LAKE COUNTY BAR ASSOCIATION

REAL ESTATE SEMINAR - CASE LAW UPDATE

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March 7, 2000

State Bank of the Lakes - Grayslake, Illinois

Steven B. Bashaw

e-mail: sbashaw@bashawlaw.com

(Copyright 2000 - All Rights Reserved)

[ Editor's Note: The following is a compilation of the monthly case notes of recently decided Illinois Supreme Court, Appellate and Seventh Circuit Cases dealing with Illinois real estate law which appears on the website of the Illinois Institute of Continuing Legal Education as the "Real Estate Flashpoints", (iicle.com), also appears on the Illinois State Bar Association Real Estate Section Council Discussion Site, (isba.org), and may be included from time to time on the Illinois Real Estate Lawyer's Association website (reallaw.com). Archived copies are available at the author's law firm website, (mbc.com), in the "Books and Articles" area under "Real Estate". For this material, the cases have been organized under general topic headings for ease of reference and relatedness. The citations for published reports have been inserted for some cases as they become available in print form, (most cases are noted at a point in time when they are only available in electronic print form on the internet), and the url addresses for most cases are preserved, (although after the passage of time, some cases may no longer be available electronically). The case notes contain editorial material and comments which are solely those of the author and are not to be construed as a statement of position of the Northwest Suburban Bar Association, Illinois Institute of Continuing Legal Education, the Illinois State Bar Association, Illinois Real Estate Lawyers Association, or McBride Baker & Coles.]

ADVERSE POSSESSION, EASEMENTS and ENCROACHMENTS:

Intentional Encroachments and Laches:

In Whitlock v. Hilander Foods, Inc., (2nd Dist., October 29, 1999), No. 2-98-1421, http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/October/HTML/2981421.htm, Whitlock owned the property south and adjacent to the property owned by Hilander Foods, Inc., and upon which it had operated a grocery store for a number of years. When Hilander built an addition to its store, it installed footings underground which encroached on the Whitlock property; although the wall itself did not encroach. The Trial Court granted Hilander's motion for summary judgment finding that Whitlock was guilty of laches and had not sufficiently met the burden to support a mandatory injunction to remove the footings considering the relative hardships to the parties. The Appellate Court reversed and remanded.

First, noting that the court must balance the hardship to defendants in requiring that they remove the encroaching footings against the benefit to the plaintiff in order to grant an injunction to remove the encroachment, ("if the former is great and the latter slight, the court will ordinarily leave the plaintiff to his remedy at law" for damages), the decision makes the distinction that where the encroachment is deliberate and intentional , the injunction may issue without considering balancing the relative hardships. "One who knows of a claim to land that he proposes to use as his own proceeds at his peril if he goes forward in the face of protest or warnings from the owner and places a structure on the land." The Trial Court was also found to have erred in determining that Whitlock was guilty of laches in delaying the filing of suit where there were factual issues relating to Hilander's assurance that it would "work something out" with Whitlock. Hilander's attorneys and agents repeatedly told Whitlock that there would be suitable compensation forthcoming for the encroachment, and this was sufficient representation to raise an issue of fact of whether defendant contributed to the Plaintiff's delay in bringing suit on the issue of laches.

Elements and Adverse Possession:

Where the property buyers purchased property subject to an easement to maintain railroad tracks, and they were aware that the railroad's drainage ditches alongside of the tracks encroached beyond the actual easement, the encroachment ripened into a prescriptive easement over time. The case lists the elements for a prescriptive easement, (i.e., open, adverse, continuous and uninterrupted, and under a claim of right for a period of twenty years), and concludes with a finding that since the encroachment was as old as the easement itself it had ripened into a property interest. Independence Tube Corp. v. Radke, (3rd Dist., 11/19/98, No. 3-97-0987), 301 Ill.App.3d 713, 704 N.E.2d 72, 234 Ill.Dec. 914; http://www.state.il.us/court/Opinions/AppellateCourt/1998/3rdDistrict/November/HTML/3970987.htm.

CONDEMNATION/EMINENT DOMAIN:

Public Versus Private Use:

National City Environmental, L.C. appealed the ruling of the Circuit Court of St. Claire County upholding an eminent domain, quick-take action by the Southwestern Illinois Development Authority (SWIDA) of its real estate. South Western Illinois Development Authority v. National City Environmental, L.C., (5th Dist. April 29, 1999, No. 5-98-0263), 304 Ill.App.3d 542, 238 Ill.Dec. 99, 710 N.E.2d 896, http://www.state.il.us/court/Opinions/AppellateCourt/1999/5thDistrict/April/HTML/5980263.htm. Its argument was the SWIDA took the property for a private rather than a public purpose because it intended to and did immediately convey the property to a private party for that party's profit. NCE operated a metal recycling center adjacent to Gateway International Raceway. The raceway needed additional parking to expand its venue to major stock car races. When NCE refused its overtures, the raceway turned to SWIDA, which advertises that "in exchange for fees and expenses", it will condemn land at the request of private developers to advance a favorable climate for new jobs...foster civic pride...and develop entertainment and sports.

After a review of the constitutional basis and historical development of condemnation law that has expanded the "public purpose" of eminent domain to include urban development, the Court noted: "As disparate as these purposes are, it should be noted that none of them involve the taking of property from one private party and the immediate transfer of it to another private party, whose interest is solely to earn grater profits." The Court found the expansion of the raceway parking primarily to increase the venue's profitability was a "private use" rather than "public purpose" and reversed the trial court. "Eminent domain is an intrusive power, and the potential for its abuse is boundless....Although the term "public use" is flexible in an ever-changing society, the basic concept of private property does not change."

The SWIDA has asked the Illinois Supreme Court to review the lower court's decision in its petition for leave to appeal to the high court. The Supreme Court will not rule on the petition for leave to appeal until its September term begins, but there are three parties who have already sought leave to file amicus curiae briefs if the case is accepted. (As reported in the Chicago Daily Law Bulletin, Friday, July 23, 1999.) This case promises to be one worthy of watching.

Eminent Domain And The Taking Of "Replacement" Property Pursuant To An Agreement Among Governmental Agencies

In this case, The Department of Transportation of the State of Illinois v. Callender Construction Company, (4th Dist., May 28, 1999, No. 4-98-0184), 305 Ill.App.3d 396, 711 N.E.2d 1199, 238 Ill.Dec. 538 http://www.state.il.us/court/Opinions/AppellateCourt/1999/4thDistrict/May/HTML/4980184.htm, the Court grappled with a convoluted fact pattern that included a prior federal lawsuit enjoining IDOT's construction of Interstate 72 from Springfield to Quincy by passing through the Pike County Conservation Area, endangered species, and a "land trade" between IDOT and the Illinois Department of Conservation. The Defendant landowner objected to the condemnation alleging a lack of necessity and statutory authority for the taking, noting that the condemnation of 400 acres of private land, plus restrictive easements on several hundred additional acres, to replace 35 acres of Conversation Area was grossly excessive and an abuse of power.

The Court found that the Illinois General Assembly had concluded that the expressway was necessary for the public good. In order to obtain federal funding IDOT had to satisfy the IDOC that there was no feasible or prudent alternative to construction through the conservation area. Then, to provide for mitigation to preserve the wildlife habitat by using its power of eminent domain to replace the land acquired from the Conversation Area in order to comply with the statutory mandates regarding wildlife habitat and endangered species, the Court found IDOT acted within its authority to acquire a restrictive easement on defendants' property. In response to the dissent filed by Justice Cook arguing that "replacing" 35 acres with 400 and restrictive easements on hundreds of other acres was simply gross, the majority opinion cited existing law that "the court will not inquire into the extent to which the [taking of] property is necessary for such [public] use unless it appears that the quantity of property taken is grossly in excess of the amount necessary for the use." Judge Cook responded that "The argument that there are no limits upon IDOC's power to demand replacement property, perhaps in reaction to pressure by environmental groups is without support....{while} The majority states that intergovernmental agreements are encouraged. I believe that this is true, but I would caution that an agreement between two governmental bodies should not be allowed to compromise basic rights of individuals."

This case is also noteworthy for its definition of the term "necessary" in a condemnation setting as meaning "expedient", "reasonably convenient" or "useful to the public," and not as limited to an absolute physical necessity.

 

Awarding Title On Vacated Streets Or Alleys; A Constitutional Challenge:

In Chavda v. Wolak, (Il. S.Ct., December 2, 1999), http://www.state.il.us/court/Opinions/SupremeCourt/1999/December/Opinions/HTML/86687.htm the Justice Rathje wrote the Illinois Supreme Court's decision reversing a trial court's finding that a 1997 amendment to the Illinois Municipal Code relating to the vacating of streets and alleys was unconstitutional, and found that it was not.

The facts of the case deal with the Village of Lombard Ordinance which vacated a portion of Edson Street. The parcel was abutted to the west by Chavda's property and to the east by Wolak's property. Ordinance No. 4482 provided that the public interest would be served by vacating the portion of the street, that the fair market value of the parcel vacated was $30,000, and that Chavda alone should pay the Village for fair market value of the parcel. The 1997 amendment to the Illinois Municipal Code at issue provides that if an ordinance as passed requires that only one owner pay the value of the vacated parcel, then that owner shall be entitled to acquire ownership to the entire parcel as vacated. The Wolaks, as owners of the property that abutted the vacated parcel to the east argued that the amended section, (65 ILCS 5/11-91-1), conflicted with the following section, (65 ILCS 5/11/91-2), which states that upon the vacating of a street or alley, title to the parcel vacated vests proportionately in all abutting property owners. The apparent conflict, they argued, rendered the amendment unconstitutionally vague. They also argued that the amendment denied due process to them because it authorizes a municipality to arbitrarily award title to only one of several abutting owners, and thereby violates the equal protection clause and constitutes special legislation. The trial court agreed that the amendment was unconstitutional. Justice Rathje reversed. Noting first that the municipality has an obligation to act in the public's best interest when vacating a street or alley, and the ordinance is presumed to be valid, the decision then found that the Wolaks failed to show by clear and affirmative evidence that Lombard did not act in the public's best interest and therefore must be presumed to have acted reasonably in awarding title to Chavda as an abutting owner. The Court also found that Section 11-91-2, rather than conflicting with 11-91-2's general presumption that the title will vest proportionately among the abutting owners, was intended to be an "limited exception to that categorical rule" (of proportionate vesting) when compensation is required to be paid by one owner rather than all abutting owners. The argument that the ordinance was "special legislation" that discriminated in favor of a select group without a sound, reasonable basis was also denied based on the previously discussed presumption that the Village acted reasonably in the best interest of the public. Justice Rathje drew a distinction between this amendment and clearly objectionable legislation, by example, that "dictated that title always be awarded to the owner of the property that abuts the vacated street or alley on the east, or that title always be awarded to the abutting property owner who last name contains the fewest letters".

(I still didn't "get it", though...how did the Village of Lombard determine that Chavda rather than Wolaks got to pay the $30,000 and obtain title???)

The statute is constitutional, however, and the case was remanded to the trial court to hear "material issues of fact"...presumably about HOW the Village of Lombard proceeded under Ordinance No. 4482, now that we know the empowering legislation is constitutional .

CONDOMINIUMS & COOPERATIVES:

Amendments to the Declaration:

In Huskey v. Board of Managers, (1st Dist. 1998), 297 Ill.App.3d 292, 696 N.E.2d 753, 231 Ill.Dec. 457, the developer had reserved the right to add additional condominium units to the development in the declaration by amendment. In a series of amendments, the Board of Directors increased the percentile ownership in the common elements of the owners of the larger units. The owners of those units brought suit claiming that a change in the percentage ownership of common elements required the consent of all unit owners. The board responded that the change was done to correct an error in the percentage calculation and as reserved in the declaration. The Appellate court held that 756 ILCS 605/4 mandates the unanimous consent of all unit owners and this statutory provision controlled over the general reservation of right incorporated into the declaration by the developer, thereby invalidating the last amendments.

Assessment Lien Priority:

In a case of first impression, the Second District has analyzed the issues relating to the priority of a condominium assessment lien, (which continues to accrue monthly relative to other liens), and whether repair expenses can be included in addition to assessments in the lien. Lake Hinsdale Village Condominium Association v. Department of Public Aid, (2nd Dist, 1998), 2968 Ill.App.3d 192, 698 N.E.2d 214, 232 Ill.Dec. 376. The Court held that the associationís lien for unpaid assessments has priority over Illinois Public Aid lien, even as to assessments for the months after the Department recorded its lien, based on a conclusion that the legislature intended the lien of assessments relate back to the date the associationís lien for the initial past due payment was perfected; i.e. the date of the first default. To hold otherwise, the Court reasoned, would create a "needlessly harsh result" because the association relies exclusively on the unit owners assessments to pay the common expenses. The decision also noted that the Condominium Act provides that an encumbrancer can request a statement of the associationís expenses on a unit and pay them, (thereby giving its lien a priority under 765 ILCS 605/9(j), or, if the association does not respond to the request, the lien of assessments become subordinated. The decision makes a distinction between assessments for common expenses and advances made to repair or maintain the unit excluding the later its decision on priority.

Cooperatives Create A Landlord-Tenant Relationship Allowing Remedy Of Forcible Entry And Detainer:

In Harper Square Housing Corporation v. Hayes, (1st Dist., June 17, 1999, No. 1-97-4177), ____ Ill.App.3d ____, 713 N.E.2d 666, 239 Ill.Dec. 135, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/June/HTML/1974177.htm, the First District affirmed the finding by the Cook County Circuit Court that a Cooperative has the right to proceed in forcible entry and detainer against a member/occupant of a unit in the Coop. The Court noted that the Illinois Courts have previously reviewed the nature of a cooperative and ruled that the usual coop creates the relationship of landlord and tenant between the cooperative and shareholder-occupant, and therefore extended to the corporation the usual remedies of a landlord against a tenant for nonpayment. In this case the tenant attempted to rely upon a prior decision in which the Court found a cooperative shareholder was not a "tenant". The First District distinguished that case from this one based upon the unique "Mutual Ownership Contract" in the first which contained no language indicative of a leasehold. In the case at bar, the Court found ample language indicative of a "lease", references to the right to "re-let the unit", and references to a term of lease arrangement, and therefore upheld the Circuit Court's ruling imposing the remedies of a landlord, holding that the nature of the relationship is to be determined by reviewing, in totality, the cooperative's documents. (This case also has some good language relating to the fact that a lack of subject matter jurisdiction is a fundamental defect that may be raised at any time, by any means.)

 

Fiduciary Duties Of Developers To Fund Reserves For Townhomes And Condominiums:

Two decisions rendered within a week of each other should give some sobering thought to developers of condominiums and townhomes, and promises to provide a "full-employment opportunity" for their lawyers.

In Weathersfield Condominium Association v. Schaumburg Limited Partnership, (1st Dist., July 16, 1999), http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/September/HTML/1981053.htm, 240 Ill Dec. 336, 717 N.E.2d 429, the Court ruled in favor of the condominium association against the developers for breach of fiduciary duty to maintain adequate reserves and concealment of the status of the reserve accounts from purchasers of units. The developers moved to dismiss the associations' complaint which alleged that at the time of the turnover the developer had only accumulated $26,541.17 in capital reserves and knew that the roof and parking lot needed repairs that would cost $500,000.00. Finding that the complaint alleged a cause of action for breach of a fiduciary duty to establish reasonable reserves, the Court affirmed the applicability of Maercker Point Villas Condominium Assn. v. Szymaki, (2nd Dist., 1995), 275 Ill.App.3d 481, 655 N.E.2d 1192, 211 Ill.Dec. 809. The decision also found that the concealment of the reserve problems from unit purchasers stated a cause of action under the Consumer Fraud Act, and reversed and remanded the trial court's dismissal in favor of the developer.

The Second District also believes that the developer of a townhouse project has a fiduciary duty to the association to fund reserves and collect assessments. Applying the same reasoning in Maercker Point Villas Condominium Assn. v. Szymaki, (2nd Dist., 1995), 275 Ill.App.3d 481, 655 N.E.2d 1192, 211 Ill.Dec. 809, the Court stated "We find nothing in this language that limits it solely to situations involving condominiums...we find that there is a common-law based fiduciary duty relationship between a townhome developer and a townhome association.", in Seven Bridges Courts Assn. v. Seven Bridges Development, Inc., (2nd Dist., July 23, 1999, No. 2-98-0729), http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/July/HTML/2980729.htm, 306 Ill.App. 3d 697, 239 Ill.Dec. 682, 714 N.E.2d 601, Unfortunately, this case also dealt with an exculpatory clause which was contained in the recorded declaration and provided that the assessments paid by the developer were to be based on actual operating expenses and "shall not include capital expenditures, amounts to be set aside as a reserve for contingencies or replacements...". The trial court ruled that this language was ambiguous, against public policy and unenforceable. The appellate court reversed, finding the language clear from any ambiguity, and then went to great lengths to support its decision that exculpatory clauses can be used to limit a fiduciary's liability in this circumstance.

3. Condominium Declarations, Assessments, And Limited Common Elements:

The Second District was confronted with a challenge that an amendment to a condominium declaration was violative of the Condominium Property Act as creating an impermissible class of limited common elements in Hofmeyer v. Willow Shores Condominium Association, (2nd Dist., December 23, 1999), http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/December/HTML/2990030.htm.

In this case, the original declaration was recorded in September, 1980, creating 15 buildings each containing common hallways, heating units, and shared utilities in an apartment building setting with a total of 60 units. An amendment to the declaration was recorded in 1982 expanding the development parcel to include the plaintiff's four, townhomes-style structures that did not have common hallways, utilities or heating. The amendment further divided the development into two "neighborhoods", one consisting of the original 15 buildings and the other consisting solely of the plaintiff's building, and creating separate assessments against units within each neighborhood for the maintenance of limited common elements in that neighborhood. Everything appeared to proceed without a problem until 1997, when the Association's Board of Directors decided to assess all units equally without any distinction between the neighborhoods, and thereby increased the plaintiff's assessments from $77 to $225 per unit.

In response to the action, the plaintiff unit owners filed a declaratory action seeking a ruling that the amendment was valid and binding on the board. The Association responded that the amendment was invalid as creating an impermissible class of limited common elements. The trial court granted summary judgment and awarded attorney's fees in favor of the unit owners, and the Association appealed.

