(March, 2003)


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


(Copyright 2003 - 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.



In Estate of Genevieve Bontkowski, (1st Dist., January 30, 2003),, Guido Calcagno filed an action to foreclose two mortgages against property that was held in land trusts. Edward Bontkowski, the son of Genevieve, was the beneficiary of both trusts. The Estate filed a petition for recovery of the real estate seeking to set aside the deeds conveying title into the land trusts claiming that Genevieve’s signature on those deeds were forged. The foreclosure case was consolidated into the Estate proceedings. The trial court found that one deed (the Mason Avenue property) was forged and therefore void. Accordingly, the mortgage on that real estate was of “no effect”. The trial court also found that the second deed (the Cortez property) was also void as obtained by undue influence based on a breach of fiduciary duty between Edward and Genevieve, despite the fact that the Estate failed to prove either forgery or incompetence as to that deed. The foreclosure on the Cortez property was dismissed. Calcagno appealed arguing that the trial court erred in that the evidence was not clear and convincing as to the Mason Avenue property, and that that the finding of a breach of fiduciary duty should be reversed because the Estate’s petition did not allege fact to support finding a fiduciary relationship existed. The First District affirmed the trial court.

First, relating to the issue of the forgery, the Court noted that the burden is on the party alleging the forgery, and that the evidence must be clear and convincing. Here, the notary public admitted that she had never met Genevieve and did not see her sign the deed. A handwriting expert also testified that the Mason Avenue deed signature was forged. This was sufficient evidence to support a finding of clear and convincing evidence, and a trial court’s determination will not be disturbed unless against the manifest weight of the evidence.

Second, turning to the Cortez deed, the Court noted that there was not sufficient evidence to support a finding that this deed was a forgery. (At trial one handwriting expert testified the Cortez deed was not a forgery and the other stated that the signature was probably Genevieve’s). The trial court’s reliance on the theory of breach of fiduciary in declaring the deed void, however, was in error because the Estate did not plead breach of fiduciary duty or undue influence in its petition. There simply were no allegations of fact in the petition that Genevieve entrusted her business or financial affairs to Edward, or reposed any trust or confidence in him.

The First District affirms the trial court’s decision on this deed, however, on other grounds. Stating that “The real issue on appeal is not the reasoning of the court nor the basis for its decree, but whether its decree was correct.”, the Court notes that the Cortez deed stated on its face that it was without consideration. While “Mere want or inadequacy of consideration is, standing alone, no ground for canceling a deed;…if, however, a person has been induced to part with a thing of value for little or no consideration, equity will seize upon the slightest circumstance of oppression, fraud, or duress for the purpose of administering justice in the case at hand….Those circumstances exist in this case.” The Cortez deed was prepared by Edward’s attorney and improperly notarized. Geneveive was an 85 year old woman, with no more than a 6th grade education, and with limited ability to speak English. These facts, combined with the absence of consideration and no allegation by Edward of a gift, were such that “equity will seize upon” in order to “administer justice”.





How interesting that we have the Bontkowski case so soon after In re Estate of Cuneo, 334 Ill.App. 3d 594. Both cases are similar in that they both deal with the fraudulent execution of recorded documents. The Cuneo case, in fact, reads almost like a detective potboiler. At one point the court in Cuneo makes a conclusion by pointing out that "evidence showed that sunset occurred at 7:38 p.m. in Addison." I immediately thought of Abraham Lincoln and the 1858 "Almanac Trial" of William Armstrong!

Like Cuneo, the court in the Bontkowski case points to a litany of reasons as to why a deed should be set aside. These include the fact that Genevieve Bontkowski was an eighty-five-year-old woman with only a sixth grade education and that her ability to speak English was very limited. After reading this case, I was reminded of a closing that almost took place in my office. In this instance the borrower spoke very little English. It seemed clear that she did not understand the documents that she was being asked to sign. The closer came to me and expressed her concern: Should we halt the closing? Luckily, I did not have to make that decision. The closing was canceled by the lender for other reasons.

Again, the court in Bontkowski had a myriad of reasons to justify its setting aside the deed; the two noted above are just a few of them. Nonetheless, this case should still serve as a warning to title company closers and underwriters. Does the borrower understand the documents that he or she is signing? Bontkowski involved a deed, but it seems to me that a mortgage signed under similar circumstances might be set aside in a subsequent mortgage foreclosure. If so, the title company that insured the mortgage would almost certainly have liability; see insuring provision number 5 of the 1992 ALTA loan policy, wherein the title company insures against loss or damage sustained or incurred by the insured by reason of "the invalidity or unenforceability of the lien of the insured mortgage upon the title".

