REAL ESTATE LAW PRACTICE “KEYPOINTS”

(April, 2002)

 

By Steven B. Bashaw

Steven B.  Bashaw, P.C. 

Suite 1012

1301West 22nd Street

Oak Brook, Illinois  60523

Tel.: (630) 472-9990

Fax.: (630) 472-9993

e-mail:  sbashaw @bashawlaw.com

(Copyright 2002- All Rights Reserved)

 

 

 

In addition to encouragement from the Illinois Institute of Continuing Legal Education and the Illinois State Bar Association’s Real Estate Section Council,  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 from the perspective of a title company serving the public and the attorneys who represent their clients in real estate transactions.

 

1.          ADJACENT LANDOWNERS: NATURAL FLOW OF WATER & INJUNCTION:

Every lawyer that has ever gone to a cocktail party has been confronted with the story of a homeowner whose neighbor has landscaped their property, and is now causing water to stand, pour into the basement, or flow into places it did not go before.  In the recent case of Sparks v. Gray, (5th District, March 20, 2002,), http://www.state.il.us/court/Opinions/AppellateCourt/2002/5thDistrict/March/Html/5000382.htm, the Court gives us some insight on handling these questions….pass the olives?

Sparks and Gray owned adjacent property in Madison County, Illinois, which was in a triangle created by Route 255, Cahokia Canal and Horseshoe Lake Road.  Horseshoe Lake Road was 417 feet above sea level, and appears to have acted as a “levy” of sorts.  Accordingly, the City of Pontoon Beach required that any new construction in this triangle have a ground floor of at least 417 feet above sea level. The Sparks property was 423 feet above sea level, but Grays’ was below the 417 foot mark.  In order to bring their property to the 417 foot level, Gray began placing fill on his property.  According to expert testimony, between 5,300 and 9,000 cubic yards of fill were brought in by Gray, and another 6,945 cubic yards of fill were placed on the  property adjacent to Gray.  In a trial on Spark’s complaint for a Permanent Injunction, the trial court found that the fill reversed the natural flow of water and resulted in water accumulation on Sparks’ property. The permanent injunction against Gray did not require that they remove the fill, (based on Gray’s expert’s testimony that the fill to date was not significant when dealing with water flow), but did enjoin them from bringing in any more fill onto their property. 

On appeal, the Fifth District majority opinion affirmed, finding that “an owner of a higher piece of property has the right to allow any surface water to follow the natural course of drainage onto the lower estate” and that Gray could not be allowed to elevate their property to reverse the natural flow of water.

Justice Welch dissented, however, stating that “This case is not about the owners of a lower piece of property elevating their property and thereby hindering the natural flow  of water.  This is a case about surface water “displacement”,  not flow.” Relying on the fact that there were no improvements that impeded the natural flow of waters, but merely the “displacement” of flood waters by the volume of fill, the dissent reasoned that “When adding this volume to the volume of the floodwaters, the rise in the height of the floodwaters would be immeasurable, like that of children dumping sand from their beach buckets into the ocean and thereby causing the seas to rise.”  Believing that the logical conclusion” of the majority opinion would forbid a landowner from placing sandbags around their home in the time of a flood, Justice Welch held fast in his position that the facts in this case were about “displacement” not “hindering the natural flows.

So, we are left with the law that an owner cannot “impede” the natural flow of water, or “reverse” the natural flow of water, but a little confused on the factual distinction relating to “displacement” and “natural flow”.

2.          TITLE INSURANCE; CONTRACT INTERPRETATION & REAL ESTATE TAX ESCROW:

In  1997, Premier Title Company acted as the closing agent and title insurer in a real estate transaction in which Duane Donahue was the purchaser. Premier  Title Company v. Donahue, (2nd Dist., March 7, 2002),  http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/March/Html/2001076.htm.  At the time of closing, it was determined that the 1995 real estate taxes had been sold, and that the first installment of the 1996 taxes were not yet paid.  Accordingly, Donahue deposited $3,500 into an escrow with Premier for the payment of taxes, and Premier issued a title policy clear of exceptions relating to the taxes. Premier redeemed the 1995 taxes with funds from the escrow account.  For some reason, however, it then returned the balance of the escrow funds to Donahue.  When the 1996 taxes became due, Premier paid the first installment pursuant to the terms of the escrow and pursuant to its title policy.  It then  sought to recover $1,189.72 from Donahue for the funds advanced after disbursement of the escrow.  Donahue refused to pay, and Premier brought a small claims action to recoup the taxes it had paid.  The trial court granted Premier’s motion for summary judgment.