In upholding the Trial Court, the decision notes that the purpose of permitting the designation of limited common elements is to avoid forcing unit owners to pay maintenance expenses for amenities from which they derive no benefit; such as patios, balconies and parking spaces. Accordingly, the Condominium Property Act expressly allows the designation of limited common elements that serve more than one unit but does not require the exclusion of all other unit owners from those limited common elements. To hold that such a designation of limited common elements creates an impermissible class of members consisting solely of owners of units served by that element would be illogical, and require that one section of the Act be construed to prohibit what another section expressly permits.

The Court, however, reversed the award of attorney's fees to the unit owners on appeal. The Plaintiff's attempt to rely upon a section of the declaration which gives the Association the right to recover its attorney's fees in an action against a unit owner was not persuasive to overcome the "American Rule" that prevailing the party must pay its own fees absent a statutory or contractual provision; even though the plaintiff's artfully argued that "fairness" and "mutuality of obligation" required the declaration be read as creating reciprocal rights to recover attorney fees.

CONSTRUCTION CONTRACTS:

Warranty of Habitability Statue of Limitations:

The purchaser contracted with John Henry Homes, Inc. to design and build a two-story home which closed in November, 1986. Just less than ten years later, the buyers noticed that the rear wall of the home had begun to buckle and filed a suit against the builder. The first complaint, based on breach of express warranty, was dismissed due to the one-year limitation period set forth in the contract, and Plaintiff filed an amended complaint alleging the builder breached the implied warranty of habitability. The trial court dismissed this complaint as well, finding that it was barred by the 10 year statue of limitation in 735 ILCS 5/13-214. The buyers appealed contending that the statute of limitations was four years from the date of discovery rather than ten years from the date of the act or omission, provided they discovered the problem within ten years from the date of the closing. The Second District first confirmed that the statute of limitations applies whether the cause of action is created by statute or common law, (i.e., implied warranty of habitability). Next, the Court reasoned, the ten year period begins to run on the date the home is conveyed to the buyer rather than the date of completion of building; because it is not until then that the defect could be discovered. Finally, in reversing the trial courtís dismissal based on the statute of limitations, the Second District noted that the Complaint was filed within the "four year grace period" following the discovery within ten years of the date of conveyance and therefore ought not have been dismissed. As a result, there may be number of builders losing sleep...or at least another four years of it. Andreoli v. John Henry Homes, Inc., (2nd Dist. 1998), 297 Ill.App.3d 1151, 696 N.E.2d 1193, 231 Ill.Dec. 622

 

Care in Drafting Construction Escrow Instructions and Agreements:

Most real estate practitioners have occasion to draft escrow instructions to govern payments to contractors and subcontractors during the construction of a residence. The task usually involves balancing the protection of the owner and the lender with the needs of the builder, and too often lawyers defer to the lender and title company to assure all is well. In Fantino v. Lenders Title and Guaranty Company, (2nd Dist. February 26, 1999) No. 2-98-0475, http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/February/HTML/2980475.htm, 303 Ill.App.3d 204, 236 Ill.Dec. 629,707 N.E.2d 756, the appellate court's reversal of the trial court's finding that the Fantinos were third-party beneficiaries of the escrow agreement drafted "for the direct benefit of the lender" is a source of warning to all. The Fantinos were actual parties to the escrow, but the agreement specifically limited the title company's duty to protect to the lender's interests. Accordingly, when the contractor overdrew on the escrow and committed forgery, the owners filed suit and obtained a judgment at trial against the title company based on the theory that they were third party beneficiaries of the escrow agreement and a breach of fiduciary duty. The appellate court reversed because the escrow agreement created only duties on behalf of the title company for the benefit of the lender, and therefore did not protect the owner. The owner was expressly a party to the escrow agreement and therefore could not be a third party beneficiary. Clearly a lesson for all involved in construction escrows, this case points out the importance of making certain that the owners' interests (in addition) to the lender's are specifically addressed in the escrow agreement.

 

FORGERY: & FRAUD

Forgery; Fraudulent Act By One Partner Within Scope Of Partnership Imputed To Other Partners:

In a decision which specifically "reconsiders" the court's prior decision in Pioneer Bank & Trust Co. v. Austin Bank, (1st Dist., 1996), 279 Ill.App.3d 9, 664 N.E.2d 182, 215 Ill.Dec. 785, the First District has held that all partners are liable when one partner commits forgery for the benefit of the partnership in Shelter Management XIX v. Much Shelist, Freed Deneberg and Ament, (1st Dist., 4/16/99, No. 1-97-0163) 303 Ill.App.3d 1067, 709 N.E.2d 592, 237 Ill.,Dec. 337, http://www.state.il.us/court/Opinions/AppellateCourt/1998/1stDistrict/December/HTML/1970163.htm, citing Saikin v. New York Life Insurance Co., (1st Dist., 1977) 45 Ill.App. 3d 1019, 360 N.E.2d 413, 4 Ill.Dec. 477, and the provisions of the Illinois Uniform Partnership Act, 805 ILCS 205/13. In this case, a general partner forged guarantee signatures on a partnership note, and then had the signatures improperly notarized. The note and guarantees were made in order to secure a purchase money mortgage to purchase real estate in the ordinary course of the partnership business. The court found that the clear and unequivocal pronouncement of Section 13 of the Illinois Uniform Partnership Act is that a partnership is liable for the wrongful acts of a partner committed in the ordinary course of the business of the partnership. The decision reversed the trial court's dismissal of the complaint pursuant to 735 ILCS 5/2-615 and held that to the extent there were negligent violations of the Notary Public Act by the parties swearing under oath that they witnessed the signing of the guarantees when, in fact, they did not , the forgery was with the express or implied authority of the co-partners and this was imputable to all partners pursuant to the Illinois Uniform Limited Partnership Act.

 

Attachment Of Real Estate; Intent To Hinder Or Delay Creditor And Regardless Of Joint Debtor's Ability To Pay:

Defendant Dean Hamilton, President of HAI, Inc., guaranteed two promissory notes of the corporation along with others. Amcore Bank brought an action against the corporation and the guarantors on the notes. The Bank filed a prejudgment attachment against only Hamilton when it discovered that just prior to the filing of the complaint Hamilton had (a) conveyed an Arizona condominium he owned by quitclaim deed to his daughter for no consideration, (b) conveyed a remainder interest in his home to his stepdaughter for no consideration while retaining a life estate for himself and his wife, (c) conveyed a remainder interest in another Arizona condominium to his daughter for no consideration while reserving a life estate for himself and his wife, (d) transferred an investment interest to his daughter, and (e) purchased a substantial annuity for his wife. The trial court denied the request for attachment. While it specifically found that the plaintiff would probably prevail, Hamilton had fraudulently conveyed his assets within two years, and as a result the Plaintiff would be hindered or delayed, the trial court noted that there were other guarantors who would also be responsible for the full amount and may have been able to pay the Plaintiff. Accordingly, the trial court reasoned, if the other guarantors were able to pay the debt, the Plaintiff would not be hindered no matter what Hamilton did, and the Bank had failed to meet its burden under the attachment statute. (735 ILCS 5/4-101 et seq.) On appeal the Second District ruled that the fact that the Plaintiff might be able to obtain payment from the other guarantors had no bearing on the attachment action, and the relevant inquiry was whether Hamilton's actions were with the intent to hinder or delay his creditors. Even though the other guarantors had not been served with summons of the attachment, this did not deprive the trial court of jurisdiction. Noting that there is dearth of modern case law concerning attachments and the "hinder or delay creditors" language, the decision holds that the Plaintiff was not required to show that it actually was hindered or delayed and states sternly that "Applying the trial court's interpretation of the statute would allow a fraudulent debtor to escape liability as long as he had joint debtors that did not fraudulently dispose of their assets, thereby rewarding a debtor for his dishonesty at the expense of his honest joint debtors, a result we do not care to encourage." Amcore Bank, N.A. Rock River Valley v. Hahnaman-Albrecht, Inc., (2nd Dist., 4/9/99, No. 2-98-0675), 305 Ill.App.3d 63, 710 N.E.2d 435, 237 Ill.Dec. 805, http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/May/HTML/2980675.htm.

Fair Debt Collection Practices Act And Collection On A Forged Mortgage:

In Transamerica Financial Services, Inc. v. Mary E. Sykes v. Ira T. Nevel, (N.D. Il., 3/25/99, No. 98-2586), 171 F.3d 553, (1999 WL 157652), the Plaintiff's attorney in a foreclosure action was the subject of a FDCPA counterclaim brought by the mortgagor who claimed that the mortgage was a forgery and that she owed no money to the Plaintiff. The case was removed by Sykes from State to Federal Court to prosecute her federal counterclaims, and the District Court granted summary judgment to Transamerica and Nevel, remanding the case to state court. Sykes appealed only the summary judgment on the Fair Debt Collection Practices Act issues. In affirming summary judgment, the Court noted that the pertinent section of FDCPA applies to circumstances where there are attempts to collect a fee or charge for which the contract itself does not provide or is not authorized by law; (i.e., the collection of forced placed auto insurance premiums not authorized by the agreement as in Jenkins v. Heintz, 124 F.3d 824, or attempted collection of a time barred debt as in Kimber v. Federal Financial Corp., 668 F.Supp. 1480). In this case, the mortgage authorized the collection efforts undertaken by the attorney, and the Court reasoned that the forgery had no bearing, given the fact that none of the documents given to Nevel by Transamerica suggested a forgery and Nevel had no notice that the debt instruments might be forgeries.

 

Fraudulent Conveyances And Tax Deeds:

In December, 1993, A.P. purchased the delinquent taxes on property owned by Leanna. In June, 1996, Leanna transferred her interest to Robert. In July, 1996, A.P. filed a petition for a tax deed and the redemption period was set to expire on November 29, 1996. Ten days before the expiration of the redemption, Robert sold the property to the Illinois Real Estate Opportunity Fund for $5,000, and the Fund redeemed the next day. A.P. sought to set aside the transfers from Leanna to Robert and Robert to the Fund as fraudulent conveyances under the Illinois' Uniform Fraudulent Transfer Act, and the Fund moved to dismiss under Section 2-619 arguing that the Act only provides relief to "creditors" and that A.P. is not a "creditor" under the Act. A.P. also argued that the Fund's motion to dismiss its Tax Deed Petition should be denied because the Fund had not filed a redemption under protest under the Tax Code. The trial court granted both motions to dismiss, was affirmed by the appellate court, and that decision was affirmed by the Supreme Court.

The Court's decision found that in order to have standing to object to a transfer under the Uniform Fraudulent Conveyances Act, one must be a "creditor" under Section 5(a) of the Act. After a review of the Tax Code, the Court concludes that the "debtor-creditor" relationship exists solely between the county and the landowner, but that "Nowhere, however, does the Code establish such a relationship between the landowner and the purchaser (at a tax sale)." While the definition of a "claim" giving rise to a debtor-creditor relationship is "expansive", and includes contingent and unmatured rights to payment, it is not all encompassing.

The Courts also rejected A.P.'s argument that the redemption was ineffective because the Fund redeemed after the filing of the Tax Deed Petition without filing a written notice of a redemption "under protest" pursuant to 35 ILCS ILCS 200/21-389. Holding that the Fund clearly did not intend to "protest "the tax sale, but simply wished to redeem, the Court distinguished the holding in two apparently contradictory cases, (Galmon and Bluegreen), holding that "a person who is not redeeming under protest need not comply with section 21-380 and will not lose their right to defend against a petition for a tax deed by not redeeming "under protest". A.P. Properties v. Goshinsky, (Ill.S.Ct., Dist., July 1, 1999, No. 86191), 186 Ill.2d 524, 1999 WL 482083, http://www.state.il.us/court/Opinions/SupremeCourt/1999/July/Opinions/HTML/86101.htm.

Constructive Trust Distinguished From Resulting Trust:

In a case that initially makes you wonder just how many fraudulent conveyance theories there are in the world, the Seventh Circuit Court of Appeals draws an interesting distinction between constructive trusts and resulting trusts under Illinois Law that may prove worthwhile to some litigators. In Dunham v. Kisak, (7th Cir., October 4, 1999), No. 99-1106, the bankruptcy trustee filed an adversary complaint asserting that in executing a quit claim deed to his parents within ten months of his bankruptcy filing, Kisak fraudulently transferred the property. The bankruptcy court denied the trustee's request for relief noting that the debtor had either "bare legal title" or an interest in the real estate that "has no value whatsoever" because his parents were the real party in interest and he held title "solely in constructive trust for his parents". On appeal, the district court affirmed on a different ground, stating the debtor's interest in the property was a "resulting trust under Illinois law", rather than a constructive trust. The Court of appeals affirmed both lower courts, but clarified the theories noting that a constructive trust is imposed as a remedy to prevent unjust enrichment in cases of wrongdoing, whereas a resulting trust seeks to carry out a donative intent rather than thwart a wicked scheme. (Got that??) Noting that Illinois law presumes that when a deed lists two family members as joint tenants, only one of who supplied the consideration, that one is presumed to be making a gift of a one-half interest in the property and only by clear and convincing evidence can a resulting trust theory overcome the presumption. In this case, there was no clear and convincing evidence to support a resulting trust, and the conveyance was simply transferring the title in the parents and not a scheme to defraud the creditors because the son never had an interest available to him for disposition.

LANDLORD/TENANT:

Lease provisions exempting landlord from damages arising from negligence is void as against public policy regardless of whether suit is brought under tort or contract theory.

The Plaintiff landlord brought an action to enforce an indemnification provision of a lease against the tenant to recover workmanís compensation costs paid to the landlordís employee. The trial court dismissed the case pursuant to Section 2-619 based upon the Landlord Tenant Actís voiding of lease provisions "exempting" a landlord from liability for damages arising from its negligence as contrary to public policy. (765 ILCS 705/1) On appeal, the landlord argued that inasmuch as the claim was based upon a "contract" rather than "tort" theory, the statuteís prohibition was inapplicable, citing a 1990 case limiting application of the act to negligence actions. (Madigan Brothers, Inc. v. Melrose Shopping Center Co., (1st Dist. 1990), 198 Ill.App.3d 1083, 556 N.E.2d 73. 145 Ill.Dec. 112.) The courtís majority opinion specifically declined to follow the Madigan case and held that: "We do not believe that the same lease provisions can be simultaneously void and not void...Whether a particular lease provision is void depends not on the cause of action in which the lease provisions is invoked, but rather, whether the language of the lease provision runs afoul of the statutory prohibition." In dissent, Justice Hoffman disagreed with the majority opinion, but on definitional terms rather than distinctions relating to contract versus tort theory of recovery. The dissent notes that the statutory prohibition addresses "exemption" lease provisions as void against public policy without reference to "indemnification". Inasmuch as the lease language at issue was an "indemnification" rather than an "exemption" clause, Justice Hoffman took the position was that it was not void. Economy Mechancial Industries, Inc. v. T.J. Higgins, (1st Dist, 12/19/97) 294 Ill.App.3d 150, 689 N.E.2d 199, 228 Ill.Dec. 327.

Landlord's Duty to Mitigate Damages; A Setoff, Not A Defense:

It should not be surprising that a case involving a landlordís duty to mitigate damages would involve a law firm tenant. In St. George International v. George J. Murges & Associates, (1st Dist. , 1998) 296 Ill.App.3d 285, 695 N.E.2d 503, 230 Ill.Dec. 1013, the break-up of a firm resulted in the termination of the lease for nonpayment, with the landlord reserving the right to sue for damages. A subsequent suit against the firm and the individual guarantors was met with several affirmative defenses; including an alleged failure to mitigate damages pursuant to a specific provision in the lease plead as a bar to recovery in total. The appellate court ruled that landlord had the burden to prove that it took reasonable measures to mitigate, but that its failure to mitigate would only reduce its recovery, not completely bar recovery since the duty to mitigate relates to the measure of damages, not the right to recovery.

 

Landlord/Tenant and Fair Debt Collection Practices Act:

Most real estate litigators have become accustomed to the pronouncement of the United Supreme Court that we are "Debt Collectors" subject to the Fair Debt Collection Practices Act, (15 U.S.C. Section 1692 et seq.), but the warnings seem to bear repeating, and especially so as each new scenario presents itself. In a recent New York case, the Second Circuit has ruled that lawyers who send a three day rent demand letter to tenants under New York law, (similar to our "Five Day Notice"), are required under the Fair Debt Collection Practices Act to include the statements that the communication is an attempt to collect the debt and the "30 day validation" notice statement. (See the decision by Judge Posner in Bartlett v. Heibl, (7th Cir. 10/8/97), No. 7-1946, discussed in the Illinois Bar Journal, Vol. 85, December 1997, page 582 for a "safe harbor" example of the FDCPA language in the Northern District of Illinois.) The Court ruled that the notice was a "communication" that was an attempt to collect a debt under the FDCPA. The "offending" attorney made a motion to dismiss the FDCPA claim, but the Court, even while it acknowledged that it might be opening a floodgate of litigation, denied the motion. Romea v. Heiberger & Assoc., (2nd Cir. 12/9/98), No. 98-7259, U.S. App. LEXIS 30906.

Sublesee's Right To Notice Of Early Termination Of Lease:

It is commonly noted by real estate practitioners that law firms make the worst tenants, BUT they do make the most interesting landlord-tenant case law. The recent case of Coleman v. Madison Two Associates, (1st Dist, Sept. 10, 1999), No. 1-98-1064, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/September/HTML/1981064.htm, is an excellent example.

Plaintiff's law firm sublet space on the 56th floor of the Three First National Plaza Building from NCNB Bank. The underlying lease between NCNB Bank and Madison Two Associates provided for a right by either the landlord or the tenant to elect "early termination by giving not less than twelve months prior written notice to the other". The sublease between Coleman and NCNB specifically incorporated the terms of the underlying lease and was consented to by the landlord. The sublease also provided that the sublessor was to give the sublease a copy of each notice and demand received FROM the landlord in the underlying lease. NCNB notified Madison Two Associates of its intention to exercise its right to early termination, reminded Madison Two that it was currently subleasing to the Plaintiff, and stated that a copy of the notice of early termination was sent to Plaintiff. Plaintiff did not receive a copy of the notice of early termination and only learned of NCNB's intent to end the underlying lease at a point when it was too late to meaningfully negotiate with the landlord and the space was leased to another party.