Dick Bales

Chicago Title, Wheaton



For a number of years, there has been a divergence of opinion in the Northern District of Illinois Bankruptcy Court about whether a debtor is able to reinstate a mortgage default while a foreclosure is pending by filing a Chapter 13 Bankruptcy following the sale but before confirmation. (See In re Crawford, 217 B.R. 558, In re McEwen, 199 B.R. 382.) A number of Bankruptcy Judges, interpreting the rule in 11 U.S.C. 1322 (c)(1) that “a default with respect to, or that gave rise to, a lien on the debtor’s principal residence may be cured…until such time as the residence is sold at a foreclosure sale that is conducted in accordance with …(state law)”, had found that the sale was not actually “conducted” until the confirmation by the trial court pursuant to 735 ICLS 5/15-1508, and therefore a debtor was permitted to file at any time prior to confirmation. The result would be that the debtor could then reinstate or cure the default through the plan regardless of the fact that the redemption period had expired in the foreclosure and the sale had been held. Other Bankruptcy Judges, however, have interpreted the word “conducted” in this section to mean that once the sale occurred and a bid is accepted, the debtor no longer can cure the default, and therefore can not file a Bankruptcy petition imposing a stay on the foreclosure during the period from sale to confirmation.

Now, at least in the Northern District of Illinois for the time being, the law is settled. A debtor can not file between sale and confirmation according to the law set fort in the recent decision in Colon v. Option One Mortgage Corp., (7th Cir., February 11, 2003),,

There was no dispute that Norma Colon filed her Chapter 13 Bankruptcy seeking to cure the default upon the mortgage on her home after the foreclosure sale, but before the confirmation of that sale. The Bankruptcy Court and the District Court held that the right of redemption under the Bankruptcy Code, applying Illinois mortgage foreclosure law, expired on the completion of the foreclosure sale and does not continue during the period between that sale and the confirmation of the sale by the Court. Although the confirmation is more than a mere formality, the state court is limited in its ability to deny confirmation to an examination under 735 ILCS 5/15-1508 of whether (1) notice was improper, (2) a fraud committed, (3) an unjust result or (4) unconscionable result would be the outcome. Noting that “Congress clearly intended to extend the debtor’s right to cure to the outer limits allowed under state law…[but] the intent could not have included a desire to permit the debtor, through creative invocation of bankruptcy protection, to do an end-run around state law once all substantive events have come and gone.”, the Seventh Circuit decision by Circuit Judge Ripple affirmed the decisions below. “Any other result would allow a federal procedural mechanism to afford greater rights than would otherwise be available under state substantive law.” Once the highest bid is accepted, the sale has occurred and been “conducted” as defined by the Bankruptcy Code. The inclusion of the provision that the sale is “conducted” when held in accordance to “applicable non-bankruptcy law” clearly leaves the substantive mortgage foreclosure of the state in which the property is located in place, and allows “the states the right to fix the outer limits of the right to redeem…the states have the last word in determining the scope of the right of redemption”. Illinois law provides that the sale is not to take place until the redemption period expires. The rights of the purchaser at the sale attach at the time of the sale subject only to the “highly circumscribed authority of the state court to void the sale on any of the grounds set forth in the statute.” Ms. Colon’s redemption rights had expired prior to the sale, and therefore only ”If the sale is void, she will have the rights under the Code and state law of a debtor whose property has not yet undergone a judicial sale.”


(Ed. Note: I know that no one wants to think about this but… What if the property were sold to the plaintiff for a sum less than the mortgage debt, giving rise to a special right of redemption under 735 ILCS 15-1604? Could Norma Colon file Bankruptcy within the 30 days…… Forget I asked that question!)




(Ed. Note: Judge Altenberger, sitting in Bankruptcy in the Central District of Illinois, has written three decisions in a complex and somewhat convoluted Chapter 7 Bankruptcy proceeding, In Re Pak Builders. The decisions are quite important statements of law in themselves, but the implications of Judge Altenberger’s thinking on the doctrine of “chain of title” in real estate are especially worthy of consideration. For some reason, these decisions were not listed in the usual case law updates I receive over the internet, so I owe a special thanks to Timothy J. Howard of Peoria, Judicial Administrative Assistants Eric Schleef and Lyn Vespa, who brought these cases to our attention.)

