ILLINOIS STATE BAR ASSOCIATION

REAL ESTATE LAW SECTION - CASE LAW UPDATE

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November 2, 2000 - Bloomington, Illinois

November 10, 2000 - Chicago, Illinois

Steven B. Bashaw

McBride Baker & Coles

10th Floor - One MidAmerica Plaza

Oakbrook Terrace, Illinois 60171-4710

Tel: (630) 954-7588

Fax.: (630) 954-2112

e-mail: SBashaw @mbc.com

(@Copyright 2000, All Rights Reserved, Steven B. Bashaw)

ADVERSE POSSESSION; VACANT LAND AND PAYMENT OF TAXES WITH COLOR OF TITLE:

In a case which goes up on appeal relating to whether the Defendant should have been granted an order vacating a default judgment under Section 2-1301(g) of the Code of Civil Procedure, we nonetheless find a lot of good law on the defense of an action to quiet title based upon statutory (rather than common law) adverse possession. In Jones v. Unknown Heirs or Legatees of Fox,(3rdDist.,April 28, 2000),http://www.state.il.us/court/2000/3990512.htm, the trial court entered a default judgment in favor of the plaintiff claiming adverse possession. Jurisdiction was based upon publication notice against Unknown Heirs or Legatees this action to quiet title to a 7 ½ acre parcel of land in Peoria. Wesley Fox, a purported heir of the defendant Maymee Fox filed a motion to vacate the judgment, which was denied by the trial court. On appeal, the decision of Justice Slater reversed the denial, finding that the defendants had not received actual notice of the proceedings and only been served by publication. Accordingly, the motion to vacate should have been evaluated by the trial court under the "liberal ‘substantial justice’ (between the parties) standard" under Section 2-1301(g), rather than the stricter requirements of a 2-1401 motion. Here, the Court found that the defendant had established the existence of a meritorious defense, for which ‘substantial justice’ requires a trial on the merits rather than a default judgment. The "meritorious defense" consideration is what makes this case worthy of study.

Turning first to the provisions of 735 ILCS 5/13-110 "Vacant land—Payment of taxes with color of title", the Court notes that whenever a person having color of title pays all taxes for 7 successive years, they shall be deemed to be the legal owner of vacant and unoccupied land. Here, however, the Defendant raised an issue of fact by alleging in his motion to vacate that he believed either he or his mother had paid taxes for at least one of the seven years in question, and therefore "substantial justice" required the default judgment be vacated in favor of a trial on the issue.

Section 13-110 also requires possession "of such a nature as to place others claiming title upon inquiry", and here the motion to vacate was accompanied by an affidavit of a neighboring land owner that over an 11 ½ year period she had only been aware of two occasions of persons entering onto the property; negating the plaintiff claim of the requisite possession. This was sufficient to raise an issue to controvert plaintiff’s claim that they had taken and maintained possession of the property so that "substantial justice" required the default be vacated in favor of a trial on the issue. Likewise, an allegation by defendant that his father had placed a fence on the property line within the adverse possession period raised a factual issue which "weighs in favor of granting to the motion to vacate the judgment." on the issue of requisite possession.

Accordingly, substantial justice required the motion to vacate be granted in order to compel the plaintiff to go to trial on the merits. In the process, a nice analysis of the application of Section 13-110 of the "Real Actions" portion of the Code of Civil Procedure is provided by the facts of this case.

BROKERS; UNLICENSED CORPORATION MAY NOT MAINTAIN AN ACTION FOR RECOVERY OF COMMISSIONS:

In CEAS Mortgage Company v. Walnut Hills Associates, Ltd., (1st Dist., March 10, 2000), http://www.state.il.us/court/2000/1990472.htm, 726 N.E.2d 695, 244 Ill.Dec. 720, the Plaintiff mortgage company filed an action against the sellers asserting a right to a real estate brokerage commission. At the time of the closing, the payment of the commission was deferred and the defendants agreed not to refinance unless the commission was paid. They later did refinance and failed to pay the commission. The Corporation sued.

Defendants filed a Section 2-619 motion to dismiss the complaint citing Section 7 of the Illinois Real Estate License Act of 1983, (225 ILCS 455/7, which has since been superceded by the Real Estate License Act of 2000, and the pertinent portion of the Act can be found in essentially the same form at 225 ILCS 455/10-15(b) ), which provides that "No action or suit shall be instituted....in any court...by any...corporation for compensation...unless the...corporation was duly licensed hereunder..." The trial court denied the Defendant's motion and apparently accepted Plaintiff's argument that the corporate license was unnecessary since under Section 3 of the license act each and every officer and employee who actively participates in the activities must be licensed.

Regardless of the fact that those who performed the brokerage services were personally licensed, the First District held that the Act mandates that the corporation must be licensed in order to institute an action in any court. The decision notes that there are two requirements that must be met under Section 7: first, that the party bringing the action must be licensed, and, second, that the person performing the services for which compensation is sought must be licensed.

Accordingly the trial court's certified question was answered affirmatively that "plaintiff, an unlicensed corporation cannot maintain and action to recover commissions for brokerage services", and the trial court was reversed.

 

BROKERS; PENALTIES FOR RACIAL DISCRIMINATION BY REALTORS:

In a case that makes you wonder if the defendant Realtor was angry, foolish or simply not very bright, the Court of Appeals for the Seventh Circuit has ruled that a Realtor may be punished for discriminatory housing practices, civil rights violations, or illegally discriminating by the sanction of ordering the license suspension or surrender by the Realtor....but they didn't do it! Suburban Housing Center v. Berry, (7th Cir. August 2, 1999), No. 98-1764, http:www.208.196.83.69/members/htm/illinoid/1999/aug/98-1764.htm. The Housing Center alleged that Anne Berry, a Realtor, engaged in racial steering, and the parties settled the underlying case by a consent decree. In the decree, Ms. Berry promised to refrain from racial steering, to document her contacts buyers in the future, pay the Housing Center damages in the amount of 10% of her commissions in excess of $25,000 per year, and provide an accounting of her earnings quarterly to the Center. (Perhaps a little overbearing, but Berry agreed to it all and signed the decree.) The agreement further provided that if she violated any fair housing ordinance thereafter, she would voluntarily surrender her real estate license for five years.

Berry failed to comply with any of her reporting or payment obligations under the decree, and the Housing Center brought a civil contempt proceeding requesting that they be awarded attorney's fees and Berry be ordered to surrender her license. The District Court found that Berry had willfully violated the consent decree by clear and convincing evidence, and entered judgment for $4,280.40 representing 10% of her commissions in excess of $25,000. Berry paid the judgment (although late), but pleaded poverty in response to the request for fees and argued that the surrender of her license was inappropriate penalty for the technical violation of the reporting provisions of the decree since she had not engaged in further racial steering. The district court refused to order the surrender of her real estate license as "draconian", and declined to "impoverish" Ms. Berry, characterizing the Housing Center's requests as motivated by "vengeance" and "vindictiveness".

On appeal the Seventh Circuit specifically noted that surrender or suspension of a real estate license is contemplated by the Fair Housing Act, (42 U.S.C. 3612(g)(5), the Illinois Human Rights Act, (975 ILCS 5/8-109(B), and the Illinois Real Estate Licensing Act, 225 ILCS 455/18.3, for violation of civil rights or discriminatory conduct, and therefore not an "unenforceable penalty" as Ms. Berry argued. On review, they agreed, however, that for minor violations, license surrender is inappropriate and affirmed the district court's decision denying the Center's request for surrender of Berry's license because she had not engaged in continued racial steering.

 

CONDOMINIUMS; DECLARATIONS, ASSESSMENTS, AND LIMITED COMMON ELEMENTS:

The Second District was confronted with a challenge that an amendment to a condominium declaration was in violation 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/1999/2990030.htm, 722 N.E.2d 311, 242 Ill.Dec. 822. 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, townhome-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; ASSIGNMENT AND SUBROGATION:

Lawyers make the interpretation of words and the standing of parties as their stock and trade, but every now and then the absurdity of our efforts shines through. In this construction case, an Insurance company attempted to argue that inasmuch as the assignor had been made whole by the assignee, there was no "loss" to assign, and that since the damages sought were the obligation of the plaintiff under the contract there was no basis for "subrogation". Both arguments were rejected.

The Board of Education entered into a contract for the construction of a middle school building with Maggio as a general contractor in the facts of A.J. Maggio Company v. Coy Willis, (1stDist.,May23,2000) http://www.state.il.us/court/2000/1993425.htm. Maggio subcontracted with Willis to for the construction of the sanitary and storm sewer. The subcontract provided that Willis would perform the necessary corrective work if the materials or workmanship it furnished were deemed inadequate; and if Willis failed to perform the corrections Maggio could deduct the cost of making the corrections from the sums due to Willis. Willis was also required to provide comprehensive general liability insurance naming Maggio and the School Board as an additional insured. Willis failed to provide coverage to Maggio as required, but did insure the architect and Board of Education.

Shortly after Willis completed the sanitary and storm sewers, sink holes appeared, Maggio requested Willis correct the situation, and Willis refused. Maggio performed the corrective work as demanded by the School Board pursuant to the terms of the general contract, and incurred costs of $497,067 which it billed to Willis. After Maggio paid the $497,067 for the corrective work, the School Board, which was named as an additional insured under Willis’ policy, executed a written assignment of its cause of action under the policy to Maggio. Maggio filed suit for breach of contract against Willis, and included a third-party breach of contract, assignment of cause of action, and subrogation of cause of action against Willis’ insurer. The Insurance Company, noting that the school never incurred a loss because Maggio corrected the problem as required under its contract, argued that there was nothing to assign after Maggio had the damage repaired, and, like wise, there was nothing to which Maggio could be subrogated. The trial court granted the insurance company’s motions to dismiss the derivative counts for failure to state a cause of action based on the assignment and subrogation.

The Appellate Court rejected both arguments and reversed giving us some good law about assignments and subrogation.

An assignment is the transfer of some identifiable property, claim or right from the assignor to the assignee. The assignee can obtain no greater right or interest than that possessed by the assignor. Nonetheless, an insured’s claim under a policy of insurance may be assigned after a loss.

Subrogation is a method whereby one own has involuntarily paid a debt or claim of another succeeds to the right of the other with respect to the claim or debt so paid. While subrogation is only available where the plaintiff is under a legal obligation to pay the debt of another, despite the insurance company’s argument that Maggio was actually only paying its own debt as an obligation to correct any defects during construction in its contract with the School Board, it is nonetheless clear that Maggio was under a legal obligation to pay for the School’s damages and entitled to subrogation of its claims against Willis.

9. CONSTRUCTION CONTRACTS; STATUTE OF LIMITATIONS AND INDEMNIFICATION vs CONTRIBUTION:

In September 1992, Guzman sued Epperson Construction for improper construction of their home. Guzman voluntarily dismissed their suit in March, 1996 and re-filed it in April 1996. In September, 1996, "literally weeks shy of the four-year anniversary of the Guzmans filing their first lawsuit", Epperson filed a third party complaint against five of the subcontractors it had employed on the Guzman project and later amended it pleadings to include claims against each for indemnification. The trial court dismissed Epperson's complaint based on the statute of limitations which requires that actions based on construction of an improvement to real property shall be commenced within four years from the date the party knew or should have reasonably known of the act or omission. (735 ILCS 5/13-214) Evidence revealed that Epperson had written a letter indicating that it knew of the alleged deficiencies in the construction as early as 1989 or 1990. Epperson argued, however, that since its claim against the subcontractors was for contribution or indemnity, the time period which governs the limitation of its action against them is set forth in the "Contribution and Indemnity" (735 ILCS 5/13-204), rather than the "Construction-Design Management and Supervision" provision, (735 ILCS 5/13-214), of the Limitations Act. The time limit for contribution or indemnity actions is" 2 years after the party seeking contribution or indemnity has been served with process in the underlying action or more than 2 years from the time the party... knew or should reasonably have known of an act or omission...whichever period expires later.", and application of this limitation period would have given Epperson until 1998 to file against the subcontractors.

Justice Cook's opinion in Guzman v. C.R. Epperson Construction, Inc., (4th Dist., January 7, 2000), http://www.state.il.us/court/2000/4981050.htm, declined to follow other appellate districts that have ruled that Section 13-214 applies to third party contribution or indemnity claims that are construction related. Noting that "the right to contribution exists in inchoate form from the time of injury but does not 'ripen, mature, vest, or accrue' until either payment is made, obligated or incurred or an action is brought against the defendant ....Otherwise...parties who might need third-party relief could be compelled to file numerous anticipatory claims well before they are sued..." Rejecting the subcontractor's argument that Section 13-214 should be applied, the Court noted that Epperson failed to file any third-party claims until "literally weeks shy of the four-year anniversary of the Guzmans filing their first lawsuit.", but used the amendment of Section 13-204 on January 1, 1995 or the re-filing of Guzman's lawsuit as the measuring date for the two year limitation period for Epperson to file its indemnity complaint. "Either way, Epperson scraped through and its claims are not time-barred.", and the case was remanded with direction to reinstate the claim for indemnity.

 

COVENANTS, CONDITIONS AND RESTRICTIONS; ENFORCEMENT:

In the 1950s, Francis and Adelaide Paradise created a subdivision named Paradise Park, divided it into 34 lots and recorded a plat of the subdivision. All of the lots were approximately one-half acre each, except lot 34, which was three acres, did not have access to the two subdivision roads, and was deed back to the Paradises after being conveyed with the other lots into a land trust. All of the deeds conveying the lots to other grantees contained covenants restricting use to residential purposes, mandating a two car garage, and providing that no more than one structure was to be erected on each lot. The deed to Paradise of lot 34 did not contain these restrictions. Oberto acquired lot 34 from the Paradises and then contracted to sell the property to Werchek Builders, who intended to further subdivide lot 34 into three lots and build a single family residence on each lot. The Plaintiffs in Krueger v. Oberto, (2nd Dist., December 29, 1999), http://www.state.il.us./court/2000/2981611.htm, 724 N.E.2d 21 243 Ill.Dec. 712, are the owners of other lots in the original Paradise Park, and they brought this action to enjoin the subdivision and building on the subdivided lot 34 based on the restrictions on the other lots limiting the improvements to a single structure. The trial court granted a permanent injunction against the defendant's intended subdivision and building finding that since the "first deed out" of the Paradise Park subdivision contained the restrictions, and the "public index of restrictions" maintained by the Lake County Recorder contained the restrictions, the Obertos had constructive notice of the restriction as part of the general plan for Paradise Park, even though there was no indication of the restrictions on the recorded plat of subdivision or their deed. The Second District reversed. First, the "first deed out" theory propounded by Plaintiff's and accepted by the Court based on the affidavits of various title examiners was rejected as "merely a practice of title examiners. In fact, this alleged 'first deed out' rule is contrary to the law, which provides that a party will not be charged with constructive notice of an interest in property unless it appears on record within the chain of title". Since the deeds in the chain of title to lot 34 never mention the restrictions, there was no constructive notice to defendants, and "plaintiffs cite no authority to support their allegation that restrictive covenants contained in the first deed out binds third parties whose deeds did not contain the restriction.". Constructive notice is given only when an encumbrance is in the chain of title, and an encumbrance is within the chain of title only when it is recorded within the legal record of title required to be maintained by the Recorder, (such as the grantor-grantee index), not within other indices kept merely for convenience of title searchers such as the "index of restrictions" here. Accordingly, the Defendants had no constructive notice by chain of title or official indices. While there was a "general plan of development" for Paradise Park at the time of the subdivision, such a general plan requires a subdivision with identical conditions designed to create reciprocity between the owners, based on restrictions contained in all the deeds in the subdivision, with generally equal burdens for the mutual benefit and advantage, with notice given in the recorded plat of subdivision. Here, the restrictive covenant was not contained on the recorded plat, the restriction was not contained in the deed to lot 34, the burden was not equal, (all lots other than lot 34 were one-half acre whereas 34 was six times larger in size), and the distinction in size did not suggest equal reciprocity. Restrictions that are part of a general plan are not enforceable against and owner who has neither actual or constructive knowledge and are not recorded within the chain of title. (Finally, while the Code of Civil Procedure bars actions based on any claim arising or existing more than 40 years before the commencement of the action, (735 ILCS 5/13-118), the Court noted the cases cited by Defendants did not relate to restrictive covenants, but did not rule on this issue because "we do not feel the need to decide whether Section 13--118 of the Code applies to restrictive covenants.")

 

COVENANTS, CONDITIONS AND RESTRICTIONS; BUILDING PERMITS; ESTOPPEL BY ISSUANCE OF PERMIT:

In a Second District case, Village of Wadsworth v. Kerton, (2nd Dist., March 2, 2000), http://www.state.il.us/court/2000/2981661.htm, 726 N.E.2d 156, 244 Ill.Dec. 560, an interesting and almost compelling set of facts served as a background for the Court to nonetheless rule that there was no estoppel of a municipality by the issuance of a permit to erect a fence to in a later action to require the removal of the fence.

Kerton purchased a vacant lot which had a deed restriction designating a portion of his property as "deed restricted open space" and part of a "scenic corridor" area. The deed restriction provided that the open space was to be maintained in its natural, undisturbed condition, and "no man-made structures of any kind shall be constructed thereon". The "man-made structure" Kerton had in mind was a stockade fence along the border of his property abutting highway Route 41 for security. Before embarking on the project, he went to the Village hall and received a permit to build the fence. The administrative assistant for the Village who issued the fence testified she was unaware that the fence was to be located on the scenic corridor, (although she had a copy of the plat of subdivision with the restriction in her office), and that she would not have issued the permit had Kerton told her that the fence was going to be erected in the open space area. For his part, Kerton admitted that the restrictions were contained in his deed, a copy of the covenants he received at closing, and noted on his title policy, but stated he understood and never read the documents after he received them. Upon receiving his permit, Kerton placed his order for the fencing, waited approximately six weeks for delivery before erecting the fence, but never heard anything from the Village in the interim following the issuance of the permit. It was not until he had removed vegetation from the area, installed the fence, and planted trees and landscaping, (the removal of vegetation and plantings were also violations of the restrictions), that Kerton was advised by the building inspector for the Village that the fence would have to be removed and erected outside the scenic corridor.