The law firm, of course, sued everyone in sight for declaratory judgment that: (1) NCNB breached its lease by failing to give notice of its election for early termination, and (2) that Madison Two beached by not demanding attornment from the firm as a condition precedent to termination of its sublease before reletting the space to other tenants because of its consent to the sublease. NCNB defended by stating that the sublease only required it to tender notices that it received FROM the landlord, not that which it sent TO the landlord as here. Since it did not receive a notice of early termination from Madison Two Associates, but sent the notice to them, it argued it had no obligation to tender the notice to Plaintiff. Madison Two Associates responded to the attornment argument by noting that the plain language of the lease indicated that it, as the landlord, had the option to elect and demand attornment. Since it did not choose to exercise that option, the law firm had no opportunity to agree to attorn. The trial court agreed with both the landlord and sublessor and dismissed the law firm's complaint under Section 2-615 for failure to state a cause of action.

On appeal, the law firm argued that incorporation of the terms of the underlying lease in the sublease by reference, (including the early termination provisions), in conjunction with the undertaking by NCNB to "use its best efforts...to assist in relations with the Underlying Landlord" in the sublease created a duty that NCNB violated by not giving it notice of its election at the time it was given to the landlord. The Court agreed and held that the duty of good faith and fair dealing implied in all contracts was bolstered here by the incorporation by reference of the notice provisions and "best efforts" language to mandate that it give the sublessee timely notice of its election of early termination so it would have time to negotiate directly with Madison Two prior to the time the landlord would have needed to seek other parties to take over the subject space. The law firm was not as successful with its attornment argument against the landlord, however. The Court held that the sublease did not require the landlord either demand or afford the plaintiff the opportunity to attorn as a condition precedent to early termination of the sublease. The attornment provision was clearly created as an option to be elected by the landlord. Good faith and fair dealing require one vested with contractual discretion to exercise it reasonably and not arbitrarily or capriciously, but the implied covenant of good faith cannot override or modify the clearly expressed terms of the contract giving the election of that discretion solely to one party.

Interest On Security Deposits Applies To "Pet Deposit" And Ordinance Does Not Require Willfulness For Penalty:

The tenant in Lawrence v. Regent Realty Group, (1st Dist., August 11, 1999), No. 1-97-1217,

http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/August/HTML/1971217.htm, sued the landlord for failure to pay interest on the "pet deposit", in her lease under the Chicago Residential Landlord and Tenant Ordinance requiring interest on "security deposits". Chicago Municipal Code, 5-12-080(c)(f).

The trial court first determined that the "pet deposit" required by a lease was a "security deposit" as defined by the ordinance, and the landlord was obligated to pay interest on the entire sum. The landlord testified that he calculated interest only on the security deposit because he thought that the pet deposit was a "fee or charge, not a security deposit". The trial court educated the landlord by its ruling, but then refused to award damages equal to two times the security deposit, plus interest, plus reasonable fees under the ordinance based upon a finding that the landlord's failure was not willful.

On appeal the Court stated that whether the tenant was entitled to the penalty award as requested turns upon whether the ordinance was "remedial" or "penal"; (i.e., if penal, the violation would have to be willful, whereas a remedial legislative purpose would not require a willful showing to support the award). Despite the fact that the Court in its prior decision of Szpila v. Burke, (1st Dist. 1996) 279 Ill.App.3d 964, 665 N.E.2d 357, 216 Ill.Dec. 297, had ruled that the ordinance required a showing of willfulness, (and therefore must be penal), the decision in this case notes that "We deviate from the Szpila holding...(based upon) a peculiar set of facts not present here...(because)...When the precise reading of a statute yields an absurd result, the reading must be abandoned...(and)...We adhere to what we believe is the clear intent of the ordinance to protect tenants and hold landlords to a high standard of conduct when entrusted with a tenant's money."

So....the tenant is entitled to interest on her "pet deposit" and an award on remand was mandated for two times the total security deposit plus interest and reasonable attorney's fees to reflect the remedial intent of the ordinance.

Landlord/Tenant: Cancellation Of Lease And Discrimination Tests:

In Wirtz Realty Corp v. Freund, (1st Dist. June 23, 1999), No. 1-97-3573, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/June/HTML/1973573.htm, the Defendant-Tenants appealed the trial court's judgment in favor of the landlord awarding past due rents notwithstanding the defendant's counterclaim that the landlord violated the Illinois Human Rights Act, (775 ILCS 5/3--101 et seq.), which prohibits discrimination against mentally handicapped individuals in rental of residential property. The landlord evicted the defendants from their apartment on Lake Shore Drive after terminating their lease based upon a 30 day "mutual cancellation rider" inserted into the renewal agreement due to earlier complaints by other tenants that the Freund's mentally handicapped adult son was interacting in an inappropriate way with building employees and other tenants. The Freunds counter-claimed alleging violation of the Human Rights Act, and Wirtz raised an affirmative defense based on an exemption in the Act where a handicapped person poses a "direct threat to the health and safety" of the building occupants.

On appeal the major issue was whether the trial court's ruling in favor of the landlord, based upon eight specific incidents, was supported by (a) objective evidence, (b) of overt acts or current conduct rather than subjective fears or speculation, (c) which was sufficiently recent as to be credible, and (d) relevant to a determination of behavior that constitutes a "direct threat". The Court reviewed the specific details and time periods of each of the eight incidents and found that "Placing the incidents on a timeline, it becomes clear that over time (the) behavior began to escalate in intensity." It was not necessary that the conduct actually result in a violent incident; only that the evidence be objective, overt, recent and relevant. The trial court's decision in this case that the son posed a direct threat to the health and safety of the building was not against the manifest weight of the evidence and supported a safe harbor under the Act's exemption for the landlord. The opinion is quite lengthy and offers analysis of issues relating to AIDS discrimination under the Americans With Disabilities Act, as well.

Landlord/Tenant: Waiver Of Consent To Assignment Of Lease Presumed By Conduct:

While the case of American National Trust Co. v. KFC of Southern CA, Inc.(1st Dist., September 30, 1999) No. 1-98-1356, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/September/HTML/1981356.htm, contains some complex inter-party relationships in a bankruptcy context, it stands clearly for the proposition that a landlord's conduct following the assignment of a lease may determine whether or not the assignment has been consented to, regardless of whether the consent was actually given. The original lease between American National Trust and Naugles, Inc. was for 15 years and contained a provision that the lease was not to be assigned without the landlord's consent; which would not be unreasonably withheld. Naugles merged with Kentucky Fried Chicken and requested American National consent to an assignment of lease to Collins Foods and Collins Properties, which was then acquired by Sizzler International, Inc. The landlord refused consent without financial information and assurances of the lessee's performance by the assignors. Nonetheless, the lease was unilaterally "assigned" through the circuit of successors and subsidiaries, and rent checks issued by Sizzler were cashed by the landlord on a monthly basis over a period of five years. During that time the landlord also requested Sizzler execute an affidavit in support of a tax appeal. When the rent checks stopped coming, American filed a complaint in the Circuit Court for failure to pay rent, taxes, and maintenance expenses, against all four of the "lessees"; Naugles, KFC, Collins Foods and Properties and Sizzler. KFC responded with a motion to dismiss pursuant to Section 2-619 on the basis of a purported release by assignment. Before the motion could be argued, Sizzler and its subsidiaries, Collins Foods and Collins Properties, filed for bankruptcy in California. American filed a proof of claim in the bankruptcy, acknowledged the assignment of the lease, and eventually entered into a stipulation with the "tenant/debtor" for payment of two-thirds of the sums due under the lease. Thereafter, American resumed its suit against KFC. KFC's motion to dismiss under 2-619, based on a finding that American had by its conduct consented to the assignment and thereby released KFC, was granted. The decision holds that "Restrictions against assignment are intended to benefit only the lessor of property and where attempted assignment of a lease by a tenant is in contravention of its terms, the assignment is only voidable and not void....Where the landlord does not elect to treat the leasehold as void, the requirements of the lease regarding its assignment are deemed waived.". Based on this, the Court ruled the undisputed conduct subsequent to the assignment, (acceptance of payment of rent, obtaining tenants affidavits in tax appeals, and filing proof of claim and stipulation in bankruptcy for rents"), all proved American acquiesced in the assignment and the consent provisions were waived. The assignment was valid and KFC released.

 

LAND TRUSTS:

The Distinction Of A Land Trust:

More and more people are using the vehicles of inter vivos trusts and land trusts to hold title to real estate these days. Some times the distinctions between the two are blurred. In Re Estate of Jeanette Mendelson, (1st Dist. 1998), 298 Ill.App.3d 1, 697 N.E.2d 1210, 232 Ill.Dec. 280, however makes for some good, quotable findings of law relating to the nature of land trusts. In this case, the beneficial interest in the land trust was held by the decedent with percentage interests passing to named individuals on her death. One of the individuals predeceased Jeanette. Finding that interest lapsed on the individual's death and became part of the decedent's estate, the court's decision contains some basic findings about the nature of a land trust: A land trust is not a conventional trust. Both legal and equitable interests pass to the trustee to be held for the benefit of the beneficiaries. Since the land trust converted the beneficiary's interest from real to personal property, the interest did not pass until death. No vested interest was created in the designated individual until death.

Leases And Land Trusts; Beneficiaries, Lessors, And Agents:

The Defendants, Shadeco, Inc. and Morningstar Lamp Company, Inc., leased industrial property, title to which was held in a land trust, from R-Five, Inc. in R-Five, Inc. v. Shadeco, Inc, (1st Dist. 1999), 305 Ill.App.3d 635, 238 Ill.Dec. 809, 712 N.E.2d 913. The Plaintiff, R-Five, Inc. was the beneficiary of the land trust and brought a forcible entry and detainer action against each tenant. The trial court found that R-Five had no standing to enforce the terms of the lease inasmuch as it was not the legal title holder, and the trust agreement contained language that "no beneficiary hereunder shall have any authority to contract for or in the name of the Trustee or bind the Trustee personally" . On appeal, the First District found that R-Five, Inc. could enter into and enforce the leases as the beneficiary designated in the land trust agreement, and reversed the trial court. The leases clearly identified R-Five, Inc. as the lessor and expressly designated it as the beneficiary of the land trust holding title. The defendant's argument was that specific provisions in the trust agreement both designated R-Five as the beneficiary and prohibited any beneficiary from contracting in the name of the trustee. The Court rejected the resulting argument that the leases were executed by R-Five in violation of the express language of the trust and without authority, finding that R-Five had the legal capacity to sue under the leases. The prohibition, the Court ruled, related solely to "One of the most common errors is for a beneficiary to execute a lease in the name of the land trustee by himself as an agent. Such a lease...is meaningless and not binding upon the trustee since the beneficiary is not an agent of the trustee." Here, however, the Court noted, R-Five never designated itself as an "agent", but only acted as a "beneficiary", and therefore did not violate the trust agreement prohibition.

A convoluted argument, but the Court concluded that the lessor was clearly and permissibly identified as R-Five, in its individual beneficiary capacity, and not as an agent of the trustee, and therefore could sue. (Why didn't they just pay the trustee's fee and get the lease signed in the first place?)

 

Lien Priority And Perfection Against Land Trusts :

In the recent First District case of Wagemann Oil Co. v. Marathon Oil Co., (1st Dist. June 30, 1999, No. 1-98-0553), 1999 WL 441863, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/June/HTML/1980553.htm, the Court affirmed the trial court's grant of summary judgment in favor of Marathon finding that its recorded judgment lien on the real estate was superior to Wagemann's security interest in the beneficial interest of the land trust, even though the security interest was lodged with the land trustee well before the memorandum of judgment was recorded.

The land trust was established on June 1, 1973. On June 23, 1977 the beneficiaries, (the Lussows) assigned their beneficial interest to Wagemann as security. On September 11, 1992, without the consent or knowledge of Wagemann, the Lussows caused the property to be transferred to themselves as tenants by the entirety. (This conveyance was later declared void as a fraudulent conveyance, but that did not seem to overly concern the court in its decision.) On March 10, 1994, Marathon obtained a $200,000 judgment against the Lussows and recorded a memorandum of judgment with the county recorder of deeds on the same day.

The ultimate issue, of course, relates to which lien interest was "perfected" first and therefore entitled to a priority. Wagemann contended that its interest was prior because it was "perfected" by filing with the land trustee long before Marathon filed its memorandum of judgment. Marathon argued that its interest was superior because Wagemann's interest only applied to personal property (beneficial interest of the land trust) and thus did not constitute a lien on the real estate. The Court reasoned that an assignee of a beneficial interest in a land trust does not acquire a direct interest in real estate, but only an assignment of personal property, and, citing First Federal Savings & Loan Assn v. Pogue, (2nd Dist., 1979) 72 Ill.App.3d 54, 389 N.E.2d 652, 27 Ill.Dec. 588, and St. Charles Savings & Loan v. Estate of Sundberg, (2nd Dist. 1986), 150 Ill.App.3d 100, 501 N.E.2d 322, 103 Ill.Dec. 301, noted that registration of a judgment against the beneficiary of a land trust does not have the effect of impressing the real estate with a lien because the beneficiary is not the record title holder. Because Wagemann did not take steps to have its interest attach to the real estate (i.e., levy or recordation), prior to the recordation of Marathon's memorandum of judgment, it was subordinate and "To hold otherwise would be inconsistent with a body of law holding that an interest in a beneficial interest does not attach to the real estate."

 

LENDER LIABILITY/TRUTH IN LENDING/RESPA/CLOSING COSTS :

Lender's Breach Of Duty Of Good Faith And Fair Dealing As Basis For An Action In Tort:

While there have been a good number of recent cases dealing with the implied duty of good faith and fair dealing in contract actions, (and especially relating to that duty on behalf of lenders), the recent case of Voyles v. Sandia Mortgage Corp., (2nd Dist., November 4, 1999), No. 2-98-0753, http://www.state.il.us/court/Opinions/AppellateCourt/2000/2ndDistrict/February/HTML/2980753.htm, appears to be the first to recognize this as a basis for a cause of action in tort. "Defendant property notes that no Illinois cases have heretofore explicitly recognized the independent existence of a tort action for breaching the duty of good faith and fair dealing....Recent decisions, however, have shown that courts have implicitly accepted the existence of the tort."

Ms. Voyles purchased a single family residence in Springfield, Illinois, but then rented it to her attorney when she moved to Chicago to find employment. As a result of personal problems, she made arrangement with her tenant/attorney for him to make the monthly mortgage payments directly to the lender. Following an all too familiar course of events, the lender was taken over by the RTC and then the servicing of the loan was transferred to Fleet Mortgage. Fleet refused to accept payments from the tenant based on a suspected violation of the due on sale clause, and then increased the monthly mortgage payments to reflect the annual property tax. (Neither of these actions or the basis for their decisions was communicated to Ms. Voyles.) A convoluted series of tenders and refusals culminated when Ms. Voyles attempted to refinance her residence in the Chicago area and was denied based upon a pending foreclosure initiated by Fleet Mortgage in Springfield. Before the foreclosure could be resolved, Ms. Voyles was unexpectedly terminated from her job, and the refinancing fell through. She filed suit against Fleet alleging negligent reporting of credit information (Count I), negligent failure to correct falsely reported credit information (Count II), breach of contract (Count III), breach of the duty of good faith and fair dealing (County IV), and for punitive damages based on willful conduct. The Trial Court granted Fleet's motion for summary judgment and the Appellate court reversed. The Court's decision begins with a restatement of the implied duty of good faith and fair dealing, then finds that the actions of the lender relating to the credit reporting were "intentional" as "purposeful and directed" rather than "negligent" as "careless or accidental", and finally rejects the Moorman doctrine and proximate cause as a defense. While the decision was expressly "Based on the narrow circumstances of this case", there can be no doubt that the court found a cause of action exists for breach of the duty of good faith and fair dealing, and lenders whose conduct approaches that of Fleet Mortgage here had best beware.

After the December, 1999, "Flashpoints" in which we noted the case of Voyles v. Sandia Mortgage Corporation, n/k/a Fleet Mortgage Corporation, (2nd Dist. November 4, 1999) No. 2-98-0753), as the first time an Illinois court has recognized an action in tort for breach of the covenant of good faith and fair dealing, the decision was withdrawn for re-hearing. The importance of the court's own observation that that no Illinois case had heretofore explicitly recognized the independent existence of a tort action in favor of a borrower for a lender's breach of the covenant of good faith and fair dealing also recommended the decision for our "year-end" summary of significant cases. Those of you who have attempted to obtain a copy of the case, however, have since learned that the decision has been "withdrawn" by the Court. The appellant filed a petition for rehearing, which was granted on December 9, 1999. The order granting rehearing required the appellee to file an answer to the petition for rehearing within 21 days and the appellant to file a reply within 14 days. The December 9, 1999, order also withdraws the November opinion. Oral argument is not scheduled and typically not held on a petition for rehearing. We will keep you advised of the developments of this case on rehearing.

 

Cost Of Recording Assignment Of Mortgages And Escrow Fees:

This particular case has been before both the Appeallate and Supreme Court for decision in the past year. In the First District decision, Weatherman v. Gary-Wheaton Bank of Fox Valley, N.A., (1st Dist. 1996) 286 Ill.App.3d 48, 676 N.E.2d 206, 221 Ill.Dec. 685, the Court ruled that the originating lender may charge a borrower for the cost of recording an assignment of mortgage to the servicing lender -- provided it is clearly and meaningfully disclosed in an itemized good faith estimate. In this case the lender simply provided a "gross recording charge estimate" under RESPA regulations. There is interesting language in this decision discussing custom and practices relating to allocating closing costs and the Court clearly felt the lender was guilty of "passing on" the recording fee to the buyer that it felt was the lenderís cost of doing business. Their decision that the charge was in error under these circumstances was based upon the fact that the disclosure simply set forth an estimate of "gross recording charges" without specific reference to the assignment. The case also reviewed the bankís charging a fee for "suspension" of the escrow account, and found this fee did NOT to violate either the Illinois Mortgage Escrow Act or Consumer Fraud Act under the recent decision in Stern v. Norwest Mortgage, (where a fee for waiver of escrow was found not "deceptive" in violation of Consumer Fraud). The Court ruled that the "suspension" fee involved an option not addressed by the Escrow Act and therefore did not violate it. Judge DiVito dissented relating to the issue of "gross estimate of recording fees", and concurred on the escrow suspension fee decision in a well reasoned opinion that indicated there was room for reasonable minds to differ on these issues.

