REAL ESTATE LAW PRACTICE “KEYPOINTS”

(JULY, 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)

 

 

(Ed. Note:  You can’t always believe what you read.  The caption above, for instance, indicates that these  are the “July” Keypoints.  Many of you may have noted, however, that there were no Keypoints in May or June, and reading on will lead you to the conclusion that most of the decisions presented would have been in the May or June installment had they been published.  The patience and understanding of the readers and subscribers to these case law updates are most appreciated, and you can be assured that no important or noteworthy cases will be missed.)

 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.          TENANCY BY THE ENTIRETY AND FEDERAL TAX LIENS; BE CAREFUL OUT THERE:

The most talked and written about case from the United States Supreme Court relating to real estate of recent date is United States v. Craft, (U.S.,  April 17, 2002),  122 S.Ct. 1414. (See “Law Pulse”, ‘Uncle Sam sidesteps tenancy-by-the entirety restrictions’, ISBA Bar Journal, Vol. 90, July 2002, pg. 341, and ISBA Real Estate Section Council Newsletter,  “U.S. Supreme Court rules tax lien effective against half of tenancy by the entirety property”, by Gary Gehlbach, July, 2002).  This decision from our highest court may significantly restrict the “protection” afforded through tenancy-by-the-entirety relative to debts owed to the federal government. 

The Court has held that a lien of the federal government against one spouse is not rendered unenforceable against property held in the entireties under state law:  “As we elsewhere have held, ‘exempt status under state law does not bind the federal collector.’ “   The entireties law at issue was that of Michigan, which is similar to the Illinois entireties statute, (735 ILCS 5/12/-112).  The lien in question was a federal tax lien for $482,466 owed by the husband and which, pursuant to 26 USC 6321, attached to “all property and rights to property, whether real or personal, belonging to” him.   The majority opinion focuses largely on the issue of whether or not the husband had “property” as a tenant by the entirety to which the lien attached.  They determined that he did, under Michigan law, have property rights, and that therefore the lien attached pursuant to federal law to property rights created by state law.  (This initially appears not to create a issue with Illinois property inasmuch as there is no question that a lien attaches to tenancy by the entirety property, it is simply unenforceable under our state law.)  Of important note is that the facts in this case are that the issue of whether the lien attached was raised after the property was sold out of the entireties and as an bill to quiet title brought by the wife relating to the proceeds of sale.  Reading through the majority opinion, one is struck by the similarities of Michigan and Illinois law relating to the entireties, but it appears that the facts and conclusions in this  case may not be contrary to current thinking that a federal tax lien attaches but is unenforceable against Illinois entireties property as long as it remains in the entireties or is not sold. 

This thinking, however, is undermined by the language in the last paragraph of the majority decision.  Here the decisions notes that under Michigan law (as in Illinois), “Land held by husband and wife as tenants by the entirety is not subject to levy under execution on judgment rendered against either husband or wife alone.”, but then states “As we elsewhere held, ‘exempt status under state law does not bind the federal collector’”, and the “Supremacy Clause ‘provides the underpinning for the Federal Government’s right to sweep aside state-created exemptions.”  Without this language, the argument could be made that the Craft  decision relates only  to cases in which the entireties had been terminated by the sale of the property and the holding by the court was limited to finding  that the lien had attached to the husband’s interest and became enforceable upon the termination; which would be consistent with current interpretation of Illinois entireties law.   These last few lines, however are broad in their scope and characterization; broad enough that we must all now warn our tenancy by the entirety clients that their interest may not be immune from enforcement by “the federal collector”.

Justice Thomas’ dissent emphasizes this distinction by noting that “The Court today allows the Internal Revenue Service (IRS) to reach proceeds from the sale of real property…” (emphasis added), which may support the interpretation that the decision relates only to proceeds not the ability of the IRS to undertake enforcement while title continues in the entirety.   There is a great deal of difference between the question of whether the IRS lien attaches  to the entireties property and whether the IRS can enforce their lien while the tenancy exists in contravention to state law.  The majority decision is a result based largely on the rejection of the view that Michigan’s “state law fiction” is that tenancy by the entirety property does not belong to the individual spouse, and therefore the taxpayer has no ‘property rights’.  Illinois is distinct, however, in that the protection attempted to be afforded by our  Civil Practice act is not based upon the fiction that there is no property right, but on a legislative policy  that the lien is unenforceable against homestead property while the tenancy is maintained.   Justice Thomas completes his dissent thusly: “Just as I am unwilling to overturn this Court’s long-standing precedent that States defines and create property rights and forms of ownership, (cite), I am equally unwilling to redefine or dismiss as fictional forms of property ownership that the State has recognized in favor of an amorphous federal common-law definition of property.”

