REAL ESTATE LAW PRACTICE KEY POINTS
By Steven B. Bashaw
McBride Baker & Coles
10th Floor - One MidAmerica Plaza
Oakbrook Terrace, Illinois 60171-4710
Tel.: (630) 954-7588
Fax.: (630) 954-7590
e-mail: SBashaw @MBC.COM
(Copyright 2000 - All Rights Reserved)
Each of the “Flashpoint” Authors writes the postings you receive for the next month in the closing days of the preceding month, (even electronic publication has it’s “deadlines”!). And so, these January notes are being written and published at the end of December, 1999--As we all wait to see just for what we have spent all our money becoming "Y2K Compliant" ....., which, of course, causes us all to be PROSPECTIVE rather than merely “reflective” of the year past.
Our editor, (i.e., the person who calls and reminds us of our deadlines, and then calls again, and then threatens, and then calls again....), suggested we offer as our reflections on where our area of the law is going in the New Millennium at year’s end..... Makes you sort wanna go hmmmmmmmmm....... but.....
I think the “key” to this year (and what we might expect to see develop in real estate in the New Millennium) is in the emergence of a number of interesting cases that seemed to play-off on one another, as well as some trends in real estate industry and practice of law that make one wonder what the future of lawyers will be in real estate transactions.
First the cases:
1. Residential Real Estate Property Disclosure Cases:
The Residential Real Estate Property Disclosure Act has been interpreted by the Courts in two significant cases; one last year and one this. Last year we saw the pronouncement in Hirsch v. Feuer, (1st Dist., October 16, 1998) 234 Ill.Dec. 99, 702 N.E.2d 265, that the Seller must be alleged to have had actual knowledge of a defect at the time of the making of the representation under 765 ILCS 77/20 in order to state a cause of action under the Disclosure Act. Now, in this last year, the Third District has ruled in Woods v. Pence, (3rd Dist., March 12, 1999), 236 Ill.Dec. 977, 708 N.E.2d 563, that while the Act requires a buyer to prove that the seller knowingly made a false disclosure, the issue is one of fact that cannot be resolved by summary judgment. It seems that what the legislature seems to give, the courts may be taking away, but then giving back enough to let us get to trial. It seems to me that the Residential Real Estate Property Disclosure Act is not going to be the key to a floodgate of litigation in the New Millennium as many have thought, but it may support some good causes of action backed-up with great facts.
2. Fraudulent Conveyances:
Fraudulent conveyances are still making case law. 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 re-evaluation of the elements the courts will look to in their review. In the Illinois Supreme Court review of a Second District case, (yes, the "home" of the original McKernen case that started it all!), A.P. Properties v. Goshinsky, (2nd Dist., July 1, 1999) 186 Ill.2d 524, 239 Ill.Dec. 600, 714 N.E.2d 519, we have a new perspective on the finer distinctions in this area of the law as applied to real estate tax sales. 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 concluded 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, and thereby the Court limited the application of the Fraudulent Conveyances Act in this context. Then, in Amcore Bank v. Hahnaman-Albreacht, Inc. (2nd Dist., April 9, 1999), 305 Ill.App.3d 63, 237 Ill.Dec. 805, 710 N.E.2d 435, the Court ruled that even though there were other guarantors available to satisfy the debt, a pattern of clearly fraudulent transfers overcame the need for strict proof of the element "hinder or delay creditors" in the Act in order to not "reward(ing) a debtor for his dishonesty...". The creditor was allowed to employ the remedy of attachment in order to avoid a Fraudulent Conveyance under a relaxed or less strict standard for "hinder or delay". There is still a lot of case law to be made in the area of Fraudulent Conveyances....
