REAL ESTATE LAW PRACTICE “KEYPOINTS”

(November, 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.      STATUTORY CONSTRUCTION; ILLINOIS AERONAUTICS ACT AND THE EXPANSION OF O’HARE AIRPORT:

Adding its legal viewpoint to the “politics” of the expansion of O’Hare Airport, the Illinois Supreme Court has spoken on one avenue of this complex situation in People of the State of Illinois ex rel. Birkett v.  City of Chicago, (October 20, 2002, Il. S. Ct.), http://www.state.il.us/court/Opinions/SupremeCourt/2002/October/Opinions/Html/93978.htm, and in the process provided us with an interesting and worthwhile example of the rules of statutory construction and interpretation in action.

DuPage County State’s Attorney Birkett brought an action on behalf of the People of the State of Illinois, County of Bensenville, Village of DuPage, and Cities of Elmhurst and Wood Dale to stop construction of improvements at O’Hare Airport.  The basis of the action for an injunction was the allegation that the City of Chicago had failed to obtain approval from the Illinois Department of Transportation required by Section 47 of the Illinois Aeronautics Act (620 ILCS 5/1 et seq.) prior to making “any alteration or extension of an existing airport or restricted landing area”.  The City took the position that the construction did not relate to the alteration or expansion of any runways that would affect flight patterns, but was limited to extensive terminal and ground transportation improvements -- which did not require IDOT approval under the Act.

The trial court entered summary judgment in favor of the City of Chicago, finding that the wording of Section 47 (“any alteration or extension of an existing airport’) was ambiguous, and determining that IDOT approval was necessary only for those matters which affect “flight safety, glide path, obstruction of approaches, and things of that matter.” The trial court held that since the City had not yet begun construction on anything other than terminal and ground transportation, approval was not yet necessary because “The issue of runways is not before the court and not germane.”  The Second District Appellate Court reversed the trial court based upon the premise that the City had clearly undertaken the terminal and ground transportation alterations in anticipation of new or expanded runways, and could not avoid the IDOT approval requirement by “segmenting” the expansion project between matters that did and did not directly affect “flight safety” when the project as a whole clearly did have such an impact.

In reversing, the Illinois Supreme Court rejected the “theory of segmentation” advanced by the Appellate Court to prohibit evasion of the statutory requirements by “segmenting an overall project into smaller pieces.” Regardless of the fact that there was evidence in the record suggesting that the terminal and ground transportation improvements were a part of a larger overall plan that would eventually include reconfigured runways, the Appellate Court’s ruling based on “anticipated” further improvement that would require IDOT’s approval was erroneous on the issues and at the time the matter was before the Court:  “the City’s long-term plan for O’Hare is irrelevant to the question of whether IDOT certification is required for the improvements at issue.” 

In the process of reaching this decision, the Supreme Court agreed with the trial court that the wording in Section 47 was ambiguous because of the fact that “any alteration or extension of an existing airport” could be read to imply IDOT approval for a small project such as a drinking fountain as well as a new runway, (an “absurdity”), and that “The difficulty lies in discerning the point in this continuum at which a project becomes less like a drinking fountain and more line a runway-in other words the point at which IDOT certification becomes necessary.”  Noting that the plain language of the statute was of no assistance, the Court turned to the IDOT issued regulations which specifically construed the ambiguous language in 1985.  Those regulations require certification only if the alteration or expansion affected the length, width or direction of a runway or impacted the approach, glide slope or turning zone of air traffic.  “While courts afford considerable deference to an agency’s interpretation of a statute that it administers, that interpretation is not binding and will be rejected if erroneous.”   Nonetheless, the Court found IDOT’s regulations a reasonable interpretation of Section 47 here, and bolstered its finding by noting “That the statute has remained unaltered through successive sessions of the General Assembly, (i.e., since the promulgation of the interpretive regulation in 1985)…[which] indicates legislative acquiescence in the contemporary and continuous administrative interpretation.”   Since IDOT’s construction of Section 47 as applicable only to alteration or extensions of runways or facilities that affect movement of air traffic had remained “undisturbed by legislative intervention for more than 17 years, [this is] a clear indication that the General Assembly fully acquiesces in that construction.”

