and each of them in and to those certain contracts listed on Exhibit "A" attached hereto and made a part hereof (being hereinafter collectively referred to as the "Construction Contract") pursuant to which the General Contractors have agreed to act as

General contractors for the construction and/or remodeling of the Project.

B. Lender agrees that unless and until an event of default occurs under the

PROMISSORY NOTE of Trustees of even date herewith (the "Note") which evidences the Loan, or under the MORTGAGE, SECURITY AGREEMENT AND FINANCING STATEMENT of

Trustee securing the Note or under the BUILDING LOAN AGREEMENT of even date herewith concerning the Loan or under any other document executed by Trustee or Beneficiary or by other and given to secure repayment of the Loan, Lender shall not exercise any rights of Assignor or any of them under the Construction Contract; provided, however, that from and after the time of such event of default, Lender shall become immediately entitled to exercise all of the rights of Assignor and each of them under the Construction Contract.

THIS AGREEMENT is executed by Trustee, not personally but as trustee as aforesaid in the exercise of the power and authority conferred upon and vested in it as such trustee (and the undersigned Trustee hereby warrants that it possesses full power and authority to execute this instrument), and it is expressly understood and agreed that nothing herein contained shall be construed as creating any liability on Trustee personally to perform any covenant either express or implied herein contained, all such liability, if any, being expressly waived by every person nor or hereafter claiming any right or security hereunder.

46 IN WITNESS WHEREOF, Assignor has executed this Assignment as of the day and year first above written.

ASSIGNOR

47 Conditional Assignment Of General Contractor

The undersigned herein after referred to as "General Contractor," represents that it is the general contractor of the Project described in the foregoing ASSIGNMENT OF GENERAL

CONTRACTOR'S CONTRACT. In consideration of LAST MORTGAGE COMPANY herewith referred to as Lender agreeing to make the Loan as aforesaid the General Contractor hereby agrees that in the event of default by the Trustee, any Beneficiary, therewith any other party set forth under any of the documents evidencing and/or securing the Loan, the General Contractor shall, at the request of the Lender continue performance on behalf of Owner or Lender under the Construction

Contract June 24, 1986, in accordance with the terms and conditions thereof.

48 General Contractor agrees that it shall not perform any work pursuant to any Change Order or otherwise which will result in any change in the Contract Sum or in a material deviation from the

Plans and Specifications, unless in each case General Contractor has received specific approval from Lender of such change or deviation. General Contractor's Construction Contract for the

Project shall (for the purpose of General Contractor's obligation aforesaid to continue performance thereunder and hereunder for the benefit of Lender by deemed not to have been modified by such change or deviation.

The officers executing this instrument on behalf of General Contractor hereby personally certify that General Contractor has full power and authority under all applicable laws, ordinances and regulations to perform all of its obligations under the Construction Contract in accordance with the terms thereof and to execute this Agreement.

Dated as of June 26, 1986.

General Contractor

______

By:______Its: President

ATTEST:

By:______

49 Its: Secretary

Last National Bank, not personally, but as Trustee as aforesaid

ATTEST:

By:______

Its:______

Honest Owner an Illinois Partnership Limited

By:______

Its:______

Accepted: Last Mortgage Company

By:______

Its:______

50

BIBLIOGRAPHY

Construction Law, Steven G.M. Stein Editor, Ch. 9. Construction Lien by Stanley P. Sklar, Mathew Bender & Company

Lien and Bond Claims, American Subcontractors Association, Alexandria, Va. 22314-3512.

Credit Manual of Commercial Laws, National Association of Credit Management, New York, N.Y.

Direct Disbursement, American Subcontractors Association, Alexandria, Va. 22314-12.

Legal Practices Manual for Construction Subcontractors, ASA, Chicago, American Subcontractors Association, Hillside, Illinois 60162

Illinois Mechanics' Liens, Stanley P. Sklar and Steven G.M. Stein, Professional Education Systems, Inc., Eau Clair, Wis. 54702

California Mechanics' Liens, California Continuing Education of the Bar, Berkeley, California

The New AIA Contract Documents, Steven M. Siegfried, Gerald I. Katz, Stanley P. Sklar, Joseph A. McManus Jr., Professional Education Systems, Inc., Eau Clair, Wis.