On appeal, Judge Grometer’s opinion offers a point-by-point review of the law of contract interpretation to the context of this escrow agreement.  Defendant contended that the escrow agreement terminated when Premier disbursed the balance of escrow funds. Premier, on the other hand argued that the escrow provisions requiring Donahue to “forever defend and save…harmless” created an ongoing obligation that survived the disbursement and required reimbursement of the later paid taxes.  Holding for Premier and affirming the trial court, the decision outlines the rules of contract interpretation: (1) Contracts are to be interpreted as a whole document, (2) attempting to determine which of two conflicting clauses most clearly expresses the chief objective and purpose of the contract, (3)  assuring that none of the terms are regarded a mere surplusage as a result.  Specific provisions are entitled to more weight than general in interpreting the intention of the parties, and the doctrine of merger does not apply where there are covenants that are distinct from the performance itself or to be performed afterwards.  Finally, the rule that ambiguity in a contract should be resolved against the party who drafted the instrument is “at best a secondary rule of interpretation, a last resort which may be invoked after all the ordinary interpretive guides have been exhausted.”  Here, the Court determined that purpose of the contract was to assure that Donahue would be responsible for the payment of unpaid taxes from the funds in escrow, and imposing a continuing duty for loses arising out of the unpaid taxes was the intent of the parties.  Accordingly, the escrow agreement was intended to provide for the payment of both year’s taxes and reimbursement if necessary.

3.          TAX ESCROWS AND TITLE INSURANCE FROM THE TITLE INSURANCE COMPANY PERSPECTIVE:

FROM THE TITLE INSURANCE COMPANY PERSPECTIVE

Premier Title Company v. Duane Donahue, No. 2-00-1076, is an interesting reminder to attorneys that the title company title indemnity contains powerful language.

In 1997 Premier Title Company (Premier) conducted a real estate closing wherein the 1995 real estate taxes were sold and the first installment of 1996 taxes was delinquent.  Premier Title set up a title indemnity to pay these outstanding taxes.  Premier then redeemed the 1995 tax sale but apparently forgot to pay the first installment of the 1996 taxes.  Instead, it reimbursed itself out of the indemnity funds for the tax sale and sent the balance back to the indemnitor.  When Premier realized its mistake, it paid the 1996 taxes and asked the defendant to cover this expense.  When the defendant refused, Premier filed a small claims action for recoupment.  Both parties moved for summary judgment.  The trial court granted Premier's motion and this appeal followed.

The defendant had an interesting theory.  He pointed to the following provision of the indemnity: "If this title indemnity-escrow agreement is not terminated within thirty calendar days. . . the agent escrowee shall thereafter charge a reasonable annual service or handling fee. . . ."  He claimed that this paragraph indicates that the intent of the parties was to create a relationship that would terminate in thirty days, that the provision indicates that the disbursal of the funds would terminate the agreement.

The plaintiff, however, relied on this provision of the indemnity:  "To forever defend and save the agent-escrowee, and Premier Title Company, harmless from all the exceptions, and from any loss, costs, damages, attorneys' fees, and expenses of every kind which they may suffer, expend, or incur under. . . ."  Pointing to the word "forever," plaintiff contended that the agreement created an ongoing obligation on the defendant's part to indemnify it against any losses due to the unpaid taxes.  Premier claimed that this obligation was unrelated to the disbursal of the escrowed funds.

The court stated that when read in isolation, the two paragraphs created an apparent ambiguity as to the parties' intentions.  The defendant argued that ambiguities in the contract should be construed against the drafter, which was Premier.  But the court said that this doctrine is at best a secondary rule of interpretation that should be used only if ordinary rules of interpretation fail to reveal the intent of the parties.