2.    DEMOLITION;  DUE PROCESS AND CONSTITUTIONALITY:

In Village of Lake Villa v. Staokovich, (2nd Dist., October 29, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/October/Html/2000943.htm, the Second District has held the section of the Illinois Municipal Code (65 ILCS 5/11-31-1) that authorizes demolition of property which is dangerous and hazardous to the public health and safety unconstitutional.  The first six pages of this nine page decision (as printed from the official Illinois Courts website), set forth a detailed and exhaustive recitation of the facts and testimony provided in support of demolition at the trial court.  There is no question of fact that the property was rat-infested, without water service, plumbing, heat or electricity and generally in a dilapidated and deteriorated condition.  Nonetheless, the trial court’s demolition order was reversed based on the fact that the statute does not provide the owner with an opportunity to repair the property and therefore is an unlawful taking without due process. The Second District opinion noted that the Supreme Court had previously declined to rule on the constitutionality of this particular section (5/11-31-1) in City of Aurora v. Meyer, (1967) 38 Ill.2d 131, but apparently had mandated the consideration “in the exercise of its supervisory authority directed us to vacate our affirmance of the judgment of the circuit court of Lake County ordering demolition and to address defendant’s claim that section 11-31-1 is unconstitutional.”  Taking up that task, the decision holds that Section 11-31-1 is unconstitutional because it (1) fails to allow a property owner a reasonable time within which to repair his property after receipt of a demolition notice, requiring repair of unknown conditions within 15 days, and (2) fails to provide a choice of repair to the owner based on the presumption that the municipality “may demolish” or “cause the demolition” of the property without offering the owner the alternative of repair.  Citing the Supreme Court’s decision in City of Aurora v. Meyer that “The court should find from the evidence what the specific defects are which render the building dangerous and unsafe.  If they are such as may readily be remedied by repair, demolition should not be ordered without giving the owners a reasonably opportunity to make the repairs”, the Second District finds the statute does not provide the constitutionally mandated framework to provide that opportunity.  Lacking that framework, the statute does not present the least restrictive means of protecting the public from unsafe buildings despite infringing upon a fundamental constitutional right of property ownership. California and Kentucky demolition statutes specifically provide that the owner of property determined to be unsafe shall have the choice of repairing or demolishing the structure within a reasonable and feasible time schedule, spending whatever it costs to bring the property into compliance with the local codes; “far be it from the City to say how a reasonable person should spend his/her money.”  (Does that include the cost of prosecuting these expensive appeals?)

How the Illinois Supreme Court will rule on this issue is not clear, but in the interim, it appears that all demolition actions based upon 65 ILCS 5/11-31-1 are currently constitutionally infirm.

3.    QUIET TITLE; EASEMENTS, RIGHT-OF-WAY AND DEED CONSTRUCTION:

In Diaz v. Home Federal Savings and Loan Association of Elgin, (2nd Dist., October 10, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/October/Html/2011165.htm land formally used by the Union Pacific Railroad was subject to competing claims by the owners of parcels adjacent to the railroad’s right of way.  The Diaz family owned a restaurant on one side of the right of way.  The Savings and Loan owned the property adjacent on the other side of the rail right of way.  Diaz purchased the property in 1994 and traced their ownership of “the north ½ of lot 3, lying east of the Chicago and Northwestern Railroad Company right-of-way” through a chain of title back to Erastus Tefft in 1850. The bank on the other hand claimed title by virtue of the purchase of the right-of- way from the railroad in 1999, and the railroad’s interest was traced back to 1849 when Tefft granted a right of way to the railroad’s predecessor over the land he owned at the time.  The railroad ceased operating trains in 1997, removed the tracks in 1998, and conveyed its interest by quit claim to the bank in 1999.  The bank had been using the parcel for ingress and egress pursuant to a licensing agreement with the railroad prior to the conveyance. Diaz had been using the parcel for ingress and egress, as well as employee parking and storage of a dumpster. The issue before the Court was whether the 1849 conveyance by Tefft to the railroad was of a fee interest or merely an easement.  (i.e., if it was of a fee interest, then the 1999 deed to the bank by the railroad conveyed ownership of the parcel underlying the right-of-way, whereas if the 1849 conveyance by Tefft was merely an easement, then the abandonment of the right-of –way by the railroad in 1997 left title in Diaz as the successor in interest to Tefft of the fee simple, and Diaz was the owner of the parcel unburdened by the easement.)

