REAL ESTATE LAW PRACTICE KEY POINTS
By Steven B. Bashaw
Steven B. Bashaw, P.C.
1301 West 22nd Street
Oak Brook, Illinois 60523
Tel.: (630) 974-0104
Fax.: (630) 974-0107
e-mail: sbashaw @bashawlaw.com
(Copyright 2001 - All Rights Reserved)
(EDITOR’S NOTE: This month’s installment of the Real Estate Law Practice Key Points comes to you from our new office; physically and electronically...and now some of the boxes are getting put away…. This month has been a little more hectic (we almost didn’t have health insurance) and a little more daunting (you’ll never know the beauty of a T-1 communications line until you have to log on to AOL at 9.2k with a 56k modem), so the coverage is a little more brief than usual. Please note our changes in your records and computer. You will find these “Keypoints”, as well as earlier month’s, archived on my website, (www.bashawlaw.com), as my “thanks” for your support and encouragement. Please logon to the website, feel free to browse, read, copy the materials and e-mail us there.
In addition to encouragement from the Illinois State Bar Association’s Real Estate Section Council, and the Illinois Institute of Continuing Legal Education, it should be noted that Chicago Title Insurance Company helps underwrite the monthly production of these real estate law Keypoints. Chicago Title is committed to the role of attorneys in real estate transactions and their continuing education in this area. Its staff attorneys are pleased to offer their view points on various developments in the law as set forth below.)
1. RESULTING TRUSTS: RULES AND BURDENS OF PROOF:
A Resulting Trust arises from the presumed intention of the parties based on their conduct rather than a contract or agreement, and is created by operation of law when one person furnishes the consideration for the purchase of property while the conveyance is taken in the name of another. In Judgment Services Corporation v. Kathleen Sullivan, (1st Dist., March 23, 2001), the imposition of a resulting trust was attempted to avoid the impact of a partition suit brought against Kathleen by a creditor of her husband, (attorney John Sullivan, who was disbarred and had a sizable judgment against him as a result of conversion of client’s funds in his trust and estates practice). The Sullivan’s purchased their residence in Wilmette in 1972 for $58,000.00; with a mortgage of $22,000.00 plus $36,000.00 received from Kathleen’s father. In 1996, Judgment Services obtained a sheriff’s deed conveying John’s interest in the property to them. Prior to that time, John had quitclaimed his interest to Kathleen and received a discharge in bankruptcy in 1994. Even though the title to the property was taken in the name of John and Kathleen as joint tenants in 1972, Kathleen argued that title was actually held through the years as a resulting trust in favor of her father due to his contribution of $36,000 of the purchase price. The trial court bought the argument and ruled in favor of Kathleen, finding that John never held an ownership interest in the property to which the lien could attach. The Appellate Court reversed (J. Gallagher and O’Brien) with Justice Buckley dissenting. Noting that there are certain rebuttable presumptions relating to transfers from one family member to another, (i.e., that the transfer was intended as a gift rather than to create a resulting trust), the majority opinion holds that Kathleen did not meet the burden of proof of establishing a resulting trust by clear and convincing evidence at the trial. Under the facts in this case, and reciting a litany of presumptions raised in inter-family transactions, the Court determined that Kathleen did not overcome the burden that her father intended the $36,000 to be a gift rather than give rise to a resulting trust. The dissenting opinion felt that this factual determination was best left to the trial court, and that the majority “improperly reweighs the evidence to reach a conclusion opposite to that reached by the trial court.” The case has been remanded with directions for additional proceedings relating to any equitable lien that may exist on the part of Kathleen.