Introduction to Construction Law, Steven M. Siegfried, American Bar Association, Chicago, Illinois

Design and Construction Contracts. New Forms - New Realities, American Bar Association, Chicago, Ill.

Negotiating The Fair Construction Subcontract, Thomas A. Barfield, American Subcontractors Association, Alexandria, Va. 22314-3512.

FL: E:\WPDATA\SPS1\SPS00213.1 SPS/lmh/lsc/cms

51

1. See, Sweet on Construction Industry Contracts, 1987.

2. 40 U.S.C. (270a - 270b).

3. Ill. Rev. Stat., ch. 29, par. 15 and 16.

4. Conally & Hunt, "Surety's Obligation to Pay Consequential Damages . . . and Update," August, 1984, Fidelity & Surety Law Committee Meeting.

5. See, Priebie & Sons, Inc. v. United States, 332 U.S. 407 (1947); Hughes Brothers, Inc. v. United States, 133 Ct. Cl. 108 (1955); Hunt v. Bankers & Shippers Insurance Company, 423 N.Y.S. 718 (App. Div. 1979); Turk v. United States Fidelity & Guarantee Company, 361 Ill. 206, 197 N.E. 765 (1935); Robinhorn Construction v. Snyder, 47 Ill. 2d 349, 265 N.E.2d 670 (1970); New Amsterdam Casualty Company v. Mitchell, 325 F.2d. 474 (5th Cir. 1963); MSP Collaborative Developers v. Fidelity & Deposit Company, 596 F.2d 247 (7th Cir. 1978).

6. See In re Scherer Hardware and Supply, Inc., 9 B.R. 125, (N.D. Ill. 1981).

7. Umbaugh Bldrs., Inc. v. Parr Co. of Suffolk, Inc., 86 Misc. 2d 1036, 1037, 385 N.Y.S. 2d 698, 700 (1976).

8. See Verplank Concrete & Supply, Inc. v. Marsh, 40 Ill. App. 3d 742, 744, 353 N.E. 2d 27, 29 (4th Dist. 1976).

9. See Robert Burns Concrete Contractors v. Norman, 561 S.W.2d 614, 617 (Tex. 1978). Is Privity of Contract a Dinosaur? Stanley P. Sklar, Fourth Annual Meeting of the ABA Forum Committee on the Construction Industry (1988).

10. See R.D. Reeder Lathing Co. v. Allen, 66 Cal. 2d 373, 57 Cal. Rptr. 841, (1967).

11. Hartman v. Travis, 81 A.D. 2d 692, 693, 438 N.Y.S. 2d 633, 634 (1981).

12. See Hill Behan Lumber Co. v. American Nat'l Bank & Trust Co., 101 Ill. App. 3d 268, 270, 427 N.E. 2d 1325, 1327 (2d Dist. 1981); Dunlop v. McAtee, 31 Ill. App. 3d 56, 59, 333 N.E. 2d 76,

78 (2d Dist. 1975).

13. Fischer v. McHenry State Bank, 74 Ill. App. 3d 509, 511, 392 N.E. 2d 995, 997 (2d Dist. 1979).

14. City Lumber Co. v. Brown, 46 Cal. App. 603, 189 P. 830, 832 (1920); Cf. Duitman v. Liebelt, 17 Wis. 2d 543, 549, 117 N.W. 2d 672, 675 (1962).

15. Clegg Concrete, Inc. v. Bonfanti-Fackrell, Ltd., 532 So. 2d 465, 469 (La. App. 1st Cir. 1988).

16. Parker-Danner Co. v. Nickerson, 554 A.2d 1193, 1194-95 (Me. 1989).

17. Id.; Rowen & Blair Elec. Co. v. Flushing Operating Co., 399 Mich. 593, 600, 250 N.W. 2d 481, 485 (1977); Warshaw v. Pyms, 266 So. 2d 355, 357 (Fla. 1972).

18. Fullerton Lumber Co. v. Korth, 23 Wis. 2d 253, 257, 127 N.W. 2d 1, 3, (1964); Armstrong v. Blackadar, 118 So. 2d 854, 860-6l (Fla. 1960).

