REAL ESTATE LAW PRACTICE KEY POINTS

(MARCH 2000)

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)

 

 

1. LENDER'S BREACH OF DUTY OF GOOD FAITH AND FAIR DEALING - A TORT RECONSIDERED:

 

The December "Flashpoints" noted the case of Voyles v. Sandia Mortgage Corporation, n/k/a Fleet Mortgage Corporation, (2nd Dist., 11/4/99), No. 2-98-0753),  as the first time an Illinois court has recognized an action in tort for a lender's breach of the covenant of good faith and fair dealing.  The importance of the court's own observation that no Illinois case had heretofore explicitly recognized the independent existence of a tort action in favor of a borrower for a lender's breach of the covenant of good faith and fair dealing also recommended  the decision for the "year-end" summary of significant cases. We then learned that the decision had been "withdrawn" by the Court pending ruling on the appellant's petition for rehearing.  On February 16, 2000, the Second District published their decision on rehearing (see link above).

 

Justice Inglis' opinion restates the earlier, withdrawn decision that a lender owes a duty of good faith and fair dealing in the conduct of servicing the mortgage,  and that a breach of that duty forms the basis of a separate and independent tort in Illinois.  Distinguishing Cramer v. Insurance Exchange Agency,  (a case about an insured's claim against the insurer for breach of good faith and fair dealing in denying insurance proceeds; for which the Illinois Insurance Code provides a legislatively created, statutory remedy), the Court noted that "the legislature has not intervened to remedy the abuses of lenders in the home mortgage field".  Turning to the Moorman doctrine, the Court notes "that damages for economic losses are permitted where the plaintiff claims tortious interference with prospective business advantage", and the "economic harm caused by defendant to plaintiff's credit reputation is exactly that which defendant is under a duty in tort to prevent." The decision is specifically "Based on the narrow circumstances of this case", but provides a potent warning in our current mortgage environment where lenders are merged, loan servicing is transferred, and the borrower's get caught in the middle:  "This case involved a homeowner whose longstanding and personal relationship with the lender was terminated by defendant's purchase of the assets of the original lender.  Defendant then embarked on a course of action to force plaintiff into foreclosure...(and)...the wrongfulness of defendant's conduct, plaintiff's lack of choice in dealing with defendant, the inequality of plaintiff's position in relation to defendant and the vital importance of plaintiff's interest in her home mortgage establishes the hallmarks of any future bad faith claims arising from a lender's misconduct."  Any lawyer who practices in real estate can bear witness to the fact that lenders are more impersonal and less responsive to their borrowers as each day passes.  The printed receipt most ATMs offer is the closest thing to interaction most banks give their customers today.  This case MAY cause some lenders to rethink the consequences of refusing to deal on a personal basis with their borrowers and consider the results of their failure to communicate appropriately in an arena of such "vital importance" as servicing a home mortgage.

 

 

2.  DUTY OF GOOD FAITH AND FAIR DEALING CAN BE ABROGATED BY EXPRESS CONTRACT TERMS AND THE CREDIT AGREEMENTS ACT APPLIES TO GUARANTEES:

 

Before we all get too excited over the decision in Voyles v. Sandia Mortgage Corp. relating to the duty of good faith and fair dealing between a borrower and a lender, it might be worthwhile to review a case that was decided back in November, 1999, that found that a lender did NOT breach their duty of good faith and fair dealing relating to a guaranty, and that the Credit Agreements Act applies to a guaranty to bar affirmative defenses based on alleged oral agreements with the lender.  In Bank One, Springfield v. Roscetti, (4th Dist., 11/20/99), Bank One successfully appealed the trial court's summary judgment in favor of Roscetti finding that it violated its duty of good faith and fair dealing and that his affirmative defenses were not barred by the Credit Agreements Act,  (815 ILCS 160/1).  The case was the result of a complaint by Bank One against Roscetti to enforce a guaranty on a loan to Illini Motorama that was used to finance a floor-plan line of credit to purchase vehicles.  Roscetti responded with five affirmative defenses and a counterclaim alleging that Bank One had breached its implied duty of good faith and fair dealing.