Condemnation promises to be an area the Illinois Supreme Court, (and perhaps the United States Supreme Court thereafter), will be giving some thought to in the new millennium. In South Western Illinois Development Authority v. National City Environmental, L.L.C.. (5th Dist. , April 29, 1999), 238 Ill.Dec. 99, 710 N.E.2d 896, the Appellate Court overturned the quick-take action by the SWIDA based upon a finding that the taking was for a private rather than a public purpose. (National City's recycling property was taken by SWIDA and immediately conveyed to Gateway International Raceway for a parking area in order to expand their venue to advance a favorable climate for new jobs...foster civic pride...and develop entertainment and sports in the area.) This apparent limitation of the right of condemnation was quickly followed by the decision in The Department of Transportation v. Callender Construction Co., (4th Dist., May 28, 1999), 305 Ill.App.3d 396, 238 Ill.Dec. 538, 711 N.E.2d 1199, which upheld an intricate transfer of "replacement properties" between state agencies in order to preserve wetlands while building an expressway and regardless of the criticism that the "trade" was grossly excessive and an abuse of power. The SWIDA has asked the Illinois Supreme Court to review the Fourth District's decision and its petition for leave to appeal to the high court has been granted. The Supreme Court will not rule on the petition for leave to appeal until later this year, and there are three parties who have already sought leave to file amicus curiae briefs. This case promises to be one worthy of watching.
4. Builder's Duties:
In Weathersfield Condominium Association v. Schaumburg Limited Partnership, (1st Dist., July 16, 1999), 240 Ill.Dec. 336, 717 N.E.2d 429, 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: "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), 306 Ill.App.3d 697, 239 Ill.Dec. 682, 714 N.E.2d 601, the Second District also found that there was a common-law based fiduciary duty to maintain adequate reserves, but upheld the an exculpatory clause which was contained in the recorded declaration as free from any ambiguity, and permissible to limit a builder's fiduciary liability to the Association. There has been a good deal of concern over the duties of builders, whether the implied warranty of habitability extends to common recreational facilities and the expansion of the statute of limitations period in the case law this last year. The New Millennium should be busy for law firms representing builders.
5. Lender's Breach of Duty of Good Fair and Fair Dealing as a Basis for an Action in Tort.
While there have been a good number of recent cases dealing with the implied duty of good faith and fair dealing in contract actions, (and especially relating to that duty on behalf of lenders), the recent case of Voyles v. Sandia Mortgage Corp., (2nd Dist., November 4, 1999), No. 2-98-0753, appears to be the first to recognize this as a basis for a cause of action in tort. "Defendant properly notes that no Illinois cases have heretofore explicitly recognized the independent existence of a tort action for breaching the duty of good faith and fair dealing.... Recent decisions, however, have shown that courts have implicitly accepted the existence of the tort." The Court's decision begins with a restatement of the implied duty of good faith and fair dealing, then finds that the actions of the lender relating to the credit reporting were "intentional" as "purposeful and directed" rather than "negligent" ..."careless or accidental", and finally rejects the Moorman doctrine and proximate cause as a defense. While the decision was expressly "Based on the narrow circumstances of this case", there can be no doubt that the court found a cause of action exists for breach of the duty of good faith and fair dealing, and lenders whose conduct approaches that of Fleet Mortgage here had best beware.
Now the trends:
1. Internet Transfer Tax Declarations:
If you aren't already on the Internet, the last, final, and really good reason to get going is that the Illinois Real Estate Transfer Declaration has been completely revised AND is available to be filled-out, downloaded and printed from the Web. The "new and improved" Illinois Transfer Declaration Form (PTAX-203 & 203-A, formerly known as the "green sheet") is now available. All sales occurring on or after January 1, 2000 must be reported on the new form. The new form is a one-page (two-sided) form that the Illinois Department of Revenue characterizes as more logically organized. Practitioners should note that more representations regarding the sale are now being required. In addition, a verification is now required to be included with the declaration. To find the full text of the legislation, visit:
Hard copies of the forms are now available at county recorder's offices. In addition, the development of the system to allow electronic filing is nearing completion. Preparers will be able to complete the form using software or accessing a web site and then print it out to submit it for filing. At the end of the year there were a lot of promises that this would be ready to use by the first of the year. On January 12, 2000, the Illinois Real Estate Lawyer's Association will present a program on the new form and how to complete it on the Internet. The meeting is a early morning meeting held at the Forest View Education Center in Arlington Heights, Illinois. The Lake County Recorder, Mary Ellen Vanderventer will be the featured speaker in this IRELA educational project for its member attorneys. Call IRELA Director Ralph Schumann at (847) 806-6455 if you have any questions about the project or the new declaration forms-- or John O'Brien at (847) 593-5126 if you'd like to join IRELA--an organization well worth your time and involvement.