19. Stern & Son, Inc. v. Gary Joint Venture, 530 N.E. 2d 306, 308 (Ind. App. 1988).

20. Newtown Assoc. v. Northeast Structures, Inc., 15 Conn. App. 633, 546 A.2d 310, 314 (1988).

21. In re California Steel Co., 21 B.R. 383, 386 (N.D. Ill. 1982).

22. Bates v. McKay, 724 S.W. 2d 565, 571 (Mo. App. 1987).

23. See Dunlap v. Hinkle, 317 S.E. 2d 508, 512 (W. Va. 1984).

24. Stroh Corp. v. K & S Dev. Corp., 247 N.W. 2d 750, 752 (Iowa 1976).

25. Newtown Assoc. v. Northeast Structures, Inc., 15 Conn. App. 633, 546 A.2d 310, 313-14 (1988).

26. Fettes, Love & Sieben, Inc. v. Simon, 46 Ill. App. 2d 232, 234, 196 N.E. 2d 700, 702 (1st Dist. 1964).

27. Clemens Graf Droste zu Vischering v. Kading, 368 N.W. 2d 702, 709 (Iowa 1985).

28. Express Ready-Mix, Inc. v. Evans, 266 So. 2d 257, 259 (La. App. 1972).

29. Boutte & Courrege v. Derokay, 168 So. 39, 4l (La. App. 1936).

30. Id.

31. McCombs Const., Inc. v. Barnes, 32 Wash. App. 70, 73-74, 645 P. 2d 1131, 1133-35 (1982).

32. Meadows S. Const. Co. v. Pezzaniti, 108 So. 2d 499, 501 (Fla. 1959); Bingaman v. Dahm, 307 Ill. App. 432, 30 N.E. 2d 509, 511 (4th Dist. 1940).

33. Paul v. Shukes, 317 Ill. App. 650, 47 N.E. 2d 374 (1st Dist. 1973); Liese v. Hentze, 326 Ill. App. 633, 158 N.E. 428, 429-30 (1927).

34. W.H. Dail Plumbing, Inc. v. Roger Baker and Assoc., Inc., 338 S.E. 2d 135, 137 (N.C. App. 1986); Royal Ambassador Condo. Ass'n v. East Coast Supply Corp., 495 So. 2d 932, (1986).

35. Edward Hines v. Dell Corp., 49 Ill. App. 3d 873, 880, 364 N.E. 2d 368, 374 (1st Dist. 1977).

36. Donkle & Webber Lumber Co. v. Rehrmann, 310 Ill. App. 17, 33 N.E. 2d 709, 711 (3d Dist. 1941); County of Los Angeles v. Winans, 13 Cal. App. 234, 109 P. 64 (1910).

37. Robert S. Moore, Inc. v. Whittaker, 538 N.Y.S. 2d 415, 416-17 (1989).

38. Moray Corp. v. Griggs, 713 S.W. 2d 753, 754-55 (Tex. App. - Houston [1st Dist. 1986]); Stewart v. Clark, 677 S.W. 2d 246, 249-50 (Tex. App. 13? Dist. 1984).

39. See Robert S. Moore, Inc. v. Whittaker, 538 N.Y.S. 2d 415, 416-17 (1989).

40. See Cal. [Liens] Code 3128; Ill. Rev. Stat. ch. 82, 1.

41. Lake Forest, Inc. v. Cirlot Co., 466 So. 2d 61, 64 (La. App. 4th Cir. 1985); Charles D. Jones Co. v. Cliff Manor, Inc., 668 S.W. 2d 613, 616 (Mo. App. 1984).

42. (E and E Elec. Co. v. Gold Coast 72nd St. Diner, Inc., 116 So. 2d 660, 662-63 (Fla. 1978))

43. W.L. Dev. Corp. v. Trifort Realty, Inc., 44 N.Y. 2d 489, 497, 377 N.E. 2d 969, 973 (1978). Howard A. Deason & Co. v. Costa Tierra Ltd., 2 Cal. App. 3d 742, 751, 83 Cal. Rptr. 105, 113 (4th Dist. 1970).

44. See New York Artcrafts, Inc. v. Marvin, 29 Misc. 2d 774, 776, 215 N.Y.S. 2d 788, 790 (4th Dist. 1961).

45. Hurst v. V. & M Virginia, Inc., 433 A.2d 1231, 1233-34 (Md. App. 1981).

46. Balch v. Chaffee, 73 Conn. 318, 320, 47 A. 327, 328 (1900); Grant-Punder, Inc. v. Oregon D.R. Co., 2 F. 470, (1890).

47. In re California Steel Co., 21 B.R. 383, 386-87 (N.D. Ill. 1982).

48. Hill Behan Lumber Co. v. First Natl Bank of Woodstock, 95 Ill. App. 3d 426, 429, 420 N.E. 2d 268, 269-70 (2d Dist. 1981).