Citizens Savings Bank brought an adversary proceeding to determine the validity of a number mortgages made to it by the Debtor, Pak Builders in In Re Pak Builders.  Pak Builders was an Illinois General Partnership consisting of David Pugsly and Martin Kracher. The Bank sought a finding that the mortgages were valid and enforceable liens, and , if necessary, sought reformation of the mortgages to correctly name the mortgagor in the instruments in concert with the finding of validity. The Bankruptcy Trustee, on the other hand, sought to avoid the mortgages, arguing that since the mortgages were rife with errors relating to the correct name of the mortgagors, they failed to give constructive notice, were therefore not valid mortgages; and threw in the argument that the Bank was grossly negligent in preparing the mortgages.

Prior to filing a Chapter 7 Bankruptcy, Pak Builders acquired a number of real estate lots located in Peoria County, Illinois, in the name of “Pak Builders, an Illinois General Partnership, with Martin Kracher and David Pugsley, sole general partners”, or simply as “Pak Builders, an Illinois General Partnership”, and in at least one instance simply as “Pak Builders” , all of which were thereafter pledged to the Bank by mortgages. The mortgages, however, identified the mortgagor as “Pak Builders, Inc.”, a corporate entity, except two of which that simply identified the borrower as “Pak Builders”. Subsequent mortgages had similar errors or inaccuracies relating to the mortgagor’s name and form or style of entity. All of the mortgages were listed under “Pak Builders” in the Grantor/Grantee Index in the Office of the Recorder of Deeds of Peoria County.

Within the Chapter 7, acting under his powers in the Bankruptcy Court, the Trustee, Charles Covey, sold several of the properties to third parties, and applied to the Court for direction relating to the distribution of proceeds for those sales. The Trustee argued that since the mortgagors were not properly named in the mortgages, they were “wild instruments” outside of the chain of title, and therefore avoidable under the provision in Section 544(a)(13) of the Bankruptcy Code that a Trustee can avoid any mortgage avoidable by a hypothetical bona fide purchaser for failure of constructive notice. The Bank, of course, asserted that they should be paid from the proceeds of the sale pursuant to the terms of their mortgages.

Judge Altenberger ruled that while the Courts in interpreting Illinois law have held mortgages that were technically outside of the chain of title are “wild instruments” that fail to provide constructive notice to prospective purchasers, (In re Bruder, (N.D.Ill., 1997) 207 B.R. 151), “in certain limited circumstances a document recorded outside of the direct chain of title can provide a bona fide purchaser with constructive notice of an encumbrance upon property based upon an inquiry notice theory;”. Citing 1879 and 1927 Supreme Court cases, (Beaver v. Slanker, (1879) 94 Ill. 175 and Leeser v. Kibort, (1927) 243 Ill.App.258), Judge Altenberger finds that “inquiry notice could lead to constructive notice under Illinois mortgage law, even when the instruments in question were recorded outside the direct chain of title.” In Beaver, the names of the mortgagee and mortgagor had been transposed. The Illinois Supreme Court rejected the argument that the title was unaffected by the mortgage because the mistake was “palpable” on the face of the document; the parties signed and acknowledged the instrument correctly designated as mortgagor and mortgagee at the bottom of the document. In the later Leeser decision the court noted that “If there is an error apparent on the face of the instrument and of such a character as to lead a purchaser of ordinary prudence to make inquiry, and such inquiry would have led him to knowledge of the true condition of the title, he will be held to such knowledge.” This reasoning lead Judge Altenberger to declare “a rule in Illinois that to provide constructive notice to a bona fide purchaser an encumbrance recorded in the Grantor/Grantee Index must generally be within the direct chain of title unless there are errors palpable n the face of the document requiring a diligent purchaser to inquire further.” (Emphasis in the original.) Here, due to the irregularities on the face of the various mortgages, a purchaser would be put on inquiry notice that the various inconsistencies would lead one to conclude that names “Pak Builders, a general partnership” and “Pak Builders, Inc.” may have been used interchangeably. Further, inconsistencies in the mortgage documents such as the mortgagor being named as a corporation, followed by a signature line for an individual or partnership entity placed further inquiry notice on a prospective purchaser. “These are exactly the type of irregularities within the chain of title charging a diligent purchaser with the duty to inquire into the discrepancies. Such inquiry would quickly lead to knowledge of the Bank’s liens.” Answering the question of whether a title examiner is required to go to such lengths to discern an indicia of inquiry notice, the decision cites Ward on Title Examinations: “The indices in the recorder’s office simply are designed to alert the title searcher to the existence of various instruments…The title searcher always should be sure that the title examination is made upon the basis of a complete reading of the instrument.”




