THE JOSEPH T. KELLEHER, JR. MEMORIAL
CASE LAW UPDATE
ISBA LAW ED SERIES - REAL ESTATE LAW SECTION COUNCIL
November 2, 2001 – Chicago, Il
The Palmer House – 17 East Monroe St
17 East Monroe Street
November 9, 2001 – Bloomington, Il.
The Radisson Hotel – 10 Brickyard Dr.
10 Brickyard Drive
Steven B. Bashaw, P.C.
Oak Brook, Illinois 60525
Tel. (630) 974-0104
Fax (630) 974-0107
ANNEXATION: QUO WARRANTO, STANDING, AND CONTIGUITY AS A JURISDICTIONAL ELEMENT:
An action under quo warranto is a statutory process (735 ILCS 5/88-101) that is the only appropriate vehicle for challenging a completed annexation of land, and was filed by two groups of Plaintiffs against the Village of Lake Bluff in People ex rel Graf v. The Village of Lake Bluff, (2nd Dist. May 7, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/2ndDistrict/May/Html/2991235.htm. A complaint in quo warranto, if leave to file is granted, requires a defendant explain by what authority it acts, and seeks to have the court determine whether the exercise of authority by the challenged body was beyond its powers or jurisdiction. This case presents some of the common issues raised in these cases, and good background for those who have not ventured into these waters before.
The first group of plaintiffs was residents of the Village of Lake Bluff who alleged they had standing as taxpayers adversely affected by the annexation because of the increased cost in providing governmental services to the area being annexed. This was held to be speculative and insufficient to meet the requirement that only where one can show a direct, substantial, and adverse impact does one have standing to challenge the annexation. Mere status as a resident is an insufficient basis to raise a challenge. The residents had no standing, and the trial court correctly denied their application for leave to file a complaint in quo warranto. The other Plaintiff was a resident of the parcel annexed, who alleged that he was adversely impacted due to the fact that he was required to purchase vehicle stickers from the Village, was assessed with Village property taxes, and was required to pay for garbage removal regardless of whether he used it or not. This was a sufficient direct, substantial and adverse impact to confer standing upon him, and the Court then turned to his contention that the annexation was void because the property annexed was not “contiguous” to the Village as required by the Municipal Code (65 ILCS 5/7—1—4). Holding the requirement that the land annexed by the Village be contiguous to the annexing municipality is a jurisdictional prerequisite rather than a mere issue of fact, the Court trial court’s denial of leave to file the complaint for quo warranto as to this plaintiff was reversed and remanded. The decision also notes that the limitation period of one year set forth in 65 ILCS 5/7—1—46 is specifically excepted where the annexed land is not contiguous at the time of annexation and when the complaint is brought, and that an absence of contiguity is jurisdictional which can not be waived by a failure to object during the annexation proceeding. Finally, Judge Grometer’s opinion ends with a reflection that may be telling of his recent elevation from the trial courts in Kane County to the Second District: “However, in determining whether to grant leave to file a quo warranto action, the trial courts possess broad discretion…which may consider all surrounding circumstances and conditions, the motives of the petitioner in having the proceeding instituted, and whether the public interest will be served by permitting the action.” (Citations omitted).
ANNEXATION; CONTIGUITY AND “PREDATORY ANNEXATION”:
A reading of People ex rel Graf v. The Village of Lake Bluff might lead one to believe that all municipalities can only annex properties that are contiguous to their boundaries. This is the law, however, only in Cook County, the “collar counties” surrounding Cook County, and the St. Louis metro-east area. Elsewhere, contiguity is not required, as is pointed out in The City of Springfield v. Judith Jones Dietsch Trust, (4th Dist., April 13, 2001),http://www.state.il.us/court/Opinions/AppellateCourt/2001/4thDistrict/April/Html/4000524.htm. This case focused on a conflict between the City of Springfield and the Village of Chatham relating to jurisdiction over a 36-acre parcel of land owned by the Judith Jones Dietsch Trust.
In 1988, Springfield adopted a comprehensive land development plan pursuant to the Illinois Municipal Code, (65 ILCS 5/11-12-5), and asserted jurisdiction over unincorporated contiguous property within 1.5 miles of its boundaries. In 1998, the Trust decided to develop the property for sale of single family lots, and, rather than submitting its plans for subdivision to the City of Springfield, it entered into an annexation agreement with the Village of Chatham. Springfield filed a complaint seeking declaratory judgment that the development was within its jurisdiction by virtue of the 1998 comprehensive plan. Chatham argued that its annexation agreement with the landowner superseded the Springfield’s plan. Springfield countered with the argument that since the parcel was contiguous to Springfield and more the 1.5 miles from Chatham, (i.e., not contiguous to Chatham), the annexation agreement was illegal; (citing Village of Lisle v. Action Outdoor Advertising Co., (2nd Dist., 1989) 188 Ill.App.3d 751, 544 N.E.2d 836.).
The Fourth District affirmed summary judgment in favor of Chatham. Noting that the Municipal Code, (65 ILCS 5/11-15.1-2.1), grants jurisdiction to a municipality over territory to be annexed without regard to contiguity except in Cook County, its collar counties and the metro-east area, the Court’s decision perceives that “Essentially, Springfield asks us to treat Chatham as if it were part of Cook county…. and require that annexation agreements may only be entered with property owners of land contiguous to Chatham.” The legislature specifically limited its prohibition of annexation of non-contiguous land to the areas it perceived municipalities engaged in “predatory annexation”, but this prohibition does not apply to the Village of Chatham. “Based on our review of the Municipal Code, nothing precluded the execution of the annexation agreement at issue here…. The legislature has provided for annexation agreements, and we are unable to discern any intent on the party of the legislature to prohibit such agreements where the property is within 1.5 miles of another municipality, with the exception of those counties specifically listed.”
CONDOMINIUM ASSOCIATIONS; LATE CHARGES ON PAST DUE ASSESSMENTS:
The Third District was confronted with an appeal from a condominium homeowner alleging that the late charges her association levied upon her for failure to pay her January assessment until October were unreasonable and constituted an unenforceable penalty. The Appellate Court agreed and reversed the trial court’s award of $1,696.12 to the association in Hidden Grove Condominium Association v. Katherine Crooks, (3d Dist. Jan. 26, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/3rdDistrict/January/Html/3000329.htm. Noting that it is the duty of every unit owner in a condominium to pay a proportionate share of the common expenses by statute (765 ILCS 605/9(a)), and that the statute further provides that a late charge may be imposed by a board of managers (765 ILCS 605/18.4), the court noted that the charge must be reasonably related to “The necessary expenses and administrative costs of pursuing the late assessment fee as well as lost interest income.” Otherwise, “if the purpose [of the charge] is merely to secure performance of the agreement, it will not be upheld.” Noting that the typical late charge is 5 - 10%, and that “to demand an interest rate in gross excess of this amount is unnecessary and does not reasonably relate to any recoverable expense,” the court determined that a $25 late charge on a monthly assessment of $88.23 would be reasonable. Here, however, the association had engaged in “piling on of an additional $25 per month for each month the assessment fee goes unpaid.” The resulting “255% return on an initial $88.23” as the association continued to tack on an additional $25 each month from the January due date until the payment in October. “An agreement setting damages in advance of a breach is an unenforceable penalty unless: (1) the amount so fixed is a reasonable forecast of just compensation of the harm that is caused by the breach; and (2) the harm caused is difficult of impossible to estimate.” The case was remanded to the trial court to determine the amount of the late charges and with direction that the judgment entered should be reduced accordingly.
CONDOMINIUMS/HOME OWNERS ASSOCIATIONS; THE COST OF LITIGATION:
John Bishof was an attorney, and he and his wife and owned a lot in the Forest Glen subdivision in Oak Brook, Illinois. Prior to 1996, the annual assessment charged by the homeowners association was $127.50. This figure was based on a calculation of multiplying the minimum lot size of 15,000 square feet by $0.085. (The Association did not have accurate lot sizes prior to 1996, so they used the minimum allowable lot size under the local zoning ordinance, and the $0.085 was the maximum annual rate of assessment as defined in the Declaration.) In 1996, however, the Association Board advised each owner that while the prior Boards had used the smallest lot size allowable under the zoning ordinances as their multiplier, this Board was going to use the actual lot size in order to increase the assessment to fund the cost of landscaping. Bishof objected and refused to pay the increase. The Association sued to foreclose for nonpayment, recover late fees, costs, and attorneys fees. Bishop argued on appeal that there was an ambiguity in the Declaration in that there were provisions which stated that the Board of Directors was to determine the regular assessment by a 2/3 vote of its members, while a separate contradictory provision stated that: “In the event the Membership shall consider…the levying of regular assessments larger than the previous year’s regular assessment, …such matter or matters shall be adopted at a Membership meeting at which a quorum is present upon the affirmative vote of two-thirds (2/3) of the entire Membership, except as provided by (the declaration provision providing for Board determination).”. This apparent contradiction, he argued made the increase invalid. The trial court adopted the Association’s interpretation that the declaration provision for a membership vote was simply an alternative method of arriving at the assessment, and not an ambiguity or contradiction. The Second District agreed. Not seeing an ambiguity, the Court simply looked to the ordinary meaning of the words employed and stated “we will not arrive at a construction that runs contrary to the plain and ordinary meaning of the language used.” The Declaration was not ambiguous, but simply provided that if the Board increased assessment by a vote of 2/3 of its members, then the increase need not be adopted by a vote of the entire membership.
More instructively, the trial court’s award of $6,107.00 in attorney’s fees for the Association was affirmed based on the clear language of the declaration and with the admonishment that:
“Since Defendant John S. Bishof, Jr., is a lawyer and represented himself and his wife, they many not have incurred legal fees in litigating this $60 dispute over the assessment of a one-half acre lot in Oak Brook. But they knowingly took the risk that their arguments, which, incidentally we have found to be without merit, would fail and this $60 dispute would result in liability for several thousand dollars of legal fees.” Forest Glen Community Homeowners Association v. Bishof, (2nd Dist, April 17, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/2ndDistrict/April/Html/2991346.htm
CONDOMINIUMS: SCRIVENER’S ERRORS AND AMENDMENT OF DECLARATION:
The decision in Schaffner v. 514 West Grant Place Condominium Association, (1t Dist. August 29, 2001) http://state.il.us/court/opinions/AppellateCourt/2001/1stDistrict/August/Html/1010441.htm begins with Justice Wolfson’s statement that: “Three into two don’t go – not when the three are the only unit owners in a condominium apartment building and the two are outside parking spaces that are part of the development but are not mentioned in the Declaration of Condominium Ownership.”
The controversy arose when Alan Schaffner purchased Unit 103 in a three-unit condominium building. The building had five parking spaces; three indoor spaces and two outdoor. Each unit had an indoor space assigned, but neither the Plat of Condominium nor the Declaration depicted or mentioned the two outdoor spaces. The owners of units 101 and 102 alleged that the Developer and the original purchasers of their units agreed that the outdoor parking spaces would be limited common elements for the exclusive use of their units. (The Developer was the original owner of Unit 103.) When the Plaintiff purchased Unit 103 a number of years later, according to Defendants, he knew of the “drafting error” in the Declaration and had been advised that the parking spaces had been claimed and used by the other two owners. Schaffner repeatedly parked in the outdoor spaces and threatened to continue to do so. The owners of the other two units, who were members of the Board of Directors of the Condominium Association, served notice and convened a special meeting to “correct” the Declaration. They proposed and passed an amendment providing that the outdoor spaces were limited common elements of their units by a vote of two to one, along natural lines of self-interest. Schaffner filed a complaint to declare the amendment invalid. The Declaration, he argued, required an affirmative vote of 100% of the unit owners for amendment. The Defendants, however, contended that they only needed a two-thirds vote based on the statutory provision of the Condominium Law, (765 ILCS 605/27(b)(2), for correcting “scrivener’s errors” in condominium declarations. The Defendants also counter-complained for reformation of the Declaration.
The Appellate Court affirmed the trial court ruling that the amendment was void. First, analyzing the meaning of “scrivener’s error”, and intent of the legislature in using this “archaic phrase that somehow has survived time and legislative amendment”, the decision holds that the omission of the outdoor spaces from the declaration was not a typographical error, clerical error, minor mistake in transcription, or technical mistake. The result of the amendment was not a mere correction of an error, but a substantive change in the nature of the common elements. The effect was to diminish the common elements by granting specific unit owners exclusive use of part of the condominium property, and this thereby reduced the value of Schaffner’s ownership interest in the common elements. In order to do this, a unanimous vote of all unit owners was required by the specific provision of the Declaration. The statutory provision of the Condominium Law allowing correction of scrivener’s omissions or errors applies only to typographical or similar types of mistakes, correction of provisions which conflict with current case and statutory law, or internal inconsistency within the Declaration by vote of two-thirds of the members of the Board or Managers or a majority vote of the unit owners. (The decision also reversed the trial court’s dismissal of the Defendant’s action for reformation and rejected Schaffner’s argument that the parole evidence rule served as a bar to the introduction of evidence on mutual mistake of fact.)
CONSTRUCTION CONTRACTS; STATUTE OF LIMITATIONS:
There are two different statute of limitation provisions in the Code of Civil Procedure that can possibly relate to the filing of an action based upon a construction contract. 735 ILCS 5/13-206 provides for a ten-year statute of limitation for written contracts generally. 735 ILCS 5/13-214, on the other hand, provides for a four-year statue of limitation for actions relating to contracts for the design, planning, supervisions, observation or management of construction projects. Blinderman Construction Co., Inc. v. Metropolitan Water Reclamation District, (1st Dist., September 4, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/September/Html/1001940.htm affirmed the trial court’s ruling that the four-year statute applied to a contract to construct a laboratory building. Blinderman’s base contract provided for payment of $8,534,748 upon its base contract, but its verified complaint sought to recover an additional sum of $3,268,774.79 for “extra work”. The District moved to dismiss the complaint pursuant to Section 2-619, arguing that the action was time barred under the Section 13-214 provision that actions based upon the performance of construction activities must be brought within four years. Binderman contended, however, that the applicable statute of limitation was the ten-year period found in the Code of Civil Procedure for written contracts generally under Section 13-206. Binderman’s theories were that the court should look to the “nature of the injury”, (i.e., failure to pay under the contract), in determining the statute to apply, that the District was estopped from raising the statute of limitations because of protracted settlement negotiations between the parties, and that the District violated the Local Government Prompt Payment Act, (50 ILCS 505/1), requiring payment within thirty days of approval. The District argued the statute of limitations in reply to all theories. Noting that Section 13-214(a) provides that “Actions based upon tort, contract, or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within four years from the time the person…knew or should reasonably have known of such an act or omission.”, the Court held this to be the applicable limitation statute. The basis for the claim of Binderman against the District was the “extra work” resulting from the rejection of materials, services and subcontractor’s work by the District’s engineers. Accordingly, the District was “engaged in the construction activities enumerated under Section 13-214(a)…” According, faced with “the choice between the statutes prescribing the different periods of limitations [the court] looks to the nature of the defendant’s activities rather than to the form of the action”, and the conduct rather than the contract controlled the applicable limitation period. Because of the ruling on this issue, it the Court did not address the industrious arguments relating to estoppel and the Local Government Prompt Payment Act.
Just as the ink was drying on this decision, the Fifth District considered a similar distinction when it reversed and remanded the trial court in Litchfield Community Unit School District No. 12 v. Speciality Waste Services, Inc, (5th Dist., September 25, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/5thDistrict/September/Html/5000209.htm. The Trial court erred when it dismissed complaint filed by school district against firm it hired to perform work under written contract for asbestos-abatement based on four-year limitations period for improvements to real property rather then ten-year limitations period for breach of written contracts. The contract was for asbestos removal and work that constituted maintenance and repairs, and therefore did not meet the statutory definition of “improvements” to real estate. An "improvement", this decision holds, “is an addition to real property which amounts to more than a mere repair or replacement and which substantially enhances the value of the property. It does not include ordinary maintenance… Based upon agreed facts in this record, we believe that the trial court erred in finding that the work performed pursuant to the contract constituted the construction of an improvement to real property and in applying the four-year statute of limitations set forth in section 13-214 of the Code of Civil Procedure. The work amounts to ordinary maintenance and repair of an existing structure. Therefore, plaintiff's breach-of-contract action is governed by the 10-year statute of limitations set forth in section 13-206 of the Code of Civil Procedure (735 ILCS 5/13-206 (West 1996)).
DEED DELIVERY; ESCROW AND TRUST DISTINGUISHED:
In Albrecht v. Brais, (3rd Dist., July 27, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/3rdDistrict/July/Html/3000906.htm, the trial court was confronted with the issue of whether certain farmland was includable in the Estate of Harry Emhouser, or had passed by deed deposited in escrow prior to his death. The will admitted to probate provided that the farmland in question was to be devised to a group of churches. The special administrator of the estate, however, took the position that the farmland was not part of the estate (and therefore could not be devised) due to the fact that it had been conveyed by quitclaim deed deposited in escrow prior to death. Both Harry and his wife Rose executed a document entitled an “escrow agreement” that provided a quit claim deed conveying title to Marlo Jean Popp Brais that they executed would be held by Courthouse Title Services and delivered to Brais when both of the Emhousers were deceased. Prior to that time, however, the “escrow” agreement provided, Harry or Rose could recall the deed at any time prior to the death of the survivor of the two of them. Rose died first, and then a year later, Harry bequeathed the farmland to the churches in his will.
The trial court found that the farmland was part of the estate because Harry’s will was “an effective revocation of the trust”, and Brais appealed. In affirming the trial court, the Third District decision first deals with the distinction between an “escrow” and a “trust” arrangement. Brais argued that the deposit of the deed with Courthouse Title Services actually created a “trust”, which is only revocable by an inter vivos act of the settlor. The Court disagreed, noting that a trust encompasses a conveyance to a trustee who holds legal title for the beneficiary as the equitable owner, whereas an escrowee is not vested with title and simply holds the documents of conveyance pursuant to directions. Here Courthouse Title Services was clearly acting as an escrowee and not a trustee. Title remained in the Emhousers because they could revoke the deed at any time and there was no “delivery”. This aspect of the case focused the Court’s reasoning on the issue of whether this was a proper escrow, and inasmuch as the escrow agreement specifically allowed them to recall the deed prior to the death of the survivor, there was no enforceable escrow. “To be a complete delivery, the grantor must have intended to party with all dominion, power and control over the deed.” Here the deed was not unconditionally delivered, and therefore there was no “escrow” which could then pass title to Brais at Harry’s death. Since Harry retained dominion and control over the deed, the farmland was still a part of his estate at his death to be disposed of by his will. (This case, in conjunction with the ‘dresser-drawer deed” case last year, (In re Estate of Wittmond, see July, 2000 “Keypoints”), certainly reinforces the fact that there are disputes and litigation over the issues of delivery of deeds in modern Illinois law as well as law school text books.)
