Southwest Bank v. Poulokefalos

• Court: Appellate Court of Illinois
• Decided: June 4, 2010
• Docket: 1-09-2387 Rel
• Status: Published

Opinion

FIFTH DIVISION June 4, 2010

No. 1-09-2387

SOUTHWEST BANK OF ST. LOUIS, ) Appeal from the ) Circuit Court of Plaintiff-Appellant, ) Cook County. ) v. ) ) DIMITRIOS POULOKEFALOS and ) Nos. 08L051336 and NIKOLAOS KALOURIS, Individually ) 08L013689 and as Beneficiaries of Chicago Title ) Land Trust Company, Successor to ) LASALLE BANK, N.A., as Trustee ) The Honorable under Trust No. 4020, ) Alexander P. White, ) Judge Presiding. Defendants-Appellees. ) )

JUSTICE FITZGERALD SMITH delivered the opinion of the court:

Plaintiff Southwest Bank of St. Louis (Bank) instituted a replevin suit against defendants

Dimitrios Poulokefalos and Nikolaos Kalouris (Owners or Landlords), individually and as

beneficiaries of a land trust. Bank now appeals from an order of the circuit court finding that

certain distrained property was permanently attached to real estate such that it had become

fixtures and, accordingly, Landlords had a priority interest over the distrained property superior

to the Bank’s Uniform Commercial Code lien (810 ILCS 5/9-102 (West 2008)). For the

following reasons, we affirm.

BACKGROUND

Landlords own a commercial building located at 1975 Cornell Avenue in Melrose Park, No. 1-09-2387

Illinois (the Premises). In December 2003, Landlords entered into a lease agreement (the Lease)

with Converters Extruded Films, Inc. (Original Tenant), leasing the premises for a term of five

years, from February 1, 2004, to January 31, 2009. The lease included a provision (section

9.1.12) stating that, at termination:

“all alterations, additions, floor covering and carpeting

thereto and all decorations, fixtures, furnishings, partitions,

heating, ventilating and cooling equipment and other equipment,

which are permanently affixed to the Premises, which (if not then

the property of the Landlord) shall thereupon become the property

of Landlord without any payment to tenant [].”

In 2003, Original Tenant installed various large pieces of equipment to be used in the

commercial production of plastics. Owner Poulokefalos testified at trial that the equipment was

brought in piece by piece, reassembled and welded by Original Tenant. According to Owners,

the equipment included silos and large extruding machines that ran from floor to ceiling, were

bolted to the floor, the ceiling rafters and joists, and the walls, along with a series of pipes, tubes,

and conduit carrying raw materials and electricity to the machinery. The assembly required

removing some rafters in the ceiling and replacing them with new rafters. After the silos were

installed, a wall was built to divide the space rented by Original Tenant. Owner Poulokefalos

testified that he discussed with Original Tenant that the machinery could never be removed

because it required the removal of some of the rafters. As a result, Original Tenant considered

purchasing the building.

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Two years later, however, Original Tenant sold its business to C. Extruded Films, L.L.C.,

a Missouri limited liability company (Second Tenant). On December 5, 2005, Original Tenant

assigned its lease to Second Tenant, and Second Tenant remained in possession of the premises

thereafter.

On December 5, 2005, Bank loaned Second Tenant one million dollars (the loan). The

loan was secured by a commercial security agreement between Bank and Second Tenant,

pursuant to which Second Tenant granted a security interest in all equipment, inventory and other

property of Second Tenant. The security agreement and financing statement generically

identified “fixtures” as property security for the loan. Shortly thereafter, on December 20, 2005,

Bank filed its UCC financing statement with the Missouri Secretary of State.1 However, Bank

did not record its UCC financing statement with the Cook County recorder of deeds.

Second Tenant ceased paying rent in September 2008 and abandoned the leasehold in

October 2008. In doing so, it abandoned 12 plastic extruding machines and 3 silos that were

attached to the floors, ceilings and duct work, as well as heavy duty electrical systems and piping

connecting the machinery.