In an action for an injunction to remove the fence, restore the vegetation, and impose fines brought by the Village, the trial court ruled in Kerton's favor; finding that the Village was estopped from requiring the Defendant to remove the fence. On appeal, the Second District reversed with an opinion that is a primer in the application of equitable estoppel to municipalities. While the doctrine of equitable estoppel may apply, its use against a public body is not favored. Estoppel will lie only in extraordinary or compelling circumstances. Two requisites must be met: (1) there must be an affirmative act on the part of the municipality, and (2) there must be an inducement of substantial reliance by the affirmative action. The affirmative action on the part of the municipality can not be based on the unauthorized act of a ministerial officer beyond the scope of his duties, but must be an act of the municipality itself, such as a legislative enactment. Here, where the administrative assistant issued the permit in error, there is no "affirmative act of the municipality", but the unauthorized act of an employee despite their directives. If the unauthorized acts of government employees were allowed to bind a municipality by equitable estoppel, the Court noted, the municipality would remain helpless to remedy errors and be forced to permit violations in perpetuity. Additionally, there was no substantial loss to the Defendant here. The fence cost approximately $2,000, and this was neither a substantial loss nor a compelling circumstance for invoking estoppel against the Village.

There is some good language in this case about the effect of the constructive notice given Mr. Kerton by the recording of the restrictions and statements that: "The party seeking to claim benefit of estoppel cannot shut his eyes to obvious facts, or neglect to seek information that is easily accessible, and then charge his ignorance to others.", and "Once a subdivision plat with restrictions is recorded, every lot purchaser has constructive notice of the restriction."

DEEDS AND DELIVERY; ‘DRESSER DRAWER DEEDS’:

In 1996, Charles Burch prepared a warranty deed to convey the Smith farm owned by his uncle, Carl H. Wittmond, into a land trust at Carrollton Bank and Trust Company. Wittmond appeared in Burch’s law office, executed the deed, and left in Burch’s possession with instructions that it not be recorded because, Burch explained, Wittmond did not want this deed to be the topic of "public discussion". Burch placed the deed in a safety deposit box. He did not deliver the deed to Carrollton Bank, and only recorded the deed after this dispute arose. The dispute related to the fact that Wittmond’s will left the Smith Farm to Jane Stewart, Wittmond’s companion of 30 years. Jane filed a petition asking the trial court to direct Burch as the Executor of the estate to execute Wittmond’s bequests to her. Burch filed a petition for citation for recovery of assets, and argued that because of the deed to the land trust, the Smith farm was not a part of the estate. Stewart argued that because Wittmond never completed delivery, the deed to the land trust was ineffective and title remained in the estate.

The Fourth District agreed with Stewart in its opinion In re Estate of Wittmond, (4th Dist., June 22, 2000), http://www.state.il.us/courts/2000/4990719.htm .

A conveyance of real property does not occur merely because a deed is executed by the grantor. The grantor must also deliver the deed in a manner which evidences an intent to pass title at the time of the delivery. Delivery of a deed is essential to complete a conveyance, although no particular method of delivery is required. In this case, Burch was a beneficiary of the land trust to which title was to be conveyed, and therefore, he argued, delivery of the deed to him was tantamount to delivery to the trustee. The Court rejected that argument stating "The transaction passing title occurs exclusively between the grantor/trust settlor and the grantee/trustee. A beneficiary’s possession of the deed is, at best, ambiguous regarding the question of whether the grantor intended title to pass to the trustee."

 

DEED INTERPRETATION; DO "MINERAL RIGHTS" INCLUDE LIMESTONE?:

In Solve Our Little Vermillion Environment, Inc. v. Illinois Cement Company, (3rd Dist., 2/17/2000), http://www.state.il.us/court/2000/3990315.htm, 725 N.E.2d 886, 244 Ill.Dec. 275, the Court was required to interpret the language of a 1907 deed containing a reservation of "the coal and other minerals underlying" the parcel, and whether that language reserved rights to mine limestone in the grantor's successor, SOLVE. The grantee's successor, Illinois Cement Company, of course, argued that limestone is not a "mineral" that was reserved and therefore the deed conveyed to it, by its predecessor, the rights to remove the limestone. Factually important was the trial testimony of quarry foremen for both parties that the "overburden", or surface material covering the limestone, varied from 3 feet to 60 feet in depth, and the only way to "mine" the limestone was by removing the surface material. This is important because most "minerals" such as coal are removed by the process of "mining" which does NOT involve removal of the surface material. Rejecting an analysis of the definition of the word "minerals" as the appropriate vehicle for resolving the ambiguity in the deed, (and noting that in 1907 the commercial value of limestone was largely unrecognized), the Court declared the ambiguity must be "decided upon the language of the grant or reservation, the surrounding circumstances, and the intention of the grantor, if it can be ascertained." The decision contains very good language that "where there is doubt as to the construction of a deed it is to be interpreted most favorably for the grantee...(and) most strongly against its author", and applied the doctrine of ejustdem generis, (i.e., where general words follow specific things of a particular class, the general words are to be construed as applying only to things of the same general class as those enumerated), to hold that "coal and other minerals" must have meant minerals that are mined without disturbing the surface (like coal) to the exclusion of limestone, (which is quarried, rather than mined, at the surface), and therefore the reservation did NOT include the right to remove limestone. This passed to the grantee, and on to Illinois Cement Company as successor rather than remaining in the grantor and passing to SOLVE.

 

DRAINAGE DISTRICT; MANDAMUS; REQUIRED TO PROVIDE PRIVATE BRIDGE TO LANDLOCKED PARCEL:

In a case of first impression, the Third District has ruled that when a drainage district dredged a ditch separating a parcel of farmland into two parcels on either side of the ditch, it must thereafter provide a bridge to a landlocked parcel of farm land that will support modern farm equipment. People ex rel. Donald Peters v. O'Connor, (3rd. Dist., February 25, 2000), http://www.state.il.us/court/2000/3990354.htm.

The Illinois Drainage Code, (70 ILCS 605/12-5), states that drainage districts "shall be liable for the construction, reconstruction and maintenance of at least one bridge or passageway over each open ditch which it constructs or orders constructed." The bridge in this case was the only access to one parcel, and it became useless to the owner-farmer, so he brought a mandamus action and asked for damages for crop loss for the six year period during which he could not access the land. Noting that the Act specifically requires at least one "proper passageway", the Court rejected the Drainage District's contention that it need only repair the bridge to the condition as it originally existed. The ruling specifically stated, however, the bridge did not have to be constructed to the farmer's specifications, but it must be able to accommodate modern farm equipment.

Looking to the issue of damages, the Court noted that while "absolute mathematical certainty is not required to fix the amount of damages", the "probable amount of grain the crop would produce and the probable value of the same in the market at the market season, deducting there from the necessary costs of cultivating, harvesting and taking the same to market" were ascertainable as the measure of damages to be allowed. This case was actually the "continuation" of an apparently acrimonious prior proceeding between the farmer and the district and also discusses whether the "taking" of the ditch was of a fee or an easement interest.

 

EASEMENTS APPURTENANT: CONVEYANCE AND TITLE

In Dimucci Home Builders, Inc. v. Metropolitan Life Insurance Co. , (1st Dist., March 31, 2000), http://www.state.il.us/court/20001984265.htm, 728 N.E.2d 749, 245 Ill.Dec. 667, the Court was confronted with the issue of title to a sewer line. The Plaintiff, Dimucci brought suit against Metropolitan Life and EQR-Bourbon Square Vistas, Inc. to recover unpaid fees for use of the sewer line. The Defendants counterclaimed seeking a declaration that the ownership of the sewer line passed with the conveyance of the title to the property and therefore they need not pay a user fee for using that which they owned. The interesting part of the facts in this case is that 90% of the sewer line was "off-site", (i.e., not within the boundary lines of the property), and the Defendants argued that they owned the off-site sewer line as an "appurtenance", ("Upon conveyance of property the law implies a grant of all incidents rightfully belonging to that property at the time of conveyance and which are essential to the full and perfect enjoyment of the property."). An interest in the off-site sewer line was therefore included in the conveyance of the land, they argued. The First District disagreed. Citing the Illinois Supreme Court case of McPeak v. Thorell for the proposition that when real property is conveyed only those "buildings and appurtenances located thereon are likewise conveyed", and noting that here the Plaintiff did not record a sewer easement or other document reserving title to the sewer, it held that the off-site sewer line located outside of the property boundaries is NOT appurtenant to the land.

Easement by Implication; Existing use at the time of severance:

In the case of Emanuel v. Hernandez, (2nd Dist., May 4, 2000), http://www.state.il.us/court/2000/2990656.htm, 728 N.E.2d 1249, 245 Ill.Dec. 892, the defendants appealed the trial court’s grant of summary judgment in favor of the plaintiff for declaratory judgment that plaintiff had an easement by implication over defendant’s property. (The complaint contained two counts; Count I sought an easement by prescription over the driveway, and Count II sought an easement by implication. The law relating to Count I was not, for some reason, discussed in the appeal.) The defendants argued that plaintiffs failed to prove all of the elements of either an easement by necessity or easement by prior existing use, and the appellate court agreed and reversed.

Defendants owned the property immediately north and adjacent to the plaintiff’s property. The property line bisects a driveway between the parties’ property, and when they purchased the parcel, defendants blocked the driveway with railroad ties and began constructing a fence so the plaintiff could not use the driveway to get to their garage. The plaintiff had owned their property since 1965, and the defendants had only recently acquired their property. A common owner severed the title into the two parcels in 1890, and there was no evidence that the garage even existed before the 1920s. The plaintiffs argued that in order to support a finding that they had an easement by implication, they need only prove that the title to both properties had once been held by a single owner, the property had been severed at some point, and, at the present time, the easement was necessary so that they could use the property without disproportionate effort or expense. The defendant agreed that there was once as single owner, and that title had been severed, but argued that plaintiff failed to prove as an essential element that at the time of the severance of title the existing use of the property supported the easement by implication. (Apparently the plaintiffs could not prove that the driveway came into existence prior to the severance of title.)

Noting that "It is crucial to recognize that an implied easement is the product of the intention of the parties", and therefore "whether an easement exists depends wholly on the circumstances at the time of the severance of title.", the Court found that an easement by implication must arise, if at all, at the time of the severance, and a change of circumstance following the severance, no matter how great, cannot create an easement.

EMINENT DOMAIN; CALCULATION OF JUST COMPENSATION FOR PARTIAL TAKING:

In The City of Springfield v. West Koke Mill Development Corporation, (4th Dist., April 14, 2000), http://www.state.il.us/court/2000/4990472.htm, 728 N.E.2d 781, 245 Ill.Dec. 699, the city filed a petition to condemn a portion of Defendant's property to make roadway improvements. The two issues on appeal related to the method to evaluate the condemned property and whether the city failed to make a bona fide offer to negotiate a price prior to bringing suit.

Beginning with the proposition that "The purpose of condemnation proceedings is to place the landowner, or condemnee, in the same economic position as if no condemnation occurred, not to improve the condemnee's financial status.", the Court grappled with the application of the "unit rule" in evaluating the condemned property where only a portion of the total premises are being taken. Just compensation is "the amount of money that a purchaser, willing but not obligated to buy the property, would pay to an owner willing but not obligated to sell in a voluntary sale." This definition has occasionally proved difficult in partial taking situations where the public body seeks to take a narrow strip along a road way or some other oddly shaped parcel, which may contribute significantly to the value of the whole, but has limited economic value as a separate piece of land. Two different values can result. The first value is based simply on the market value of the small or oddly shaped parcel in the market place. The second is to determine the value that the parcel provided to the owner because of its relationship to the rest of the owner's land. Two different approaches to value are also commonly used. The "unit value" approach suggests finding the value of the whole parcel, then determining value on a per unit basis, (i.e., per square foot), and applying that unit value to the parcel taken. The "before and after" approach simply has an appraiser value the entire parcel prior to the condemnation, then value the remainder of the parcel after the taking, and the difference is the resulting award valuation.

Here, the Court rejected the "unit rule" approach suggested by the owner. Even though this approach has been approved by the Illinois Supreme Court in past cases, the Fourth District held that there is no authority that the landowner is entitled to a "unit rule" valuation, and notes that just compensation requires that the owner be paid for whatever economic loss is incurred, even if that loss is disproportional to the area of land condemned. "...it does not follow that the vacant land is as valuable as the land which has the improvements on it, nor does it mean that every part of the vacant land is as valuable as every other part."

Turning to the next issue, the Court disagreed with the owner's contention that the City failed to make a bona fide offer to negotiate prior to filing the complaint. Case law holds that as a condition precedent to filing a condemnation petition, the City is required to engage in a good-faith effort to reach an agreement with the owner on an amount of compensation. Nonetheless, the Court refused to find that the City's "take-it-or-leave-it" offer of $200 for property that the jury later granted the owner a $54,925 award on was not in good faith, ruling the owner had procedurally "forfeited this issue".

Justice Cook's dissent took issue with the bona fide offer portion of the majority opinion. "The power of the government to take the private property of an individual is a tremendous power, one capable of great abuse...The taking body does not have the option of "playing hardball."... We should not allow plaintiff, or any taking body, to begin these proceedings after making only a token insignificant offer."

 

EMINENT DOMAIN; JUST COMPENSATION UPON "TAKING" AN EASEMENT FOR PUBLIC ROADWAY:

The Village of Round Lake filed a condemnation proceeding to establish a public roadway over a gravel driveway approximately 1,100 fee long that extended from Route 134 to the Defendant's properties in Village of Round Lake v. Marianne Amann, (2nd Dist., February 15, 2000), http://www.state.il.us/court/2000/2990372.htm, 725 N.E.2d 35, 244 Ill.Dec. 240, The driveway had been in use for over 70 years, and cut across property being developed by the Pritzker Family Trust as a single family residential subdivision. The Defendants claimed an easement by prescription for ingress and egress to their property over the driveway. The developer had initially attempted to negotiate to purchase the Defendant's properties, but had been unable to agree on price. The Zoning Administrator and Building Commissioner for the Village of Round Lake admitted that the purpose of the Village in acquiring the a public right-of-way over the driveway was to allow a public street to be constructed for access to the residential development. The Village offered $500 as compensation for the condemnation of the easement, but this was rejected because the Defendants felt the loss of privacy, increased traffic and complained that "her dog barked when cars passed."

The trial court held that Defendant's interest was merely that of a nonexclusive easement, and therefore the owner of the property could grant others the same right of passage, thereby significantly reducing the impact of Defendant's arguments. Accordingly, the value of the taking was held to be "no tangible loss" and an award of $50 given to each Defendant. The Defendants appealed these findings and, based upon the recent decision in Southwestern Illinois Development Authority v. National City Environmental, L.L.C., (the taking of a private waste site for conveyance to a local automobile raceway for parking was held to be a violation of the "public purpose" requirement by the appellate court), also argued that the taking of their driveway easement to permit a residential development was also not for a "public purpose".

Justice Hutchinson's decision quickly dismissed the "public purpose" argument by noting that the taking here was to construct a public road that is "a public highway regardless of the number of people who use it if everyone who desires to do so may lawfully use it.", as distinct from the conveyance of a parcel by the condemning authority to a private owner for use as a private parking facility.

Then, presenting a comprehensive discussion of the standards for determining the value of an easement and noting that the developer "was free to pave the easement, subdivide the remaining property and grant easements for ingress and egress to each of the subdivided parcels, as long as defendants were still allowed access" in any event, the Court notes: "A long-standing and almost self-evident rule of eminent domain is that when what is taken for public use is of no value, no award is required for the defendant to be justly compensated." The loss of privacy, increased traffic, (and yes, even the barking dog), were merely the natural result of the developer, as the owner of the servient estate, using its property as it saw fit and not as the result of the Village's condemnation. Just compensation: $50...It could have been $0.

 

EMINENT DOMAIN: COST-TO-CURE AND NOMINAL DAMAGES VALUATION:

The Illinois Department of Transportation sought to widen and improve Highway 192 adjacent to the Bolis apple orchard in Department of Transportation v. Bolis, (3rd Dist., May 23, 2000), http://www.state.il.us/court/2000/3990359.htm. Filing a Complaint for Condemnation and a Motion for Immediate Vesting of Title, ("Quick Take"), IDOT sought title to 1.036 acres of a 58.6 acre farm, of which 18.747 acres was apple orchard. Of the 1.036 acres sought, 0.728 acres was already an existing public right of way, and the twelve to seventeen foot additional strip along the front of the Bolis property would result in a loss of the parking area in a semi-circular drive in front of the apple shed on the road side, eleven apple, one elm, and two poplar trees, along with a fence, a utility pole, security light, electrical service, and three signs would have to be relocated. The Bolis further argued that the front porch of the apple shed would no longer be functional as a loading dock after the taking.

At the trial, there was a "battle of the experts", with the appraiser’s valuations that began with similar figures, but diverged in their opinions of the extent of damages. The IDOT appraiser valued the taking of 1.036 acres at $2,800 reflecting the fact that 0.72 acres was already an existing public right of way and therefore the measure of compensation should be limited to "nominal value". The temporary easement necessary for access to the roadway was valued at $265, and the damage to the remaining property based on diminution of value was $8,758; for a total suggested compensation of $11,823. The Bolis appraiser, on the other hand, testified that the damage to the remaining property would be $61,337.16. This valuation was based on consideration of the cost of building a new loading dock, parking lot and fence, relocating signs and a light pole and removing trees, using a "cost-to-cure" analysis. The jury awarded Bolis $41,468 comprised of $2,700 for the temporary easement, $5,768 for the taken property, and $33,000 for damages to the remaining property.

IDOT appealed the trial court’s ruling which allowed the jury to consider the "cost-to-cure" method of value calculation and argued that since the tract was already burdened by a public right of way, a denied jury instruction that only nominal value could be placed on the taking of the parcel was in error.

The decision of the Third District agreed with Bolis’ position that the cost-to-cure evidence was admissible to assist the jury in understanding the expert’s analysis and to make an accurate assessment rather than a speculative award of damages, noting that "The law in Illinois is well established that the improper admission or exclusion of value evidence in condemnation cases does not constitute reversible error when there are other witnesses and evidence as to value on both side, and the jury had the opportunity to view the property and weigh the conflicting evidence." Turning to the issue of the denied jury instruction on nominal value, the decision notes that the determination of proper jury instruction lies within the sound discretion of the trial court and distinguished Department of Transportation v. Lawler (a case where IDOT refused to make any payment to landowners for land already encumbered by a right of way access road), noting that IDOT was not prejudiced by the failure to give the instruction and that even its own appraiser allotted more than "nominal value" to the 0.72 acre expansion of the existing public right of way.

ENCROACHMENTS; INTENTIONAL CONDUCT AND LACHES:

In Whitlock v. Hilander Foods, Inc., (2nd Dist., October 29, 1999), No. 2-98-1421, , http://www.state.il.us/court/1999/2981421.htm, 720 N.E.2d 302, 241 Ill.Dec. 847, 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.

