REAL ESTATE LAW PRACTICE “KEYPOINTS”

(October, 1998)

 

By Steven B. Bashaw

Steven B.  Bashaw, P.C.

Suite 1012

1301West 22nd Street

Oak Brook, Illinois  60523

Tel.: (630) 472-9990

Fax.: (630) 472-9993

e-mail:  sbashaw@bashawlaw.com

(Copyright 1998 - All Rights Reserved)

 

1. CONDOMINIUM ASSOCIATION LIEN PRIORITY AND EXTENT:

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

 

2. SURPLUS PROCEEDS OF FORECLOSURE SALES:

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

 

3. TENANCY BY THE ENTIRETY REVISITED:

A great deal of litigation, a number of articles and commentaries, and legislative amendments have followed the Second District’s 1994 ruling in the case of E.J. McKernan Co. v. Gregory that a judgment debtor’s transfer of property into tenancy by the entirety in order to shield that property from a judgment creditor can not violate the Uniform Fraudulent Transfer Act. The First District held otherwise in In re Marriage of Del Guidice in 1997, and that same year the legislature amended the tenancy by entirety provision in the Code of Civil Procedure to provide an exception if the property was transferred with the sole intent of avoiding debts existing at the time of the transfer. In its recent decision of Harris Bank v. Weber, (2nd Dist. 1998), Case No. 2-97-0508, (Released September 8, 1998), 1998 Ill.App. LEXIS 601, the Second District noted that the legislative history and comments relating to the 1997 amendment left "little doubt that Senator Cullerton’s mention of the "case out in DuPage County" was a reference to E.J. McKernan", and that "The purpose of this bill is to overcome what was viewed by many as a wrongly decided case...". The Second District ruled that based on the language of the amendment its decision in McKernan was no longer valid, but also held that the Del Guidice court’s application of the eleven factors found in the Uniform Fraudulent Transfer Act was not the appropriate test for invalidating a transfer. The test, the Second District opinion states, is confined to the amendment language of whether the transferor’s "sole intent" is to avoid the payment of "existing debts". Justice Hutchinson wrote a specially concurring opinion stating that she would remand with instructions that the trial court consider the factors set forth in the Uniform Fraudulent Transfer Act and look specifically to the timing of the transfer and determine the "sole intent" from the facts. (A similar finding, based on similar reasoning, is set forth in the Bankruptcy Court opinion in the case of In Re Gillissie, (N.D. Il. 1997), 215 B.R. 370).

 

4. "FRANK TALK ABOUT EARNEST MONEY":

For years, Harold Levine has offered "frank talk" and "war stories" to continuing legal education audiences that have decried the commonly held misconceptions about the practice of real estate law. In his most recent article, "Professional Responsibility: Frank Talk About Earnest Money", DuPage County Bar Association Brief, June, 1998, Harold bursts that most commonly held misconception; that a defaulting buyer’s earnest money may actually be available to salve the seller’s damaged finances when the deal doesn’t close. In addition to references to the Broker’s License Act prohibition relating to releasing the earnest money except upon the agreement of the parties or pursuant to a court order, Harold leads the practitioner to the recent Second District decision in Johnson v. Maki, (2nd Dist. 1997) 289 Ill.App.3d 1023, 682 N.E.2d 1196, 225 Ill.Dec. 119, notes that the current earnest money mechanisms don’t work for either the buyer or the seller, and ends by suggests that practitioners designate the title company to act as the earnest money escrowee rather than a Realtor. This, he suggests will avoid the problems that arise with the Realtor in a role as a dual fiduciary role which lead the parties to develop a deep cynicism for law and lawyers when the "earnest money games" begin.

 

5. TRUTH IN LENDING DEFENSE LIMITATIONS:

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

 

6. "VOLUNTARY" AGREEMENT TO PAY DISCHARGED DEBT CONSTITUTES AN INVALID "REAFFIRMATION":