 

First, Bank One contended that the affirmative defenses were barred by the Credit Agreements Act. The trial court, however, ruled that guaranties are not "credit agreements" under the Act and refused to strike the affirmative defenses.  The operative facts of the case were that after the floor plan note matured, Bank One continued to advance funds to Illini and thereby increased his risk, failed to inspect and monitor Illini and its floor plan, and discussed an alleged "check-kiting scheme" by Illini with its depository bank but failed to disclose this to Roscetti despite its assurances to him that it would "watch Illini like a hawk". Holding that the trial court erred in ruling that a guarantee is not a "credit agreement" within the act (which then resulted in the Bank not being able to use the act to bar the oral agreement/promise to monitor as a defense), this decision notes that during the development of case law under the Credit Agreements Act there have been a number of cases specifically dealing with guarantees, and that "A credit agreement often consists of several documents that, together, create the terms of the extension of credit." Accordingly, the trial court erred in considering the guaranty in isolation from the rest of the loan transaction.  Since Roscetti's defenses and counterclaims were all based on the bank officer's agreement to monitor Illini "like a hawk", the finding that the guaranty IS a credit agreement served to allow the bank to bar the purported oral agreements of the officer as the basis for defenses.

 

Turning then to the duty of good faith and fair dealing this decision begins with the concomitant rule that if the guaranty is part of the credit agreement, then a bank has a duty of good faith implied in its dealing with a guarantor.  That good faith requires that one who has contractual discretion exercise it reasonably and not arbitrarily or capriciously. Good faith in the context of a guarantor relationship implies an obligation to inform the guarantor of facts known by the bank that materially increase his risk.  (A material change that increases the guarantor's liability without his consent, of course, may discharge his obligation.)  Despite all of this, however, the parties are entitled to enforce a contract according to its terms, and an implied duty of good faith cannot overrule or modify the agreement of the parties as expressed in the contract and does not allow one to read into a contract an obligation that does not exist.  Here, the guaranty was absolute, unconditional, continuing and unaffected by the bank's failure to exercise its rights relating to the collateral. The guaranty also provided that Roscetti waived all notice and assumed full responsibility for obtaining information regarding Illini's financial condition. "In sum, none of the actions that Roscetti alleges Bank One to have taken materially modified Roscetti's obligations or risks beyond those for which he contracted. (Which were absolute, unconditional and continuing..."no harm, no foul".)  For that reason, the Court concluded that "the express terms of the guaranty negate all of Roscetti's claims of good-faith violations..".

 

Clearly, then, the duty of good faith and fair dealing which is IMPLIED in the case law, can be abrogated by clear and unequivocal waiver in the documentation....happy drafting...good luck objecting to those waivers in the boilerplate of your next credit agreement!

 

 

3. TENANCY BY THE ENTIRETY AND FRAUDULENT CONVEYANCES; THE ILLINOIS SUPREME COURT SPEAKS:

 

Another substantive area we have visited repeatedly over the last two years is the interplay between tenancy by the entirety and fraudulent conveyances. Beginning with E.J. McKernan Co. v. Gregory, (2nd Dist., 1994), 268 Ill.App.3d 383, through In re Marriage of Del Giudice, (1st Dist. 1997), 287 Ill. App.3d 315, Harris Bank St. Charles v. Weber, (2nd Dist., 1998) 298 Ill.App.3d 1072, In re Stacy, (N.D. Il. 1998) 223 B.R. 132, and the legislative amendments to 735 ILCS 5/12-112, a number of commentators, (including the editor of this "Flashpoint", who argued Del Giudice at trial and on appeal), have argued that the application of the criteria found in the Uniform Fraudulent Transfer Act, (740 ILCS 160/1), was improper where the legislature specifically stated that only transfers "with the sole intent to avoid the payment of debts existing at the time of the transfer" should be excluded from protection from sale by creditors of only one spouse in title.  Others have noted that the rich common law precedent on the Uniform Fraudulent Transfer Act decisions cannot be ignored.  The Illinois Supreme Court has now ruled on this issue in Premier Property Management, Inc. v. Chavez, (Il.S.Ct., 2/17/00).  Justice Bilandic begins by noting that the decisions in McKernan and Del Giudice are in conflict, and then finds that they are both incorrect; Del Giudice because it applied the "actual intent" standard of the Fraudulent Transfer Act, and McKernan because it stated that intent is never relevant. The Court's reasoning is that the sole intent standard of the amended tenancy by the entirety provision is substantially different from the actual intent standard of the Fraudulent Transfer Act. The legislature, by adopting the sole intent standard,  "has made it clear that it intends to provide spouses holding homestead property in tenancy by the entirety with greater protection from the creditors of one spouse than that provided by the Fraudulent Transfer Act.  Accordingly, "Under the sole intent standard, if property is transferred to place it beyond the reach of the creditors of one spouse and to accomplish some other legitimate purpose, the transfer is not avoidable."  This case also includes a discussion of the "Single Subject Rule" inasmuch as the amendment to the tenancy by the entirety provision was contained in an act that also amended the property tax code.  Holding that both matters have a "natural and logical connection to the subject of property", and rejecting the dissent's assertion that there is a "second requirement" to the Single Subject Rule that both provisions bear a logical relationship with one another as well as a natural and logical connection to a single subject, the decision held that the amendment was not an unconstitutional violation of the single subject rule.