The second decision in the Pak Builders case deals with a different theory advanced by the Bankruptcy Trustee, to the same end.  In this Adversary Complaint, the Trustee was confronted with the fact that within 90 days of the filing of the Bankruptcy petition, Pak Builders had paid $634,000 of payments to the bank under the mortgages, and argued that since the mortgages were not valid liens by virtue of being outside of the chain of title by misnomer of the borrower, or invalid by virtue of the misidentification of the borrower, the lender was an unsecured creditor. This status would render the payments to the bank, (as an unsecured creditor), a voidable “preference” under Section 547(b) of the bankruptcy code.

Judge Altenberger agreed that the underlying deeds conveying the property to Pak Builders were invalid, but held them to be reformable. The mortgages were nonetheless valid, (as stated in the earlier decision), and not avoidable due to negligence in their execution. Finally, and a subsequent bona fide purchaser would have notice of the liens despite the fact the doctrine of ‘chain of title’.

Some facts: The deeds of conveyance were of lots originally owned by Jack Snyder, as sole beneficiary of a trust. At Jack’s direction, his attorney and the trustee of the trust, Mercer Turner, prepared and executed deeds naming “Pak Builders, Inc., a corporation”, a non-existent entity, as grantee. The deeds were recorded, and it was only after the corresponding mortgages by “Pak Builders, Inc., a corporation” had also been executed and recorded that the misnomer was discovered. Turner then prepared and recorded new deeds correctly naming the grantee “Pak Builders, a partnership” to correct the misnomer. The bank was never notified and did not record new, corrective mortgages.

Going back again to early Illinois case law, Judge Altenberger notes that a deed entirely lacking a named grantee is void, and a deed to a fictitious grantee conveys no interest. Where, however, the parties intend to convey title, but make a scrivener’s or other errors in the deed, reformation will allowed where the intent of the parties can be discerned from the facts surrounding the transaction. Referring again to Beaver v. Slanker, (1879) 94 Ill. 175 and Richey v. Sinclair, (1897), 167 Ill.184, 47 N.E. 364, Altenberger finds that the deeds here, although void, can be reformed to conform to the intent of the parties because “it is the intent of the contracting parties that governs, and as a result, nothing more than a clerical error appears on the facts before this Court.” Noting that “negligence, standing alone, will not bar reformation because of mutual mistake in that mistake almost always presupposes negligence”, reformation here would not prejudice a bona fide purchaser because, (as stated in the previous decision), “due inquiry notice” required of any purchaser would have lead to these mortgages. “There are simply too many inconsistencies for a would-be purchaser to ignore and still claim a diligent search.”




The third decision in Judge Altenberger’s trilogy, In Re Pak Builders,  relates to mechanic’s lien issues. Citizen’s Bank, (the same lender that the Trustee attempted to defeat using the chain of title and misnomer arguments), brought their own adversary complaint relating to the priority of mechanic’s liens filed by Gingerich Plumbing Co. on real estate owned by Pak Builders. Citizens alleged Gingerich had not properly perfected their liens on six of the Pak parcels. The perfection issue revolved around the Bank’s assertion that Gingerich did not comply with the Section 7, (770 ILCS 60/7), requirement that the notice of claim for lien or suit be filed within four months of the last date of work. Gingerich argued that its plumbing work was “staggered” nature due to the type of development; (i.e., the plumbers first lay all of the underground pipe and plumbing while foundations are being excavated, then leave and return to the jobsite some time later to install the interior plumbing and fixtures while the homes are being built, and leave again to finally return as all of the final elements of the construction are being complete to install faucets and “trim” their work on construction contracts in large projects such as the Pak Builder’s developments.) Accordingly, its theory was that it’s work was not complete, and therefore the time for filing did not begin to run, until all work under the contract was done. Citizens argued that to perfect its mechanic’s lien, Gingerich must file its lien within four months of the completion of the work forming the basis of the claim, regardless of whether the entire contract was complete at that time or not. Because Gingerich’s liens were filed more than four months after the last date it performed its last work on the project, the bank claimed the liens were unenforceable.