 

FAIR DEBT COLLECTION PRACTICES ACT; SAFE HARBOR:

While there is no end in sight of Fair Debt Collection Practices Act cases, another "safe harbor" is constructed for your use if you are an attorney engaging in debt collection. The Seventh Circuit in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols and Clark, LLC, (7th Cir.-Il., June 5, 2000), has ruled that law firms engaged in the collection of a mortgage debt violated their duty under the FDCPA to state the amount of the debt where the firm’s collection letter indicated the amount of the principal balance and then noted that this sum did not include interest, late charges, escrow advances, or other charges and invited the mortgagor to call to obtain complete figures. The Act requires a statement of the debt, which is not satisfied by providing a telephone number for contact. (Perhaps the Court tried to contact the firm and got voicemail??) The Court ruled that the letter could have complied with the Act’s requirements by noting the amount due as a specific date and indicate that additional charges would accrue. Judge Posner, (as he did previously in Bartlett v. Heibl, (7th Cir. 1997) 128 F.3d 497, 501-02, sets forth the following language as a "safe harbor" which, if used by one who "does not add other words that confuse the message", will serve to satisfy the debt collector’s duty to state the amount of the debt":

"As of the date of this letter, you owe $________[the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1-800[phone number]."

Does this mean we have to get an 800 Number to collect a debt???

FARM LEASE - UNDUE INFLUENCE AND DECEDENTS ESTATES:

The case of In Re: Estate of Edwin Long, (4th Dist., March 10, 2000), http://www.state.il.us/court/2000/4990422.htm, we find some perhaps useful lessons relating to the nature of farm leases and land values, fiduciary relationships, and undue influence. Edwin Long did not read or write other than to sign his name. He farmed the 134 acre parcel his wife inherited until 1986, when he leased it to Bruce Lyon on an oral, 50/50 crop-share, annual lease. Marion Knobloch lived in a farmhouse a few miles away and after his wife's death visited daily with Edwin to read him his mail, write letters for him and do his bookkeeping. When she moved with her husband to Illiopolis in 1991, she nonetheless spoke with him daily by telephone. In 1993, Edwin began suffering a series of illnesses which eventually lead to his demise in December, 1995. Prior to that time, however, Edwin executed a codicil to his will which named Marion Knobloch as his executor, adding Bruce Lyon as his co-executor. In November, 1994, Bruce presented Edwin with an eight page farm lease prepared by Bruce's attorney. The lease provided for a 15 years term (rather than the annual term lease they had orally agreed upon in the past), and after a few days, Edwin signed the lease. Edwin also executed a power of attorney for health care in favor of Bruce. Upon his death, Edwin's children and Marion first learned of the 15 year farm lease for the first time, and Marion brought this action as executor, (Bruce had declined to serve), to sell the farm free and clear of the lease, asking that it be declared invalid based on undue influence.

Testimony in the case from Edwin's attorney revealed that he had never seen this lease, nor had he ever seen any 15 year farm lease during his years of practice in the area. A farm management and appraisal expert testified that a long term lease significantly reduces the value of farmland because it takes active farmers out of the market to purchase, and that he, too, had never seen a 15 year farm lease in this area, where the customary lease was on an annual basis. Bruce also testified that he knew the 15 year lease was "unusual [and] a detriment to the value of the land", but stated that he had to buy expensive farming equipment, (a long term proposition), and did not in any way attempt to influence the decedent.

Justice Cook's decision notes that a person who cannot read can still execute a binding agreement where the contents of the agreement are read to him and understood by him. This particular lease was not prepared at the decedent's request, but by Bruce Lyons' attorney, and there was no evidence that Edwin discussed it with a third party or that it was suggested to him that he do so. The Court also affirmed that the relationship between Edwin and Bruce was a fiduciary one. Bruce was not merely a tenant farmer. He drove Edwin to the doctor and hospital, held a power of attorney for Edwin's health care, and was named as the co-executor of his will under a codicil. The lease was executed less than two weeks after a petition for Edwin's guardianship was denied, and was unknown (kept secret?) from Edwin's children and attorney. "Once a fiduciary duty is established, the law presumes that any transaction between the parties in which the dominant party has profited is fraudulent, a presumption that my be rebutted only by clear and convincing proof...[that may include] a showing that the fiduciary made a frank disclosure...paid adequate consideration, and the principal had competent and independent advice." Noting that no reasonable farm owner would bind himself to use the same tenant for the next 15 years, ("Just as no reasonable person would bind himself to see the same doctor or lawyer for the next 15 years"), there was no evidence that Bruce made a frank disclosure to Edwin Long, that Edwin was told to or sought independent advice, or that adequate consideration was paid, and the lease was found to be presumptively fraudulent and set aside so the sale could proceed.

 

FRAUDULENT CONVEYANCES; THE STATUTE OF LIMITATIONS AND TIMING THE ATTACK ON A FRAUDULENT TRANSFER:

While the Courts have recently focused on fraudulent transfers in the context of tenancy by the entirety, most times a transfer is made to delay or hinder creditors where title is not held in tenancy by the entirety. The pivotal issue those cases is not the "sole intent", but when the statute of limitations to attack the transfer as fraudulent begins to run, which occurred in Levy v. Markal Sales Corporation, (1st Dist., 2/2/2000), http://www.state.il.us/court/2000/1980442.htm. In this case, the creditor had filed suit in October, 1982, but did not obtain a judgment until October, 1991. In the interim, and while the case was pending, one of the defendant/debtors quitclaimed his one-half interest in his marital residence, (then held in joint tenancy between the husband and wife), to his spouse and recorded that deed on January 16, 1987. As a defense to the post-judgment motion seeking a turnover order of the marital residence, the debtor asserted that the transfer had occurred more than four years earlier, and therefore was beyond the statute of limitations set forth in the Illinois Uniform Fraudulent Transfer Act; 740 ILCS 160/10(a). The creditor urged the court to interpret the language of the four-year statute of limitations as running from the date of the judgment obtained by the creditor rather than the date of the transfer. The Court rejected the creditor's argument, holding that the clear and unambiguous wording of the Act demonstrates that the four year period begins to run on the date the transfer was made, and not the entry of the judgment against the debtor. Noting that statutes must be construed in light of their objectives, and that the objective of the adoption of the Fraudulent Transfer Act in Illinois was to promote a uniform law of fraudulent transfers among the states adopting the law, the Court reconciled a divergence between a majority of states, (Washington, New Jersey, and New Mexico), holding that the period runs from the date of the transfer, and a minority, (California, who else?), holding that where the transfer occurs during the pendency of the creditor's suit to establish his claim, the four year period begins to run on the date of the judgment. Holding with the majority of states, the First District noted two important points: (1) the Act's 4 year provision is "more akin to a statute of repose since it operates to extinguish the cause of action on a certain date" than a limitation which can be tolled until the creditor's claim is reduced to a judgment, and, (2) while under prior Illinois common law the creditor was required to obtain a judgment before seeking relief from a fraudulent transfer, the Uniform Fraudulent Transfer Act contemplates and provides that a creditor can take action against a fraudulent transfer before the entry of judgment, and therefore the Act "displaced" the prior common law judgment requirement as a condition precedent to attacking a fraudulent transfer. So... there is some degree of certainty here, (the right to set aside a fraudulent transfer must be brought within four years of the transfer), but a whole new set of concerns for creditor's attorneys; (i.e., how and when to know that there is a potential fraudulent transfer which requires "provisional litigation" to avoid losing the right to set aside a fraudulent transfer once a judgment is obtain and collection efforts begin!)

FRAUDULENT TRANSFERS; 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, http://208.196.83.69/members/html/illinois/1999/oct/99-1106.htm, 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.

(Just when we thought fraudulent conveyances was getting clearer, eh?)

INSURANCE COVERAGE; ESTOPPEL BY BROCHURE:

In distinguishing a prior case that appeared to state the relevant law, (perhaps too favorably for the insured), the Second District opinion in Whitt v. State Farm Fire and Casualty Co., (2nd Dist., July 7, 2000), http://www.state.il.us/court/2000/2990708.htm sets some limitations for finding coverage for flooding based upon a brochure drawing supplied by the company. Stuart and Rebecca Whitt purchased homeowners insurance from State Farm for their home. While they were covered under the policy, 17 inches of rain fell in Aurora, where their home was located, and water entered the house around the basement window casing, through a hole in the furnace room wall, under doors, and through the roof and skylight sufficiently to fill the entire basement and the first floor to a dept of over four feet. The Whitts left their home in a boat and canoe. They then filed a claim with State Farm under the policy, which had a specific exclusion for water damage caused by flooding. Despite this exclusion, the Whitts argued for coverage due to a brochure given to them that described the policy coverage and included drawings of different perils covered; including one drawing which depicted rain falling through an open window and puddling on the floor. The trial court found that the word "flood" contained in the brochure was "at best ambiguous.." and ruled in favor of the Whitts.

The Appellate Court found no such ambiguity and noted that the brochure contained a statement in bold black print, larger than the print used in the drawing captions, that stated "This brochure contains only a general description of coverages and is not a statement of contract. All coverages are subject to the exclusions and conditions in the policy itself." The policy, of course, specifically excluded coverage for flood damage. The case distinguished in the opinion was Dobosz v. State Farm Fire and Casualty Co., (1983), 120 Ill.App.3d 674, in which coverage was declared where water leaked through the walls of the policyholder’s basement causing damage while there was a policy in effect with wording almost exactly the same as the policy in this case and a brochure very similar to that given to the Whitts. The Court in Dobosz declared an ambiguity in favor of the insured and held that the brochure was part of the policy thereby estopping State Farm from relying on the exclusionary clause. The brochure in Dobroz did not contain the same bold type disclaimer, and the policy there did not specifically state that flooding was an exception to coverage. In the Whitt’s case, "Even treating the brochure as part of the homeowners’ policy…The single drawing in the brochure of rain water entered an open window and accumulating on the floor, captioned "Water Damage", does not make ambiguous the clear exclusions of ‘flood’ and ‘surface water’.

Real estate practitioners confront issues relating to homeowners insurance coverage from time to time, and a reading of BOTH of these cases is necessary before you counsel your clients…and then you still may not be able to predict the outcome.

INSURANCE COVERAGE; ‘VACANT’ AND ‘UNOCCUPIED’ PROPERTY:

In a scenario all too familiar to transactional lawyers, the Lundquists purchased a new home in Oregon, Illinois before selling their current residence in Rockford. The Rockford property was on the market for a number of months and they had signed a contract to sell, but had not yet closed, when the Lundquist’s Rockford home was destroyed by a fire caused by vandalism. The fire occurred on December 5, 1996. The Lundquists moved into their new home in Oregon, Illinois in August, 1996. The Allstate Insurance policy contained an exclusion for coverage of loss caused by "vandalism or malicious mischief if your dwelling is vacant or unoccupied for more than 30 consecutive days immediately prior to the vandalism or malicious mischief." Allstate denied coverage based on the exclusion. The Lundquists offered evidence to support their contention that the house was neither "vacant" nor "unoccupied" because Mr. Lundquist stayed overnight at least once in mid-November, their sons stayed overnight on various weekends during the same period, Mrs. Lundquist visited and cleaned the home weekly, and there were a number of personal items and appliances left on the property even though it was not fully furnished. Reversing the trial court’s grant of summary judgment in favor of Allstate based on the policy exclusion for "vacant" and "unoccupied" property, the a Second District offers a decision which contains some very powerful language and reasoning on behalf of homeowners in a position similar to these owners in Lundquist v. Allstate Insurance Co., (2nd Dist., June 19, 2000), http://www.state.il.us/court/2000/2990863.htm .

Finding that there is a potential for ambiguity in the interpretation of ‘reside’, ‘vacant’, and ‘unoccupied’ in the policy exclusion language, the Court notes that: "Where competing reasonable interpretations of a policy exist, a court is not permitted to choose which interpretation it will follow. Rather, in such circumstances, the court must construe the policy in favor of the insured and against the insurer that drafted the policy. Accordingly, we hold that Allstate cannot deny coverage based upon its definition of ‘reside’ ". The decision also distinguishes cases holding for the insurance company where the owner had not visited the home for a number of months and where the owner had sold a home under an installment contract and relinquished the right of possession as factually different than the Lundquist situation where they continually visited, cleaned, stayed overnight and kept articles of personal property on the premises. In Illinois, a person may reside in a particular location without being continuously physically present and one may have more than one residence according to this case.

Moreover, the Court noted that the Illinois "Standard Fire Policy", promulgated pursuant to the Illinois Insurance code (215 ILCS 5/397) as the minimal coverage allowable by law in this state, provides for an exclusion of coverage for fire loss if a building is vacant or unoccupied beyond a period of sixty consecutive days rather than the thirty day period in the Allstate policy. Any conflict between the statutory and insurance policy minimal provisions for coverage is to be resolved in favor of the statutory provisions as minimal, and therefore Allstate can not exclude coverage under its policy in a manner more restrictive or inconsistent with the Standard Policy. Therefore, the Allstate exclusion could not conflict with the state policy provision requiring the property be vacant or unoccupied for more than 60 consecutive days. "Any conflict between statutory and insurance policy provisions is resolved in favor of the statutory provisions. Rules and regulations promulgated pursuant to authority delegated by specific provisions of the Insurance Code have the force of statute. Thus, the policy must conform to the Standard Policy."

 

LANDLORD/TENANT; CONTINGENT ATTORNEY’S FEE AWARD AND LATE CHARGES CONSIDERED:

The Third District has added an interesting bit of nuance to the ordinarily mundane world of landlord/tenant law and attorney’s fees in Collins v. Hurst, (3rd Dist. August 30, 2000), http://www.state.il.us/court/2000/3990937.htm. In a case revolving around a default in payments by the tenant of a lease, the two salient provisions of the lease agreement that were reviewed were (1) "Lessees shall be responsible for any or all attorney fees…" and (2) "a service charge to two percent for that month for any payment made past the 10th of the month.."

Turning first to attorney’s fees, {I knew you’d be most interested in this aspect of the case}, the landlord’s counsel had agreed to represent the lessor on a contingent fee of one third of any recovery. The Trial Court initially awarded attorney’s fees equaling one third of the $7,040.06 damage award, but, upon a motion for reconsideration, vacated the attorney fee award. On appeal, the Third District ruled that the a court may award attorney’s fees if expressly authorized by the agreement of the parties, and that this clearly was the agreement in the subject lease. Only fees which are reasonable will allowed, however, and while the court may consider the contingency fee agreement, it must also weigh the (1) skill and standing of the attorney, (2) nature of the cause, (3) novelty and difficulty of the questions, (4) amount and importance of the matter, (5) the degree of responsibility, (6) the time and labor required, (7) the usual and customary charges in the community, and (8) the benefit resulting as part of its determination. "In sum, the attorney fee provision contained in the lease…should be enforced. However, the contingency fee agreement…may not be applied…without consideration of whether that fee amounts to a reasonable award in light of the well established factors…"

On the issue of the "service charge" the decision provides very quotable language that "A lease may provide that if rent is not paid on or within a given number of date from the due date, a late charge can be added to the rent.". "A reasonable late charge provision in a contract should be enforced." This does not, however, amount to interest which can be "compounded", but "Simply put, Hurst must pay 2% of the rent due for any month that he did not pay his rent."

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/appellates/1999/1973573.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; CONSTRUCTIVE EVICTION; PLEADING:

Shaker and Associates, Inc. v. Medical Technologies Group, Inc., (1st Dist., June 30, 2000), http://www.state.il.us/court/2000/1991679.htm , is a classic constructive eviction case that the tenant should have won, but lost due to poor pleading in the trial court, and serves as a good lesson to us all to take care in amending our pleading to not lose the factual detail that will support the cause of action.

Medtech rented commercial office space from Shaker on a five year lease from 1994 to 1999 to conduct its business of reviewing claims for medical benefits. Shaker built the space out for the tenant, and Medtech was consistently late in rent payment from the beginning. In September, 1994, Medtech stopped paying rent altogether and was served with a five day notice. Shaker filed a forcible action in late September, and Medtech vacated the premises on December 20, 1994, shortly before the trial date. Medtech filed a counter complaint and affirmative defenses alleging Shaker failed to provide adequate air conditioning in the summer or heat in the winter, (causing one employee to quit and others to be ill), failed to fix plumbing, broken skylights, and didn’t provide cleaning services and light bulbs. The trial court dismissed the counterclaims and struck the affirmative defenses with leave to replead. Medtech’s first amended counterclaim and affirmative defenses repeated the same allegations, but with significantly more detail; setting forth days when the temperature was 48-54 degrees in the winter and others when the summer heat rose to exceed 90 degrees, rendering the space unusable as an office. The trial court again dismissed the counterclaims with leave to replead under sections 2-615 and 2-619, and Medtech filed its second amended counterclaim . The only basis Medtech alleged in this third pleading to support its counterclaim and affirmative defenses, however, was failure to provide heat and air conditioning, and it did not provide the specific detail of exactly how hot or cold it became or the damages caused as found in the prior pleadings.

The trial court interpreted the lease language as merely requiring the landlord to provide electricity to operative the HVAC system during certain hours, but not to repair, maintain and provide heating and air conditioning, and therefore entered summary judgment in favor of the landlord.

On appeal, the Court agreed with Medtech that it would make no sense to express exceptions to the landlord’s duty to regulate temperature as set forth in the lease unless the landlord also had a duty to provide heating and air conditioning, but noted "in this case the error was harmless due to the deficiency of Medtech’s pleadings…we note that Medtech waived the issues not included in its second amended counterclaim and affirmative defenses. Where an amendment is complete in itself and does not refer to or adopt the prior pleading, the earlier withdrawn pleading ceases to be a part of the record for most purposes, being in effect abandoned and withdrawn." In the absence of supporting facts, the general allegations of constructive eviction were mere conclusions and properly stricken.

Turning to the affirmative defenses of constructive eviction, the opinion also contains an excellent discussion of the necessary element of vacating the premises by the tenant. Noting that Medtech did not vacate for almost ten months after the heating and air conditioning problems began, the Court noted that there can be no constructive eviction without vacating the premises, although attempts to repair the heating and air conditioning system do not necessarily preclude a claim of constructive eviction. The landlord is allowed a reasonable time to repair, and the tenant is allowed a reasonable time to vacate; this being a question of fact allowing considerations of the time required to find a new location and reliance upon the promises by the landlord to repair. Ten months, in this case however, was viewed as an unjustifiable delay b y Medtech, and "Without the defenses and counterclaims of breach of contract and constructive eviction, Medtech had no basis to dispute that it was liable for at least some rent." Because its cause for constructive eviction failed, Medtech was obligated to pay rent that accrued until the landlord was able to relet the property rather than to the date of vacating the premises.