 

 

4. MORE THAN YOU MAY HAVE WANTED TO KNOW ABOUT FRAUDULENT TRANSFERS; THE STATUTE OF LIMITATIONS AND TIMING THE ATTACK ON A FRAUDULENT TRANSFER:

Now that we know all about fraudulent transfers in the context of tenancy by the entirety, we still have the vast majority of cases in which a transfer is made to delay or hinder creditors, but not into tenancy by the entirety. Often, the pivotal issue is when the statute of limitations to attack the transfer as fraudulent begins to run, as in Levy v. Markal Sales Corporation, (1st Dist., 2/2/2000).  In this case, the creditor had filed suit in October 1982, but did not obtain a judgment until October 1991.  In the interim, and while the case was pending, one of the defendant/debtors quitclaimed his one-half interest in his marital residence, (then held in joint tenancy between the husband and wife), to his spouse and recorded that deed on January 16, 1987.  As a defense to the post-judgment motion seeking a turnover order of the marital residence, the debtor asserted that the transfer had occurred more than four years earlier, and therefore was beyond the statute of limitations set forth in the Illinois Uniform Fraudulent Transfer Act; 740 ILCS 160/10(a).  The creditor urged the court to interpret the language of the four-year statute of limitations as running from the date of the judgment obtained by the creditor rather than the date of the transfer. The Court rejected the creditor's argument, holding that the clear and unambiguous wording of the Act demonstrates that the four-year period begins to run on the date the transfer was made, and not the entry of the judgment against the debtor. Noting that statutes must be construed in light of their objectives, and that the objective of the adoption of the Fraudulent Transfer Act in Illinois was to promote a uniform law of fraudulent transfers among the states adopting the law, the Court reconciled a divergence between a majority of states, (Washington, New Jersey, and New Mexico), holding that the period runs from the date of the transfer, and a minority, (California, who else?), holding that where the transfer occurs during the pendency of the creditor's suit to establish his claim, the four year period begins to run on the date of the judgment.  Holding with the majority of states, the First District noted two important points: (1) the Act's 4 year provision is "more akin to a statute of repose since it operates to extinguish the cause of action on a certain date" than a limitation which can be tolled until the creditor's claim is reduced to a judgment, and,  (2) while under prior Illinois common law the creditor was required to obtain a judgment before seeking relief from a fraudulent transfer, the Uniform Fraudulent Transfer Act contemplates and provides that a creditor can take action against a fraudulent transfer before the entry of judgment, and therefore the Act "displaced" the prior common law judgment requirement as a condition precedent to attacking a fraudulent transfer.  So... there is some degree of certainty here, (the right to set aside a fraudulent transfer must be brought within four years of the transfer), but a whole new set of concerns for creditor's attorneys; (i.e., how and when to know that there is a potential fraudulent transfer which requires "provisional litigation" to avoid losing the right to set aside a fraudulent transfer once a judgment is obtain and collection efforts begin!)

