REAL ESTATE LAW PRACTICE “KEYPOINTS”
By Steven B. Bashaw
Steven B. Bashaw, P.C.
1301West 22nd Street
Oak Brook, Illinois 60523
Tel.: (630) 472-9990
Fax.: (630) 472-9993
(Copyright 1999 - All Rights Reserved)
1. DEVELOPMENTS IN ELECTRONIC CASE CITATIONS:
The Illinois State Bar Association is working with the Illinois Supreme Court on the issues relating to a "universal citation" system that will permit citations to electronically stored case decisions. The ISBA drafted a model rule in April 1999 for consideration by the Court. The model is intended to be both vendor and media neutral because of the fact that many cases are available from various sources on the Internet far before the official reported decisions appear in print. The distinction in the state bar association proposal is that decision are assigned sequential numbers as they are decided, (rather than the current case numbers assigned upon filing), and the paragraph numbers, rather than page numbers, would the internal decision locator due to the varying "page" size within various electronic formats. In essence, the Court would be the "publisher" inasmuch as it would control the sequential case and internal paragraph numbering. The citation would contain the case name, followed by the year in which the decision is rendered, a court of decision designation, an opinion number followed by the specific paragraph referenced, ending with a website domain name; i.e., Smith v. Jones, 1999, Ill. App. 3rd Dist., No. 12345, P4, Supreme Court Rule 6 currently regulates the form of case citations. (See article “State bar making push for electronic-age case cites", by Molly McDonough, Chicago Daily Law Bulletin, May 19, 1999, p. 1.)
2. TRUST ACCOUNTS AND REAL ESTATE CLOSINGS EXPLAINED:
When the Attorney Registration and Disciplinary Committee first noted that there may be a problem with the practices of attorneys acting as title or disbursing agents at real estate closings, the Illinois State Bar Association Real Estate Section Council responded with proposed amendments to the Supreme Court Rules resulting in rule 1.15 providing the circumstances under which an attorney could accept certain forms of proceeds and immediately disburse without running afoul of trust account ethics. The Rule limits the form of funds and requires a specific form of bank account. The details are discussed in the articles "Trust Accounts and the New Rules for Real Estate Closings," by Paul Sullivan of Quinn, Johnston, Henerston & Pretorius of Peoria, Illinois. The article can be found in the May 1999, ISBA Bar Journal, Vol. P., and on-line at the Illinois State Bar Association website, isba.org.
3. ELECTRONIC COMMERCE IS COMING!
Over the last few years, I have heard a great deal from my partner, Tom Smedinghoff, about the need for law establishing the verification of electronic signatures for commerce on the Internet. When the Electronic Commerce Security Act, (5 ILCS 175/1-101), becomes effective on July 1, 1999, I really didn't think that it would have too great of an impact on my real estate practice. (After all, I deal with things like the Statute of Frauds and the Rule in Shelly's Case, not "day-trading" and "e-bay" contracts.) The article in the June, 1999 ISBA Journal, Vol. 87, P. 308, "Illinois law Enters Cyberspace: The Electronic Commerce Security Act", by R. J. Robertson, Jr. and Thomas J. Smedinghoff.
4. ENFORCING JUDGMENTS AGAINST PROPERTY HELD IN TENANCY BY THE ENTIRETY"
Those who have followed these "Flashpoints" over the months have seen the gradual development of the law on tenancy by the entirety as both the courts and the legislature have attempted to deal with the issue of whether conveyance into this form of co-ownership to protect a marital homestead constitutes a fraudulent conveyance. In "Enforcing Judgments Against Property Held in Tenancy by the Entirety", Ronald R. Peterson and David R. Seligam, Vol. 87 Illinois Bar Journal, April 1999, page 196, give us a great historical overview of these developments. Beginning with the path from E.J. McKernan v. Gregory, (2nd Dist., 1994), 268 Ill.Ap.3d 383, 643 N.E.2d 414, (holding that conveyance pursuant to the rights granted by the legislature could not be fraudulent") to In Re: Marriage of Del Guidice, (1st Dist. 1997), 287 Ill.App.3d 215, 678 N.E. 47, (holding that such a conveyance could be a fraudulent transfer...and, it should be noted the author of this "Flashpoint" represented Del Guidice...), and the amendment of 735 ILCS 5/15-112 by Senate Bill 465, the authors take us through bankruptcy decisions, In Re: Gillissie, (Bankr ND Il.. 1997), 215 B.R. 370) and In Re Whittom, (Bankr CD Il., 1998) 220 BR 365, culminating in the Second District case of Harris Bank St. Charles v. Webber, (2nd Dist. 1998) 298 Ill.App.3d 1072, 700 N.E.2d 722, (where the Second District states its decision in McKernan was legislatively "overruled"). This article concludes with the observation that while the Courts have come full circle and the legislature responded with the best of intentions to resolve the "problem", we STILL do not know clearly the meaning of with "the sole intent to avoid debts existing at the time of the transfer."