 

8. LANDLORD/TENANT; CRIMINAL ACTIVITY:

In a case which reviews whether a tenant can be strictly liable for a third party’s criminal activity in her leased apartment, the Second District ruled that a tenant must have "some minimum connection with the criminal activity" before she can be evicted for ‘good cause’ under the terms of the lease. Kimball Hill Mgt. Co. v. Roper, (2nd Dist., July 20, 2000), http://www.state.il.us/court/2000/2990470.htm Kimball Hill operated the Foxview Apartments in which Terri Roper was a Section 8 tenant. (Under Section 8 of the Housing Act of 1937, 42 USC Section 1437, people with low incomes, disabilities and the elderly can qualify for federal rent subsidies whereby the tenant pays 30% of their adjusted income and the balance of rent is paid by HUD to the landlord.) Paragraph 13(c)(1) of the lease provided that the tenant agrees to not engage in or permit unlawful activities on the property and that neither the lessee nor any members of the lessee’s household or guests shall engage in or facilitate criminal activity with or without the actual knowledge of the lessee. While Terri Roper was away undergoing dialysis treatment, her brother Edward was babysitting her children. Shortly after she returned and went to her room to sleep, the Carpentersville police department’s narcotics task force broke into the apartment under a search warrant specifying "a black male and various electronic equipment." Edward was downstairs in the living room and Terri and her children were upstairs. The police found cannabis, a semiautomatic handgun and ammunition, and a stolen WHS recorder and speakers. At the trial on her eviction, Terri argued that she cannot be held responsible for her brother’s illegal activities of which she had no knowledge. She also asserted that the lease was ambiguous in that it both required some involvement (‘engage or permit") while providing for strict liability ("with or without actual knowledge") in the criminal activity. The Court ruled that the conflicting provisions were ambiguous, and the resulting ambiguity must be construed against the landlord. Citing the prior decision in Diversified Realty Group, Inc. v. Davis, (1993) 257 Ill.App.3d 417, the Court stated "We agree with the Diversified court that the language…should be read to require that the tenant have some minimum connection with the criminal activity before she can be evicted for ‘good cause’".

 

LANDLORD/TENANT; SECURITY DEPOSIT RETURNS:

The Illinois Security Deposit Return Act, (765 ILCS 710/1), prohibits a lessor of residential property of five or more units from withholding any part of a security deposit unless the lessor, within 30 days of the date the lessee vacates, furnishes the lessee with an itemized statement of damage and an estimate or actual cost of repair, attaching the paid receipts. If the lessor provides an estimate of the cost of repair, the lessor must provide paid receipts within 30 days of giving the estimate. If the lessor does not provide a statement of damages and paid receipts, the security deposit must be returned in full within 45 days of the date the premises are vacated. The act provides a penalty for failure to comply of an award of an amount equal to twice the security deposit together with court costs and reasonable attorney’s fees "upon a finding by a circuit court that a lessor has refused to supply the itemized statement required…or has supplied such statement in bad faith, and has failed or refused to return the amount of the security deposit due within the time limits provided..." The tenants in Ikari v. Mason Properties, (2nd Dist., June 14, 2000), http://www.state.il.us/court/2000/2990714.htm were found to have returned the apartment rented while they were students and Northern Illinois University to the lessor in the same or better condition than they received it, ordinary wear and tear excepted, and were entitled to a full refund of their security deposit. The landlord, Mason Properties, however, retained $259.90 of the $709.00 security deposit as payment for itemized damages. The trial court also found that Mason had acted in bad faith in not returning the entire security deposit and awarded the tenants $519.80 as "double damages", reasoning that Mason had failed to conduct an inspection at the termination of the lease that would have provided the tenants with an opportunity to correct any defects in the apartment, although requested to do so in ample time prior to the end of the lease term by the tenants.

The landlord argued on appeal that the trial court erred in assessing the penalty inasmuch as the "failing" here was relating to providing an exit inspection, and that it did not fail to provide an itemized statement of damages as required by the statute as a basis for the penalty. The Appellate Court affirmed the trial court holding that the record supported a finding of bad faith generally that would not be overturned because it was not against the manifest weight of the evidence. The decision also held that the proper interpretation of the penalty clause of the statute was to award twice the "security deposit due" (i.e., $519.80) rather than twice the "security deposit", ($1,418.00), and held that the trial court erred in not awarding attorney’s fees because the tenants were represented without cost by NIU’s Students’ Legal Assistance Office; ("Whether an attorney charges a fee is not a basis upon which to deny attorney fees where a statute clearly and unambiguously requires an award of reasonably attorney fees upon a finding that a party acted in bad faith.)

LANDLORD/TENANT; SENIOR CITIZEN RESIDENCE DISTINGUISHED; SECURITY DEPOSIT RETURNS:

A would-be-tenant’s argument was rejected in Antler v. Classic Residence Mgt. LP, (1st Dist., June 30, 2000), http://www.state.il.us/court/2000/`991486.htm when a senior citizen attempted to bring a class action lawsuit against an extended care facility under the Chicago Residential Landlord Tenant Ordinance (RLTO, Chicago Municipal Code Section 5-12-080, 5-12-170) and the Illinois Consumer Fraud and Deceptive Business Practices Act, (815 ILCS 501/1 et seq.) for failing to pay interest on her "building entrance fee" as a "security deposit in disguise", and for failing to attach summaries of the Ordinance to her residency agreement. The Court rejected Antler’s argument that she was a "tenant" entitled to interest on her entrance fee as a "disguised security deposit". Her argument that the defendants deliberately concealed her rights under the RLTO in violation of the Consumer Fraud Act was also rejected. The Chicago RLTO specifically excludes "extended care facilities" from the requirements relating to payment of interest on security deposits and disclosure summaries. While the ordinance does not defined "extended care facilities", the Court noted the distinction between traditional landlords who provide rarely more than shelter, and utilities and care facilities that provide services such as transportation, laundry and meals. The defendant was found be more than a mere "landlord" with extended obligations to its residents. The premises are more than simply a "luxury high-rise for senior citizens. The Court distinguished the Wisconsin decision in M&I First National Bank v. Episcopal Homes Management, Inc., (1995) 195 Wis.2d 485, 536 N.W.2d 175, (in which the Wisconsin Court held certain "residency agreements" signed by residents of a facility for the elderly were, in essence, rental agreements and the ‘entrance fees’ were therefore properly categorized as ‘security deposits’), on the basis of "a sound application of Wisconsin law to the facts of that case, (although) we find it inapposite to the case sub judice." This is an interesting case to review from the point of view of statutory interpretation, defined exemptions (or perhaps delineated but undefined exceptions…), and distinction of a decision which appears to be factually on all fours, but is rejected as applying differing laws under differing circumstances.

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/apellates/1999/1981356.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.

 

LENDER'S BREACH OF DUTY OF GOOD FAITH AND FAIR DEALING:

While there have been a good number of 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), http://www.state.il.us/court/1999/2980753.htm, 724 N.E.2d 1276, 244 Ill.Dec. 192, 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 re-hearing, Justice Inglis' opinion in the second Voyles decision restated the earlier, withdrawn decision that a lender owes a duty of good faith and fair dealing in the conduct of servicing the mortgage, and that a breach of that duty forms the basis of a separate and independent tort in Illinois. Distinguishing Cramer v. Insurance Exchange Agency, (a case related to an insured's clam against the insurer for breach of good faith and fair dealing in denying insurance proceeds; for which the Illinois Insurance Code provides a legislatively created statutory remedy), the Court noted that "the legislature has not intervened to remedy the abuses of lenders in the home mortgage field". Turning to the Moorman doctrine, the Court notes "that damages for economic losses are permitted where the plaintiff claims tortious interference with prospective business advantage", and the "economic harm caused by defendant to plaintiff's credit reputation is exactly that which defendant is under a duty in tort to prevent." The decision is specifically "Based on the narrow circumstances of this case", but provides a potent warning in our current mortgage environment in which lenders are merged, loan servicing is transferred, and the borrower's get caught in the middle: "This case involved a homeowners who longstanding and personal relationship with the lender was terminated by defendant’s purchase of the assets of the original lender. Defendant then embarked on a course of action to force plaintiff into foreclosure...(and)...the wrongfulness of defendant's conduct, plaintiff's lack of choice in dealing with defendant, the inequality of plaintiff's position in relation to defendant and the vital importance of plaintiff's interest in her home mortgage establishes the hallmarks of any future bad faith claims arising from a lender's misconduct." Any lawyer who practices in real estate can bear witness to the fact that lenders are more impersonal and less responsive to their borrowers as each day passes. The printed receipt most ATMs offer is the closest thing to interaction most banks give their customers these days. This case MAY cause some lenders to rethink the consequences of refusing to deal on a personal basis with their borrowers and consider the results of their failure to communicate appropriately in an arena of such "vital importance" as a home mortgage.

 

LENDER’S DUTY OF GOOD FAITH AND FAIR DEALING; ABROGATED BY EXPRESS CONTRACT TERMS AND THE CREDIT AGREEMENTS ACT:

Before we all get too excited over the decision in Voyles v. Sandia Mortgage Corp. relating to the duty of good faith and fair dealing between a borrower and a lender, it might be worthwhile to review a case that was decided in November, 1999, that found that a lender did NOT breach their duty of good faith and fair dealing relating to a guaranty, and that the Credit Agreements Act applies to a guaranty to bar affirmative defenses based on alleged oral agreements with the lender. In Bank One, Springfield v. Roscetti, (4th Dist., 11/20/99), http://www.state.il.us/court/2000/4990254.htm, 726 N.E.2d 755, 243 Ill.Dec. 452, Bank One successfully appealed the trial court's summary judgment in favor of Roscetti finding that it violated its duty of good faith and fair dealing and that his affirmative defenses were not barred by the Credit Agreements Act, (815 ILCS 160/1). The case was the result of a complaint by Bank One against Roscetti to enforce a guaranty on a loan to Illini Motorama which was used to finance a floor-plan line of credit to purchase vehicles. Roscetti responded with five affirmative defenses and a counterclaim alleging that Bank One had breached its implied duty of good faith and fair dealing.

First, Bank One contended that the affirmative defenses were barred by the Credit Agreements Act. The trial court, however, ruled that guaranties are not "credit agreements" under the Act and refused to strike the affirmative defenses. The operative facts of the case were that after the floor plan note matured, Bank One continued to advance funds to Illini and thereby increased his risk, failed to inspect and monitor Illini and its floor plan, and discussed an alleged "check-kiting scheme" by Illini with its depository bank but failed to disclose this to Roscetti despite its assurances to him that it would "watch Illini like a hawk". Holding that the trial court erred in ruling that a guarantee is not a "credit agreement" within the act (which then resulted in the Bank not being able to use the act to bar the oral agreement/promise to monitor as a defense), this decision notes that during the development of case law under the Credit Agreements Act there have been a number of cases specifically dealing with guarantees, and that "A credit agreement often consists of several documents that, together, create the terms of the extension of credit." Accordingly, the trial court erred in considering the guaranty in isolation from the rest of the loan transaction. Since Roscetti's defenses and counterclaims were all based on the bank officer's agreement to monitor Illini "like a hawk", the finding that the guaranty IS a credit agreement served to allow the bank to bar the purported oral agreements of the officer as the basis for defenses.

Turning then to the duty of good faith and fair dealing this decision begins with the concomitant rule that if the guaranty is part of the credit agreement, then a bank has a duty of good faith implied in its dealing with a guarantor. That good faith requires that one who has contractual discretion exercise it reasonably and not arbitrarily or capriciously. Good faith in the context of a guarantor relationship implies an obligation to inform the guarantor of facts known by the bank that materially increase his risk. (A material change that increases the guarantor's liability without his consent, of course, may discharge his obligation.) Despite all of this, however, the parties are entitled to enforce a contract according to its terms, and an implied duty of good faith cannot overrule or modify the agreement of the parties as expressed in the contract and does not allow one to read into a contract an obligation that does not exist. Here, the guaranty was absolute, unconditional, continuing and unaffected by the bank's failure to exercise its rights relating to the collateral. The guaranty also provided that Roscetti waived all notice and assumed full responsibility for obtaining information regarding Illini's financial condition. "In sum, none of the actions that Roscetti alleges Bank One to have taken materially modified Roscetti's obligations or risks beyond those for which he contracted. (Which were absolute, unconditional and continuing..."no harm, no foul".) For that reason, the Court concluded that "the express terms of the guaranty negate all of Roscetti's claims of good-faith violations..".

Clearly, then, the duty of good faith and fair dealing which is IMPLIED in the case law, can be abrogated by clear and unequivocal waiver in the documentation....happy drafting...good luck objecting to those waivers in the boilerplate of your next credit agreement!

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/appellates/1999/3980761.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."

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/1999/2990287.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!)

MECHANIC'S LIENS 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/1999/1984337.htm , 724 N.E.2d 49, 243 Ill.Dec. 740, 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.

MECHANIC'S LIENS; 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/appellates/1999/1983749.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 appealable or not when issues of attorney's fees remain to be ruled upon.

 

MECHANIC’S LIENS; SUBSTANTIAL COMPLETION, WAIVER OF LIEN, AND RECITING THE DATE OF COMPLETION ON THE LIEN CLAIM:

In addition to the simple calendar calculations that go into determining if a subcontractor or contractor has complied with the notice provisions of the Illinois Mechanic’s Lien Act by filing a timely notice of claim for lien, often the issue revolves around whether certain work was "substantial" in order to be used as a date of completion, or "trivial" so as to not extend the time for filing notice of claims for lien as the last date of work. The court considered the various tests for the "substantial" vs "trivial" work issue in Merchants Environmental Industries, Inc. v. SLT Realty, (1st Dist., June 6, 2000), http://www.state.il.us/court/2000/1992942.htm. In this case, the HVAC subcontractor completed work on a restaurant project by installing 8 ceiling air diffusers on August 29, 1997. Prior to that work, the last substantial work done on the project was invoiced on June 3, 1997 with a "final bill" and "final lien waiver". Accordingly, the filing of the notice of claim for lien was either proper or untimely depending on which date the final, substantial work was completed under the Act. To make the determination that a genuine issue of fact was raised that the work on August 29, 1997 was not trivial, the Court reviewed various theories and remanded the case. Under Illinois law, work that is trivial, insubstantial, and not essential to the completion of the contract does not extend the time to file under the Mechanics Lien Act. That which is in the nature of maintenance or correction of a completed job rather than work need for the completion of the contract will not extend the time in which to file a lien. A contractor who does work at his own initiative, (rather than at the request of the owner), purely in order to revive a lien claim will not be countenanced with an extension of the period to file. Whether the owner requested the work will be an important consideration, and work done at the request or demand of the owner will most likely extend the time to file. Work which, as in the case at issue, is part of the "base contract work" and is required to complete the contract will be included in the period from which the lien must be filed. Work necessary to make something operable is not trivial or inconsequential and will also come within the time period of substantial work.

This decision also considered the argument made by the contractor that there was a factual issue as to whether the owner relied upon the mechanic’s lien waivers given. The owners argued that the contractor supplied lien waivers which were clear and unambiguously a full release and therefore served as a bar to the action. The Court noted that "While a clear unambiguous waiver of mechanic’s lien rights bars an action under the Mechanic’s Lien Act, this rule is only applicable where an innocent party has relied upon the waiver in making payments to the general contractor." Here, while the lien waivers were clear and unambiguous, extrinsic evidence relating to the dealings of the parties could and should have been be considered by the trier of fact to determine if the waivers were actually relied upon by the owners. If the facts could have shown that the owners did not actually believe that the lien waivers represented a full release of the lien rights at the time given, then the waivers would not serve as a bar to recovery. "Hence, the question becomes whether custom and usage would be helpful in determining how the waivers of lien to date were viewed by the parties. If so, it should be considered, and we think that it should."

Finally, the Court held that since the Notice of Claim for Lien did not include a completion date, the claim was unenforceable against third parties. Section 7 of the Act requires that a claim for lien be recorded within four months of the completion of work in order that third parties be able to determine from the claim itself whether it can be enforced. Inasmuch as the subject claim for lien did not set forth the date of completion, it was not susceptible to review and determination of validity by third parties on its face, and therefore not effective as to them. "While Section 7 itself does not expressly require inclusion of the completion date in the lien claim, nevertheless that requirement must be inferred. One of the primary purposes of that section’s four-month requirement is that third parties be enable to learn from the claim whether it is enforceable. Without a completion date, a person examining the lien claim would not know whether the four-month filing requirement had been met."

 

MINERAL RIGHTS; PARTITION AND TENANCY IN COMMON:

In order to obtain the relief of partition, a party must own real estate as a tenant in common with the party from whom partition is sought. While mineral rights are "real estate", and therefore subject to partition, the Fifth District has ruled that the plaintiff could not be granted partition because he was not a tenant in common under the definition of that estate in Dunn v. Patton, (5th Dist., August 27, 1999) No. 5-98-0493, http://www.state.il.us/court/1999/5980493.htm. Dunn owned one-half of the mineral rights under the real estate owned by Patton, and brought this partition suit. Patton owned the other half of the mineral rights, but owned the entire surface estate. The Court ruled that there is no estate for the mineral rights separate from the surface estate until severance, and without severance Dunn had no right to partition. Turning to the definition of tenants in common, the Court found that since the parties in this case did not have "unity of possession" (i.e., Dunn had no right to possession or occupancy of any portion of the surface estate to which the mineral rights are tied), he was not a tenant in common with Patton and therefore his partition action was barred as a matter of law.

There is some colorful language used to "spice-up" this estates-in-land decision taken from the Black's Law Dictionary definition of tenancy in common, ("Where property is held by several and distinct titles by unity of possession, neither knowing his own severalty {hmmmm...} and therefore they all occupy promiscuously" {I LIKE that}), and a good discussion for appellate practitioners of when the appeal time begins to run when the final order is not docketed or filed or communicated to the appellate, both which make this case worth reading.

MINERAL RIGHTS/OIL & GAS LEASES; ADMINISTRATIVE RES JUDICATA:

More and more, administrative law and hearings are determining the rights of parties relating to real estate. Accordingly, it is increasingly important that practitioners be not only familiar with administrative procedures (and opportunities!), but also know when the findings of an administrative tribunal are res judicata. In Schofield, Inc. v. Nikkel, (5th Dist., June 12, 2000), http://www.state.il.us/court/2000/5980769.htm the determination of the Illinois Department of Mines and Minerals (the what?) to unitize mineral leases pursuant to statute (225 ILCS 725/23.1 et seq.) was binding upon Schofield in this case brought for damages based on an alleged oral agreement by Nikkel to convey an interest in oil and gas leases acquired in exchange for geological services rendered. In order to "unitize" mineral leases, ("Unitization is a method of combining separate leases to allow for the operation of the field as a single unit."), the Department hearing must allocate the costs of production to each separately owned tract and determine the owners. It did this at the administrative hearing, and during that process found that Scofield had no interest in the oil and gas lease held by Nikkel. Accordingly, Nikkel argued that Schofield could not collaterally attack the finding of the Department of Mines and Minerals by relitigating the issue in the trial court. Both the trial court and the Fifth District agreed. The opinion has an excellent discussion of oral agreements relating to interests in land, the statute of frauds, and specific performance of a contract to convey land in exchange for services. (The Statute of Frauds (740 ILCS 80/2) applies, and in order to apply the exception for partial performance, the court must find that the contract terms are clear, definite and unequivocal enough to support specific performance.) This case sets forth a cogent discussion of the "same-evidence test" and "same transaction" approach to res judicata, and a quotable cite that: "In Illinois, administrative decisions have res judicata and collateral estoppel effect where a department’s determination is made in proceedings that are adjudicatory, judicial, or quasi-judicial in nature."