2. REAL ESTATE TAXE SALES; INDEMNITY FUND:
When he failed to timely redeem, Ralph Prince’s property was sold at a tax sale, and thereafter a tax deed was issued, Prince v. Rosewell, (1st Dist., March 16, 2001). Three years after the deed, Ralph filed a petition for indemnity under Section 21-305 of the Property Code. That section provides that any owner of property sold at tax sale “without fault or negligence” on his part has a right to be indemnified for the loss or damage by reason of the issuance of the tax deed. The same section also provides that in the case of residential real estate occupied by the petitioner, the court can find that an owner is equitably entitled to compensation regardless of fault or negligence. Here, Mr. Prince was clearly at fault and negligent in allowing the home to be lost for nonpayment of taxes. There was ample evidence that he was advised he was to pay his taxes, received numerous notices to redeem, and did not do so. Additionally, despite the evidence that he was 72 years old, was blind in one eye, partially blind in the other, suffered from high blood pressure, diabetes, a pinched nerve, heart attack and sclerosis of the liver, had his right leg amputated, and no formal education beyond the fifth grade, the trial court found that he “lacked credibility” and was not equitably entitled to indemnity under the Property Code. The First District’s decision in this case clearly delineates the distinction between the “without fault or negligence” standard from the “equitable entitlement” basis set forth in the Code. Asserting that “a trial court has broad discretion in determining whether a petitioner is equitably entitled to compensation, and its conclusions will not be disturbed on review absent an abuse of that discretion.”, the First District decision affirms the trial court. (“It is not the function of this court to reweigh the evidence or substitute our judgment for that of the trier of fact.”….sound familiar? Is this the same Court? Well…it is the First Division…just the Fifth Division rather than the Sixth…) This is a good case to review. It will remind you that a client who has lost their home in a tax sale may be able to obtain indemnification, regardless of the depths of their fault or negligence, with equities on their side.
3. REAL ESTATE CONTRACTS; ANTICIPATORY BREACH AND RES JUDICATA WOES:
In Altair Corporation v. Grand Premier Trust and Investment, Inc., (December 20, 2000), the Court considered the impact of a prior dismissal of a complaint filed claiming anticipatory breach, and ruled that the result was res judicata on the filing of a subsequent action. On July 29, 1997, the parties entered into a contract for the sale of real estate in Waukegan, Illinois. The contract provided that (1) Grand Premier would either provide a letter from the City that no retention area was required as part of the development of the property, or, that Grand Premier would pay the cost of constructing the retention/detention area, and (2) the property would be vacant and the surrounding area clean at the time of closing. Nine days before closing, no letter was forthcoming from the City, and Altair sent a letter to Grand Premier requesting that $665,674.89 be placed in an escrow to cover the cost of building the retention pond; which sum included $120,000 for the purported reduction in the value of the land due to the dedication of the retention area. Grand Premier responded by questioning the extent and cost of the retention construction and denying any basis for compensation for diminution of value. Three days later, (six days before the agreed upon closing date), Altair filed its first complaint alleging anticipatory breach by Grand Premier. While the parties litigated, the closing date passed without closing, and then the trial court dismissed the first complaint, (presumably finding that there was no cause of action for anticipatory breach). Altair appealed and the trial court’s dismissal was affirmed. After the appeal of the dismissal of the first complaint, Altair filed its second complaint. This action moved from anticipatory to actual breach allegations, alleging Grand Premier’s failure to obtain the City’s letter that no retention area was necessary and that various debris remained on the property as a breach on the date set for closing. Grand Premier moved to dismiss pursuant to Section 2-619 arguing res judicata and election of remedies, and won in the trial court. Altair appealed again, and lost again.
Res judicata precludes subsequent litigation between the same parties on the same claim after a court of competent jurisdiction renders a final judgment on the merits. Res judicata precludes not only those issues that were actually raised, but also those that could have been raised in the first proceeding, and is founded on the principal that litigation should have an end rather than allow harassment by multiple suits. Noting that the Illinois Supreme Court has adopted the “more liberal transactional test”, (versus the “same evidence test”), and that all of the facts alleged in the second complaint existed at the time of the dismissal of the first complaint, the Second District found res judicata applied to bar Altair’s second proceeding.