DEMOLITION, NOTICE, AND DUE PROCESS:
The City of Marseilles successfully appealed the LaSalle County Circuit Court’s dismissal of its complaint for demolition filed against the land trustee holding title to the subject real estate in City of Marseilles v. Union Bank, (3rd Dist., December 22, 2000), http://www.state.il.us/court/Opinions/AppellateCourt/2000/3rdDistrict/_NotRel/Html/3991003.htm. The property was the former Washington School building, which City officials investigated after receiving numerous complaints, and found to be dangerous, a nuisance, and a fire hazard. Based on the reports of its investigators, the City Council passed a resolution declaring the property to be a hazard to the community, and the next day the city attorney issued a notice by certified mail advising the legal title holder, Union Bank, as trustee u/t/a No. 1046, that the property constituted a public nuisance as a structure so in need of repair as to be a danger to the community, was an invitation and endangerment to children in the area, and a fire hazard due to its condition. The letter ended with a statement that unless the nuisance was abated within 15 days, the City would petition the Court for appropriate relief, and solicited the owner of the building to give immediate attention to the matter and contact the city attorney if there were any questions. This letter was sent to the trustee, Union Bank, by certified mail, which, in turn, forwarded the letter to its beneficiaries by certified mail. The trustee’s certified letter was returned undelivered. When the nuisance was not abated within the 15-day period, the City filed a complaint for injunctive and other relief. A summons and complaint was served upon the trustee, and when the trustee failed to file and an answer, a default judgment was entered. Union Bank thereafter vacated the judgment based on pleadings that alleged that the beneficiaries of the trust, upon learning of the condition of the property, began to abate the nuisance and attempted to contact the city attorney to determine if the steps they had taken were sufficient, but never received a return telephone call. The trial court vacated the judgment and dismissed the case, finding that the 15-day notice sent as required of the City by the Municipal Code, (65 ILCS 5/11-31—1(a)), was deficient because it failed to specify the defects that rendered the property a public nuisance and enumerate the requisite remedies.
In reversing the trial court, the Third District began by noting that the Municipal Code, Section 11—31—1(a), grants the municipality authority to apply to the Circuit Court if the owners of the building, including the lien holders of record, after at least 15 days written notice by mail, fail to put the building in a safe condition or demolish it. The plain language of the statute does not mandate that either the defects be stated or that the remedies be listed. Minimal due process requires only that notice be provided and that an opportunity to be heard, appropriate to the nature of the case, be granted. The parties in interest have to be afforded advice of the pendency of the action and an opportunity to be heard and object. Here, the city met these standards by first notifying the trustee that it would be filing suit, and then serving summons and complaint. “Nothing more needed to be done to satisfy due process requirements of the Illinois and United States Constitution.”
DEMOLITION: JURISDICTION, SUMMONS AND PROCESS:
In City of Chicago v. Yellen, (1st Dist, September 4, 2001), http://state.il.us/court/opinions/AppellateCourt/2001/1stDistrict/September/Html/1001309.htm the important of the technicalities of service of process are illustrated for the benefit of real estate practitioners who represent land owners in demolition proceedings. The City brought an action for demotion against Nathan Yellen and Marie Yellen as the owners of the property. Nathan appeared pro se for trial, but Marie failed to appear, and an order for demolition was entered. Afterwards, an attorney filed an appearance on behalf of both Nathan and Marie accompanied by a motion to reconsider, asking the Court to allow the Yellens an opportunity to rehabilitate the property, and arguing that Marie had not been properly served with summons. The trial court denied the motion to reconsider. On appeal, the trial court was reversed based on a finding that it lacked jurisdiction. The only copy of the summons in the record indicating service upon Marie Yellen had neither a seal nor a signature of the Clerk of the Court on its face. Noting that “the plaintiff bears the burden of presenting a record sufficient to establish the court’s jurisdiction before the court enters a default judgment”, the court restated the law that “A summons not signed by the clerk of the court which issues it is not summons, (citations) because it is not issued by any court.” An interesting distinction was also made relating to the appearance of the attorney for Marie Yellen on the motion to reconsider. The City argued that the appearance submitted Mrs. Yellen to the jurisdiction of the trial court and constituted a waiver of the jurisdictional issue. Holding that the court lacked jurisdiction over Mrs. Yellen at the time of the entry of the demolition order because of the apparently defective summons, the decision also held that her subsequent appearance by an attorney to reconsider the order would not retroactively validate the order.
This case is an excellent example of the importance of service of process and reminds us to carefully examine the procedural aspects of real estate litigation that would otherwise seem to be substantively closed to defense. The decision also has some good language relating to the nature and purpose of summons.
DUTY OF A LANDOWNER TO INVITEES:
Even those who practice primarily in the area of real estate manage to come across issues relating to the liability of a landowner or person in possession to someone on their property and the duty to avoid dangerous conditions. A recent Fourth District Case, True v. Greenwood Manor West, Inc., (4th Dist., October 4, 2000), http://www.state.il.us/court/Opinions/AppellateCourt/2000/4thDistrict/October/Html/4000222.htm provides a good review, and reaffirms the application of the Restatement (Second) of Torts adopted by the Illinois Supreme Court relating to the “open and obvious hazard” and “distraction” exceptions.
In this case the Plaintiff, Vivian Opal True was visiting her sister in a nursing home when she tripped over a fan that had been left in the center of the room. Following a jury verdict in her favor, the nursing home, Greenwood, filed a motion for judgment notwithstanding the verdict, alleging that it did not owe a duty to True as a matter of law. The trial court denied the motion, and on Greenwood’s appeal, the Fourth District reversed citing Section 343A of the Restatement for the law in Illinois that:
“A possessor of land is not liable to his invitees for physical harm caused to them by any activity or condition on the land whose danger is known or obvious to them, unless the possessor should anticipate the harm despite such knowledge or obviousness.”
The Restatement offers the illustration of an injury caused by walking into a plate glass door that would be obvious to anyone exercising ordinary attention. A customer mistakes the door for an open doorway while coming into a business office and preoccupied with his own thoughts. The resulting injury is one for which the landowner is not liable under the “open and obvious hazard” exception to the duty of care set forth in Section 343 of the Restatement. The “distraction” exception set forth in the Restatement requires that the landowner/possessor anticipate the injured person might be distracted from the open and obvious condition because circumstances require them to focus their attention elsewhere. Here, Ms. True simply did not look down as she turned to leave the room, and missed the open and obvious hazard of falling over the fan, but Greenwood could not have reasonably foreseen that True would be distracted. The likelihood of injury was slight, and the Court found it burdensome and impractical to require the Greenwood staff remove the fan each time a resident left the room or did not need the fan; hence, no liability as a matter of law.
EASEMENTS BY NECESSITY; PROOF REQUIRED, EXPANSION OF IMPLIED USE:
In Weaver v. Cummins, (4th Dist., June 28, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/4thDistrict/June/Html/4000982.htm , it seems pretty clear that the Plaintiff sought to change theories of easement in mid-stream, and that it worked well….for the most part.
The Plaintiff’s original complaint sought enforcement of an express easement created in 1995 by their predecessor in title for a roadway to the plaintiff’s property. The trial court dismissed the complaint finding that the predecessor had no right to grant an easement, so the Plaintiff amended their complaint to allege an easement by necessity. This theory worked much better, and the trial court found the elements of unity of title in a common grantor and necessity existed in ruling for the Plaintiff. The necessity finding was based largely on testimony that while an alternative roadway could be constructed, the high cost together with the current use supported the implied easement. The Appellate Court’s analysis of easement by necessity is good background for anyone working on a case in this area. Easements by necessity and easements implied by a preexisting use are both drawn from an inference of the intentions of the parties to a conveyance of the land. Necessity is a required element, but “evidence of prior use may lower the necessity requirement… The preexisting use, therefore, reduces the extent of necessity required to be proved”.
The scope of the easement is, likewise, based upon the implied intention of the parties as determined by the Court. Here, the Plaintiff sought to use the roadway to move their antique car collection by semi-trailer trucks to auto shows over the roadway. In order to accommodate the semi-trailers, the Plaintiff sought to widen the roadway by three feet so the trucks could turn onto and from the roadway. While the trial court fashioned a remedy allowing the Plaintiff to make 12 annual roundtrips with semi-trailers, the decision on appeal found that this was against the manifest weight of the evidence. The record was “devoid of any evidence that the parties to the original conveyance contemplated the type of use plaintiffs proposed.”, and “the intent of the parties is evidence by the dimensions of the roadway at the time of separation of title.” The trial court was affirmed in its finding of necessity, but reversed in the allowing Plaintiff to use semi-trailer trucks on the roadway.
EASEMENT BY NECESSITY; EXTRINSIC EVIDENCE AND THE NECESSITY OF UTILITIES:
In Smith v. Heissinger, (4th Dist, March 6, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/4thDistrict/March/Html/4000571.htm, Michael Smith sought to impose an easement by necessity over his neighbor’s property for the purpose of providing utilities to his newly constructed home. The common grantor of the parties was John Homeier. Mr. Homeier first sold a tract of his land to Heissinger retaining a 25 foot right of way easement on the west side of the parcel without limiting the purpose of the right of way. Eight years later, Homeier sold another, adjacent parcel to Heissinger, and the deed provided an easement long the same west 25 feet, creating a right of way “for the sole purpose of ingress and egress for the benefit of [a third parcel] the [Smith property]”. When Homeier conveyed to Smith, he assigned his interest in both easements. Smith then proceeded to build a home on the property purchase from Homeier, and in the process instructed Central Illinois Light Company to install electrical lines on the easement. Heissinger refused to allow the installation, and this suit followed requesting that the court declare the 25 foot easement include the right to place underground utilities and enjoin Heissinger from interfering with the installation.
The Defendant moved for summary judgment and objected to Plaintiff’s introduction of extrinsic evidence to prove the intent of the parties relating to the purpose and limitations of the right of way, stating the documents “speak for themselves”. The trial court denied Defendant’s motions, heard the matter as a bench trial, allowing the extrinsic evidence to be introduced, and ruled in favor of Plaintiff on the basis of the doctrine of necessity. On appeal, the Fourth District agreed that the inconsistent language of the two grants of the easement (one without limitation on the right of way, and the second limiting the easement to ingress and egress) created an ambiguity with allowed the introduction of extrinsic evidence. The Court next turned to the elements of an easement by necessity; (1) ownership by a common grantor followed by a separation of title, (2) use of the easement before separation in an apparent, obvious, continuous, and manifestly permanent manner, and (3) necessity for the enjoyment of the property. Evidence of the element of “prior use” was not presented, and therefore the Plaintiff’s contention could be based only upon necessity to prevail. Holding that “a showing of absolute necessity is not required in Illinois”, the Court cited various decisions holding a sewer line, water supply line, and catch basin to be sufficiently necessary for the beneficial enjoyment of a parcel to constitute an easement by necessity. Noting that all of the owners of other neighboring properties had denied Smith access for utilities, and testimony was received that without utilities the home was not habitable, the determination of the trial court that the Plaintiff had established a utility easement by necessity was affirmed as not against the manifest weight of the evidence.
PRESCRIPTIVE EASEMENTS; ACQUIENCE AND MISTAKE:
In Sparling v. Fon Du Lac Township, (3rd Dist., March 6, 2001) http://www.state.il.us/court/Opinions/AppellateCourt/2001/4thDistrict/March/Html/4000571.htm, Peggy Sparling brought an action for ejectment to force the township and bridge commission to remove a drainage pipe encroaching onto her property. Sparling purchased the property in 1995. At some time prior to 1983, the township obtained an express easement for the drainage pipe over a ten-foot wide strip of land; five feet of which was on the Sparling property and five feet of which was on the adjoining lot. In 1983, however, the township mistakenly moved the drainage pipe two to three feet outside of the easement and onto the unencumbered portion of what was later to become Sparling’s property. Prior to Sparling’s purchase, her predecessor, Gerald Gray, sent a letter to the township advising them of the encroachment and requesting they remove the pipe. Following her purchase in 1996, Sparling also wrote requesting the township remove the pipe. The township admitted receipt of these letters.
As their affirmative defense to Sparling’s 1999 ejectment action, the township asserted that they had established a prescriptive easement pursuant to the Illinois Highway Code, (605 ILCS 5/2—202; which also includes “drainage structures”, and provides for a 15 year statutory period for obtaining a prescriptive easement, while retaining the other common law elements of adversity, exclusivity, continuous and under a claim of right inconsistent with that of the owner). The trial court ruled the defendants did not occupy Sparling’s property under a claim of right because the encroachment was the result of the mistaken location of the pipe outside of the easement. The Third District opinion rejects this reasoning, but affirmed nonetheless.
Noting that the statute changed the time period within which a “highway” might be established by prescription, but not doing away with the other elements of a prescriptive easement, the Court pointed out that a “use must be adverse, under claim of right, continuous and uninterrupted, with the knowledge of and without the consent of the owner of the estate.” in order to establish a prescriptive easement. The “acquiescence” of the fee owner, (i.e. knowledge without consent), was destroyed in this case when Sparling and her predecessor put the township on notice that they objected to the encroachment in 1995 and 1996; within the 15-year period. The concurring opinion by Justice Breslin clarifies that the acquiescence of the fee owner necessary to establish an easement by prescription is distinct from adverse possession, which does not require the element of acquiescence, and further states that the “use by mistake is not sufficient adverse or under claim of right to establish a public way by prescription” under the statute. The township’s “mistaken belief that [they were] positioning the pipe within the easement is the basis upon which Peggy Sparling should prevail.”
EMINENT DOMAIN; SWIDA v NATIONAL CITY LTD:
In 1999, the Fifth District’s finding in South Western Illinois Development Authority v. National City Environmental L.C., 304 Ill.App.3d 542, 238 Ill.Dec. 99, 710 N.E.2d 896, that SWIDA’s use of its condemnation power to take property at the request of private developers to increase their profitability was an unacceptable expansion of that power earned it a good deal of commentary. In the recent case of Southwester Illinois Development Authority v. Masjid Al-Muharirum, (5th Dist., January 30, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/5thDistrict/January/Html/5990545.htm, the same Court dealt with the same agency’s use of its advertised power of eminent domain to transfer ownership of property from one entity to another, and reached a different decision, while limiting the application of its previous decision. The new millennium case deals with the Mosque property of a not-for-profit religious corporation that was transferred to a limited partnership of private investors providing housing and renovation in a blighted area of East St. Louis, Illinois. The Mosque asserted in the trial court that SWIDA lacked the constitutional authority to take this property, and cited the special concurring opinion filed in the 1999 case. The Fifth District’s opinion clearly states that the Mosque’s “reliance upon the words and ideas expressed in that special concurrence is misplaced. Obviously, those words and ideas do not speak for this court.” Noting that “The singular facts of that case were essential to the constitutional analysis”, the Court noted that “The key to the case (SWIDA v. National City) lies in the fact that SWIDA exercised its eminent-domain power purely in the name of further economic development of the area.”, whereas the focus of the exercise in the instant case is urban renewal, and “The exercise of eminent-domain powers for the purpose of eliminating slums or blighted property is a proper use for a valid public purpose.”… and …”if a public purpose is served…it makes no difference that the condemning body chooses to transfer title…to a private, for-profit entity to carry out that purpose.” Which leaves us with the suggestion that it is what you do, (parking vs. urban renewal), rather than how it is done, (i.e., advertising the use of the governmental power to condemn to entrepreneurs), or who profits thereby that is at issue.
EMINENT DOMAIN; PUBLIC TAKING AND PRIVATE USE
We have been following the case of Southwestern Illinois Development Authority v. National City Enviornmental, L.L.C. over the last two years. (This is the condemnation case in which the SWIDA used its quick take power to condemn real property owned by National City and used as a metal recycling center adjacent to the Gateway International Motorsports Corporation. Gateway needed more parking to expand, and SWIDA had advertised that in exchange for fees and expenses it would condemn land at the request of private developers to advance a favorable climate for new jobs, foster civic pride, and develop entertainment and sports venues. As part of the “quick take”, SWIDA conveyed the property to Gateway, and National City appealed seeking to enjoin the taking for use as a parking lot as a “private” rather than “public” purpose.) Numerous articles and analysis of the case decision in the Fifth District, Southwestern Illinois Development Authority v. National City Environmental, L.L.C., (5th Dist, April 29, 1999), 304 Ill.App.3d 542, 238 Ill.Dec. 99, 710 N.E.2d 896, emphasize the fact that this is an unique example of the Appellate Court limiting the power of eminent domain by finding the conveyance to increase the raceway’s profitability to be was a taking for “private use” rather than a “public purpose”.
On April 19, 2001, however, the Illinois Supreme Court reversed the Fifth District and remanded the case to the Appellate Court stating, “We agree with the circuit court that the Authority properly exercised its power of eminent domain. The taking of the Property is for a public use, not a private purpose. The appellate court believed otherwise, and, in light of its holding decided not to address other issues it had determined were property raised in this interlocutory appeal. We reverse the judgment of the appellate court and remand this cause to that court for further proceedings consistent with this opinion.”, Southwestern Illinois Development Authority v. National City Environmental, L.L.C., (Il.S.Ct., April 19, 2001).
Justice Freeman’s opinion for the Court systematically reviewed the powers and purpose granted to the Authority by the legislature to promote economic development and elimination of blight. Noting that the role of the judiciary in condemnation cases is “an extremely narrow one” based on the United States Supreme Court decisions, and that” condemnation for a public purpose is not transformed into condemnation for a private use merely because the condemning body transfers title, use or possession of the property to a private party to carry out the public purpose involved.” Justice Freeman concludes with the U.S. Supreme Court’s statement that ‘In short, the Court has made clear that it will not substitute its judgment for a legislature’s judgment as to what constitutes a public use unless the use be palpably without reasonable foundation’. The evidence at the trial was reviewed in detail and found to support the Authority’s use of it s power in furtherance of a public purpose which was not an abuse of the discretion granted by the legislature, and therefore judicial intervention was not warranted.
The dissents written by Justice Harrison and Kilbride, with concurrence by Justice Thomas, speak eloquently of our forefathers and their struggle against governmental tyranny, concluding that the taking in this case ”carries ‘the right of eminent domain to an alarming and dangerous extent” due to the fact that the taking which transferred the private property to another private person for a profit does not satisfy the ‘public purpose’ mandate limiting the right of eminent domain.
Is it possible that we will see this case one more time??… in the United States Supreme Court Reports? (Note: Rehearing allowed June 4, 2001, previous link to IL S. Ct. opinion not released for publication.)
ENVIRONMENTAL LAW, CLEAN WATER ACT, NAVIGABLE WATERS and THE MIGRATORY BIRD RULE:
The United States Supreme Court reversed the Court of Appeals of the Seventh Circuit in Solid Waste Agency of Northern Cook County v. United States Army Corp of Engineers, 121 S. Ct. 675, 148 L.Ed.2d 576 (Jan. 2, 2001) http://supct.law.cornell.edu/supct/html/99-1178.ZO.html, resulting in a limitation of the definition of “navigable waters,” and the ability of the Army Corps of Engineers to use the “Migratory Bird Rule” to affect local governmental bodies (and perhaps private parties) to develop sites in which habitat for migratory birds have evolved into permanent and seasonal ponds. The dispute arose when a consortium of 23 suburban Chicago cities and villages sought to determine if a federal landfill permit was required to purchase and develop a site for the dispose of nonhazardous solid waste on a 533 acre parcel between Cook and Kane counties. The site was a sand and gravel pit until 1960, when mining was abandoned. Over the years, the site became a collection of ponds which attracted seasonal and migratory birds “in interstate commerce”; (i.e., the birds weren’t “in interstate commerce”, as much as they had an “aggregate effect” on interstate commerce “because each year millions of Americans cross state lines and spend over a billion dollars to hunt and observe migratory birds.”) The Clean Water Act, Section 404(a), grants the Army Corps of Engineers authority to issue permits “for the discharge of dredged or fill material into the navigable waters at specified disposal sites.” Under that Section of the CWA, the Corps developed the “Migratory Bird Rule” stating that its jurisdiction encompasses not just the “navigable waters” of the United States but also includes intrastate lakes, rivers, streams, “prairie potholes,” or wet meadows, which are or would be used as habitat for migratory birds crossing state lines or constituting endangered species. The United States Supreme Court had agreed with the Corps’ interpretation of its jurisdiction relating to wetlands adjacent to the waters of the United States in United States v. Riverside Bayview Homes, Inc., 474 U.S. 121, 88 L.E.2d 419, 106 S.Ct. 455 (1985), but refused to extend the jurisdiction in this case. “It was the significant nexus between the wetlands and “navigable waters” that informed our reading of the CWA in Riverside Bayview Homes. Indeed, we did not “express any opinion” on the “question of the authority of the Corps to regulate discharges of fill material into wetlands that are not adjacent to bodies of open water [and] In order to rule for respondents [the Army Corps] here, we would have to hold that the jurisdiction of the Corps extends to ponds that are not adjacent to open water. But we conclude that the text of the statute will not allow this.” The term “navigable waters” refers to those bodies that ebb and flow with the tide or are used in interstate or foreign commerce. Isolated potholes, ponds, and water-filled mining trenches simply do not meet the criteria for “navigable waters.” Water areas used as habitat by migratory birds that cross state lines do not qualify as “waters of the United States” subject to the control of the Army Corps of Engineers through the “Migratory Bird Rule” under the Clean Water Act, unless the body of water is “inseparably bound up with the ‘waters’ of the United States” by being either adjacent to or part of the navigable waters. Isolated ponds, wholly located within a single state do not fall under the definition of “navigable waters” simply because they are the habitat for migratory birds, and there is no clear statement from Congress that it intended to affect “an abandoned sand and gravel pit such as we have here.’ Rather, the States have traditional and primary authority over the development and use of land and water within their boundaries, and the Army Corps” use of the “Migratory Bird Rule” exceeded the authority granted to it by Congress under the Clean Water Act.