In this case, a mortgage lender was held to have violated the injunction imposed by a bankruptcy discharge by adding the deficiency obtained in a foreclosure to the debtor’s new mortgage loan without complying with the reaffirmation requirements of the Bankruptcy Code. Solomon Smith v. First Suburban national Bank (N.D. Il. Bkptcy, Released 8/31/98), Case No. 93 B 03560, 1998 Bankr. LEXIS 1121. Mr. Smith was foreclosed by his lender, resulting in a deficiency judgment which he thereafter discharged in a Chapter 7. When he sought to purchase another home with his wife and daughter, he went to the same lender, and based upon his purported voluntary agreement to repay the discharged debt regardless of his bankruptcy, obtained a new loan which included an additional sum equal to the deficiency as part of the total debt. The debtor was allowed to reopen the bankruptcy case to file an action against the lender for violating the discharge injunction, and Judge Schmetterer noted that there were a number of factual discrepancies in the case relating to Mr. Smith’s actual intentions. Nonetheless, the Bankruptcy Court ruled that any post-petition agreement which obligates a debtor on a discharged debt must comply with the relevant Code sections dealing with reaffirmation. Failure to do so will not create a valid post-petition obligation, but merely constitute a "re-working of a discharged debt" in violation of the permanent post-bankruptcy injunction of Section 524(a) unless there is compliance with the reaffirmation provisions. This case serves as a good lesson in avoiding "post-bankruptcy-pragmatics" to lenders.

 

7. PRIVATE MORTGAGE INSURANCE CANCELLATION:

In recent legislation signed by President Clinton on July 29, 1998, the Homeowners Protection Act of 1998 (Senate Bill 318), becomes effective in July 1999. The law is directed to the problem of lenders who either require homeowners continue to pay private mortgage insurance premiums after they have accumulated adequate equity in their homes to obviate the need for PMI coverage. The Homeowners Protection Act mandates that the insurance be canceled once a 22% equity stake in the home has been achieved. This is obviously a compromise in that a "conventional" loan-to-equity ratio (which does not require private mortgage insurance) is a 20% equity position, but the Act will give borrowers a uniform national mandate to call upon with their lenders.

8. MORE ON CONFIRMATION OF FORECLOSURE SALE AND BANKRUPTCY FILINGS:

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

 

9. WARRANTY OF HABITABILITY STATUTE OF LIMITATIONS:

The purchaser contracted with John Henry Homes, Inc. to design and build a two-story home which closed in November, 1986. Just less than ten years later, the buyers noticed that the rear wall of the home had begun to buckle and filed a suit against the builder. The first complaint based on breach of express warranty was dismissed due to the one-year limitation period set forth in the contract, and Plaintiff filed an amended complaint alleging the builder breached the implied warranty of habitability. The trial court dismissed this complaint as well, finding that it was barred by the 10 year statue of limitation in 735 ILCS 5/13-214. The buyers appealed contending that the statute of limitations was four years from the date of discovery rather than ten years from the date of the act or omission, provided they discovered the problem within ten years from the date of the closing. The Second District first confirmed that the statute of limitations applies whether the cause of action is created by statute or common law, (i.e., implied warranty of habitability). Next, the Court reasoned, the ten year period begins to run on the date the home is conveyed to the buyer rather than the date of completion of building because it is not until then that the defect could be discovered. Finally, in reversing the trial court’s dismissal based on the statute of limitations, the Second District noted that the Complaint was filed within the "four year grace period" following the discovery within ten years of the date of conveyance and therefore ought not have been dismissed. As a result, there may be number of builders losing sleep...or at least another four years of it. Andreoli v. John Henry Homes, Inc., 92nd Dist. 1998), 297 Ill.App.3d 1151, 696 N.E.2d 1193, 231 Ill.Dec. 622

 

10. FHA INSURED MORTGAGES: LOSS MITIGATION PROGRAM:

Attorneys who dealt with foreclosures and legal assistance lawyers may recall that in the 1980s there was a remedial assistance program (sometimes referred to as a "HUD Assignment" of "FHA Mortgage Assistance Program") that could be employed to avoid foreclosure in the event the cause for the default was beyond the mortgagor’s control and the borrower could cure the default if granted a forbearance. That program was terminated effective February 1, 1998, but the FHA has established new procedures and mandates to implement a "loss mitigation" process for single family dwellings that may offer some similar benefits. Under the program, HUD may offer incentives to lenders, (rather than borrowers under the prior program), including compensation for implementing special forbearance plans, loan modifications, deed in lieu of foreclosure, payment to the mortgagee of a partial claim to be applied to cure the arrearage on a defaulted mortgage loan, or acceptance of an assignment of a mortgage that the lender has agreed to modify in order to cure the default. The Rules and Regulations for Single Family Mortgage insurance - Loss Mitigation Procedures can be found at 62 FR 60124.