2.          DEVELOPMENT AND DEVELOPERS; MUNICIPAL IMPACT FEES:

In a case certain to be of interest to real estate developers, Thompson v. Village of Newark, (2nd Dist., May, 2002),  http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/May/Html/2010542.htm ,  the Second District held that the ordinance assessing developmental impact fees for school construction was not authorized by statute and unconstitutional.   

The Village of Newark was non-home-rule municipality which passed an ordinance imposing school impact fees on new developments within the village when faced with rapid residential development in 1995.  The Thompsons owned a lot in the village an attempted to obtain a permit to build a single family residence.  They were assessed fees totaling  $3,924.54 by the village, which they paid  under protest and then brought this suit.  In reversing the trial court’s decision in favor of the Village,  the Second District notes that non-home-rule villages have only the powers specifically granted to them, and any exercise of a power outside of those enumerated in the Municipal Code, (65 ILCS 5/11-12-5), is void.  The Municipal Code does provide that a village can implement ordinances relating to “school grounds”, but  the decision in this case holds that this does not include the cost of the construction of improvements on the land.   Citing the definition of “grounds” and noting: “Development exactions, or impact fees, are one of the most innovative and potentially  burdensome mechanisms for funding public facilities made necessary by increased local growth…However the use of such funding devices remains quite controversial…subject to the criticism that, among other things,  they ultimately drive up the cost of housing and unfairly burden newcomers to the area with providing public facilities for the entire community.”, the Court held the ordinance invalid.  The decision also makes an interest distinction between “permissible and forbidden requirements” imposed upon developers:  “the municipality may require the developer to provide the streets which are required by the activity within the subdivision but can not require him to provide a major thoroughfare, the need for which stems from the total activity of the community.”

 

3.          ILLINOIS REAL ESTATE TRANSFER TAX REVIEW:

To the uninitiated, the concept of Transfer Tax can both confusing and contradictory. (Why is that the most prestigious communities like Lake Forest and Hinsdale do not have transfer tax, where as the lesser, such as Cicero and Berwyn, have outrageously high taxes on the right to purchase or sell, and the City of Chicago transfer tax is tied to a complex net of water and zoning certifications?) Newly admitted attorneys look on in puzzlement as we older lawyers hand them white sheets of paper and insist on calling them “Green Sheets”.  To those long-in-the-tooth there are new variations on transfer tax situations to ponder as well.  Beyond these larger social issues and questions of hue, Howard Samson of Chicago Title Insurance Company has authored a highly readable reference article entitled “Q&A: Illinois Real Estate Transfer Tax” that can be found in the May, 2002,  ISBA Real Property Section Newsletter, (Vol. 47, NO. 6, May 2002;  http://www.isba.org/Sections/RealEstate/5-02a.htm ).  

Beginning with the distinction between transactions which are exempt but require no declaration and those which require a declaration even though exempt from transfer tax is the first indication that this is an excellent and thorough treatment of the subject.  Howard references not only the law relating to exemptions, but notes where common practice of attorneys is contrary to the law; (i.e., in divorce proceedings, where the actual net value of the property being conveyed from one spouse to another is more than $100,  the exemption pursuant to subsection “e” ordinarily employed is not actually correct, and facsimile assignments  of beneficial interest need only be recorded in counties with a population of more than two million – Cook County.)  The section relating to exempt transactions requiring a declaration is equally helpful.  While Howard’s insight into the fact that the state revenue law “does not specifically ascribe the state tax obligation to any party.” is somewhat disconcerting, he notes that the statute can be read as imposing the obligation on the seller as a tax on the “privilege of transferring title” found in 35 ILCS 200/31-10, and that the custom in Illinois is to impose the obligation on the seller.  (In most contracts, as well, the seller is obligated to provide a “recordable warranty deed”, which most of us interpret as one with transfer stamps attached.)  There are a number of excellent questions (and answers!) illustrating the completion of the declaration and a insightful remark that will resolve most questions of  the amount of the tax:  “That a seller is not profiting from a sale is not a test of whether a revenue declaration form is needed and a tax required to be paid.”;  it is the amount for which the real estate is being transferred not the “profit” one makes that is the measuring element for the tax calculation.  This is a good article to test your knowledge of transfer tax and keep on the shelf for future reference.

