REAL ESTATE LAW PRACTICE KEY POINTS
By Steven B. Bashaw
Steven B. Bashaw, P.C.
1301 West 22nd Street
Tel.: (630) 974-0104
Fax.: (630) 974-0107
(Copyright 1999 - All Rights Reserved)
1. FIDUCIARY DUTIES OF DEVELOPERS TO FUND RESERVES FOR TOWNHOMES AND CONDOMINIUMS:
Two decisions rendered within a week of each other should give some sobering thought to developers of condominiums and townhomes, and promises to provide a "full-employment opportunity" for their lawyers.
In Weathersfield Condominium Association v. Schaumburg Limited Partnership, (1st Dist., July 16, 1999), No. 1-98-1053, the Court ruled in favor of the condominium association against the developers for breach of fiduciary duty to maintain adequate reserves and concealment of the status of the reserve accounts from purchasers of units. (Webmaster’s note: The author’s original reference to the court opinion for Bd. of Mgrs. of Wethersfield Condominium Ass'n v. Schaumburg Limited Partnership was modified on denial of rehearing, so a link is not available - see Sept. 30, 1999 court opinion). The developers moved to dismiss the associations' complaint alleging that at the time of the turnover the developer had only accumulated $26,541.17 in capital reserves and knew that the roof and parking lot needed repairs that would cost $500,000.00. Finding that the complaint alleged a cause of action for breach of a fudiciary duty to establish reasonable reserves, the Court affirmed the applicability of Maercker Point Villas Condominium Assn. v. Szymaki, (1995), 275 Ill.App.3d 481, 655 N.E.2d 1192. The decision also found that the concealment of the reserve problems from unit purchasers stated a cause of action under the Consumer Fraud Act, and reversed and remanded the trial court's dismissal in favor of the developer.
The Second District also believes that the developer of a townhouse project has a fiduciary duty to the association to fund reserves and collect assessments. Applying the same reasoning in Maercker Point Villas Condominium Assn. v. Szymaki, (1995), 275 Ill.App.3d 481, 655 N.E.2d 1192, the Court stated "We find nothing in this language that limits it solely to situations involving condominiums...we find that there is a common-law based fiduciary duty relationship between a townhome developer and a townhome association.", in Seven Bridges Courts Assn. v. Seven Bridges Development, Inc., (2nd Dist., July 23, 1999), No. 2-98-0729. Unfortunately, this case also dealt with an exculpatory clause which was contained in the recorded declaration and provided that the assessments paid by the developer were to be based on actual operating expenses and "shall not include capital expenditures, amounts to be set aside as a reserve for contingencies or replacements... ” The trial court ruled that this language was ambiguous, against public policy and unenforceable. The appellate court reversed, finding the language clear from any ambiguity, and then went to great lengths to support its decision that exculpatory clauses can be used to limit a fiduciary's liability in this circumstance.
These two cases together should give heart to at least two groups: unit owners and associations dealing with developers who have underfunded reserves, and the attorneys for those developers; who should be at the word processor changing their declarations as they read this to incorporate exculpatory clauses.
2. FRAUDULENT CONVEYANCES AND TAX DEEDS:
In past "Flashpoints" we have devoted a good deal of discussion to fraudulent conveyances in the context of tenancy by the entirety, the legislative attempts to clarify the issues, and the resulting reevaluation of the elements the courts will look to in their review. The recent Illinois Supreme Court review of a Second District case, (yes, the "home" of the original McKernen case that started it all!), in A.P. Properties v. Goshinsky, (2nd Dist., July 1, 1999) No. 86191, gives us a new perspective on the finer distinctions in this area of the law as applied to tax sales.