An action to quiet title requires that a party prevail on the strength of its own title rather than merely based upon defects in another’s title, and a party is barred from maintaining an action where it can not show title in the property.  The plaintiff’s title, however, need not be perfect, and in this case the ability of Diaz to trace his title back to the common grantor, Erastus Tefft was sufficient.  The decision sets forth the rules of construction relating to deeds and concludes that it is only necessary to determine if the grantor (Tefft) intended to create an easement or a fee interest in the railroad when he granted it a right-of-way.  Noting that the circumstances are unique in each conveyance and “each such transaction occurs in a different factual context”, the Court held that here Tefft intended to create only an easement in the railroad and reserved a fee in the underlying land to himself; which then passed to Diaz as his successor.

In the process, the Court was also required to review the various statute of limitations relating to actions against real estate titles.  It found that the statute which precludes reliance on documents more than 75 years old (735 ILCS 5/13-114) did not bar reliance upon the Tefft deed in 1850 to Diaz’ predecessors because in order to invoke the bar the party must be in possession of the property, and the bank was not in possession of the parcel. Likewise, the 40 forty year statute of limitation (735 ILCS 5/13-118) was determined to be inapplicable because the bar is of an action based on a claim arising more than 40 years ago, and the Diaz claim here did not arise until 1997 when the railroad ceased using the easement.

 

4.    REAL ESTATE CONTRACTS; MISREPRESENTATION, WAIVER AND MUTUAL RELEASES:

Robert Krilich’s developments have provided much fodder for newspapers as well as case law over the years.  The decision in Krilich v. American National Bank, (2nd Dist., October 17, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/October/Html/2010921.htm deals not only with alleged misrepresentation between Krilich and his buyer on an underlying contract, but also includes an excellent discussion on the law of releases applied to an agreement between Krilich and his joint venturers; i.e., a “case-within-a-case”.

The underlying cause of action was brought by Bongi Development against Krilich for fraud and misrepresentation relating to development and zoning.  The property purchased consisted of 15 lots in a subdivision in North Barrington which Krilich knew Bongi intended to develop as single family residences. The contract provided that Bongi’s obligation to purchase was contingent upon its review of soil tests to assure the property could support improvements and septic systems within 10 days as well as final approval of the development plans by the Village.  The sale closed in 1998 with Krilich taking back a promissory note for a portion of the purchase price.  There were a number of modifications of the contract’s post-closing terms and the promissory note over a ten year period, but Krilich eventually sued for nonpayment on the note.  Bongi counterclaimed for fraud and misrepresentation, stating that Krilich knew it would not be able to obtain the necessary Village approvals “as a routine matter” as represented.  Krilich moved to dismiss Bongi’s counterclaim pursuant to Section 2-619 based on the assertion that the Bongi did not reasonably rely upon Krilich’s statements relating to the zoning because they were “statements of law, not fact”, and “future fact” at that, (i.e., that the Village would approve zoning after the closing).  The trial court granted the motion to dismiss and further found that inasmuch as Bongi had closed the sale, he had waived his contractual rights to terminate the agreement based upon review of the soil test and final approval of the development plans by the village.  Bongi also filed affirmative defenses alleging that Krilich employed duress and business compulsion in negotiations with it because the parties had another, unrelated transaction which he threatened to breach if the North Barrington matter was not resolved. This affirmative defense was also dismissed.  Bongi had the benefit of counsel throughout the negotiations, and a mere threat of breach of contract is not actionable economic duress.

Finally, Krilich filed a third-party complaint against his joint venturers for indemnification for any liability he might have to Bongi.  The joint venturers responded with a motion to dismiss noting that the joint venture had been terminated by the parties and they had executed mutual releases of any indemnification obligation.  Krilich replied asserting that inasmuch as the releases had been executed prior to the filing of the Bongi countercomplaint, the joint venturers could not have anticipated or intended to release one another from this particular liability.  The trial court granted this motion, and Krilich’s appeal was consolidated with those of Bongi in this case.