2. The Business of the Practice of Law; 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 tabled a vote on 13 proposed changes to the Model Rules of Professional Conduct recommend by the Commission on Multidisciplinary Practice under intense pressure from state bar associations for further study. The goal of the recommendations were 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. In the ISBA 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 that will probably intensity in the coming Millennium.
3. The Business of the Practice of Law; Ancillary Business:
The ISBA, on the other hand, in its Advisory Opinion No. 99-06 adopted on November 12, 1999 by the Board of Governors, seems to actually be approving the spread of attorneys into ancillary business in the New Millennium; (or is it just my viewpoint?) This opinion relates to business transactions with clients and the referral of the client to a trust company when the lawyer receives a fee from the company. In an opinion clearly related to the rationale behind disclosure of fee arrangements between title companies and their 'lawyer/agents', the ISBA states that a lawyer may receive a fee from a trust company to whom he refers a client, but must disclose his relationship with the trust company to the client, the method and source of his compensation, and obtain the client's consent to avoid a conflict of interest. The factual scenario presented in the Opinion is obviously intended to cover the recent efforts by 'bar-related' title companies to expand their relationship with attorneys and their clients from title to trust administrative services. Carefully noting that the lawyer bills the client for legal services in preparing the trust instruments, and that the trust company does not practice law or prepare documents, the Opinion takes the position that this arrangement is permissible provided "an extensive written disclosure and consent form which the client must sign as party of the trust agreement" is obtained; (which, of course, we are all to presume is fully explained and understood by the client). In a transactional world which is "driven by meaningless disclosure", (not the least of which are the 'Miranda-like' Fair Debt Collection Practices Act statements), is it any wonder lay people don't listen to much of what lawyers have to say and take even less at face value? The reasoning of this ISBA Committee Opinion notes that: (a) a lawyer who is both a director and lawyer for a bank may not insist his clients designate that bank as a fiduciary, (b) it is professionally improper for a lawyer employed by a company selling revocable living trusts from to prepare those documents for his clients or aid in the unauthorized practice of law, or (c) receive a fee from an investment advisor to whom the lawyer refers clients unless the "…appropriate disclosures are made…", and, "…provided that appropriate safeguards are employed to satisfy the rules regarding conflicts of interest.” The Opinion concludes that the Committee "believes that the arrangement described is not professionally improper", (but fails to deal with it's own citation to the law of In re Anderson, (1972), 52 Ill.2d 202, 287 N.E.2d 682, and In re Schuyler, (1982), 91 Ill.2d 6, 424 N.E.2d 1137, which mandates that in addition to full disclosure and consent, to assure that "the client had the advice of independent counsel before entering into the transaction".) Into this foray comes the tumor, (Ed.: this term is a contraction of the words "rumor" and "truth" with some artistic license taken with the language to point more that the "truth" that the rumor), that Attorney's Title Guaranty Fund, Inc., (the underlying supporter of the bar-related-title movement in Illinois as well as the bar-related-trust organization), is also beginning to put into place an entity through which its members can "broker" publication services in foreclosure, probate and other litigation and receive compensation in some form or another. Hmmm.... lets see.... attorney's compensation in residential real estate closing is enhanced by an agency relationship with the title insurance company, compensation in trust administration can be another source of enhanced compensation with an agency relationship with the trust company, and we can all pick up a few dollars here and there by brokering our clients' publication needs through a bar-related entity. This is all based on the laudable goal of keeping lawyers in business and profitable in the New Millennium, and requires that the Client receive full disclosure and consent, but there just something here that is disconcerting.....may be its just a "Y2K Bug".