MORTGAGE FORECLOSURE; 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/appellates/1999/1980849.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.

MORTGAGE FORECLOSURE; PUBLICATION JURISDICTION, DUE DILIGENCE AND SALE PRICE:

In a decision that is a little confusing in the reading but has some good quotable language nonetheless, the Fifth District has ruled on two issues in mortgage foreclosure cases that arise fairly commonly these days: (1) Publication jurisdiction based on due diligence in attempting to locate a defendant, and (2) attacking a sale for inadequacy of the sale bid. First Bank and Trust Company of O'Fallon v. Janet King, (5th Dist., March 17, 2000), http://www.state.il.us/court/2000/5990182.htm, 726 N.E.2d 621, 244 Ill.Dec. 646.

The trial court granted summary judgment in favor of the bank and against King on her motion to set aside the judgment of foreclosure on jurisdictional grounds, vacate the foreclosure sale to the bank, and declare the bank's subsequent conveyance to third party Jeffrey and Lea Green as void.

Turning first to the jurisdictional issue, the Court noted that the record indicated the bank had filed affidavits supporting the fact that they had made repeated, unsuccessful attempts to locate Janet King and had an inspection of the premises conducted by a private investigator which indicated that the property was vacant. Since the bank met the statutory requirements for alleging due diligence, the Court reasoned, "it became incumbent upon King to file an affidavit that upon 'due inquiry' she could have been found." Since King did not properly challenge the bank's affidavits, the trial court's finding that they did diligently inquire was affirmed noting: "Although King appears to suggest that notice by publication is never appropriate, even when a property owner cannot be located, the legislature has determined otherwise. See 735 ILCS 5/2-206. We also reject King's argument that notice by publication is a violation of due process. Numerous cases are found in which similar contentions have been made and decided adversely. These cases hold that service by publication satisfies the requirement of due process of law."

Then turning to the adequacy of the sale bid, the Court recites the litany of foreclosure cases that stand for the proposition that there is no requirement that foreclosed property be sold for its appraised value, and only where the bid amount is so grossly inadequate that it shocks the conscience of a court of equity will there be an evidentiary hearing afforded the defendant; at which some other "irregularity" must be present in order to upset the sale since the law intends to provide stability and permanency to judicial sales. Here, King offered no appraisal to support her position that the sale price was unconscionable, and therefore the trial court was justified in not conducting a formal hearing and affirmed.

MORTGAGE LIEN PRIORITY; ASSIGNMENT OF MORTGAGE:

In Federal National Mortgage Association v. Kuipers, (2nd Dist., June 28, 2000), http://www.state.il.us/court/2000/2990933.htm , 732 N.E.2d 723, 247 Ill.Dec. 668, the issue of relative lien priority was examined in a situation where the assignee of a priority mortgage failed to record the assignment until after the perfection of a judgment lien. As a consequence, the judgment lien creditor argued, the mortgagee under the unrecorded assignment was subordinate to the judgment lien. The trial court rejected this somewhat unique argument, and the appellate court affirmed.

The first mortgage between Kuipers and Medallion Mortgage was recorded properly on August 1, 1994 to secure a note in the principal sum of $100,000. On August 3, 1994, Medallion assigned the mortgage and note to FNMA, but the assignment was not recorded until October 2, 1998. In the interim, Lisa Fortney obtained a judgment against the Kuipers for $650,000, and recorded a memorandum of judgment on June 25, 1997; i.e., after the mortgage but prior to the assignment recording. Fortney was made a party defendant to FNMA’s complaint to foreclose its mortgage with an allegation that her lien was subordinate. She counterclaimed, however, alleging that her judgment lien was recorded prior to the assignment of the mortgage to FNMA, and therefore had priority inasmuch as the transfer of the mortgage "extinguished" Medallion’s interest. FNMA countered with the argument that the Medallion mortgage was not released and the assignment did not operate to extinguish the lien and its lien remained as notice to third parties of the existence of a first mortgage. Therefore FNMA simply "stood in the shoes" of Medallion as its assignee, and it was not necessary to record the assignment to retain the priority position of Medallion’s mortgage lien.

Noting that a recorded mortgage remains a lien on real estate until such time as the release is recorded under 765 ILCS 905/2, the decision in this case finds that the assignment of a mortgage note carries with it an equitable assignment of the mortgage by which it is secured, and therefore the assignee stands in the shoes of the assignor-mortgagee with regard to the rights and interests under the mortgage and note. The subject mortgage specifically provided that it was assignable, and therefore third parties such as Lisa Fortney examining the chain of title to the real estate were on notice of the existence of the debt and lien. Because no release had been filed, there was no basis upon which third parties could reasonably believe the mortgage had been extinguished. The assignment by Medallion to FNMA did not create a new lien that required recording or a new priority position. The original lien and its priority position remained in tact, and the Court held that absent a recording of a release, the assignee of a mortgage is entitled to the same priority position established by the original mortgage.

 

MORTGAGE LIEN PRIORITY; CONVENTIONAL AND EQUITIBLE SUBROGRATION AND REFINANCING:

In Aames Capital Corporation v. Interstate Bank of Oak Forest (2nd Dist. July 31, 2000) http://www.state.il.us/court/2000/2991289.htm., 734 N.E.2d 493, 248 Ill.Dec. 565the Court’s decision begins with a deceptively simple statement that "This appeal arises from a dispute concerning lien priority in a mortgage foreclosure proceeding. The issue is whether a mortgagee that pays off a priority mortgage pursuant to a refinancing agreement is entitled to be subrogated to the priority lien recorded by the original mortgagee." The mortgagor was the infamous Patrick J. Wangler; a builder in DuPage County not well favored in the last few years. Mr. Wangler and his wife made a mortgage in 1986 to Hinsdale Federal that was later assigned to Standard Federal. (The "first mortgage".) Thereafter, Wangler made four mortgages to Suburban Bank during the period from 1988 through 1991. In 1996, the Appellee, Interstate Bank, obtained and recorded a judgment against Wanglers for $75,89.06; (a sixth position priority for those of you keeping track). Thereafter, Wangler executed a mortgage to Pacific Thrift and Loan Company pursuant to a refinancing agreement which paid off the mortgages of Standard Federal and Suburban Bank. This mortgage was assigned to the Appellant Aames Capital. (The mortgage instrument assigned was a standard Fannie/Mae/Freddie Mac Uniform Instrument.) This mortgage was recorded subsequent in time to the recording of the Interstate Bank memorandum, and the lender incorrectly assumed there were no prior liens. When Aames began foreclosure, Interstate answered, raising the their judgment lien and the issue of priority. Both parties came before the trial court on motions for summary judgment on the issue of priority. The trial court ruled in favor of Interstate based on the theory that the prior recording of its memorandum of judgment entitled it to a superior lien, and rejected Aames’ theory that even though Interstate’s lien predated its mortgage, it was entitled to priority because it was subordinated to the position of the Standard Federal and Suburban mortgage liens it paid off during the refinancing. Interstate countered on this issue with the argument that the doctrine of subrogation will only apply where there is an express agreement that the refinancing mortgage will assume the priority position of the debt it satisfies.

The Appellate Court begins its decision reversing the trial court by noting that "The doctrine of first in time, first is right is not always as clear and obvious as it may seem", and "blind adherence to the first in time, first in right doctrine is sometimes insufficient to determine lien priority." (The decision then notes the exceptions to the "first in time" rule for renewals of notes and mortgage and the recent case of FNMA v. Kuipers, {discussed in the July and August, 2000 Keypoints} relating to the priority position of assignees under assignments of mortgages.) Noting that "Subrogation is a method whereby one who had involuntarily paid a debt of another succeeds to the rights of the other with respect to the debt paid.", the Court makes an important factual distinction in this case: no release of the original mortgages had been recorded and there was no indication that those liens had been extinguished when Interstate recorded its judgment. Because Interstate had constructive notice of the prior, unreleased mortgages when it recorded its judgment, there was "no reason why the doctrine of first in time, first in right would require us to reject…Aame’s argument that subrogation may apply." Accordingly, the Court appears to be saying that because the prior mortgages were of record, and Interstate had constructive notice of them, merely subrogating Aames to that position would not harm Interstate, but would "comport with the purpose of the recording requirement, namely , to provide notice of liens to third parties.".

Turning to a comparison between equitable and conventional subrogation, the decision distinguishes conventional subrogation as that arising out of contract, whereas equitable subrogation is that which arises in common law to prevent unjust enrichment and depends on the facts of each particular case. Conventional subrogation requires an express agreement. The Court, however, states "we decline to analyze the present case under equitable subrogation and, instead, consider whether conventional subrogation…may be applied." (Ed.: I interpret this as implying and perhaps instructing that should a similar fact pattern arise, the theory of equitable subrogation would be favored.)

Noting that Firstmark Standard Life Insurance Co. v. Superior Bank, 271 Ill.App.3d 345 (1995) held that there must be an express agreement that the refinancing mortgage be give the priority position of the mortgage it pays off, the Court distinguishes Firstmark; (but not until reiterating that it did not appear that the decision in that case considered the distinction between equitable and conventional subrogation), and "resurrects" the theory set forth in Homes Savings Bank v. Bierstadt, (1897!), 168 Ill.618, 624. In Firstmark there was specific language in the mortgage that it was subject to the mortgage held by the appellee, and therefore there was no express agreement of subrogation that would overcome the priority of that mortgage. In the instant case, however, the mortgage instruments were the standard FNMA/FHLMC Uniform Instruments and they contained language that the mortgagors were to discharge any liens that had a priority over the mortgage; indicating an agreement of the parties that the mortgage would be a first priority lien. Conforming to the rule in Bierstadt that "the subrogee is entitled to the benefit of the security that he has satisfied with the expectation of receiving an equal lien.", and based upon an express agreement found to be present in the subject mortgage documents, the Court ruled that: "The holding in Bierstadt fits the precise definition of a mortgage refinancing" situation.

As a clear caveat, the Court notes that its application of conventional subrogation would not apply "if the original mortgagee files a release of lien prior to the recordation of the refinancing mortgagee’s lien and if a third party records its lien after the release is recorded but before the refinancing lien is recorded," AND, "Nothing in our holding, however, limits the court from considering whether the doctrine of equitable subrogation may apply."

It is finally noteworthy that the case was remanded to determine the amount to which Aames is subrogated; i.e., limited to the amount remaining on the original mortgages secured at the time of its perfection of its subrogated lien.

MORTGAGE LIEN PRIORITY; SUBROGATION REAFFIRMED:

The Second District’s decision in Aames Capital Corporation v. Interstate Bank of Oak Forest, which distinguished Firstmark v. Superior Bank and applied the 1897 case of Homes Savings Bank Bierstadt gave new life into the doctrine of subrogation. Conventional subrogation was used to give a lien priority to a later recorded mortgage to the extent its funds were used to refinance a superior mortgage. Not long after the ink was dry on that decision, the First District filed a decision adding it to the supporters of the application of the doctrine of conventional subrogation in LaSalle Bank v. First American Bank, (1st Dist., September 12, 2000), http://www.state.il.us/court/2000/1981388.htm.

This case also revolved about a mortgage foreclosure proceeding. LaSalle filed against the holder of legal title, First American Bank, As Trustee u/t/a No. F89-130. The beneficiary of the trust was Brandess Home Builders, which had entered into a contract with Daniel Lopez to build and sell a custom home on the subject property. Lopez paid Brandess $120,033 in earnest money on a contract for a total of $519,042. Brandess then applied to LaSalle for a construction loan of $385,000 to finance the building of the custom home; (the application noted that Lopez had contracted to purchase the completed structure and land). Its land trustee gave LaSalle the mortgage sought to be foreclosed. LaSalle funded $199,400 of the construction financing; $150,000 of which was used to payoff the prior mortgage of Parkway Bank which had been used to purchase the land for development well before either Lopez or LaSalle had any interest in the property. When Brandess stopped construction the building was approximately 50% complete. Brandess defaulted in payments to LaSalle and its subcontractors, resulting in the foreclosure, counterclaims for mechanic’s liens, and Lopez’ counterclaim seeking specific performance and a declaration that his Vendee’s lien for the earnest money was a prior and superior lien to that of LaSalle.

In denying Lopez’ motion for summary judgment, the trial court applied the doctrine of conventional subrogation to find that LaSalle, as subrogee of Parkway had a mortgage lien superior to Lopez. The construction loan agreement and the mortgage both contained an agreement between Brandess and LaSalle that LaSalle’s mortgage was to have a priority over all other liens. Accordingly, LaSalle was conventionally subrogated to the prior lien of Parkway’s mortgage, and defeated Lopez to the extent it paid off Parkway. In affirming the trial court’s award of summary judgment in favor of LaSalle, the First District noted that "Contrary to the assertions of Lopez, the doctrine of conventional subrogation does not require either that LaSalle obtain Lopez’ consent to subordinate Lopez’ purported lien, or that LaSalle obtain an assignment of the Parkway mortgage." The Court also denied any importance to the fact that Parkway released its mortgage, (a distinction that was preserved in the Aames Capital case), and stated that "LaSalle’s knowledge of Lopez’ purchase contract with Brandess is immaterial to the application of the doctrine of conventional subrogation." Instead, Justice McBride’s decision emphasizes that Lopez gave Brandess his earnest money knowing that Parkway had a superior mortgage lien, and takes the position that Lopez is left in the same position that he was when he first contracted by virtue of the application of the doctrine of conventional subrogation; "In such a case, the doctrine may be applied."

The Court’s decision also rejected Lopez’ argument based on the doctrine of equitable conversion. Noting that the contract with Lopez was entered into by Brandess (the beneficiary of the land trust) rather than the legal title owner (First American Bank), McBride states "The doctrine of equitable conversion has traditionally been applied where there was a contract between and owner and a purchaser. Thus, Lopez, in essence, asks us to expand the doctrine to include holders of a beneficial interest in a land trust. This we decline to do."

In a somewhat confusing turn of the tale, the Court then rejects Lopez’ argument that LaSalle’s lien should be limited to the principal payment it made to Parkway under conventional subrogation, (i.e., $150,000 rather than the $220,000 awarded in the trial court, which included interest, late charges, attorney’s fees and costs), based on the fact that it need not apply the doctrine of conventional subrogation at all. (huh??) Disregarding the lengthy discussion of the doctrine of conventional subrogation, the previous statement that "We thus find that the trial court properly applied the doctrine of conventional subrogation", and highlighting that the trial court failed to determine if Lopez had a vendee’s lien, the decision states "Where Lopez had no lien, LaSalle did not even need to rely on the equitable doctrine of conventional subrogation to gain priority over Lopez…The trial court did not err in granting LaSalle its contractual attorney’s fees, costs, late charges and interest."

Mortgages; payoff letter quote and fax fee allowed:

in Krause v. GE Capital Mortgage Service, Inc., (1st Dist. May 30, 2000), http://www.state.il.us/court/2000/1992443.htm, 731 N.E.2d 302, 246 Ill.Dec. 866, Justice Frossard affirmed the trial court’s summary judgment in favor of the mortgage company. The plaintiffs were borrowers who had requested payoff statements by fax from G.E. Capital as the mortgage servicer of their loans at the time of closing and been charged a $15 quote fee and a $10 fax fee. Arguing that these charges were not provided for in the mortgage instruments and constituted a prepayment penalty specifically waived by the language of the mortgage documents, the Plaintiffs sought a finding for breach of contract in Count I, restitution in Count II, and damages under the Illinois Consumer Fraud and Deceptive Business Practices Act, (815 ILCS 505/1 et seq.), in Count III.

The Defendant argued with supporting affidavits that the charges were not in the nature of a prepayment penalty, but a charge for services rendered. GE Capital’s affidavits provided that it did not charge for verbal payoff quotes or the first payoff statement in writing, but did include a $15 service or quote fee if more than one written payoff statement was requested, and an additional $10 fee for each fax transmission. Additionally, the automated telephone system from which borrowers ordered payoff letters disclosed the costs for multiple payoff and fax requests. The computer records of the defendant in this case indicated that Krause had ordered two payoff letters, both by fax, and therefore been charged a $15 payoff fee (for the second request) and $20 for fax fees (both requests). The other named plaintiff, Lindberg, had ordered a total of five payoff statements and requested three of the statements by facsimile; and were charged $15 for the multiple quote and $30 for the fax fee.

The opinion affirming the trial court’s ruling for GE Capital begins by noting that "A charge is a prepayment penalty if the charge imposed at the time of prepayment was one that would not have been imposed if the note were paid at maturity instead of at an earlier date", and cites recent Minnesota and Massachusetts cases. The defendants in the case at bar did not assess these fees because the loans were paid early, but because the plaintiffs requested multiple statements and that the statements be faxed rather than mailed. Charges imposed because of a request for special services are not in the nature of prepayment penalties. Likewise, the fact that the charges were disclosed on the automated phone service resulted in the Court’s determination that nothing was concealed, suppressed or hidden to form a cause of action for Consumer Fraud.

When the facts are properly understood, the decision in this case is a foregone conclusion. What is also worthwhile reading is the Court’s distinction of other, similar cases, and handling of the equitable maxims "expressio unius est exclusio alterius" (the mention of one thing excludes another) and "contra proferentum" (an ambiguous contract is construed against its drafter).

 

MORTGAGES; SALES AND SERVICING AGREEMENTS - RES JUDICATA:

Most real estate practitioners have witnessed the documentation of the sale of a mortgage at residential closings, and most, I suspect, have wondered what happens when the loan sold goes immediately into default or is in some other manner not acceptable to the purchaser after closing. There is an entire industry that is devoted to the "packaging" and sale of loans. The case of Saxon Mortgage v. United Financial Mortgage Corporation, (1st Dist., March 24, 2000), http://www.state.il.us/court/2000/1992577.htm, offers some insight and instruction on litigation in this area.

