LaSalle Bank v. Cypress Creek: competing security interests and mechanic's liens

Secured Trans

LaSalle Bank, N.A. v. Cypress Creek 1, L

Secured transactions are relatively commonplace and generally well understood, however certain scenarios can emerge that challenge legal minds and legal precedents to offer an appropriate solution. Article 9 of the Uniformed Commercial Code governs this type of transaction, in which the lender obtains a security interest in certain goods or property owned by the borrower and becomes owner (or part owner) of this collateral should the borrower default on the loan payments, but this law is not necessarily enough to adequately determine the outcome in every situation (Cornell, 2012). A recent case in Illinois illustrates the complexities that can occur when more than one party has a security interest in a property, and there isn't enough value in the property to satisfy all claimants. In such situations as these, more common in the recent years of economic turmoil and the accompanying downturn in the housing market and construction industries, the law doesn't always apply directly or clearly.

The facts of LaSalle Bank, N.A. v. Cypress Creek 1, LP are relatively straightforward: LaSalle Bank extended a mortgage to property developer Cypress Creek of just over eight million dollars for the purchase of land and the construction of residences on that land (Glazov et al., 2011; WestLaw, 2011). Cypress Creek hired contractors for the development of the land and the construction of residences before coming to a point of financial insolvency and abandoning the project, with payments on the mortgage still due to LaSalle Bank and money for construction still owed to at least two contracting companies (Glazov et al., 2011; WestLaw, 2011). The property itself was not worth the remaining balance on the mortgage (Glazov et al., 2011).

Due to the default status of Cypress Creek, the developer, LaSalle Bank naturally moved to acquire the property it held a mortgage on, foreclosing on the property, however the contractors had established mechanic's liens on the property and foreclosed as well, leading to a dual claim on the property as a means of partially recovering the real financial damages that all parties had experienced (Glazov et al., 2011; WestLaw, 2011). The property was actually repurchased by the lender, LaSalle Bank, from a sheriff's sale, leading to an even more complex case and where a decision had to be made regarding the cash from the sale -- the lender put this cash up and stood to collect some or all of it as partial payment on the mortgage, yet the contractors were also entitled to a substantial portion of the sale proceeds for the money still owed on material and labor (Glazov et al., 2011; WestLaw, 2011). A decision under Uniform Commercial Code Article 9 was rendered but appealed, and the resulting Illinois Supreme Court ruling led to the establishment of a rather novel yet highly equitable outcome and precedent (Glazov et al., 2011; WestLaw, 2011).