49. Houston Elec. Dist. Co. v. MBB Enterprises, 703 S.W. 2d 206, 208 (Tex. App. 14 Dist. 1985).

50. Northwest Fed. S & L v. Tiffany Const., 158 Ariz. 100, 761 P. 2d 174, 175-76 (1988).

51. Cal. [Liens] Code 3128 (West).

52. See Henry & John Assoc. v. Demilo Const. Corp., 137 Misc. 2d 354, 355, 520 N.Y.S. 2d 340, 341 (1987).

53. In re Moussa, 93 B.R. 96, 99 (N.D. Tex. 1988).

54. Flader Plumbing & Heating Co. v. Callas, 171 Ill. App. 3d 74, 77, 524 N.E. 2d 1097, 1099 (1st Dist. 1988).

55. Howell v. Worth James Const. Co., 259 Ark. 627, 535 S.W. 2d 826, 829 (1976); See Gary Hardware Co. v. McCorty, 10 Colo. App. 200, 150 P. 744, (1897).

56. W.L. Dev. Corp. v. Trifort Realty, Inc., 406 N.Y.S. 2d 437, 441, 377 N.E. 2d 969 (1978).

57. Contract Steel Sales, Inc. v. Freedom Const. Co., 321 N.C. 215, 362 S.E.2d 547, 550 (1987).

58. Sanford v. Hodges Builders Supply, Inc., 166 Ga. App. 86, 303 S.E. 2d 280, 282-83 (1983).

59. Chief Industries, Inc. v. Schwendiman, 99 Idaho 682, 587 P. 2d 823, 828 (1978); Dublin Co. v. Brady Sales, Inc., 380 So. 2d 1095, 1096 (Fla. App. 1980).

60. 5500 Coastal Hwy. v. Electrical Equip. Co., 305 Md. 532, 539, 505 A.2d 533, 537 (1986).

61. See Dublin Co. v. Brady Sales, Inc., 380 So. 2d 1095, 1096 (Fla. 1980); Jolite Industry, Inc. v. Millnan Const. Co., Inc., 501 So. 2d 655, (1987), review denied, 509 So. 2d 1118, (1987).

62. 5500 Coastal Highway, Ltd. Partnership v. Electrical Equip. Co., 305 Md. 532, 539-40, 505 A.2d 533, 537 (1986).

63. Alley v. Erbach, 89 Or. App. 5, 747 P. 2d 360, 362 (1987); Koza v. Ryan Dev. Co., 384 N.W. 2d 233, 235 (Minn. App. 1986); Star Rentals, Inc. v. Seeburg Const. Co., Inc., 66 Or. App. 822, 677 P. 2d 708, 711 (1984).

64. Giles and Ransome, Inc. v. First Nat'l Realty Corp., 238 Md. 203, 207-08, 208 A.2d 582, 585 (1965).

65. Slagle-Johnson Lumber Co., Inc. v. Landis Const. Co., Inc., 379 So. 2d 479, 482 (La. S. Ct.1979).

66. T & R Dragline Serv., Inc. v. Galan, 485 So. 2d 947, 950 (La. App. 1986); Crane Rental, Inc. v. Hunnicutt Land Co., 352 N.W. 2d 888, 890 (Ne. 1984).

67. See Bushman Const. Co. v. Air Force Academy Housing, Inc., 327 F.2d 481, 488 (10th Cir. 1964).

68. See C.S. Lewis, Inc. v. Cabot Corp., 85 Ill. App. 3d 708, 713, 407 N.E. 2d 84, 88 (4th Dist. 1980).

69. Dean v. McFarland, 81 Wash. 2d 215, 500 P. 2d 1244, 1247-48 (1972).

70. Mich. Comp. Laws 570.1104-570.1107; Fla. Stat. 713.01-713.06.

71. Legualt v. Suncoast Lawn Serv., Inc., 486 So. 2d 72, 73 (Fla. App. 1986); D.M. Foley Co., Inc. v. North West Fed. S & L Ass'n, 122 Ill. App. 3d 411, 417, 461 N.E. 2d 500, 503 (1st Dist. 1984).