 

 

5. DEED INTERPRETATION; DO "MINERAL RIGHTS" INCLUDE LIMESTONE?

 

In Save Our Little Vermillion Environment, Inc. v. Illinois Cement Company, (3rd Dist., 2/17/2000), the Court was required to interpret the language of a 1907 deed containing a reservation of  "the coal and other minerals underlying" the parcel, and whether that language reserved rights to mine limestone in the grantor's successor, SOLVE.  The grantee's successor, Illinois Cement Company, of course, argued that limestone is not a "mineral" that was reserved and therefore the deed conveyed to it, by its predecessor, the rights to remove the limestone.  Factually important was the trial testimony of quarry foremen for both parties that the "overburden", or surface material covering the limestone, varied from 3 feet to 60 feet in depth, and the only way to "mine" the limestone was by removing the surface material.  This is important because most "minerals" such as coal are removed by the process of "mining" which does NOT involve removal of the surface material. Rejecting an analysis of the definition of the word "minerals" as the appropriate vehicle for resolving the ambiguity in the deed, (and noting that in 1907 the commercial value of limestone was largely unrecognized), the Court declared the ambiguity must be "decided upon the language of the grant or reservation, the surrounding circumstances, and the intention of the grantor, if it can be ascertained."  The decision contains very good language that "where there is doubt as to the construction of a deed it is to be interpreted most favorably for the grantee...(and) most strongly against its author", and applied the doctrine of ejustdem generis, (i.e., where general words follow specific things of a particular class, the general words are to be construed as applying only to things of the same general class as those enumerated), to hold that "coal and other minerals" must have meant minerals that are mined without disturbing the surface (like coal) to the exclusion of limestone, (which is quarried, rather than mined, at the surface), and therefore the reservation did NOT include the right to remove limestone. This passed to the grantee, and on to Illinois Cement Company as successor rather than remaining in the grantor and passing to SOLVE.

 

 

6. PARTITION SUITS: PUBLIC SALE AND OWELTY AS AN ALTERNATIVE TO SALE:

 

In Steinbrecher v. Steinbrecher, (2nd Dist., 1/26/2000), the Second District reversed the trial court's ruling that property be "sold" in a partition suit instituted among the heirs following probate by listing the property under an exclusive listing with a real estate agency.  The trial court's decision to sell the property was based upon the Commissioner's report that the property could not be divided "without manifest prejudice" to the parties as required by the Partition statute.  There were three parcels with a total estimated value of $4,859,000.00, and three heirs for whom partition was necessary. And, while Commissioner's testimony was that he was unable to divide the property into three parcels of exactly equal value, he did testify that he was able to arrive at a division of the property into five parcels, and that the variation in value from the most valuable to the least valuable of the three component parts of the division would only be approximately $200,000.00.  The Second District noted that although the trial court had found it would be "a momentous job to try to equitably divide [the] parcels among the three heirs", it should nonetheless be charged to do that on remand reciting precedent that: "The law favors a division of land in kind, rather than a division of proceeds of a sale of the land and, therefore, an unequal division with owelty is preferred over a sale of the premises." The fact that at the brokered sale approved by the trial court resulted in net proceeds of the sale ($2,967,392.60) that were almost a $2,000,000.00 less than the estimated value of the property ($4,859,000) certainly supported this conclusion and the direction for a division in kind with payment of owelty.  The largest portion of the Court's opinion deals with a procedural morass that is not atypical or unexpected when family probate disputes are coupled with pro se litigants and multiple attempted appeals, but there are some well stated principals of law relating to partition suits awaiting those willing to wade through discussions of moot and timely appeals.  The Code of Civil Procedure provides that Partition sales are to be directed only where the property cannot be "divided without manifest prejudice to the owners", and the decision defines "manifest prejudice" under Section 17-108.  The Code also provides that property not susceptible to division shall "be sold at public sale, upon such terms and notice of sale as the court directions", (Section 17-116), and the Court ruled that the trial court's order listing the property with a real estate agency did not satisfy the provisions for a "public sale"; which should be "at auction of property upon notice to public of such", regardless of the fact that the Code does vest the court with discretion to set the terms and notice of the sale.  "We do not find that such discretion allows the trial court to ignore the plan language of the Code, which requires a public sale."