Saxon, a Virginia corporation, is in the business of purchasing residential mortgage loans. United, an Illinois corporation, is in the business of originating, selling and servicing residential mortgages. They entered into a sales and serving agreement whereby Saxon agreed to purchase loans from United according to terms and conditions set forth in Saxon's Seller/Servicer Guide, which was specifically incorporated into the agreement. One provision of the Guide stated that if a loan purchase by Saxon from United for a premium was prepaid in full within 180 days following the purchase, United would reimburse Saxon for any premium paid to it on the sale of that loan. Between October 1996 and April 1998, eight of the loans purchase by Saxon from United prepaid within the 180 day period. Saxon alleged it was entitled to a return of premiums of $70,455.77 paid for the loans to United by virtue of the prepayment in the complaint filed in this case in the Circuit Court of Cook County. Prior to this suit, however, Saxon had filed another action on May 1, 1997, in Federal Court in the Northern District of Illinois, against United to recover in a seven count complaint for breach of contract, breach of implied covenant of good faith and fair dealing, breach of express warranty, indemnification, intentional misrepresentation and negligent misrepresentation on a delinquent loan identified as the "Stulka" mortgage. (The "Stulka" mortgage was NOT one of the prepaid loans which were the subject matter of the Cook County case.) United filed its motion to dismiss the Cook County complaint pursuant to Section 2-619, alleging rest judicator based on the fact that the sales and servicing agreement which formed the contractual basis of the complaint in Cook County was the same contract which was the foundation of prior the Federal Court proceeding, and therefore Saxon was guilty of "splitting a single cause of action into more than one proceeding" and should be barred by res judicata from raising in State court that which could have been raised in Federal Court. The trial court, (Judge Lee Preston), agreed and dismissed the Cook County complaint.

On appeal, the First District reversed, providing an excellent review of the doctrine of res judicata and the "transactional analysis" adopted by the Illinois Supreme Court in determining that it did not apply in this case. Res Judicata, of course, provides that a final judgment rendered on the merits by a court of competent jurisdiction is an absolute bar to a subsequent action involving the same claim, demand or cause of action between the same parties. The doctrine extends to not only those claims actually decided, but also those issues that could have been decided in the suit. In this case, even the application of the "transactional test" rather than the "same evidence test" reveals that res judicata is not present. The Federal Court claim, while based on a "blanket contract" (the sales and servicing agreement) was of an entirely different nature from the State Court claim. The basis for the Federal case was a delinquent mortgage with numerous underwriting issues. The basis of the State case with the fact that the loans had paid-off early, without any delinquency or underwriting problems. The transactions took place in different time periods, and one of the State court claims did not even arise until after the Federal suit was filed. "...two claims are not the same cause of action simply because they involve the same contract or contractual relationship...for res judicata purposes."

 

PARTITION SUITS - LIFE ESTATES AND CONTINGENT REMAINDERS:

Loretta Westerdale died testate leaving her real estate divided into three shares for each of her three children, Wallace, Sarah and Ruth in Westerdale v. Grossman, (3rd Dist., April 3, 2000), http://www.state.il.us/court/2000/3990619.htm., 728 N.E.2d 67, 245 Ill.Dec. 336, The sisters each received a one-third share, but Wallace received only a life estate in the remaining one-third. The remainder on that third was left to any surviving children of Wallace, except his only child at the time the action was filed, Vicoria. (Did you get that? Wallace has a life estate and the contingent remainder was left to such unborn child(ren) as he may have thereafter, and if he has no other children, then the remainder goes to his sisters if they survive him, and, if the don't survive him and there are not further children, the remainder passes to the estates of Wallace, Ruth and Sarah...if I were Wallace, I simply would have called 'Regis', gotten him to produce a new tv show called "How to Marry a Land Baron", and had another child to remove the contingency from the remainder and set the matter at rest...but....)

Wallace filed a complaint to partition the land. Ruth filed a motion to dismiss claiming that because Wallace could still have children, the remainder was contingent, and a partition could not be accomplished because it would be impossible to determine what share each child of Wallace would receive. The trial court agreed with Ruth and dismissed the partition. Wallace appealed and the Third District reversed.

The issue on appeal was whether Wallace, a life tenant could bring a partition even though the remainder interest in the life estate is contingent. The Code of Civil Procedure applicable to Partitions, (735 ILCS 5/17-101), provides that when property is held as tenants in common, "any one or more of the persons interested therein may compel a partition thereof." Holding that a tenant in common has an absolute right to partition, which is imperative and completely binding upon a court when a case is fairly brought and yields to no consideration of hardship, inconvenience, or difficulty, the Court stated that "We find no evidence in the record, and his sisters do not contend, that Wallace is using the partition action to circumvent the law or public policy of this state." Rejecting Ruth's argument that only a vested remainderman who holds an interest in fee, and not a life tenant, may bring a suit for partition, Justice Breslin noted "But Wallace did not ask the trial court to partition the remainder of his life estate. Instead, he requested that his life estate be partitioned from that of his sisters. Thus, his estate would remain intact until his death when it would be divided among his children, should he have any in addition to Victoria.", and reversed and remanded the case for further proceedings consistent with the opinion.

(Huh? Here's what I don't understand: In the end, what is going to be sold at a partition sale presuming there is no accord to which the parties can agree? Does the successful bidder get a fee simple absolute, a fee subject to a condition subsequent, (Wallace having a child or two or three), a life estate per autre vie, or what???)

 

PARTITION SUITS; PUBLIC SALE AND OWELTY AS AN ALTERNATIVE TO SALE:

In Steinbrecher v. Steinbrecher, (2nd Dist., 1/26/2000), http://www.state.il.us/court/2000/2981010.htm, 726 N.E.2d 1118, 244 Ill.Dec. 807, the Second District reversed the trial court's ruling that property be "sold" in a partition suit instituted among the heirs following probate by listing the property under an exclusive listing with a real estate agency. The trial court's decision to sell the property was based upon the Commissioner's report that the property could not be divided "without manifest prejudice" to the parties as required by the Partition statute. There were three parcels with a total estimated value of $4,859,000.00, and three heirs for whom partition was necessary. And, while Commissioner's testimony was that he was unable to divide the property into three parcels of exactly equal value, he did testify that he was able to arrive at a division of the property into five parcels, and that the variation in value from the most valuable to the least valuable of the three component parts of the division would only be approximately $200,000.00. The Second District noted that although the trial court had found it would be "a momentous job to try to equitably divide [the] parcels among the three heirs", it should nonetheless be charged to do that on remand reciting precedent that: "The law favors a division of land in kind, rather than a division of proceeds of a sale of the land and, therefore, an unequal division with owelty is preferred over a sale of the premises." The fact that at the brokered sale approved by the trial court resulted in net proceeds of the sale ($2,967,392.60) that were almost a $2,000,000.00 less than the estimated value of the property ($4,859,000) certainly supported this conclusion and the direction for a division in kind with payment of owelty. The largest portion of the Court's opinion deals with a procedural morass that is not atypical or unexpected when family probate disputes are coupled with pro se litigants and multiple attempted appeals, but there are some well stated principals of law relating to partition suits awaiting those willing to wade through discussions of moot and timely appeals. The Code of Civil Procedure provides that Partition sales are to be directed only where the property cannot be "divided without manifest prejudice to the owners", and the decision defines "manifest prejudice" under Section 17-108. The Code also provides that property not susceptible to division shall "be sold at public sale, upon such terms and notice of sale as the court directions", (Section 17-116), and the Court ruled that the trial court's order listing the property with a real estate agency did not satisfy the provisions for a "public sale"; which should be "at auction of property upon notice to public of such", regardless of the fact that the Code does vest the court with discretion to set the terms and notice of the sale. "We do not find that such discretion allows the trial court to ignore the plan language of the Code, which requires a public sale."

 

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/1999/3980959.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....)

 

POWERS OF ATTORNEY ACT; THE IMPORTANCE OF FOLLOWING THE STATUTORY FORM:

A recent case which indicates the trials and tribulations that can result from the use (or "half-use") of the statutory form is Fort Dearborn Life Insurance Co. v. Holcomb, (1st Dist., August 28, 2000), http://www.state.il.us/court/2000/1993627.htm. The facts in this case are entertaining and read like a soap opera; the husband gives his wife a power of attorney effective only upon his disability, then they get separated, but not divorced; when he is diagnosed with "virulent cancer" and hospitalized, he has his secretary deliver a change of beneficiary forms naming his paramour as the beneficiary under his life insurance policies in place of his wife. In the meantime, of course, the wife has exercised her power of attorney given five years earlier and named herself as beneficiary under the policies. The issue is whether the power of attorney to the wife was "Durable" under the Statutory Short Form. If so, the statute, which expressly states that the agent does not have power to change any beneficiary designated by the principal unless the power explicitly so provides. If, alternatively, the power is a "broad form" outside of and not subject to the provisions of the Short Form Act, then the power to change beneficiaries was arguable granted to the wife by the husband in the "catchall" provisions.

The Court’s decision holds that the power of attorney in question was substantially compliant with the statute and therefore constituted a "Short Form entitled to the meaning and effect prescribed in Article III". This, accordingly, meant that the wife could not change the beneficiary of the policies because the husband had not specifically granted that power within the enumerations of the powers, and the change of beneficiary by the wife to herself was invalid under the document.

This case is an interesting read for the facts, but also an example of how important following the form and statutory mandates are in the preparation of powers of attorney.

 

PREMISES LIABILITY; LANDOWNER’S DUTY OF CARE:

Last year, in Bartelli v. O’Brien, (2nd Dist., Sept. 1999), 718 N.E.2d 344, 240 Ill.Dec. 863, a property owner sued an adjacent landowner alleging that the landowner was negligent in failing to prevent a fire which originated from the defendant’s hotel, from causing damage to the plaintiff’s property. The decision held that a landowner has a commonly-law duty to use reasonable means to prevent the spread of fire to adjacent structures and reversed the trial court’s grant to summary judgment, holding that defendant’s failure in these specific circumstances to maintain fire detection and prevention equipment was actionable negligence. There was a dissent on the issue of the common law duty of a landowner to install and maintain smoke detectors and fire extinguishers to reduce fire damage to adjacent property. The case reversed on the summary judgment and remanded the case for trial, so it may be the subject of a future decision.

In Calhoun v. Belt Railway Company of Chicago, (1st Dist., May 31, 2000), http://www.state.il.us/court/2000/1984161.htm, the issue of duty of care owed to others on land is also discussed in a manner that may be instructive to real estate practitioners. Here, a 12 year old boy’s leg was amputated by virtue of injuries suffered when he was playing on railroad tracks and cars. The trial court granted summary judgment in favor of the railroad carriers based on the fact that neither of them owned or controlled the land and tracks over which their cars rode and upon which the child was injured.

Notably, the decision sets for the standard for determining the liability of an owner, occupier or controller of land to children injured on their premises. The Kahn doctrine, (with reference to Kahn v. James Burton Co.,) provides the rule that the measure of liability for those who own, control and maintain property is based upon the reasonable foreseeability of harm; effectively abolishing the "attractive nuisance" doctrine as the benchmark of liability "and further obviating the need for classifying the child’s status as either invitee, licensee, or trespasser.", in harmony with the Second Restatement of Torts. Here, "a reading of Kahn clearly reveals that a duty to exercise reasonable care for the protection of children runs only to one who either owns, occupies, or controls the land upon which the dangerous condition exists. Absent ownership, possession, or control, no duty arises and liability cannot attach." The operating agreements between the railroads in this case did not give the defendants control of the tracks, and they neither occupied nor owned the land; they were simply granted permissive use of the tracks, and this was not sufficient to establish liability as a matter of law.

 

PREMISES LIABILITY; OPEN AND OBVIOUS HAZARDS:

Even Real Estate lawyers have to know a little bit about tort and personal injury law from time to time, and the case of King v. NLSB, (3rd Dist., June 7, 2000), http://www.state.il.us/court/2000/3990027.htm, is a good example with some very clear statements of the law in Illinois relating to a property owner’s duty to warn of the existence of an open and obvious hazard.

Janice King was a customer of New Lenox State Bank (NLSB) and visited the lobby of their banking facility on only a second occasion when she was injured. As she was preparing to leave the building, she turned, thinking that a teller had called out to her, and then walked into the clear glass panel located immediately to the right of the door breaking her nose and bruising her arm. She filed suit and NLSB filed its affirmative defenses alleging that she failed to keep a proper lookout, failed to avoid an object within plain view, and walked through the premises at a greater speed than was reasonable under the circumstances. The Bank moved for and was granted summary judgment based on its allegation that the glass panel was an open and obvious hazard from which the Bank had no duty to protect King . The Appellate Court reversed finding that there was a material issue of fact, and sent the case back to the trial court with instructions that: "On remand, the circuit court should instruct the jury consistent with sections 343 and 343A of the Restatement (of Torts) and direct that its verdict should be consistent with its findings in that regard."

Section 343 of the Restatement (Second) of Torts (1965) is the standard adopted by the Illinois Supreme Court relating to a property owner’s duty to a person lawfully on the premises, (the distinction between invitee and licensee having been abrogated by 740 ILCS 130/2), and provides that the possessor of land has a duty only if he (a) knows or should know of the condition and that it involves an unreasonable risk of harm, (b) should expect that persons on the property will not discover or realize the danger or will fail to protect themselves against it, and (c) fails to exercise reasonable care to protect them against the danger.

Illinois has further adopted Section 343A of the Restatement which sets forth the "open and obvious hazard" exception to the duty of care set forth in Section 343. Under the exception, there are two considerations to the "open and obvious hazard" exception: (1) the person on the property will not discover or will forget what is obvious or fail to protect himself against it, and (2) the owner has reason to expect that the person will proceed despite the open and obvious danger because the perceived advantages outweigh the perceived risks.

Accordingly, "a premises owner is under a duty to warn of existing hazards under certain circumstances, but is relieved of such a duty under other circumstances…Thus the issue is a mixed question of law and fact." in Illinois under the Restatement of Torts (Second). The Court specifically noted at the conclusion of its opinion that "…we caution that our holding is a limited one. Importantly, we are not holding as a matter of law that glass panels can never be open and obvious hazards or that such panels are always in need of warning."

 

RAILROAD RIGHT OF WAY; REVERSIONARY INTERESTS IN ADJOINING LAND OWNERS:

The Plaintiffs in Marlow v. Malone, (4th Dist, August 3, 2000), http://www.state.il.us/court/2000, 734 N.E.2d 195, 248 Ill.Dec. 321brought an action against the defendants as adjacent landowners to quiet title to property which had once been a part of a railroad right of way. From 1967 on, Plaintiff’s owned property west of and adjacent to the Illinois Central Railroad Company right of way. They did not own the underlying property. In 1986, the ICR abandoned the right of way, and by federal statute "when railroad operations cease, the railroad has no power to convey any interest in its former right of way. (43 USC 912) Nonetheless, in 1988, the ICR conveyed the right of way to the Defendant’s predecessor in title. Plaintiff argued that since the United States Code, (43 USC 912), provides that the federal government automatically divests itself of its reversionary interest in land originally granted for railroad usage and then abandoned, and the Plaintiff’s predecessors received title by grant from the government of land surrounding the right of way, this statute operated to vest title to the property in them when initially abandoned by the ICR.

Noting that "It is a fundamental requirement in an action to quiet title…that the plaintiff must recover on the strength of his own title", and "Moreover, where a plaintiff has no title in himself, he cannot maintain an action for quiet title", the Court found that Plaintiffs did not have the quality of title needed to support a claim under Section 912 or a quiet title action. Section 912 requires title to the property underlying the right of way, and the Plaintiff only received title to the land lying adjacent to the right of way inasmuch as the deeds in the chain of title specifically described a parcel "lying West of the Illinois Central right of way". Ownership of adjacent property alone is not sufficient to acquire title to property when abandoned as in this case. While two difference owners each owning property abutting a right of way will own to the centerline of the right of way upon abandonment under state law, (65 ILCS 5/11-91-2), nothing in 43 USC 912 supports this interpretation where the claimant does not own the underlying land itself. Accordingly, the majority decision concludes, Plaintiff’s cause of action fails for lack of a claim of title in the underlying property.

Justice Cook dissented noting that the railroad could not reserve more than a right of way in itself when it conveyed title to the property adjacent to the tracks to third parties under the grant it received from the United States. Accordingly, when the deed to Plaintiff’s predecessor from the railroad described the property as that lying west of the right of way, the railroad failed to convey the underlying property to Plaintiff’s predecessors, but could not claim ownership in itself by failing to make a conveyance regarding the right of way. Therefore the title to the underlying property must have remained in the federal government. "If the title of the United States to an entire quarter-section has been conveyed to an individual, except for a railroad right-of-way traversing that quarter-section, the owner of the quarter-section will own the former right-of-way when the use and occupancy of said lands for such purposes ceased. 43 USC 912", Justice Cook argues. Since no party had a fee interest in the land underlying the right of way and the last party to hold the fee was the United States, the issue for the court to determine is who owns the land through which the right-of-way passes so that the provisions of 43 U.S.C. 912 can be applied to determine who is the property recipient of the benefit of the government’s intent to divest itself of its reversionary interest.

 

REAL ESTATE CONTRACTS: CONTINGENT 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/1999/2990004.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 rescission 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.

 

REAL ESTATE CONTRACTS: MERGER BY DEED:

The Buyer brought suit against the Seller in Neppl v. Murphy, (1st Dist., September 22, 2000), http://www.state.il.us/court/2000/100072.htm for breach of an express warranty contained in a contract for the sale of residential real estate when the heating system failed to perform and was "red tagged" immediately after the closing.

The contract specifically provided that the Seller warranted that "all fixtures, systems and personal property …shall be in operating condition at possession…[and] shall be in operating condition if it performs the function for which it is intended regardless of age, and does not constitute a threat to health or safety". The Defendant/Sellers brought a motion in the Circuit Court of Cook County before Judge Laurie to dismiss pursuant to Section 2-615 and 2-619, and the complaint was dismissed based on a finding that, under the doctrine of merger, the warrantys expressed in the contract were merged into the deed.

During the inspection stage of contract, Buyer’s raised the fact that the furnace had a cracked heat exchanger, and the Sellers replaced it. Their inspector also recommended that a safety inspection be performed by the gas company. People’s Gas inspected the furnace on the day of the transfer of possession as the gas service was transferred to Buyers, and "red tagged" the furnace as a safety hazard because the venting and access were not incompliance with the City of Chicago building code and People’s Gas requirements.