When the case made it up to the Illinois Supreme Court, Weatherman v. Gary-Wheaton Bank of Fox Valley, N.A., (Il. S. Ct., June 17, 1999, No. 83822), 186 Ill.2d 472, 713 N.E.2d 543, 239 Ill.Dec. 12, http://www.state.il.us/court/Opinions/SupremeCourt/1999/June/Opinions/HTML/83822.htm, Supreme Court also ruled that a lender neither violated the Illinois Consumer Fraud Act nor the Deceptive Business Practices Act by charging the borrowers a mortgage assignment recording fee and a tax escrow suspension fee at closing. The majority opinion, written by Justice Bilandic, first deals with the mortgage assignment recording fee by noting that RESPA mandates only that the Good Faith Estimate set forth a gross or "amount or range" of recording charges; not a detailed itemization. It is only at closing that a detailed itemization of all charges is required on the HUD-1 Settlement Statement. (The Court even noted that the Good Faith Estimate form provides only a single line for estimating the recording charges, whereas the HUD-1 contains several lines and spaces for a lender to identify the amounts of specific recording fees.) Accordingly in this case, where the Good Faith Estimate disclosed a gross recording fee of $80, and the actual recording fees at closing, (including the $15 assignment of mortgage recording fee), were $77, there was no violation. Moreover, the Court ruled, Congress included compliance with the disclosure regulations prescribed by HUD as a condition for absolving lenders from liability under RESPA. Here the lender had complied by disclosing the gross recording charges under RESPA, and therefore was rendered EXEMPT under Section 10b(1) of the Consumer Fraud Act's provision for "actions or transactions specifically authorized by laws administered by any regulatory body".

Turning to the Escrow Suspension Fee, the majority opinion noted that the borrowers admitted that they had asked the lender to suspend its escrow requirement AFTER the loan had been approved. Accordingly, the Court held that the borrower here voluntarily agreed to the fee AFTER they had rejected their options under the Illinois Escrow Act, and the Court was simply upholding the "rights of competent parties to enter into contracts." This was not a situation where the lender was imposing a fee on the borrowers because they chose to exercise an option provided by the Escrow Act, but rather a circumstance where the parties modified the terms of the loan agreement at closing and following an election by the borrower.

Justice Harrison concurred in part and dissented in part. Based on reasoning that the Consumer Fraud Act should be liberally construed, Judge Harrison found the assignment of mortgage recording fee violative because of the fact that the lender "without plaintiff's prior knowledge and consent, [was] assessing them a fee that was not theirs to pay...".

 

Truth In Lending Defense Time Limitation:

In an opinion written by Justice Souter, Beach v. Ocwen Federal Bank (1998) 118 S.Ct. 1408, 140 L.Ed.2d 566, the United States Supreme Court has clarified the application of the limitation provisions of the Truth in Lending Act to defenses asserted in foreclosure cases. The Act has a limitation that provides a borrower may rescind a consumer credit transaction secured by a principal dwelling if the lender fails to deliver disclosure forms or disclose terms accurately. This right of rescission, however, "expires" three years after the loan closes or upon the sale of the property, whichever date is earlier. The issue that made it all the way to the Supreme Court is whether the conduct which would give rise to exercising the right of rescission can be raised in the context of an affirmative defense or counterclaim in a collection action AFTER that limitation period had expired. Turning on the fact that the Act does not distinguish between the right to bring an action or claim a right to setoff, but instead provides that the right of recession "shall expire", Justice Souter concluded that the Act does not permit rescission, either defensively or otherwise, after the three year period, and affirmed the ruling by the Supreme Court of Florida.

Truth in Lending: Substance over Form:

Federal Truth in Lending can sometimes be confusing. This is especially so because of the efforts of so many to comply with the procedures required for disclosing finance charges in real estate transactions without actual disclosure of some of the substance upon which the law focuses. An example in a non-real estate scenario that might be of good use to real estate practitioners is found in Christine Adams v. Plaza Finance Company, (7th Cir. January 27, 1999, No. 98-1190), 168 F.3d 932, http://www.bashawlaw.com/publications/keypoints/supplements/No98-1190.htm. In that case the "amount financed" was disclosed by the lender in a small, short-term, unsecured loan, but the calculation did not included a $7.00 "nonfiling insurance" premium that the lender paid to a related entity in lieu of filing a UCC Financing Statement. In the majority opinion written by Judge Posner, the Court determined that the insurance premium as actually "default insurance", which must be included in the finance charge, and reversed the summary judgment order of the trial court in favor of the finance company. The decision advocated penetrating form to reveal substance as the right approach in a Truth in Lending Act case, and held that "it is the actual character of a policy of insurance---what it really insures---rather than the name, that controls its classification for purposes of the Act." Judge Esterbrook's dissenting opinion stated that "the substance-over-form approach is fundamentally incompatible with TIL's penalty provisions, which exalt form over substance. It just won't do to have a system in which the propriety of classification can be known only after the fact." This is an interesting case for anyone who has to deal with a Truth in Lending issue, (and there are any number of class action suits spawned in this area as noted in the decision), OR, equally interesting to anyone who wants to witness the impact of the larger economic theories for which Judge Posner is noted in the working of a recent court decision.

 

Lender Liability and Forced Placed Insurance:

When the mortgagor defaulted on the payment of the monthly installments of principal, interest, taxes and insurance, Citicorp filed a foreclosure against Fred Rucker. Mr. Rucker filed a counterclaim in the foreclosure case AFTER the judgment was entered alleging that Citicorp fraudulently overcharged him on replacement property insurance. Citicorp Savings of Illinois v. Rucker, (1st Dist., 1998) 295 Ill.App.3d 801, 692 N.E.2d 1319, 230 Ill.Dec. 153. The trial court dismissed Ruckerís third amended counterclaim stating the it was barred by the law-on-the-case doctrine inasmuch as the judgment had been entered. The appellate court reversed, holding the issue was specifically reserved and restating the law that every contract, (including mortgagor/mortgagee relationships) carry the duty of good faith and fair dealing as a matter of law. Where on party is given broad discretion in performance, (such as procuring insurance), that party is obligated to exercise that discretion reasonably and within the reasonable expectations of the parties. While the appellate court refused to rule that there was a fiduciary duty breached or facts sufficient to support an action for punitive damages, it did remand with a finding that his counterclaim sufficiently stated a cause of action for breach of the implied duty of good faith and fair dealing.

Private Mortgage Insurance: Lender Not Currently Required To Disclose That Private Mortgage Insurance Can Be Terminated:

In a recent class action case, Perez v. Citicorp Mortgage, Inc., (1st Dist., 11/13/98, No. 1-98-0930), 301 Ill.App.3d 413, 703 N.E.2d 518, 234 Ill.Dec. 657, http://www.state.il.us/court/Opinions/AppellateCourt/1998/1stDistrict/November/HTML/1980930.htm, the First District has affirmed the trial courtís dismissal of a complaint brought by borrowers against Citicorp Mortgage, Inc. for failure to disclose to them the option of terminating their private mortgage insurance. Finding that the mortgage was obtained prior to the effective date of the Mortgage Insurance Limitation and Notification Act, (765 ILCS 930/1 et seq.), the court dismissed complaints brought under that recent consumer legislation. The court also noted that the terms of the mortgage provided for payment of private mortgage insurance for the life of the loan and found that this was neither a deceptive nor an unfair practice, and that the lender was not thereby unjustly enriched.

Note, also the passage of similar federal legislation, The Homeowners Protection Act of 1998 (Senate Bill 318) which becomes effective in July, 1999, and mandates private mortgage insurance be canceled when a 22% equity position in the residential real estate is achieved.

Truth In Lending And RESPA As Compulsory Counterclaims, Res Judicata, Collateral Estoppel, And More:

A recent decision in bankruptcy by Judge Schmetterer reveals the intricate dance that often occurs in real estate litigation between bankruptcy and foreclosure proceedings and especially where there is a late discovery of a defensive counterclaim. In Re Margie Walker, (Bankr. ND Il., May 5, 1999, Bankruptcy No. 98 B 39289, Adversary No. 98 A 00783), 232 B.R. 725.  Ms. Walker made a mortgage with Investaid for $63,750.00. (Conti Mortgage was Investaid's successor.) The Truth in Lending Statement disclosed the amount financed was $63,296.25. Additionally, at the closing, a mortgage brokerage fee and a yield spread premium were paid by Investaid, which Walker claimed was an illegal kickback under RESPA.

After a little more than a year following the closing, Conti filed a foreclosure in state court based on a default in payments. Ms. Walker filed a Ch. 13 bankruptcy. Conti filed a proof of claim. Walker did not object to Conti's claim. This bankruptcy was dismissed without confirmation of the plan. Conti resumed its foreclosure, and the state court entered a judgment by default against Walker. Two days prior to the expiration of the redemption period, Walker filed her second bankruptcy. Conti again filed its proof of claim; this time based on the judgment. In this second bankruptcy, Walker, however, filed an Adversary Complaint alleging that the mortgage transaction violated Truth in Lending based on the incorrect disclosure of the amount financed, a RESPA violation relating to the alleged kickback, and sought to rescind the transaction. Conti moved for summary judgment on three grounds: (1) The current TILA and RESPA claims were compulsory counterclaims that should have been raised in the first bankruptcy and therefore were waived, (2) The failure to raise the TILA and RESPA counterclaims in the first bankruptcy bars the current counterclaims as res judicata, and (3) The state court judgment of foreclosure bars Walker's counterclaims under res judicata and collateral estoppel.

In denying summary judgment, Judge Schmetterer ruled the TILA and RESPA claims are not compulsory counterclaims under the "logical relationship test" because, while they relate to the same initial transaction as the foreclosure, the counterclaims raise different factual and legal issues which are governed by different bodies of law. Then, inasmuch as Walker's first bankruptcy was dismissed without confirmation of her plan, Section 1327 of the Bankruptcy Code did not serve to bar raising the TILA and RESPA in the second bankruptcy action by adversary action. Finally, Walker's failure to raise the TILA and RESPA claims in the state foreclosure did not bar them in the adversary action as a matter of law either under res judicata or collateral estoppel. Collateral estoppel did not apply here because where a judgment is entered by default, the "actually litigated" requirement has not been met. And, while res judicata does apply to default judgments generally, the foreclosure judgment was not res judicata on these issues because (1) it did not dispose of all issues and terminate the litigation until the sale is held and confirmed, and (2) the judgment did no meet the "same cause of action" ( i.e., supported by the "same evidence") test since the TILA and RESPA claims do not involve the same cause of action, either from an evidence or transaction approach.

 

Agreement To Release Mortgage:

In a Bankruptcy decision appealed to the District Court, and then to the Court of Appeals for the Seventh Circuit, the interpretation of an addendum to a mortgage note requiring release of a mortgage upon certain conditions was considered. In Re Michael J. Krueger, (7th Cir., September 24, 1999), No. 99-1221.

The Debtor appealed the bankruptcy court's judgment in favor of the lender finding that the Bank was not required to release the mortgage it held on his residence. While the loan was for the purchase of a saloon in Moline, Illinois, Mr. Krueger also pledged his home as collateral. The note addendum requested by Krueger provided that the Bank would release the mortgage when (1) the balance of the loan is paid below $26,000, and if (2) all payments were paid on or before the due date and all terms are met. Mr. Krueger paid a single payment 14 days late. The Bank accepted the late payment without reacting in any fashion. Thereafter, he reduced the balance below $26,000 and requested a release from a Bank employee. He received no response and contacted the same employee on two other occasions, but did not receive either a release or refusal. Thereafter he closed the saloon following damage during a windstorm and eventually filed bankruptcy. His Chapter 13 plan, however, proposed that the Bank release its mortgage on his residence under the terms of the note addendum. The Bank objected to confirmation of the plan on the basis of feasibility, good faith, and that it improperly required the Bank to release its mortgage, which it alleged it was not legally required to do under the terms of the addendum because Mr. Krueger had not made all payments on or before the date due. Krueger contended that the single late payment was de minimis and not material, that strict compliance was waived by the Bank's acceptance of the late payment without declaring a default or advice to him that it would deny release, and that the Bank was estopped to demand strict compliance. Each argument failed before each court. The decision noted that the addendum was clear and unambiguous and "A court cannot revise a contract and give a litigant a better bargain that he himself made." Waiver is an intentional relinquishment of known right, but nothing in the evidence indicated the Bank knew or intended to relinquish its right to demand strict performance as a condition to early release. There was no detriment or change in Mr. Krueger's position as a result of any reliance upon any conduct of the Bank. And, finally, whether a single, 14 day late payment was material or de minimis must be determined from the intent of the parties as expressed in the addendum. Parties to a contract may make timely performance a material element of the contract, and that was what occurred here.

All of Mr. Krueger's arguments were for naught, and the decisions in the Bankruptcy, District, and Court of Appeals all affirmed the Bank's right to refuse release of the mortgage under the terms of the addendum.

 

MECHANIC'S LIENS:

Mechanic's Liens: Attorney's Fees Recovery

The contract for the construction of a single family residence in this case provided that in the event of litigation to enforce the agreement, the successful party was entitled to recover its attorney's fees. After construction was complete, the contractors filed a multi-count complaint to foreclose its mechanic's lien, breach of contract, and quantum meruit. The owners counter-claimed for breach of contract, breach of warranty, and breach of warranty of habitability. The trial court entered judgment in favor of the contractor on its lien claim, but denied the request for attorney's fees concluding that the Illinois Mechanic's Lien Act had no basis for awarding attorney's fees at the relevant time. Both parties appealed.

The Third District in Mirar Development, Inc. v. Kroner, (3rd Dist., August 13, 1999), No. 3-98-0761, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/August/HTML/3980761.htm, noted that by amendment effective August 8, 1995, the Illinois Mechanic's Lien Act now provides that if the court specifically finds the owner who contracted for improvements made fails to pay a lien claimant the full contract price without just cause, the court may tax that owner for the lien claimant's reasonable attorney's fees. (770 ILCS 60/17.) The Court then affirmed the trial court , however, finding that the contractor was NOT able to recover its attorney's fees under the Act in this case because the its lien rights were perfected by recording prior to the effective date of the amendment. Turning to the agreement of the parties, however, the case was remanded to the trial court to award fees pursuant to the provision in the contract for prevailing party recovery noting that: "We agree with the circuit court that the Act does not provide for attorneys fees in this instance. However, the contract does so provide and the Act does not prohibit such a provision...Accordingly we conclude the circuit court erred when it denied attorney fees without considering the contract's fee-shifting provision...(and)...the circuit court must give effect to the intent of the construction contract."

Mechanic's Lien And Quantum Meruit

In a case that has almost everything that could possibly happen "wrong" in a residential construction scenario, the First District opinion in Fieldcrest Builders, Inc. v. Antonucci, (1st Dist. December 30, 1999), http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/December/HTML/1984337.htm, sets forth some good black letter law for those of who would consider a sojourn into this arena. The Antonuccis entered into a contract with Fieldcrest to extensively renovate their single-family residence in Glenview, Illinois for $846,978.00. Fieldcrest had no employees and provided no supervision or oversight of the project, (i.e., they were a general contractor that subcontracted out all of the work....and THIS should have been the "first warning" to the Antonuccis and us all). There were a number of problems from the beginning of work in May, 1994, and by August 20, 1994, the Antonuccis gave notice to terminate based on Fieldcrest's alleged breach. On August 22, 1994, Fieldcrest ceased work. (The facts as set out in the Court's opinion are very detailed and worth reading for their "horror-story" value alone.) The Antonuccis filed a two-count complaint in the law division for breach of contract and consumer fraud. Fieldcrest filed answers, affirmative defenses and counterclaims asserting anticipatory breach of contract and seeking relief under quantum meruit for the extent of the work completed. The rough carpenter subcontractor and a material supplier both intervened and filed mechanic's lien claims. The trial court issued a 19 page opinion containing findings of fact and ruled that Fieldcrest breached the contract, but was entitled to the reasonable value of its services less the injury suffered by the Antonuccis due to the breach. Judgment was entered in favor of the subcontractors. (The case was remanded to the trial court for clarification on whether the judgment for Fieldcrest included or was exclusive of the sums due to its subcontractors or constituted paying twice for the same services.)

The Appellate Court's opinion holds that under the theory of quantum meruit, the measure of recovery is the reasonable value of the services, and they would not disturb the trial court's finding as to that reasonable value; (even though it may have included amounts billed for "overhead, fees and general conditions".) The measure of damages for breach of contract when a builder has provided less than full performance or defective performance is generally the cost of correcting the defective condition and the owner may be able to recover damages for delays, but he must prove with reasonable certainty that the delays were caused solely by the other party. Citing the recently noted case of Brown &. Kerr, Inc. v. American Stores Properties, Inc., (1999) 306 Ill.App.3d 1023, the Court noted that where both parties won and lost on claims in the proceedings below, neither could be awarded costs as the prevailing party, and reversed the award of costs in favor of Fieldcrest on its quantum meruit claim. Most importantly, the opinion affirms the Trial Court's order extinguishing Fieldcrest's mechanic's lien. Holding that the burden is on the lien claimant to prove every essential element to establish the lien, and noting that the Trial Court had found that Fieldcrest breached the contract before substantially performing, the Appellate Court ruled that a contractor is not entitled to a mechanic's lien, (nor entitled to recovery of its attorneys fees under 770 ILCS 60/17), and is limited to recovery in quantum meruit only where it breached the contract.