 

4.          RESIDENTIAL REAL PROPERTY DISCLOSURE ACT; FRAUDULENT MISREPRESENTATION:

Add Rolando v. Pence, (2nd Dist., May, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/May/Html/2010099.htm, to the growing archive of cases under the Illinois Residential Real Property Disclosure Act.  Here, Pence, an architect who designed and built the house he sold to Rolando, was sued  for fraudulent misrepresentation based on the disclosure under the Act that there were no defects in the roof and fraudulent concealment of the defects.  Pence testified that there were repeated and continual roof leaks which he repaired by the application of silicone to the affected areas over a ten year period. The Rolandos testified that when the leaking began shortly after they took possession, they found evidence of previous leaks and repairs throughout the home which were concealed by painting and not discovered by their home inspector. At the close of  Rolando’s case in a bench trial, Pence moved for a directed finding based on the argument that the statements made pursuant to the Act could not constitute the basis for a cause of action for fraudulent misrepresentation.  This decision by the Second District specifically finds under these facts that a statutorily mandated disclosure can be the basis for another claim at law. Section 45 of the Residential Real Property Disclosure Act specifically provides that it “is not intended to limit or modify any obligation to disclose created by any other statute or that may exist in common law in order to avoid fraud, misrepresentation, or deceit in the transaction.” (735 ILCS 77/45)  Accordingly, a purchase may seek recovery for fraudulent misrepresentation based solely on a disclosure made pursuant to the Illinois Residential Real Property Disclosure Act.   Based on the factual finding of the trial court relating to the history of the leaking and Defendant’s unsatisfactory attempts to repair the leaks, the Appellate Court also affirmed the trial court finding that Pence could not have reasonably believed that the roof problems had been fixed.

 

5.          PROBATE AND TITLE EXAIMINATION: DEATH CERTIFICATES AND CAUSE OF DEATH FROM THE TITLE INSURANCE PERSPECTIVE:

At first In Re Estate of Ira D. Malbrough, No. 1-00-2765 (First District)appears to be a case that would be of little concern to real estate attorneys.  Ira Malbrough had been married to the respondent Graciella Malbrough for twenty years when he died in April of 1998.  His health had been deteriorating since 1980.  He suffered a stroke in 1997, after which he became completely dependent on his wife for full-time personal care.

Ira received in-home health care from Advocate Home Services after his stroke.  Care givers who observed Ira at home said that he was receiving "grossly inadequate" care. They believed that Ira was regularly denied food, liquid, and oxygen.  His brother (Petitioner) believed that respondent repeatedly denied Ira food, drink, and oxygen and that she was steadfastly opposed to placing Ira in a hospital.  Eventually his brother began guardianship proceedings.  Ira was admitted to a hospital, but later died.  His death certificate indicated that he died of "renal failure and congestive heart failure."

Respondent, as surviving spouse and principal beneficiary under Ira's will, stood to inherit up to three million dollars.  Petitioner alleged that the respondent intentionally caused Ira's death by giving him grossly inadequate care, thereby disqualifying herself from inheriting under Ira's will pursuant to Section 2-6 of the Probate Act (755 ILCS 5/2-6).

Section 2-6 provides that "a person who intentionally and unjustifiably causes the death of another shall not receive any property, benefit, or other interest by reason of the death, whether as heir, legatee, beneficiary, joint tenant, survivor, appointee or in any other capacity..."  Respondent argued that "the complaint alleges not facts, but gossip, innuendo and speculation and makes unfounded and unsupported allegations about respondent's marital relationship to decedent."  She concluded that when these improper allegations are disregarded, all that remains is the uncontested fact that the decedent died at the age of ninety of natural causes, as set forth in the death certificate.

The appellate court reversed the decision of the trial court and remanded the case for further proceedings.  The court maintained that petitioner does have a cause of action under Section 2-6.  The court stated that respondent's conduct of neglecting Ira's basic needs and giving inadequate care, as documented by several care givers, indicated an intent to cause and actually did cause Ira's death.  The alleged facts support an inference that respondent intentionally caused Ira's death.   The court added that the death certificate does not preclude an inquiry into the cause of death as a matter of law.  The death certificate establishes only the fact of death.  The cause of death--natural or intentional--is disputed by the parties and is the question of fact for the trier of fact.