 

 

7. STATUTE OF LIMITATIONS ON CONTRACTS; WRITTEN VERSUS ORAL AND UNDISCLOSED PRINCIPALS.

 

The statute of limitations for enforcing an oral contract is five years, (735 ILCS 5/13-205).  The statute of limitations for enforcing a written contract is ten years. (735 ILCS 5/13-206).  The issue presented in Reid v. Wells, (3rd Dist., 11/19/99), was whether the time period in which to bring suit on a loan agreement was to be governed by the "written" or "oral” statute of limitations when the party executing the contract was the undisclosed principal for the lender. In response to the suit filed by that undisclosed principal, the borrowers moved for summary judgment arguing that since the plaintiff had not signed the agreement, it was not "in writing" as to him and should be governed by the 5 year rather than 10 year statute of limitation. Citing Munsterman v. Illinois Agricultural Auditing Ass'n, (1982) 106 Ill.App.3d 237, 435 N.E.2nd 923, for the proposition that a contract is in writing as to one only if he can be ascertained as a party from the face of the agreement, the Defendants argued that since the maker of their written agreement was the undisclosed agent for the Plaintiff, the Plaintiff was not ascertainable from the face of the agreement, and therefore it was an "oral" agreement as to the Plaintiff for the purpose of determining the applicable statute of limitations.  The case of Jovan v. Starr, (1967) 87 Ill.App.2d 353, 231 N.E.2d 639, however, was more persuasive to the Third District.  There the Court held that it was immaterial that the plaintiff was not mentioned in the written agreement because "An undisclosed principal is in a fundamentally different position than a third party to a contract. For example, whereas an undisclosed principal may step into the shoes of his agent and assume all the rights and obligations of a contract that the agent has entered into on the undisclosed principal's behalf, (cite), third parties are not afforded such a right."  Accordingly, the contract was "in writing" as to the undisclosed principal who could step into the shoes of his undisclosed agent, and governed by the 10-year statute of limitations.  Makes you wonder about all of those "nominee" contracts over the years doesn't it?

 

 

8. RESTRICTIVE COVENANT ENFORCEMENT:

 

In the 1950s, Francis and Adelaide Paradise created a subdivision named Paradise Park, divided it into 34 lots and recorded a plat of the subdivision. All of the lots were approximately one-half acre each, except lot 34, which was three acres, did not have access to the two subdivision roads, and was deed back to the Paradises after being conveyed with the other lots into a land trust.  All of the deeds conveying the lots to other grantees contained covenants restricting use to residential purposes, mandating a two-car garage, and providing that no more than one structure was to be erected on each lot. The deed to Paradise of lot 34 did not contain these restrictions. Oberto acquired lot 34 from the Paradises and then contracted to sell the property to Werchek Builders, who intended to further subdivide lot 34 into three lots and build a single-family residence on each lot. The Plaintiffs here are the owners of other lots in the original Paradise Park, and they brought this action to enjoin the subdivision and building on the subdivided lot 34 based on the restrictions on the other lots limiting the improvements to a single structure.  The trial court granted a permanent injunction against the defendant's intended subdivision and building finding that since the "first deed out" of the Paradise Park subdivision contained the restrictions, and the "public index of restrictions" maintained by the Lake County Recorder contained the restrictions, the Obertos had constructive notice of the restriction as part of the general plan for Paradise Park, even though there was no indication of the restrictions on the recorded plat of subdivision or their deed.  The Second District reversed.  First, the "first deed out" theory propounded by Plaintiff's and accepted by the Court based on the affidavits of various title examiners was rejected as "merely a practice of title examiners. In fact, this alleged 'first deed out' rule is contrary to the law, which provides that a party will not be charged with constructive notice of an interest in property unless it appears on record within the chain of title".  Since the deeds in the chain of title to lot 34 never mention the restrictions, there was no constructive notice to defendants, and "plaintiffs cite no authority to support their allegation that restrictive covenants contained in the first deed out binds third parties whose deeds did not contain the restriction.".  Constructive notice is given only when an encumbrance is in the chain of title, and an encumbrance is within the chain of title only when it is recorded within the legal record of title required to be maintained by the Recorder, (such as the grantor-grantee index), not within other indices kept merely for convenience of title searchers such as the "index of restrictions" here. Accordingly, the Defendants had no constructive notice by chain of title or official indices.  While there was a "general plan of development" for Paradise Park at the time of the subdivision, such a general plan requires a subdivision with identical conditions designed to create reciprocity between the owners, based on restrictions contained in all the deeds in the subdivision, with generally equal burdens for the mutual benefit and advantage, with notice given in the recorded plat of subdivision. Here, the restrictive covenant was not contained on the recorded plat, the restriction was not contained in the deed to lot 34, the burden was not equal, (all lots other than lot 34 were one-half acre whereas 34 was six times larger in size), and the distinction in size did not suggest equal reciprocity. Restrictions that are part of a general plan are not enforceable against and owner who has neither actual nor constructive knowledge and are not recorded within the chain of title.   (Finally, while the Code of Civil Procedure bars actions based on any claim arising or existing more than 40 years before the commencement of the action, (735 ILCS 5/13-118), the Court noted the cases cited by Defendants did not relate to restrictive covenants, but did not rule on this issue because "we do not feel the need to decide whether Section 13--118 of the Code applies to restrictive covenants.")