The court ruled that taken as a whole, the contract unambiguously expressed the intent of the parties, which was that the defendant was under a continuing obligation to indemnify the plaintiff.  The court said that when two clauses conflict, the court must determine which of the two clauses most clearly expresses the chief object and purpose of the contract.  It concluded that the chief object of the indemnity was to insure that the defendant would be responsible for the unpaid taxes and that the paragraph the defendant relied on dealt with a collateral matter.  Second, the court stated that the defendant's construction of the contract violated the principle that requires that a contract be construed so that none of its terms are regarded as mere surplusage.  The defendant's interpretation of the contract would render the term "forever" in the paragraph on which the plaintiff relied meaningless.  Third, the defendant's interpretation disregards the rule that when there is a conflict in an instrument, specific provisions are entitled to more weight in determining the parties' intent than general provisions.  The section that plaintiff relied on specifically addressed the defendant's obligation to indemnify the plaintiff.  The section that the defendant cited dealt with matters that were unrelated to this obligation.

The defendant also argued that the agreement between him and the plaintiff merged with the deed at closing.  The court stated that "although still a part of Illinois law, the merger doctrine is disfavored by modern courts." The court noted that there are exceptions to this rule, and that two of them were appropriate here.  First, executory agreements for the performance of separate and distinct obligations beyond the conveyance itself do not merge with a deed.  Second, obligations that are not to be performed until after delivery of a deed do not merge.

So what can we learn from this case?  Probably nothing that we didn't already know before.   The decision was an obvious one; indeed, it seems odd that this case went up on appeal.  But does this decision mean that when attorneys set up title indemnities for their clients at closing, they should get them formally released when the money is paid out?  I don't think so. In this instance it was clear that the defendant owed the money; the title company was not seeking to do anything underhanded, surreptitious, or sinister in attempting to enforce the agreement after the money was paid out.

But on the other hand: Assume that the title company has agreed to underwrite a title exception pursuant to a time-based title indemnity.  An example might be the issuance of a title policy without obtaining a deed from a distant heir who is presumed to be deceased.  The title company might agree to hold the cash equivalent of this heir's interest in the property in an indemnity for three years.  If the heir has made no attack on the land at the end of three years, the title company could agree to return the money to the indemnitor.  It seems to me that in this situation the attorney might want to consider obtaining a release of the indemnity to ensure that his client has no further obligation in the event the heir shows up after the three-year period.  But a simple alternative solution would be to draft the indemnity, making it clear that the indemnity would terminate at the end of three years with no attack on title.

Dick Bales

4.          MORTGAGES: ENFORCEMENT OF PREPAYMENT PENALTIES:

Over a number of months, there has been a recurring  conversation on the ISBA Real Estate Law Discussion site to which I have referred to in these “Keypoints” relating to the issue of whether the prepayment penalty provisions many lenders are now including in their residential real estate mortgages are enforceable when the interest rate on the debt is in excess of 8%.  A number of lender’s attorneys have taken the position that these prepayment penalties are valid based on the fact that there is federal preemption in this area.   Defendant’s attorneys seem to be unconvinced.  Last month, I included some material I received by email without crediting the author, Diane E. Thompson, Supervising Attorney, Housing and Consumer Unit at Land of Lincoln Legal Assistance Foundation.  When I called to apologize, Diane and I spoke about this issue at some length, and she agreed to share her analysis of the conflict between state and federal law:

“The Illinois Interest Act on its face caps fees at 3%, 815 ILCS 205/4.1a,  and prohibits prepayment penalties, 815 ILCS 205/4(a)(2), on all loans secured by real estate with stated interest above 8%.  What it actually covers, however, depends on what exactly is preempted by two federal statutes:  the Depositary Institutions Deregulation and Monetary Control Act, 12 U.S.C. §1735f-7a, (DIDMCA) and the Alternative Mortgage Transaction Parity Act, 12 U.S.C. §3801 et seq.  (AMTPA). What is clearly covered is a second lien that imposes high fees but is otherwise a conventional mortgage.  What is clearly not covered is a purchase money mortgage by a federally related lender.  Everything else is in the gray area, open for argument.

DIDMCA applies to federally related lenders (lenders making more than $1 million annually in residential mortgage loans, federally insured, or national banks).  It prohibits caps on fees on first liens.  There is, however, some legislative history that indicates that Congress’s primary concern was to make money available for purchase money mortgages, not for refinances.  In addition, the statute allowed states to opt-out at any time of the regulation on fees.  DIDMCA(b)(4).  The Illinois legislature amended and re-enacted 815 ILCS 205/4.1(a) of the Interest Act in 1991, arguably “adopt[ing] a provision of law placing limitations on discount points or such other charges on any loan.”  This position was at least partially adopted by the First District in 1991, in Fidelity v. Hicks, 158 Ill. Dec. 221, and is currently before the First District in several cases brought by the Legal Assistance Foundation of Metropolitan Chicago and a case brought by the Illinois Attorney General.