FORCIBLE ENTRY AND DETAINER, CONDOMINIUM ASSOCIATIONS, SIGNATURES ON 30 DAY NOTICE:
There have been decisions declaring pleadings invalid when the parties’ attorneys do not sign the pleadings themselves, but resort to stamps or allow others to “sign” for them. (See Bachmann v. Kent, (1st Dist 1997), 293 Ill.App.3d 1078, 228 Ill.Dec. 299, 689 N.E.2d 171, where a notice of rejection of an arbitration award was invalid under Supreme Court Rule 137 where it was signed by a secretary.) The trial court in Knolls Condominium Association v. Czerwinski, (2nd Dist., May 10, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/2ndDistrict/May/Html/2000003.htm refused to accept the 30 day notice plaintiff served upon the owner of a condominium unit to support its action for possession for unpaid assessments in a forcible entry and detainer case. The notice bore the stamped signature of the attorney, followed by a proof of service statement signed by the handwritten signature of another person, which was then notarized. The trial court found that the notice was improper and dismissed the complaint, sua sponte, expressing doubt that a stamped signature is “authentic”, capable of being notarized, and therefore would not support the action.
Reversing, Justice Byrne’s decision notes that Section 9—102(a)(7) provides that a Condominium Association can file an action in forcible entry and detainer against an owner of a condominium unit for failure to pay their proportionate share of common expenses, and that Section 9—102(a)(7) requires a demand signed by the person claiming such possession, his or her agent, or attorney, as a prerequisite for the cause. Requiring that the notice be “signed”, however, does not require that the signature be “subscribed” in handwriting: “Anything which can be reasonably understood to symbolize or manifest the signer’s intent to adopt a writing…” is sufficient, and “This may be accomplished in a multitude of ways, only one of which is a handwritten subscription.” The decision notes that reported cases have held that endorsement stamps on checks for deposit and stamps of magistrate signatures on search warrants have not invalided those documents, and, most recently, the Electronic Commerce Security Act, 5 ILCS 175/1—101 et seq., contains a clear statement that alternative forms of signatures, (electronic signatures), are legally acceptable in trade and commerce. Accordingly, using a stamp to indicate the intent to “sign” the 30-day notice to the unit owner was sufficient, and plaintiff’s complaint should not have been dismissed.
INJUNCTIONS, ATTACHMENT, and INTEREST IN REAL ESTATE DISTINGUISHED:
The case of Franz v. Calaco Development Corp., (2nd Dist., June 21, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/2ndDistrict/June/Html/2001023.htm deals with a preliminary injunction granted in favor of a limited partner, enjoining the general partner from continuing to sell real estate lots in a development pending the trial of a complaint for breach of contract and fiduciary duties. The purpose of the limited partnership was to develop and sell vacant lots for construction of single-family residences and townhomes. The Complaint alleged that the general partner breached the partnership agreement by selling vacant lots to affiliated entities without the written consent of the limited partners and for less than the prices set forth in the partnership agreement, resulting in loss profits to the limited partner in excess of $1 million dollars. To support the request for a preliminary injunction against the further sale of lots in the trial court, the plaintiff claimed irreparable harm in that the only partnership asset was the lots which would be depleted by the sales, and there would be insufficient funds in the partnership to satisfy a judgment in plaintiff’s favor. Following an evidentiary hearing, the trial court granted the injunction, finding plaintiff had shown irreparable harm, no adequate remedy at law, and that the only remaining asset of the partnership was the unsold lots. Without an injunction, the trial court ruled plaintiff faced the possibility of an uncollectible judgment, and rejected defendant’s argument that there was an adequate remedy in the form of money damages and no right to an injunction to ensure collection should plaintiff prevail.
The Second District reversed. After reviewing the elements and underlying purpose of a preliminary injunction, the Court found that the trial court’s ruling “effectually amounts to a prejudgment attachment and that the plaintiff has failed to establish the requisite elements of irreparable harm and inadequate remedy at law.” A prejudgment Attachment is a specific remedy provided by the Code of Civil Procedure, (735 ILCS 5/4-101), and the decision notes that “The law does not provide for a process of equitable attachment. Taking away the control of property by means of an injunction for the purpose of anticipating a judgment is abhorrent to the principals of equitable jurisdiction.” Additionally, the only harm to the plaintiff in this case was monetary; lost profits. The Appellate Court rejected the plaintiff’s claim of an absence of an adequate remedy at law due to the fact that the subject of the partnership was real estate. “The fact that the controversy concerns the conveyance of land does not change the character of the complaint or the relief sought therein. The limited partnership was formed for the purpose of developing real estate. However, plaintiff’s entitlement based on the partnership agreement is to profits in the partnership, not to an interest in real estate.” By halting the sale of the real estate with the injunction, the trial court effectively granted the plaintiff an interest in real estate (“effectively placed a lien”) by the prejudgment attachment without complying with the Code of Civil Procedure. This was not the intention of the parties to the underlying limited partnership agreement, which gave plaintiff only a right to profits from sales of real estate; an important, if discreet, distinction.
(Ed. Note: The author of these Keypoints was counsel of record for the appellant in this case, and may certainly be less than completely objective in the review of this decision.)
INSTALLMENT CONTRACTS AND EQUITABLE CONVERSION; INSURANCE POLICY RECOVERY AND PREMIUM PAYMENTS:
The Suburban, Inc. entered into an installment contract for the sale of a tavern and restaurant to Larry Joe Pasley. The contract provided that Pasley was also required to maintain insurance on the property. Suburban had an existing policy of insurance on the property at the time, and remained the insured under its policy, but Pasley was added as a “loss payee” after the contract was in place. Pasley paid the premiums on the policy during the contract. The tavern was destroyed by fire during the term of the seven-year period of the contract. After Suburban filed an initial claim, a dispute arose between it and Pasley regarding who was entitled to the proceeds and who had the right to make a claim under the policy. Suburban filed a complaint against Pasely and the insurer, Cincinnati Insurance Company, seeking declaratory judgment that it was entitled to proceeds of an insurance policy, and that Pasley was only entitled to the sum equivalent to what he had paid under the installment contract. The Suburban, Inc. v. Cincinnati Insurance Company, (3rd Dist., June 20, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/3rdDistrict/June/Html/3000704.htm Pasley, on the other hand, argued that he was the equitable owner of the property under the doctrine of equitable conversion and entitled to the insurance proceeds to rebuild the tavern. The trial court granted summary judgment in favor of Pasley, subject to payment of the balance on the contract to Suburban. The trial court also granted summary judgment against Cincinnati and denied its motion to dismiss based on the policy language that only the named insured, Suburban, was entitled to seek replacement costs.
The Third District reversed on appeal holding that while the doctrine of equitable conversion provides that the seller of land, after entering into a land sales contract, holds legal title to the property in trust for the buyer, and the buyer becomes the equitable owner of the property, this doctrine is effective only as between the parties to the contract. It does not alter the rights and obligations of third parties, such as insurance carriers. Accordingly, while the doctrine of equitable conversion affects the relationship between the buyer and seller, it does not entitle a purchaser, such a Pasley, to a direction action suit against the insurer if only the named insured is given that right under the policy terms. Pasley’s rights were “derivative in nature and wholly dependent upon the rights of the named insured”; (i.e., Suburban).
Just as you might wonder where the Court is going with this decision, however, Justice Breslin writes, “Our analysis does not end there, however. It is the law in Illinois that when a party contracts for insurance, pays the premium, and the insurer makes the loss payable to such party, the agreement pay is a contract with the party who paid the consideration, and he has a right of action in his own name, despite the fact that the insurance is in the name of another.” Noting that the pleadings filed by Pasley alleged that he paid all of the premiums, but that there was no conclusive evidence of the payment, the Court reversed the summary judgment and remanded the case to the trial court because there was a material issue of fact. (It seems much ado about equity, but perhaps the “lesson” in this case is that all parties to an installment contract and their attorneys should give some extra thought to who is the named insured on policies.)
INSURANCE; LEAD PAINT COVERAGE AND EXCLUSION:
Guillen v. Potomac Insurance Company, (1st Dist., May 24, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/May/Html/1002314.htm is a case that appeals primarily to personal injury and insurance defense lawyers because of the intricacy of its duty to defend, indemnification, and coverage issues. The case has one important lesson for real estate lawyers, however.
The insured was sued for lead based paint poisoning by a minor daughter of a tenant in one of their buildings. The initial insurance policy obtained by the landowner contained no lead exclusion provision, but later renewals did have an exclusion that denied coverage for bodily injury arising out of the ingestion, inhalation, absorption or exposure to lead. Potomac refused to denied coverage when the claim was filed and refused to defend the action brought against the landowner. The insured entered into a settlement agreement with the plaintiff to pay $600,000, to be satisfied solely through the assignment of the owner’s rights under the policy, (Can you see this coming?)…. and then the plaintiff filed an amended complaint for declaratory judgment against Potomac. The insurance company responded with an affirmative defense that it had provided written notice of the addition of the lead exclusion to its insured to the renewal policy and therefore there was no coverage, no duty to defend, and no obligation to indemnify. The plaintiff responded that proper notice of the lead exclusion was required according to the provisions of the Illinois Insurance Code mandating that the insurer maintain proof of the mailing of notices on a recognized U.S. Post Office form or other commercial mail delivery service, (215 ILCS 5/143.14(a), and noting that prior case law from the Illinois Supreme Court had held that “There is no alternative method of providing compliance with the proof of mailing requirements other than to maintain the proof of mailing.” In these circumstances. The insurance company, of course, could not provide the proper proof of mailing, and the Court affirmed the trial court’s ruling that the exclusion never became a part of the policy because the insured were not given property notice of the lead hazard exclusion. The result was that the plaintiff’s won not only the declaratory action on the policy, but prevailed on the issues of breach of the duty to defend, was estopped from raising any policy defenses to coverage, and had a duty to indemnify. The only issue remanded to the trial court was whether the settlement amount, which exceeded the policy limits, was reasonable. The lesson for real estate lawyers is clear: don’t just read the policy; get some good counsel from a practitioner who knows and understands the issues of insurance law, coverage, notice, and policy issues.
INSURANCE COVERAGE; ECONOMIC RATHER THAN PHYSICAL DAMAGE TO REAL ESTATE:
An interesting, although perhaps specifically fact oriented decision, that may be of use in a claim against or on behalf of an insurer of improvements on real estate is the recent Illinois Supreme Court decision in Travelers Insurance Company v. Eljer Manufacturing, Inc., (Il. S.Ct., December 2, 2000), http://www.state.il.us/court/Opinions/SupremeCourt/2001/September/Opinions/Html/88407.htm. (Get out your “Moorman Doctrine Hats” and “Thinking Caps” for this one!) The appeal arose out of four declaratory judgment actions filed by insurance companies against Eljer Manufacturing and others for a determination of their duty to indemnify policyholders for damages caused to their homes due to the installation of a residential plumbing system known as Qest from 1979 to 1990. There were allegations that after the systems were installed, thousands of homeowners filed claims against those involved in the manufacture of the systems for damages due to leaks. Additionally, some homeowners, whose systems did not leak, also filed claims seeking damages for the cost of replacing non-leaking systems and for the diminution of the value of their homes solely because of the installation of the Qest system in those homes. Several of the insurance companies moved for summary judgment contending that they had no duty to indemnify the policyholders for claims by homeowners whose systems did not leak during the policy period, even though the installation of the system diminished the value of the homes and some homes were physically damaged by the homeowners in the process of replacing non-leaking Qest systems.
In an elegantly brief (3 pages) opinion, the decision provides that “An insurer’s duty to indemnify arises only when the claimed loss or damages actually falls within the policy’s coverage”, and then notes that a portion of the policies (pre-1982) were governed by New York law interpreting the language of the policies (coverage for “injury to tangible property”), whereas another portion (post-1981) were governed by Illinois law in defining the scope of coverage under those policies, (coverage for “physical injury to or destruction of tangible property”). The language in the pre-1982 policies was considered to determine whether the damage alleged constituted “physical injury to tangible property” under New York law. In a holding in New York’s “highest court, interpreting an insurance policy with language identical to the policy in the instant case”, (I can never remember what they call the “highest court in New York…), the Illinois Supreme Court held that mere installation of the Qest system in a home, (i.e., the incorporation of a defective product into a larger entity), can constitute “injury to tangible property”. Accordingly, for the pre-1982 policies, the installation of a potentially defective plumbing system, which resulted in a reduction in the value of the real estate which was greater than the value of the system installed, was a physical injury to tangible property that was covered under the policy by virtue of the application of New York law. Under Illinois law, however, and using slightly different policy language providing for coverage for “physical injury to tangible property”, the Illinois Supreme Court found that: “Affording the unambiguous terms of the policy their plain, ordinary, and popular meaning, no ‘physical injury to tangible property’ occurred when the Qest systems were installed in the homes which did not experience leaks.” (I have an intuitive feeling this is the same thought process that confounds so many of us when we examine the “Moorman Doctrine”!) Since the systems did not leak, there was no “physical injury to tangible property”; (i.e., ‘physical’ vs. ‘economic’ loss??). Finally, noting that insurance coverage only extends to “fortuitous occurrences”, the court held that damage caused by a homeowner replacing a system that did not leak does not result in a covered occurrence under the policies.
LAND TRUSTS: FORGERY AND WARRANTY BY THE TRUSTEE:
The title to real estate in Northbrook, Illinois was held in a land trust at First National Bank of Northbrook in In Re Marriage of Lily Gross, (1st Dist., June 8, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/August/Html/1982975.htm. The beneficiary and holder of the power of direction in the land trust was Lily Gross. Letters of Direction, however, were forged by Lily’s husband, Jeffrey Gross, directing First National Bank to execute a mortgage in the sum of $210,000 and a line of credit in the sum of $125,000, both in favor of Success National Bank. When Success obtained judgment of foreclosure due to a default on the debt, Lily filed a complaint against First National Bank for breach of its fiduciary duty as trustee and negligence in the execution of the mortgage documents based on the forged Letter of Direction. First National filed a counterclaim against Jeffrey, of course, but also filed against Success National Bank, claiming that Success delivered the mortgage documents and forged Direction to them, and that First National “relied upon Success’ somehow warranting that the letter of direction was signed by the appropriate party.”
In a decision deals extensively with issues relating to admissions in a deposition by a First National Bank employee relating to whether the Letter of Direction came from Success Bank, (which may be helpful to some litigators in its finding that “no” means “no” and there is no “wiggle room in the word ‘no’” in interpreting testimony), the Court affirmed the trial court’s summary judgment in favor of Success. Holding that First National Bank had no basis to look to Success to warrant that the signature of its own beneficiary on the Letter of Direction was authentic, the decision notes that the security documents contained an express warranty by First National Bank that it had authority to act as trustee, (given by its beneficiary pursuant to a power of direction), in executing the security instruments. Accordingly, summary judgment in favor of Success National Bank and against First National Bank was affirmed. This is a short and concise decision that may be helpful in land trust issues.
LANDLORD TENANT; SECURITY DEPOSIT INTEREST AND PENALTIES:
In Aurelia Lawrence v. Regent Realty Group, Inc., (Il. S. Ct., July 26, 2001), http://www.state.il.us/court/Opinions/SupremeCourt/2001/July/Opinions/Html/88237.htm, the majority opinion by Chief Justice Harrison noted that “The sole issue presented for our consideration is whether the trial court was correct in concluding that the RLTO requires a landlord’s violation of the interest payment provisions to have been willful before the tenant is entitled to recover the damages, attorneys fees and costs provided by the ordinance.” The decision then holds that a tenant who brought an action against her landlord for failure to make annual interest payments on a portion of her security deposit was entitled double damages, fees and costs pursuant to the provision of the Chicago Residential Landlord and Tenant Ordinance, (RLTO), Chicago Municipal Code Section 5-12-080(f), regardless of whether the landlord’s actions were willful or not.
The issues of the case were important enough to justify a grant to the Chicago Association of Realtors, Illinois Association of Realtors, Illinois Consumer Justice Council and Legal Assistance Foundation of Chicago to file amicus curiae briefs. The portion of the security deposit upon which the landlord failed to pay interest was a $100 “pet deposit”. Each year the landlord credited Ms. Laurence with the accrued interest on her “basic security deposit”, but refused to pay interest on the “pet deposit” portion of the funds. They claimed that they did not regard the “pet deposit” as a “security deposit” within the meaning of the RLTO, and denied that they intentionally violated the ordinance as a defense to the tenant’s request for double damages, refused to pay interest on the “pet deposit” portion of the funds. They claimed that they did not regard the “pet deposit” as a “security deposit” within the meaning of the RLTO, and denied that they intentionally violated the ordinance as a defense to the tenant’s request for double damages, costs and attorneys fees. The trial court ruled that the penalty provisions of RLTO should only be applied where the landlord’s failure to pay is willful, and denied the relief the tenant requested relating to her fees, costs and double damages; limiting her recovery to a refund of the amount of her security deposit with accrued interest. The First District reversed, finding that a showing of willfulness is not necessary for recovery under the Ordinance, and the Supreme Court granted the landlord’s petition for leave to appeal.
Noting that “the statute must be enforced as written, and a court may not depart from its plain language by reading into it exceptions, limitations or conditions not expressed by the legislature.” Supreme Court of Illinois refused to “second-guess the city council’s judgment” in apparently intending to impose the double damages, costs and fees penalty as absolute liability and regardless of a willful violation. “The purpose of the law is to help protect the rights of tenants with respect to their security deposits…the amount of interests landlords owe…is too small to warrant litigation…Without the prospect of liability for significant additional damages…” to assure compliance. “Under our system of government, courts may not rewrite statutes to make them consistent with their own ideas of orderliness and public policy.”
Justice Freeman dissented. He saw two issues, (rather than one, sole issue), in the case, and those were (1) whether RLTO is a remedial or penal ordinance, and (2) whether a showing of willfulness is required to subject a landlord to the penalties of the Ordinance. Justice Freeman, after recounting the legislative history and background of RLTO, concludes that the Ordinance was remedial rather than penal, and therefore does not believe that the courts may impose absolute liability on a landlord absent a clear indication that the City Council intended to impose the penalty regardless of willfulness. Noting that the majority’s decision to impose absolute liability must rest on a belief that landlord’s failure to pay interest on security deposits is “a pervasive problem in the City of Chicago”, Justice Freeman states that “I cannot agree that punishing landlords for inadvertent infractions of the ordinance best serves the interests of tenants and the City of Chicago in quality housing…(the penalties) may devastate the smaller landlord. I do not believe that the Chicago city council intended to force smaller landlords out of business. Instead, I believe that the Chicago city council intended to punish landlords only for knowing violations of the Ordinance.”