The Second District agreed with the trial court rulings on the Bongi issues and reversed on the release issues.  Bongi had no right to rely upon Krilich’s representation relating to the “routine” nature of the zoning as a statement of law not fact, and the Court agreed that it was a statement of “future fact” as well.  Moreover, the argument that Bongi had a contract provision which conditioned its obligation to close upon obtaining approvals and it closed the transaction nonetheless and before the approvals were granted constituted a waiver.  The dismissal of the duress and business coercion were also affirmed.  Duress requires a wrongful act or threat that removes one of the parties’ ability to exercise its free will, but this can be “moral” as well as criminally or tortiously wrongful conduct.  “It is well settled that, where consent to an agreement is secured merely through hard bargaining positions or financial pressures, economic duress does not exist….Ordinarily, a threat to break a contract does not constitute duress, and to infer duress, there must be some probable consequences of the threat for which the remedy of the breach afforded by the courts is inadequate.”  Here, Bongi had adequate counsel, time to consider the alternatives during negotiation, and “We acknowledge that Bongi’s damages would have been substantial, but we disagree that all of the consequential and incidental damages of Krilich’s threatened breach could not have been recovered through judicial proceedings.”

The last area covered by the opinion generated a good discussion of releases as well as a thoughtful dissent.  Justice Byrne’s majority opinion (Justice Grometer concurred) held that the language of the mutual release and circumstances indicated that the parties had considered the possibility that claims such as Bongi’s might be brought after the joint venture was terminated and nonetheless mutually released the joint venturers’ duty to indemnify each other.  The intention of the parties is determined from the language as well as the circumstances surrounding the release, and here the parties appeared to be willing and intending to include any and all future claims.  The dissent by Justices O’Malley recites the law that “Exculpatory agreements releasing parties from future liability are not favored…Such agreements are strictly construed against the benefiting party and ‘must spell out the intention of the parties with great particularity.’ “  Noting that “A claim not in existence when a release is signed is not extinguished absent a clear expression of intent to that effect…[A] general release does not apply to an unspecified claim if the releasing party is unaware of such claim when executing the release.”  The dissent, believing that whether the parties knew of Bongi’s potential claim when they executed the release and nonetheless intended to release themselves from that claim was a material issue of fact, would have reversed the trial court’s dismissal of Krilich’s third-party complaint against his joint venturers for indemnification.

5.    RESIDENTIAL REAL ESTATE DISCLOSURE ACT; STATUTE OF LIMITATIONS AND SANCTIONS:

In Penn v. Gerig, (4th District, October 17, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/4thDistrict/October/Html/4010196.htm, the buyers brought an action against the sellers after discovering defects in the home quite some time after the closing.  The Residential Real Property Disclosure Report expressly disclosed a crack in the foundation on the south side of the house and small settling cracks throughout.  The buyers, however, were required to spend $17,900 to correct defects in the sewer system, roof, and foundation, and the complaint was filed on May 16, 2000.  The sellers filed a motion to dismiss based on the one year statute of limitations contained in the Act (765 ILCS 77/60).  It was uncontested that possession was delivered on November 28, 1997 and the deed recorded on December 4, 1997; two and a half years earlier.  The Act provides that the one year limitation is measured from the earlier of the date of possession, date of occupancy, or date of recording an instrument of conveyance.  The buyers responded that (1) the “discovery rule” should be applied to the Act to toll the running of the statute of limitations until the plaintiffs knew or reasonably should have known of the problem.  In holding that the discovery rule should not be applied, the Fourth District decision by Justice Knecht acknowledges that the rule is applied to alleviate “harsh results” of a statute of limitations, but will not be invoked where there is a “contrary indication of legislature intent.”  The Residential Real Property Disclosure Act has indications of a contrary intention: (1) the Act in clear and unambiguous terms specifies three events that trigger the statute; possession, occupancy and recording, none of which relate directly to the discovery of a defect; (2) the provision that the measuring date is the earlier of the three events indicates the choice of a period which may even begin to run before the buyer even has an opportunity to discover a condition; i.e., where the buyer delays occupancy but the deed is recorded immediately following closing; and, (3) the choice of a relatively short, one year limitation period itself indicates legislative intent to restrict the cause of action to that period rather than the uncertainly of a “discovery rule” period.  Finally, strict enforcement of the limitation period does not result in a “harsh result” because the buyer’s rights to proceed under common law fraud or misrepresentation are specifically preserved by the Act. (765 ILCS 77/45)