(Author's note: Tenancy by the Entirety has certainly been a full employment opportunity for lawyers...)
5. TRUTH IN LENDING AND RESPA AS COMPULSORY COUNTERCLAIMS, RES JUDICATA, COLLATERAL ESTOPPEL, AND MORE:
A recent decision in bankruptcy by Judge Schmetterer reveals the intricate dance that often occurs in real estate litigation between bankruptcy and foreclosure proceedings and especially where there is a late discovery of a defensive counterclaim. In Re Margie Walker, (Bankr. ND Il., May 5, 1999), Bankruptcy No. 98 B 39289, Adversary No. 98 A 00783. Ms. Walker made a mortgage with Investaid for $63,750.00. (Conti Mortgage was Investaid's successor.) The Truth in Lending Statement disclosed the amount financed was $63,296.25. Additionally, at the closing, a mortgage brokerage fee and a yield spread premium were paid by Investaid, which Walker claimed was an illegal kickback under RESPA.
After a little more than a year following the closing, Conti filed a foreclosure in state court based on a default in payments. Ms. Walker filed a Ch. 13 bankruptcy. Conti filed a proof of claim. Walker did not object to Conti's claim. This bankruptcy was dismissed without confirmation of the plan. Conti resumed its foreclosure, and the state court entered a judgment by default against Walker. Two days prior to the expiration of the redemption period, Walker filed her second bankruptcy. Conti again filed its proof of claim; this time based on the judgment. In this second bankruptcy, Walker, however, filed an Adversary Complaint alleging that the mortgage transaction violated Truth in Lending based on the incorrect disclosure of the amount financed, a RESPA violation relating to the alleged kickback, and sought to rescind the transaction. Conti moved for summary judgment on three grounds: (1) The current TILA and RESPA claims were compulsory counterclaims that should have been raised in the first bankruptcy and therefore were waived, (2) The failure to raise the TILA and RESPA counterclaims in the first bankruptcy bars the current counterclaims as res judicata, and (3) The state court judgment of foreclosure bars Walker's counterclaims under res judicata and collateral estoppel.
In denying summary judgment, Judge Schmetterer ruled the TILA and RESPA claims are not compulsory counterclaims under the "logical relationship test" because, while they relate to the same initial transaction as the foreclosure, the counterclaims raise different factual and legal issues that are governed by different bodies of law. Then, inasmuch as Walker's first bankruptcy was dismissed without confirmation of her plan, Section 1327 of the Bankruptcy Code did not serve to bar raising the TILA and RESPA in the second bankruptcy action by adversary action. Finally, Walker's failure to raise the TILA and RESPA claims in the state foreclosure did not bar them in the adversary action as a matter of law either under res judicata or collateral estoppel. Collateral estoppel did not apply here because where a judgment is entered by default, the "actually litigated" requirement has not been met. And, while res judicata does apply to default judgments generally, the foreclosure judgment was not res judicata on these issues because (1) it did not dispose of all issues and terminate the litigation until the sale is held and confirmed, and (2) the judgment did no meet the "same cause of action" (i.e., supported by the "same evidence") test since the TILA and RESPA claims do not involve the same cause of action, either from an evidence or transaction approach.
(Oh the tangled web we weave.....)