While instructive for its warning to those of us who are tempted to file in the arena of anticipatory breach, (a difficult and nebulous concept in the inception), the decision here is also noteworthy for the laundry list of “ways around res judicata” that the Court gives those of us who are tempted: (1) the parties agree that the plaintiff may split his claim, (2) the court reserves the plaintiff’s right to maintain the subsequent action in the first case order, (3) the plaintiff is precluded from complete relief in the first case because of subject-matter jurisdiction issues, (4) the finding in the first case is inconsistent with the equitable mandate of a statutory scheme, (5) the plaintiff’s damages are recurring or ongoing, or (6) there is a clear and convincing showing that the policy of res judicata are inapplicable for some extraordinary reason. Altair wasn’t able to make use of them, but the Court gives ample warning and some instruction to those who will tread into the forest of anticipatory breach on how to get back out again.
4. EMINENT DOMAIN; SWIDA v NATIONAL CITY LIMITED:
In 1999, the Fifth District’s finding in South Western Illinois Development Authority v. National City Environmental L.C., 304 Ill.App.3d 542, 238 Ill.Dec. 99, 710 N.E.2d 896, that SWIDA’s use of its condemnation power to take property at the request of private developers to increase their profitability was an unacceptable expansion of that power earned it a good deal of commentary. In the recent case of Southwestern Illinois Development Authority v. Masjid Al-Muharirum, (5thDist., January 30, 2001), the same Court dealt with the same agency’s use of its advertised power of eminent domain to transfer ownership of property from one entity to another, and reached a different decision, while limiting the application of its previous decision. The new millennium case deals with the Mosque property of a not-for-profit religious corporation that was transferred to a limited partnership of private investors providing housing and renovation in a blighted area of East St. Louis, Illinois. The Mosque asserted in the trial court that SWIDA lacked the constitutional authority to take this property, and cited the special concurring opinion filed in the 1999 case. The Fifth District’s opinion clearly states that the Mosque’s “reliance upon the words and ideas expressed in that special concurrence is misplaced. Obviously, those words and ideas do not speak for this court.” Noting that “The singular facts of that case were essential to the constitutional analysis”, the Court noted that “The key to the case (SWIDA v. National City) lies in the fact that SWIDA exercised its eminent-domain power purely in the name of further economic development of the area.”, whereas the focus of the exercise in the instant case is urban renewal, and “The exercise of eminent-domain powers for the purpose of eliminating slums or blighted property is a proper use for a valid public purpose.”…and…”if a public purpose is served…it makes no difference that the condemning body chooses to transfer title…to a private, for-profit entity to carry out that purpose.” Which leaves us with the suggestion that it is what you do, (parking vs. urban renewal), rather than how it is done, (i.e., advertising the use of the governmental power to condemn to entrepreneurs), or who profits thereby that is at issue.
5. CONDOMINIUM ASSOCIATION LATE CHARGES; SOME FEED BACK:
Last month, we discussed the Third District appeal by a condominium homeowner alleging that the late charges her association levied upon her for failure to pay her assessment constituted an unenforceable penalty as they “piled-on”. (Hidden Grove Condominium Assoc v. Crooks, 3rd Dist., January 26, 2001). I received the following remarks from a “trench warrior”, Donald E. Weihl, who had some pragmatic problems with the impact of that decision:
“The legal system in this country and state works very well.
That notwithstanding, once in a while judges make decisions about a subject that they know nothing about and apply law that creates devastating problems.
In the above case (Hidden Grove v. Crooks) the judges have totally overlooked the fact that the Board of Managers needs the monthly fees of all condo owners to meet the normal expenses of the condominium. If the $25.00 fee is not cumulative, the owners have no incentive to pay regularly and the condominium association must increase the fees of everyone to cover ordinary and regular reoccurring expenses. As the fees are increased there is a converse reduction of condominium unit values because buyers desire to purchase units where the fees are low.
There are so many adverse ramifications of this bad decision that I won’t bore you because you are familiar with them. Suffice it to say, it would be appropriate to require Justice Holdridge and Justice Lytton and Justice Breslin to serve a three-year term on a condominium Board of Managers. The experience would provide a needed education and understanding of why bylaws for condominiums provide for cumulative late charges.”
Whew, Don! I dunno… sentencing Justices to six hours every Wednesday night in the association management office in Schaumburg going over the books seems ‘cruel and unusual punishment’ to me…but maybe an hour or three talking to Judge Posner about the “economic approach” to the law might be enough??