Judge Altenberger agreed with the Bank’s argument: “Unfortunately for Gingerich, Illinois law on the subject is clear and ultimately fatal to its position. Illinois law explicitly holds that “completion” as applicable the in mechanics lien statute means “completion of the work for which a contractor seeks to enforce his lien. (citations)”. Because Gingerich’s liens were recorded more than four months after the last date of their work, and regardless of whether the work was complete under the contract or not, the liens were not properly perfected under Section 7.



In Gretchencord v. Cryder, (3rd Dist., January 29, 2003),, a Realtor brought suit for a commission on the sale of the defendant’s farm property. Dana Cryder only owned an undivided one-half interest in the farm by virtue of an inheritance when his father died. The other half was owned by his Aunt Mary, who did not want to sell. The property was farmed by a tenant, Kirk Friestad. In 1996, Cryder was in need of money and unable to obtain a bank loan with only an undivided one-half interest to pledge for security, and wanted to sell. His aunt was immovable on the issue on sale and refused to speak with him or his attorney. Cryder managed to list his undivided one-half interest with Gretchencord, and the listing agreement stated that he would owe the Realtor a 6% commission of the total price of any sale or exchange within 3 months, provided for a ‘broker’s protection period’ of 3 months thereafter if the property was sold or exchanged to anyone to whom the Broker had made aware of the property, and required Cryder disclose all prospective purchasers who contacted him to the Realtor.

Prior to the listing, Cryder had told Friestad he was considering listing the farm for sale, but Friestad stated he did not have the money to buy it, although he wished he could. When later approached by an agent in Gretchencord’s office about buying the property, Friestad indicated that he was still interested in purchasing the farm but still did not think he could afford to purchase it. During the listing period, an offer was received from William Eisenbrandt to purchase the entire farm, but it was contingent on Aunt Mary’s agreement; which she still refused to give. The same purchaser then proposed buying Cryder’s undivided one-half interest in the property if Aunt Mary would agree to a partition of the farm. Aunt Mary and her attorney did not respond, and the listing agreement expired without a contract being formed.

Shortly thereafter, the tenant, Friestad, again offered to purchase Cryder’s one-half interest in the farm, contemplating a partition, and this time, Aunt Mary agreed to the partition with him. Friestad obtained a loan for the purchase of Cryder’s one-half interest and closed the transaction four months after the listing agreement expired.

The trial court found that the Realtor was entitled to a commission based on the evidence the Friestad had contacted Cryder and his attorney during the listing agreement period, (if only to say he wished he could afford to buy, but couldn’t), and had been approached by an agent in Plaintiff’s office. The trial court also found that Friestad had “carefully waited until he knew the listing agreement had expired before he made his written offer to purchase at a price practically equal to the listing price, less six per cent, thereby saving himself the cost of plaintiff’s commission.” Cryder argued that he should not be punished for Friestad’s conduct, “especially since he did not receive any more money from the sale than he would have…[if the commission had been factored in]…and that he did not know that Friestad was a prospective purchaser until after the listing agreement expired.”

Upholding the trial court, the Third District decision notes that Cryder’s absence of bad faith would not absolve him: “Notwithstanding defendant’s lack of bad faith, his failure to comply with his duty to refer exposed him to liability under the contract.” The contract required Cryder to disclose all prospective purchasers who contacted him. Despite his denials of an ability to afford to purchase the farm, Friestad was still a “prospective purchaser”, (i.e., one contemplating the future purchase of defendant’s property), and should have been disclosed whether Cryder knew or believed that he was a prospective purchaser or not. Because he did not do this, he breached the agreement and was liable for the commission.


(Ed. Note: In perfect hindsight, should Cryder have sued Friestad for interference with contract????)



Miller v. Hill, (3rd Dist., February 6, 2003), begins when the Fulton County Zoning Board grants a conditional use permit to Defendant Hill to operate a trapshooting range on his property adjacent to Miller. In two separate actions, the Millers attempt to challenge the grant of the conditional use permit and seeking to enjoin Miller’s use of the firearm range; both without success.