In December 1993, A.P. purchased the delinquent taxes on property owned by Leanna. In June 1996, Leanna transferred her interest to Robert. In July 1996, A.P. filed a petition for a tax deed and the redemption period was set to expire on November 29, 1996. Ten days before the expiration of the redemption, Robert sold the property to the Illinois Real Estate Opportunity Fund for $5,000, and the Fund redeemed the next day. A.P. sought to set aside the transfers from Leanna to Robert and Robert to the Fund as fraudulent conveyances under the Illinois' Uniform Fraudulent Transfer Act, and the Fund moved to dismiss under Section 2-619 arguing that the Act only provides relief to "creditors" and that A.P. is not a "creditor" under the Act. A.P. also argued that the Fund's motion to dismiss its Tax Deed Petition should be denied because the Fund had not filed a redemption under protest under the Tax Code. The trial court granted both motions to dismiss, the appellate court affirmed the motions, and the Supreme Court affirmed that decision.
The Court's decision found that in order to have standing to object to a transfer under the Uniform Fraudulent Conveyances Act, one must be a "creditor" under Section 5(a) of the Act. After a review of the Tax Code, the Court concludes that the "debtor-creditor" relationship exists solely between the county and the landowner, but that "Nowhere, however, does the Code establish such a relationship between the landowner and the purchaser (at a tax sale)." While the definition of a "claim" giving rise to a debtor-creditor relationship is "expansive", and includes contingent and unmatured rights to payment, it is not all encompassing.
The Courts also rejected A.P.'s argument that the redemption was ineffective because the Fund redeemed after the filing of the Tax Deed Petition without filing a written notice of a redemption "under protest" pursuant to 35 ILCS ILCS 200/21-389. (This strikes one as similar to the reasoning that accompanies the technicalities attendant to filing a Special and Limited Appearance.) Holding that the Fund clearly did not intend to "protest "the tax sale, but simply wished to redeem, the Court distinguished the holding in two apparently contradictory cases, (Galmon and Bluegreen), holding that "a person who is not redeeming under protest need not comply with section 21-380 and will not lose their right to defend against a petition for a tax deed by not redeeming "under protest".
3. LIEN PRIORITY AND PERFECTION AGAINST LAND TRUSTS:
If the issue of lien priority is the "meat-and-potatoes" of real estate litigators, then the interplay of land trusts and lien perfection are the "baked Alaska" brought flaming down the aisle after dinner. In the recent First District case of Wagemann Oil Co. v. Marathon Oil Co. (1st Dist. June 30, 1999) No. 1-98-0553, the Court affirmed the trial court's grant of summary judgment in favor of Marathon finding that its recorded judgment lien on the real estate was superior to Wagemann's security interest in the beneficial interest of the land trust, even though the security interest was lodged with the land trustee well before the memorandum of judgment was recorded.
The land trust was established on June 1, 1973. On June 23, 1977 the beneficiaries, (the Lussows) assigned their beneficial interest to Wagemann as security. On September 11, 1992, without the consent or knowledge of Wagemann, the Lussows caused the property to be transferred to themselves as tenants by the entirety. (This conveyance was later declared void as a fraudulent conveyance, but that did not seem to overly concern the court in its decision.) On March 10, 1994, Marathon obtained a $200,000 judgment against the Lussows and recorded a memorandum of judgment with the county recorder of deeds on the same day.
The ultimate issue, of course, relates to which lien interest was "perfected" first and therefore entitled to a priority. Wagemann contended that its interest was prior because it was "perfected" by filing with the land trustee long before Marathon filed its memorandum of judgment. Marathon argued that its interest was superior because Wagemann's interest only applied to personal property (beneficial interest of the land trust) and thus did not constitute a lien on the real estate. The Court reasoned that an assignee of a beneficial interest in a land trust does not acquire a direct interest in real estate, but only an assignment of personal property, and, citing First Federal Savings & Loan Assn v. Pogue, (2nd Dist. 1979) 72 Ill.App.3d 54, and St. Charles Savings & Loan v. Estate of Sundberg, (2nd Dist. 1986), 150 Ill.App.3d 100, noted that registration of a judgment against the beneficiary of a land trust does not have the effect of impressing the real estate with a lien because the beneficiary is not the record title holder. Because Wagemann did not take steps to have its interest attach to the real estate (i.e., levy or recordation of a lis pendens), prior to the recordation of Marathon's memorandum of judgment, it was subordinate and "To hold otherwise would be inconsistent with a body of law holding that an interest in a beneficial interest does not attach to the real estate."