Jurisdiction And Void Vs Voidable Judgments

In JoJan Corporation v. Brent, (1st Dist., August 25, 1999), No. 1-98-0849, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/October/HTML/1980849.htm, defendant Brent brought a declaratory judgment action to set aside a judicial sale to JoJan Corporation, (and the "expunge" the title of its subsequent grantees in conveyances following the sale confirmation), alleging that the judgment entered by the court was void. The underlying case was a complaint to foreclose two mortgage notes and a mechanic's lien claim JoJan had acquired from New World Construction, Inc. and R.M.C., Inc. on Brent's property. A default judgment based upon service by publication on Brent was entered in favor of JoJan, and the property was sold to JoJan at the sale. After confirmation and issuance of a sheriff's deed, Brent filed a special and limited appearance contesting jurisdiction by publication. (See the note relating to Special and Limited Appearances in note No. 10 below.) The trial court ruled in favor of JoJan on the jurisdictional issue and denied Brent's motion to reconsider. JoJan then conveyed the property to a third party, Jay Shavin. Thereafter, Brent "instituted a collateral attack" on the underlying judgment on the basis that it was void for want of jurisdiction due to the fact that the suit to foreclose the mechanic's lien was not brought within two years of the completion of work as required by the Illinois Mechanic's Lien Act according to the date of last work set forth on the mechanic's lien claim notice. (There are a confusing number of appeals and collateral attacks in the procedural history of this case, but at one point the trial court on remand ruled that the complaint to foreclose mechanic's lien was filed more than two years after the last date of work, and accordingly set aside the judgment on jurisdictional grounds.) While all of this is going on, Jay Shavin conveys the property to a third party land trust, expanding the cast of characters!

Justice Cerda's decision first notes that Brent's action is NOT a Section 1401 petition to vacate the judgment and sale, but an attack on a "void judgment" for lack of subject matter jurisdiction; which can occur "at any time in any court, in either a direct or collateral proceeding". To support a collateral attack based on subject matter jurisdiction, however, the jurisdictional defect must be apparent on the face of the record at the time the rights of innocent third parties intervene in order to support a finding affecting the title acquired for value and without notice of a defect. In this case, the fact that the mechanic's lien foreclosure complaint was filed more than two years after the work was completed was NOT apparent from the record. (In fact, one of the remands in the appeals process was to the mechanic's lien section of the circuit court to determine the true completion date of the work for the purpose of ascertaining if the court had subject matter jurisdiction by filing within the two year limitation period.)

Accordingly, despite the fact that the court lacked jurisdiction to enter the original judgment resulting in the sale and chain of conveyances, the rights of a third party bona fide purchaser could not be affected because the jurisdictional defect was not apparent on the face of the record.

 

Mechanic's Liens And Requiring Release Of Lien As Element Of Full Performance Of Contract:

In the recent case of R.W. Dunteman Co. v. C./G. Enterprises, Inc., (1998), 181 Ill.2nd 153, the Illinois Supreme Court upheld the provisions of the Mechanic's Lien Act (770 ILCS 60/1.1) that prohibits agreements to waive any right to enforce or claim a lien as against public policy and unenforceable. The same case made a distinction between agreements in anticipation of and consideration for obtaining construction contracts, and those agreements to waive a lien claim AFTER the work has been completed. A further distinction and development of this law is set forth in Brown and Kerr, Inc. v. American Stores Properties, Inc., (1st Dist., August 6, 1999), No. 1-98-3749, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/August/HTML/1983749.htm.

In this case, a subcontractor brought an action against the owner and general contractor for the balance due on a construction contract. The complaint alleged that the Plaintiff performed all of its contractual and statutory duties, but the Defendants denied this allegation, asserting by counterclaim that since the subcontractor had failed to provide guarantees, sworn statements, and (most importantly) a final lien waiver and release as required by the contract, it had not fully performed and therefore was not entitled to payment. The trial court granted summary judgment in favor of the subcontractor, and the owner and general contractor appealed.

The First District affirmed the trial court's judgment in favor of the subcontractor, noting that while the contract language did provide that final payment would not be due until the subcontractor provided final lien waivers, that provision would require that the subcontractor forfeit its lien rights notwithstanding the owner's failure to pay, and such a provision is unenforceable under Section 1.1 of the Mechanic's Lien Act and the reasoning in the Dunteman decision as a condition precedent to payment or element of full performance. Noting that "While the contract does not affirmatively state that B&K has waived its lien rights, under defendant's interpretation (of full performance according to its terms), the contract contains an implied (prohibited) waiver because B&K must waive its lien rights in order to establish it's full performance on the contract...that term is void and B&K is not required to show its fulfillment."

This case also contains a discussion of whether either party could be said to have been "the prevailing party" to obtain an award of attorney's fees, whether a motion for reconsideration must be actually signed by an attorney of record under Rule 137 to be valid and extend the time period to file a notice of appeal, and a whether an order is final and appeallable or not when issues of attorney's fees remain to be ruled upon.

 

Mechanicís Lien Act Section 34 - Premature Demand For Suit:

While acknowledging the purpose of Section 34 and 35 of the Mechanicís Lien Act is to provide a method for property owners to force to issue the validity of a mechanicís lien claim and clear a cloud on title by a homeowner, the courtís majority opinion in Krzyminski v. Dziadkowiec, (1st Dist. 1998) 296 Ill.App.3d 710, 695 N.E.2d 1275, 231 Ill.Dec. 156, has suggested an interesting window of opportunity to contractors; a matter not lost on Judge Sheila M. OíBrien in her dissent. In this case the property owner sent a demand to the contractor to institute suite within 30 days under the provisions of Section 34, approximately six months after completion of the work, and even though there was no notice of claim for lien recorded. When the contractor did not file suit, the owner issued a demand for a release under Section 35, and then filed an action to clear the cloud on their title. The Courtís decision reversed the trial court grant of summary judgment for the owner holding that to permit a property owner to require the contract to file suit and enforce his lien rights when no claim had been filed, (and the two year time period from the date of last work to file had not yet passed!), would be contrary to the intent of the act in providing that two year period. Judge OíBrienís dissent noted that the majorityís opinion permits a contractor to maintain an ability to claim a lien for two years without being required to prove his claim and with no recourse to the owner to clear their title other than to wait and see what the contractor will do.

 

Mechanic's Liens: Section 34 Demand To File Suit While General Contractor Is In Bankruptcy:

The use of Section 34 of the Mechanic's Lien Act, (770 ILCS 60/34), which provides that upon written demand of the owner...served upon the person claiming the lien...requiring suit to be commenced to enforce the lien or an answer to be filed in a pending suit...suit shall be commenced or answer filed...or the lien shall be forfeited, seems to be getting a lot of attention these days. (See the prior note dealing with Krzyminski v. Dziadowiec, (1998), 296 Ill.App.3d 710, 695 N.E.2d 1275, 231 Ill.Dec. 156.) The timing of Mechanic Lien can be fairly complex to begin with, and, when coupled with issues relating to necessary parties (the general contractor) and bankruptcy stays, (See Garbe Iron Works v. Priester, (1983), 457 N.E.2d 422), this all becomes downright confusing....but not really. In this case, the owner filed a Section 34 demand on the electrical subcontractor in a pending declaratory judgment action and while the general contractor was in bankruptcy. The trial court found in favor of the owner over the objection of the electrical subcontractor that it could not file suit to enforce its lien because the general contractor was a necessary and the automatic stay in bankruptcy prevented the filing. On appeal the Court reversed and adopted the Defendant's position that the law in the Garbe case that a mechanic's lien statute of limitation was tolled during the pendency of a bankruptcy stay was applicable and determinative of Section 34 filing deadlines as well. Chicago Whirly, Inc. v. Amp Rite Electric Company, Inc., (1st Dist., 3/30/98, No. 1-97-3713), 304 Ill.App.3d 641, 710 N.E.2d 45, 237 Ill.Dec. 622, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/March/HTML/1973713.htm.

 

Mechanics Liens And Bankruptcy Stay; A Further Refinement:

Last year, we reported the impact the decision in Chicago Whirly, Inc. V. Amp Rite Electric Co., (1999), 304 Ill.App.3d 641, on the existing law set forth in Garbe Iron Works, Inc. v. Priester, (1983), 99 Ill.2d 84, holding that a bankruptcy filing by a necessary party in an action to enforce a mechanic's lien stayed and extended the time available to a subcontractor to file suite for a period equivalent to the amount of time the contractor spent under bankruptcy protection. This year's refinement on this rule of law comes in Concrete Products, Inc. v. Centex Homes, (2nd Dist., December 3, 1999), http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/December/HTML/2990287.htm.

In this case, the general contractor filed for bankruptcy after the Plaintiff's filing of the complaint to foreclose mechanic's lien, but before a ruling on a motion for summary judgment, and the issue on appeal was the effect of the automatic stay of judicial proceedings pursuant to Section 362(a) of the Bankruptcy Code, (11 U.S.C. 362). The appellants contended on appeal that the automatic stay required that the Plaintiff's action be abated until either the general contractor was discharged or the plaintiff obtained relief from the automatic stay in the bankruptcy court. The Second District agreed, and declared that inasmuch as the motion for summary judgment was initiated after the commencement of the automatic stay, the trial court's ruling granting summary judgment and awarding attorneys fees was void, and "We must therefore vacate all of the trial court's rulings made after the automatic stay took effect and remand the case." (Surely there can be no further confusion on this issue now!)

 

Sanctions in Mechanic's Line Cases Only Available to the Owner:

In Hake Enterprises, Inc. v. Betke, (2nd Dist., November 13, 1998), 301 Ill.App.3d 176, 234 Ill.Dec. 502, 703 N.E.2d 114, a convoluted set of facts served to give the Court an opportunity to state that only owners can recover attorneyís fees and costs as sanctions under Supreme Court Rule 137 and Section 17(c) of the Mechanicís Lien Act. Betke entered into a contract to purchase undeveloped land and construct a residence thereon. When he encountered financial difficulties in the midst of construction, he sold the property to Charlotte Birck, and her son, Jason Birck, took title. Nonetheless, Betke continued to contract with the Plaintiff subcontractors to complete the house. The house was completed and Charlotte sold it to a third party with title being conveyed by Jason. When they were not paid, the Plaintiffs brought a suit to foreclose their mechanicís lien claim against Betke, Charlotte Birck, Jason Birck and the third party purchasers. The trial court granted a directed finding dismissing the mechanicís lien complaint against all defendants except Betke, finding that the mechanicís liens were void because no agency relationship existed between the owner of the property, Jason Birck, and Betke, with whom the Plaintiffís contracted. This finding was affirmed on appeal, (with some nice language setting forth the law on review), but it was the trial courtís granting of sanctions in favor of Charlotte against the Plaintiffs that was reversed on appeal that is of note. The Court specifically ruled that sanctions pursuant to Supreme Court Rule 137 were not supported by the facts in that Plaintiffís reasonably could have believed that Betke was Birckís agent, and Charlotte knowingly permitted Betke to continue to hold himself out as having authority to contract for improvements on the parcel. In a non-factual sensitive ruling, the Second District then clearly interpreted 770 ILCS 60/17(c) as limiting sanctions awards for actions brought without good cause or in bad faith as available to ONLY the property owners. In as much as Jason was the owner of the property, the award of sanctions in favor of Charlotte was reversed because she was not the owner.

 

Subcontractor's Failure To Provide 90 Day Notice To Lender Only Makes Lien Unenforceable Against Lender, Not Owner:

Where a plaintiff subcontractor provided a 90 day notice to the owners under Section 24 of the Mechanic's Lien Act, but failed to provide notice to the lender, the owners attempted to defend a foreclosure action by arguing that strict construction mandated the entire lien be unenforceable due to the failure of notice. In a case of first impression, the First District held the failure did not invalidate the lien as to the owners; only as to the lender. Petroline Company v. Advanced Environmental Contractors, (1st Dist., April 27, 1999, No. 1-98-2026), 305 Ill.App.3d 234, 711 N.E.2d 1146, 238 Ill.Dec. 485, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/April/HTML/1982026.htm. The Mechanic's Lien Act has always required strict construction inasmuch as the rights granted to contractors and subcontractors are in derogation of the common law, but the owner's contention that strict construction mandates the conclusion that any deviance whatsoever will serve to invalidate the lien entirely was rejected. The act is to be "liberally construed as a remedial act", the court ruled, and this apparent inconsistency is reconciled by distinguishing that strict construction applies to the requirements upon which the right to a lien depends, but once a lien has properly attached, liberal construction applies. Here that liberal construction resulted in finding that failure to give notice to the lender only means that the subcontractor's lien cannot have priority over the mortgage, not that the lien cannot be enforced against the owners. "The lack of notice to the mortgagee is, from the perspective of the owner, a minor deficiency. The owner's rights are not prejudiced....Accordingly we hold that notice to the mortgagee is not a requirement upon which the right to assert a lien against the owners depends."

(This decision also contains an excellent example of the "math" of "enhancement" in the calculation of the value of priority of mechanic's lien claim over that of a prior recorded mortgage that is well worth the reading.)

 

MORTGAGE FORECLOSURE:

Surplus Proceeds of Sale:

In another case of first impression, Members Equity Credit Union v. Duefel, (3rd Dist. 1998), 295 Ill.App.3d 336, 692 N.E.2d 865, 229 Ill.Dec. 876, the Third District has ruled that surplus proceeds from a foreclosure sale must be awarded to the foreclosed mortgagor rather than be applied to payoff an outstanding, prior mortgage lien as requested by the third party bidder. The foreclosure was of a junior mortgage on residential real estate. The first mortgage lien holder was not a party to the suit. At sale, a third party bidder bid a sum resulting in a surplus, and then, at confirmation of the sale, petitioned the trial court to direct the surplus be paid to satisfy the outstanding first mortgage. The trial court granted the petition and the borrowers appealed. On appeal, the Third District considered, but rejected, the bidderís argument that to award the surplus proceeds to the mortgagors would result in a windfall to them because they had no equity in the property over the first mortgage, noting that "Illinois law mandates that a buyer at a judicial foreclosure sale takes the property subject to any outstanding debts which may encumber the property subsequent to the sale." All bidders are deemed to bid with constructive notice of liens on the property offered for sale. Competitive bidding at foreclosure sales promotes the public policy goal of maximizing the selling price. Accordingly, the Court reasoned, application of any surplus to liens that the property was sold "subject to" would undermine that goal and render the competitive bidding process Ďpractically meaningless". The Court found that the trial court abused its discretion by directing payment to the first lender, which was a non-party to the case and over whom it did not have jurisdiction, and interfered with the contractual relationship between the first lender and its borrower by directing the surplus award.

Extinguishing Liens in Foreclosure:

Confirmation of foreclosure sale cases seem to abound of late. In BCGS, L.L.C. v. Jaster, (2nd Dist. 9/18/98), 1998 Ill.App. LEXIS 628, 299 Ill.App.3d 208, 233 Ill.Dec. 367, 700 N.E.2d 1075, the appellate court affirmed the confirmation of a sale to the mortgagor, despite his knowledge of an outstanding junior lien on the property, and held that the title acquired was free and clear of that lien. The Illinois Mortgage Foreclosure Law, the courtís opinion holds, expressly provides that foreclosure extinguishes all claims for lien upon the property held by parties over whom the court has jurisdiction in favor of the bidder at sale. Accordingly and regardless of his knowledge of the claims, a literal reading of the statute is that any bidder, even the mortgagor, can extinguish those liens foreclosed by being the successful bidder at sale. In her dissent, Justice Hutchinson states that Mr. Jasterís actions were admittedly to extinguish the lien of his former wifeís divorce attorney that "reflects a showing of fraudulent conduct that the majority fails to acknowledge." The dissent takes that position that a mortgagor "does not morph into a bona fide purchaser upon the expiration of the redemption period.", and warns that "Future implications of this decision are horrific and likely contrary to legislative intent. The majorityís decision means that mortgagors, when faced with an unwanted lien on their property, should simply stop paying on their mortgage, allow the property to fall into foreclosure, allow the redemption period to pass, and then successfully bid on the property to retake title free and clear of all junior liens."

Fee Simple Determinable By Bankruptcy Reorganization Plan:

And, another case that makes you take stock of everything you know about priorities and real estate liens is Klein v. DeVries, (2nd Dist., December 28, 1999), http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/December/HTML/2981400.htm.

John DeVries filed for bankruptcy while Metropolitan Life held a first mortgage on his real estate. Under the final plan of reorganization, DeVries was to deliver a quitclaim deed in escrow to Metropolitan's attorney. In the event of a default, Metropolitan was to give notice to DeVries, "each junior lien or mortgage holder" and "all other creditors and parties in interest", who would then have an opportunity to cure the default or title would pass to Metropolitan free and clear of liens and encumbrances. The reorganization plan was recorded in the Ogle County Recorder of Deeds office in April, 1987. In February, 1989, DeVries executed a mortgage to Klein, and then subsequently defaulted on the Metropolitan mortgage. Metropolitan sent notices to DeVries and other parties, but not to Klein, and then recorded its quitclaim deed on December 7, 1989. In September, 1997, Klein filed a complaint to foreclose his mortgage and for declaratory judgment that sought a finding that his mortgage was valid. The Trial Court dismissed Klein's complaint pursuant to Section 2-619 of the Code of Civil Procedure, and he appealed. Affirming the Trial Court, the Second District's decision held that "In general, a mortgagee can have no greater rights than his mortgagor", and since DeVries had not right to cure a default on Metropolitan's mortgage after he entered into the reorganization plan, his title was a fee simple determinable that had been terminated by the occurrence of the condition subsequent. When DeVries defaulted on the Metropolitan mortgage, both his and Klein's estate in the property ended.