1 Bank filed its financing statement with the Missouri Security of State. Tenant Two is

organized under the laws of the State of Missouri, and is a “registered organization,” as defined

in section 9-102(70) of the Illinois Uniform Commercial Code (810 ILCS 5/9-102(70) (West

2008)). Pursuant to section 9-370(e), the location of a registered organization is the state of

organization. Therefore, Bank’s UCC financing statement was properly filed in the State of

Missouri. This is not at issue in this appeal.

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Landlords filed a complaint and distress warrant on December 11, 2008, seeking to

distrain the plastic extruding machines and silos still in Landlords’ possession for past-due rent

and property taxes.2 Landlords claimed a landlords’ lien on the equipment in the amount of

$235,000.3 The distrained property was inventoried in an exhibit to the distress warrant. On

December 12, 2008, Bank filed a replevin lawsuit seeking attachment of the same property

sought by Landlords to satisfy its rent claim. The two causes were consolidated on January 21,

2009.

A bench trial of Bank’s replevin complaint was heard on December 29, 2008. At trial,

Landlords claimed a priority interest over the trade fixtures and leasehold fixtures abandoned by

Second Tenant by virtue of its landlord’s lien for unpaid rent and section 9.1.12 of the lease.

Bank claimed a priority interest by virtue of its UCC financing statement.

At trial, owner Poulokefalos testified that it was the intent of both himself and Original

Tenant at the signing of the lease that Original Tenant would bring equipment into the building.

However, there was no specific agreement about what would happen to the equipment at the

termination of the lease other than section 9.1.12 of the lease, which he understood to mean

“whatever is bolted in the floor stays with the building.” Poulokefalos testified that the removal

of the distrained property would cause substantial damage to the real estate. He testified that the

2 This cause, LaSalle Bank, N.A. U/T/A No. 4020 v. C. Extruded Films, LLC, 08L13689,

was filed in the circuit court of Cook County. 3 A default judgment in the amount of $235,410.26 was entered against Second Tenant on

February 26, 2009.

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electrical panels, conduit, and air pipes servicing the equipment were attached to the walls and

ceilings. According to Poulokefalos, at the time of the lease signing, the space in question was

50,000 square feet of open space. Original Tenant informed Poulokefalos that it needed a wall

built. However, it had to install equipment before building the wall or it would be unable to

bring the equipment in. Accordingly, a wall was constructed after Original Tenant installed the

equipment at a cost of $30,000. Now, this wall must be removed in order to remove the

equipment. Many rafters supporting the ceiling over a 24,000-square-foot area used by Original

Tenant would also have to be removed and replaced at substantial cost that could exceed the

value of the equipment. The equipment itself, welded together, would have to be dismantled by

cutting it into pieces with a blowtorch, relegating it to scrap. Unbolting the equipment from the

floors would leave many holes in the floor.

Edward Mundt, Second Tenant’s general manager and chief financial officer, testified

that machinery was bolted to the concrete floor with industrial anchor bolts. He did not know if

the machinery was attached to the rafters. He could remove the machinery from the building, by

breaking it down into several pieces, unbolting it from the floor, and lifting it with a fork truck.

It could be moved out of the building through garage doors.

On June 10, 2009, the trial court entered a memorandum decision and judgment in which

it made the following findings of fact and conclusions of law: (1) the Bank has a perfected

security interest in all of its collateral; (2) perfection of the Bank’s security interest in its

collateral did not require a fixture filing; (3) Landlords had a perfected landlord’s lien upon the

disputed equipment; (4) the Bank’s security interest in its collateral has priority over the

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landlord’s lien, and the Bank’s security interest is entitled to satisfaction prior to the landlord’s

lien; (5) Landlords’ right to possession of all fixtures and equipment permanently attached to the

premises is superior to the Bank’s security interest; (6) the disputed equipment cannot be

removed from the premises without material damage to the premises; and (7) the disputed

equipment is permanently attached to the premises and constitutes trade fixtures. The trial court

concluded that the Bank’s security interest is subordinate to the landlord’s lien as to trade fixtures

because the Bank did not file a fixture filing.