72. Broderick v. Overhead Door Co. of Ft. Lauderdale, 117 So. 2d 240, 243 (Fla. App. 1959).

73. Id.

74. Farley v. Zapata Coal Corp., 281 S.E. 2d 238, 242 (W. Va. S. Ct. 1981).

75. Carpenters S. Cal. Admin. Corp. v. Majestic House, 743 F. 2d 1341, (9th Cir. 1984).

76. Sprinkler Fitters and Apprentices Local Union No. 821 U.A. v. F.I.T.R. Serv. Corp., 461 So. 2d 144, 146 (Fla. App. 1984).

77. Edwards v. Bethlehem Steel Corp., 517 N.E. 2d 430, (1988); Ridge Erection Co. v. Mountain States Tel. & Tel. Co., 549 P. 2d 408, 410 (Colo. App. 1976).

78. See Sussel v. First Fed. S & L Ass'n of St. Paul, 232 N.W. 2d 88, (Minn. S. Ct. 1975).

79. McLaughlin v. Gwynedd Pike Assoc., 534 A.2d 122, 123-24 (Pa. 1987); Fisher v. Harris Bank & Trust Co., 154 Ill. App. 3d 79, 506 N.E. 2d 418, (1st Dist. 1987); Pero Bldg. Co. v. Smith, 6 Conn. App. 180, 504 A.2d 524, 526-27 (1986); S. J. Groves & Sons v. Midwest Steel Erection Co., 666 F. Supp. 129, 130-31 (N.D. Ill. 1986); Faerber Elec. Co. v. I.T.T. Corp., 123 Ill. App. 3d 704, 463 N.E. 2d 820, 823-24 (1st Dist. 1984).

80. MCC Powers v. Ford Motor Co., 184 Ga. App. 487, 488, 361 S.E.2d 716, 717 (1987).

81. Bentz Plumbing & Heating v. Favaloro, 128 Cal. App. 3d 145, 149, 180 Cal. Rptr. 223, 226 (3d Dist. 1982); Md. R.P. Code 9-113; Utah Code 38-1-19; Cal. Civ. Code 3262.

82. Glidden Coatings & Resins v. Suitt Const. Co., 349 S.E. 2d 89, 91-2 (S. C. App. 1986); Anchor Concrete Co. v. Victor S & L Ass'n, 664 P. 2d 396, 399 (Okla. S. Ct. 1983).

83. Application of Wade Lupe Const. Co., 134 Misc. 2d 738, 739-740, 512 N.Y. S. 2d 338, 339-40 (1987); Cornell V. Sennes, 18 Cal. App. 3d 126, 134-35, 95 Cal. Rptr. 728, 733 (1971).

84. Scott Paper Co. v. Adair Truck & Equip. Co., Inc., 542 F.2d 1257, 1259 (5th Cir. 1976).

85. Alternate v. Glass, 186 Ill. App. 488; Ill. Rev. Stat., ch. 82, 1.

86. Northwest Fed. S & L v. Tiffany Const. Co., 158 Ariz. 100, 761 P.2d 174, 179 (1988).

87. Westinghouse Elec. Supply Co. v. Levin, 115 So. 2d 423, 425 (Fla. App. 1959).

88. Mid-West Engineering & Const. Co. v. Campagna, 397 S.W. 2d 616, 626-27 (Mo. S. Ct. 1965).

89. Premier Elec. Const. Co. v. LaSalle Nat'l Bank, 132 Ill. App. 3d 485, 492, 477 N.E. 2d 1249, 1256 (1st Dist. 1984); Ill. Rev. Stat. ch. 82, 21.01.

