An Illinois appellate court has considered whether a commercial broker must release its lien on a property when the lender has released its liens on the property, under the state's commercial broker lien law.
The Lombard Lodge 2350 Loyal Order of Moose ("Seller") obtained two loans from West Suburban Bank ("Lender"). The loans were secured by mortgages on property ("Property") owned by the Seller. The Lender recorded its mortgages in 1996.
In 1998, the Seller decided to sell the Property and entered into a listing agreement with Coldwell Banker Stanmeyer REALTORS® ("Brokerage"). The Brokerage located a buyer for the property, and the Seller accepted the buyer's offer. However, the accepted offer was less than the amount of the Lender's loans. The Lender's attorney sent a letter to the Brokerage, informing the Brokerage that the sale price was insufficient to pay the mortgages that the Lender held on the Property and therefore the sale would be insufficient to pay any liens asserted by the Brokerage at closing. The letter also advised the Brokerage that if the Brokerage tried to lien the property, then the Lender would dispute the lien. The letter further stated that if a dispute arose over liens, an amount equivalent to the Brokerage's lien claim would be deposited into escrow and the Brokerage would then be required to release its lien at closing. If the parties could not resolve the dispute after the money was escrowed, the letter stated the Lender would then file a lawsuit seeking a judicial declaration of the parties' rights to the escrowed funds. The Lender believed its actions were mandated by the requirements of the Illinois commercial broker's lien law.
Before the closing, the Brokerage filed and recorded a lien against the Property for the amount of its commission. The Lender then sent instructions to Attorney's Title ("Title Company") on how the funds were to be distributed at closing, including depositing into escrow the amount of the Brokerage's claimed lien. The Title Company also entered into an agreement with the Seller and buyer to escrow the amount of the Brokerage's lien. The Title Company's agreement stated that the parties agreed to use the escrowed funds to satisfy or remove the Brokerage's lien prior closing. The Title Company then issued a policy insuring that the Lender's recorded mortgages would receive lien priority on the Property.
Following the issuing of the policy, the Lender released its security interest in the Property that it had obtained from its original two loans. The Brokerage never released its lien. The Lender then filed a lawsuit seeking a judicial declaration that it was entitled to receive the escrow funds and the Brokerage was required to release its lien. The trial court found that the while the Illinois commercial broker lien law did not require the Brokerage to release its lien, the court extinguished the Brokerage's lien and awarded the Lender the amount held in escrow. The Brokerage appealed.
The Appellate Court of Illinois, Second District, partially reversed the trial court's ruling. The court looked at the Illinois commercial broker lien law. This law allows a licensed broker to place a lien on commercial property for the amount of the commission owed from the sale or lease of the property, pursuant to a written commission agreement. The broker must give notice of its intent to claim a lien prior to closing. The commercial broker lien law provides a process for escrowing funds when the broker's lien is challenged, but this process does not apply when the proceeds from the sale are insufficient to satisfy the liens on the property.
Applying the law to these facts, the court ruled that the Brokerage had a valid lien on the Property, as it had properly given notice and recorded its lien. The court also ruled that the escrow process described in the law and also in the Bank's letter to the Brokerage did not apply, as the Lender's security interest in the property exceeded the sale price. The court also ruled that while the Lender's liens at one time had priority over the Brokerage's lien, the Lender lost its priority when it released its lien. The court also ruled that the Lender was estopped, or prohibited, from claiming the escrow funds, as it had released its liens and created the escrow fund to satisfy the Brokerage's lien. Thus, the court reversed the trial court and sent the case back to the trial court for further proceedings.
West Suburban Bank v. Attorney's Title Ins., 761 N.E.2d 346 (Ill. App. Ct. 2001).
Editor's Note: Presently, nineteen states have some type of broker lien legislation. Click here for a link to a chart prepared by NAR Legal Affairs briefly detailing the current broker lien laws.