AMTPA covers “alternative” mortgages.  These are non-purchase money mortgages.  AMTPA permitted non-federally chartered institutions to issue variable rate mortgages, balloon payment mortgages, and mortgages with prepayment penalties.  However, the Home Ownership Equity Protection Act, 15 U.S.C. § 1602(aa) & 1639 , (HOEPA), enacted in 1994, is a subsequent and more specific statute covering the same area as AMTPA.  HOEPA provides that federal law does not preempt more protective state legislation 15 U.S.C. 1610(b), and would therefore appear to permit state regulation of these mortgages, including caps on fees and bans on prepayment penalties, per the Illinois Interest Act.   Judge Norgle of the Northern District of Illinois accepted this position in his ruling on Illinois Association of Mortgage Brokers v. Office of Banks and Real Estate, 174 F. Supp. 2d 815, when he found that Illinois predatory lending regulations that went into effect last May, were not pre-empted by AMTPA.  That decision was appealed, and is currently before the 7th Circuit. 

In short, stay tuned for exciting developments in the Illinois Interest Act, and the permissibility of prepayment penalties, high fees, and equity stripping.”

Diane E. Thompson

Supervising Attorney, Housing and Consumer Unit

Land of Lincoln Legal Assistance Foundation. 

327 Missouri Avenue, Suite 300

East St. Louis, IL  62201

(618) 271-9140 x220

 

5.           PREDATORY LENDING:  ADVERTISING AND “BAIT AND SWITCH”:

If you look through your mail today, it is likely that you have received a flyer advertising a seminar, program or article dealing with “Predatory Lending”.  Exactly where the line is drawn between permissible activities in a “free commercial society” and illegal activities that are grouped under Predatory Lending is still developing, but some indication is given in  Chandler v. American General Finance, Inc., (1st Dist., March 27, 2002) http://www.state.il.us/court/Opinions/AppellateCourt/2002/1stDistrict/March/Html/1012789.htm.

The Chandlers borrowed money from American General Finance and began making payments.  They were then “bombarded” with opportunities to borrow more money by way of advertisements placed in with their monthly statements and direct mailings specifically addressed to them and their circumstances. The Chandlers finally took American General up on its offers.  The transaction they were provided, however, was a “refinance” of their old loan rather than a “new loan”, and  at a significantly greater cost than had they received a new loan as implied throughout the solicitations.  In the trial court, American General moved to dismiss the Chandler’s amended complaint for failure to state a cause of action brought under the Consumer Fraud and Deceptive Business Practices  Act and the Consumer Installment Loan Act,  and argued that the cause was barred by the lender’s compliance with Federal Truth in Lending at closing.  The trial court dismissed the case, and on appeal the First District reversed.

The conduct of American General was identified as “loan flipping”; about which the Court specifically stated  “We do not hold the ‘loan flipping’ is fraud, because the boundaries of the term are obscure.”  Conduct that implies that one is being offered a separate loan, which is then replaced by a refinance of the existing loan when the customer attempts to take advantage of the offer,   without there being any intent to provide the offered loan, is a sufficient allegation of  potential “deceptive practice” to withstand a motion to dismiss. The mailings represented that there was a “home equity loan” available which was never offered or discussed.  The “home equity” offer was the “bait”, and the refinance at significant expense was the “switch”.   “…an alluring but insincere offer to sell a product or service which the advertiser in truth does not intend or want to sell.  Its purpose is to switch customers from buying the advertised merchandise, in order to sell something else, usually at a higher price or on a basis more advantageous to the advertiser.”  These are “a common thread” running through a number of deceptive practices cases in which unsophisticated consumers are attracted by solicitations for one product and then only delivered something  different.  No actual reliance is required to state a cause of action. Trust in Lending compliance is not a defense because the “deception” occurs before the closing,  not at the closing where the disclosures are made, and extends beyond the loan agreement itself.  While the Court makes it clear that the Chandlers still have a significant task before them on remand, this opinion is one in a growing collection of “Predatory Lending” decisions.