LANDLORD TENANT: SEMI-ANNUAL PAYMENTS AND NOTICE OF STRICT COMPLIANCE WITH LEASE PAYMENT TERMS:
In a case of first impression, the First District was called upon to determine the date upon which “semi-annual” payments are due in Fox v. Commercial Coin Laundry Systems, (1st Dist. September 13, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/September/Html/1003820.htm. In this case, the owner of an apartment building filed a forcible entry and detainer case against the lessee, Commercial Coin, for failure to make timely rent payments under the lease. The July 2, 1987 lease provided that the lessee was to pay 15% of the coin receipts “semi-annually” to Fox. During the 13 years preceding this litigation, Commercial alleged that it made its payments “sometime” during January and July of each year. Fox wrote Commercial on January 27, 2000, stating that he understood the lease to require payment on January 2 and July 2 of each year, and that while he had accepted three late payments in the past, any future late payment would be a breach of the lease. When the July 2 payment date passed without payment, Fox served a five-day notice on July 3, 2000, and then file his complaint on July 14, 2000. The trial court granted Commercial’s motion for summary judgment, finding that Commercial had not breached the payment terms of the lease; (presumably because the suit was filed before the end of July). On appeal, Justice Theis’ decision reversed. Holding that a “valid lease requires a definite agreement as to the time of payment”, and noting that “where by the contract the rent is payable either yearly, half-yearly, quarterly, monthly, or weekly, and there is no provision for payment at any particular time during such period…the rent is not due and payable until the end of those respective periods…”, the decision finds that the January 2 and July 2 dates were implied by using the definition of “semiannually” found in the dictionary in conjunction with the fact that the particular lease before the Court was entered into on July 2, 1987. “To hold, as Commercial suggests, that the rent could be paid at any two times during the year is inconsistent with the rule in Illinois requiring a definite time for payment.” Most importantly, the Court also found that the letter Fox directed to Commercial on January 27, 2000 was “sufficient notification to his desire to insist on strict compliance with the lease.”
LEASE GUARANTY AND EXTENSION; RELEASE AND WAIVER:
The issues presented for review in T.C.T. Building Partnership v. Tandy Corporation, (1st Dist., May 31, 2001) http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/May/Html/1001749.htm,
were whether the guarantor of a lease is excused from liability when an option to extend the lease is not exercised in strict accordance with the terms of the lease, whether the defendant waived this defense when its principal’s tardy exercise of the option was nonetheless accepted by the lessor, and the impact of express waiver language in the guaranty. The tenant of the commercial real estate was Color Tile of Illinois, Inc., and the lease granted Color Tile the right to extend the lease for four additional terms of five years each upon written notice given at least six months prior to the expiration of the original term or any extension period. Defendant “absolutely and unconditionally” guaranteed Color Tile’s performance. Color Tile gave notice to extend the lease, but the notice was given less than six months prior to the termination of the original lease term. The lessor, nonetheless, accepted the notice and extended the term of the lease. Thereafter, of course, Color Tile declared bankruptcy and defaulted. In a suit on the guaranty, the Defendant alleged that because Color Tile had failed to exercise its option timely, it was released from liability on its guaranty during the extension period. The Plaintiff argued that the failure was so minor that a release was inappropriate and that the express language of the guaranty waived the defense by Defendant’s agreement that “no extensions of the time granted to the lessee for the payment of said rents…or for the performance of the obligations of the lessee… shall operate to release or discharge the Guarantor from its full liability under this instrument of guaranty or prejudice the rights of lessor hereunder.” The trial court entered judgment in favor of the Defendant, and the Plaintiff appealed.
Agreeing that the Plaintiff had the right to waive strict compliance with the notice provisions of the lease relating to extending the lease as for its benefit, the Court nonetheless noted that the issue was not one of waiver of the benefit of the provision of a contract between the parties, but the impact of that waiver on a guarantor. Holding that a guarantor can be released when a lessor, without the consent of the guarantor, permits a lessee to extend the lease without strict compliance with the terms of the option because this extends the liability of the guarantor beyond the precise terms of its undertaking, the Court also noted this to be a case of first impression, and cites cases from Rhode Island, Arizona, and Georgia in accord, as well as the prior holdings that guaranty contracts are to be strictly construed in favor of the guarantor. Turning to the language of the guaranty in this case, however, the Court also ruled that the defendant unambiguously consented to continue to be bound regardless of the extension by the express language of the guaranty. “Consequently, that portion of the defendant's guaranty wherein it agreed that no extension of time granted to Color Tile for the performance of any of its obligations under the lease or the lessor's forbearance or delay to enforce any of the provisions, covenants, agreements, conditions, and stipulations of the lease would operate to release or discharge it from liability under the guaranty” was an express, enforceable waiver of any release based on the untimely extension. Accordingly, since the notice requirement was for the benefit of the lessor and could be waived by the plaintiff, and the defendant unambiguously waived any release by virtue of the tenant’s failure to perform in a timely manner, there was no release. While a guarantor will generally be released where a landlord permits the lessee to extend the lease without strict compliance with the terms of the lease/option, a guarantor can agree to be bound by its guaranty notwithstanding conduct that might otherwise discharge it from liability. Accordingly, the guarantors have good, new law suggesting a release of liability, and the landlord’s attorneys have a blueprint for avoiding the impact of that law in the drafting of their lease guaranties.
MECHANIC’S LIENS; SECTION 23 PUBLIC FUNDS AND PAYMENT THROUGH THE COURT:
A recent decision from the Second District in favor of a subcontractor directing the release of funds held by Lake County for excavation on a public sewer project provides both a good overview of the provisions of the Mechanic’s Lien Act relating to public funds, (770 ILCS 60/23), and illustrates the authority of the trial court to distribute funds when the county deposits the balance of money on hand with the Clerk of the Court. In Westcon/Dillingham Microtunneling v. Walsh Construction Company, (2nd Dist., March 30, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/2ndDistrict/March/Html/2000590.htm, Glenbrook Excavating intervened in an action filed by Westcon/Dillingham pursuant to Section 23. Westcon’s complaint was filed in two counts. It sought $266,484.85 for payment under the base contract, and $1,048,581.61 for additional work required by virtue of the fact that it encountered unusually difficult subsurface conditions during excavation. Prior to Glenbrook intervening, Westcon was paid its based contract sum from the funds deposited with the Clerk with the agreement of the then parties, pursuant to order of the trial court, and reserving its right to seek compensation for the additional work. Glenbrook was also a subcontractor, and alleged that it was owed $427,323.31 for its work on the sewer system when it intervened. Lake County petitioned the trial court to deposit the balance of the amount due on the original contract with the Clerk. This was $769,395.97. Westcon objected to Glenbrook’s motion to release $427,323.31 from this fund as the sum due under its subcontract, arguing that Section 23 required the county deposit an amount sufficient to satisfy all liens, and noting that the funds were insufficient to satisfy both its additional work and Glenbrook’s liens. The trial court indicated that it considered the earlier payment to Westcon as a waiver of any objection to Glenbrook’s request for payment of its base contract amount, and allowed Westcon 30 days to return these funds to be added to the balance on hand with the Clerk to be distributed proportionately. Westcon did not return the funds, and after 30 days, Glenbrook’s motion to release funds was granted with the Court noting that Westcon’s remaining claim related to additional compensation outside of the original contract. Since it had been paid in full under the original contract, this additional compensation would come from a separate fund should it be successful in its claim. Glenbrook was asking for nothing more than Westcon had itself received by the prior distribution, and Westcon was “judicially estopped” to take a position inconsistent with its prior petition for payment.
The majority opinion by Justice Grometer reviews the purpose of Section 23 to allow a subcontractor working on a public improvement project to assert a lien against payments due to the general contractor, noting that once a lien is perfected, the public body must withhold sufficient funds to pay the amount of the lien. The subcontractor must then file a suit for an accounting within 90 days, and the public body must either withhold the sum claimed until final adjudication of the litigation or may deposit the sum with the clerk of the court in which the suit is pending to be distributed according to the judgment or other court order. (770 ILCS 60/23(b) ). Here, Lake County chose the second alternative by depositing the balance of funds with the Clerk. Because the protection offered by the Act is in derogation of common law, strict compliance with the technical and procedural requirements of the act is necessary. Once this compliance has occurred and the lien perfected, however, the Act is “remedial” in its impact and to be liberally construed to accomplish its goal of protecting one who, in good faith, has furnished labor and materials for construction of public improvements. “Accordingly, once a lien exists, a court has discretion in shaping a remedy for claims brought under section 23…. courts may consider the relative benefits and hardships to the parties in crafting an appropriate remedy.” Finding that Westcon had received payment for what was due under the original contract and was now claiming compensation for additional extraordinary work, the Appellate decision affirms the trial court noting that Westcon still had an alternative remedy under its contract action and would not be prejudiced by payment to Glenbrook. Glenbrook, on the other hand, would have suffered hardship by not having received payment on its base contract otherwise. Justice McClaren specially concurred, emphasizing that Westcon was “judicially estopped” by taking the distribution on this base contract to oppose the same request by Glenbrook. “Although I agree with the majority opinion, I feel that the patent deficiency of the appellant’s inconsistent position is also dispositive.”
Mechanics Liens; Temporary Staffing As Subcontractor:
In Onsite Engineering & Management, Inc. v. Illinois Tool Works, Inc., No. 1-00-0786, 2001 WL 114266 (Ill. App. 1st Dist. Feb. 8, 2001) http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/February/Html/1000786.htm, the court considered whether a temporary staffing agency is a subcontractor entitled to relief under the Mechanics Lien Act, and found that it is not. The Act provides that “every mechanic, worker or other person who shall furnish or perform services or labor for the contractor’s shall be known under this Act as sub-contractor, and shall have a lien for the value thereof’’ (770 ILCS 60/21), and when the Contractor shall sub-let his contract or a specific portion thereof to a subcontractor, the party furnishing the material to or performing labor for such subcontractor shall have a lien therefore’’ (770 ILCS 60/22). Illinois Tool Works argued that Onsite was not a subcontractor because its work was performed under a ‘National Services Agreement’’ between Onsite and the general contractor (Smith Technology Corporation) whereby Onsite was Smith’s sole provider of temporary contract employees in numerous states and projects to perform environmental remediation work. This made them a “temporary staffing agency,” not a “subcontractor” specifically related to the Illinois project work, and therefore not entitled to a lien under the Act. The Illinois Court found the reasoning of the Colorado Court of Appeals in Skillstaff of Colorado, Inc. v. Centex Real Estate Corp., 973 P.2d 674 (Col.App. 1998), persuasive and noted: “At the heart of this matter is the relationship between Onsite and Smith. A subcontractor, in general, is ‘one who has entered into a contract, express or implied, for the performance of an act with the person who has already contracted for its performance.’” In this case, Onsite was providing temporary employees who were under Smith’s management, supervision and direction, and absent in the agreement was any reference to the Lincolnwood, Illinois project. “Thus, like the plaintiff is Skillstaff, Onsite had no contractual obligation to perform any work for this particular project,” and no standing as a subcontractor within the meaning of the Illinois Mechanic’s Lien Act. (This case also discussed issues relating to standing to sue when a foreign corporation fails to file its annual report and pay franchise tax, and the two-year limitation period set forth in 770 ILCS 60/9.)
MINERAL LAW, OIL AND GAS LEASE; TERMINATION FOR NONPRODUCTION:
Maschhoff v. Klockenkemper, (5th Dist., December 7, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2000/5thDistrict/December/Html/5990276.htm , probably seems pretty straight forward to most of the practitioners who deal with oil and gas leases on a regular basis, but for those of us in the northern part of the state, it seems both somewhat factually complex and foreign; (but then again, maybe all of our friends in Cairo and Metropolis don’t understand testing for radon gas beneath ranch homes in Northbrook, either…)
Ruth Maschhoff brought a suit against Edward Klockenkemper under the Illinois Oil and Gas Release Act (765 ILCS 535/0.01) seeking a judgment finding that his lease on her property be released as terminated by its terms for non-production. There were actually two leases relating to oil and gas on the real estate. The first in 1954 was executed by Ruth’s parents and was the subject of litigation filed by Klockenkemper in August 1977, to determine its validity. The second lease was executed by Ruth, her husband, and her parents in May 1977, and ran to Klockenkemper relating to the same real estate. The 1977 lease specifically provided that it was for a term of one year, but would continue as long thereafter as oil or gas products was produced, and that if production should cease from any cause the lease would not terminate if the lessee commenced additional drilling or reworking operations within 60 days. The parties agreed that although equipment and four well bores remained on the property, no oil or gas was produced from the real estate after 1987. Nonetheless, Klockenkemper alleged as his affirmative defense to the complaint that the lease could not terminate because of non-production while he was engaged in litigation to establish the validity of his lease. He had been engaged in litigation since the filing of the 1977 case and through and including 1997 relating to the 1954 lease. At one point, on June 6, 1980, the Circuit Court in the 1977 case granted Klockenkemper permission to operate the wells on the real estate, and although this order was later vacated, Klockenkemper did not commence drilling or reworking operations because “he did not want to expend the funds unless he knew for certain that his oil and gas lease was valid”. The Appellate Court affirmed the trial court’s ruling that Klockenkemper execute a release of the lease, based upon non-production, awarding a judgment of attorney’s fees in favor of Maschhoff against Klockenkemper, and ordering him to remove his equipment from the leasehold. Distinguishing two other cases, (Greer v. Carter Oil Co., based on a failure to record and give constructive notice, and Brookens v. Peabody Coal Co., based on an express agreement relating to the impact of litigation between the parties), the Fifth District found that: “Pursuant to the lease, defendant failed to perform his obligations. The fact that defendant was also engaged in litigation…is of no consequences”
MORTGAGE LENDERS; DUTY OF GOOD FAITH AND FAIR DEALING REVISED:
The law enunciated by the Second District Appellate Court that a mortgage lender owes a duty of good faith and fair dealing in Voyles v. Sandia Mortgage Corp., (2nd Dist., 2000), 311 Ill. App. 3d 649; 724 N.E.2d 1276; 244 Ill. Dec. 192, has just now entered into the common parlance of real estate litigators; (in the last six months, I have cited this decision four times, and had it cited to me 3 times by defendants). This month, however, the Illinois Supreme Court issued its decision reversing the Second District in Voyles v. Sandia Mortgage Corp., (May 24, 2001), http://www.state.il.us/court/Opinions/SupremeCourt/2001/May/Opinions/Html/89201.htm, -- leaving borrowers’ attorneys with an empty quiver in their arsenal.
You may recall the facts in this case; after a long period of dispute about a payment increase, refusal to accept payments from a tenant, credit reports affecting her ability to purchase another home, and foreclosure, Graceia Voyles first brought her mortgage current, and then brought an action in the Circuit Court of DuPage County against Sandia Mortgage Corporation seeking damages for its reports to credit agencies. The trial court found that Sandia was negligent in submitting the credit reports and failing to correct inaccuracies, awarding her damages in the sum of $10,000.00. The trial court refused to rule in favor of Ms. Voyles on her other theories of defamation, tortuous interference with prospective economic advantage, and breach of the implied duty of good faith and fair dealing, however.
On appeal, the Second District found that the lender had intended the consequences of its credit reports and therefore acted intentionally, reversing the trial court’s judgment in favor of the lender on the aspects of the case relating to defamation and tortuous interference. Most emphatically, the Second District reversed the trial court, finding the lender breached its implied duty of good faith and fair dealing, giving the borrower a cause of action; and it is on this basis that the decision is most commonly cited.
The Illinois Supreme Court granted the lender’s petition for leave to appeal, and reversed the Appellate Court, affirming the judgment of the circuit court. Importantly, the Supreme Court specifically ruled in favor of the lender’s argument that the Second District erred in recognizing an independent cause of action in tort for breach of an implied duty of good faith and fair dealing arising from the mortgage contract: “…we decline to recognize the cause of action in the circumstances of this case. Until the decision below, appellate court panels which had squarely addressed the question had consistently refused to recognize an independent tort for breach of the implied duty of good faith and fair dealing in a contract.” The Court’s decision was based on three things it did not find present in the case: (1) it did not find that the lender intended to create a credit controversy, (2) it did not find that it is advisable to recognize a cause of action for breach of the implied duty of good faith and fair dealing in these cases, and (3) it did not find a need to expand the reach of the limited cause of action created in insurance policy duty-to-settle cases to mortgagor-mortgagee cases.
Lender’s counsel will especially appreciate the finding by the Court that the lender need not provide a detailed explanation of an increase in monthly mortgage payments; given the language of the mortgage. Sending a new payment booklet showing the increased payment was sufficient. There was no ‘false statement’ in the reports to the credit agencies to support defamation. There was no intentional and unjustifiable interference to support the tort of interference with economic advantage.
The period during which it appeared that the Courts were going to take the side of borrowers who have suffered at the hands of less and less competent and responsive lenders and servicers seems to have been short lived.
MORTGAGE FORECLOSURE; ACCORD AND STATISFACTION WITH THE FEDERAL GOVERNMENT:
Where appropriate, the United States is not only denied the relief it requests, but can be sanctioned as well. This occurred in United States of America v. William McCall, (10th Cir, 12/15/00), http://www.kscourts.org/ca10/cases/2000/12-99-2166.htm, a mortgage foreclosure proceeding. The United States filed the appeal after judgment was entered against it in a foreclosure suit that it filed against William McCall in the District Court of New Mexico to foreclose property pledged to secure several notes on which McCall had defaulted. The judgment dismissed the foreclosure suit after a bench trial, and also imposed sanctions in the form of an award of attorney’s fees, costs and other expenses in favor of McCall. The ruling against the United States was based on a finding of bad faith in filing the foreclosure in light of what the District Court found to be a binding settlement agreement that served as an accord and satisfaction of the debt owed, and therefore barred the action.
Prior to the filing of the suit, McCall entered into prolonged settlement negotiations with Asst. U.S. Attorney Manuel Lucero. Lucero had received a referral package from the Farmers Home Administration (FmHA) recommending foreclosure based upon the monetary default, and which had a statement in the “Special Remarks” section stating, “…the amount the agency will settle this account for is $76,894.00.” Settlement negotiations between McCall and Lucero culminated in a June 26, 1995 letter from Lucero to McCall which, after rejecting a number of counteroffers from McCall stated:
“I have contacted the agency regarding your officer to settle this matter for $70,000; however the Farmers Home Administration would like me to proceed with the foreclosure action unless you can pay to this office on or before July 15th $84,000. If that is not possible, I will file the foreclosure action on July 17th.”
Thereafter, Lucero stipulated on July 17th, he extended the offer expiration date to September 6, 1995.