In reversing the trial court, the First District begins by noting that an exception to the doctrine of merger, (i.e., that the deed supersedes all of the contract provisions and any warrantees not restated in the deed are merged or extinguished by the deed), occurs when the contract contains warrantees that are not fulfilled by the deliver of the deed, but relates to "collateral undertaking"; i.e., matters not germane to the conveyance and therefore excepted from the doctrine. Beginning with Rouse v. Brooks, (1978) 66 Ill.App.3d 107, 383 N.E.2d 666, (which first excepted the express quality warranty of a builder/vendor from the doctrine of merger since the delivery of the deed did not constitute performance of that covenant) and including the recent cases of Lanterman v. Edwards and Krajcir v. Egidi, (which were highlighted in previous Keypoints, May, 1998 and July, 1999), the Court that "the threshold issue in any case involving the merger doctrine as a defense is whether the contractual provision at issue is collateral to an independent of the provisions in the subsequent deed; if so there is no merger." The decision takes on the attempts of the defendant to distinguish Lanterman on the facts, dismisses the dissent in Lanterman, and concludes with an unequivocal statement that "the defendants’ express warranty in the contract as to the quality of , among other things, the heating system is a collateral undertaking not fulfilled by the delivery of the deed…Plaintiffs’ complaint is not barred by the merger doctrine and should not have been dismissed."

 

REAL ESTATE CONTRACTS; RESIDENTIAL REAL PROPERTY DISCLOSURE ACT AND BREACH OF CONTRACT:

In King v. Ashbrook, (4th Dist., June 12, 2000), http://www.state.il.us/court/2000/4991013.htm, 732 N.E.2d 730, 247 Ill.Dec. 675, the purchaser of residential real estate (King) sued the seller (Ashbrook) in small claims court more than one year after the closing and surrender of possession of property based on the fact that their contract had a Residential Real Property Disclosure Report attached which disclosed leaking in the basement and roof. The contract provided in handwritten interlineations on the addendum indicating that the report was attached and that these items would be repaired. Within two weeks of taking possession the purchasers experienced problems with the areas to have been repaired. The Seller indicated he had made repairs and would do no more.

The trial court found in favor of the Purchaser stating "If it were not for the notation on the contract, I would say the disclosure report would relieve the defendant from any liability…(but)…Because the notation was made on the contract, and both parties acknowledge its presence, that means they agreed to repair the items and they were not repaired." The trial court awarded the Purchaser $2,684.00 plus costs based upon an estimate for the repair of the basement wall and roof.

The Seller filed a post trial motion arguing that the claim was barred by the one year limitation of actions under the Residential Real Estate Disclosure Act, he was not liable under the Disclosure act, having disclosed and undertaken repairs, and that the damages awarded were based on inadmissible estimates. These same arguments were made on appeal after the denial of the post trial motion.

Turning first to the statute of limitations issue, the Appellate Court’s decision acknowledged that the Residential Real Property Disclosure Act requires an action be commenced no later than one year from the earlier of the date of possession, occupancy or recording, (765 ILCS 77/60), but noted that the trial court’s decision was based on a cause of action for breach of contract, (which has a 10 year statute of limitations under 735 ILCS 5/13-206), rather than the Disclosure Act. Noting that "The Disclosure Act does not limit or change a purchaser’s common-law remedies.", it ruled the action was brought within the appropriate statute of limitation period.

Based on the same reasoning, (i.e., that the case proceeded under a contract theory at common law rather than the statutory remedy of the Disclosure Act), the Court also dismissed the Seller’s argument that the Purchaser’s failed to prove his liability under the Act.

The Court also affirmed the breach of contract decision below, holding the contract sufficiently definite and finding that "common sense dictates the repairs had to be made in a ‘reasonable fashion’" so that they would last more than two weeks after closing.

Finally, applying civil procedure rules, the trial court’s award of damages based on estimates was upheld due to the fact that the Seller failed to raise a hearsay objection at trial and thereby waived the problem relating to the estimates, but reduced the award by $34 noting that the damages awarded must be based on the amount supported by the evidence; (at least mathematically).

(This case is the latest link in a growing chain of post-closing decisions relating to the Residential Real Property Disclosure Act, and certainly illustrates the importance of pleading multiple counts, including common law breach of contract…although the issue of "merger" seems to have been missed here….)

 

REAL ESTATE CONTRACTS; RESIDENTIAL REAL PROPERTY DISCLOSURE ACT AND ATTORNEY'S FEES FOR DEFENDANT:

The development of the law relating to the Residential Real Property Disclosure Act, (765 ILCS 77/20), continued last month. In addition to the cases noted in last year's Keypoints, (Hirsch v. Feuer, (1st Dist. 1998), 234 Ill.Dec. 99, 702 N.E.2d 265, and Woods v. Pence, (3rd dist. 1999), 236 Ill.Dec. 977, 708 N.E.2d 563), we have received a most interesting addition to the law from the Fourth District in March with Miller v. Bizzell, (4th Dist., March 3, 2000), http://www.state.il.us/court/2000/4990614.htm, 726 N.E.2d 175, 244 Ill.Dec. 579.

Miller sued Bizzell for damages they incurred after closing the purchase of Defendant's home when a leak in the roof occurred four months later. Miller alleged Bizzell knew of the leak in the roof and failed to disclose it on the disclosure form. In March, 1999, a bench trial was held following the denial of Defendants' motion for summary judgment which alleged that there were no facts presented in the pleadings to support a finding of the seller's knowledge of the roof leak at the time of the disclosure. At the conclusion of the Plaintiff's case, the trial court entered judgment for Defendants, finding that Plaintiff had not proven the requisite knowledge of the defect required by the Residential Real Property Disclosure Act. In April, Defendants filed a petition for attorney's fees under Section 55 of the Act which provides that the court may award reasonable attorney's fees to the "prevailing party". The trial court granted Defendant's request for attorney's fees under the Act, and Plaintiff appealed.

Justice Cook's opinion reversed and remanded the case to the trial court with directions, but it IS clear that a Defendant has an equal right to an award of attorney's fees as the prevailing party in a case brought under the Residential Real Property Disclosure Act.

765 ILCS 77/55 provides that "the court may award reasonable attorneys fees incurred by the prevailing party." The Court rejected the Plaintiff's argument that the legislature intended only to provide the buyers, and not sellers, with an award of attorneys fees based on statutory interpretation of the language of the section. They also disagreed with the Plaintiff's argument that allowing attorneys fees to defendants would have a chilling effect on buyers asserting their rights under the act because, while the Act changed the long-standing common law rule of caveat emptor, it did not express an intent to treat plaintiffs differently than defendants. Accordingly, "We conclude that either plaintiffs or defendants, in appropriate circumstances, may recover fees under the Act."

Turning to what those "appropriate circumstances" are, the Court noted that "a plaintiff....must show knowing misconduct on the part of defendant. A defendant seeking attorneys fees should be required to establish similar misconduct on the part of the plaintiff.". The award of fees is permissive rather than mandatory, and lies within the discretion of the trial court, which will not be overturned on appeal absent an abuse. The decision reviewed the standard for an award under Supreme Court Rule 137, and stated that "a similar standard should apply in the determination of whether to award attorneys fees under the Disclosure Act.", and then remanded the case to the trial court for a determination on whether fees should be allowed under this standard.

(As John O'Brien of IRELA recently stated in a bulletin about this case to his members: "Have you even noticed how Buyers assume that if anything breaks during the year after the closing that the Seller must have committed fraud? Miller v. Bizzell will give them something to think about!")

 

REAL ESTATE CONTRACTS (LOAN); STATUTE OF LIMITATIONS, WRITTEN VERSUS ORAL AND UNDISCLOSED PRINCIPALS:

The statute of limitations for enforcing an oral contract is five years, (735 ILCS 5/13-205). The statute of limitations for enforcing a written contract is ten years. (735 ILCS 5/13-206). The issue presented in Reid v. Wells, (3rd Dist., 11/19/99), http://www.state.il.us/court/1999/3981035.htm, was whether the time period in which to bring suit on a loan agreement was to be governed by the "written" or "oral" statute of limitations when the party executing the contract was the undisclosed principal for the lender. In response to the suit filed by that undisclosed principal, the borrowers moved for summary judgment arguing that since the plaintiff had not signed the agreement, it was not "in writing" as to him and should be governed by the 5 year rather than 10 year statute of limitation. Citing Munsterman v. Illinois Agricultural Auditing Ass'n, (1982) 106 Ill.App.3d 237, 435 N.E.2nd 923, for the proposition that a contract is in writing as to one only if he can be ascertained as a party from the face of the agreement, the Defendants argued that since the maker of their written agreement was the undisclosed agent for the Plaintiff, the Plaintiff was not ascertainable from the face of the agreement, and therefore it was an "oral" agreement as to the Plaintiff for the purpose of determining the applicable statute of limitations. The case of Jovan v. Starr, (1967) 87 Ill.App.2d 353, 231 N.E.2d 639, however, was more persuasive to the Third District. There the Court held that it was immaterial that the plaintiff was not mentioned in the written agreement because "An undisclosed principal is in a fundamentally different position than a third party to a contract. For example, whereas an undisclosed principal may step into the shoes of his agent and assume all the rights and obligations of a contract that the agent has entered into on the undisclosed principal's behalf, (cite), third parties are not afforded such a right." Accordingly, the contract was "in writing" as to the undisclosed principal who could step into the shoes of his undisclosed agent, and governed by the 10 year statute of limitations. Makes you wonder about all of those "nominee" contracts over the years doesn't it?

REAL ESTATE CONTRACTS (SERVICE) AND UNDISCLOSED OR PARTIALLY DISCLOSED PRINCIPAL; LIABILITY OF THE AGENT:

It is common for limited partnerships to own commercial buildings and hire management companies to conduct the day-to-day business of running the building, including janitorial services. It is also common knowledge that the management agent will be personally liable to the third party service provider unless it has disclosed that there is an owner for whom the agent is conducting the business. An case illustrative of this principle, as well as how important it is to actually disclose the principal’s identity, (and how difficult it can be to prove disclosure), is Kimco Corp. v. Murdoch, Coll, and Lillibridge, Inc., (1st Dist., May 23, 2000), http://www.state.il.us/court/2000/1984579.htm , Kimco was to provide janitorial services on a month to month basis according to its agreement with Murdoch at the Fisher Building in downtown Chicago. When payment became a problem, Kimco met with Murdoch employees, who disclosed they were managing the building for a principal, and Kimco was advised that the building owner was a limited partnership. Murdoch told Kimco that the owner was having financial difficulties, refused to invest any more capital in the building, and was attempting to refinance. As a result, the owner would only pay for services after they were rendered rather than in advance; as was Kimco’s ordinary billing practice. While it was agreed that Murdoch disclosed it was acting for a principal, parties disputed whether Kimco was actually advised of the identity of the partnership; (which might be somewhat confusing since the owner of the Fisher Building was the Fisher Building Limited Partnership). The trial court granted summary judgment in favor of Kimco on the issue of Murdoch’s liability for the janitorial fees incurred after the meeting, holding that Murdoch had not disclosed the identity of principal at the time of the meeting.

In reversing the trial court, Justice Cousins begins with the distinction between a partially disclosed and undisclosed principal; when the principal’s identity is not known, although it is disclosed that the agent is contracting on behalf of a principal, the resulting partial disclosure will not relieve the agent of personal liability. An agent who contracts on behalf of an undisclosed or only partially disclosed principal is personally liable on the contract because the third party is obviously relying on the credit of the agent and not that of the unknown principal. In order to avoid liability, Murdoch would have had to have disclosed that it was acting for the "Fisher Building Limited Partnership" and not merely that it was acting as an agent for "the Fisher Building".

Murdoch, citing cases from North Carolina and Kentucky, urged the Court to adopt as an exception to this rule the circumstance where, while in the course of an executory, divisible contract (remember this is a month-to-month janitorial contract), the existence of an undisclosed principal becomes known and the third party nonetheless continues to perform. "If a third party…discovers the agency…while a continuing, divisible contract…is still executory, he then has the option to deal either with the agent or the principal…[and]…the agent…is not liable if the third party continues…" Noting that this appears to be a question of first impression in Illinois, the decision reverses the trial court on remand stating that "But as no authority from any jurisdiction has been cited rejecting the exception, we recognize it on the strength of the cases from other states." In order to reverse, the Court determines that the month-to-month contract is a "divisible" not "entire" contract, "analogous to a monthly employment contract.", and also appears to have adopted the exception applied divisible contracts.

On remand, the trial court will have to determine who actually told exactly what to whom and how and whether to apply the exception to the rule of partially disclosed agency.

REAL ESTATE TAXES; APPEALS; STANDING AS AN "OWNER" TO APPEAL COUNTY ASSESSMENT:

Kankakee County Board of Review v. PTAB,(3rd Dist., August 21, 2000), http://www.state.il.us/court/2000/3990580.htm, is a case that bears reading by all real estate practitioners regardless of whether you ever intend to hand a tax appeal. This is largely because of the discussion of who is an "owner" of real property that the court presents in its decision. At issue was whether or not Heinz Pet Products had standing to appeal the County’s assessment of taxes as an "owner". The County records showed that Gaines Foods Corporation owned the property and that the county assessor had received a letter from Star-Kist Foods, Inc. stating that all correspondence should be sent to it due to a recent change in ownership. Heinz did not present any evidence of its interest in the property at the administrative hearing, and Board of Review argued that Heinz must show that it owned the property to have standing appeal the decision to the PTAB.

The owner of real estate on January 1st of any given year is liable for the taxes on the property for that year (35 ILCS 200/9-175), and "a taxpayer or owner of property" may file an appeal of the decision of a board of review with the PTAB under the Illinois Administrative Code. Noting that "The term ‘owner’, as applied to land, has no fixed meaning applicable under all circumstances and as to any and every enactment….Title refers only to a legal relationship to the land, while ownership is comparable to control and denotes an interest in the real estate other than that of holding title thereto.", the Court ruled that "Heinz Pet Products, as operator of the facility on the property in question and as the party paying the property taxes, has standing to appeal the Board’s decision.." Heinz Pet Product’s name appeared on the check by which the property taxes were paid, but there is also good language in this decision that may apply elsewhere holding that "the key elements of ownership are control and the right to enjoy the benefits of the property."

REAL ESTATE TAX APPEALS; WEIGHT OF THE EVIDENCE:

In a case that seems to point to the old saying that "Figures don’t lie, but liars DO figure", the Second District was confronted with an appeal brought by Winnebago County Board of Review of a decision by the Property Tax Appeal Board (PTAB) reducing two tax assessments on an uncompleted office building owned by Alpine Bank. The Winnebago County Board of Review v. PTAB and Alpine Bank, (2nd Dist., May 4, 2000), http://www.state.il.us/court/2000/2990526.htm.

The Bank’s building consisted of 102,473 square feet of land improved with a three story building. Each floor was about 15,420 square feet, and the first floor was occupied, but the other two floors were unfinished and would have to be "built-out" before they could be occupied. The County Board of Review assessed the property for $1,184,292 based on a market value of $3,561,780 for 1997, and the Bank filed an appeal of the Board’s valuation with the PTAB as excessive. Both the Bank and the Board submitted a report of an expert appraiser to the PTAB. Each appraiser estimated the property’s market value according to the cost, sales comparison, and income approaches, but came up with widely divergent values. The Board’s expert valued the property at $3,430,000 based on a built-out value of $92 per square foot, (or $4,117,920), but then reduced this figure for a build-out cost of $25 per square foot plus 10% entrepreneurial profit (or $683,788), resulting in an "as is" market value of $3,430,000. The Bank’s expert valued the property at $2,675,000 beginning with a built-out value of $81 per square foot and reducing that by a cost of $40 per square foot for build-out. The PTAB’s decision drew upon both expert’s opinions, mixing and matching the comparable sales properties from each to arrive at a $76.00 per square foot, (or $3,561,7809) market value from which it then deducted $25 per square foot for build-out, resulting in an "as is" value of $2,890,000, leading it to rule that the Board of Review assessment was excessive.

The issue on appeal was whether the PTAB’s decision was against the manifest weight of evidence in order to support a reversal. While a "manifest weight of the evidence" test was accepted by the Appellate Court, they rejected that the Board of Review’s argument that the test should be whether the taxpayer proved by clear and convincing evidence (rather than a mere preponderance) that the assessment was excessive. The decision notes that the Board of Review’s argument attempts to "confuse claims of excessiveness with claims of nonuniformity." A taxpayer objecting to an assessment on the basis on nonuniformity must prove a disparity by clear and convincing evidence to obtain relief. Challenges based on excessiveness of assessment valuation, however, must only be proved by a preponderance of the evidence. Here, the PTAB’s decision was that the assessment was excessive based upon a preponderance of the evidence provided by the two experts, and therefore not against the manifest weight of the evidence and must be affirmed.

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/1999/3980633.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.)

 

REAL ESTATE TAX SALES; PROMULGATING RULES FOR THE AUCTION:

The Plaintiffs in Phoenix Bond and Indemnity Co. v. Pappas, (1st Dist.., January 25, 2000), http://www.state.il.us/court/2000/1982905.htm, were tax buyers at the annual Cook County tax sale who sought an injunction against the Cook County Treasurer. The object of the injunction was to stop enforcement of a rule that properties for which multiple, simultaneous identical bids were made would not be sold, but be forfeited. The rule was promulgated in response to a perceived anti-competitive practice among bidders at the auction where all bidders bid the maximum allowable 18% interest and then no further bids were made. Since the bids were simultaneous, the auctioneer had no method to determine the first or winning bid, and was forced to award the property at random. 95% of the properties were sold in this fashion, and then the auctioneer announced a rule that "If multiple simultaneous bids are received at the same percentage, bidders will be given an opportunity to bid at a lower percentage and if no bid of a lower percentage is received, the property will be forfeited." As a result fewer than 1% of the properties were sold for 18% penalty over the next five days under the rule. On the sixth day, the Plaintiffs obtained a temporary restraining order from the Circuit Court preventing enforcement of the rule, and the tax buyers immediately resumed making multiple, simultaneous identical bids of 18%.

An appeal of the summary judgment rendered in favor of the tax buyers resulted in the First District's decision reversing the trial court's rulings in favor of the tax buyers. In a decision that can apply to many different types of auctions, (not just tax sales), Justice Cousins reasons that when an auctioneer is authorized to hold an auction, it is impliedly granted authority to make rules for the orderly, efficient, and fair conduct of the sale, provided such rules are not specified by statute. It simply is not practical, or convenient, or even possible to specify all of the rules of an auction in the enabling statute, and "the power to conduct an auction necessarily carries with it the power to set reasonable ground rules..." provided that rules are not contrary to those specified in the statute, arbitrary or capricious. These implied powers involve many aspects of the sale which are discoverable only through the auctioneer's practical experience.