Title examiners learn early in their career about Section 2-6 of the Probate Act.  They learn that when examining a file involving a deceased title holder, they should review the death certificate of the decedent and note the cause of death of the decedent. They know, for example,  that a surviving joint tenant who was responsible for the death of the other tenant cannot acquire by operation of law the decedent's interest in the real estate.

At first it appears that the title companies should re-examine their examining practices.  After all, this case indicates that a death certificate that discloses that a decedent died of natural causes will not preclude a Section 2-6 action.  Should this case give title people and real estate attorneys cause for alarm?

Probably not.  In order to show that a person should not acquire an interest in land because of Section 2-6 of the Probate Act, there must be a judicial determination.  In the absence of such a proceeding pending in a probate case, injunction suit, or other similar case, a bona fide purchaser for value and without notice should be protected.

But assume that A and B owned a home as joint tenants.  A died, and B, as surviving joint tenant, immediately contracted to sell the home to C.  When insuring title through the death of a joint tenant, title companies might not always examine a pending probate proceeding.  Should the title company re-evaluate its procedures?

Probably not.   Assuming that there has been no lis pendens recorded against the land, it appears that a purchaser would acquire the land free of this possible outstanding interest.

Exclusion 3(d) of the owners title policy is "defects, liens, encumbrances, adverse claims or other matters attaching or created subsequent to date of policy."  Using the above example, assume that A died on May 1 and B quickly sold the property on May 15th.  A title policy was immediately issued.  Three months later a court determines that B was responsible for A's death and that Section 2-6 applies.  Therefore, B does not acquire A's interest in the land as a surviving joint tenant.  A's brother now files a partition suit.  Is this suit a post-policy event?  Can the title company refuse to defend the suit?

Again, probably not.  It seems to me that this "adverse claim" was "created" when A died, which was prior to the date of the title policy.  It appears that the title company will have to defend the suit, but it should succeed.

--Dick Bales

 

6.          LANDLORD/TENANT; ORAL FARM LEASE TERMINATION BY LESS THAN ALL LANDOWNERS:

In Daugherty v. Burns, (4th Dist., May, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/4thDistrict/May/Html/4010795.htm  the Fourth District tackles an issue of first impression which may have some interesting application to non-farm leases.  Daugherty was a tenant farmer under an oral share-crop lease on three parcels of farmland.  He also happened to be a joint owner of all three tracts with his sister, brother, and two aunts by inheritance or family transfer. Daugherty was not a majority interest owner. Although he had been farming at least one of the tracts since 1988, on October 22, 1999,  his brother, sister, and one of the aunts served Daugherty with notice to terminate the leases and filed a partition suit on the three parcels.  The court ruled in Defendant’s favor at the trial level, and Daugherty brought this appeal contending that the Defendants lacked the power to terminate his lease absent the consent of all joint owners, (he and one aunt did not consent or join in the termination notice), and that the notice was not effective because it was not served more than four months prior to the end of the lease as required by 735 ILCS 5/9-206.

The issue relating to the notice period was adjudicated in favor of Defendants. While the oral lease had no agreed upon date of termination from which to measure the four month statutory period provided by statute relating to farm land,  Daugherty argued that the October 22, 1999 date was not effective because the lease payments were made during January of each year and therefore the notice was within only three months of the end of the term.  The Defendants on the other hand prevailed on this issue by arguing that the oral lease did not have a stated period beginning and ending date, and that custom and usage in farm leases in this area was for a period beginning on March 1, 2002;  thereby bringing their notice within the four month period.

The most interesting aspect of this decision relates to the issue of first impression  relating to unanimous consent by of all owners for termination of the lease. Looking first to the Nebraska and Iowa Supreme Court decisions, (which conflict in their holdings), the Fourth District settled on a rationale that inasmuch as a lease could not be created without the unanimous consent of all co-owners, once that unanimous consent to continue the tenancy no longer exists, the lease could not be renewed.  This holding is with replete with reference to “the most sensible rule” and “most logical extension” in an effort to bolster a decision that could clearly have gone either way. Having determined that a lease must have unanimity among co-owners to come into existence, it seems that it could have been just as logical to rule that unanimity would be required to terminate the lease.  The Court, however, determined that unanimity was required to renew the lease, therefore the notice to terminate by less that a majority indicated an intent not to renew, and since the required unanimity was absent, the lease was terminated.  (Got that?) We are left with the law that where there are co-owners, there must be unanimous action to lease the property, but whether full consent of all owners is required depends upon whether the lease is being created, renewed or  forfeited.