On September 5, 1995, David Blagg, a neighbor of McCall and owner of land adjacent to his, called Lucero to notify him of an agreement he had reached with McCall to loan him the $84,000 to payoff the loan and clear title to the property. In an affidavit filed at the trial, Blagg stated that he understood from Lucero at the time of this telephone conversation that the arrangement would be acceptable and a closing would be arranged in the near future. Asst. U.S. Attorney Lucero stated at trial, however, that he had handwritten notes that indicated otherwise, and that he advised Mr. Blagg that a new appraisal had to be done; which implied that if the appraisal stated a higher value than anticipated, the offer of settlement would be rejected or renegotiated. (Neither Blagg nor Lucero actually testified at trial and these facts were adduced by affidavits and stipulations much to the consternation of the Tenth Circuit’s opinion which sharply criticized Lucero for not avoiding the ethical dilemma of playing a dual role as both a material witness and advocate for the plaintiff in the case; “Lucero should have never have been in this position, and once he found himself there, should not have allowed himself to remain.”) The District Court rejected Lucero’s interpretation of the events. It found that the June 26th letter set forth no conditions or prerequisites, and constituted an unconditional offer to settle the debt for $84,000. Noting that the offer had remained pending for several weeks before both the original and extended expiration dates passed, during which time the agency neither undertook an appraisal nor communicated an appraisal requirement to defendants, the trial court found that McCall reasonably expected his case had been resolved, and the government could not impose a condition on an offer to settle that had never been communicated. Awarding fees under the bad faith exception to the “American Rule”, Dist. Judge Kane adopted the statement of law that: “Because inherent powers are shielded from direct democratic controls, they must always be exercised with restraint and discretion.”, and noted that the actions of the government here appeared to be “neither fair nor forthright.” with “no basis in fact or in law for its abrupt change of position, which revoked the essential terms of settlement it had itself unilaterally established.”, so that “The agency’s actions depart so far from reasonableness as to warrant the imposition of sanctions.”
This case has a lot of good language for foreclosure defendants who may be the victim of perceived lender abuse during settlement negotiations. Many times it appears that the unreasonable actions are related to the inconsistent positions or lack of communication with the lender. Other times the source of the problem is, as appeared here, the result of counsel’s position. The point made by the Court in criticizing the Asst. U.S. Attorney for his “dual role” is one to be remembered.
MORGTGAGE FORECLOSURE; CONFIRMATION OF SALE:
World Savings and Loan Association v. AmerUs Bank,(1st Dist., November 16, 2000), http://www.state.il.us/court/Opinions/AppellateCourt/2000/1stDistrict/November/Html/1991922.htm, is a case that visits familiar territory to mortgage foreclosure attorneys, but with a different result than some recent case law; pointing out that sometimes it is most important to consider whose interests are being affected at confirmation of sale to determine what the courts may do.
The appeal was taken by a junior mortgagee from the confirmation of the sale to a third party bidder. The sale publication notice and judgment provided that the terms of the sale were to be “Cash”. When the Plaintiff sought to confirm the sale, AmerUs Bank opposed the confirmation and alleged that the sheriff failed to follow the terms of the sale by allowing the third party bidder, Dorota Wasik, to pay 10% of the sale price at the time of the sale and the balance within 24 hours, while rejecting the higher bid of AmerUs because its attorney did not have cash-on-hand at the sale. (AmerUs Bank had wired transferred sufficient funds to bid to its attorney, but his own bank inadvertently delayed crediting the law firm’s account until the day following the sale, and as a result he had no “cash” at sale.) Even though AmerUs Bank’s attorney had obtained the plaintiff’s permission to bid without cash on hand, provided he obtained the cash before 5 pm of the same day, the sheriff’s deputy determined the inability to tender cash at the time of sale invalidated the AmerUs bid and held the sale over; resulting in the sale to Wasik on a second round of bidding. At the hearing on confirmation, Dorota Wasik filed an affidavit stating that in reliance upon her successful bid at the sale, she contracted to sell her current home in anticipation of moving into the subject premises as her new home. The deputy sheriff testified that the policy of his office was to require 10% down in the form of cash or a certified check at the time of the sale and payment of the balance within 24 hours, and that this policy was announced before commencing each sale. AmerUs argued on appeal that the sheriff’s conduct deprived it of its interest in the subject property without due process of law and that the trial court erred in considering Wasik’s affidavit.
Section 15-1507(b) of the Illinois Mortgage Foreclosure Law provides that the sale officer derives his authority to hold the sale from the judgment, and it is his duty to conform to the court’s order. Justice Barth, (who had last served in the trial courts in the Chancery Division of Cook County where he regularly presided over foreclosure cases and confirmation of sales), nonetheless notes that there was no specific requirement of a cash sale in the judgment in this case, and reviewing cases where deviation from the trial court’s order provided cause for setting aside a judicial sale, holds that there was no clear departure from the sale terms set forth in the judgment here. “To give a party in [AmerUs]’s position the ability to delay a sale any time the order does not directly address an issue which arises at the sale could have serious implications for the orderly administration of judicial sales…Had the judgment contained more specific terms of sale…this dispute could have been avoided. In any event, the circumstances surrounding this sale did not give rise to irregularities which would have required the trial court to set it aside.” While the trial court should not have considered the disputed evidence regarding the sale of Wasik’s residence in reliance upon the sale, “The trial court’s consideration of this evidence does not warrant a reversal here, however… It is proper for a trial court to balance the hardship that would result to a third party bidder if the sale is not confirmed against the hardship which would result to other interested parties if the sale to the third-party is confirmed.” Noting that “…because [AmerUs] could attempt to recover the debt from the [owners] through other means. The hardships which [AmerUs] and the [owners] allegedly have suffered are a natural result of any sale to a third-party bidder.”. Justice Barth concludes that “Therefore, this is not a situation where the actions of the sheriff’s department had the effect of unilaterally depriving [AmerUs] of its property rights without notice or an opportunity to be heard.”, and affirmed the confirmation of the sale.
It is clear that the position of AmerUs as a junior mortgagee, (which probably did not prove-up in the judgment and therefore could not “credit bid”), was the most important aspect of this case. The mortgagor/owners were served with process by publication and therefore their interests were really not at issue as in the Espinosa and Deal decisions where the confirmation of third-party sales was denied in order to avoid an unjust result. Not to be overlooked is the potential for the precedent in this case to combine with that in Phoenix Bond and Indemnity Co. v. Pappas, (1st Dist., January 25, 2000), http://www.state.il.us/court/Opinions/AppellateCourt/2000/1stDistrict/January/HTML/1982905.htm, (discussed below), to stand for the proposition that the sale officer has significant implied powers to set reasonable grounds for the conduct of the sale.
MORTGAGE FORECLOSURE: VACATING DEFAULT JUDGMENTS:
In Bank and Trust Company v. Line Pilot Bungee, Inc., (5th Dist., July 13, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/5thDistrict/July/Html/5000211.htm the Court provides an important and often overlooked distinction between vacating a default judgment within thirty days of the entry (735 ICLS 5/2-1301), and after thirty days of entry, (735 ILCS 5/2-1401), applied to a mortgage foreclosure case.
The facts were simply that two of seven defendants sought to vacate a judgment of foreclosure entered by default by filing a motion to vacate the judgment ten days after the date of entry of the judgment. (An order of default was entered more than thirty days prior to entry of the judgment and the filing of the motion to vacate, but the defendant’s motion appears to have specifically sought to vacate the judgment rather than the order of default, and this is the focus of the decision on appeal.) Defendants seeking to vacate default judgments will like the language of the opinion: “A default judgment has been recognized as a drastic action, and it should be used only as a last resort…. Illinois courts have a history of being liberal with respect to vacating default judgments under Section 2-1301.” At the same time, Plaintiff’s attorney’s will appreciate the Court’s words: “However, we conclude that the application of the correct standard satisfactorily considers plaintiff’s rights by including the evaluation of the hardship imposed on plaintiff by proceeding to a trial on the merits. In addition, we note that section 2-1301(e) allows the trial court to establish whatever provisions it deems reasonable in setting aside the default judgment. This includes the imposition on defendants of plaintiff’s costs and attorney fees incurred in obtaining the default judgment.”
This case has a good overview and great language for both sides of the motion to vacate, and should be worth the read.
PARTITION SUIT; BONA FIDE PURCHASER PROTECTION AND VOID JUDGMENTS:
In December 2000, the case of Steinbrecher v. Steinbrecher, (2nd Dist., 1/26/2000), 726 N.E.2d 1118, 244 Ill.Dec. 807, was reported in these “Keypoints” for the proposition that the Circuit Court did not have authority in a partition proceeding to order that property be listed under an exclusive listing with a real estate agent in lieu of the mandated “public sale” under Section 17-116. That case was mired with procedural issues and the usual “baggage” that comes with pro se litigants, so it should come to no surprise that when the Illinois Supreme Court issued its decision in this case, Steinbrecher v. Steinbrecher, (Il. S.Ct., September 27, 2001) http://www.state.il.us/court/Opinions/SupremeCourt/2001/September/Opinions/Html/89551.htm, the majority opinion focused on whether Rosemary Steinbrecher’s attack on the sale could affect the third party bidder’s rights under Supreme Court Rule 305(j), while the dissenting opinion declared the entire sale void for lack of jurisdiction. The result, though, offers some excellent analysis on both sides of the argument relating to the impact of sales generally.
The bidder at sale, Moser Enterprises, Inc., was not a party to the partition proceeding and purchased the property by submitting an offer in the form of a contract through the Clerk of the Court the evening before a continued hearing for confirmation before the trial court. The Second District vacated the confirmation of the resulting “sale” to Moser by this process and remanded the case for further proceeding, determining that the discretion allowed to the trial court under the Partition Act did not permit it to direct the property be offered for sale by a Realtor rather than at a public sale; “We do not find that such discretion allows the trial court to ignore the plain language of the Code, which requires a public sale.” Rosemary Steinbrecher continued her legal odyssey by petitioning for leave to appeal to the Illinois Supreme Court, but failed to obtain a stay of the judgment pending appeal. In reversing, the Supreme Court majority relied upon the provisions of Rule 305(j) that if a stay is not perfected with the time for filing of a notice of appeal, the reversal or modification of a judgment on appeal does not affect the rights of any person who was not a party to the proceeding appealed from and who obtained rights in real or personal property after or through the judgment. The majority opinion adopts the theories that the law needs to protect the integrity and finality of judicial sales and extend this protection to bona fide purchasers at those sales because, absent such assurance, “no person would purchase property involved in a judicial proceeding.” This, it notes, is the purpose of Supreme Court Rule 305(j). Accordingly, the majority opinion holds, even should the sale be vacated, the result could not, as the directed by the Second District, affect the interest of Moser as the purchaser at sale. Noting that “The dissent suggests that this court ignore the plain language of Rule 305(j) and strong public policy favoring the finality and permanence of judicial sales to address alleged procedural irregularities occurring during the sale.”, the majority nonetheless held steadfast in its reversal.
The dissent, beginning with the theory that since the trial court undertook a sale beyond its statutory authority the judgment was void, and advanced a multi-faceted argument. In addition to asserting that the judgment was void because it directed a non-public sale, the dissent also notes that the commissioner did not take the oath required by the Partition Act to fairly and impartially partition the property, the commissioner’s report did not state specifically the property could not be divided in kind, and there were numerous “irregularities” in the sale process relating to Moser’s “last minute contract” which would not have occurred at a public sale under the Act. Justice Freeman concludes that: “Rosemary argued that the judgment of partition, and the sale pursuant thereto, were void because the circuit court did not comply with the requirements of the Act. The majority answers that Rule 305(j) precludes Rosemary from contesting the validity of the sale… If the circuit court’s judgment, and the resulting sale, are void, Rule 305(j) does not apply, for it is a requirement of the rule that the property passed pursuant to a final judgment. Avoid judgment may be attached either directly or indirectly at any time.”
The majority, however, parries this argument by noting that the judgment is either “void” or “voidable”, and the distinction relates to jurisdiction over the parties and subject matter. A judgment is “void” only if jurisdiction is lacking. Here, the trial court had both personal and subject matter jurisdiction, therefore, the resulting judgment was not “void” as argued by the dissent and Rule 305(j) applies.
This case, while limited in its application because we are unlikely to ever see another partition suit like this one, is nonetheless worthwhile in the reading because of the analysis that leads to all three decisions; the Second District, the Majority and the Dissent.
REAL ESTATE CONTRACTS; ANTICIPATORY BREACH AND RES JUDICATA WOES:
In Altair Corporation v. Grand Premier Trust and Investment, Inc., (December 20, 2000), http://www.state.il.us/court/Opinions/AppellateCourt/2000/2ndDistrict/December/Html/2990554.htm the buyer asserted that failure to obtain the City’s letter that no retention area was necessary and that various debris remained on the property served as a breach on the date set for closing. Grand Premier moved to dismiss pursuant to Section 2-619 arguing res judicata and election of remedies, and won in the trial court. Altair appealed again, and lost again.
Res judicata precludes subsequent litigation between the same parties on the same claim after a court of competent jurisdiction renders a final judgment on the merits. Res judicata precludes not only those issues that were actually raised, but also those that could have been raised in the first proceeding, and is founded on the principal that litigation should have an end rather than allow harassment by multiple suits. Noting that the Illinois Supreme Court has adopted the “more liberal transactional test”, (versus the “same evidence test”), and that all of the facts alleged in the second complaint existed at the time of the dismissal of the first complaint, the Second District found res judicata applied to bar Altair’s second proceeding.
While instructive for its warning to those of us who are tempted to file in the arena of anticipatory breach, (a difficult and nebulous concept in the inception), the decision here is also noteworthy for the laundry list of “ways around res judicata” that the Court gives those of us who are tempted: (1) the parties agree that the plaintiff may split his claim, (2) the court reserves the plaintiff’s right to maintain the subsequent action in the first case order, (3) the plaintiff is precluded from complete relief in the first case because of subject-matter jurisdiction issues, (4) the finding in the first case is inconsistent with the equitable mandate of a statutory scheme, (5) the plaintiff’s damages are recurring or ongoing, or (6) there is a clear and convincing showing that the policy of res judicata are inapplicable for some extraordinary reason. Altair wasn’t able to make use of them, but the Court gives ample warning and some instruction to those who will tread into the forest of anticipatory breach on how to get back out again.
REAL ESTATE CONTRACTS: FORMATION, EARNEST MONEY, AND LIQUIDATED DAMAGES:
In Catholic Charities of Archdiocese of Chicago v. Thorpe, (1st Dist, December 12, 2000), http://www.state.il.us/court/Opinions/AppellateCourt/2000/1stDistrict/December/Html/1991717.htm , the first issue was whether there was a contract in existence before the earnest money was deposited, and the second was the enforceability of a liquidated damages clause relating to that earnest money.
The purchaser, Thorpe, entered into a contract on April 29, 1996 to purchase property at 1300 South Wabash in the City of Chicago from Catholic Charities. The contract called for the immediate payment of $10,000 earnest money to be increased to $25,000 upon acceptance of the contract by Seller. The initial $10,000 earnest money was deposited by personal check that was returned NSF. When the original closing date was extended from June 6, 1996 to June 25, 1996, and then the purchaser did not appear at the closing, the seller sold the property to a third party and brought suit for the earnest money as liquidated damages under the contract.
The purchaser’s first argument was that the payment of the earnest money was a condition precedent to the formation of the contract, and since the earnest money was never paid, no contract was formed; and, therefore, the sellers were not entitled to judgment on the contract. The sellers, of course, argued that the payment of earnest money was not a condition precedent to the formation of the contract, but merely a condition precedent to the seller’s obligation to perform the contract itself, and noted that they were ready, willing, able, and appeared at closing. The trial court and the First District both agreed with the seller on this issue. Citing cases from the D.C. Court of Appeals and Texas before turning to the language of the contract, the Court states very clearly that: “All the Illinois cases which our research has disclosed which found a condition precedent to the formation of a contract contain express language on the face of the contract to support that construction.” There was no language in this contract to support the position that it was the intent of the parties that the payment of the earnest money was a condition precedent to their agreement, but only that the earnest money was to be increased upon the formation of the contract. “Moreover, even assuming that the payment of the earnest money is a condition precedent to the formation of the contract, performance of that condition by Buyer was waived by the Seller. A party to a contract may waive performance of a condition by the other party where the condition precedent is intended for the benefit of the waiving party.” Since the payment of the earnest money was intended to benefit the seller, Catholic Charities was able to unilaterally waive the payment and the Thorpe’s attempts to take advantage of their own failure to perform as the basis for avoiding further liability under the agreement was rejected.
Turning to the next argument, the Court recognized that the buyer’s interpretation of the liquidated damages clause was based on their decision in Grossinger Motorcorp, Inc. v. American National Bank & Trust Co., (1st Dist. 1992), 240 Ill.App.3d 737, 670 N.E.2d 1337. In Grossinger, the Court held that an optional remedy provision, including liquidated damages in a contract, “which allows defendant to seek actual damages or alternatively retain the earnest money as liquidated damages is unenforceable”. Since the concept of liquidated damages requires an agreement by the parties that the earnest money is to be fixed as the sum recoverable under the contract in the event of a breach, if a party retains the ability to reject that remedy and pursue actual damages, how can it be said that the parties had reached an agreement? “We reasoned that this scheme (preserving the option to pursue actual damages while stating an agreement to be limited to liquidate damages) distorts the very essence of liquidated damages…The preservation of an option to alternatively seek the recovery of actual damages reflects that the parties did not have the mutual intention to stipulate a fixed amount of their liquidated damages…Such a clause ‘is no settlement at all’ as it ‘permits the seller to have his cake and eat it too.” Affirming the reasoning in Grossinger, the Court remanded the case for a finding of actual damages based on the unenforceability of the liquidated damage judgment in the trial court.
REAL ESTATE CONTRACTS: FORMATION, ENVIORNMENTAL AUDIT AND WAIVER:
Although Thomas K. Allen, Jr. v. Cedar Real Estate Group, LLP, (7th Cir., January 3, 2001), http://www.ca7.uscourts.gov/op3.fwx?submit1=showop&caseno=99-4090, applies the substantive law of Indiana, its discussion relating to the distinction between a condition precedent to the formation of a real estate contract versus a condition precedent to performance of the contract, as well as the issues of waiver of a condition in a contract for one party’s benefit, make it a perfect case to follow Catholic Charities of Archdiocese of Chicago v. Thorpe.
Allen made a written offer to Cedar Real Estate Group to purchase a 6.2-acre parcel of land in Lake County, Indiana that had previously been used as a trucking terminal. The site had five underground storage tanks ranging in volume from 500 to 10,000 gallons to store fuel. Four of the largest of the tanks had been removed and the fifth was left in place, filled with concrete, and a “closure report” was filed with the State of Indiana. Allan made his offer on a preprinted form that specified that the property was to be sold “as is”, and a typewritten page entitled “Further Conditions” was attached which stated “This offer to purchase is subject to purchaser’s approval of the following… purchaser’s review of the Environmental Disclosure Document…a current Phase I and Phase II Environmental Audit with soil borings…Cost not to exceed $5,000 and to be split on 50/50 basis between purchaser and seller.” Although the agreement as drafted gave Allen the right to investigate the environmental contamination, it did not provide how the discovery would affect his obligation to buy or the seller’s obligation to sell. Cedar made a minor change in the offer as drafted and Allen accepted. The parties then entered into a four month period of audits and reviews, Cedar taking the position that the sale would be “as is”, and Allen offering to pay as much as half of the remediation costs. After a number of rounds, Cedar informed Allen that it had received three other offers, and that all buyers were to communicate their “final and best offer” to Cedar by noon on October 2, 1998. On October 1, 1998, Allen’s attorney advise Cedar by letter that there was an existing contract between the parties and than any attempt to breach the agreement “by entering into agreements of sale with other parties will be resisted.” Cedar directed its Broker to terminate the agreement and return Allen’s earnest money. Allen indicated that he was ready to close according to the terms of the contract and that the property would be submitted to the Voluntary Remediation Program of the Indiana Department of Environmental Management, with the costs to be forwarded to Cedar. Allen file suit in federal district court when Cedar did not respond.