Confirmation of Sale and Bankruptcy Filings:

There are conflicting decisions in the Northern District of Illinois on the issue of whether a bankruptcy filed after a foreclosure sale is held but before it is confirmed by the trial court has the effect of staying the foreclosure and allowing the debtor to cure the default by payments under the protection of the bankruptcy court. See In Re Beatty, (N.D. Il. Bnkrptcy 1990) 116 B.R. 112, (J. Barliant), Federal National Mortgage Association v. McEwen, (N.D. Il. 1996), 194 B.R. 594, (J. Grady revíg Bnkrptcy J. Schmetterer), Christian v. Citibank, F.S.B., (N.D. Il. 1997), 214 B.R. 352, (J. Bucklo), revíg In Re: Dorsey Christian, (N.D. Il. Bnkrptcy 1997), 199 B.R. 382, (J. Wedoff) and In Re: Nathaniel Jones and Ida Jones, (N.D. Il. April 24, 1998), No. 97 B 28408, revíg In Re: Jones, (N.D. Il. Bnkrptcy 1998), 215 B.R. 990 (J. Barliant). Now, Judge Shadur has added his voice to those who have ruled that a foreclosure sale is not "conducted" within the meaning of Section 362, applying Illinois law, until the sale is confirmed by the trial court. Crawford v. First Nationwide Mortgage Corporation, (N.D. Il. Bnkrptcy 1998), 217 B.R. 558. There seems to be a fairly even split between the Bankruptcy Judges, some holding that the foreclosure sale under Illinois law occurs at the "drop of the gavel.", other contending a confirmation hearing is the final act which extinguishes a debtorís right to stay foreclosure in bankruptcy. All have noted that "the law of this District recognizes that judges in a multi-judge districts cannot establish precedent binding upon bankruptcy judges within that District." District Judges Grady and Buklo have held that a sale is not "conducted" until confirmed by the trial court, noting that Illinois law is that a bid at sale is a mere irrevocable offer until confirmed and therefore the debtor can cure a mortgage in bankruptcy up to the time the sale is final. The theory of the loyal opposition is that the integrity of the sale and the intention of the Illinois legislature to induce third party bidders to approach the market value of properties in foreclosure will be undermined by granting debtors the right to cure through filing bankruptcy during the period from the sale to confirmation hearing. It currently appears that whether a debtor may still cure a default through bankruptcy between the sale and confirmation depends upon which Bankruptcy Judge a case is assigned.

Illinois Credit Agreements Act: a bar to affirmative defenses and counterclaims in foreclosure:

Although the cases upholding the application of Illinois Credit Agreements Act, (815 ILCS 160/1), have consistently barred borrowers from asserting counterclaims and affirmative defenses against lenders based on alleged oral agreements to restructure a loan or forbear, it appears that defendants have not grown weary of this defense; or appeals based upon it. In the most recent case, Teachers Insurance and Annuity Association of America, (2nd Dist. 1998) 295 Ill.App.3d 61, 691 N.E.2d 881, 229 Ill.Dec. 408, the Court considered and rejected the borrowerís numerous arguments that (1) the mortgagor-mortgagee relationship is a fiduciary arrangement allowing avoidance of the oral agreements limitation under theories of equitable or promissory estoppel similar to those employed to avoid the impact of the Statute of Frauds, (2) the Credit Agreements Act violates the borrowerís right to equal protection, and (3) the Credit Agreements act is "special legislation" or "dual purpose legislation", in order uphold the constitutionality and application of the law. It would certainly appear that the courts are convinced that the Credit Agreements Act IS a bar to defenses based on alleged oral statements made by lenders to borrowers, and even these fairly inventive arguments are unpersuasive.

Real Estate Broker's Commission Post Foreclosure:

In Owen Wagener & Co. v. U.S. Bank, (1st Dist. 1998), 297 Ill.App.3d 1045, 697 N.E.2d 902, 232 Ill.Dec. 160, a real estate broker brought an action against the bank which obtained title to real estate in foreclosure and then sold the property to a buyer located by the broker for the foreclosed owner. The broker was retained by the property owner after the foreclosure proceeding was instituted by the bank Although a contract was entered into between the property owner and the buyer, the contract was specifically subject to the approval of the bank, and the bank refused to approve the sale during the foreclosure because the proceeds of the sale would not be sufficient to satisfy the debt. Approximately five months after obtaining title following the completion of the foreclosure, the bank sold the premises to the buyer "procured" by the broker, and the broker sued under theories of express contract, implied contract and quantum meruit. In a decision which admirably sets forth the basics of broker employment, oral and written agency agreement, and quantum meruit, Justice Wolfson found that there was no employment relationship, the bank never ratified the brokerís acts nor acted in a manner which evidenced it accepted the broker as its agent, and held that the broker had no expectation of receiving its commission from the bank, and therefore could not recover under quantum meruit.

"Unknown Occupants" and Forcible Entry and Detainer Actions:

Foreclosure attorneys have long grappled with the problem of obtaining possession at the end of the foreclosure action from persons in possession over whom the foreclosure court does not have jurisdiction. It is common for this to occur where either the plaintiff in the foreclosure was not diligent in inspecting the premises and advising their counsel of the names of occupants during the foreclosure, or the persons in possession come into possession during the pending proceeding and are truly "unknown occupants" or interlopers. In Rembert v. Sheahan, (N.D. Il., 1994) No. 92 C 67, Judge Holdermans entered an order often cited by the Sheriff of Cook County in support of his position that he can not evict "unknown occupants" (or anyone that is not fully and completely named in an order for possession at the end of a foreclosure case). In response, many foreclosure attorneyís have resorted to proceeding separately in forcible entry to obtain jurisdiction over those "unknown occupants" for eviction following foreclosure. In the recent case of Norwest Mortgage Inc. v. Ozuna, (1st Dist., 12/28/98), No. 1-98-1481, 302 Ill.App.3d 674, 236 Ill.Dec. 110, 706 N.E.2d 984, http://www.state.il.us/court/Opinions/AppellateCourt/1998/1stDistrict/December/HTML/1981481.htm, the Court ruled that the Rembert v. Sheahan injunction applied only to orders for possession entered in mortgage foreclosure actions, and not to forcible entry and detainer actions. The Court ruled that the Plaintiffs failure to comply with the provisions of the Code of Civil Procedure relating to publication against unknown owners, (735 ILCS 5/2-413), rendered the order of possession against the generically named defendants "void ab inito ", but found that while the Sheriff was not justified in refusing to execute the orders for possession based on the distinction between a foreclosure and a forcible proceeding. The Court also found that the refusal to evict was not contemptible because the Sheriff acted in good faith to obtain review of the order and application of the Rembert injunction.

Lis Pendens: Constructive Notice of Proceedings to Purchasers:

In Equitable Real Estate Investments, Inc. v. United States Department of Housing and Urban Development, (N.D.Il. 1998), 14 F.Supp.2d 1058, the Court ruled that when property was sold in foreclosure, a purported purchaser of the property who had constructive notice of the foreclosure could not recover for improvements to the property under the theories of either unjust enrichment nor equitable lien for the value of the improvements. The ruling underscores the applicability of the "doctrine of lis pendens" reported last year and the concept of constructive notice of the foreclosure proceeding imparted by the recording of the lis pendens. (See First Midwest v. Pogge, (4th Dist. 1997), 293 Ill.App.3d 359,678 N.E.2d 1195, 227 Ill.Dec. 713.)

PARTITION SUITS:

Weight To Be Given To Commissioner's Reports:

Before a sale pursuant to a complaint for partition can be held, the Code of Civil Procedure requires that three commissioners appointed by the court make a physical partition of the premises "if the same are susceptible of division without manifest prejudice to the rights of the parties, (735 ILCS 5/17-108), that the commissioners report to the court in writing, (735 ILCS 5/17-109), and that the court shall order the premises be sold at public sale only if not susceptible of division, (735 ILCS 5/17-116). Joseph v. Joseph, (3rd Dist., October 8, 1999), No. 3-98-0959, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/October/HTML/3980959.htm, deals with the rare situation in which the commissioners disagree in their determination of divisibility. Here, two of the commissioners reported that the property was not susceptible to division, whereas the third commissioner reported that it was, and that equity could be achieved through "owelty"; (i.e., payment to compensate and equalize the values of the divided lots - A new contribution to my 'real estate vocabulary!). The trial court denied the defendants' objections, finding that the majority report was not contrary to the manifest weight of the evidence, and this appeal ensued. Noting that "No specific legislative directive is given as to the manner in which an aggrieved party's challenge to the commissioners' report is to proceed or as to the level of deference a trial court should give to the report when a challenge is made.", the appellate court reversed the judgment of the trial court and remanded the case for a hearing on the objections to the commissioners' majority report. It is the trial court, not the majority of commissioners, the appellate decision reasoned, that alone has the authority to decide the issue of divisibility, and the ruling that the majority report was not against the manifest weight of evidence was an improper delegation of the trial court's authority. (Just goes to show that it is also "how you say it" rather than necessarily what you say....)

REAL ESTATE BROKERS:

Real Estate Brokers fiduciary duty and self-dealing:

The Fourth District affirmed the black letter law that a Realtorís fiduciary duty to his principal prohibits the agent from profiting to the principalís prejudice and without full disclosure in Kirkruff v. Wisegarver, ( 4th Dist., 1998), 297 Ill.App.3d 826, 697 N.E.2d 406, 231 Ill.Dec. 852, http://www.state.il.us/court/Opinions/AppellateCourt/1998/4thDistrict/June/HTML/4970667.txt. The principal was a trust seeking to subdivide vacant land for development and sale. The Realtor, Wisegraver, held himself out as an expert in the area of land development and subdivision. The Realtor worked with the owners to develop the property of the trust over a number of months, but never obtained a written employment agreement or had the owner sign a listing. When the Realtor advised the owners that the project was economically unfeasible, they asked him to list and sell the property for the trust and orally agreed to pay a brokerís commission. Without ever listing the property and without disclosure to the client, the Broker platted the property as "Wisegarverís subdivision", and purchased the land himself from the trust. Wisegarver later developed the property for a profit of more than $90,000.00, and this litigation followed. The jury granted verdict in favor of the trust for $58,200.00, but the trial court increased damages to $90,235.00; a sum equivalent to the Brokerís profit from developing and selling the land. Both parties appealed. The Realtor claimed that the trial court erred in finding a breach of duty because there was no agency agreement in writing creating a relationship. The owners appealed the trial courtís refusal to award attorneyís fees and damages based on the consumer fraud allegations in their complaint. On appeal, the Court found the brokerís actions to be a violation of the Consumer Fraud and Deceptive Practices Act, as well as a breach of the common law duties every broker owes to the principal of care, obedience, accounting, loyalty and disclosure. The appellate opinion states that the agency relationship arose from the conduct of the parties regardless of the fact that there was no contract to employ the broker in writing. The court further found that while a broker can purchase property from a principal, there must be complete and full disclosure of all facts and circumstances. Finally, the Court reversed the trial courtís ruling on the issue of fraud, finding that the failure to advise the owners that the property was outside the cityís zoning area, he had not listed or advertising the property, and did not disclose that he was planning to develop the property himself, all constituted fraud and deceptive practices under the Act. In todayís environment of "buyerís brokerís" and "disclosed dual agency" and shifting agency relationships, it is important to note that the underlying fiduciary duties of the agency relationship are still in place; (itís just hard sometimes to know who is whoís agent).

 

REAL ESTATE CONTRACTS:

Contract Conditional Upon "Permitability" Of Vacant Lots And Slander Of Title:

In a breach of contract for the sale of real estate case, the court interpreted the meaning of the provision that the closing was to take place when the vacant "lots [were] permitable by the [City of Geneva]." American National Bank v. Bentley Builders, Inc., (2nd Dist., October 20, 1999) No. 2-99-0004, http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/October/HTML/2990004.htm. Bently agreed to purchase five vacant lots on which the Plaintiff was in the process of obtaining final plat approval. The Plaintiff sent Defendant a letter from the City's building inspector indicating that "building permits are now available for construction of single family homes", but Defendant refused to close and explained that according to industry custom, they believed the lots would be "permittable" only when the site improvements necessary to secure occupancy permits (i.e., curbs and underground utilities) were completed. Plaintiff declared a default, Defendant recorded the contract, and Plaintiff sued seeking a declaration that Defendant was in default, damages for slander of title, breach of contract, and recission of the agreement. The trial court ruled the term "permitable" was ambiguous and allowed parole evidence to determine the intention of the parties. The Appellate Court affirmed in part and reversed in part. The order granting summary judgment in favor of the Defendants for slander of title by recording the contract was reversed. The decision held that the Trial Court's finding that Defendant had acted with malice in the recording after notice of termination by the Plaintiff was an issue of fact, and a proper inquiry would have to be made as to whether the Defendant had reasonable grounds to believe that it had an interest in the five lots at the time of recording. The issue of fact, of course, revolved around the parties' interpretation of "permitable", and the case was remanded for trial on the facts.

Further Developments on Attorney Approval Clauses:

Most of us who keep abreast of this rapidly developing area of the law recognize the importance of distinguishing between an attorneyís approval and attorneyís modification clause in the contracts with which we work; (and can cite the Olympia Restaurant case, (2nd Dist., 1993), 252 Ill.App.3d 594, 622 N.E.2d 904, 190 Ill.Dec. 874, in casual conversation for the proposition that the exercise of the attorneyís right to disapprove must be clear, in good faith, unambiguous, and with proper notice). Exercising a disapproval clause is clearly distinct from proposing modification of a contract, although both have become matters which must be undertake with a great deal of thought and care. In the recent First District case of McKenna v. Smith, (1st Dist., 12/7/98 No. 1-98-1049), 1998 WL 83907, 302 Ill.App.3d 28, 235 Ill.Cec. 253, 704 N.E.2d 826, http://www.state.il.us/court/Opinions/AppellateCourt/1998/1stDistrict/December/HTML/1981049.htm, the Sellerís attorney disapproved the contract within the time period allowed. In the negotiations, the purchaserís third offer made to seller within a three hour period mandated acceptance within a half hour. Seller had indicated her desire to consult with her attorney prior to signing the contract during the previous offers, but accepted this offer when advised by the agent that the purchaser would "walk" if the offer was not accepted within the short time limitation. The Seller quickly received another, better offer to purchase that same day, and her attorney disapproved the contract by written notice the next day directed to the purchaserís agent, who faxed the disapproval to Purchaserís attorney, who informed the purchaser. Affirming the trial courtís dismissal of the Purchaserís declaratory judgment action seeking to enforce the contract, Justice Tullyís opinion reiterates the position that an acceptance of an offer to purchase containing an attorneyís approval provision is a qualified or conditional acceptance while the approval time period is pending. While the invocation of the right to disapprove of the contract must be in good faith, the court ruled: (1) the attorney need not state a reason for disapproval because this is within the proper exercise of the attorneyís judgment based on all the facts and circumstances, (2) placing a very short time period to accept the offer is a good faith basis upon which disapproval can be exercised simply because of the time pressures placed on the Seller, (Sellerís attorney testified that the second, better offer was not a relevant factor to disapproval of the first contract), and (3) notice of the disapproval given to the agent is sufficient where the agent immediately notified the party through the attorney and there was actual notice of the rejection regardless of the contractís provision for notice directly to the parties at the address following their signatures.

 

Unambiguous Contract Language, Summary Judgment, "Terminate" and Compounded Interest considered:

In Reaver v. Rubloff-Sterling, (3rd Dist., March 12, 1999), No. 3-98-0560, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/March/HTML/3980560.htm, 303 Ill.App.3d 578, 236 Ill.Dec. 973, 708 N.E.2d 559, Rubloff-Sterling entered into a contract to purchase a 29.5 acre parcel of commercial real estate from Reaver contingent upon obtaining permission from the Department of Transportation to install two curb cuts that would allow access to the property. They later amended the agreement to divide the property into two separate parcels, and Rubloff-Sterling was granted an option to buy parcel 2 contingent upon obtaining the curb cuts. The amendment provided the purchaser was to pay a non-fundable sum of $1,750 upon the execution of the amendment, earnest money of $5,000 deposited at that same time, and the balance of the purchase price of $663,550, together with accrued interest at the rate of 8.25% from the date of the closing of Parcel 1 payable, quarterly in arrears. Rubloff-Sterling never obtained permission for the curb cuts and made no quarterly payments of interest. Seller sued for approximately $40,000 in interest on the option to buy parcel 2. The trial court found that the contract unambiguously required the Purchaser to pay the Seller interest even though the option was not exercised as a matter of summary judgment, and Seller appealed. The appellate court affirmed and the opinion has four very useful points for real estate litigators to note: (1) If the language of a contract is unambiguous, the intent of the parties must be determined solely from the words of the contract. Obviously, Rubloff-Sterling's position was that the interest was only to be payable if and when it exercised its option. Because the wording of the contract was clear and unambiguous, the "intent" of the parties was contained within the words of the document and summary judgment proper. (2) The use of the word "terminate" in the contingency provision did not relieve Purchase of the obligation to pay interest under the option. If the parties had so intended they should have used the words "expunge" or "refund" to indicate an intent to forego the interest rather than "terminate" which "simply means 'to bring to an ending". (3) Compound interest exists when accrued interest is added to the principal and the whole is treated as a new principal for the calculation of interest for the next period. Compound interest is disfavored in Illinois; and this was not compound interest. (4) The Interest Act (815 ILCS 205/2) provides for creditors to be allowed 5% interest for all monies after they become due on "any bond, bill, promissory note, or other instrument of writing", and a contract for the sale of real estate qualifies as an "instrument of writing" under this provision of the act. (If Fantino v. Lenders Title and Guaranty Company, gave one pause to consider the importance of careful drafting, this case should certainly emphasize that point four-fold!)

 

Promissory Estoppel Requires Additional Consideration And Detrimental Reliance In Addition To Conduct Inconsistent With Enforcement of a Contractual Right:

In this case the First District Illinois Appellate Court applied North Carolina law to a contract by which Parkside Senior Services, LLC and National Development and Consultants, LTD agreed to jointly develop 215 acres in Greensboro, North Carolina as a health care complex for senior citizens. The parties entered into an indemnity agreement which provided the Parkside would withdraw its 50% share of funds deposited within 40 days of the execution of the contract. There was no dispute that Parkside did timely exercise its right but its deposit was not returned. National contended that Parkside's conduct in participating in the development of the property for at least six months after it requested return of its funds constituted a waiver by estoppel or promissory estoppel. The parties each moved for summary judgment, and on appeal summary judgment in favor of National was reversed based on a finding that mere conduct inconsistent with the enforcement of a contractual right is not sufficient to establish promissory estoppel. There must also be some additional consideration to support the waiver and/or detrimental reliance upon the conduct and a change of position or condition where detriment could only be avoided by enforcement of promissory estoppel. Mere inconsistent conduct does not establish waiver by estoppel. Here, on remand, the First District directed that if there was a consequential loss of money and/or resources after Parkside's conduct following the demand of it deposit, (i.e., forming additional consideration and detriment), then judgment should be entered for National; otherwise, judgment for Parkside. While this case is based upon interpretation of North Carolina law to the contractual rights of Illinois parties, the reasoning and application to Illinois law seems clear as well. Parkside Senior Services, L.L.C. v. National Development and Consultants, Ltd., (1st Dist, 3/23/99, No. 1-98-0943), 303 Ill.App.3d 1022, 709 N.E.2d 605, 237 Ill.Dec. 350, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/March/HTML/1980943.htm.