 

7.          EMINENT DOMAIN; GOOD FAITH NEGOTIATION AND 60 DAY NOTICE PRIOR TO CONDEMNATION:

In the March, 2002 issue of these case law notes, the decision in City of Naperville v. Old Second National Bank of Aurora, (2nd Dist.,  February 7, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/February/Html/2001482.htm was presented,  holding that the good faith negotiation requirement was not met where the condemnor offered only $425,000 for property  which its own appraisal indicated had a value of at least  $500,000.  The Second District has now added another, similar case decision in this area with DOT v. 151 Interstate Road Corporation, (2nd Dist., May, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/May/Html/2010870.htm . In the trial court, the Defendant-owners of the property sought to be condemned filed a traverse  and motion to dismiss the Condemnation Complaint on jurisdictional grounds alleging that the DOT had (1) failed to  negotiate in good faith as a statutory pre-condition to the filing of the complaint, and (2) not provided 60 days notice prior to filing the complaint after making an amended offer of settlement to the owners. The appeal was taken on an interlocutory basis pursuant to Supreme Court Rule 307, contesting the Plaintiff’s authority to condemn.

Noting that “It is well established that good-faith negotiation by the condemnor is a condition precedent to the exercise of the power of condemnation”,  the Second District opinion finds that the issue of whether  whether the condemnor’s  conduct constitutes negotiation in good faith is within the jurisdiction of appeals under Rule 307.

This particular condemnation deals with the taking of property on the corner of Lake Street and Addison Road in Addison, Illinois, necessary to widen Lake Street.  The appraiser employed by IDOT concluded that the property had a value of approximately $10.00 per square foot. Based on this valuation, the IDOT negotiator sent a “final offer” letter to the owners informing them of the proposed compensation, that IDOT was willing to continue to negotiate, that in the absence of an agreement, it intended to begin condemnation, and acknowledged that it could not begin litigation for a 60 day period following the final offer being tendered. (735 ILCS 5/7-102.1) Within the 60 day period, the owners contacted the IDOT negotiator, advised him that they were obtaining an independent appraisal and would not be able to respond to the final offer letter within the 60 days. Thereafter, the IDOT negotiator sent  a second offer letter to the owners with a revised offer that reduced the area of the property to be taken and reduced the compensation offered accordingly. No “final offer letter” was sent relating to this revised offer.  

The owner’s appraiser valued the property at $20.68 per square foot, (twice that of the IDOT appraiser), and based thereon, the owners made a counter-offer in writing. IDOT did not respond to this counter-offer, but filed its complaint 56 days after sending its revised offer.  At the evidentiary hearing in the trial court, numerous issues were raised relating to the IDOT appraiser’s opinion of value, and that value was contradicted by the owner’s appraiser.

In an opinion that begins with a good overview of the procedural aspects of condemnation cases and holds that the proper vehicle to challenge an agency’s right to condemn is a traverse and motion to dismiss, the Second District restates it prior holding in City of Naperville that good faith and bona fide negotiations are a pre-condition to filing the condemnation action.  Finding that IDOT’s failure to respond to the owner’s counter-offer was not sufficient in and of itself to demonstrate an absence of good faith, the Court nonetheless found IDOT’s reliance on a “suspect appraisal, particularly in light of its ‘one-offer’ method of negotiating, demonstrates IDOT failed to make a good faith attempt to reach an agreement…”.  Based on the fact that there were various “defects and inconsistencies” in IDOT’s appraisal, the decision finds that IDOT’s reliance on that report in making its offer demonstrates a lack of good faith negotiating, and that the owner’s appraisal of the property at twice the square footage in value “should have caused IDOT to scrutinize its own actions in this matter.”.   “IDOT’s reliance on a patently suspect appraisal shows a lack of good faith”. Finally, the Court held that the owners were entitled to a full sixty day period to consider the revised offer received by IDOT, and the filing of the complaint only 56 days thereafter was premature. 

The case was reversed and remanded to vacate the order vesting title, fixing compensation, and most importantly “to address the issue of defendant’s fees and costs as provided in the Act.”