The second half of this case deals with attorney’s fees and sanctions.  Affirming the trial court’s award of fees, (and granting sanctions for frivolous appeal under Rule 375 as well), the opinion of the Court incorporates the criteria of Rule 137 with the ruling in Bizzell v. Miller, (3rd Dist., 2000), 311 Ill.App.3d 971, 974, 726 N.E.2d 175, 177.  Rule 137 requires that there be a pleading not well grounded in fact or warranted by existing law or the good faith argument for the extension, modification or reversal of existing law, or pleadings interposed for the purpose of delay or harassment.  The Bizzell decision adds the criteria of the degree of bad faith, whether an award of attorney’s fees could deter others in similar circumstances, and the relative merits of the parties positions in the case.  Here, the “time line” reconstructed by the Court, together with its holding that “for plaintiffs to argue for the application of the discovery rule in this case was entirely contradicted by the facts”, lead it to uphold the award of attorney’s fees under the Act.

6.    FROM THE TITLE COMPANY PERSPECTIVE:

The case entitled Village of Lake Villa v. Dorothy Stokovich, as trustee, et al., No. 2--00--0943, takes up six of its nine pages in detailing the many problems with a dilapidated one hundred-year-old home.  (One of the more interesting observations was a statement that implied that as the building exceeded maximum height limitations, the third floor might have to be removed, and that as this antiquated structure violated the building setback line, the foundation "might have to be pushed back.")

The second district ruled that 65 ILCS 11-31-1 was unconstitutional because it authorized a municipality to take private property without compensation and without due process by demolishing or requiring demolition without first giving the owner the option of repairing the property within a reasonable time and spending whatever it costs to bring the property into compliance.

As I recall my college religion course, it was Karl Barth who preached about the dangers of throwing the baby out with the bath water. If so, I think that he would agree that the second district has done just that.  By invalidating section 11-31-1, has not the court eviscerated the entire demolition statute and with it the entire demolition process?  Can there now be any municipal demolition of property, at least in the second district? Remember that section 11-31-1(d) allows a municipality to petition the court to have property declared abandoned.  Section 11-31-1(e) refers to "fast track" demolition.  As these sections are also part of section 111-31-1, are they unconstitutional as well? I wonder what the corporate counsels of Aurora, Elgin, and some of those other older and bigger cities in the second district feel about this case.

I was equally uncomfortable with Diaz v. Home Federal Savings and Loan Association of Elgin, No. 2--01--1165.  This case concerned two parties, each claiming ownership of a parcel of land that was formerly used as a right-of-way by the Union Pacific Railroad.  Both the plaintiffs and the defendant derived their land from a common grantor named Tefft.  The defendant pointed out that in the chain of title for the plaintiffs, the deed from Tefft to his successor in interest described the property as "all of that certain part [of the lot] which lays east of the line of the Chicago & Galena Rail Road."  The court then drops this bombshell: "The bank contends that the "lays east of" language demonstrates that this conveyance specifically excludes any interest in the land used by the railroad.  We disagree."  (???)

The court pointed to the following language in this deed: "Together with all and singular the hereditaments and appurtenances thereunto belonging or in any wise appertaining and the reversion and reversions remainder and remainders rents issues and profits thereof and all the estate right title interest claim or demand whatsoever of the said party of the first party either in Law or Equity of in and to the above bargained premises with the hereditament and appurtenances."