 

6.          LANDLORD/TENANT: AMENDMENT, NOVATION, REAFFIRMATION AND REVIVAL OF A “GOLD CLAUSE”:

In Nebel, Inc. v. The Mid-City National Bank of Chicago, (4th Dist. March 21, 2002) http://www.state.il.us/court/Opinions/AppellateCourt/2002/1stDistrict/March/Html/1011309.htm,  the Court was confronted with interpreting not just a 99 year lease, but one with a clause that provided that the rent was to be paid in gold.

The lease began on May 1, 1906 and terminates on April 30, 2005.  The monthly rent was $1,090 until 1911, and then increased to $1,333.33 and 1/3 cents until expiration; all payable “in standard gold coin of the United States, of not less than the present weight and fineness…twenty three and twenty-two hundreds ( 23-22/100s) grains Troy weight for each dollar.”  In 1933, the United States Congress passed a resolution (31 USC Section 463) that made all obligations requiring payment in gold unenforceable.   In 1977, that resolution was amended to allow the enforcement of gold clauses…for obligations issued after October 27, 1977.  Therein lay the “rub”.

The subject lease was assigned four times from one lessee to another, and in 1976 the defendant, Mid-City National Bank became the tenant.  In 1984, the Plaintiff, Nebel, Inc., purchased the property and became the lessor.  Negotiations between the Plaintiff and Defendant ensued during 1988 in which the bank indicated it wanted Plaintiff to consent to its construction of pedestrian walkway from its  parking lot and drive-thru banking facility to the west on to the property. The owner’s attorney drafted a “Lease Amendment” permitting the walkway construction, included Mid-City Bank as a party to the agreement, “reaffirmed” all of the provisions of the 1906 lease, provided that the bank would maintain the walkway and pay taxes on the improvement, indemnity the lessor for any loss related to the walkway or construction, and provided for reimbursement of the lessor’s expenses and costs in negotiating the Lease Amendment. The parties did not address the “gold clause”.

On September 16, 1998, Nebel made a written demand upon Mid-City for payment “in gold coin, as provided by the lease”.  Defendant refused to pay in gold and Plaintiff brought a declaratory judgment action.

The central issue before the trial court was whether the Lease Amendment resulted to a new obligation “issued after October 27, 1977”. The trial court found that no new obligation was undertaken by the Defendant after October 27, 1977, and therefore there was no novation that would allow the enforcement of the gold clause as one issued after that time, granting summary judgment in favor of Defendant. On appeal, the Plaintiff argued that the Lease Amended created new obligations as of that date, and therefore the gold clause was once again enforceable. Defendant argued that the language in the Lease Amendment that “all terms and provisions are reaffirmed and not modified by an amendment” is not tantamount to a novation reviving the gold clause under the federal regulation.

Surprisingly, there are cases that have held deal with and held that post-October 27, 1977 novations of a lease created a new contract-- rendering the gold clause enforceable. This case, however,  is the first instance of a Lease Amendment being put forth for that position. The Court was required to determine the intent of the parties. The fact that there is a change in the terms of an agreement does not necessarily result in novation. The changes “must effect a material alteration of the parties rights and obligations before it can be said that the parties intended a new contract or agreement.”  In this case, the changes in the Lease Amendment were material to the parties’ contractual duties and obligations, and therefore the constituted a novation.  The lessee was building a new walkway, insuring it, paying taxes on it, indemnifying the lessor and paying its attorney’s fees and costs, and being formally named in the agreement.  “These changes significantly and materially altered the existing rights and obligations of both parties.”, and therefore the Lease Amendment was a new obligation entered into after October 27, 1977 that revived the gold clause.

(Makes you wonder if the attorneys were really ‘asleep at the switch’, or trying to ‘out-smart’ each other, doesn’t it?)

7.          DEDICATION; STATUTORY AND COMMON LAW FACTUAL ISSUES:

In General Auto Services Station v. Sam Maniatis, (1st Dist., March 8, 2002),  http://www.state.il.us/court/Opinions/AppellateCourt/2002/1stDistrict/March/Html/1010330.htm,  an alley abutting some very valuable real estate takes the Court back 120 years to determine the intent of the parties to a subdivision and conveyance of law.