The district court granted summary judgment in favor of Cedar, finding that Allen’s approval of the environmental audit was an unsatisfied condition precedent o the existence of a contract. The Court of Appeals affirmed. Allen’s insertion of language that his “offer to purchase…subject to purchaser’s approval of the following:”, and setting forth the environmental audit process, created a condition precedent that needed to be fulfilled before an enforceable agreement was formed. The language used by Allen indicated a clear intent to condition his offer on an acceptable environmental report. The Court felt that “Allen’s choice of the word ‘offer’ “ in the “Further Conditions” was telling of his intent and the frame of mind of the parties: “The only reasonable interpretation of this language is that Allen intended to be able to opt out of the agreement if the property turned out to be contaminated.”…”The right to order an environmental audit would be rendered completely meaningless if Allen had an obligation to purchase this property regardless of the results.” Allen was not willing to purchase the property “as is” and the negotiations between the parties indicates that there was no agreement. Even Allen’s argument that the “as is” provision of the contract was meaningless because under Indiana law a previous owner/operator could not relieve itself of liability for clean-up was “not relevant” to the decision of the Court. Noting that there are many reasons a party would not purchase contaminated property even if the prior owner was responsible, and whether Allen was misinformed about Indiana law was immaterial, the Court returned to the fact that “Allen specifically inserted the condition precedent requiring his approval of the environmental audit into the contract, and now he must accept the consequences of his decision.”
Finally, turning to the issue of waiver, the Court found that it was undisputed that Allen never expressly waived the condition of his approval of the environmental audit. Accordingly, although he had the right to waive the condition precedent as one solely for his benefit, there was no indication that he was willing to or did waive. The condition precedent was neither waived nor satisfied, and therefore there was no enforceable contract.
REAL ESTATE CONTRACTS; STANDING TO SUE & LAND TRUSTS:
Kaplan v. Shure Brothers, Inc., (7th Cir., September 4, 2001),
http://www.ca7.uscourts.gov/op3.fwx?submit1=showop&caseno=00-4027 brought suit in the Northern District of Illinois asserting breach of a 1987 real estate contract against Shure. The suit was based on allegations that Shure had misrepresented the industrial property sold to RBK Furniture, Inc. nine years earlier had not been used for production or storage of hazardous substances and had never been used as a landfill. The contract provided these representations survived the closing. Title to the real estate was conveyed at closing by Shure to a land trustee for the benefit of RBK. When RBK needed financing to renovate the property, Kaplan, as the majority shareholder, officer and director of the corporation, executed a guaranty of 25% of the outstanding principal of the loan to Fidelity Mutual Life Insurance Company. In exchange, RBK assigned its entire beneficial interest in the Land Trust to him. The Trust then leased the land to RBK for use as a retail furniture showroom warehouse and office until it ceased business and assigned its assets for the benefit of creditors in 1991. Fidelity foreclosed the mortgage and Kaplan paid in excess of $1,000,000 to settle his liability on the guarantee. Prior to the completion of the foreclosure, however, the Trust entered into a contract with Wal-Mart to sell the property in an attempt to avoid foreclosure. The contract was terminated when Wal-Mart conducted an environmental examination of the site and discovered contamination. In addition to the failure of that transaction, RBK was then visited with an action by the owner of the adjacent property against it claiming its property was contaminated by the RBK property. Kaplan settled that matter as well. As a result, Kaplan brought this action against Shure on the contract for sale to RBK. The District Court granted Shure’s motion to dismiss for lack of standing, rejecting Kaplan’s argument that he was a third party beneficiary to the contract, and when Kaplan amended his complaint to allege that he was RBK’s “successor” under the contract by virtue of the assignment of the beneficial interest in the land trust, it again granted summary judgment in favor of Shure on the standing issue.
In a clear recitation of Illinois law, Judge Bauer’s decision begins by noting that “Under Illinois law, a cause of action may be brought only by a party to that contract, by someone in privity with such a party, or by an intended third-party beneficiary of the contract.”, and then defines the concept of privity, (which “may arise by operation of law, by descent, or by voluntary or involuntary transfer”). Finding that there was no indication that the real estate contract was assigned by RKB to Kaplan, (only the beneficial interest in the land trust was assigned), the Court rejected the theory that he was a successor in interest; “without some positive indication that Kaplan and RBK intended Kaplan to succeed to RBK’s rights in the real estate contract, we cannot grant Kaplan the relief he seeks.” Too often, real estate lawyers look at land trusts as mere holding vessels and equate holding the beneficial interest with ownership of all of the “bundle of rights” relating to the real estate. Here, a clear distinction is made when the Court concludes “Overwhelmingly, the evidence suggests that the Land Trust contained on the real property and not the real estate contract rights), and that the assignment transferred only the rights under the Trust Agreement. Therefore, Kaplan cannot successfully argue that any rights to the real estate contract “flowed through” the Trust to him as the beneficial interest holder.” Now…. if you are working with Land Trusts and transferring interests in the subject of those trusts…it bears repeating: “Be careful out there.”
RESIDENTIAL REAL PROPERTY DISCLOSURE ACT; NO ACTUAL ‘TRANSFER’ NECESSARY:
There aren’t many cases in the appellate decisions that end with a mandate that affirms in part, reverses in part, vacates in part, and remands for further proceedings to the trial court, but just this occurred in Justice Rapp’s decision in the recent case of Provenzale v. Forister, (2nd Dist. January 23, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/2ndDistrict/January/Html/2000108.htm , adding to the accumulating law in the area of post-closing real estate transactional law and the Illinois Residential Real Estate Disclosure Act.
The Provenzales filed a complaint after their contract to purchase residential real estate from the Foristers failed to close. In October 1994, the Foristers executed a Residential Real Property Disclosure that stated that the property was not in a flood plain. It appears that the Realtor put that disclosure form in the file and held on to it until May 1996, when it was given to the Provenzales as prospective purchasers. (Another fine example of a Realtor following the form but certainly not the substance of a disclosure law’s intent.) In July, 1996, relying on the disclosure, the Provenzales entered into a contract for the purchase of the property. When and exactly why the transaction did not close isn’t clear, (although there is reference in the opinion to the fact that Mr. and Mrs. Forister had separate attorneys, and this implies that they may have been involved in a divorce), but it didn’t close, and after the Provenzales filed their third amended complaint, the trial court entered an order dismissing all counts on a mixed 2-615 and 2-619 motion. The order also granted Ruth Forister’s motion for forfeiture of the earnest money, and awarded attorneys fees of $30,483.74 and $13,123.25, respectively, to Ruth Forister and Harold Forister respectively.
As the pleadings grew in the trial court, there were a number of factual allegations that Harold Forester knew that the property flooded, stated so orally to the Provenzales, and so admitted in filings challenging the property’s tax assessment before the county board. Nonetheless, the ultimately successful motion to dismiss at the trial level was based on the proposition that since there was no transfer, (remember the contract never closed), there was no violation under the Disclosure Act. Section 10 of the Act states that it applies to “any transfer”, and therefore Forister argued that an actual transfer of the property was a necessary element for a cause of action. In support, the Foristers noted that the beginning of the one year statute of limitation period in Section 60 of the Act ties directly to the date of possession, occupancy, or recording of a conveyance – requiring a “transfer”. Since there could be no limitation on an action without an actual transfer, they reasoned, a cause of action must be predicated on the occurrence of an actual transfer. The Provenzales, in rebuttal, argued that the Act requires the sellers deliver the disclosure report prior to the signing of the contract, imposes obligations irrespective of the actual transfer, and therefore “the trial court misinterpreted the word ‘transfer’ as a verb rather than a noun…”
The Second District opinion begins by adopting the position that if actual transfer was intended as an element of a cause of action under the Act, the provisions requiring the delivery of the disclosure report prior to the contract becoming effective would be meaningless because this is a pre-transfer duty. Additionally, while “ordinarily the buyer discovers the material defect after the property is conveyed.”, the decision notes that the buyer’s remedies under Section 55 of the Act belong to the “prospective buyer of real property who discovers false information on the disclosure report before closing the transaction even though the property was never transferred.” The Court dismisses the enticing argument that using “transfer” as a measuring date for limitation purposes is meaningless unless a sale is closed, by noting that even though there is no measuring date for limitations without closing, the Code of Civil Procedure provides a general limitation that all civil actions be commenced within five years after the cause of action accrued, and therefore these types of situations would not be in limbo indefinitely.
The decision also reiterates the law that “an individual who casually sells his or her own single-family home is not subject to liability under the Consumer Fraud Act”, and chides the mixing of 2-165 and 2-619 motions, and concludes by reversing the award of earnest money and attorneys fees.
RESIDENTIAL REAL PROPERTY DISCLOSURE ACT; WAIVER:
The almost inevitable “Well, they closed so they must have waived” defense to the failure of a seller to provide a Residential Real Estate Disclosure Report was tried and failed in Curtis Investment Firm, Ltd. v. Schuch, (3rd Dist., April 2, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/3rdDistrict/April/Html/3000283.htm, The Schuches entered into a contract with Curtis Investment for the sale of residential real estate. Approximately six weeks prior to the closing, Curtis Investment request the Schuchs provide them with a Residential Real Estate Disclosure Report. The Schuchs did not provide the report. The closing took place nonetheless, and afterwards, when Curtis Investment attempted to restore water service to the property, they discovered the Schuches had the water supply turned off at the street because the supply line between the curb and the house was damaged. Curtis repaired the water supply and internal plumbing as well and then sued the Schuches. Robert Schuch denied any knowledge of the problem during the trial, and argued that Curtis Investment had waived its rights to receive the disclosure report by closing. The trial court found that the Schuches knew of the defective water supply line, and that the buyer could not waive the right to receive the disclosure statement. On appeal, the Third District affirmed.
The legislature’s use of the word “shall” in Section 20 of the Residential Real Estate Disclosure Act is indicative that providing the report is mandatory and not “waivable” by the buyer. “We therefore hold that a buyer cannot waive the seller’s responsibility to disclose certain defects by signing a contract without receipt of a written disclosure statement.” The Court was equally unimpressed by Schuches' argument that waiver was one of the intended “negotiated contingencies” referenced in the statute, and reiterated the mandatory nature of the disclosure. “Consequently, a seller cannot fail or refuse to provide a disclosure report with impunity.”
Justice Holdridge dissented, stating that he believed the majority erred in finding the buyer cannot waive the seller’s obligation to provide the disclosure. A waiver may be implied when a party’s conduct is inconsistent with an intention to assert a right in a contract. The buyers requested the report, and the seller refused to deliver it over a six-week period. When the sellers did not provide the report, Section 55 of the Act states that “If the seller fails or refuses to provide the disclosure document prior to the conveyance of the residential real property, the buyer shall have the right to terminate the contract.” Accordingly, not having elected their remedy to terminate the contract, the dissent argues, their conduct indicated an intention to waive the right to receive the report.
RESPA; OVERCHARGING FOR RECORDING EXPENSES:
Eschevarria v. Chicago Title & Trust Company, (7th Cir., July 5, 2001), http://www.ca7.uscourts.gov/fox/foxweb.exe/Op3?submit1=showop&caseno=00-4087 , deals with the issue of “overcharging” for recording charges and whether this is a violation of RESPA. Plaintiffs were homebuyers who sued Chicago Title claiming that it violated RESPA’s prohibition on fee-splitting when it charged them more to record their deeds and mortgages than the actual costs of the recording. Chicago Title charged Eschevarria $25.00 for recording their deed and $45.00 for recording the mortgage. The actual charges were $25.00 and $31.00 respectively. Chicago Title did not refund, but kept the $14.00 overcharge. (The Court’s decision written by Judge Bauer and concurred by Judges Coffey and Poser, the Judge responsible for the Court’s well known decisions based upon economic theories, described the action thusly: “Chicago Title pocketed the $14.00 overcharge.”)
Affirming the District Court’s dismissal of the suit for failure to state a cause of action under the Federal Rules of Civil Procedure, the Court essentially found that “pocketing” is not the equivalent to “fee-splitting”. RESPA prohibits accepting any portion, split or percentage of any charge made for rendering a real estate settlement service. Chicago Title successfully argued, (as had Intercounty Title Company in Durr v. Intercounty Title Company, (7th Cir., 1993), 14 F.3D 1183, cert. denied 513 U.S. 811), that because it received the extra money from the plaintiffs and kept the overcharges itself, rather than sharing them with a third party, there was no fee-splitting required to support a finding of a RESPA violation. Noting that it had earlier held that “Intercounty merely receive a ‘windfall’ and did not violate RESPA”, the Court syllogistically determined that there were no facts plead showing that Chicago Title had illegally shared fees with the Recorder, the Recorder received no more than it’s regularly recording fees, and the Recorder did not arrange for Chicago Title to receive any unearned fee; ergo, no wrongdoing under RESPA. “This result makes sense considering not only RESPA’s plain language, but its intended purpose. We state in Durr: At its core, RESPA is an anti-kickback statute…If we subjected to RESPA liability a title company that kept an overcharge without requiring allegations that it shared an unearned fee with a third party, we would radically, and wrongly expand the class of cases to which RESPA Sec. 8(b) applies.”
(Does anyone else have the image of the ‘one-legged-man-in-a-butt-kicking-contest’ going through their mind?? Theoretically and procedurally, I understand this case, but perhaps one of our title company friends can help us see the justice in this decision next month? I’m just bothered by the fact that there seems to be a case, no two cases, that tackle the circumstances where a title service provider “pockets” a fee and allows this to occur with impunity)
RESPA; “DECEPTIVE PRACTICES” EXCLUSION UNDER INSURANCE POLICY
Beyer v. Heritage Realty, Inc. (7th Cir., June 8, 2001) http://www.ca7.uscourts.gov/fox/foxweb.exe/Op3?submit1=showop&caseno=00-2016 is a case from the Eastern District of Wisconsin that considers whether violation of RESPA’s disclosure requirements is a “deceptive practice” as defined in a errors and omissions insurance policy exclusion provision. The circumstances giving rise to the issue are a little convoluted, but essentially, Beyer sued Heritage Realty for failure to disclose its affiliation with a title insurance company in transactions that it initiated, and for which the title company provided settlement services. The case was a class action, and Heritage’s carrier under a “Real Estate Agents and Brokers Program Professional Liability” policy, St. Paul Fire and Marine Insurance Company, intervened seeking a declaration that its policy did not cover liability for non-compliance with RESPA disclosure mandates. Its argument was based upon a policy exclusion for coverage for any violation of “antitrust, price fixing, restraint of trade or deceptive trade practice law”. Agreeing that the lack of disclosure which was at the center of the case was a deceptive trade practice, the magistrate judge entered a judgment holding that St. Paul need not defend nor indemnify Heritage Realty.
The Seventh Circuit reversed. Keying on whether it was the intention of the parties to exclude violations of RESPA within the policy exclusion under the penumbra of “deceptive trade practice”, it noted that the policy specifically mentions and explicitly excludes coverage for violations of antitrust laws, securities laws, and ERISA, but specifically does not mention the principal federal statute regulating to activities of real estate brokers relating to disclosure, RESPA. The Court then ponders: “Would it not be weird—would it not be deceptive? — to exclude all coverage of RESPA in such a policy without mentioning RESPA by name or direct reference?”, and reverses.
RESPA/TRUTH IN LENDING; DISCLOSURE OF PAYMENT DUE DATE AND REGULATORY COMMENTS:
In Clay v. Johnson, (7th Cir., September 5, 2001), http://www.ca7.uscourts.gov/op3.fwx?submit1=showop&caseno=00-1203, the Seventh Circuit Court of Appeals confronted and reversed a finding by the District Court that disclosure of the beginning payment on a series of retail installment contracts and mortgages to finance home improvements would be due “30 days from completion” did not satisfy Truth in Lending. Davenport Construction Company entered into a series of three contracts with Ree Clay and her sister Ruby Chivers for home improvements. Each of the retail installment contracts attempted to comply with the requirement of Truth in Lending that there be disclosure of the exact date on which payments would be due, (or an estimate of the due date if they could not determine a precise calendar date), by reference to “30 days after completion”. (15 USC 1638(b)(1) and 12 CFR 226.17(a)(1). The District Court granted summary judgment to the Plaintiff consumers on the issue of liability, rescinded their contracts, and awarded statutory damages and attorney’s fees for failure to comply with the disclosure mandate.
On appeal, the Court’s interpretation of the statute and applicable regulations was complicated by the fact that Comment 81(g)-4 promulgated by the Board of Governors of the Federal Reserve System to interpret the provisions of TIL on this issue changed during the pendency of the proceeding. The original, proposed comment published in December, 1997 specifically provided that disclosing that the first payment was due “30 days after completion of construction” was not sufficient to comply with TIL. The Board received a large number of responses to the proposed comment stating that determining the exact date on which payments should begin is often difficult at the time the disclosures must be made and that compliance with the interpretation would be practically impossible. Accordingly, the final Comment provided that “In a limited number of circumstances, the beginning-payment date is unknown and difficult to determine at the time…Alternatively, the disclosure may refer to the occurrence of a particular event, for example by disclosing that the beginning payment is due “30 days after the first loan disbursement.”, and thereby specifically stated that a creditor could satisfy TIL by defining the beginning payment date by reference to the occurrence of a particular event rather than disclosing a specific date. The issue then evolved to the question of whether the final comment was retroactively applicable to the case at hand, and the Court of Appeals stated this depended upon whether the Comment was a change in the law (i.e. one which can not be applied retroactively) or merely a clarification of the existing law, (which can be applied retroactively). While the District Court thought that it was “incongruous for the Board to characterize both of these positions as a clarification of the existing law”, the Court of Appeals ruled otherwise. “We are convinced that the Board’s retraction of its initial position is not sufficient to tax the Board with inconsistency. The Board recognized that creditors were confused…Although the Board initially thought is property to clarify the law by requiring creditors to disclose an exact date, it apparently thought better of that position following the comment period in light of the comments it received.” The result is that it is established that TIL disclosure of the beginning date of payments can be with reference to an occurrence rather than a specific date. The process of getting to that result is a decision that anyone who has a case involving regulatory comments and changes in the law should read.
RESTRICTIVE COVENANTS; PRIVITY OF ESTATE AND PRIOR VIOLATIONS:
Save the Prairie Society brought an action to enforce a restrictive covenant relating to use of property in a 200 acre area once owned entirely by Bartlett & Co. in Save the Prairie Society v. Greene Development Group, Inc., (1st Dist., June 18, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/June/Html/1003758.htm. The use was limited to residential use and garden farming, and prohibited hog, goat or mushroom farming, as stated in deeds between 1942 and 1947. These specific restrictions were stated as a covenant running with the land in a deed to defendant’s predecessors from Bartlett, but the plaintiff’s were unable to prove privity of estate due to an intervening deed from Bartlett & Co. to Frederick Bartlett, as trustee, which did not set forth the same restrictions; although later deeds from the trust stated similar covenants forbidding any principal buildings other than a residence and hog or mushroom farming.
In denying Plaintiff’s petition for a preliminary injunction, the trial court ruled that the plaintiff lacked standing to enforce the restrictive covenant due to the absence of privity of estate. The court also found that multi-unit residential and commercial uses in the northern part of the 200-acre tract changed the character of the tract and rendered the restrictive covenants unenforceable. In its decision reversing, the First District noted that a plaintiff does not have to prove privity of estate in order to equitably enforce a restrictive covenant. If the restriction or covenant is part of general scheme or plan for the mutual benefit of the owners of all lots in the particular tract, the courts will enforce the restriction regardless of direct privity. The Courts will consider whether (1) the restrictions are included in all deeds to the subdivisions, (2) the restrictions have been previously violated, (3) the burdens imposed are generally equal and for the mutual benefit and advantage of all lot owners, and (4) notice of the restriction is given the recorded plat of subdivision. There were numerous previous violations of the restrictions, but “a general plan may be found to exist even though there are violations….”, and violations of building restriction are not material when they occur on other streets or areas than the one directly involved. Here, the extensive violations of the restrictions on other parts of the 200-acre area had not impacted the character of the land use in the immediate vicinity of the property in question, and that property had retained its residential nature. The trial court “failed to apply recognized legal principals” relating to these issues, and there was no adequate remedy at law because if allowed to proceed the “Defendant’s development would have irrevocably changed the character of the neighborhood. The courts must balance the harms from granting or denying the preliminary injunction, and here the plaintiff’s interest were in greater need of protection than the defendant’s delay in realizing profits sought from developing the property.” While there were clearly some hurdles for the Plaintiff to surmount in proving a likelihood of success on the merits necessary for the imposition of an injunction, “If the subject of the injunction is property which may be destroyed, or if, as here, the plaintiff seeks only to maintain the status quo until the ultimate issue is decided, the injunction is property allowed or maintained even where there may be serious doubt as to the ultimate success of the complaint.”