Miller first attacks the notice of the hearing at which Hill requested to build and operate a firearm range on his property under a conditional use permit. The Millers objected to the notice language, (“for a conditional use permit to construct a metal building for the purpose of operating a privately operated for profit recreational facility and also to operate a radiator repair shop”), as not clearly stating what was being sought with sufficient detail to provide due process. The court held that while “Generally speaking, we would agree with plaintiffs that the failure to give proper notice constitutes a violation of due process and voids a condition use permit granted under the suspect proceedings.”, here there was due process because the Millers were given two subsequent opportunities after the initial hearing to present their case in opposition. While the Millers did not appear at the first hearing on August 26, 1998, they did participate at subsequent hearings on February 24, 1999, April 29, 1999, and at a hearing on remand on January 26, 2000, where over 30 witnesses were heard. Under these circumstances, the defect in the initial notice was “rendered harmless”.

The Millers then attacked the continuation of the use under the nine conditions set forth in the Zoning Board’s Conditional Use Permit. These conditions ranged from the use not posing a danger to public safety, health and welfare, to not substantially diminishing and impairing neighboring property values. The Board heard testimony that Miller’s property had lost value due to the presence of the range, but also was presented with testimony of other neighbors that while they could hear the noise, it was not loud enough to interfere with their use and enjoyment of their property. The appraisals were found to be without the detail necessary to establish that there was a substantial diminution in value by the Board, and testimony that the range patrons followed gun safety procedures off-set the Miller’s fears that errantly fired guns presented a safety hazard. In the end, the standard for Administrative Review requiring a finding of against the manifest weight of evidence to disturb an agency’s decision was not present here for a reversal by the Court.

The decision also reviewed the trial court’s dismissal of Miller’s complaint filed in chancery for nuisance. Section 5 of the Premises Liability Act, (740 ILCS 130/5) specifically provides immunity to an owner or operator of a firearm range for any action for public or private nuisance, trespass, or attempt to enjoin the use or operation. (Do you need any more proof of the power of the ‘gun lobby’?) The valiant efforts of the Millers to challenge the constitutionality of this section of the Premises Liability Act also failed. (While the Illinois Constitution’s provision that there shall be a remedy in the law for all injuries and wrongs to property, this is “an _expression of philosophy and not a mandate that a certain remedy be provided. Previous cases have upheld statutory prohibitions of injunctions as constitutional. Section 5 is not ‘special legislation’ because the legislature does have the power to make classifications of persons and objects as it passes law, and a law need only act uniformly throughout the state.)

In the end, the Millers are left with the fact that there are 29 other states that have similar laws limiting the right to bring nuisance actions against firearm ranges, and “the legislature could have rationally concluded that firearm ranges, which by their nature are almost exclusively situated in rural areas, need protection from the influx of new persons into these areas.” The Zoning Board’s decision was not against the manifest weight of evidence, and the Millers had ample opportunity for hearing despite the obtuse language in the initial notice.



The growing precedent relating to the Illinois Residential Real Property Disclosure Act has given us instruction on the pleading, burdens of proof, elements, and rights of recovery under the act. This month, in a case which is as yet unpublished, Calhoun v. Koszulinski, (1st Dist., February 18, 2003), but should appear at, the standard of the proofs necessary to support a judgment in favor of a buyer against a seller is set forth: “clear and convincing”.

The Calhouns brought an action against Leonard and Sheila Koszulinski under the Illinois Residential Real Property Disclosure Act, (765 ILCS 77/1), relating to leaks in the basement of the home they purchased from Koszulinski in Tinley Park in 1997. Koszulinski had purchased the home from a builder in 1989, and had basement leaks repaired while the house was still under warranty. Defendants also repaired additional basement leaks later on, after which they testified they noticed no further problems. During the sale negotiations and walk-through, the Calhouns notices cracks in the basement. The sellers told them the cracks were caused by settling and had been repaired. Based on these statements, the buyers did not conduct an inspection. After moving into the house, the Calhouns noticed a slant in the living room floor and cracks in the foundation. They obtained estimates to correct the problems that ranged from $10,000 to $75,000, and brought a three-count complaint. One count was based on the statement made by Koszulinski that they were not aware of any defects in the basement or foundation as required by the Illinois Residential Real Property Disclosure Act.