The Devil Is In The Details; Contract Unenforceable Without Specifying Details Such As Price, Payment Terms, Closing Date, And Adjustments For Taxes And Closing Costs:

In J.F. McKinney & Associates v. General Electric Investment Corp., (7th Cir., June 4, 1999, No. 98-3914), 1999 WL 444511, the Court held that there never was an enforceable contract for the sale of a $47,200,000 note between the holder of an option to purchase and an ultimate investor . The note was secured by a mortgage on a large building in Chicago, 200 South Wacker Drive. The Plaintiff obtained a 70 day option to purchase the note at a premium from Prudential Insurance Company and then entered into negotiations to sell the note to General Electric Investment. While GEI never signed a contract to purchase, McKinney attempted to enforce a purported agreement to purchase based upon a correspondence from GEI setting forth two alternative compensation proposals for the payment of McKinney's placement fee. Noting that "No one commits to spend more than $47 million without specifying details such as price, payment terms, closing date, and adjustments for taxes and closing costs.", the Court affirmed the district court's reading of the letter as simply proposing two compensation options; not as a promise to buy the note. Citing Illinois law that a meeting of the minds requires the application of an objective theory of contract under which understandings and beliefs of the existence of a contract are effective only if shared, the Court concluded that "It is not enough to get halfway to a contract and then hope that the jury will complete the process; the parties themselves must show assent." The fact that there were vital terms missing in the terms of the letter, in addition to language which implied continuing negotiations, negated the existence of an agreement.

 

RESIDENTIAL REAL ESTATE DISCLOSURE:

The Standard of Pleading and actual knowledge of Defect:

There can be little doubt that in the years to come litigation against sellers based on defects in residential real estate will include a standard count alleging a violation of the Illinois Residential Real Property Disclosure Act, (765 ILCS 77/20), to accompany the counts for breach of contract and fraud. An interesting dilemma, (or "defense" depending on your viewpoint of the case), is that the Act requires the seller had knowledge of the defect at the time of making the disclosure required under the act. Section 55 of the Act sets forth the elements of a cause of action as requiring actual knowledge of the defect and exonerates one who reasonably believes that an undisclosed problem has been repaired or corrected. Most sellers, of course, deny they knew of the defect and most buyers are going to only be able to plead circumstances that would imply the sellerís knowledge. In an appeal of a motion to dismiss pursuant to Section 2-615 for failure to plead sellerís knowledge in just such a case, (although the facts are interesting here because of the five chances given to the plaintiff to correctly plead), the First District reversed the trial court and held that the facts alleged in the fifth amended complaint were sufficient to state a cause of action under the Residential Real Property Disclosure Act, even thought the plaintiffs failed to plead the defendants knew that the report was false at the time it was made.

Hirsch v. Feuer, (1st Dist. 10/16/98), 1998 Ill.App.LEXIS 715, 299 Ill.App.3d 1076, 234 Ill.Dec. 99, 702 N.E.2d 265.

 

"Knowing" violation under Residential Real Property Disclosure Act an Issue of Fact:

The Third District has added to the precedent on post-closing actions relating to residential real estate transactions with Woods v. Pence, (3rd Dist., March 12,1999, No. 3-98-0469), 303 Ill.App.3d 573, 236 Ill.Dec. 977, 708 N.E.2d 563, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/March/HTML/3980460.htm. In this case the appellate court found that the trial court erred in granting summary judgment in favor of the seller where the evidence showed that the sellers had made between three and five repairs to the roof of the property in a four year period but failed to disclose any defects to the buyer at the time of the contract. The Court held that the reasonableness of the seller's belief that the problem had been corrected was a question of fact and not a basis to grant summary judgment, and further held that the fact that the buyers were aware of water damage might be a factor in determining damages at trial, but did not preclude liability. The Residential Real Estate Disclosure Act, (765 ILCS 77/20), imposes liability for a knowing violation of the duty of disclosure prescribed, but what is knowingly false, what is known by the buyer regardless of the disclosure report, and what need not be disclosed based on a reasonable belief that a defect has been corrected, are all clearly issues of fact according to this recent case.

 

REAL ESTATE TAXES:

Real Estate Tax sale and the Automatic Stay in Bankruptcy:

When the owners of real estate file a Chapter 13 Bankruptcy, a tax sale which occurs while the stay is pending, or if the stay is later reinstated, is void and will be declared a sale in error. This was the holding in In re Application of County Collector, (4th Dist. 1997) 291 Ill.App.3d 588, 683 N.E. 2d 995, 225 Ill.Dec. 492 , even though the debtors failed to include the real estate tax as a debt in their original Chapter 13 petition. The Chapter 13 was converted to a Chapter 11, which was then reinstated after being dismissed for failure to pay the filing fee, finally converted to a Chapter 7, and ultimately discharged. The sale was a "sale in error" and set aside on the motion of the mortgagee as in violation of the stay and the tax buyer was entitled to a refund of his money plus interest.

 

Tax Deeds; Exempt Property And Parties Entitled To Notice:

The case of In Re Application of Ward, (2nd Dist., December 23, 1999) http://www.state.il.us/court/Opinions/AppellateCourt/2000/2ndDistrict/January/HTML/2981656.htm, sets forth some good instruction relating to property which is "tax exempt", and the parties to whom notice of a tax deed petition must be sent, in an not-too-unusual circumstance. The property sold at a tax sale was a park consisting of approximately eight acres in a residential subdivision. After the tax deed had issued and been recorded, the property owners in the subdivision brought an action pursuant to Section 1401 of the Code of Civil Procedure to dismiss the tax deed claiming that: (1) the property was exempt, not subject to taxation, and therefore improperly sold, and (2) the tax deed petitioner did not name the homeowners as parties or make a diligent effort to learn of their interest and then serve notice upon them as a condition to the issuance of the tax deed.

The plat of subdivision as recorded indicated in large block letters that the area sold was designated a "PARK" for the benefit of the homeowners. The recorded declaration of covenants also stated that the property designated "PARK" was to be conveyed to a homeowners' association, which was to hold title to the property. (The homeowners' association was never formed, and title never conveyed; therefore the tax deed petitioner argued that a search of title indicated that persons other than the association were the assessee and trust holding title, and notice was given to those two persons.) The McHenry County Treasurer admitted that the assessor had over-assessed the property because it qualified for a $1 assessment, had this been known a certificate of error would have been issued, the sale would have been a "sale in error", and the County had no objection to the Court vacating the sale.

The Appellate Court first rejected the homeowner's assertion that the property was exempt from taxation. The property, although dedicated to common use, remained privately owned, and therefore was not "exempt" as dedicated to public use. (i.e., an assessment of $1 is not the same as tax exempt.) Turning to the issue of notice, however, the Court found that the homeowners were "parties interested in the property" under 35 ILCS 200/22-15, to whom notice of the petition for tax deed must be given. The recorded plat and declarations were found to be clear expression of donative intent for the benefit of the homeowners, and this created an interest sufficient to make the homeowners parties with a right to redeem to whom notice could have easily been sent. Accordingly, the dismissal of the motion to dismiss the tax deed was reversed and remanded.

 

Priority Of Deeds; Tax Deeds Are Not Always "First":

Most of us have been schooled in the maxim that liens generally attach according to the time they are perfected, (i.e., "first in time is first in right"), except for real estate taxes and mechanic's liens, (under specific circumstances). Accordingly, a judicial deed issued based upon a superior lien should extinguish subordinate liens. And, of course, inasmuch as real estate taxes always occupy a superior lien position, a tax deed should extinguish all other liens and any judicial deed obtain based on those liens, Right? Well, In Re Application of County Treasurer, (1st Dist., October 21, 1999) http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/October/HTML/1980518.htm.

appears to set forth something different based on the language contained in the Illinois Municipal Code relating to the Chicago Abandonded Property Program, (CAPP), 65 ILCS 5/11-31-1(d). In this case, the City of Chicago filed a petition to vacate a tax deed issued to City Sites, L.L.C. on July 22, 1997, following the sale of the property for nonpayment of taxes in 1992. The City had obtained its own judicial deed to the same property pursuant to CAPP on July 7, 1997, and recorded it on July 10, 1997. Based on the language of that statute that "a conveyance by judicial deed shall operate to extinguish all existing ownership interest in, liens on, and other interests in the property, including tax liens", the City argued its judicial deed operated to extinguish the tax deed. The Circuit Court denied the City's petition to vacate the tax deed, and on appeal the City contended that the Court abused its discretion in denying its petition to vacate the tax deed pursuant to 65 ILCS 5/11-31-1(d). The First District reversed and remanded with directions to vacate the deed noting that "Under the plain language of that section, the issuance of the judicial deed extinguished all existing ownership or other interests in the Property, including those of the tax purchaser....There is no rule of statutory construction which authorizes a court to declare that the legislature did not mean what the plain language of the statute says." The decision found that the tax deed was a nullity and that the tax purchaser was entitled to a refund of the monies paid at the tax sale. (And, in that short, three page decision, the First District has forever made me wonder what OTHER statutory exceptions to the "first-in-time-first-in-right-except-for-taxes- special-assessments-and-mechanic's liens" rule there are that I don't know about yet....)

 

Exercise of the Right of Redemption in Tax Deed Cases:

The concept that someone must have an "interest" in the real estate in order to exercise the right to redeem real estate from a tax sale seems to be as difficult for the Courts as it is for practitioners to grasp. In the recent case of In re Application of Cook County Treasurer, (Ill.S.Ct., December 31, 1998, No. 75156), 185 Ill.2d 428, 706 N.E.2d 465, 235 Ill.Dec. 910, http://www.state.il.us/court/Opinions/SupremeCourt/1998/December/Summaries/HTML/85156s.htm, 1998 WL 906614, the majority opinion written by Justice Hiepel found that the owner of "record title" who held neither legal nor equitable interest in the real estate has no right to redeem. In this convoluted case the party who redeemed (Williams) was acting under a power of attorney for Lee, who had entered into an installment contract and conveyed title to Smith as the purchaser. Smith, however, never recorded the deed, and Lee subsequently informed Smith that she was rescinding the contract and the deed as procured by fraud, and entered into a contract to sale the same property to Williams. (Yes, the same Williams acting under the power of attorney - I warned you it was convoluted....). The Supreme Court ruled that Lee, as the owner of record who had no legal or equitable interest in the property, had no right to redeem, but, affirmed the appellate court's decision allowing the redemption on other grounds. In addition to good language regarding the necessity of recording a deed to create an "interest" as to third parties to the transaction, this case found that Williams did not have a right to redeem as Lee's representative, but DID have an interest sufficient to redeem in his own stead. Under 35 ILCS 200/21-345, "any owner or person interested in that property" has the right to redeem. While Lee was no longer the "owner", (regardless of her "record title" due to the unrecorded deed to Smith), Williams did have an "interest" sufficient to have a right to redeem by virtue of the contract to purchase; "the contract to purchase itself is sufficient to create an equitable interest in the property." Justice McMorrow's specially concurring opinion gets to the heart of the issues and the public policy that the redemption laws should be liberally construed in favor of redemption, but this is a classic example of a case that can be "misread by the headnotes."

Fraud Required To Set Aside Tax Deed:

The owner of real estate sold at a tax sale brought a motion to vacate the tax deed under Section 1401 of the Code of Civil Procedure based upon bad service of notice in In The Matter of the Application of The County Treasurer, (3rd Dist., May 4 1999, No. 3-98-0816), 304 Ill.App.3d 502, 710 N.E.2d 906, 238 Ill.Dec. 109, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/May/HTML/3980816.htm.  The trial court granted the petition noting that the tax purchaser's affidavit falsely stated that the owner was served. In fact, the owner was a professional corporation, (Charles E. Johnson, Ltd.). Charles E. Johnson, DDS, was the sole officer, director and shareholder of the corporation. His wife, Beverly, was his secretary and paid the bills; including the real estate taxes on the building. Beverly failed to pay the taxes and went to great lengths to hide this from Dr. Johnson, including hiding the mailed notices, forging letters from the county treasurer stating the sale had been an error, and altering cancelled checks to make it appear that she had paid the taxes. When the tax purchaser placed the notices for service with the Sheriff, the deputy mistakenly omitted the "Ltd." designation so that it appeared Charles E. Johnson was to be served, and then served Beverly. She, of course, failed to advise Dr. Johnson. It was on this service, and the tax purchaser's sworn statement, that Dr. Johnson based his motion to vacate the deed. The trial court granted the motion and the purchaser appealed.

In reversing, the appellate court noted that under Section 1401, the owner must prove by clear and convincing evidence that the tax deed was procured by fraud or deception on the part of the tax purchaser. Without proof of fraud, mere proof that the owner was not served is insufficient to vacate the deed. Holding that the purchaser had no knowledge of the failure of service, the court found that it was not possible for her to have the necessary intent to perpetrate a fraud. She simply relied upon the Sheriff's representation of service, and this cannot be characterized as fraud. The court also rejected the owner's argument that the trial court should be affirmed on an "equity driven analysis" adopted in other, factually similar decisions. The court responded that this approach has not been embraced by the Supreme Court of Illinois, nor has the legislature amended the Tax Code to encompass the reasoning. Accordingly, proof of the fraud by the purchaser is required before a tax deed may be set aside.

Valuation Of Minerals For Real Estate Tax Assessment Purposes:

The Board of Review of Alexander County appealed a decision of the Property Tax Appeal Board reducing its assessed valuation of mineral reserves owned by the tax payer in The Board of Review of the County of Alexander v. The Property Tax Appeal Board and Unimin Specialty Minerals, (5th Dist., May 11, 1999, No. 5-97-1089), 304 Ill.App.3d 535, 710 N.E.2d 915, 238 Ill.Dec. 118, http://www.state.il.us/court/Opinions/AppellateCourt/1999/5thDistrict/May/HTML/5971089.htm. The issue on appeal was the method of valuation of mineral deposits removed from the real estate. The County Assessor valued the mineral deposits based on the "income approach", (i.e., the income from the minerals as sold, less the expenses to produce the final product, and then capitalizing the net income at 25% to derive a value which was then translated into an assessed value of $2,248,000.00). The PTAB and owner argued that the assessment should be based on the "market value approach", (i.e., the fair market value of the minerals, before processing, when they were removed from the real estate, which was $.50/ton and resulted in an assessed value of $27,488.00). The Court determined that the since the minerals become personal property once they are severed from the soil in which they are embedded, the market value as they lie in the ground, prior to any removal, is the appropriate measure.

(This case has a lot of analysis of the difference approaches to valuations, but comes to the conclusion based on some foundational principals of severance and real estate law.)

Real Estate Tax Assessed Valuation - Lease Vs License:

In Metropolitan Airport Authority of Rock Island County v. State of Illinois Property Tax Appeal Board, (3rd Dist., August 27, 1999), No. 3-98-0633, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/August/HTML/3980633.htm, the issue was whether the relationship between the airport and car rental companies using space in the airport facility created by a "Concession Agreement" was than of landlord/tenant under a lease or a mere license. The distinction was important because although property belonging to an airport authority is exempt from property taxation, it loses that exemption when leased to a non-exempt entity. "While leases are taxable, licenses are not subject to taxation under the property tax code...Whether an agreement is a license or a lease is not determined by the language used, but by the legal effect of the provisions and intent of the parties." The decision affirming the administrative ruling and circuit court holding in favor of the PTAB noted that a lease is a contract conveying a lesser interest in property than a deed, which gives possession in exchange for the payment of rent, but does not grant the lessor control over the lessee's operations on the premises. A license, on the other hand, is a limited right to use property for a specific purpose, subject to the management and control of the licensor. A license conveys no right in the land and is revocable at the will of the licensor. Turning to the facts that the airport authority exercised no control over the conduct of the rental car companies in the day-to-day running of their business and the only restriction in the Concession Agreements was upon the use of the premises only for operating a car rental facility, the relationship was determined to be a lease rather than a license. There were specific termination provisions in the Concession Agreements that required specific enumerated occurrences and written notice to terminate. This is inconsistent with the terminable at will nature of a license. Finally, the agreement contained an express statement that payments were to be deemed as lease payments, and although the Authority argued that this provision was operative only in the event of bankruptcy, the Court deemed this to be a general statement of the intent of the parties in their agreement. (Does that mean that if they had called it a "license" it would have been one?...probably not; which is perhaps the basis for the lease vs. license distinction in the decision.)

Legal Descriptions And Inclusion In A 'Tif' District:

Tax increment financing districts, ("TIF districts"), seem to be more and more prevalent these days. Even in La Salle County, the interplay between the power to create TIF districts and condemnation seems to be creating some interesting results. In City of Marseilles v. Radke, (3rd Dist., September 30, 1999), No. 3-98-0518, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/September/HTML/3980518.htm, the city adopted an ordinance creating a real property TIF district and an attendant redevelopment plan to support a condemnation suit across Radke's property to acquire an easement to construct a railroad spur in an industrial area. A consent judgment was entered requiring Radke to convey the easement. The city was to pay him $30,000 and make a good faith effort to help him obtain better access to his property. Radke noticed, however, that there was an inconsistency in the legal description of the easement and the boundary area of the TIF district, and moved to vacate the judgment. His theory was that the easement was outside of the TIF district according to one interpretation of the legal description of the district, and therefore the court lacked subject matter jurisdiction to approve the consent judgment. The appellate court's ruling upholding the denial of the motion to vacate relied upon the fact that the ordinance which created the boundaries of the TIF district also had a map attached which, when considered in conjunction with the legal description containing a 'scrivener's error', clarified the intended boundaries of the district. Of more general precedental value is the finding that: "Illinois courts have consistently applied a more relaxed standard of interpretation to descriptions of municipal boundaries than to those in deed or contracts.", and "If the ordinance and accompanying map, when viewed together, fairly apprise the public of the property involved, the description will be considered sufficient."

 

SPECIFIC PERFORMANCE:

Specific Performance And The Statue Of Frauds:

In Crawley v. Hathaway, (4th Dist., December 16, 1999), http://www.state.il.us/court/Opinions/AppellateCourt/1999/4thDistrict/December/HTML/4990278.htm, the Court was confronted with a classic case of whether a writing was sufficient in details to take it out of the Statute of Frauds defense interposed and allow specific performance if parole evidence were admitted; in this case a survey created after the agreement. It was, and the Trial Court's dismissal was reversed, but not without a dissent.