6. CONDEMNATION: PUBLIC VERSUS PRIVATE USE:
National City Environmental, L.C. appealed the ruling of the Circuit Court of St. Claire County upholding an eminent domain, quick-take action by the Southwestern Illinois Development Authority (SWIDA) of its real estate. SouthWestern Illinois Development Authority v. National City Environmental, L.L.C., (5th Dist. April 29, 1999) No. 5-98-0263. Its argument was the SWIDA took the property for a private rather than a public purpose because it intended to and did immediately convey the property to a private party for profit. NCE operated a metal recycling center adjacent to Gateway International Raceway. The raceway needed additional parking to expand its venue to major stock car races. When NCE refused its overtures, the raceway turned to SWIDA, which advertises that "in exchange for fees and expenses", it will condemn land at the request of private developers to advance a favorable climate for new jobs...foster civic pride...and develop entertainment and sports.
After a review of the constitutional basis and historical development of condemnation law that has expanded the "public purpose" of eminent domain to include urban development, the Court noted: "As disparate as these purposes are, it should be noted that none of them involve the taking of property from one private party and the immediate transfer of it to another private party, whose interest is solely to earn grater profits." The Court found the expansion of the raceway parking primarily to increase the venue's profitability was a "private use" rather than "public purpose" and reversed the trial court. "Eminent domain is an intrusive power, and the potential for its abuse is boundless....Although the term "public use" is flexible in an ever-changing society, the basic concept of private property does not change."
(Any takers on a bet that this case will be cited somewhere, some time if the Bears try to build a new stadium???)
7. FRAUD REQUIRED TO SET ASIDE TAX DEED:
The owner of real estate sold at a tax sale brought a motion to vacate the tax deed under Section 1401 of the Code of Civil Procedure based upon bad service of the notice in In The Matter of the Application of The County Treasurer, (3rd Dist., May 4 1999), No. 3-98-0816. The trial court granted the petition noting that the tax purchaser's affidavit falsely stated that the owner was served. In fact, the owner was a professional corporation, (Charles E. Johnson, Ltd.). Charles E. Johnson, DDS, was the sole officer, director and shareholder of the corporation. His wife, Beverly, was his secretary and paid the bills; including the real estate taxes on the building. Beverly failed to pay the taxes and went to great lengths to hide this from Dr. Johnson, including hiding the mailed notices, forging letters from the county treasurer stating the sale had been an error, and altering cancelled checks to make it appear that she had paid the taxes. When the tax purchaser placed the notices for service with the Sheriff, the deputy mistakenly omitted the "Ltd." designation so that it appeared Charles E. Johnson was to be served, and then served Beverly. She, of course, failed to advise Dr. Johnson. It was on this service, and the tax purchaser's sworn statement, that Dr. Johnson based his motion to vacate the deed. The trial court granted the motion and the purchaser appealed.
In reversing, the appellate court noted that under Section 1401, the owner must prove by clear and convincing evidence that the tax deed was procured by fraud or deception on the part of the tax purchaser. Without proof of fraud, mere proof that the owner was not served is insufficient to vacate the deed. Holding that the purchaser had no knowledge of the failure of service, the court found that it was not possible for her to have the necessary intent to perpetrate a fraud. She simply relied upon the Sheriff's representation of service, and this cannot be characterized as fraud. The court also rejected the owner's argument that the trial court should be affirmed on an "equity driven analysis" adopted in other, factually similar decisions. The court responded that this approach has not been embraced by the Supreme Court of Illinois, nor has the legislature amended the Tax Code to encompass the reasoning. Accordingly, proof of the fraud by the purchaser is required before a tax deed may be set aside.