The court concluded that the railroad right-of-way was an easement.  The court decided that if Tefft had intended to retain a fee simple interest in the land underlying the right-of-way, he would have been left with an irregular-shaped parcel of land that was being used exclusively by the railroad.  The land would have little, if any, value to Tefft.  Therefore, the court determined that because the deed from Tefft included this language quoted above,  Tefft therefore intended to include his interest in the land underlying the easement--land that is clearly outside the boundaries of the legal description--in the conveyance to the plaintiffs' predecessors!

As one who makes his living working with and interpreting legal descriptions, I find this conclusion extremely unsettling.  In reading this case, I was immediately reminded of another railroad case, Marlow v. Malone, No. 4-99-1024 (2000), where the court noted in dictum that a deed conveying "that part of the southwest quarter of the southwest quarter of section 26, lying west of the Illinois Central Railroad right-of-way" meant that the "plaintiffs received only the land lying west of the ICGR right-of-way." It might be interesting to compare the two deeds referred to in these two cases.

Dick Bales

Chicago Title

Wheaton

 

7.    DICK BALES, AUTHOR -- THE MYTH OF THE CHICAGO FIRE:

Have you ever wondered what it is that Dick Bales does with his “free time”…you know, when he isn’t answering attorney’s questions at Chicago Title, responding to postings frantically looking for title guidance on the ISBA website, giving lectures to the attorney/title community or teaching title examination classes for American Land Title Association?  Well, he’s a historian and a bit of a sleuth and an author, and it all comes together in his recently published book “The Great Chicago Fire and the Myth of Mrs. O’Leary’s Cow”, McFarland & Company, Inc., 2002.  The Foreword by Thomas F. Schwartz, Illinois State Historian, begins with the statement that “Catastrophes invite investigation.”, and notes that Dick’s work is not the first to attempt to definitively determine the cause of the great Chicago fire of 1871.  What Dick brings to the investigation that is both new and the foundation of this work is what no one else could have brought:  his access to the records of Chicago Title Insurance Company, (which alone survived the fire when the public records were destroyed), and his decades of experience reading those records, plat maps, surveys, and recorded documents.  With those resources, and the skeptical eye of a lawyer, Dick unravels the long accepted explanations of the origin of the Chicago Fire and shows why the official recorded testimony of the Police and Fire Commissions simply do not make sense given the indisputable facts and records of the time.  Using the title records, Dick reconstructs the O’Leary property and surrounding area, and them identifies a number of crucial inconsistencies in the key statements made during the official investigations of the cause of the fire.  He believes that the Board of Police and Fire Commissioner could have actually determined the cause of the fire had it actually wanted to, but at the time they were more concerned with repairing their reputation sullied by post-fire stories of incompetence, drunkenness and bribery than finding the truth. One of the most arresting aspects of this book are its illustrations, diagrams and photographs;  90 in all. It is also well documented by footnotes, selections from the inquiry panel transcripts, the official report of the Board of Police and Fire Commissioners, an annotated bibliography, and a collection of the source materials consulted for photographs, drawings and diagrams.  It is however, the story that Dick weaves and the illustrations that amplify his conclusions that Mrs. O’Leary’s cow didn’t do it that make this worthwhile reading.  I teach a course at the local community college every fall for would-be Realtors that includes a chapter on title records.  Every class seems to ask the same question:  “What can we do with the public land records that is worthwhile?”  I’m no longer tied to the standard answer that we can determine who owns what subject to what liens and encumbrances after Dick’s book.  Is this a beginning for a new TV series:  “CT: Forensic Title Search”??

You can read promotional materials, reviews and order the book through the publisher’s website, http://mcfarlandpub.com.  The book can also be ordered through the publisher’s toll free number. The cost is $45 plus $4 shipping. It can also be ordered at http://www.amazon.com, or http://www.barnesandnoble.com, and also http://www.borders.com.  (You can find the book on these sites through the ISBN#, 0-7864-1424-3)

Best of Luck, Dick!  (Is it true you are already working on book 2?)