RESULTING TRUSTS: RULES AND BURDENS OF PROOF:
A Resulting Trust arises from the presumed intention of the parties based on their conduct rather than a contract or agreement, and is created by operation of law when one person furnishes the consideration for the purchase of property while the conveyance is taken in the name of another. In Judgment Services Corporation v. Kathleen Sullivan, (1st Dist., March 23, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/3rdDistrict/April/Html/3000283.htm, the imposition of a resulting trust was attempted to avoid the impact of a partition suit brought against Kathleen by a creditor of her husband, (attorney John Sullivan, who was disbarred and had a sizable judgment against him as a result of conversion of client’s funds in his trust and estates practice). The Sullivan’s purchased their residence in Wilmette in 1972 for $58,000.00; with a mortgage of $22,000.00 plus $36,000.00 received from Kathleen’s father. In 1996, Judgment Services obtained a sheriff’s deed conveying John’s interest in the property to them. Prior to that time, John had quitclaimed his interest to Kathleen and received a discharge in bankruptcy in 1994. Even though the title to the property was taken in the name of John and Kathleen as joint tenants in 1972, Kathleen argued that title was actually held through the years as a resulting trust in favor of her father due to his contribution of $36,000 of the purchase price. The trial court bought the argument and ruled in favor of Kathleen, finding that John never held an ownership interest in the property to which the lien could attach. The Appellate Court reversed (J. Gallagher and O’Brien) with Justice Buckley dissenting. Noting that there are certain rebuttable presumptions relating to transfers from one family member to another, (i.e., that the transfer was intended as a gift rather than to create a resulting trust), the majority opinion holds that Kathleen did not meet the burden of proof of establishing a resulting trust by clear and convincing evidence at the trial. Under the facts in this case, and reciting a litany of presumptions raised in inter-family transactions, the Court determined that Kathleen did not over come the burden that her father intended the $36,000 to be a gift rather than give rise to a resulting trust. The dissenting opinion felt that this factual determination was best left to the trial court, and that the majority “improperly reweighs the evidence to reach a conclusion opposite to that reached by the trial court.” The case has been remanded with directions for additional proceedings relating to any equitable lien that may exist on the part of Kathleen.
SPECIFIC PERFORMANCE AND RESCISSION; COST OF ENVIRONMENTAL REMEDIATION:
The recently reported decision in Bond Drug Company of Illinois v. Amoco Oil Company, (1st Dist. June 8, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/June/Html/1000961.htm, is more of a “re-visit” of the Court’s prior decision in 1995 then a “new case”. Even though the substantive holdings of this ruling would be of interest primarily to appellate practicioners, (relating to the trial court’s obligation to follow the mandate and the doctrine of the law of the case on remand), the language in the case reiterating the prior decision relating to specific performance and equity are simply too good not to note here for real estate lawyers.
Amoco entered into a contract with Bond whereby Amoco was to convey a gas station site to Bond in exchange for other properties elsewhere worth $1,175,000. The fact that there was significant environmental contamination on the property was not known until after the Exchange Agreement had been entered into by the parties. Shortly before the final closing, Amoco gave Bond notice that it considered the exchange agreement terminated because of the unexpected cost of having to correct the contamination of the premises. Bond disagreed citing the provision in the contract which provided that if zoning, building, fire or health code violations were found to exist on the premises, Amoco would correct them prior to the final closing. When Amoco failed to comply with the terms of the agreement and close, Bond filed a complaint for specific performance. Amoco counterclaimed for rescission, alleging that the cost of remediation, ($1,01,.096.53), was so great that enforcement was unconscionable and constituted grounds for rescission. Amoco’s position was that there was a mutual mistake of fact that allowed them to rescind, and enforcing the contract by specific performance would be inequitable. In the instant case, the First District noted that Bond I, (the first decision reversing the entry of summary judgment in favor of Amoco, found at 274 Ill.App.3d 630), held “there was no mutual mistake of fact in this case. Rather than a mutual mistake of fact, this case involves a unilateral mistake in the cost to be incurred for performance of the contract and is not a basis for rescission.” On the issue of the inequity or unconscionability of forcing Amoco to pay almost as much in remediation as the value of the exchange, the Court reiterated its prior ruling that “No equitable principal, including unconscionability, will compel the cancellation of a valid contract merely because one of the parties thereto will possibly or probably sustain a loss. Where the parties to an instrument are competent to contract with each other, and there is no question of fraud, neither can be relieved from his agreement on the ground that he did not use good business judgment in entering into the contract…In addition, if the Exchange Agreement is enforced according to its terms, Bond will merely receive what it is supposed to receive under the Exchange Agreement. It will not receive a windfall or some type of serendipitous benefit.” The contract was fairly entered into by the parties without any fraud, duress or oppression, the fact that the circumstances, although unknown, will result in a “bad deal” to one party are neither the grounds for rescission or defense to specific performance. There is no “unjust result” in specific performance under these circumstances.
In Herman Hood, d/b/a G&H Investments v. Richard Hall , (5th Dist., Apri8l 17, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/5thDistrict/April/Html/5990733.htm, the interplay between the issuance of tax deeds and the automatic stay of bankruptcy was presented once again…with a result perhaps different that you might have thought, and acknowledgement that there are decisions contrary…but a good explanation provided nonetheless.
Richard Hall argued that the issuance of the tax deed was stayed by the filing of his bankruptcy, and therefore the deed void as issued in violation of 11 U.S.C. Section 362. Herman Hood purchased at the tax sale in 1995, and received a certificate of purchase at that time. The redemption period on the tax sale was to expire on July 10, 1998. On June 19, 1997, Hall filed a bankruptcy petition, which was converted to a Chapter 7 on March 3, 1998, and on October 5, 1998, he was discharged. On March 23, 1998, Hood filed a petition for tax deed in the Circuit Court alleging the redemption date expired on July 10, 1998. On July 20, 1998, the deed was issued. Almost a year later, on July 8, 1999, Hall filed a motion to vacate the tax deed alleging the issuance of the deed violated the automatic stay. The trial court denied the motion to vacate, and the Fifth District affirmed, drawing an important distinction in the timing of all of this that should not go unnoted. The automatic stay provision of the Bankruptcy Code does not toll the running of the statutory period of redemption provided by Illinois law, it only provides a stay that prohibits any affirmative actions against the debtor. Accordingly, the expiration of the redemption period automatically divested the owner of his interest in the property, and is not an affirmative act proscribed by the automatic stay. Here, like in the case of In re Tabor Enterprises, (Bankr. N.D. Ohio, 1986), 65 BR 42, (a case interpreting Illinois tax deed law), the expiration of the redemption period automatically divested the owner of the their property interest, and no affirmative action was required of the tax purchaser within the meaning of the Bankruptcy Code. All of the legally significant acts necessary to convert the certificate of sale into a tax deed took place automatically, (rather than requiring an affirmative step by the tax buyer), and there was no violation of the stay. The Court distinguished In re County Collector, (1997) 291 Ill.App.2d 588 on the basis that the bankruptcy petition was filed prior to the sale and therefore the conduct sale was an affirmative act in violation of the stay. A similar rationale produced a similar result in In re Jackson, (Bankr. N.D. Ill., 1994), 176 B.R. 156, but this opinion noted that “We recognize that there are decisions that hold contrary to Tabor Enterprises, Inc. and Jackson, (see In re Bequtee, (Bankr. S.D. Il. 1995), 184 B.R. 327; In re Stewart, (Bankr. C.D. Il. 1996) 190 B.R. 846); however we find the reasoning of Tabor Enterprises, Inc. and Jackson to be more persuasive.”
TAX DEEDS; NOTICE TO “OCCUPANTS”:
The Illinois Property Code, 35 ILCS 200/1—1 et seq., provides that an “occupant” or real property must be served with notice of the expiration of the period of redemption as a prerequisite to obtaining a tax deed. In Ex Sites, L.L.C. v. First Union Bank of North Carolina, (1st Dist., April 25, 2001), http://www.state.il.us:8080/court/Opinions/AppellateCourt/2001/1stDistrict/April/Html/1001091.htm the issue was whether the adult daughter of the owner of the property who was living on the property was an “occupant” under the Code, and therefore the tax deed was invalid without service upon her as argued by the bank. The Court held that she was not. Although the daughter permanently resided on the property since 1991, and had not been served with any notices of the tax sale proceedings, there was no evidence that she had any right to exercise any control the property or had any possessory rights. The trial court found that the tax deed petitioner had used due diligence in attempting to find and serve her, (she was not listed in the telephone directory, not a registered voter, a “For Sale” sign was on the property, there were no names on the mailbox, and no one answered the door or contacted the person who inspected the property and left a card taped to the front door.). Her father and the bank were both found and diligently served, and therefore the deed ought not be vacated.
TAX SALES; INDEMNITY FUND:
When he failed to timely redeem, Ralph Prince’s property was sold at a tax sale, and thereafter a tax deed was issued. Prince v. Rosewell, (1st Dist., March 16, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/March/Html/1992879.htm. Three years after the deed, Ralph filed a petition for indemnity under Section 21-305 of the Property Code. That section provides that any owner of property sold at tax sale “without fault or negligence” on his part has a right to be indemnified for the loss or damage by reason of the issuance of the tax deed. The same section also provides that in the case of residential real estate occupied by the petitioner, the court can find that an owner is equitably entitled to compensation regardless of fault or negligence. Here, Mr. Prince was clearly at fault and negligent in allowing the home to be lost for nonpayment of taxes. There was ample evidence that he was advised he was to pay his taxes, received numerous notices to redeem, and did not do so. Additionally, despite the evidence that he was 72 years old, was blind in one eye, partially blind in the other, suffered from high blood pressure, diabetes, a pinched never, heart attack and sclerosis of the liver, had his right leg amputated, and no formal education beyond the fifth grade, the trial court found that he “lacked credibility” and was not equitably entitled to indemnity under the Property Code. The First District’s decision in this case clearly delineates the distinction between the “without fault or negligence” standard from the “equitable entitlement” basis set forth in the Code. Asserting that “a trial court has broad discretion in determining whether a petitioner is equitably entitled to compensation, and its conclusions will not be disturbed on review absent an abuse of that discretion.” The First District decision affirms the trial court. (“It is not the function of this court to reweigh the evidence or substitute our judgment for that of the trier of fact.”….sound familiar? Is this the same Court? Well…it is the First Division…just the Fifth Division rather than the Sixth…). This is a good case to review. It will remind you that a client who has lost their home in a tax sale may be able to obtain indemnification, regardless of the depths of their fault or negligence, with equities on their side.
TAX SALES; THE INDEMNITY FUND:
In April, 2001, we reported the case of Prince v. Rosewell, (1st Dist, March 16, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/March/Html/1992879.htm, to illustrate the case law applying specific facts to the provisions of the Property Code allowing an owner to recover the loss occasioned by the issuance of a tax deed on their residence their “without fault or negligence”. Mr. Prince was not able to recover in that case despite the fact that he was 72 years old, blind in one eye, partially blind in the other, suffered from high blood pressure, diabetes, a pinched nerve, heart attacks and sclerosis of the liver, an amputated right leg and had no formal education beyond the fifth grade. The “other side of the coin” is evident in this month’s case applying the same statute to arrive at a far different substantive result, (but also affirming the trial court’s determination). In Hedrick v. Bathon, Madison County Treasurer, (5th Dist., March 21, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/5thDistrict/March/Html/5990601.htm the County Treasurer argued that Ms. Hedrick failed to pay her property taxes when due because of her “inability to manage her own affairs due to mental illness” and not due to her own fault or negligence. She admitted that she received the notice that the taxes were due, but “just put them away to deal with later” because of an anxiety disorder, and that her principal method to cope with stress was by drinking. The trial court heard testimony from a clinical psychologist diagnosing Ms. Hedrick with avoidant personality disorder, among other illnesses. The Court rejected the County’s theory that it is an essential element under the statute that the petitioner plead and prove that they are barred from bringing an action for the recovery of the property in order to be compensated from the fund. The decision notes that the statute to allows compensation to a real estate owner who resides in property containing four or less dwelling units when the trial court that issued the deed determines they are equitably entitled to just compensation. The payment comes from the fund generated from fees charged to tax buyers. Accordingly, the petitioner need not show that she was without fault or negligence under the statute, but only need prove that she resided in the residential property and is “equitably entitled to relief”. Here, Ms. Hedrick met the criteria of the statute. She was the owner, the property contained four or fewer dwelling units, and she lived there at the expiration of redemption. She need not prove that she was barred from attacking the tax deed, and “a trial court has broad discretion in determining whether an owner is entitled to compensation, and its conclusions will not be disturbed on appeal absent an abuse of that discretion.”
The only apparent way to reconcile the results in these two cases is to recognize the deference paid to the trial court’s determination of when an owner is “equitably entitled to just compensation”; Ms. Hedrick was, Mr. Prince wasn’t.
TAX SALE REDEMPTION; TIMING AND ACCRUAL OF PENALTIES AND INTEREST:
“Timing is the secret to the universe”, and nowhere more so than in the redemption of real property from foreclosures and tax sales. In The Matter of The Application of the County Treasurer, Petition of Phoenix Bond & Indemnity, (1st Dist., June 28, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/June/Html/1001953.htm, Phoenix Bond sought to expunge the redemption from a tax sale that occurred on Monday, January 31, 2000. Phoenix argued that the owner’s redemption, (submitted on a Monday, 24 months and 1 day after the sale), was insufficient in sum because the redemption statute provides that any redemption made more than 18 months and less than 24 months is to include sale penalties calculated by multiplying the penalty period times four and dividing that percentage into the certificate amount paid by the purchaser at sale, whereas an additional penalty of 18% is to be added when redemption is more than 24 months after the sale.
The official estimate of redemption prepared by the Clerk quoted $40,452.35, and noted that an additional sum of $1,875.82 would be added after January 30, 2000; which fell on a Sunday. The office was closed, of course, on Sunday, so the owners appeared on Monday with $40,452.35 in hand to redeem. The redemption was accepted by the Clerk, and Phoenix objected. Filing a motion to expunge the redemption, Phoenix challenged the amount paid and contended that because it was made more than 24 months after the sale of sale, it should have included an additional $1,875.82. The Statute on Statutes, (5 ILCS 70/1.11), provides that the owner was entitled to redeem on the following Monday without any change in the amount required. Phoenix, however, sought to make a distinction between the “act of redemption” and the “accrual of penalty” dates. Conceding that while the period for the act of redemption could not legally expire on a Sunday, Phoenix nonetheless argued that there was no such limitation on the accrual of the penalty. The accrual of penalties, like the accrual of interest on a debt or judgment Phoenix contended, is not subject to abatement on non-business days. Accordingly, while the owners still had the right to redeem on the Monday following, they should have paid the additional penalty that accrued on that date in order to do so; i.e., their right to redeem did not expire on Monday, but the amount necessary to do so did increase on that date, making their deposit insufficient.
Reciting the rule that Illinois law favors redemptions and redemption statutes will be liberally construed, Justice Hartman reasons that “the determination of the redemption date and the calculation of the penalty are interrelated to the extent that the penalty is fixed by the redemption date.”, and rejected the theory that the calculation of the date could be separated or bifurcated from the calculation of the amount necessary. (This case also contains citations to similar decisions employing the Statute on Statutes to allow for the doing of any act provided by the law to be completed on the next, first business day following weekends and holidays pursuant to Section 1.11.)
TAX SALE RULEMAKING AFFIRMED BY THE SUPREME COURT:
In the April, 2000 installment of these keypoints, we considered the case of Phoenix Bond and Indemnity Co. v. Pappas, (1st Dist., January 25, 2000), http://www.state.il.us/court/Opinions/AppellateCourt/2000/1stDistrict/January/HTML/1982905.htm, where the First District ruled that the Cook County Collector’s power to hold tax sales necessarily carries with it the power to set reasonable ground rules for the sales. The Collector, in response to an anti-competitive practice among bidders to make multiple, simultaneous bids in order to force sales for the maximum interest, promulgated a rule resulted in the property being forfeited rather than sold. The bidders obtained a temporary restraining order preventing enforcement of the rule from the trial court, and the First District reversed, finding that implied in the authority to conduct the sales is the ability to promulgate rules for the conduct of the sales that are congruent with the legislative purpose.
On December 1, 2000, Justice Harrison, writing for the Illinois Supreme Court, http://www.state.il.us/court/Opinions/SupremeCourt/2000/December/Opinions/HTML/89098.htm affirmed the First District, in an opinion which is clear and concise. The preliminary portion of the opinion is worthwhile reading for the statement of the law it contains relating to tax sales and redemptions; (although the distinction that what is sold at a tax sale is the lien of the county rather than the real estate itself is not perfectly clear when it is stated that “the bidder…is allowed to purchase the property” rather than that the bidder purchases the lien and the right to obtain title through a petition for a tax deed). Stating that the appellate court was correct in its finding, Justice Harrison found that the power to conduct tax sales necessarily carries with it the powers to set reasonable rules for the sale, provided that the rules are consistent with the statutory scheme erected by the legislature. Since the Tax Code directs that the properties are to be sold to the lowest bidder in an effort to foster competitive bidding, and none of the bidders met the qualification of the statute of being the “lowest”, the Collector was acting within her power to treat the property as though it did not attract a proper bidder and declare it forfeited in order to avoid the subversion of the legislative goal in providing for the sale.
(This case and the reasoning in the prior case of World Savings and Loan Association v. AmerUs Bank certainly seem to suggest the proposition that a sale officer has significant implied powers to set reasonable grounds for the conduct of the sale, and perhaps the connection should not to be overlooked as developing the precedent in this area.)
Taxes/Impact Fees; Statutes Of Limitation And Latches:
In 1995, the Illinois Supreme Court declared two state enabling statutes and the resulting DuPage county ordinances imposing transportation impact fees on builders of new home developments unconstitutional in Northern Illinois Home Builders Association v. County of Du Page, 165 Ill.2d 25, 649 N.E.2d 384, 208 Ill.Dec. 328 (1995). As a result, the Court stated that “monies collected thereunder should be returned.” The impact fees were paid between January 1989 and July 1990 under protest by Sundance Homes, and in July 1996, filed this case as a class action suit to recover more than $6 million paid by the builders in the area to DuPage County. The county filed a motion to dismiss pursuant to section 2-619 of the Code of Civil Procedure, arguing that the case was time barred for failure to file within five years from the date its cause of action accrued and, alternatively, latches. Sundance argued that its cause of action did not accrue until the date of the Illinois Supreme Court decision in the NIHBA case in March 1995, and that prior to the ruling it had not right to a refund of the impact fees.