(And we wonder why people in South Dakota can't understand Illinois Land Trusts? Was the real error here the fact that Wagemann allowed the Lussows to retain the power of direction and may not have lodged the assignment properly?)
4. RECISSION AND THE IMPACT OF A CHAPTER 13 BANKRUPTCY:
Real estate lawyers are drawn into questions of bankruptcy law more and more frequently these days. A recent decision from the Seventh Circuit, although applying Wisconsin real estate law, serves as an excellent example of the impact a bankruptcy filing can have on a cause of action for rescission. In re J. Robin Fillion, (7th Cir. June 28, 1999), No. 98-2113, is an appeal from the District Court for the Western District of Wisconsin in a Chapter 13 Bankruptcy case. The debtors, J. Robin and Marcia Fillion received a deed from Marcia's father, Kenneth W. Bass, of the father's 152-acre farm in Dane County Wisconsin. While there was some controversy about whether the deed was also in consideration of an agreement to support Mr. Bass in his old age, it was uncontroverted that the Fillion's agreed to assume the $18,000 mortgage on the farm and forgive $5,000 of debt the father owed to the daughter, and that Bass would retain a life estate in the buildings on the property. When relationship turned "acrimonious", Bass filed a civil action in state court seeking to eject Fillion and rescind the deed. Just prior to hearing on a motion for summary judgment in the state action, the Fillions filed a Chapter 13 bankruptcy petition. The Fillions proposed to sell part of the farmland in the bankruptcy and use the proceeds to satisfy the claims of creditors, (including Bass). Bass objected to the plan claiming that it was not feasible because he and not the Fillions owned the property and initiated an adversary proceeding based on his rescission claim. The bankruptcy court denied Bass' objection to confirmation of the Chapter 13 and granted summary judgment on the rescission claim based on Wisconsin law. On appeal, the Seventh Circuit explained that Bass's objection was properly denied because "Confirmation of a Chapter 13 plan requires a substantially different inquiry than needed for a Chapter 11 plan. If the Chapter 13 plan meets the requirements contained in 11 U.S.C. sec 1325, then the bankruptcy court must confirm the plan. Creditors do not vote on a Chapter 13 plan. Under Chapter 13, if a debtor proposes a plan which complies with section 1325, a creditor has no grounds to object to the plan." Since the bankruptcy court determined that the Fillion's plan proposed to pay all creditors 100% of their claims, the plan was filed in good faith and could only be objected to as infeasible. Bass, of course, took the position that the plan was infeasible because it revolved around the sale of the land and title was disputed. The Court found against Bass on the rescission adversary, holding that the conveyance was not in exchange for support and any mutual mistake of fact did not exist at the time when the deed was given. Accordingly, the objection that the plan was not feasible failed, and the bankruptcy court was correct to confirm the plan.
(This decision also sets forth a good discussion of Wisconsin substantive law on deeds in exchange for a promise of support mistakes of mutual fact relative to the rescission aspects of the case.)