 

 

9. ZONING ORDINANCES AND APPLICATION FOR REZONING:

 

In a case affirming the trial court's denial of a developer's challenge of the validity of a Lake County zoning ordinance, the Second District provides a check-list and point-by-point analysis of what it takes to be successful in these actions in Northern Trust Bank/Lake Forest, N.A., as Trustee v. The County of Lake, (2nd Dist., January 28, 2000).  The builder wanted to have its 266 acres located in unincorporated Fremont Township adjacent to Mundelein, Illinois, rezoned from "countryside" to "suburban" to permit development. Upon denial, the developer filed suite challenging the validity of the zoning, seeking to set aside the ordinance, and contending that the refusal to rezone was arbitrary, capricious and unreasonable. Justice Inglis' decision affirms the trial court in a step-by-step analysis that is almost formula-like in its completeness.  Noting that a party attacking a zoning ordinance must first prove the existing zoning ordinance is invalid, and then prove the proposed use is reasonable, the burden on the challenger is clearly a great one. Turning to the presumptions that "a zoning ordinance, as a legislative judgment, is presumptively valid" and the courts will not interfere with that legislative judgment unless the challenger provides by clear and convincing evidence that the ordinance is unreasonable, arbitrary, and bears no substantial relationship to the public health, safety, morals or welfare, one can almost visualize Justice Inglis closing and bolting the door, lock by lock. The eight factors courts consider in determining whether the ordinance is valid are listed and factually correlated to the case at bar: (1) the existing uses and zoning of nearby property (2) the extent to which property values are diminished by the ordinance, (3) the extent to which the impact ordinance destroys the value of property relative to the value of promoting health, safety, morals or welfare, (4) the relative gain to the public compared to the hardship imposed n the owner, (5) the suitability of the property for the rezoned purpose, (6) the length of time the property has been vacant as zoned, (7) the community's need for the proposed use, and (8) the care with which the community has planned its land use development.

 

Holding that it can not reverse the trial court's findings of fact on these eight criteria unless they are against the manifest weight of evidence, the decision set forth some clear, black-letter zoning law: (a) density is a legitimate concern in a zoning case and an adequate basis for classification; (b) the adoption of a comprehensive plan increases the likelihood that the zoning is not arbitrary or unrelated to the public interest; (c) the 'highest and best use' of property is that which effectively utilizes a parcel of land and at the same time is in harmony with the growth goals and planning policies of the community.  All of which fairly well predict the outcome where the plaintiffs acquired the property with full knowledge of the current zoning classification.

 

10.  THE BUSINESS OF THE PRACTICE OF LAW; THE CONVERGENCE OF MULTIDISCIPLINARY PRACTICE ISSUES AND EFFORTS BY REALTORS TO PROMOTE "ONE-STOP-SHOPPING" AT THE EXPENSE OF ATTORNEY'S AND THEIR CLIENTS:

 

Over the past few months, the "Tenth Flashpoint" has been devoted to passing along discussion and conversation among real estate practitioners on topics such as "attorney-agency" relationships with title companies, "ancillary business", client disclosures, and other ethical and "business of the practice" issues.  During the month of February 2000, some most unexpected developments in the arena of lawyer-Realtor relationships have occurred in the "collar counties" surrounding Chicago that portend great impact on the real estate practitioner who engages in residential transactions.  The following article by Ralph J. Schumann presents, admittedly in a somewhat biased fashion, a real estate lawyer's view of these developments and the interplay they have with Multidisciplinary Practice Issues. (The ISBA Real Estate Section Council Resolution referenced in Ralph's article can be found in its entirety on the Real Estate Section Council's discussion site at ISBA.org.  The Section Council notes that the resolution set forth below has not yet been reviewed or approved by the ISBA Board of Governors, and does not constitute the opinion of the ISBA Board of Governors unless and until same is passed by the Board. The Article will be published in the forthcoming Northwest Suburban Bar Association newsletter.)