Justice Harrison’s decision in Sundance Homes, Inc. v. County of DuPage, 2001 WL 175526 (Ill. Feb. 16, 2001), http://www.state.il.us/court/Opinions/SupremeCourt/2001/February/Opinions/Html/88763.htm , serves as an “analysis with observations on the nature of time limitations applicable to legal and equitable actions by way of statutes of limitation and the equitable doctrine of laches, respectively, focusing specifically on refund litigation.” A statute of limitation begins to run on the date that the party has a right to seek a remedy from the court; “when facts exist which authorize one party to maintain an action against another’s limitation period will not await commencement until a plaintiff has assurance of the success of an action.” Specifically, relating to tax refunds, the period begins to run when the taxpayer tenders payment, not when the taxpayer discovers that the payment or assessment was erroneous. Laches occurs when there is “a neglect or omission to assert a right, taken in conjunction with a lapse of time or more or less duration, and other circumstances causing prejudice to an adverse party, as will operate to bar relief in equity a plaintiff must have knowledge of his right, yet fail to assert it in a timely manner.” A relationship exists between the two because courts will generally look to the limitation period as a “convenient measure” for determining the laches period, so that “laches is the doctrine of limitation as applied to actions in equity.” The result of the majority decision is to hold that the general five-year statute of limitations of the Code of Civil Procedure applies to tax refund cases, and the period begins to run upon the tender of payment, regardless of intervening litigation relating to the constitutionality of the tax. Justice Freeman, with Justice McMorrow joining, specially “concur(s) in the judgment of the court, but not in its opinion,” finding fault with the attack on the distinction/relationship between cases at law and equity, and giving an interesting insight into the differing philosophical positions of the Justices.
REAL ESTATE TAXES: DEVELOPMENT AND RE-ASSESSMENT:
The Illinois Property Tax Appeal Board and DeKalb County Board of Review appealed the trial court’s decision in favor of the developer of land on the issue of the timing of reassessment of property in Paciga v. The Property Tax Appeal Board, (2nd Dist., May, 16, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/2ndDistrict/May/Html/2000177.htm
At issue was the applicability of Section 10—30 of the Property Tax Code, (35 ILCS 200/10—30) to Paciga’s 23.59-acre parcel in Kingston, Illinois. Prior to 1997, the parcel was assessed as farmland at $1,178.00. In 1996, however, Paciga subdivided the property into 14 lots and installed a road to the lots. The result was that the DeKalb Board reassessed the subdivided property at $21,763.00 based on the median sales of comparable farmland in 1996. Paciga claimed the DeKalb Board overvalued his property before the PTAB, arguing that 35 ILCS 200/10—30 prohibited increased assessed valuation until the completion of a habitable structure on any lot of the subdivided property as set forth in subsection (c). The PTAB interpreted subsection (b) of Section 10—30, however, as allowing the new assessed valuation by calculating the subdivided property’s market value based on its use prior to the subdivision. The trial court reversed the decision of the PTAB, finding that it had misinterpreted the law. On appeal, the Second District agreed that there was an apparent ambiguity because subsection (a) provides that the assessed valuation of subdivided farmland or vacant property larger than 10 acres will not increase as a result of the subdivision, whereas subsection (b) appeared to provide for annual increase of assessed valuation based on an estimation of the value of the property at a fair, voluntary sale. Turning to the legislative history indicating the purpose of the statute was to “protect the real estate developers from rising assessment which result from initial platting and subdividing farmland for real estate development”, until a house is build or the property is used for commercial purposes, the Court specifically found that: “the ‘particular evil’ that section 10—30 was intended to remedy was the imposition of a higher tax upon real estate property developers before they had the opportunity to reap the benefits of their investments.” This is clear, the Court held, when subsection (a) is read in conjunction with subsection (c) stating that until a habitable structure has been completed or any lot is used for business, commercial or residential purposes, the assessed value of the lots will not be increased. When a structure on that first lot is completed however, then that lot will be assessed separately from the remaining lots pursuant to the provisions of subsection 10--30(b), and this provision explains how the remaining lots are to be assessed; i.e., “based on the estimated price the property would bring at a fair voluntary sale”. The PTAB’s error was interpreting subsection (b) as allowing a change in assessed value prior to the first lot having a habitable structure, business or commercial use: “Therefore, subsections 10—(b) applied only when none of the lots contains a habitable structure or is used for residential, business, or commercial purposes. Absent such a change in use, subsection 10—30(a) applies to the entire property and the assessment valuation will not increase.” To the great relief, I am sure, of all real estate developers around the state.
TITLE INSURANCE COVERAGE; SUCCESSORS BY OPERATION OF LAW, PURCHASE AND DISTRIBUTEES:
It never ceases to amaze me that certain topics and issues just seem to spontaneously generate and then become “hot areas” in the law. Last month, a conversation with Richard Spicuzza of DiMonte & Lizak over the seemingly harsh result in a title/trust case out of Maryland lead me to present Gebhardt Family Investment, L.L.C. v. Nations Title Insurance of New York, http://www.courts.state.md.us/opinions/cosa/2000/1510s99.pdf, as and illustration, (and warning), of the position a title company is able to take denying coverage following conveyance from the insured to a trust for estate planning purposes. Dick Bales even agreed to write a “Keypoint” from his point of view in the title industry explaining to all of us why this case represents an appropriate result. This month, the First District gives us a case even more representative of Illinois transactions, (a land trust rather than an investment trust is involved).
The Buteras in Butera v. ATGF, Inc., http://www.state.il.us:8080/court/Opinions/AppellateCourt/2001/1stDistrict/March/Html/1991387.htm were brothers, Joseph and Paul, who originally held title to real estate in a land trust, Chicago Title and Trust Company, Trust No. 51843. Joseph, Paul and Giovanni were the beneficiaries when the trust was created in 1968. After Giovanni assigned his interest to Paul and Joseph in 1974, ATGF issued a title policy naming the land trustee as the insured in 1986. In 1993, the land trustee conveyed title by trustee’s deed to an Illinois Corporation, Joe and Paul, Inc., of which Joseph and Paul were the only shareholders. A few years thereafter, in 1995, Joe and Paul, Inc. conveyed by warranty deed to Joseph and Paul, and the corporate entity was subsequently dissolved. In 1997, the Buteras learned that the 1978 real estate taxes were an outstanding lien on the property; despite the fact that in the 1986 ATGF policy insured the land trustee over all taxes prior to 1985. They filed this action against ATGF for Declaratory Judgment that they, Joseph and Paul Butera, were insured under the policy of title insurance issued in 1986. ATGF denied coverage noting the policy language that defined “insured” as those who are named (the land trustee) or those who succeed by “operation of law” as distinguished from those who “purchase”. In a decision that has some great title insurance law language, the First District affirmed the trial court’s ruling in favor of ATG.
Title insurance policies are subject to the same rules of construction as other insurance policies, in accordance with the common understanding of the words used, but with ambiguities in favor of the insured inasmuch as the policy is drafted by the insurer. Here the Buteras did not succeed to their interest “by operation of law” because the plain meaning of this phrase denotes those who acquire property rights without the necessity of a conveyance by deed. The Court held that this interpretation was consistent with title insurance cases from New Jersey and Delaware, Historic Smithville Development Co. v. Chelese Title and Pioneer National Title v. Child, which had dealt with the same policy language, as well Illinois public policy allowing insurers to place limitations on title policy insureds to a certain, foreseeable group of individuals. The Court rejected the Buteras’ contention that they were insured pointing to the policy limitation that made a distinction between those who purchase real estate rather than succeeded to it by operation of law. Then, finding the term “purchase” to be ambiguous, and adopting ATG’s interpretation of purchase as any acquisition of title by the voluntary act of the parties, the Court rejected the Buteras’ argument that “purchase” required payment of valuable consideration. The Buteras were not “successors” or “distributees”, either. The title obtained by the corporation from the land trustee was a voluntary conveyance, as was the conveyance from the corporation to the individuals. The corporation was never a named insured. The Court refused to consider whether the Buteras had an estate or interest in the property as beneficiaries of the named insured land trust. Accordingly, there was no coverage available to the brothers Butera.
UNAUTHORIZED PRACTICE OF LAW; LOAN DOCUMENTS PREPARATION IN MICHIGAN:
My friend and colleague, John O’Brien of IRELA brought a recent Michigan Court of Appeals case to my attention with an admonishment that it could have significant ramifications on residential transactions in Illinois as well. In Dressel v. Ameribank, (Mich. App., August 3, 2001), 2001 WL 877574, http://www.icle.org/michlaw/oview.cfm?caseid=22244721 the Dressels obtained a mortgage from Ameribank. The RESPA statement at closing disclosed a fee of $400 for “document preparation”. The publication provided to the homeowners, (“Buying Your Own Home”, United States Dept. of Housing & Urban Development, 1997), described this as “a separate fee that some lenders or title companies charge to cover their costs of preparation of final legal papers, such as mortgage, deed of trust, note or deed.” The Dressels filed suit against Ameribank alleging that the charge for completing the mortgage documents constituted the unauthorized practice of law and violated the Michigan Consumer Protection Act. Ameribank argued that its actions were not the unauthorized practice of law because it was an interested party to the transaction. The trial court granted Ameribank’s motion for summary judgment. On appeal, the Michigan Court of Appeals reversed, finding that the preparation of the mortgage documents was the unauthorized practice of law. The purpose of prohibiting the unauthorized practice of law, the Court reasoned, is to protect the public from untrained legal counsel and incorrect legal advice. Prior Michigan decisions had held that charging a fee for the preparation of legal documents for others was engaging in the practice of law. A distinction had been drawn, however, where the document preparation was not accompanied by advise or counsel as to the legal effect or validity of the documents. Noting that Michigan real estate brokers had long engaged in filling-in pre-printed form contracts incidental to their business, the Court turned to decisions in other states, and noted that only where the pre-printed forms had been approved by an attorney, there was no advice being given, or a separate charge being assessed, were the services not transformed into the unauthorized practice of law. Compensation appeared to be a significant factor, and accordingly, “This Court agrees with the majority opinion of the states that charging a fee can take an otherwise incidental act into the realm of the unauthorized practice of law.” Regardless of the fact that Ameribank was an “interested party” to the transaction, charging “the separate fee for the preparation of the mortgage documents by a bank crosses the threshold of providing services for the bank’s own benefit and engaging in a business where a profit is made from manufacturing legal documents without the requirement of licensure from the state bar.”
A quick review of the last ten settlement statements most of us have received at closings here in Illinois will likely reveal that most included a separate charge for “document preparation” by the lender. Hmmmm…
WRONGFUL TREE CUTTING ACT; TREBLE DAMAGES AND PUNATIVE DAMAGES:
The Illinois Wrongful Tree Cutting Act, (740 ILCS 185/0.01), provides that “Any party found to have intentionally cut or knowingly caused to be cut any timber or tree which he did not have the full legal right to cut or caused to be cut shall pay the owner of the timber or tree 3 times its stumpage value.” "Stumpage" is defined to mean a standing tree. (hmmm…being a “city boy”, I guess I don’t understand this stuff…I thought a “stump” was left after a tree was cut down…).
In Marsella v. Shaffer, (2nd Dist., August 1, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/2ndDistrict/August/Html/2000912.htm, the Plaintiffs appealed the jury’s award of damages for trees wrongfully cut by the Defendants. The Defendants cross-appealed the award of both treble damages and punitive damages for the same injury.
The Plaintiff’s third amended complaint consisted of ten (10) counts, and the mere listing of the causes for negligent property damage, assault, trespass, violation of county and local ordinances for burning trees, nuisance, and an injunction seeking to keep the Defendants from building a home on their property after cutting trees on Plaintiff’s adjoining parcel gives some measure of the animosity between the parties. The injury occurred when David Shaffer crossed onto the Marsella’s property to clear trees on his property for construction of a house. He used a Bobcat and chainsaws, and then burned the logs and tree limbs to avoid the cost of disposal. Shaffer testified that he inadvertently misjudged the lot line, and that the affected area of the Plaintiff’s property was a heavy thicket, underbrush with a few smaller trees of little value. There was extensive expert testimony relating to the quality and value of the trees cut. One expert testified that using the “trunk formula method” placed the value at $15,448, whereas replacement cost was approximately $8,350. The trial court’s instruction to the jury informed them that the plaintiffs were entitle to “three times the standing value of the trees cut down on the plaintiff’s property.” by the statute. The jury’s verdict was an award of $10,500 as three times the standing value of the trees under the act, and included $5,000 punitive damages for intentional trespass.
In affirming in part and reversing in part, the opinion by Justice McLaren noted that when Defendant’s counsel argued that the Plaintiff’s “want this punishment thing. They want to stick it to him.” He “completely misstated the law and, essentially, asked the jury to ignore the legislature’s mandate that the stumpage value was to be determined and then tripled. Defendant’s counsel essentially told the jury that it could choose to ignore the legislature’s mandate to punish defendants and simply award plaintiffs actual damages only.” Having determined that the argument presented by defense counsel was improper and constituted error, the Court also noted that the jury’s award of $10,500 strongly suggested it accepted the argument to simply compensate the Plaintiff’s with replacement cost, rather than using the mathematic trebling formula of the statute, and reversed due to the prejudice that occurred. Finally, however, the Court agreed with the Defendant that the Plaintiff could not be awarded both treble damages under the act and punitive damages for the same conduct as a common law remedy. A party can seek both a statutory penalty and a common law punitive damages award in its complaint, but there cannot be a double recovery for a single injury. The treble damages provisions of the act is punitive in nature and allowing punitive damages in addition constituted a double recovery for the same injury. The case was reversed as to the issue of damages under the Wrongful Tree Cutting Act, and remanded for a new trial on damages with instructions and a direction that there be no double recovery for the same conduct.
ZONING; ADMINISTRATIVE PRECEDENT AND ESTOPPEL:
Allan Monat brought an action seeking a mandamus against Cook County and the Department of Building and Zoning requiring them to issue a building permit that would allow him to construct a horse stable on property he purchased in unincorporated Cook County. Monat v. County of Cook, (1st Dist., May 14, 2001), http://www.state.il.us/court/Opinions/AppellateCourt/2001/1stDistrict/May/Html/1000782.htm. There were a number of nearby homeowners who kept horses on their properties, and the subdivision in which he purchased land was surrounded by a Forest Preserve and bridle paths for horses. Twenty years earlier, the Cook County Board of Commissioners granted a special use ordinance for property in the subdivision allowing private boarding of horses based upon a report from the Zoning Board of Appeals. Monat was advised of this during his negotiations for the purchase of the property. Nonetheless, in order to build a stable on the small lot he intended to purchase, Monat required a variance from the setback requirements, and applied for the variance to permit construction of the stable. Owners of several nearby homes opposed Monat’s request for a variance, but the Zoning Board of Appeals granted the variation as requested. Monat thereafter signed an offer to purchase the lot and applied for the building permit. After closing and moving in, Monat modified the plans to change the stable’s roof and applied to modify his building permit as well. The Department of Building then issued a “stop work” order. Monat then brought this action for mandamus seeking the permit and arguing that the special use permit granted him the right to a building permit and the that Department of Building was equitably estopped to deny him and issue a stop work order.
Turning first to the issue of whether the prior decision of granting the special use permit was res judicata upon the Department, the Court held: “A prior determination by an administrative body is not res judicata in subsequent proceedings before it. [Citations] An administrative body has the power to deal freely with each situation as it comes before it, regardless of how it may have dealt with similar or even the same situation in a previous proceeding.” Finding that the twenty year old ordinance was ambiguous because it did not clearly state whether it applied only to stables that existed at the time or to any stables to be built in the future in this subdivision, the Court examined the genesis and facts surrounding the special use ordinance and found that its purpose was to allow the continued housing of horses in stables existing at the time, but no evidence of any intent to expand the special use to all lots in the subdivision. Monat’s lot did not have a stable or horses when the county granted the special use twenty years ago, and therefore had no basis for a claim of right to a permit to build a stable now.
Monat was more successful with his argument that the Department was equitably estopped to deny him the permit. An affirmative act which serves as the basis for a claim that a municipality is equitably estopped must not be merely the unauthorized acts of a ministerial officer, but be an affirmative act of the municipality such as legislation, and result in extraordinary or compelling circumstances. Finding that the holding of a hearing, at which owners of neighboring property expressed their opinions, construing the prior special use ordinance, and then issuing a building permit for the stable, together constituted an “affirmative act” of the County that supported estoppel. The issue of whether Monat changed his position substantially enough to give rise to extraordinary or compelling circumstances necessary for estoppel is a question of fact, and therefore the trial court should not have granted summary judgment in favor of the County.
The case was affirmed in part, reversed in part, and remanded for findings of fact and application of law.
ZONING HEARINGS AND THE RIGHT TO CROSS EXAMINATION:
In People ex rel. Klaeren v. Village of Lisle, (2nd Dist., October 13, 2000), http://www.state.il.us/court/Opinions/AppellateCourt/2000/2ndDistrict/October/Html/2991256.htm an interlocutory appeal was brought from an order granting a preliminary injunction preventing the defendants, Saint Procopius Abbey and Meijer, Inc., from constructing a retail store on property owned by the Abbey pursuant to a contract with Meijer. The Plaintiffs were adjoining landowners who alleged that the ordinances enacted by the Village of Lisle, (also a defendant), annexing, rezoning, and authorizing the construction of a planned unit development on the property were adopted following procedurally defective public hearings. The defects alleged occurred at a July 9, 1998 joint public hearing of the Village Board of Trustees, Village Plan Commission, and Village Zoning Board of Appeals. At the public portion of the meeting in a local junior high school, the Mayor announced: “…this is a public hearing. It is not a debate. There will be no attempt at tonight’s hearing to answer any question raised by the audience…(There will be an orderly process of people from the audience speaking in favor and against the proposal)…To be fair to everyone in the audience, I ask that you limit your comments to two minutes each…No one will be allowed to speak a second time until everyone has an opportunity to speak once.”
Based on the Mayor’s procedure, the Plaintiff’s asserted in their complaint that they were denied procedural due process by virtue of the fact that there was no opportunity to cross-examine the representatives of Meijer relating to the proposed development in order to bring out the facts and impact of the development on the community to the boards. The Defendants, of course, argued that there was no procedural due process requirement for cross-examination in a zoning hearing. The Second District noted that “this is an area of the law around which no clear consensus had developed.”, and proceeded with its own analysis and determination.
The majority opinion written by Justice Hutchinson turned on the definition of the word “hearing” in the Municipal Code, and concluded that while the official presiding at a zoning hearing must be given broad discretion to ensure that the cross-examination is appropriate, relevant, reasonable and contributes to the fact-finding process, that discretion does not allow a local zoning body to adopt a procedure that does not include the right to cross-examination. Procedural devices to ease the administrative burden of allowing cross-examination, which do not unduly interfere with that right, are permissible. Limitation of the right of cross-examination based on subject matter is permissible. The joint hearing procedure used here is permissible to provide greater efficiency when several different bodies must rule on the same evidence, but the procedure must not interfere with the independent evaluation of the hearing body. The two-minute time limit used here is within the presiding officer’s reasonable discretion to limit public comment, but should be exercised with due care, and may not be the vehicle by which the right of cross-examination in the search for a full and true disclosure of the facts is denied. Finally, where a modification of a proposal before the board is produced in response to evidence obtained during a public hearing is allowed, a second hearing is required where those modifications result in a material change in the nature of the proposal, or involved introduction of additional evidence to the hearing body. Justice Rapp dissented, noted that the process of municipal annexation and zoning is a legislative function. As an administrative body, the board possesses board discretion in conducting its hearings. While that discretion may not be exercised arbitrarily, all that is necessary is a meaningful opportunity for all to present their case. In this instance, the board’s duty was to conduct a fact-gathering rather than a full adversarial hearing. The definition of “hearing” relied upon by the majority was distinguished by Justice Rapp, and he concludes with a concern that there is “a danger in the various suggestions as to the procedures set out by the majority. Too much discretion is allowed to the presiding officer. These requirements are best left to the legislature, from which all local zoning authority emanates.”