The Court rejected the tax buyers' argument based on "expressio unius est exclusio alterius", (the expression of one thing implies the exclusion of another), urging that the taxes could not be forfeited because the legislature directed that property be forfeited when there are no bidders, so there could be no forfeiture when there were multiple, simultaneous bidders. Instead, the Court reasoned, "If we were to adopt the interpretation urged by the plaintiffs, it would defeat the entire purpose of having a tax auction. If there is no competitive bidding and the auctioneer is handing out properties at a fixed rate, there is no reason to have the auction...", and noted that the end result of the tax buyers' tactic would be to thwart redemption by leading to a higher cost of redemption due to an absence of competitive bidding on the penalty rate. Finally, "the fact that a property is "forfeited to the State" does not mean that the delinquent taxes will not be recovered. "Forfeited" simply means that the county will attempt a different means of collection."

REAL ESTATE TAXES; SPECIAL ASSESSMENTS; OBJECTION TO COMPUTATION:

Special Assessments, (taxes collected for improvements which benefit specific parcels of real estate), are somewhat confusing, both in their inception and collection. In re County of Kankakee Special Assessment for Improving Riverside Country Estates, (3rd Dist., August 31, 2000), http://www.state.il.il.us/court/2000/2990710.htm is a case which offers some insight into the creation and calculation of the sums due for the improvements to be paid for by a special assessment. The case also presents some interesting arguments and ruling on statutory interpretation.

Property owners from four Kankakee County subdivisions petitioned the Kankakee County Committee for Local Improvements for the extension of water service when their wells became contaminated and redrilling failed. The petition came under the Local Improvements Act, (55 ILCS 5/5-32001, et seq.), which requires that the work is financed through a special assessment, and provides the method for the calculation of the total amount due. When this project was complete, the County filed its certificate of final costs, which included charges for time expended by county employees in preparing the special assessment. One of the property owners, Thomas McClure, filed and objection, arguing that the County was not entitled to be reimbursed for the costs of the use of salaried county employees. Section 32059 of the Land Improvements Act provides that 6% of the total cost and expenses for the improvement can include the salaries of the members of the Committee, but does not make any mention of salaries of regular county employees who work on the project. The Court agreed with the trial court and Mr. McClure and rejected the County’s argument that it should be allowed to include the employee salaries. Turning first to rules of legislative interpretation, the decision then incorporates supporting argument based on the fact that it would be impractical to attempt to identify the percentage of the employee’s time spend on this particular project, and notes that in the end the water main extension will increase the property values in the subdivisions, and this will result in increased tax revenues that will benefit the public as a whole. Accordingly, the County need not be directly compensated by the special assessment. While the County asked the Court to reverse the trial court on public policy grounds that counties will be less inclined to approve special assessments in the future, (or outsource the work to private contractors), if they cannot recoup the costs, the Court rejected this justification, noting that while the consideration may be true, "it is not the role of the judiciary to rewrite the legislative enactments."

 

SPECIFIC PERFORMANCE AND THE STATUE OF FRAUDS:

In Crawley v. Hathaway, (4th Dist., December 16, 1999), http://www.state.il.us/court/1999/4990278.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.

 

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/1999/2991656.htm, 724 N.E.2d 1, 243 Ill.Dec. 692, 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.

TAX DEEDS AND PRIORITY; 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/1999/1980518.htm, appears to set forth something different based on the language contained in the Illinois Municipal Code relating to the Chicago Abandoned 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....)

 

TENANCY BY THE ENTIRETY AND FRAUDULENT CONVEYANCES; THE ILLINOIS SUPREME COURT SPEAKS:

Another substantive area we have visited repeatedly over the last two years is the interplay between tenancy by the entirety and fraudulent conveyances. Beginning with E.J. McKernan Co. v. Gregory, (2nd Dist., 1994), 268 Ill.App.3d 383, through In re Marriage of Del Giudice, (1st Dist. 1997), 287 Ill. App.3d 315, Harris Bank St. Charles v. Weber, (2nd Dist., 1998) 298 Ill.App.3d 1072, In re Stacy, (N.D. Il., 1998) 223 B.R. 132, and the legislative amendments to 735 ILCS 5/12-112, a number of commentators, (including the editor of this Flashpoint, who argued Del Guidice at trial and on appeal), have argued that the application of the criteria found in the Uniform Fraudulent Transfer Act, (740 ILCS 160/1), was improper where the legislature specifically stated that only transfers "with the sole intent to avoid the payment of debts existing at the time of the transfer" should be excepted from protection from sale by creditors of only one spouse in title. Others have noted that the rich common law precedent on the Uniform Fraudulent Transfer Act decisions can not be ignored. The Illinois Supreme Court has now ruled on this issue in Premier Property Management, Inc. v. Chavez, (Il.S.Ct., 2.17/00), http://www.state.il.us/court/2000/86045.htm, 728 N.E.2d 476, 245 Ill.Dec. 394. Justice Bilandic begins by noting that the decisions in McKernan and Del Giudice are in conflict, and then finds that they are both incorrect; Del Giudice because it applied the "actual intent" standard of the Fraudulent Transfer Act, and McKernan because it stated that intent is never relevant. The Court's reasoning is that the sole intent standard of the amended tenancy by the entirety provision is substantially different from the actual intent standard of the Fraudulent Transfer Act, and the legislature by adopting the sole intent standard "has made it clear that it intends to provide spouses holding homestead property in tenancy by the entirety with greater protection from the creditors of one spouse than that provided by the Fraudulent Transfer Act. Accordingly, "Under the sole intent standard, if property is transferred to place it beyond the reach of the creditors of one spouse and to accomplish some other legitimate purpose, the transfer is not avoidable." This case also includes a discussion of the "Single Subject Rule" inasmuch as the amendment to the tenancy by the entirety provision was contained in an act which also amended the property tax code. Holding that both mattes have a "natural and logical connection to the subject of property", and rejecting the dissent's assertion that there is a "second requirement" to the Single Subject Rule that both provisions bear a logical relationship with one another as well as a natural and logical connection to a single subject, the decision held that the amended was not an unconstitutional violation of the single subject rule.

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/1999/2990183.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; 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), http://www.state.il.us/court/appellates/1999/1982039.htm, 715 N.E.2d 778, 240 Ill.Dec. 91, 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.

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/1999/2981196.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."

 

ZONING ORDINANCES & BOUNDARY LINE MEASUREMENTS:

In People of the State of Illinois v. Studio 20, (2nd Dist., July 20, 2000), http://www/state.il.us/courts/2000/2990596.htm , the Second District was called upon to review the ruling of the Boone County Circuit Court interpreting Section 5-1097.5 of the Counties Code which provides that an "adult entertainment facility" may not be located within 1,000 feet of the property boundaries of any school, day care center, cemetery, (cemetery??), public park, forest preserve, public housing and place of religious worship. (55 ILCS 5/5-1097.5) In the trial court, the issue was whether the adult entertainment "facility" was within 1,000 feet of a church boundary when measured from property line to property line or if the distance should be measured from the boundary line of the church parcel to the edge of the building ("facility") which housed the adult entertainment activities and was set back from the parcel lot line. The building was located on a five acre parcel. The distance from property line to property line was 955.13 feet, whereas the distance from the boundary line of the leased portion of the property on which the adult entertainment facility was located to the boundary line of the church parcel was 1130 feet and therefore non-violative if so measured.

The majority opinion interpreted the statute as requiring the measurement be taken from property line to property line based upon its determination of the legislative intent: "The evil sought to be remedied here is the purveyance of adult entertainment close by places children or families frequent…By measuring the distance from the property lines of both the protected entity and the adult entertainment facility, this protection can be maximized." The Court also noted that the alternative interpretation of measuring from the boundary line to the facility raises more questions than it answers and provides plenty of opportunity for manipulation. (Can you visualize the neon signs set back three acres into the woods??) The Court justified its decision with "Our interpretation, on the other hand, promotes both stability and certainty."

Justice Hutchinson disagreed and dissented based upon the clear meaning of the language used by the legislature. Noting that the statute did not use words which indicated the "concept of property boundaries" at all, but referred to the "facility", the dissent argues that the "language here is clear and unambiguous, and it does not say that the distance between the protected entities and an adult entertainment facility is to be measured property line to property line."

 

ZONING ORDINANCES; DEFINITIONS AND ADULT USES:

In case which deals with zoning law and definitions, Dottie's Dress Shop, Inc. v. The Village of Lyons, (1st Dist. March 10, 2000), http://www.state.il.us/court/2000/1983118.htm, 729 N.E.2d 1, 246 Ill.Dec. 1, however, there was less "real estate" at issue, but nonetheless an entertaining and an instructive example of how litigants try to "fashion" definitions in zoning cases to suit their own needs. The trial court, (Cook County's own Hon. Ellis Reid presiding), reversed the findings and orders of the Zoning Board of Appeals of the Village of Lyons that denied a use and occupancy permit to Dottie's Dress Shop, Inc. The application for a business license and occupancy permit represented that Dottie's business was to be the sale of "retail clothing, apparel and accessories". When the Zoning Administrator visited the site, however, he found a lot less "dresses" and a lot more "accessories" than he had anticipated. Dottie's had a sign erected (without a permit) advertising it was actually selling "Seka's Exotica Life Style Clothing and Accessories". (Justice Greiman felt compelled to explain that "Seka is apparently a well-known porno film star of the 1970s and 1980s" -- like we didn't know that!) The Zoning Administrator testified before Judge Reid in great detail as to the contents of Dottie's, providing an inventory count, computing the volume of each category of merchandise based on the square footage of each area in the store, and gave Dottie's credit for the 20 or so pieces of lingerie actually hanging on a rack at the rear of the store.

The Appellate Court rejected the argument, (that must have worked at the trial level, and been pretty darn entertaining at that, too), that a B-1 occupancy permit should have been granted to Dottie's because some other businesses in Lyon's B-1 districts sell some of the same items Dottie's sells and are granted a permit; i.e. Walgreen's sells condoms, department stores sell "candles", toy stores sell "toys", and gift shops sell "adult party favors" --- all of which one might expect to find at Dottie's. Justice Greiman's opinion held that "Twenty pieces of lingerie, however, do not a dress shop make!", and "Dottie's is in engaged in the business of selling sexual paraphernalia, and although Walgreen's may sell condoms it is hardly in the business of selling sexual paraphernalia. A similar view is true with respect to Toys-R-Us, which sells toys, or Marshall Field's which sells creams and lotions, or for that matter, Jiffy Lube, which sells lubricants."....(which goes to show what Justice Greiman knows about "lubricants"....)

ZONING; NON-COMFORMING USE, ABANDONMENT AND EXPANSION:

An 11 acre parcel of land located in the Village of Plainfield was the subject of a Village complaint against the owner to cease the use of its property for cedar fence manufacturing in Village of Plainfield v. American Cedar Designs, Inc., (3rd Dist., September 12, 2000), http://www.state.il.us/court/20000/3990305.htm American purchased the property after it had been used for eleven years as a pallet-making site. There was a period of just over one year prior to the purchase when the prior owner had ceased making pallets on the property. The property was in an area zoned for residential use, but the pallet manufacturing was a prior non-conforming use. After American had been manufacturing fences for six years, the DuPage River flooded and carried off bundles of its fencing, which floated as far as five miles down river. Thereafter, the Village filed its complaint against American for violation of the Village’s flood control ordinance, asserted that the nonconforming use had been expanded in violation of the zoning ordinance, and alleging that the use constituted a nuisance. The trial court determined that the non-conforming use had been "grandfathered" and was unable to determine if there was an actual expansion of the use.

The Third District decision affirms in part and reverses in part, offering a bit of good language on non-conforming use, abandonment and expansion. Holding that a legal non-conforming use is a nonpermitted use under a current zoning ordinance which predates the ordinance and is thus legal nonetheless, the Court affirms that an ordinance is invalid if it unreasonably or arbitrarily deprives an owner of his property right to a non-conforming use. The Village’s flood control ordinance did not prohibit the continuation of a prior nonconforming use, and therefore did not assist the Village in its efforts against American. Although there was a discontinuance of the prior owner’s use for a period of just over a year, this did not constitute an "abandonment" of the non-conforming use. An abandonment must be the result of a voluntary intention to abandon the use, and not a mere cessation of the use, in order to prohibit reestablishment. There must be evidence of voluntary conduct which indicates the owner intended to abandon the nonconforming use. There was no evidence that the prior owner intended to abandon the use; only that he stopped manufacturing pallets in anticipation of selling the property. American lost on the issue of expansion, however, based on aerial photographs over a five year period showing a progressive enlargement of storage of materials well beyond the boundaries of the prior use, and the Court ruled that the trial court’s ruling otherwise was contrary to the manifest weight of the evidence.

 

ZONING ORDINANCES AND APPLICATION FOR REZONING:

In a case affirming the trial court's denial of a developer's challenge of the validity of a Lake County zoning ordinance, the Second District provides a check-list and point-by-point analysis of what it takes to be successful in these actions in Northern Trust Bank/Lake Forest, N.A., as Trustee v. The County of Lake, (2nd Dist., January 28, 2000), http://www.state.il.us/court/2000/2990638.htm, 726 N.E.2d 1269, 243 Ill.Dec. 668,. The builder wanted to have its 266 acres located in unincorporated Fremont Township adjacent to Mundelein, Illinois, rezoned from "countryside" to "suburban" to permit development. Upon denial, the developer filed suite challenging the validity of the zoning, seeking to set aside the ordinance, and contending that the refusal to rezone was arbitrary, capricious and unreasonable. Justice Inglis' decision affirms the trial court in a step-by-step analysis that is almost formula-like in its completeness. Noting that a party attacking a zoning ordinance must first prove the existing zoning ordinance is invalid, and then prove the proposed use is reasonable, the burden on the challenger is clearly a great one. Turning to the presumptions that "a zoning ordinance, as a legislative judgment, is presumptively valid" and the courts will not interfere with that legislative judgment unless the challenger provides by clear and convincing evidence that the ordinance is unreasonable, arbitrary, and bears no substantial relationship to the public health, safety, morals or welfare, one can almost visualize Justice Inglis closing and bolting the door, lock by lock. The eight factors courts consider in determining whether the ordinance is valid are listed and factually correlated to the case at bar: (1) the existing uses and zoning of nearby property (2) the extent to which property values are diminished by the ordinance, (3) the extent to which the impact ordinance destroys the value of property relative to the value of promoting health, safety, morals or welfare, (4) the relative gain to the public compared to the hardship imposed n the owner, (5) the suitability of the property for the rezoned purpose, (6) the length of time the property has been vacant as zoned, (7) the community's need for the proposed use, and (8) the care with which the community has planned its land use development.

Holding that it can not reverse the trial court's findings of fact on these eight criteria unless they are against the manifest weight of evidence, the decision set forth some clear, black-letter zoning law: (a) density is a legitimate concern in a zoning case and an adequate basis for classification; (b) the adoption of a comprehensive plan increases the likelihood that the zoning is not arbitrary or unrelated to the public interest; (c) the 'highest and best use' of property is that which effectively utilizes a parcel of land and at the same time is in harmony with the growth goals and planning policies of the community. All of which fairly well predict the outcome where the plaintiffs acquired the property with full knowledge of the current zoning classification.

ZONING VARIANCE - EVIDENCE OF UNIQUE CIRCUMSTANCE AND HARDSHIP:

In a decision that interprets the application of the decision of the Zoning Board of Appeals of the City of Highland Park, the Second District gives us a little insight of the lengths to which some neighbors will go in opposing a variance request, as well as the weight the Court will give to those efforts. Weinstein v. Zoning Board of Appeals of the City of Highland Park, (2nd Dist., April 6, 2000), http://www.state.il.us/court/2000/2990631.htm. Here, the City granted the request of the Litkes for a variance to allow them to construct an addition to their home. The variance allowed the Litkes to exceed the maximum floor area ratio and encroach into the front, back and side yard setbacks to build an addition, garage, and covered porch. The existing dwelling already encroached 6 feet 3 inches into the side yard setback. At the hearing, the Litke's architect presented a design for the addition. There was testimony that due to the steep slope of the lot, it would be extremely expensive to put the addition on the rear of the home and the end result as proposed was a reasonable use in conformity with other residences in the area. There was also testimony that the current improvements were obsolete and difficult to sell in the market place, and the owner needed more space for his growing family. Barry Weinstein, an architect and opponent of the request, (I presume he was also a neighbor), presented an alternative plan that would not require a variance if adopted by the Litkes. The Board granted the variance finding that it was nothing more than an extension of the existing legal non-conforming use that harmonized well with the area. Weinstein filed a complaint for administrative review and then appealed the trial court's affirmation of the Board's decision.

The Appellate Court affirmed. Setting forth the findings of fact and ruling that the Litkes provided evidence that the unique circumstances and unusual hardship would be alleviated by the variance, the Court also rejected the Weinstein's assertion that because they presented an alternative plan which would avoid the need for a variance there was no particular hardship. There is no basis in the law to "...suggest that, because they (Weinstein) presented a plan that complied with the zoning ordinances, the Board was obligated to accept that plan....A reviewing court may not reweigh the evidence but will only determine whether the Board's decision was against the manifest weight of the evidence."

 

ZONING VARIANCE - PARKING - LICENSE vs LEASE:

In North Avenue Properties, L.L.C. v. Zoning Board of Appeals of Chicago, (1st Dist., February 10, 2000), http://www.state.il/court/2000/1984589.htm, 726 N.E.2d 65, 244 Ill.Dec. 469, the developer/owner was granted a zoning variance in order to use an accessory parking lot to meet the minimum required parking spaces for a retail sales site in a Planned Manufacturing District on Chicago's near north side. The ordinance required the property have 61 parking spaces. The owner entered into a "Parking Agreement" with Mid-City Parking Inc., the owner of a public parking lot on the same block, whereby 34 parking spaces would be "made available" to tenants, employees, invitees and customers "on identical terms and conditions, and pursuant to identical rules and regulations, as other Parking Spaces are generally made available to the public." While the Zoning Administrator denied the application, the Zoning Board of Appeals granted the variance, and Plaintiff filed this appeal.

The issue, of course, was whether the "Parking Agreement" was a lease or a mere license insufficient to comply with the ordinance. A lease, by definition, is an agreement which transfers exclusive possession of the property to the lessee. A license, however, merely entitles a party to use of the premises for a specific purpose and subject to the management and control retained by the owner. Accordingly, the "Parking Agreement" is a license rather than a lease. Section 17-5.8-5 of the Chicago Municipal Code requires that "In cases where parking facilities are permitted on land other than the zoning lot...such facilities shall be in the same possession as the zoning lot occupied by the building..." Since the 34 parking spaces provided by the "Parking Agreement" were in the nature of a license, those spaces were not vested in the petitioner in a manner which met the requirements of the ordinance, either by deed or lease which created rights "in the same possession". A license does not vest possession of the spaces as required by the ordinance.