In 1882 George Healy subdivided land in what is now the “Gold Coast” region of Chicago setting forth a strip of land twelve feet wide that ends at Elm Street.  The plat of subdivision named the public streets surrounding the property, but did not name or refer to the strip of land.  In 1891, Healy conveyed the land to William Seymour, but this conveyance made no mention of the strip of land.  Seymour then conveyed the land in 1899 by a deed that  stated the grantee covenanted  to “never join in any petition to vacate the public alley next west of those premises, but such alley shall forever remain a public alley situated in the City of Chicago.”  A later deed then referred to “the property on the south side of Elm Street next east of the public alley”.  Almost 100 years later, in 1985, a complaint was filed seeking  a declaration that the alley was privately owned. The trial court dismissed the complaint finding that the provision in the 1899 deed was a restrictive covenant that barred the owner’s attempt to have the property declared a private alley.  On appeal, the First District reversed, finding that the trial court erred in ruling that the complaint was an action to vacate a public alley and remanded for findings on the ownership of the alley. That case was nonsuited and  the action refilled as a new case. In the second suit, the trial court granted summary judgment to the City.  Deposition testimony of the adjacent landowner established that employees of the businesses adjacent to the alley parked their cars there regularly, the City plowed the snow , paved a portion of the alley, no taxes were paid on the alley property, and the public regularly walked into the alley at lunchtime to eat fast food, which required the area be cleaned.  Accordingly, the court   found “that the alley is public by way of common law dedication”.  As a result the fee ownership of the alley remained in the “donor”, but  an easement exists for the public right of way.  Noting that a dedication can be either a statutory dedication by virtue of the recording of a plat of subdivision, or a common law dedication based on acts and conduct without a writing. A Common law dedication requires an intent to donate property for public use and acceptance by the public based on clear and unequivocal evidence.  The City argued that the reference to the “public alley” in the deeds in the 1890s were sufficient evidence of a donative intent, and that acceptance by the public was established by including Healy’s Subdivision in its official maps, not assigning a permanent tax index number to the parcel, and maintenance of the property.  The First District ruled that each of these elements created an issue of fact that would have to be resolved other than by summary judgment.  The intent of the owners in the 1890s appeared to be an issue of fact, not unequivocally one of law.  Acceptance must be within a reasonable amount of time, and can be revoked prior to acceptance, and the evidence of acceptance by the City did not cover the period of time from the plat to Healy’s death. All told, there simply were too many issues of fact to allow resolution by summary judgment.

8.          PREMISES LIABILITY;  DUTY TO TRESPASSERS & CONDITION OF PROPERTY AMOUNTING TO WILLFUL AND WANTON CONDUCTION:

In Salazar v. Crown Enterprises, (1st Dist., March 12, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/1stDistrict/March/Html/1003590.htm, the issue was whether the disrepair and hazardous condition of the property constituted a danger sufficient to rise to the level of willful and wanton conduct required to impose liability on the owners for the death of a trespasser.  Pedro Salazar was a homeless person criminally beaten to death while trespassing on the defendant’s property.  The original complaint filed by the Administrator of the Estate against the owners alleged ordinary negligence and was dismissed for failure to state a cause of action.  The fourth amended complaint alleged willful and wanton conduct of the defendants based on the fact that there were structural hazards, sanitary hazards, and social hazards on the property.  The Defendants had been served with numerous complaints for code violations and knew the property was dangerous and hazardous because it was abandoned, vacant, vandalized and open. The property was the site of a great deal of garbage, debris and a common dumping site. There were frequent police and fire calls to the property, and trespassers were continually known to be on the premises.  Accordingly, the plaintiff argued that the defendants knew or should have known of the hazards imposed by the building’s condition, and their failure to act demonstrated a lack of concern and indifference that amounted to “willful and wanton conduction” sufficient to support liability for the death of the decedent.