Crawley and Hathaway entered into a handwritten contract whereby Hathaway was to sell "100 Acres More or less, 83 acres of pasture & timber and 19 acres of tillable ground For $90,000.00." to Crawley. Crawley paid $7,500 of earnest money and then went out looking for financing. A survey was thereafter created. With both parties present, and Hathaway directing the surveyor on the boundaries of the parcel he agreed to sell, the resulting survey revealed the parcel consisting of 127 rather than 100 acres. Hathaway reneged, listed with a Realtor, and sold the property for $150,000 to a third party. Crawley sued for specific performance.

The majority decision noted that a memorandum is sufficient to satisfy the Statute of Frauds if it contains the names of the parties, a description of the property sufficiently definite to identify the same as the subject matter, the price, terms and conditions of the sale, and the signature of the party to be charged. The intention of the parties is to govern, and any ambiguity may be explained by parole evidence. Accordingly, parole evidence may supply the details, and the survey and testimony regarding the survey are were held to be admissible as evidence of the property intended to be sold. As a result of this parole evidence, the majority reasoned, the Court could have determined that the parties knew exactly what property was intended to be sold, even if Hathaway was unaware of how may acres it may covered at the time, and should have granted Specific Performance . The purpose of the Statute of Frauds is to prevent fraud, not facilitate it, and the Courts will refuse to apply the Statute of Frauds if the result would be to perpetrate a fraud, as here.

Justice Steigmann's dissent states that "The particular document before us is so bereft of any meaningful description that the majority's resort to parole evidence amounts to 'supplying the missing terms'", and notes that the memorandum "contains nary a clue as to where this property might be located....Because the law governing the Statute of Frauds permits Crawley to use parol evidence only to clarify the terms of the purported contract, not supply missing terms, this court should agreed with the trial court's decision to grant Hathaway summary judgment....We should also reject Crawley's argument that the land survey...may be considered...Although a contract may consist of several writings, they must be connected in some definite manner...", and Justice Steigmann didn't see a connection.

 

TENANCY BY THE ENTIRETY/TITLES:

Conveyance into Tenancy by the Entirety CAN be a Fraudulent Conveyance:

A great deal of litigation, a number of articles and commentaries, and legislative amendments have followed the Second Districtís 1994 ruling in the case of E.J. McKernan Co. v. Gregory that a judgment debtorís transfer of property into tenancy by the entirety in order to shield that property from a judgment creditor can not violate the Uniform Fraudulent Transfer Act. The First District held otherwise in In re Marriage of Del Guidice in 1997, 287 Ill.App.3d 218, 678 N.E.2d 47, 222 Ill.Dec. 640, and that same year the legislature amended the tenancy by entirety provision in the Code of Civil Procedure to provide an exception if the property was transferred with the sole intent of avoiding debts existing at the time of the transfer. In its recent decision of Harris Bank v. Weber, (2nd Dist., 9/18/98, Case No. 2-97-0508), 298 Ill.App.3d 1072, 700 N.E.2d 722, 233 Ill.Dec. 194, the Second District noted that the legislative history and comments relating to the 1997 amendment left "little doubt that Senator Cullertonís mention of the "case out in DuPage County" was a reference to E.J. McKernan", and that "The purpose of this bill is to overcome what was viewed by many as a wrongly decided case...". The Second District ruled that based on the language of the amendment, its decision in McKernan was no longer valid, but also held that the Del Guidice courtís application of the eleven factors found in the Uniform Fraudulent Transfer Act was not the appropriate test for invalidating a transfer. The test, the Second District opinion states, is confined to the amendment language of whether the transferorís "sole intent" is to avoid the payment of "existing debts". Justice Hutchinson wrote a specially concurring opinion stating that she would remand with instructions that the trial court consider the factors set forth in the Uniform Fraudulent Transfer Act and look specifically to the timing of the transfer and determine the "sole intent" from the facts. (A similar finding, based on similar reasoning, is set forth in the Bankruptcy Court opinion in the case of In Re Gillissie, (N.D. Il. 1997), 215 B.R. 370, but also see In re Stacy, (N.D. Il. 1998), 223 B.R. 132.)

Revocation by Marriage and Divorce; Wills, Divorce and Land Titles:

Most real estate practitioners are aware of the fact that the dissolution of a marriage creates a number of sometime confusing issues relating to real estate and land titles. (A tenancy by the entirety, for example, becomes a tenancy in common upon dissolution whereas a failure to comply with the technicalities of the act, or if the property ceases to be the family homestead, will result in a title held in joint tenancy. (See 756 ILCS 1005-1/c) In a recent case, Estate of Donald Charles Forrest v. Catherine Dagenais, (3rd. Dist, 1999) 302 Ill.App.3d 1021, 706 N.E.2d 236 Ill.Dec. 169, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/January/HTML/3980454.htm, the Third District held that the doctrine of "revocation by divorce" (755 ILCS 5/4-7(b)) applied to invalidate a provision in a will executed before the marriage leaving everything to the soon-to-be-wife. Donald Forrest and Catherine Dagenais lived together before they were married, when Donald executed his will leaving everything to her. They were later married, and then divorced; all the while remaining "close friends". Upon Donald's death with the will not revoked, Catherine and Donald's sister Roseann disputed the validity of the will's legacy to Catherine given the intervening divorce. The Court affirmed the trial court's ruling that the doctrine of "revocation by divorce" applied to revoke the legacy to Catherine under the will, even though the will was executed before the marriage, (rather than being a byproduct of the marriage), and despite the evidence that the parties remained "friendly" after the divorce. The decision sets forth the legislative history of Illinois probate law relating to "revocation by marriage" as well as "revocation by divorce", and is well recommended to anyone who confronts an issue in this area.

TITLE INSURANCE:

Duty To Defend:

In Sabatino v. First American Title Insurance Company, (2nd Dist., November 17, 1999), No. 2-99-0183, http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/November/HTML/2990183.htm the Plaintiffs brought a declaratory judgment action against First American Title seeking a judicial determination that the defendant was obligated to defend and indemnify them in a civil suit brought by the owner of an adjacent parcel of real estate, Robert G. Hershenhorn. That suit related to a sanitary sewer line that ran from Hershenhorn's property , across plaintiff's property, and then discharged into the sewer line in the street. At one distant point in time, both properties were a single parcel; which gave rise to an implied easement by necessity. When the plaintiffs sought a zoning variance to construct an addition on their home, Hershenhorn objected, raising the issue of the unrecorded easement (of necessity by implication). The variance was denied and, without Hershenhorn's permission or knowledge, Plaintiffs then modified their plans (without showing Hershenhorn's alleged easement) and began construction. Their addition included the installation of a permanent modification to the sanitary sewer line which diverted and rerouting it around the new foundation they had constructed. As a result, debris accumulated in the sewer line and sewage and effluence flowed on to Hershenhorn's property. In response to his two count complaint seeking a permanent injunction directing the restoration of the original sewer easement and punitive damages, Plaintiffs notified First American Title of the litigation and requested it defend and indemnify them under their policy of title insurance because the unrecorded easement was not an exception to coverage. In reversing the Trial Court's grant of summary judgment in favor of Plaintiffs and against the title company, the Appellate Court's decision noted that the policy did not insure for intentional acts of the insured nor for matters attaching or created subsequent to the date of the policy. The gravaman of the cause of action stated by Hershenhorn was not to seek a judicial determination of the existence of the easement, but, rather, sough recovery for the deliberate, wrongful and intentional actions of Plaintiffs in interfering with the unrecorded easement, and therefore fell within the exclusion of the policy for those intentional acts. Additionally, the Court noted, the actions complained of (and for which indemnification and defense was sought) occurred after the policy was issued and also fell outside of the terms of the policy coverage. Since the complaint sought relief in the form of redress for Plaintiff's intentional and wrongful conduct that occurred after the date of the policy, and the policy excluded coverage for the conduct complained of, the title company had no duty to defend. The decision also noted that under the circumstances, the title policy also provided alternatives in lieu of accepting a tender of defense, (i.e., to pay or otherwise settle with other parties), of which the title company could have chosen to avail itself rather than defending.

 

Title Insurance: Zoning Disclosure, Contract Exclusion And Negligence:

Notaro Homes, Inc. filed a four count complaint against Chicago Title Insurance Company based on the issuance of a title insurance policy that failed to disclose a recorded amendment to the City of McHenry's zoning ordinance that was specifically recorded against the parcel purchased prohibiting the construction an intended apartment building. The Trial Court dismissed the Complaint pursuant to Sections 2-615 and 2-619 based upon a reading of the exclusion language in the policy and application of the Moorman Doctrine. The Second District affirmed in part and reversed in part in a decision that is certain to send title companies back to the library and drafting tables for a while. Notaro Homes, Inc. v. Chicago Title Insurance Co., (2nd Dist., December 15, 1999) http://www.state.il.us/court/Opinions/AppellateCourt/1999/2ndDistrict/December/HTML/2981196.htm.

Count I sought declaratory judgment that the policy language did not exclude coverage for failing to disclose the zoning amendment, and Count II alleged a breach of contract using the same theory. (Count I had been voluntarily dismissed in the Trial Court and the appeal proceeded on the dismissal of Count II through IV.)

The policy provided that the company would not pay the insured for loss or damage which arise by virtue of "any law, ordinance or governmental regulation (including but not limited to building and zoning law...) restricting...occupancy, use, or enjoyment of the land...except to the extent that a notice of enforcement thereof or a notice of a defect...has been recorded in the public record." The City of McHenry recorded the amendment, including the legal description of the property affected, twenty-five years prior to the issuance of the Plaintiff's policy, but neither the commitment nor the policy made any mention of the zoning.

The majority, reviewing the policy definitions of "defect", "lien" and "encumbrance", found that the zoning ordinance was none of these, that it did not constitute a "defect" that would cloud the title to the property, and rejected the claim that the recording of the amendment was a "notice of enforcement" to bring it within the exception to the exclusion of coverage. Holding that the title company is entitled to exclude coverage of zoning ordinances from the title policy as a matter of contract, the Trial Court's dismissal of Count II was affirmed based on the language of the contract.

Count III alleged a negligent misrepresentation action for failure to disclose the ordinance, and the majority decision reversed the Trial Court's dismissal, finding that neither the language of the policy nor the Moorman Doctrine barred the Plaintiff's Action. The decision holds that Moorman does not apply to title companies to deny the recovery in tort for purely economic loss where there is a contract between the parties based on the exception for those in the business of supplying information for the guidance of others in their business transactions. The title company here was clearly in the business of supplying information to the Plaintiff in its business of land development, and therefore owed a duty not to be negligent in providing the information. And, while holding that the commitment for title insurance was merged into the final title policy, (this was important because the title commitment did not contain the same exculpatory language as the final policy), the majority decision held that the exclusive remedy provisions contained in the policy would not bar the plaintiff's suit based on negligence in issuing the commitment rather than a contract action based on the policy.

The majority opinion also affirmed the dismissal of Count IV, alleging a violation of the Consumer Fraud and Deceptive Practices Act for failure to disclose the ordinance. The matter disclosed was held to be an "omission of law readily discoverable by plaintiff and, accordingly, was not a violation of the Act, as it was not an omission of material fact." within the purview of the Act.

Judge Inglis' dissent reads the policy exclusion to create an exception for notice of enforcement or notice of the defect by recording, and therefore disagreed with the dismissal of the contract action based on his interpretation of the exclusion as not applicable due to the recording of the ordinance as a notice of defect. More importantly, the dissent reasoned, "once the matter was recorded, defendant had a duty to accurately report all defects of record that adversely affect title. The prospective purchaser relies on the title insurer's search to research the applicable law and records before issuing the commitment and to provide warnings about areas in which the purchaser might find title surprises...Defendant had a duty to inform plaintiff of the recorded amendment and breached its duty by negligently failing to transcribe the recorded amendment on to the commitment."

This case has been remanded and will eventually be tried based on the negligence theory that survived the Moorman defense. It should be of interest and instructive to most of us.

Title Insurance Waivers And Agency Closings:

Lawyers all too frequently wait until the closing and then rely upon the "closer" to "waive-over" exclusions from coverage by initialing the various exceptions to title raised in Schedule B of the commitment. C.A.M Affiliates, Inc. v. First American Title Company, (1st Dist. Aug. 6, 1999)n No. 1-98-2039, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/August/HTML/1982039.htm, is a case in which the closer's assurances were relied upon at closing and later on it was determined that the closer "in error" didn't waive all of the exceptions and the agent was unable to redeem real estate taxes post-closing. The insured appealed, won at the trial level on summary judgment and was affirmed on appeal.

Exception No.1 on the commitment indicated the policy would be subject to taxes for 1989, 1990, 1992, 1993 and subsequent years. Exception No. 2 indicated the 1989 taxes has been sold and the tax buyer had added the 1990 taxes to the sale. At closing, the closer (a Republic Title employee) initialed exception No.2 indicating it had been waived, but did not initial Exception No. 1 on the commitment issued by First American Title. (Republic was acting as First American's Agent at closing pursuant to an agency agreement.) Funds were disbursed at the closing to Republic to redeem the taxes post-closing. By the time the money was presented to the County to redeem, however, additional interest and costs accrued, making the funds insufficient and redemption failed. The classic nightmare ensued, and the Republic employee who handled tax redemptions was unable to communicate with seller's attorney to obtain the balance of funds to redeem before the tax deed issued. This suit resulted.

The First District found as a matter of law that the closer had intended to waive both Exception No. 1 and No. 2 and simply erred in not initialing Exception No. 1. (No contradicting affidavits were filed in response to those submitted by the insured in support of their motion for summary judgment and therefore the "error" in not initialing the first exception was an "undisputed fact"), The other issue in this case was the relationship between the closing agent (Republic Title) and the title insurer (First American Title), and whether First American was bound by the agent's actions at closing and post-closing failure to redeem taxes. The Court interpreted the agency relationship as clearly giving the closer authority to waive exceptions on the title commitment, and rejected the argument that the loss for failure to redeem the taxes was solely related to the "escrow" responsibilities at closing rather than the "title" agency relationship.

In an increasingly complex transactional industry of subagencys and bifurcated responsibilities at closing, this case may take on greater importance as time passes.

ZONING:

Zoning Primer:

The recent case of Zeitz v. Village of Glenview, (1st Dist. 4/5/99, No. 1-97-4323), 304 Ill.App.3d 586, 701 N.E.2d 849, 238 Ill.Dec. 52, http://www.state.il.us/court/Opinions/AppellateCourt/1999/1stDistrict/April/HTML/1974323.htm, provides a good background and primer of the most the essential elements required to mount an attack, (although unsuccessful here), against a village for blocking development of land with zoning. In this case, the plaintiffs sought to develop 10 acres of vacant, densely forested, vacant land into 10 home sites. They presented a development plan to the village based on one acre sites under the zoning that existed at the time options had been initially entered into, even though they knew the property was in an "overlay zone" and subject to a sophisticated and comprehensive master plan as an environmentally sensitive area. Thereafter, the village rezoned the area to require a minimum of two acre sites. Affirming the trial court's denial of plaintiffs actions seeking to have the re-zoning declared invalid, damages for inverse condemnation, and improper taking of the property, the decision rests on the black-letter law that there is no vested right in the continuation of a zoning ordinance. The decision also outlines the rights of home rule units to adopt and enforce zoning ordinances, discussed the rare circumstances under which a public body can be equitably estopped, and enumerates the elements necessary to challenge a presumptively valid ordinance as arbitrary, unreasonable and without substantial relationship to the health, safety and welfare of the community; i.e., examination of (1) the existing uses and zoning of nearby property, (2) extent to which property values are diminished by the zoning, (3) the extent to which the destruction of the value of the property promotes the health, safety and welfare of the public, (4) the relative gain to the public compared to the hardship imposed upon the individual, (5) the suitability of the property for the zoned purposes, and (6) the length of time the property has been vacant in the context of development in the vicinity.

Zoning Cases And Robert's Rules Of Order:

Many real estate practitioners, (and some parliamentarians and libertarians as well), who attend or represent clients in zoning hearings might be interested in the ruling in County of Kankakee v. Anthony, (3rd Dist., May 4, 1999), No. 3-98-0107, http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/June/HTML/3980107.htm, 304 Ill.App.3d 1040, 238 Ill.Dec. 140, 710 N.E.2d 1242. In their efforts to contest the County's case alleging that they violated county zoning ordinances by constructing and operating a private religious school in their garage without proper permits and a zoning variance, the Anthonys counter-claimed that the ordinances violated their rights under state and federal constitutions; namely, the equal protection, free exercise of religion, freedom of speech, and freedom of religion provisions of each, but all to no avail. It was in their argument that the 1996 zoning ordinance amendment was not validly enacted because it did not receive a simple majority of votes of the county board, however, that the Anthonys almost carried the day.

The Counties Code requires that zoning code amendments be passed by a "simple majority of the votes of the board". In the passage of the pertinent portion of Kankakee's zoning code, the Anthony's discovered that the recorded vote was 14 "aye" votes, 11 "nay" votes, 1 "present" vote, and 2 members absent. A "simple majority" of 28 board members would have required 15 votes, and the question was whether the 1 "present" vote, when added to the 14 "aye" votes, equaled the requisite number; (i.e., is a "present" vote one in favor of the pending measure for the purpose of determining if a simple majority has been obtained.) After an admirable recitation of definitions and explanations from Robert's Rules of Order, (one that might come in handy at a late night board meeting), the Court ruled a "present" vote is NOT to be counted toward passage. A "simple majority...requires the affirmative votes of more than half...", and 14 "ayes and 1 "present" does not equal 15 affirmative votes.

The decision nonetheless affirmed the trial court's ruling against the Anthonys, but not based upon the reasoning set forth by the trial court in rendering its decision. The Appellate Court turned to the fact that the Anthony's undisputed principal use of their property was as a residence. The use of the garage as a school was neither incidental to a single-family home, nor was it a permissible accessory use, and therefore violated the 1967 Zoning Code, (remember the 1996 zoning code amendment was voided), "because there can only be one principal use of their residential property and a school does not qualify as an accessory use."