8. SUBCONTRACTOR'S FAILURE TO PROVIDE 90 DAY NOTICE TO LENDER ONLY MAKES LIEN UNENFORCEABLE AGAINST LENDER, NOT OWNER:
Where a plaintiff subcontractor provided a 90-day notice to the owners under Section 24 of the Mechanic's Lien Act, but failed to provide notice to the lender, the owners attempted to defend a foreclosure action by arguing that strict construction mandated the entire lien be unenforceable due to the failure of notice. In a case of first impression, the First District held the failure did not invalidate the lien as to the owners; only as to the lender. Petroline Company v. Advanced Environmental Contractors, (1st Dist., April 27, 1999) No. 1-98-2026. The Mechanic's Lien Act has always required strict construction inasmuch as the rights granted to contractors and subcontractors are in derogation of the common law, but the owner's contention that strict construction mandates the conclusion that any deviance whatsoever will serve to invalidate the lien entirely was rejected. The act is to be "liberally construed as a remedial act", the court ruled, and this apparent inconsistency is reconciled by distinguishing that strict construction applies to the requirements upon which the right to a lien depends, but once a lien has properly attached, liberal construction applies. Here that liberal construction resulted in finding that failure to give notice to the lender only means that the subcontractor's lien cannot have priority over the mortgage, not that the lien cannot be enforced against the owners. "The lack of notice to the mortgagee is, from the perspective of the owner, a minor deficiency. The owner's rights are not prejudiced....Accordingly we hold that notice to the mortgagee is not a requirement upon which the right to assert a lien against the owners depends."
(This decision also contains an excellent example of the "math" of "enhancement" in the calculation of the value of priority of mechanic's lien claim over that of a prior recorded mortgage that is well worth the reading.)
9. VALUATION OF MINERALS FOR REAL ESTATE TAX ASSESSMENT PURPOSES:
The Board of Review of Alexander County appealed a decision of the Property Tax Appeal Board reducing its assessed valuation of mineral reserves owned by the taxpayer in The Board of Review of the County of Alexander v. The Property Tax Appeal Board and Unimin Specialty Minerals, (5th Dist., May 11, 1999) No. 5-97-1089. The issue on appeal was the method of valuation of mineral deposits removed from the real estate. The County Assessor valued the mineral deposits based on the "income approach", (i.e., the income from the minerals as sold, less the expenses to produce the final product, and then capitalizing the net income at 25% to derive a value which was then translated into an assessed value of $2,248,000.00). The PTAB and owner argued that the assessment should be based on the "market value approach", (i.e., the fair market value of the minerals, before processing, when they were removed from the real estate, which was $.50/ton and resulted in an assessed value of $27,488.00). The Court determined that the since the minerals become personal property once they are severed from the soil in which they are embedded, the market value as they lie in the ground, prior to any removal, is the appropriate measure.
(This case has a lot of analysis of the difference approaches to valuations, but comes to the conclusion based on some foundational principals of severance and real estate law.)
10. "GET A LIFE" - try pro bono
I found my way to my favorite "inspirational" article this month by reading the "Feedback" section of the Illinois Bar News. A letter from Harold Levine, (admittedly a friend and long time mentor of the author of these "Flashpoints"), was actually the text on the cover of the Center for Disability and Elder Law volunteer recognition program held on April 19, 1999, and is as follows:
"There is a saying in our religious tradition that "he who saves a life saves the world." This has always been the basis for my commitment to pro bono work.
Pro bono work consists of simply of doing big things for small people. By referring to our clients as small people, I do not mean to belittle them in any way. Small means they are without power. That is, they are unable to make the system work for them.
We live in a world where there are lots of big organizations and forces that seem to overwhelm us all. People feel that they have no power to change things. What pro bono lawyers do is make the system work for their clients.
But back to my first sentence: When a lawyer saves a person from eviction or foreclosure, solves painful custody or family problems, obtains relief from our over-zealous government officials or gets a paycheck released, it has a tremendous effect on the recipient's life.
It restores his or her world and makes him or her whole. It literally saves a life.
The real satisfaction for lawyers in the practice of law is not the mega-buck deals where everyone has just part of the picture. The real satisfaction comes from one on one, face-to-face helping that is the essence of pro bono work.
It is coming home and saying "I solved a problem today which was very important to someone."
How many lawyers can say this?"
(Harold used this same approach on me years ago, (with a little less eloquence over lunch...I paid...), and then he introduced me to the Center for Elder and Disability Law. If you are like inspired, call Mary Schwartz at (312) 908-4463. She'll be happy to dole out a little potential satisfaction for you.)