8.   LAND TRUSTS AND CITATIONS TO DISCOVER ASSETS:

In Schak v. Blom, (1st Dist., September 25, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/1stDistrict/September/Html/1011196.htm Shak sought to collect on a judgment rendered against Blom by filing a supplementary proceeding under Section 1402 (735 ILCS 5/2-1402) against Chicago Title Insurance Company as Trustee under a land trust. The res of the land trust was the title to real estate which had at one time been the subject of an installment agreement to purchase between Blom and Cathy Riehs-Vlad whereby Blom was purchasing and Riehs-Vlad was selling.  Prior to the service of the citation against Chicago Title, Riehs-Vlad declared a default under the contract, Blom vacated the property and assigned any interest he had in the land trust to Riehs-Vlad to resolve the default.  Shortly after filing the third party citation against Chicago Title, Shak discovered there was a pending sale of the property by Riehs-Vlad, and filed an emergency motion to stop the sale or block the transfer of the proceeds, and the Court entered an order directing that a sum sufficient to satisfy Shak’s judgment be held in escrow with the title insurer at the closing.  Shak then filed a motion to turnover the funds held in escrow.  After the funds were turned over, Riehs-Vlad filed a motion to quash the turnover based on the fact that Blom had no interest in the property from which the citation could be satisfied and that she had not been served with notice of the motion for turnover.

The trial court granted the motion to quash, and the First District affirmed, giving us a good opinion setting forth the law on supplementary proceedings and land trust law.

When a debtor has an interest in a land trust, a citation to discover assets under Section 1402 served on both the trustee and the debtor creates a lien on any interest held the debtor in the land trust, and stays any disposition or distribution from the trust.  While the beneficiary is the holder of equitable title, the trustee, as the holder of legal title, has power to direct the sale or transfer of the trust assets upon an order of the Court.  Only if the third party (here the trustee) has assets of the debtor, however, can the Court enter a judgment against the third party in the supplementary proceedings.  The jurisdiction of the Court is dependent upon the petitioner’s proof that the citation respondent (third party) has possession of assets of the debtor, and the burden is that of the petitioner.  Here, the petitioner did not show that the debtor had an interest in the land trust, and therefore the Court lacked subject matter jurisdiction because the land trustee did not have possession of an asset of the judgment debtor.  Accordingly, the turnover order was void.  Moreover, the attorney’s fees incurred by one establishing rights in funds  which are the subject of a “wrongful garnishment” are recoverable damages, and the Court granted attorney’s fees and interest on the funds turned over during the period of retention to Riehs-Vlad.

 

9.   REAL ESTATE CONTRACTS; LIQUIDATED DAMAGES, PREJUDGMENT INTEREST AND DAMAGES ON RESALE:

Jones filed suit seeking to recover earnest monies paid to Hryn Development to purchase a newly constructed house in Jones v. Hryn Development, Inc., (1st Dist., September 30, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/1stDistrict/September/Html/1012856.htm.  On two scheduled occasions, Jones failed to close the transaction due to problems with their lender.  After the second attempt failed, Hryn Development sold the house to a third party for a sum greater than the purchase price in their contract with Jones.  After the closing, Jones demanded the return of their earnest money and the additional funds they had paid for upgrades during construction.  Hryn refused based upon a liquidated damages clause in the contract and refused to return any money. Jones’ suit sought declaratory judgment that the liquidated damages clause was unenforceable, recovery of all monies paid under theories of unjust enrichment and rescission, and prejudgment interest on those sums. The trial court agreed that the liquidated damages clause was unenforceable, but ruled against Jones on the remaining issues denying rescission, prejudgment interest, and awarded only a partial refund of the monies paid after deducting the “expenses” Hryn incurred in selling the house to the third parties.  Jones appealed arguing that the trial court’s refusal to award a complete refund of their monies did not take into consideration that the sales price of the home to the third party was greater that the contract price to the Jones, and therefore there were no actual damages suffered by Hyrn.

The Appellate Court reversed and remanded with directions.

Where a liquidated damages clause in a contract is unenforceable, the non-breaching party is only entitled to actual damages.  The goal of the law is to place the non-breaching party in the same position they would have been in had the contract been performed.  Here, Hyrn Development sold the property for more than the Jones contract price and therefore had no actual damages.  To award any damages would result in a “windfall recovery”.  Accordingly, the Jones were entitled to a complete return of their money.