4. MERS and the Recording Systems:
Lawyers are not the only ones trying to protect our "turf" in the New Millennium. The Illinois Recorders of Deeds perceive a looming challenge in the efforts by the mortgage banking industry to take control of the process of assigning mortgages by implementing the Mortgage Electronic Recording System (MERS) in the fifty states. The goal of MERS is to provide for an electronic transfer of mortgage interests by assignment from one lender to another in the secondary mortgage market independent of having to record an assignment of the mortgage in the County in which the real estate is located. The transfer would be electronically recorded in a private database developed, supported and maintained by the mortgage industry. The system has great appeal to lenders who have to keep track of the various recording nuances in thousands of jurisdictions and sometimes transfer mortgages two, three or four times during the life of the debt. The title companies seem to have initially liked the concept because it promises to simplify title searching and provide a central point of determining ownership of a mortgage; but they are growing wary of a "dual recording" system. Attorneys seemed to like MERS at first because it promises to provide a focus for inquiry relating to releases of paid mortgages; but they too are wary of having to deal with an "unresponsive mortgage banker". The Recorders, however, are most adamantly opposed to the system and, upon closer reflection, for good reason. Putting aside the loss of revenue from the recording of all of those assignments, the Recorders note that THEY are the publicly elected officials charged with the duty of keeping the public record of interests in real estate and providing free, public access to those records. The mortgage industry, they fear, will be driven only by cost-savings and expediency to the detriment of consumers and the public's need for accessible, accurate, public information at a reasonable cost. In the past, the mortgage industry has not done well with providing disclosures, (RESPA violations), absorbing rather than passing along the cost of doing business (most lenders now charge the borrower at closing for the cost of recording their assignment of mortgage and this has been upheld by the courts provided some disclosure is made), or being responsive to inquires, (try to get past voice-mail or obtain any information on a mortgage without known the borrower's mother's maiden name.) The Recorders have backed legislation by Sen. Judith Myers (SB 370) that would require that an instrument affecting real estate be recorded in order to be valid as a response to MERS, but this seems to be an over-reaction and is being fined-tuned. The Recorder's position that the real estate records need to remain public, accessible and within the control of a publicly elected and responsible official should prevail. There are points at which even the most enlightened should recognize that moving too much into the realm of privately controlled electronic media is perhaps not good for society.
5. Keeping current with the law and getting help.... electronically:
There are, however, places where the electronic exchange of information and communication about recent developments are important, worthy of a commitment of time, and should be part of the New Millennium for Attorneys. While certainly not exhaustive, I would suggest Real Estate Practitioners consider these:
A. Subscribe via e-mail to the "Flashpoints" at IICLE, of course. You will get a monthly newsletter-like update from attorneys who are considered by their peers to be experts in their substantive area of the law.... for FREE.
B. Join and subscript to the Illinois State Bar Association Real Estate Law Section Council discussion site at http://www.isba.org/. This is a site that entertains discussion, encourages the posting of inquiries and response among its members to day-to-day legal and pragmatic problems and issues of real estate. Like the IICLE site, you can subscribe so that postings to the discussion are automatically e-mailed to you. It is like having a partner in your office you can take your problems to day or night.... for FREE.
C. While you are at it, subscribe to the ISBA case law and legislative update services. These services will keep you current with developing law and pending bills and our FREE.
D. Finally, if you practice in or around the "collar counties" near Chicago, visit the Illinois Real Estate Lawyers Association (IRELA) website (http://www.reallaw.org). It is an extraordinarily localized and practical source of information on the day-to-day practice of real estate law that is committed to the lawyer's interests. There is a "Current Developments" posting and advice about continuing education, meetings and seminars IRELA is presenting.
Happy New Millennium!