The First District decision affirming the dismissal of the complaint sets forth a good survey of premise liability.  The Plaintiff is required to plead sufficient facts to establish a duty, breach of duty, and an injury proximately caused by the breach. A landowner’s duty to a person on his property is dependent upon the person’s status on the property.  (There is a great listing of factual patterns for liability of landlords, tavern and restaurant owners, schools, hotels, etc in the text of this decision with case citations.)  A landowner’s only duty to a trespasser is to refrain from willful and wanton disregard for their safety.  This duty is imposed only after knowledge of the impending danger and an “utter indifference or conscious disregard” for the safety of  another.  Where an owner takes no  action to correct a condition after being informed about it,  and knew that others had been injured due to the condition, the failure to act may amount to willful and wanton conduct.  Those cases, however, did not deal with trespassers or those injured by the criminal actions of others, as in this case.  An owner generally does not owe a duty to protect people on his property from criminal actions of others unless there is some special relationship,  (i.e., business invitee, passenger on a carrier, innkeeper and guest), and only then if there is a reasonably foreseeable danger that is relatively easy to remedy.   Recent cases have held that owners of  parking lots have no duty to protect customers from attack in the  lots and ATM machine owners are not responsible even though the circumstances of money dispensing may “draw criminal attacks”.  While the property owners here allowed their property to fall into a complete state of disrepair over a number of years and had received numerous citations and complaints, yet did nothing,  “based on the law as it exists today, no amount of notice or knowledge by a landowner that, because its property is in such a state of disrepair, vagrants live on it and commit criminal acts, would impose any duty upon the owner to protect individuals entered thereupon, irrespective of their entry status.  This court, however, is not the proper forum to impose such a duty under the strictures of precedent.”  (Legislation anyone?)

9.          REAL ESTATE CONTRACTS: TIME IS OF THE ESSENCE, EVEN A SINGLE DAY:

Beginning with the lyric from a 1959 Dinah Washington tune, (“What a diff’rence a day makes…twenty-four little hours”), and ending with a popular proverb, (“Never put off until tomorrow what you can do today.”), the lengthy opinion of Judge Coffey in Arnhold v. Ocean Atlantic Woodland Corporation, (7th Cir., March 21, 2002), http://www.ca7.uscourts.gov/op3.fwx?submit1=showop&caseno=01-1611, requires a little page turning, but has a just about everything you would want to know about “time is of the essence” relating to closing dates and more.  The facts are laborious, but suffice it to say that after a number of extensions of the closing date and intervening litigation, the Plaintiff/Sellers of 280 acres of farmland in Plainfield to Defendant/Buyers for $7.56 million. The Purchaser was to develop a residential subdivision of more than 700 homesites, and after a number of extensions for governmental compliance and such, the parties established a”drop dead” closing date of January 25, 2001.  This negotiation took the form of a settlement agreement in the intervening litigation, and was memorialized by language including a statement that January 25, 2001 was intended by the Sellers and Purchaser to be “the absolute final date for closing” and  “if for any reason”  the closing did not take place for any reason other than Seller’s default, “Purchaser shall have no rights in the property”,  their attorneys even acknowledged Seller’s absolute right to terminate the contract in the event of a failure to close on the set closing date. The initial closing was to have been on November 15, 1997, and the history of delay and extensions lead to Seller’s mandate of a specific closing date and “time is of the essence” language.  Although they had the right to close on any date from October 26, 2000 through the specific date of January 25, 2001, the Purchasers chose to schedule on January 24, 2001, ”—a mere one day prior t the drop-dead date.”  Of course, their lender demanded additional documentation on the eve of closing which the Purchasers were unable to provide and January 25, 2001 came and went without closing.  On January 26, 2001, the Purchasers announced they were ready to close, but the Sellers, who had been ready willing and able to close two days before, refused.

Affirming the magistrate’s fact finding and application of Illinois law, the opinion takes a step-by-step approach to the issues of closing dates and time is of the essence clauses.

