Illinois court holds that foreclosure sale purchaser waived defense that lis pendens barred contractor’s subsequent mechanic’s lien foreclosure

In Lake County Grading Company LLC v. Forever Construction Inc., et al; 2017 IL App (2d) 160359 (May 19, 2017), the Second District Appellate Court held that a foreclosure sale purchaser and mortgagee, waived the defense that the lis pendens barred the contractor’s suit by its conduct in inducing the mechanic’s lien claimant to commence suit, despite the contractor failing to intervene in the foreclosure before the sale was confirmed.

The mortgagee in Lake County Grading Company purchased a commercial warehouse at foreclosure sale. Before the sale was confirmed, the warehouse was destroyed by fire. The municipality, on behalf of the mortgagee, hired a contractor to demolish the remains. When it received no payment for the work, the contractor recorded a mechanic’s lien.

Before the foreclosure sale was confirmed, the contractor demanded that the mechanic lien claimant foreclose on the lien within 30 days in accordance with section 34(a) of the Mechanic’s Lien Act or else the lien was extinguished. The contractor timely sued for foreclosure of mechanic’s lien, breach of oral or implied contract, unjust enrichment, and quantum meruit. The mortgagee then moved to have the sale confirmed. After confirmation the trial court dismissed the contractor’s complaint, holding that the lis pendens doctrine extinguished the contractor’s claims because the contractor failed to intervene in the foreclosure.

The contractor appealed, arguing it was not required to intervene in the foreclosure because it lacked standing to challenge the confirmation of sale and therefore had no right to intervene. It also contended that it was entitled to an equitable lien if it could not recover under the Mechanic’s Lien Act and that the mortgagee was not a bona fide innocent third party purchaser and therefore the contractor was not required to intervene in the foreclosure.

The Appellate Court reversed finding that the mortgagee, through its conduct, waived the lis pendens protections as to the contractor’s claims. The mortgagee had hired the contractor to work on the property, thereafter demanded that the contractor foreclose on the lien within 30 days under section 34(a) of the Mechanic’s Lien Act, and the contractor complied by timely filing its action as demanded by the mortgagee. The Appellate Court also held that the better practice would have been for the contractor to intervene in the foreclosure but it was not obligated to because the mortgagee’s invocation of section 34 mandated that the contractor bring suit on the lien. Requiring intervention would have imposed an undue burden on the contractor, excused the affirmative conduct of the mortgagee in inducing the contractor to perform work and file its action, and not further the purpose of the lis pendens doctrine which is to protect a bona fide innocent third-party purchaser against outside claims. Accordingly, the mechanic’s lien claims were not extinguished by foreclosure.

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