6. TITLE INSURANCE AND THE IMPACT OF A DEED TO A FAMILY LLC ON COVERAGE:
(Ed: When Dick Bales and I spoke recently, I shared a case with him from the Maryland Court of Special Appeals on title insurance coverage that Richard Spicuzza of DiMonte & Lizak brought to my attention. We both found the case to cover an area of concern that might easily “slip by” most of our friends who practice either exclusively in estate planning or real estate, with some potentially devastating results. Here is my summary of the case, followed by Dick’s comments from the title insurance viewpoint.)
In Gebhardt Family Investment, L.L.C. v. Nations Title Insurance of New York, Inc., (Court of Special Appeals of Maryland, September, 1999), the LLC was a family trust that sued the title insurance company for breach of contract relating to its title insurance policy. The Gebharts had individually purchased 31.6707 acres in Prince George’s Count in 1987. Eight years later, they learned that someone else was paying property taxes on 4.75 acres of the property, and filed a claim against Nations Title relating to the cloud on title. Before this matter was resolved, however, the Gebhardts conveyed the title to the entire acreage into the Gebhardt Family Investment L.L.C. as part of their estate plan. The Gebhardts were the sole beneficiaries of the LLC. Thereafter, the Gebhardts and the LLC sued Nations Title for failure to resolve the cloud on their title, and Nations defended by denying that there was coverage after the date of conveyance into the LLC by the terms of the policy. The policy provided that coverage continued “so long as such insured retains an estate or interest in the land,”. There was an exception to a transfer by operation of law, but the transfer to the LLC was clearly found by the Court to be a voluntary transfer distinct from one by operation of law and regardless of the fact that the Gebhardts were the sole members of the LLC. After the conveyance, the Gebhardts no longer had an interest in the property. Rather, it is the LLC that has ownership, and to hold otherwise, the Court stated, would be to disregard the nature and viability of limited liability companies. If the party paying the real estate taxes were to bring an action claiming adverse possession or to quiet title to the 4.75 acres after the transfer, it would be the LLC and not the Gebhardts that would have to defend the action to preserve title because the Gebhardt conveyance was by a special warranty deed. There was consideration for the conveyance because “the Gebhardts reaped the limited liability and estate planning benefits conferred…and it is disingenuous for the Gebhardts to now deny that the conveyance ever took place.”
I am not as familiar with LLCs as I am with land trusts and intervivos trusts employed in an estate planning context in Illinois, but it suddenly occurred to me that there is a huge potential problem for attorneys and their clients who may have unwittingly terminated their title insurance coverage by an estate planning conveyance….so I asked Dick Bales what he thought…..
7. TITLE INSURANCE COVERAGE AND THE IMPACT OF A DEED TO A FAMILY LLC FROM THE TITLE INSURANCE COMPANY PERSPECTIVE:
In my humble opinion the court's decision in the Gebhardt case was a foregone conclusion. I first heard of this issue in the famous Fairway Development case more than fifteen years ago. I remember that the legendary Frank Leyhane wrote an article about it for one of the first issues of the Chicago Bar Association's real estate law newsletter. See Fairway Development Co. v. Title Insurance Company of Minnesota, 621 F.Supp. 120 (N.D. Ohio 1985). The decision in this case inspired the title company "Fairway endorsement."
This case has a direct application to those attorneys who prepare living trusts for their clients. When John Jones conveys his land to John Jones as trustee of the John Jones personal trust, does title insurance coverage terminate? The key to this answer lies in paragraphs 1(a) and 2 of the Conditions and Stipulations of the 1992 ALTA owner's policy.
Paragraph 1(a) defines the policy's insured. The insured includes those who "succeed to the insured's interest by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors."