At trial, the Calhoun’s attorney argued that the standard of proof was a “preponderance of evidence” under the Act. The trial court noted that the Act was silent as to the standard, but determined that standard of “clear and convincing evidence” applied to common law fraud should be applied here as well. Turning to the reports prepared by Plaintiff’s structural experts, (which did not state that Defendants should have known of the defects in the foundation), noting that there was no evidence that Defendants knew or should have known that the cracks were material defects, and finding that Plaintiff had failed to prove Defendant’s belief that the cracks had been repaired was unreasonable, the trial court entered judgment in favor of Defendants based on Plaintiff’s failure to meet their burden of proof.

On appeal, the First District opinion affirmed the trial court’s application of the clear and convincing standard of proof. Arguing that the Act is a trend away from common law fraud and misrepresentation in favor of a statutory cause action, the Plaintiff’s asserted the lower standard of proof applied in Consumer Fraud actions should be applied. This was rejected by the Court as being without any authority. Beginning their statutory construction with the foundation that “a statute is construed as changing common law only to the extent that the terms thereof warrant, or as necessarily implied from what is expressed.”, the First District notes that the Act provides that liability under the act only attaches to knowing violations, that a seller is not liable for an unknowing error, inaccuracy or omission, and is exculpated based on a reasonable belief that a defect has been cured. The Plaintiff’s interpretation of Woods v. Pence as lowering the burden and standard of proof are rejected by the Court, as are the suggestion that reversal of the dismissal of the count based on the Act in Hirsch v. Feuer while the dismissal of the fraud counts lowered the pleading requirements under the Act. Rather, the decision notes, the clear and convincing standard of proof applied in a statutory tax action as in common law fraud are more analogous to the case at bar. Finally, the Court notes that the Plaintiffs would not have prevailed even had the trial court applied the lesser, preponderance standard. There was “no evidence”, (not just less than overwhelming evidence), to establish Defendants knew or should have known the cracks were a defect.



Questions that arise among those who regularly read and respond on the ISBA Real Estate/Transactional listserv seem to be fairly cyclical. One of the most regularly cyclical questions deals with prepayment penalties. Many of the answers simply reflect ‘gut feelings’ or suggestions about the issues to research. Occasionally, however, a response will come with some real authority and citation that is worth savings for future reference. Recently the following exchange occurred relating to prepayment penalties, and the resulting response from Jack Murray, (who is also the author the IICLE handbook on Deed in Lieu of Foreclosure, a work that anyone dealing with mortgage foreclosures should have on their shelf), is simply too good to not to memorialize somewhere, so…….




Dear colleagues:

A client recently consolidated/refinanced about $1.3 million in purchase money loans originally issued to acquire tangible personal property for its business. The client entered into protracted negotiations with the new lender concerning various terms of the proposed loan documents. When they finally agreed to terms, the deal was executed quickly to get it closed within time limitations desired by the lender. About a week later and much to my client's surprise, it discovered that it was assessed a prepayment penalty of nearly $40,000 on the payoff of a $320,000 loan which it had taken out just eight months earlier and had paid down to a balance of $275,000. The security agreement for the loan contains the following language: "During the first year of the loan no prepayment is allowed." Understandably, the client is upset as imposition of this prepayment penalty pretty much blows the benefits of the refinancing deal.

My thoughts are that the foregoing language prohibiting prepayment of the loan fails to disclose that the client would, in essence, forfeit all installment payments made ($60,000) under the contract if it is paid during the first year, which results in an unreasonable... even unconscionable penalty. It also seems that as drafted, the language could be interpreted such that it should also prohibit the lender from accepting any prepayment, particularly under the rule that the document should be construed more strictly against the party which drafted it. However, not being well versed with the myriad of lending regulations which abound or the related case law which has developed concerning them, I'm not sure that time on the right track. Seems like this may be an Article IX issue, which I am totally unfamiliar with.

Anyone have any expertise or thoughts you're willing to share on this?



If I understand your scenario correctly, although the refinance transaction may have been "executed quickly to get it closed", the prepayment penalty/early payment fee was contained in the existing loan documentation from the original lender being paid off.  If this is the case, the fact that the new loan was "executed quickly" raises no issues of overreaching. In commercial lending, there is no legal prohibition against charging a prepayment penalty/early payment fee for early payoff. These are sometimes referred to as "yield maintenance payments" and are designed to assure the lender locks in the yield on its money loaned for a specified period of time. In fact, a lender in a commercial loan can even PROHIBIT pre-payment during a blackout period. Remember that in the absence of an agreement to the contrary to accept a "prepayment," a commercial lender has a contractual right recover interest at the contracted rate for the entire term of the loan. The decision to pay off the loan early was apparently your client's. This being the case, it appears your client is stuck with the terms of its contractual bargain. It is not a valid defense to the borrower's contractual obligations under the pre-existing loan that your client may have made a bad bargain.