The Bank filed a motion to reconsider and to clarify the memorandum decision. Another

hearing was held, after which the court entered a written order clarifying the judgment:

“THE COURT FINDS that (1) the twelve (12) blow film

extruders identified as Mach #1 to 12, (2) three (3) indoor silos

with 50,000 lb. Capacity, and (3) the Landtech Q Series Stretch

Wrap (‘Trade Fixtures’), as identified on the Equipment List, are

so permanently affixed to the real estate that they cannot be

removed without material damage, and that they constitute trade

fixtures;

IT IS THEREFORE ORDERED that the Memorandum

Decision and Judgment entered on June 10, 2009, is modified so as

to provide that the Owners have priority as to the Trade fixtures

and that the Bank has priority as to all other items on the

Equipment List;

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IT IS FURTHER ORDERED that the Bank may remove all

property subject to the Bank’s security interest, except the Trade

Fixtures, provided that the Bank shall reimburse the Landlord for

any damage to the premises caused by such removal.”

The Bank appeals.

ANALYSIS

Bank first contends that the trial court erred in determining that the distrained properties

were trade fixtures. Specifically, Bank contends that evidence adduced at trial failed to show that

the distrained property was permanently attached to the real estate and could not be removed

without substantial destruction of the Premises. We disagree.

In Illinois, fixtures and trade fixtures are differentiated under the law. A fixture is an item

of personal property which is incorporated into or attached to realty. Nokomis Quarry Co. v.

Dietl, 333 Ill. App. 3d 480, 484 (2002). Because a fixture is deemed a part of the realty, it cannot

be removed by a tenant without incurring liability. Nokomis, 333 Ill. App. 3d at 484. A finding

that certain property is a fixture requires the court to consider a number of factors, including the

agreement and intent of the parties, the nature of the attachment to the real estate, and whether

the property can be removed without damage to the real estate. See Crane Erectors & Riggers,

Inc. v. La Salle National Bank, 125 Ill. App. 3d 658, 662 (1984).

A trade fixture is an item of personal property that is attached to the realty by a tenant for

the purpose of carrying on the tenant’s business. Nokomis, 333 Ill. App. 3d at 484. A tenant

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may only remove a trade fixture from the realty if doing so would not damage the realty.

Nokomis, 333 Ill. App. 3d at 484 (“[r]emoval is allowed only if, after the fixture is removed, the

realty is the same as it was prior to the tenant’s tenancy”). “In other words, a fixture is a trade

fixture when the tenant leases property and adds a fixture for use in the tenant’s business. Before

the lease expires, the tenant would be allowed to remove a trade fixture, so long as the tenant did

not damage the realty in the process of the removal.” Nokomis, 333 Ill. App. 3d at 484.

On review of a bench trial, we will not disturb the trial court’s findings of fact unless they

are against the manifest weight of the evidence. Chicago Investment Corp. v. Dolins, 107 Ill. 2d

120, 124 (1985). A finding is against the manifest weight of the evidence only when an opposite

conclusion is apparent or when the findings appear to be unreasonable, arbitrary, or not based on

the evidence. Webb v. Mount Sinai Hospital & Medical Center of Chicago, Inc., 347 Ill. App. 3d

817, 826 (2004). “A trial court’s judgment following a bench trial will be upheld if there is any

evidence supporting it.” Nokomis, 333 Ill. App. 3d at 484.