8. MORTGAGES;  PAYOFF CHARGES AND FEDERAL PREEMPTION:

Marcia Noskowitz filed a class action suit in Cook County against Washington Mutual Bank based on the bank’s charging of a release fee when a mortgage is paid as a condition to providing the release.  Marcia Noskowitz v. Washington Mutual Bank, F.A., (1st Dist., March 2002),  http://www.state.il.us/court/Opinions/AppellateCourt/2002/1stDistrict/March/Html/1012982.htm The basis for her cause of action was alleged to be the Illinois Consumer Fraud Act,  (i.e., a pattern and practice of charging consumers undisclosed fees), and breach of contract.  Washington Mutual filed its motion to dismiss pursuant to Section 2-619, contending that the Home Owners Loan Act of 1993, (12 USC Section 1461),  expressly preempts stat law relating to regulated loan-related fees and charges. Noting that HOLA specifically authorizes the Office of Thrift Supervision to issue regulations of federal savings associations, and that this effectively preempts state law, the Court found that the provisions of regulation of loan-related fees excluded the applicability of the Illinois Consumer Fraud Act.  The OTS had already addressed this issue in two opinion letters relating to California and New York law. In California, the OTS concluded that demand statement fees are loan-related and state regulation is preempted.  In New York, the OTS concluded that a state law requiring that an association must provide an initial payoff letter with out charge and  not charge more than twenty dollars for each subsequent letter was also preempted as a loan-related fee.  Accordingly, in the Noskowitz case, the First District holds that “federal law preempts the Illinois Consumer Fraud Act to the extent it is used to regulate an association’s imposition of payoff statement fees.”  The Plaintiff’s argument that her cause of action for breach of contract should not have been dismissed inasmuch as the OTS regulations state that contract law is “not preempted to the extent that it only incidentally affects the lending operations of Federal savings associations…” was also rejected.  The breach of contract cause is predicated on the alleged failure to disclose in the mortgage agreement that a release fee would be charged. The effect of a ruling in her favor would be to impose a mandate of disclosure of such fees in a federally regulated transaction based on state contract law.  The OTS describes the payoff statement as “an integral part of the lending process”,  regulated and preempted by federal law, which is not to be circumvented by the application of state contract law.

 

9.  EASEMENTS, ADVERSE POSSESSION AND QUIET TITLE ON PLATTED ROADWAYS:

Illinois District of American Turners, Inc. v. Rieger, et al., (2nd Dist., May, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/May/Html/2010008.htm, presents an overview of a controversy relating to roadway easements, adverse possession,  and even a near 100 year old  action quiet title in a dispute between cottage owners in a campground in McHenry County.

In June, July and August, 1915,  N.B. Kerns purchased property on the Fox River in Algonquin, Illinois, and filed a plat of subdivision to create lots for sale in a recreational setting.   On August 19, 1915, Kern filed a bill to quiet title in himself relating to this same land, and a judgment was issued in his favor in September, 1915.   Thereafter, Kerns sold 10 of the lots to the predecessors of the Defendants in this action.  Then, in 1919, Kerns sold the remaining 40 acres of land, but specifically excluding these 10 lots to the predecessors of the Plaintiffs in this case. The plat created by Kerns provided for four  roadways; Park Way, Ridge Avenue, Oak Lane and Hill Crest Avenue. These roads were never dedicated to the public and not entirely developed.  Plaintiff then developed the 40 acre parcel as a campground (“Turner Camp”) for its members and promulgated rules relating to use. The rules do not affect the original 10 lots as outside of the Plaintiff’s ownership, although the owners of those lots were also members of the Turner Camp.  Over the years, the Defendants refused to abide by rules promulgated by the Camp relating to the roads adjacent to their property. They parked their vehicles along the road in front of their lots rather than in designated parking areas,  and one owner widened and paved the portion of Ridge Avenue in front of his lot for better parking and erected a “private parking” sign.  In 1996,  members of the camp formed the Kerns Subdivision Roads Association to foster access and use of the roads, parking and improvement of Ridge and Park Avenue, with an ultimate goal of  paving the roads and qualifying them for maintenance by the township.  In December of 1996, Plaintiff  filed a declaratory judgment action seeking a finding that (1) the uninstalled roadways depicted on the N.B. Kerns Plat of subdivision had been abandoned and extinguished by adverse possession, (2) that Defendants had no easements or other rights in the uninstalled roadways, and (3) that Plaintiffs own the property on which the uninstalled roadways are depicted in the plat.  The Defendants counterclaimed for declaratory judgment finding that (1) they had the right to improve and develop Ridge Avenue  as depicted on the plat, (2) the roadways depicted on the plat shall be open for use of the public, and (3) Plaintiffs have no right to control or restrict access or improvement of the roadways.  The trial court granted declaratory judgment in favor of Defendants on all counts of their counter-complaint and against Plaintiff on their complaint. The Second District affirmed.