90. Ill. Rev. Stat. ch. 82, 35.

91. Walker v. Lytton S & L Ass'n, 2 Cal. 3d 152, 84 Cal. Rptr. 521, (1970).

92. Northwest Fed. S & L v. Tiffany Const. Co., 158 Ariz. 100, 761 P. 20 174, 178 (1988).

93. Bolf v. Berklich, 401 F. Supp. 74, (D.C. Minn. 1975); In re Morrell, 42 B.R. 973, 976 (N.D. Cal. 1984).

94. In re Gateway Center Bldg. Investors, Ltd., 95 B.R. 647, 650 (E.D. Mo. 1989).

95. Lowes of Ark. Inc. v. Bush, 669 S.W. 2d 198, 199 (Ark. S. Ct. 1984).

96. Adamson v. First Fed. S & L Ass'n of Andalusia, 519 So. 2d 1036, 1037 (1988) (notice of commencement filed prior to purchase money mortgage); National Lumber Co. v. Advance Dev. Corp., 732 S.W. 2d 840, 843 (Ark. S. Ct. 1987); R.B. Thompson Jr. Lumber v. Windsor Dev. Corp., 383 N.W. 2d 362, 365 (1986); Knutson v. Westchester, Inc., 374 N.W. 2d 485, (1886); In re Phillips, 64 B.R. 912 (W.D. Mo. 1986).

97. In re Commercial Investments, Ltd., 92 B.R. 448, 491 (D.N. Mex. 1988).

98. Valley Fed. S & L Ass'n v. T-Bird Home Centers, Inc., 106 N.M. 223, 741 P. 2d 826, 828 (1987); Jesco, Inc. v. Home Life Ins. Co., 357 N.W. 2d 123, 127 (Minn. App. 1984); Huntington Nat'l Bank v. Treasure, 469 N.E. 2d 535, (1984).

99. A.B. Thompson Jr. v. Windsor Dev. Co., 374 N.W. 2d 493, (1985); Bank of Cave City v. Hill, 587 S.W. 2d 833 (1979).

100. Ill. Rev. Stat. ch. 82, 16.

101. See In re Elmwood Farms, Inc., 30 B.R. 282, 287 (S.D. N.Y. 1983).

102. First State Bank v. Stacey, 37 Tenn. App. 223, 261 S.W. 2d 245, 246 (1952).

103. Brooks v. United States, 833 F.2d 1136, 1144 (4th Cir. 1987); 26 U.S.C.A. 6323(a) 6321.

104. I.R.C. 6323(b)(7); Treas. Reg. 301.6323(b)-1(g).

105. Brooks v. United States, 833 F.2d 1136, 1144 (4th Cir. 1987).

106. Workout Strategies and Avoidance of Lender Liability by John C. Murray, Regional Counsel, the Travelers Companies (1988) is an outstanding treatise on the subject.

107. Southwest Federal v. Cosmopolitan Bank of Chicago, 23 Ill. 2d 174 (1959).

108. See Case International Co. v. American National Bank and Trust, 18 Ill. App. 2d 297, 309 N.E.2d 750 (1974), Dunston v. Stockton, 346 So.2d 603, 1977, Fulmer v. Martin, 162 S.E.2d 541 (1968), but see Mortgage Assoc. v. Monona Shores, 47 Wis.2d 171, 177 N.W.2d 340 (1970) which denied recovery.

109. Riddle v. LaSalle National Bank, 34 Ill. App. 2d 116 (1962). Also see Chapter 17, Section 610. Ill. Rev. St.

110. See Kingsley v. Roeder, 2 Ill. 2d 131 (1954) wherein the court held, in a contract purchasers default, that the seller had lulled the defaulting purchaser ". . . into false security whereby strict compliance with the terms of the contract was not demanded."

111. Kaplan v. Kaplan, 25 Ill. 2d 181 (1962)

112. Gerber v. First National Bank of Lincolnwood, 25 Ill. 2d 181 (1962).

113. Belleville National Bank v. Rose, 119 Ill. App. 3d 56, 456 N.E.2d 281 (1983).

114. Restatement Property (Second) Sec. 5.6 (1977).

115. Humble Oil v. Doerr 123 N.J. Super. 530 (1973). See Goldstein: Unconscionability and Real Estate Transaction, 51 New York State Bar. J. 194 (1979).

116. 37 Ill. App. 3d 168, 345 N.E.2d 782 (1976).

117. 87 Ill. App. 3d 39, 409 N.E.2d 97 (1983).

118. 85-B-42 (Ohio App. 3 Oct. 1986).

119. Kalbes v. Col. Fed. S & L Assn., 86-318 (Fla. App. 10 Oct. 1986).

120. 113 Ill. App. 3d 65, 446 N.E.2d 568 (1983).

121. 92 Ill. App. 3d 503, 414 N.E.2d 1339 (1980).

122. 11 U.S.C. Section 541.

62

63