5. "NUNC PRO TUNC"ing 'EM EXPLAINED, OR, "HOW NOT TO NULLIFY A BANKRUPTCY STAY":
There probably isn't an attorney who, upon discovery of an error in an order or judgment hasn't been tempted to go back to court to enter a "nunc pro tunc" order; some of them in response to a short-lived or procedurally troubled bankruptcy. That is what counsel for the Plaintiff did in Krilich v. Plencer, (2nd Dist. June 29, 1999) No. 2-98-0660, with dubious result. At a default judgment on an agreement to purchase real estate, Plaintiff informed the court that one of the defendants had filed for bankruptcy. The trial court nonetheless entered the default order stating that it was not finding that the bankruptcy proceedings stayed or discharged the defendant, but "we'll prove this up, if they want to vacate, it would have to be something raised affirmatively; namely for protection of the Bankruptcy Code." Thereafter, the debtor in bankruptcy filed a motion in the bankruptcy court for damages and to hold the plaintiff in contempt for violating the stay. It is unclear if the bankruptcy court made any final determination on the motion. The Second District's opinion only states "The bankruptcy court took the matter under advisement and decided that an evidentiary hearing would be necessary to determine plaintiff's and plaintiff's counsel's intent when seeking the default judgment in the trial court. The bankruptcy court also pointed out that the trial court never made a finding concerning the discharge of the debt or the staying of the proceedings in the trial court.") Into this void comes the Plaintiff's counsel back in the state trial court, and moves the Court to amend the default judgment order five months after entry, "nunc pro tunc", to include a finding that the Plaintiff was not listed as a creditor in the bankruptcy, that Plaintiff was not included in the plan of reorganization, that the automatic stay would not bar the proceedings in the trial court, and that the discharge order had no effect on Plaintiff's proceeding in the state court. (A pretty tall order of the state court to interpret federal bankruptcy law, but what the heck?) The trial court granted the motion to amend stating "So I am going to grant this motion today to amend the order, and you can do with it what you will in Federal Court".
The Second District reversed the trial court finding that the purpose of a nunc pro tunc is to correct the record for clerical or inadvertent scrivener's error, and not to alter the actual judgment of the court or correct judicial errors. Examples of appropriate nunc pro tunc orders are listed, and while a trial court may enter a nunc pro tunc order even after 30 days have passed since the entry of the final order, it may not do so to supply deliberately omitted judicial action or supply a finding that it expressly refused to make previously.
6. THE DEVIL IS IN THE DETAILS; CONTRACT UNENFORCEABLE WITHOUT SPECIFYING DETAILS SUCH AS PRICE, PAYMENT TERMS, CLOSING DATE, AND ADJUSTMENTS FOR TAXES AND CLOSING COSTS:
In J.F. McKinney & Associates v. General Electric Investment Corp., (7th Dist., June 4, 1999) No. 1-98-0838, the Court held that there never was an enforceable contract for the sale of a $47,200,000 note between the holder of an option to purchase and an ultimate investor . The note was secured by a mortgage on a large building in Chicago, 200 South Wacker Drive. The Plaintiff obtained a 70 day option to purchase the note at a premium from Prudential Insurance Company and then entered into negotiations to sell the note to General Electric Investment. While GEI never signed a contract to purchase, McKinney attempted to enforce a purported agreement to purchase based upon a correspondence from GEI setting forth two alternative compensation proposals for the payment of McKinney's placement fee. Noting that "No one commits to spend more than $47 million without specifying details such as price, payment terms, closing date, and adjustments for taxes and closing costs.", the Court affirmed the district court's reading of the letter as simply proposing two compensation options; not as a promise to buy the note. Citing Illinois law that a meeting of the minds requires the application of an objective theory of contract under which understandings and beliefs of the existence of a contract are effective only if shared, the Court concluded that "It is not enough to get halfway to a contract and then hope that the jury will complete the process; the parties themselves must show assent." The fact that there were vital terms missing in the terms of the letter, in addition to language that implied continuing negotiations, negated the existence of an agreement.
While most of us do not get to work on $47 million dollar contracts for the sale of mortgages and notes, the reasoning and reference to an "objective theory" of contract formation is equally valuable in transactions of less stratospheric proportions where one party believes it hears what it wants to hear rather than what is clearly stated.
7. ABA PROPOSES CHANGES IN RULES OF PROFESSIONAL CONDUCT TO ALLOW MULTIDISCIPLINARY PRACTICES:
Just when we think that the face of the practice of law is changing within all tolerable limits, the concept of Multidisciplinary Practices promises to catapult the speed of change to another level.