Prejudgment interest is allowed to fulfill the equitable goal of making a recovering party whole, and will be awarded based upon “equitable considerations”, and not allowed if the award does not “comport with justice and equity”, as determined by the trial court in its sound discretion.  If disallowing a party prejudgment interest will result in permitting the other party to benefit from the use of money it should not have retained in the first place, “Equitable interest may be awarded as part of restoration due a party…”

Here, the trial court erred by not ordering the return of all of the Plaintiff’s money inasmuch as Hryn had no actual damages, and to not award prejudgment interest would not be in accord with equitable considerations.

 

10.   MORTGAGE RELEASES; CERTIFICATE OF RELEASE AND THE MORTGAGE ACT

Those of you who follow these “Keypoints” each month are familiar with the Mortgage Certificate of Release Act and the “ills” which the legislature have targeted in that enactment.  Patrick Cleary, a practicing attorney in Glen Ellyn, Illinois with Morreale, Mack & Terry, has authored the following which is included in its entirety:

On August 6, 2002, Governor Ryan signed the Mortgage Certificate of Release Act PA 92-0765.  This act provides for an alternative to the sometimes never ending title “hold harmless’ daisy chain regarding missing release deeds.

THE PROBLEM:  After being paid, it is normal for a lender not to have the preparation of a release deed as their highest priority.  The job becomes lending out the money again, not cleaning up afterwards.  Although the great majority of lenders are timely and diligent in preparing and transmitting release deeds, some are not.

Title insurers insure over the mortgage after sending or wiring funds to pay off a mortgage from a closing.  Title insurers accept the risk of the release coming in and being properly recorded (subject to the pay-off letter indemnity agreement).  If the release never comes they must guarantee the title and the “nullity” of a mortgage for all future sales of that property.  They accept a risk and accept the burden of processing future “hold harmless” agreements.  This is both a risk of claim and a procedural nightmare for many title insurers.

THE PREVIOUS SOLUTION:  The Mortgage Act 765 ILCS 905/4 provided that if a mortgage was paid off, but not released the “aggrieved party’ can recover a fine of $200 and reasonable attorney fees for the failure of a lender to issue a release deed 30 days after receipt of payment.  This was intended to provide some muscle to get those tardy lenders in line.

However, the reality of title insurance raised its ugly head.  The borrower was no longer the “aggrieved party” as anticipated.  The borrower/seller/ refinancer, with the assistance of title insurance, gets paid at the closing. The borrower who receives no release deed usually has no grievance.  He/she has the money and often has moved on to a different mortgage and a different property.  The wronged borrower has no incentive to take on his old mortgage company under the Mortgage Act.  The title insurer now holds the holds the other shoe and may not be the “aggrieved party” under the statute.

THE SOLUTION DU JOUR: The Mortgage Certificate of Release Act sets up an arcane procedure calling for the following:

1.      Identification of Agents of Title Insurers who can issue said certificates (Section 30)

2.      Notice of Intention to File Certificate of Release (Section 10)

3.      Recording and Content of the Certificate of Release (Sections 15, 20 25, and 35)

 

They each have statutory forms, due process provisions (Recording of Identification of Agents and Certificates of Release), notice provisions (90 day service of Intent to Issue Certificate of Release) and the only financing condition is that the Title Insurer is entitled to use any monies collected at closing to record a release “to come” for the recording of the Certificate.

To top off this arcane procedure the statute “sunsets” or self repeals January 1, 2004.

In summary, this new statute creates a long and arduous paper trail that requires service of intent, 90-day waiting period, and the creation and recording of a certificate.  All of these duties will be imposed on title insurers without them receiving any compensation.  I do not anticipate Title Insurers beating a path to the door.  Title insurers would have to create a system, a tracking mechanism, and devote a great deal or resources to staffing and training their people to comply.  After this effort Title Companies will then have to face the possibility that 16 months from now the statute is repealed without further action.

RESOLUTION: Marshall Mc Luhan warned that, “Politics offers yesterday’s solutions to today’s problems.”  This seems to fit that caution.

No real solution to that “missing release” problem will be effective until there is either some market driven reason to comply or to compel compliance.  I am afraid that the Mortgage Certificate of Release Act will not compel parties to act or refrain from action.

Patrick Cleary