Here, the trial court found that all of the distrained property were fixtures that had been

“permanently attached to the Premises, including floors, ceilings, and heavy duty electrical

systems and cannot be removed without substantial destruction of the leasehold.” The property

distrained by Owners was itemized on the distress warrant and inventory. Prior to trial, Owners

abandoned their claim to an inventoried fork lift truck, conceding that the fork lift was not

attached to the real estate. The remaining inventoried property consisted mainly of huge

manufacturing machines, known as blow film extruders, used to manufacture large rolls of

plastic, and silos used to feed raw plastic pellets to the extruders. Owner Poulokefalos testified

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at trial that the blow film extruders and silos were bolted to the floors, ceilings, and walls. The

electrical fixtures and air pipes were attached in the same way. He testified that, at the time the

distrained property was installed, the building was permanently modified to accommodate

installation and connection of the equipment to the real estate: ceiling rafters were removed and

relocated, and a permanent interior wall was built after the silos were installed. Owner further

testified that the removal of the extruders and silos would affect the structural integrity of the

building and destroy the equipment itself. Specifically, Owner testified that, to remove the large

equipment, he would have to remove rafters as well as destroy part of the wall. He also testified

that removal of the equipment would leave many holes in the cement floor.

Bank relies on Mundt’s testimony that the silos, compressors and extruders could be

removed without materially damaging the building. Bank asserts that the “Landlords offered no

evidence to establish that removal of the Bank’s Collateral form the Premises would damage the

building.” Our review of the record leads us to conclude differently. The building owner,

Poulokefalos, who was present at the time the equipment was installed, testified that the property

would be substantially damaged upon removal of the equipment. Mundt, on the other hand, who

was not present when the equipment was installed, testified that the equipment could simply be

unbolted from the floor and lifted out the door. A trial court is in a superior position to observe

the witnesses while testifying, to judge their credibility, and determine the weight of their

testimony. Cyclonaire Corp. v. ISG Riverdale, Inc., 378 Ill. App. 3d 554, 559 (2007).

Accordingly, a trial court’s findings of fact are entitled to great deference by this court.

Cyclonaire Corp., 378 Ill. App. 3d 554, 559. Moreover, resolving conflicts relating to the

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credibility of witnesses and the weight to be afforded their testimony is the province of the trial

court. 1350 Lake Shore Associates v. Casalino, 352 Ill. App. 3d 1027, 1040 (2004). Here, the

trial court heard the evidence presented at trial and resolved conflicts in favor of Owners. The

trial court’s finding that removal of the equipment would cause destruction to the building was

not against the manifest weight of the evidence.

Next, Bank contends that the trial court erred in finding that Owners’ interest in the

distrained property had priority over Bank’s unperfected UCC lien. Specifically, Bank relies on

Cottrell v. Gersen, 296 Ill. App. 412 (1938), to argue that a landlords’ right to distrain the

personal property of a tenant for nonpayment of rent does not extend to grant Landlords a lien

upon the tenant’s property. We disagree.

Initially, we note that Bank has waived this argument by failing to raise it at the trial

level. See Addis v. Exelon Generation Co., 378 Ill. App. 3d 781, 795 (2007) (failure to properly

preserve an alleged error by both an objection at trial and a written post-trial motion constitutes a

procedural default of that error on review). Waiver aside, we find Bank’s argument

unpersuasive.

At issue here is the application of rules of priority between Landlords’ lien and Bank’s

asserted security interest in fixtures. The priority of parties’ respective security interests is a

question of law. Travelers Insurance Co. v. First National Bank of Blue Island, 250 Ill. App. 3d

641, 644-45 (1993). Our review of questions of law is de novo. See, e.g., Du Page County

Board of Review v. Department of Revenue, 339 Ill. App. 3d 230, 233 (2003).

A landlord’s distress remedy arises under section 9-301 of the Code of Civil Procedure,

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which provides:

“In all cases of distress for rent, the landlord, by himself or

herself, his or her agent or attorney, may seize for rent any personal

property of his or her tenant that may be found in the county where

such tenant resides, and in no case shall the property of any other

person, although the same may be found on the premises, be liable

to seizure for rent due from such tenant.” 735 ILCS 5/9-302 (West

2008).