One of the more interesting arguments of Plaintiff that was rejected related to the quiet title action brought by Kerns in 1915 after the recording plat of subdivision.  The Plaintiffs argued that the quiet title action  extinguished the plat of subdivision he had recorded only days earlier.  The court disposed of this argument by reference to the basics of the law relating to quiet title actions.  The proceeding is an action by a party that seeks to remove clouds on title imposed by liens which are unfounded and place title in doubt.  A plat, however, which is a valid lien is not a cloud, and there was no adverse claim to the Kerns title.  Accordingly, the bill to quiet title did not extinguish the plat roadways.

Likewise, the Court affirmed the trial court’s finding that the easements were not extinguished by adverse possession. The Plaintiffs were unable to prove that their use of the property was exclusive as a required element of adverse possession. “Any sort of joint possession with the owner is not sufficient to support title by adverse possession.”  The owner must be wholly excluded from possession by the claimant for the stated period.  There was no exclusion of the Defendants, and they even maintained and developed the roads over the years, using them against the Plaintiff’s wishes and parking where they chose. Finally, noting that the owner of a roadway easement has the right to fully enjoy the use as long as there is no interference with the landowner’s use of the land, the court stated that the user has the right to use the entire width of the way,  cut and trim trees, and grade the road in such a way as to make the necessary improvements to facilitate the use. For these reasons, the Plaintiff’s counts for negligence, gross negligence, and private and public nuisance relating to the removal of trees and shrubs in maintaining and improving the roadways were also dismissed.  “It cannot be seriously questions that such an easement carries with it the right to enter upon any party of the way and improve it in a manner to render it available for its contemplated use, if in so doing there is no unreasonable interference with the co-owner’s rights.”

 

10.  HOMEOWNERS ASSOCIATIONS AND THE EFFECT OF DISSOLUTION:

In Scott v. York Woods Community Association, (2nd Dist., April, 2002),  http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/April/Html/2001319.htm,   the pitfalls that result in allowing an incorporated homeowners association to be dissolved become abundantly clear.  Harold Scott, Peter Spelson, and Timothy Mlsna brought an action to declare amendments to the declaration of the homeowners association invalid.  The basis of their claim was an assertion that the current association was improperly formed and not the successor at law to the original association, and therefore could not amend its declaration. The old association was incorporated in 1963 pursuant to the “Declaration of Protective Covenants” recorded in 1962. The purpose of the association was to “insure high standards of maintenance and operation of all property in York Woods reserved by the Declarant for the common use of all residents…”. The Declaration also provided for amending the covenants by a vote of  ¾ of the owners during the first 10 years, and thereafter by a vote of 2/3 of the owners. In 1998, unbeknownst to the officers of the association, the Secretary of State dissolved the old association for failure to file a timely annual report.  This was not discovered until 9 years later in 1997.  In the interim, the association carried on business without regard to the dissolution. When the dissolution was discovered, the association’s attorney recorded new articles of incorporation. At the next annual meeting, the homeowners voted to approve the new incorporation, but not by either 2/3 or ¾ vote.

In the ensuing litigation, Mlsna contended that after its dissolution, the old association could only do what it needed to wind up its affairs, and this did not include a new incorporation. Accordingly, he argued, the association had thereafter been acting illegally on behalf of the homeowners. The association argued that the declaration required the homeowners to form a not-for-profit  corporation, and that the association had acted in good faith for 9 years as an unincorporated entity and then merely “reincorporated”.

Despite the fact that the “reinstatement by re-incorporation” did not occur within the statutory five year period required by 805 ILCS 105/112.45, the trial court held the new association properly succeeded the old association and granted partial summary judgment in favor of the association.   Scott and Spelson took the position that the incorporation of the new association with the approval of less than 2/3 of the homeowners did not ratify the new association by the vote required under the Declaration for amendments such as the formation of a new association.  Again, the trial court ruled in favor of the association, finding that the re-incorporation was  “mere formality” that did not require a 2/3 vote for approval.

On appeal the Second District reversed the trial court,  finding that the new association was not a valid successor to the old association because the re-incorporation was invalid. The Illinois Not-For-Profit Corporation Act requires that the association must obtain authorization “by the same procedure and affirmative vote of its voting members or delegates as its…fundamental agreement requires for an amendment …”, and the articles of incorporation must reflect that the required vote has been obtained. (805 ILCS 105/102.35(a) )  Neither the requisite 2/3 vote or statement that the vote had been obtained occurred here, and therefore the “re-incorporation “ was invalid. The “re-incorporation” was not a “mere formality”.

