Are Mechanic’s Lien Rights Available on Wind Turbines

Wind Turbines: Are Mechanic’s Lien Rights Available?

A recent court of appeals decision left one Illinois subcontractor with over $3 million in unpaid claims, and the construction and alternative energy industries with immeasurable concern and doubt.

It takes multiple contractors, subcontractors & material suppliers to successfully build one energy farm: unfortunately, this also means there are multiple opportunities for payment issues. Special fabrication, change orders, construction defects, and the simple low liquidity of a company, are common factors contributing to non-payment on projects of this size.

Fortunately, in cases of energy farms, or even single standalone wind turbines, unpaid parties can reduce their risk when they take steps to secure mechanic’s lien rights. Right?

Unfortunately, No

In AUI CONSTRUCTION GROUP, LLC v. VAESSEN, 2016 IL App (2d) 160009 – Ill: Appellate Court, 2nd Dist. 2016, AUI Construction Group, LLC (“AUI”) was hired to assist with the construction of a turbine tower foundation. AUI received partial payment and when they remained unpaid for the rest of the materials and labor provided, they filed a mechanic’s lien and proceeded to foreclose.

AUI believed their lien to be valid based on the argument that the “materials, fixtures, services, and labor it furnished constituted a valuable and permanent improvement to the property,” but the circuit court invalidated AUI’s lien, stating the wind turbine is a non-lienable trade fixture and provided the following explanation:

“If AUI’s mechanic’s lien were allowed to attach to the real estate and GSG [7] (the wind energy developer) chose to terminate the easement and removed all of its property brought onto the premises as allowed by the easement agreement, the lien would remain upon the real estate after removal of the benefit upon which the lien was based. Therefore, to allow AUI’s filing of a mechanic’s lien to attach to the real estate where removal of the fixture is allowed would produce an absurd result not intended by the lien act.”

Is the Wind Turbine a Fixture?

OK, if AUI isn’t entitled to mechanic’s lien rights, because the court indicates the wind turbine is removeable, then could AUI have pursued security via Article 9 of the Uniform Commercial Code (UCC) and treat the wind turbine as though it is a fixture? After all, the court identified the wind turbine as a trade fixture!

I wasn’t the only one with the fixture thought. Unfortunately the court nixed the fixture thought, because “UCC security interests simply do not exist ‘in ordinary building materials incorporated into an improvement on land.’ As AUI built the wind structure with concrete, rebar, electrical conduit, and other ‘ordinary building materials,’ the UCC does not apply.”

So, what can a subcontractor do if they can’t secure their right to payment via mechanic’s lien statute or via the UCC?

Comments from an Expert

As this is a recent case and a landmark decision, it’s become a hotly discussed topic so we sought insight from expert Illinois construction attorney, James T. Rohlfing.

Rohlfing discussed three issues that bother him most about this case:

“First, it holds that an item can be a trade fixture in Illinois even though it is obviously not intended to be removed from the real estate. A trade fixture is not lienable, though a fixture is. The court held that the contractual provision that defines it as a trade fixture is controlling despite obvious evidence to the contrary (removal requires dynamite).”

In his second point, Rohlfing agreed with the court’s opinion that the turbine is not lienable under traditional mechanic’s lien statute.

“The court held that the work done on the wind turbine tower is not lienable because it did not enhance the value of the owner’s property.  I agree with that holding and it is consistent with existing law.  It would be unfair to make a land owner who is getting a modest yearly income from the easement rights pay for an expensive improvement which is far more expensive than the owner’s stream of income.”

Lien on Easement vs. Lien on Leasehold

Last on Rohlfing’s list? The frustrating difference between a lien on an easement and a lien on a leasehold.

“Thirdly, the court holds that a mechanics lien can never be imposed on an easement right, even if it the right is more akin to a leasehold interest.  I am troubled by the distinction between liens on easements and liens on leasehold interests.  The authority relied on by the court to reach that conclusion is distinguishable from this case.  The court could have treated the easement rights similar to a lease and permitted a mechanics lien on the leasehold interest but not the fee simple owner.  This would have protected the lien claimant and it would have been a fair result consistent with case law.  There was a traditional easement to allow access to and from the wind turbine, but the land on which the turbine is situated has more lease-like characteristics.  For its authority, the court cites to a case which considers a more typical easement.

The problem is that typical leaseholds might now be converted to easements to avoid mechanics liens.

Further, fixtures that are clearly not intended to be removed from the property might be adjudicated to be trade fixtures and, thus, not lienable. These two developments might weaken mechanics lien rights in Illinois.”

What’s a Subcontractor to Do & What’s Next in Legal Action?

Rohlfing commented that this case could head to the Supreme Court, who may in turn handle some of these issues. There is also the possibility that some construction associations may collaborate and propose a bill. For now, the most pressing question is how to protect claimants whose mechanic’s lien rights may be undercut by this decision.

While this is uncharted territory, Rohlfing has two suggestions for potential claimants.

“1) determine whether a UCC article 9 security interest might be available in the trade fixtures under these circumstances; and 2) have the turbine supplier require the easement holder to execute a collateral assignment of easement rights to be triggered in the event of non-payment.”

It’s Certainly Not Over

This case will undoubtedly spur continued debate, and could even result in new legislation. Stay tuned to the NCS blog, as we follow this and other relevant cases.

If you are furnishing to a project and are unsure whether mechanic’s lien rights or UCC rights would apply, contact NCS or seek a legal opinion.

A special thank you to James T. Rohlfing, Attorney at Law with ARNSTEIN & LEHR LLP for his insight on this case and his continued dedication to the construction community!

Most Recent Resources

Blog

Will Safe Harbor Ever Exist for Florida UCC Filings? Zero Tolerance

Safe Harbor couldn't save this UCC. Florida's 'zero tolerance' policy means you must strictly comply with Article 9-503(a). Learn more here!
Read More
white paper
White Paper

NCS Credit Lien Index 2022 Q3

The Lien Index increased 4 points in Q3 2022, an 11% climb over Q2 2022. As expected, Q3 mechanic's lien activity rose 11% over Q2, and activity remained lower than Q1, which peaked at 43. We anticipate the Index will increase 2%-5% in Q4. Download the full report for details.

Read More
live webinars
Live Webinar

Subchapter V Bankruptcies and Impacts on Trade Creditors (1 hr CLE credit)

New Subchapter V was added to the Bankruptcy Code in 2020 to create a more efficient and economical process for small business debtors to reorganize. But the benefits to a Subchapter V debtor come at a cost to trade creditors.
Read More