Illinois law allows and will give effect to the intent of the parties that “time is of the essence”, and performance by a party within the time frame specified is a condition precedent to require the other party to perform. Accordingly, a specific, absolute closing date, when material and the clear intent of the parties,  is enforceable.  Here there was clearly the intent and understanding of the parties that the absolute date of closing was the “sine qua non of the agreement”; i.e. of such a nature and such importance that the contract would not have been made without it.” The “totality of the circumstances”  was such that the doctrine of substantial performance (i.e., ability to close a day late), “does not extend to cases like the one before us, where the plaintiff insisted upon strict compliance with its conditions..”,  and the defendant agreed to them “absolutely”.  A material breach serves to excuse the other party’s performance, and thereby discharges the other party’s duty to perform…by specific performance  as requested here or otherwise, and provided that the result is not unconscionable, gives an unfair advantage to one party, or is inequitable. While the Purchasers had invested $1.7 million in site plans  and argued that to deny specific performance would be unconscionable when balanced against the Seller’s loss of a single day’s use of the funds, the Court noted that ‘parties “who have bargained for strict compliance with specific time requirements…inherently are prejudiced by noncompliance” with those deadlines’, and that the purpose of a contract is “to allocate the risks of the unexpected in accordance with the parties’ respective preference for or aversion to risk and their ability or inability to prevent the risk from materializing—“  Here, the Purchasers had the ability to prevent the risk from materializing by not waiting until the last minute to close:  “When parties wait until the last minute to comply with a deadline, they are playing with fire.”, and can not then “attempt to find a scapegoat for its own lack of diligence.”  Even the argument that the Seller’s motivation in terminating the contract was to accept a better offer from another buyer left the Court unmoved:  “Because the Sellers had the legal right to terminate the agreement, it is legally irrelevant whether they were also motivated by reasons which would not themselves constitute valid grounds for termination.”  The Sellers were awarded their attorney’s fees and costs pursuant to the ‘prevailing party’ provision of the agreement, and the Purchaser sent on their way with the admonishment that: “…neither law nor equity guarantees that a party may specifically enforce a contract if it fails to perform its material obligations thereunder.”

10.      (REAL ESTATE) CONTRACTS: RETURN OF DEPOSIT (EARNEST MONEY):

The case of Watson v. Johnson Mobile Homes, (5th Cir., February 27, 2002), http://www.ca5.uscourts.gov/opinions/pub/00/00-60768-cv0.htm  is factually concerned with a deposit on mobile home contract , rather than earnest money a real estate purchase agreement, and comes from the Southern District of Mississippi. (Although it is noteworthy that Judge Mills, District Judge of the Central District of Illinois, was sitting on this panel by designation.)   Nonetheless, in the current environment in which it seems the exception rather than the rule that earnest money is returned upon the property termination of a contract, and builders seems to be more inclined to “let ‘em sue” than refund deposits and earnest money, this is a decision that may come in handy.

Elnora Watson agreed to purchase a mobile home from Johnson Mobile Homes.  The agreement provided that if the financing company refused Watson’s application, she would be entitled to a refund of her deposit of $4,000 towards a $22,995 purchase price. If she was approved but did not complete the purchase, she would forfeit the earnest money.  Ms. Watson’s application for financing was denied, despite the fact that her daughter co-signed the application, because of a poor credit history.  She and her daughter went to Johnson’s to get the deposit back.  Her request was refused. Her son came to Johnson’s a few days later, but he too was denied. On a third attempt by her daughter-in-law on another occasion, the owner told her “to go get herself a lawyer.”

When Watson filed suit and the case proceed to trial, the jury heard evidence of 45 other people whose deposits were also forfeited and awarded her $4,000 in actual damages and $700,000 in punitive damages.

Noting that Mississippi law requirements to sustain an award of damages for an intentional breach of contract include proof by a preponderance that the defendant acted with (1) malice or (2) gross negligence or reckless disregard for the rights of others rather than mere forgetfulness or oversight, the decision affirmed the finding that Watson had successfully established a separate tort of conversion or fraud by Johnson. Although punitive damages are disfavored , reserved for extreme cases, and then narrowly applied, the payment here of 17% of the purchase price as an “application fee”  and subsequent refusal to refund coupled with attempts to restructure the deal on even less favorable terms was sufficient to uphold the jury’s award of punitive damages.  The imposition of punitive damages under state law, however, is limited by the constitutional prohibitions against excessive fines and cruel and unusual punishments found in the Eight and Fourteenth Amendments. The factors to be considered in excessive awards are the defendant’s “reprehensibility of culpability”, the relationship between the penalty and the harm caused, and the sanctions for like conduct in comparable cases. While taking advantage of a financially unsophisticated person such as Ms. Watson in an unequal bargaining position is “particularly deserving of rebuke”, there was no violence or threats of violence; only economic harm.  The Mississippi Consumer Protection Act provision for a civil penalty of $10,000 for each occurrence of fraudulent conduct was viewed as a sanction for like conduct in comparable cases.  Accordingly, the $700,000 punitive award was “constitutionally infirm”, and the Court gave Ms. Watson her option:  “We remit punitive damages to $150,000, concluding that this amount is the maximum we could sustain in this case…At her option, Watson may refuse to accept the damages as remitted and instead have that issue tried anew.”