 

 

From:   Ralph J. Schumann, Real Estate Committee Chairperson

Subject:            MDP and Related Issues

 

            "One-Stop Shopping"

            Threatens to Bring about

            Drastic Changes To

            Your Practice. 

 

            The "Bean Counters" Are Coming. 

 

"One-Stop Shopping" is the oft-heard mantra of Multidisciplinary Practice proponents.  These entities pose a threat to your practice and to consumers of legal services.  Core attorney values of loyalty and independence are being threatened by recent developments.  Yet, too many attorneys remain unaware of the threat.

 

Some recent developments affecting attorneys are too critical to let pass without comment.  They may determine our future as small- to medium-size practitioners.

 

 

Recent Developments

in Real Estate Context

In the wake of the Burnet Title situation, where Burnet "graciously" offered to handle title insurance for sellers listing with them, we now have Coldwell Banker planning to set up an in-house staff attorney or attorneys to handle real estate transactions for their customers, and most recently, we have Koenig & Strey sending out its explosive "Closing Myth Number 1" memorandum on February 9th, which attempts to persuade its customers that they do not need an "outside" attorney to handle the preparation of conveyance documents or to handle the title preparation.  "Welcome to the Koenig & Strey family" they say, in effect. Let our team manage your real estate transaction "from contract to closing," Koenig & Strey suggests, "for no additional charge" because the "additional service [of having attorneys employed by their office prepare documents for the closing] is included in our discounted title price."  No word yet on whether the in-house attorney will be two cubicles down from the agent who took the listing, or whether the in-house attorney will be in some separate office.  It is pretty clear, however, that, at the very least, some prohibited fee sharing will be involved if there is "no additional charge" for the services.

 

I do not have to tell you what a wide range of ethical and unauthorized practice of law violations this proposal presents.

 

This is not a mere academic issue; this is a survival issue.  As I see it, we have only two options: continue to hide our collective heads in the sand, or rise to the occasion.

 

The ISBA Real Estate Section Council met two days after the memo came out and issued a strongly worded condemnation of Koenig & Strey, citing its prohibited and potentially devastating effects.  That resolution condemns Koenig & Strey's proposal as "intended to encourage and promote the unauthorized practice of law," and goes on to recite:

 

That the Real Estate Section of the Illinois State Bar Association supports and commends the efforts of the Illinois Real Estate Lawyers Association (IRELA) in raising the standards of professionalism set forth in the Section Council's Strategic Plan adopted in 1999, in promoting a positive image of attorneys in residential real estate transactions and by supporting continuing education.

 

The Section Council urges the Illinois State Bar Association, through its Board of Governors, Officers, Staff and Legal Department, to devote its efforts and resources in response to programs and statements such as Koenig & Strey's "Closing myth number 1", the efforts of some to obstruct or remove attorneys from meaningful representation of clients in residential real estate transactions, and the challenge of multidisciplinary practices.

 

 

The Trend is Global

The Barbarians Are at The Gate.

No, Let Me Rephrase That, The Gate Has Already Come Crashing Down.

 

The Koenig & Strey situation is just the tip of the iceberg.  The phenomenon is manifesting itself in many practice areas.  MDPs are on the horizon.  "One-Stop Shopping" in the form of entities like the Big Five accounting firms is being hotly debated at the ABA.  On February 13, 2000, the ABA Midyear Meeting in Dallas featured a Town Meeting "web cast" on whether or not the ABA should modify its Model Rules of Professional Conduct to allow MDPs.  Currently, Rule 5.4 of the ABA Model Rules prohibits attorneys from sharing fees with non-attorneys, and from partnering with non-attorneys if any part of the partnership activities would constitute the practice of law.  Big Five accounting firms such as Arthur Anderson, KPMG, Ernst & Young and PricewaterhouseCoopers, who have thousands of attorneys on staff, want this rule changed to pave the way for offering "name-brand" legal services in addition to their accounting services. 