Illinois law grants a landlord a common law lien on a tenant’s property for the non-payment of

rent that is perfected by the filing of a distress warrant and inventory with the clerk of the court.

735 ILCS 5/9-302 (West 2008); First State Bank of Maple Park v. De Kalb Bank, 175 Ill. App.

3d 812, 815-16 (1988). Here, Landlords properly filed a distress warrant along with a written

inventory and photographs. Cottrell is inapposite to the case at bar, where the parties in Cottrell

failed to initiate the distress proceedings by filing a distress warrant. Cottrell, 296 Ill. App. 412.

Unlike Cottrell, Landlords in the instant case properly initiated and prosecuted a distress

proceeding by filing a complaint and copy of the distress warrant along with an inventory to the

clerk of the court, served process on Second Tenant, and obtained a default judgment.

Accordingly, after determining that the distrained items were fixtures, the trial court did not err in

deciding that Landlords had perfected their lien by filing and prosecuting the distress warrant.

Moreover, the trial court did not err in finding that the perfected landlord’s lien is

superior to Bank’s unperfected security interest with respect to all fixtures permanently attached

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to the premises. The lien priorities between a landlord’s lien and a UCC lien are governed by

non-UCC principles. First State Bank of Maple Park, 175 Ill. App. 3d at 817. “Applying [these]

non-UCC principles, generally a lien which is first in time has priority [citations] and is entitled

to prior satisfaction out of the property it binds.” First State Bank of Maple Park, 175 Ill. App.

3d at 817.

Bank established at trial that it filed a UCC financing statement with the Missouri

Secretary of State claiming a security interest in property belonging to the tenant. However, the

filing was insufficient to perfect its security interest in fixtures located on Landlords’ property,

where a fixture filing was also required in the Cook County recorder of deeds. 810 ILCS 5/9-501

(West 2008). Accordingly, Bank did not perfect its security interest in the fixtures, and the trial

court correctly concluded that the perfected landlord’s lien has priority over Bank’s unperfected

UCC lien under the common law rule of first in time, first in right.

For the foregoing reasons, we affirm the judgment of the circuit court of Cook County.

Affirmed.

TOOMIN, PJ., and HOWSE, J., concur.

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__________________________________________________________________________________________________________________________ REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT (Front Sheet to be Attached to Each Case) _________________________________________________________________________________________________________________________ Please use the following form SOUTHWEST BANK OF ST. LOUIS,

Plaintiff-Appellant,

v.

DIMITRIOS POULOKEFALOS AND NIKOLAOS KALOURIS, Individually And as Beneficiaries of Chicago Title Land Trust Company, Successor to LASALLE BANK, N.A., as Trustee Under Trust No. 4020,

Defendants-Appellees. _____________________________________________________________________________________________ No. 1-09-2387 Docket No. Appellate Court of Illinois COURT First District, FIFTH Division Opinion Filed June 4, 2010 (Give month, day and year) __________________________________________________________________________________________ JUSTICE JAMES FITZGERALD SMITH DELIVERED THE OPINION OF THE COURT: JUSTICES TOOMIN, P.J., and HOWSE, J., concur.

Lower Court and Trial Judge(s) in form indicated in margin: APPEAL from the Circuit Court of Cook Appeal from the Circuit Court of Cook County. County; the Hon________ Judge Presiding. The Hon. ALEXANDER P. WHITE Judge presiding. __________________________________________________________________________________________________________________________ Indicate if attorney represents APPELLANTS or APPELLEES and include attorney's of counsel. Indicate the word or FOR APPELLANTS NONE if not represented. John Doe, of Chicago

For APPELLEES, : APPELLANT: RICHARD C. JONES, JR., TINA M. JACOBS, Law Office of Jones & Jacobs _________________________________ __ Smith and Smith of Chicago, APPELLEE: ROBERT J. WAGNER, Robert J. Wagner, P.C.

__________________________________________________________________________________________________ (Joseph Brown, of counsel) Add attorneys for third- party appellants and/or appellees.