On August 9, 1999 at the Annual Meeting in Atlanta, the ABA House of Delegates will be asked to vote on 13 proposed changes to the Model Rules of Professional Conduct recommended by the Commission on Multidisciplinary Practice. The goal of the recommendations is to allow lawyers to practice and share fees with other professionals such as accountants, financial planning and others; even if the primary business of the entity is not the practice of law and the lawyer is supervised by non-lawyers. The Commission's report notes that multidisciplinary practices already thrive in Europe, and proposes, for the first time, a uniform definition of the unauthorized practice of law. Regardless of the assurances of the inevitability of multidisciplinary practice, the discussion at the Illinois State Bar Association Annual Meeting resulted in a resolution requesting the ABA not move forward until the issues and problems are fully discussed. In the Real Estate Section Council, there was significant debate of the proposal ranging from the need of lawyers to be proactive in the face of certain change, to the lament over the continuing degradation of the "profession" of the practice of the law in favor of the "business" of lawyering. If the concept is already in place in Europe and on the Internet, and one who's "time has come", then there certainly seems to be merit in the assertion that lawyers must take a leadership role to assure that the ethical concerns that arise are addressed. Any recommendation by the ABA, of course, must be embraced by the Illinois Supreme Court in the form of changes to our Code of Professional Conduct and Supreme Court Rules. There is already a conspicuous absence in the fact that Illinois is one of the few states that does not mandate continuing education. The fact that there is a great current need for increased ethical awareness among practitioners will only be compounded by multidisciplinary practices seems obvious. And, if you think this discussion only applies to mega-firms with European offices and large estate and financial planning practices, think again. There is already a growing movement towards "controlled business relationships" among Realtors, lenders, title companies and other service providers that poses significant threats to the lawyer's role in real estate transactions. As noted in a recent Chicago Daily Law Bulletin Article, (April 2, 1999), Cornelia Honchar Tuite suggests several scenarios under MDP that could jeopardize law practices, including "Lawyer's real estate closing practices could all be gone if a major real estate company, bank or title company sets up its own division for closings." Practitioners will be profoundly affected - although whether for the good or bad is still a debate within the debate-by the adoption of multidisciplinary recommendations. Realtors and lenders are far more market savvy and aggressive than accountants and financial planners, and there is certain to be a huge impact on even the smallest law firms that look to real estate transactions as part of their practice. To get some insight to this debate, see the July, 1999, ABA Journal article entitled "Share the Wealth", the July 15, 1999, ISBA Bar News article entitled "ISBA hopes to block ABA's fast track for MDP", and the on-line discussions that can be found at abanet.org and isba.org.
8. STATE-BY-STATE SUMMARY OF REAL ESTATE CLOSING PROCEDURES
With the possible advent of "multidisciplinary practices" and practices that follow the internet across state lines, it seems likely that questions of how real estate closings are conducted in other jurisdictions may arise. The ABA Law Office Management Section has sponsored a practical guide to real estate closings that should help anyone who has come across these or general questions about the various distinctions in practice among the states. The "Real Estate Closing Deskbook" by K. F. Boackle includes principal real estate concepts, (i.e., "New York Style Closings", as well as the mechanics of how closings are conducted in different areas. There are checklists, forms, sample letters and step-by-step procedures relating to clearing title objections. The book is available from the ABA Service Center (800-285-2221) or can be ordered on-line at http://www.abanet.org/abapubs for $89.95, or $79.95 to Real Property or General Practice Section members.