Thus, the policy coverage terminates if the transfer from the named insured is in the nature of a sale. Most transfers by "operation of law" occur as a result of a change in legal status of the insured, such as the death or dissolution of the titleholder. Voluntary transfers include conveyances incident to the sale of the property in the ordinary course of business. Thus, a conveyance from one related corporation to another would be a voluntary transfer that would terminate coverage. But what about trusts? When an insured trust dissolves, the policy continues in force in favor of the successors to the trust. (See First American Title Insurance Co. v. Kessler, 452 So.2d 35 (Fla.App. 1984). But a transfer by deed from an individual to the individual's trust is a voluntary transfer that falls outside the four corners of paragraph 1(a). Such a transfer terminates liability under the title policy except for warranties of title. See paragraph 2 of the Conditions and Stipulations, which reads as follows:
"The coverage of this policy shall continue in force as of Date of Policy in favor of an insured only so long as the insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from the insured, or only so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest. This policy shall not continue in force in favor of any purchaser from the insured of either (I) an estate or interest in the land, or (ii) an indebtedness secured by a purchase money mortgage given to the insured."
Therefore, when an owner of land transfers property into his or her personal trust, the attorney should order an "Assignment of Policy" endorsement. This endorsement does not extend the effective date of the policy. It does, though, name the trustee as an insured under the policy. There really would be no reason to extend the policy date. "John Jones" has been in title since the effective date of the policy. Any additional matters that a title search might reveal would probably be excluded under paragraph 3(a) of the Exclusions from Coverage anyway: "Defects, liens, encumbrances, adverse claims or other matters created, suffered, assumed or agreed to by the insured claimant."
For additional reading, see the following:
Rivin and Stikker, Title Insurance for Estate Planning Transfers, Probate & Property, May/June 1998, p. 15; Murray, Title Insurance Issues in Limited Liability Company Transactions, 16 The Practical Real Estate Lawyer 27 (September 2000); Palomar, Limited Liability Companies, Corporations, General Partnerships, Limited Partnerships, Joint Ventures, Trusts--Who Does the Title Insurance Cover? 31 Real Property, Probate and Trust Journal 605 (Winter, 1997). Thanks to J. Bushnell Nielsen for the use of his materials in writing this article.
8. “NEW CHALLENGES FOR RESIDENTIAL REAL ESTATE LAWYERS”:
The March/April 2001 issue of “Probate & Property”, the magazine of the Real Property, Probate and Trust Law Section of the American Bar Association contains an article by Edmond R. Browne, Jr., a Vice President for Connecticut Attorneys Title Insurance Company in Rocky Hill, Connecticut that both confirms the trends in the residential real estate marketplace we are seeing in Illinois, and offers some “Survival Strategies”. Mr. Browne begins by stating most cogently what we probably have suspected for a while: (1) lender clients are consolidating, with time frames becoming increasingly compressed, and the search for economies of scale are leading a reduction in the number of attorneys and settlement agents to whom they are giving work, (2) traditional and long-term business relationships are being disrupted in the name of “faster, better, cheaper” mantra, but in actuality the overall quality of service is declining as speed and cost become paramount with consumers of services --- leaving attorney’s at a disadvantage in the marketplace; (3) customers are becoming competitors and fees are being squeezed out of transactions---leaving attorneys at a disadvantage in the marketplace, unless they shift their focus from running a real estate practice to running a real estate business. Browne believes that attorneys can continue to play an important role in residential real estate transactions provided they recognize and adapt to change by: (a) Participating in real estate settlement services (being a title agent?), (b) Becoming an effective marketer of your services by demonstrating a value added to the transaction, (c) Developing relationships through “strategic alliances with lenders, builders and brokers”, and (d) Developing a technology plan to incorporate Internet, e-mail, imaging, document management and transfer automation to be able to compete. Mr. Brown’s thinking has some very clear overtones of the ABA support of Multi-Disciplinary Practices, and he clearly warns us to “Enjoy regulatory, ethical and legal barriers while they exist” while we actively prepare for the day when they may be weakened or disappear”, (Doesn’t he know the strength of the response Cheryl Niro and the ISBA brought to this discussion?… or does he just think this was “Round One”?). Nonetheless, his article bears some careful, critical reading. He may be right, you know….