The “lesson to be learned”, of course, is to make certain that the homeowner’s association’s standing does not lapse at any time for fear of invalidating its actions on behalf of the owners.

 

11.  EMINENT DOMAIN AND TAKING FOR A PUBLIC PURPOSE; SWIDA REVISITED:

 Over the last two years, real estate lawyers have followed the saga of Southwestern Illinois Development  Authority v. National City Environmental  from the trial court to the appellate court’s stunning reversal finding the taking to be not for a public purpose and on to the Illinois Supreme Court which reversed the appellate decision.  In April, 2002,  on rehearing, the Illinois Supreme Court changed its ruling and affirmed the decision of the appellate court finding that the taking was not for a proper public purpose.

Briefly, most will recall that SWIDA advertised it would take property by exercise of its power of eminent domain upon the appropriate request in St. Clair County.  Gateway International Motorsports Corporation was in need of additional parking  for the patrons of its raceway and approached National City Environmental to purchase a portion of its property for a parking lot, but  was rebuked.   Gateway then went to SWIDA for assistance, and SWIDA condemned the property in order to convey it to Gateway, citing the need for expansion of the raceway and the resulting benefits to the economy and recreation of the area, thereby enhancing the general welfare of the public.  National City’s traverse and motion to dismiss argued that the proposed taking was for an unconstitutional private use rather than a public purpose, but was denied in the trial court.  On appeal the Third District held that the taking was not for a proper public purpose.

On rehearing, the Illinois Supreme Court stated its goal was to “determine whether this taking achieves a legitimate public use pursuant to the constitutionally exercised police power of the government, (cite), and, therefore, whether eminent domain powers authorized by the State of Illinois were improperly exercised in the taking of private property from one private entity for the benefit and use of another private entity.”   Noting the “The right of a sovereign to condemn private property is limited to takings for a public use.”, the Supreme Court holds in this decision that SWIDA “exceeded the boundaries of constitutional principles and its authority by transferring the property to a private party for a profit when the property is not put to a public purpose.”  The previous struggles with the principals that the legislature empowered SWIDA and granted its authority are resolved here by the statement that “Courts all agree that the determination of whether a given use is a public use is a judicial function.”, i.e., not intruding upon the legislative function.  Rejecting the rationale that the taking would result in increased public safety by reducing the traffic hazards and delays surrounding the racetrack, the Court found that these considerations were not sufficient to satisfy the public use requirement for condemnation; especially given the fact that a parking garage could have been built on the existing property to solve the problem rather than taking the adjacent private property.   Economic development was, likewise, not a sufficient basis upon which to find a public purpose.  “…revenue expansion alone does not justify an improper and unacceptable expansion of the eminent domain power of the government.  Using the power of the government for purely private purposes to allow Gateway to avoid the open real estate market and expand its facilities in a more cost-efficient manner, and thus maximizing corporate profits, is a misuse of the power entrusted by the public.”

The Court concludes with its new ruling that “The power of eminent domain is to be exercised with restrain, not abandon.”

Justice Freeman holds his course by dissenting on the basis that he believes the taking at issue is for a public use and in furtherance of the purpose for which SWIDA was created by the legislature. The projected creation of job opportunities with Gateway’s expansion, economic impact from increased attendance, nearby development of  a golf course, restaurant , hotels and other support facilities to serve the raceway, and relief of the traffic congestion and hazards surrounding the track all served to convince Justice Freeman that there was  a public purpose.  Citing to United States Supreme Court cases, the proposition that “Where the exercise of the eminent domain power is rationally related to a conceivable public purpose, the Court has never held a compensated taking to be proscribed by the Public Use Clause.”  the dissent  points out that revitalizing urban blight, operating toll roads, and even making contracts and granting concessions to operate gas stations and restaurants by lease to private parties have all been approved in the past, with the note that “We cannot say that public ownership is the sole method of promoting the public purposes of community redevelopment projects.”  Concluding that “Lastly, the majority commits great disservice to the State of Illinois and its citizens in engrafting upon the public use doctrine the requirement that property taken by eminent domain must be accessible to the general public as of right. This requirement is the death of social legislation in furtherance of economic development and revitalization.”, Justice Freeman dissents.