9. CONGRESSIONAL TERMINATION OF HUD's ASSIGNMENT PROGRAM UPHELD:
Mortgage foreclosure attorney's will recall the "HUD Assignment Program" that flourished during the period from 1976 through 1996; (as a pre-condition to foreclosure the lender was required to give notice to the borrower of the right to apply for remedial assistance from HUD to avoid foreclosure of an FHA insured mortgage in the event the cause for the default was beyond the borrowers control and they met the other criterion of the program--if HUD accepted the application, the mortgage would be assigned to HUD and the lender paid in full--leading to the portfolio that was later the subject of the national non-judicial foreclosure law.) A concise history and civics lesson can be found in the recent Seventh Circuit decision reversing the judgment of the District Court of Ferrell v. United States Department of Housing and Urban Development, (7th Cir. July 26, 1999) No. 98-2361. The original HUD Assignment program was the result of a class action suit seeking to mandate HUD provide mortgage foreclosure relief to homeowners with FHA insured mortgages pursuant to the provisions of the National Housing Act. The parties reached a settlement agreement creating the Assignment Program that was implemented by a consent decree. Twenty years later, Congress enacted the Balanced Budget Downpayment Act, which removed all authority for HUD to continue the Assignment Program, and substituted a system allowing recompensation to mortgagees who implemented a variety of foreclosure avoidance and loss mitigation techniques such as forbearance plans, loan modifications, pre-foreclosure sales, and deeds in lieu of foreclosure. As a result, HUD stopped accepting assignment applications after the effective date of the Act on April 26, 1996. This case was the result of HUD’s motion to vacate its obligation under the consent decree and subsequent stipulations. The District Court entered a preliminary injunction against HUD ceasing the program and ordered HUD to either reinstate the Assignment Program or an "equivalent substitute". On appeal, the Seventh Circuit reversed, finding that the Downpayment Act withdrew HUD's statutory authority to operate the Assignment Program and both specifically precluded judicial review and provided that no law shall be construed to require HUD to accept assignments. The changes in the law were interpreted as "expressing Congress' intent to remove previous statutory authority for operation of the mortgage assignment program and establish a new approach to assisting mortgagors in default." The Court recognized that a change in the law can require a modification of a consent decree if the obligation placed upon one of the parties becomes impermissible under federal law.
In June we discussed the condemnation case, Southwestern Illinois Development Authority v. National City Environmental from the Fifth District finding that eminent domain cannot be used to transfer property from one private entity to another for the second party's profit. (The SWIDA used its authority to condemn a neighbor's vacant land for a parking lot for an auto racetrack, Gateway International Raceway, to foster economic growth, but was thwarted by the court's determination that such a taking was not for a "public use" and beyond the agency's constitutional authority.) The SWIDA has asked the Illinois Supreme Court to review the lower court's decision in its petition for leave to appeal to the high court. The Supreme Court will not rule on the petition for leave to appeal until its September term begins, but there are three parties who have already sought leave to file amicus curiae briefs if the case is accepted. (As reported in the Chicago Daily Law Bulletin, Friday, July 23, 1999.) This case promises to be one worthy of watching.
The Northern District of Illinois has moved closer to electronic case filings by litigants. The U.S. District Court has placed its civil cover sheet on its Internet Web site at http://www.ilnd.uscourts.gov/. While the cover sheet must still be printed and filed as a paper document, by making it available on the Internet, the Clerk is allowing plaintiffs to avoid coming to the courthouse for forms and hopes to cut down on errors and streamline the filing process by assuring that the form is properly completed. The Northern District is regarded as a national leader in the development of federal court Web sites, and Chief Judge Aspen has stated, "we are clearing moving in the direction of an electronic filing process."
Private Mortgage Insurance (PMI) termination rights continue to attract attention. We have previously discussed the case of Perez v. Citicorp Mortgage, Inc., (1st Dist. 1998) 793 N.E.2d 518, finding that the mortgagee's failure to inform the mortgagor of his right to terminate PMI was neither a violation of the obligation of good faith and fair dealing nor a deceptive practice, and the resulting statute that now requires notice to the mortgagor of the right to cancel PMI. The ABA Probate and Property Section, June 1999 "Keeping Current" article also noted that Indiana courts have rejected an argument that the mortgagor can rely upon FNMA guidelines providing that a servicer may waive PMI when 80% of the loan-to-value ratio is reached in favor of the express terms of the mortgage relating to continuing PMI . Huntington Mortgage Co. v. DeBrota, (Ind. Ct. App. 1998) 703 N.E.2d 160.