Kymn is correct in his analysis. It would be extremely difficult to prevail on the theory that a prepayment provision in a commercial loan was "unconscionable" or "unreasonable." Also, the "perfect tender in time" rule, which is in effect in the vast majority of states (including Illinois), entitles the lender to refuse to accept payment of the loan before its scheduled maturity date unless the lender contractually agrees otherwise.

However, there is a recent Illinois prepayment decision, not involving a real-estate-financing transaction, that may be of interest. In Automotive Finance Corp. v. Ridge Chrysler Plymouth L.L.C., 219 F.Supp. 2d 945 (N.D.Ill. 2002), the court dealt specifically with the "reasonableness" of the prepayment premium. The loan agreement, which dealt with the contractual obligation of an auto dealership to remit to the lender amounts obtained from the sale of vehicle-service contracts in connection with and as payment on a three-year business loan from the lender, provided that if the borrower paid the loan in the first year the lender was entitled to 15% prepayment penalty; there was no prepayment penalty for any prepayment of the loan made after that date. The borrower prepaid the loan, but refused to pay the prepayment penalty because it claimed the penalty was unenforceable. The court held that the 12-month cutoff was "wholly arbitrary" and "unreasonable" because what the lender would receive by way of the prepayment penalty was "grossly disproportionate" to any reasonably anticipated and legitimate loss it would incur. According to the court, "only reasonable prepayments are enforceable" and "penalty clauses remain unenforceable under Illinois law even if both contractual parties are sophisticated." Id. at 949 (citations omitted). The court also contrasted typical repayment penalties with liquidated-damages provisions, stating that "a prepayment penalty is simply 'bargained for consideration' for the contractual option to prepay the loan." Id. The court rejected the lender's argument that the prepayment penalty was reasonable because the potential damages resulting from prepayment were incapable of estimation at the time of contracting. However, the court held that even though the penalty was unenforceable, under Illinois law the lender could still recover whatever actual damages it could prove.

For a detailed analysis of the law regarding prepayment premiums, you may wish to review my article entitled "Enforceability of Prepayment Premiums in Mortgage Loan Documents," which can be accessed from my Web site by clicking on the following URL: The article is located in the "Mortgages and Financing" section of the Web site.

>Jack Murray



I should have pointed out that the "perfect tender in time" rule may apply only with respect to mortgage loan obligations (although this is not entirely clear from the case law).

Also, a mortgage note that specifies a payment by the borrower "on or before" a date certain, "if not sooner paid" before a specified date, or "in" or "within" a certain period of time, creates special problems for a lender, and likely will be construed by a court to permit payment by the borrower prior to the stated maturity date of the loan. See, e.g., Latimer v. Grundy County National Bank, 239 Ill. App. 3d 1000, 1002 (Ill. App. Ct.1993) (in a case of first impression, the court stated that "[p]hilosophical justifications of mutuality and freedom of contract support the majority rule," but concluded that the parties in fact contemplated payment of the principal before the maturity date of the loan because of the phrase "if not sooner paid" contained in the contract). However, neither the Latimer decision, nor similar decisions issued by other courts (see the discussion in the "Perfect Tender in Time" section of the prepayment manual on my Web site), involved notes with prepayment-premium provisions. In Bayside Gardens Apt. Ventures v. Security Pacific Sav. Bank, 1996 WL 442689 at *2 (Wash.App. Div. 1 Aug. 5 1996) (not reported in P.2d), the court upheld the validity and strict enforceability of a yield-maintenance prepayment provision that contained the words "on or before" in the "Monthly Payments" section of the note. The court noted that, in this case, the contract expressly required the premium, and stated that cases that hold otherwise [such as Latimer, supra], "are inapposite because the question is not whether [the borrower] could prepay the loan and avoid paying unearned interest; rather, the question is whether [the borrower] could prepay without paying the premium."

>Jack Murray



Thanks to both of you for your insightful replies.


(Ed. Note: “Thanks…for your insightful replies”???? This guy owes Jack Murray lunch, don’t you think?)