 

The Big Five accounting firms have made it very clear that they will "take no prisoners" in their quest for legal services dominance.  There are numerous ethical problems, however.  They would have us believe, for example, that there is no problem reconciling the contradictory duties of a lawyer to protect client confidences with those of an accountant serving an audit function to make full public disclosure of client information.  They would have us believe that attorneys reporting to non-attorney "bean-counters" who are anxious to corner more of the global market will not be subject to any pressure to compromise their professional standards.

 

Why doesn't the ABA resist this trend more strongly?  PricewaterhouseCoopers, it should be remembered, is the firm that is the ABA's key "litigation support" arm.  They have paid a lot of money to get into that position, and, now that they have the "ear" of the ABA, will go to great lengths to try to sell its MDP proposals to allow it to branch out into the legal services area.  When you analyze the activities of the "behind-the-scenes" players, it is not hard to see why the ABA is becoming less and less the friend of the small- to medium-size firm practitioner. [I am indebted to Peter Birnbaum, President and CEO of Attorneys' Title Guaranty Fund, for the background information on PricewaterhouseCoopers and for other information.]

 

Who loses out?  Not just the small practitioner, but also the consumer, who loses the ability to rely upon an attorney loyal to his interests for independent, professional counsel free from inherent conflicts of interest.

 

 

What Can We Do?

 

We should focus on our professional responsibility to observe high ethical standards in dealing with our clients.  These standards, properly viewed, are a blessing.  Our duties of loyalty and independence set us apart from mere businesspeople plying a trade.  These are exactly the values that can help us preserve our worth to the consumer.  The higher the standards with which independent attorneys must comply, the greater our value to consumers, and the better we can distinguish ourselves from "staff" attorneys at MDPs.  When MDPs lower the bar and compromise these standards in order to maximize their bottom line, consumers will suffer.  (In at least one situation that has come to light, a Koenig & Strey seller allegedly already has been damaged by the failure to have independent representation.)

 

 

Additional Suggestions:

 

1.  Get involved in your bar association; get active, network, and take action to preserve the role of the independent attorney in the real estate transaction.

 

2.  Real estate practitioners should join an organization such as the Illinois Real Estate Lawyers Association (IRELA), if you have not already done so, and get involved.  IRELA, started a few years ago by Arlington Heights attorney John O'Brien and others, has as one of its core goals the preservation of the role of the independent attorney in the real estate transaction.  IRELA is working toward this goal in the community, in the legislature, and, if need be, in the courts.

 

As individual attorneys, focus on your own practice.  Observe high standards of professionalism and courtesy to other parties yourself.  We must clean our own house.  We cannot allow the profession to continue to come into disrepute, because the negative image pervading society in countless "lawyer jokes" and jabs against lawyers in sitcoms and on talk shows undercuts our value to the public as independent, trusted professionals with high ethical standards.  Every incivility, as Peter Birnbaum, President and CEO of ATG, said at a recent bar association Real Estate seminar, every instance of "envelope-pushing", greedy opportunism or corner cutting that goes unchecked diminishes us all.

 

Pay attention to what is going on around you.  If you run across another Coldwell Banker "friendly captive lawyer" situation or unauthorized practice of law situation, let the NWSBA know, or let IRELA know.  Get the word out regularly about the importance of having an independent attorney working for a consumer in a real estate transaction.  Make sure your clients know the value of the services you can provide as an independent legal professional.  IRELA is working in this area constantly, and has recently received commendation for its efforts in the service of the profession from the ISBA Real Estate Section Council, which noted IRELA's efforts in its recent resolution.

 

We all need to develop new and more effective ways to deliver legal services to all types of consumers, and especially to the increasing numbers of property owners who choose to go the "For Sale By Owner" route.  We need to market our professional services more effectively independently, and through means such as IRELA's "Find-a-Lawyer" service on its web site (at www.reallaw.org), as well as other means taking advantage of new developments in technology.

 

This is an exciting time: We are intelligent professionals.  We can take advantage of opportunities at the start of the new millennium and use:

$  E-commerce to our advantage as it grows and becomes more widespread;

$  Internet resources to improve the effectiveness of our service delivery; and

$  The power of technology to streamline our practices.

 

But it is up to us to see the writing on the wall, and take decisive action before the Coldwell Bankers, the Koenig & Streys and the PricewaterhouseCoopers of the world steamroll the private small- to medium-size practice into oblivion.  Hiding our collective heads in the sand is no longer a viable option.