9. Real Estate Taxes on the Internet: “Covet thy Neighbor’s Property Taxes”:
I have long been aware that the Cook County Assessor’s website on the Internet allows access to detailed facts on assessed valuation of property, but it never occurred to me to look up anyone else’s file…until I read a newsletter article in the Spring, 2001, Figliulo & Silverman “Property Tax Update” forwarded to me by Brian Liston. “Now, if you have a personal computer you can move up and down the block with single strokes, checking by address how much your neighbors pay in taxes.”, rather than going downtown to the Cook County office that is located on, of all places, the floor designated “3 ½ “…(what do you think that means?) The newsletter reminds us that “All of the information on every property in the county is there at your fingertips: how many bedrooms, bath, garage, finished attic or basement, etc.—everything but the owner’s name…the assessor’s website offers information on how to appeal an assessment, but taxpayers cannot file an appeal online…[and warns]…In looking at the property taxes on a home or business and at the assessment or ‘market value’ estimate, property owners should not be shocked if the assessed value is $50,000 less than it sold for five years ago. The assessor’s office admits to uniformly lowball assessments. The thing to look for is whether the assessment is consistent with that of other nearby properties of the same size, age, upkeep, etc.” The Assessor’s website is www.cookcountyassessor.com , and these admittedly “client oriented” comments in a newsletter by experienced practitioners in the area are a good reminder of what is right under our fingertips.
10. Fraudulent Conveyances; Evidence of Insolvency:
Matthews brought an action claiming that Mitchell Serafin transferred his entire estate into the revocable trust which is the defendant in order to avoid paying a judgment. The trial court directed verdict in favor of the trustee at the close of Plaintiff’s case, finding that there was no violation of the Illinois Uniform Fraudulent Transfer Act, (740 ILCS 160/1), because the transfer did not render Matthews insolvent at the time.
The facts begin with a lease by a company of which Serafin was president to Matthews. Serafin guaranteed payment under the original lease. Before the lease expired (after an extension), Serafin opened a revocable trust naming himself as the trustee. Thereafter, the company vacated the property, claiming constructive eviction, and filed a declaratory action on the lease. Matthews counter claimed for possession and rent due. Serafin died before the case came to trial, but after he transferred significant assets into the trust, and the trust’s assets were valued at $973,854 at the time of his death. His interest in the trust passed to his wife and daughter. Several years later the trial court ruled in favor of Matthews on the issues of unpaid rent and constructive eviction and awarded him $33,119.76; (of which $6,300 was past due rent and the balance of $26,819.76 was for attorney’s fees and costs…surprised?) Matthews then filed the instant action to set aside the transfer of assets into the trust as a fraudulent conveyance. (The decision notes that the record fails to indicate whether Matthews ever made a demand on the Trust and whether they refused payment.) The trial court ruled that Matthews failed to carry the burden of proof that the transfer rendered Serafin insolvent as required under the Section 6(a) of the Act: “(a) transfer made or obligation incurred by a debtor is fraudulent…if the debtor made the transfer…without receiving a reasonably equivalent value in exchange for the transfer…and the debtor was insolvent at the time or…became insolvent as a result of the transfer or obligation.” No evidence was submitted that Serafin was unable to pay his debts as they became due at the time of the transfer and before the judgment. The Court looked to the list of ten facts suggested for consideration in Section 5(a)(1) of the Act, and noted that none of these existed at the time of the transfer; which was after the trust was created, almost a year prior to the time the company stopped paying rent, and long before the entry of a judgment in a relatively small amount of $6,300 for rent, versus assets of over $900,000. Finally the Court notes that Matthews may have actually chosen the wrong vehicle for recovery when he decided to go forward on the fraudulent transfer path. “Matthews could have initiated supplementary proceedings under section 201402 to discover Serafin’s assets in order to satisfy the unpaid judgment.” A citation to discover assets against the trust could have resulted in a turnover order, “But apparently no such motion was made.” This reflection in combination with the earlier statement in the decision that Matthews appears to have made no demand for payment directly on the Trust leaves one to wonder whether the Appellate Court simply didn’t understand the facts, or whether Matthew’s attorney was in the “wrong pew” in his procedure to recover the judgment. In any event, this is a good checklist and litmus test for anyone involved in a fraudulent conveyance, and reminds us to get “back to the basics” in our attempts to recover judgments.