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Real Estate FLASHPOINTS May 2019

May 15, 2019Print This Post Print This Post

Michael J. Rooney, Illinois Institute for Continuing Legal Education, Springfield
312-401-3454 | E-mail Michael J. Rooney

Seventh Circuit Gets It Right — Meaningless Data or Actionable Information?

One of the great things about real property law is that some things never change, making it easy for lawyers of a certain age to remember certain things. As far as I am aware, an acre of land still comprises 43,560 square feet and always has. The computer age has not changed that fact. A full section of land is a square (despite the “rectangular survey system” nomenclature) of one mile on each side and contains 640 acres and always has. Satellite-based GPS and lasers have not changed that fact. As with so many other areas of the law and our lives generally, however, the computer age does raise some interesting questions. In a recent case, the U.S. Court of Appeals for the Seventh Circuit addressed the question of whether a recorded federal tax lien constituted constructive notice due to an incorrect spelling of the first name of the taxpayer against whom the lien was filed. United States v. Z Investment Properties, LLC, 921 F.3d 696 (7th Cir. 2019).

A man named Carroll V. Raines and his wife bought a home and took title as joint tenants. When his wife died, Raines became the sole owner. In 2007, he filed tax returns for several years and the IRS determined he owed taxes, penalties, and interest that were still unpaid when he died in 2009, intestate and survived by six heirs. The government filed a notice of tax lien in 2010. However, the notice of lien recorded in the Lake County Recorder of Deeds’ office incorrectly eliminated the second letter l in his first name, identifying the taxpayer, and owner of the property, as “Carrol V. Raines.” After the notice of lien was filed, the heirs conveyed their interests in the real property to Chicago Title Land Trust Company (CTLTC). Improvements and investments in the property were made, and when the government filed an action in 2017 to enforce its lien, CTLTC and Z Investment Properties (presumably the beneficiary of the land trust) objected that the spelling error in the tax lien notice made it ineffective to give them constructive notice and prevented the government from enforcing the lien against them.

In ruling on cross-motions for summary judgment, the district court ruled in favor of the government and granted its motion (while denying CTLTC’s motion), finding that CTLTC and Z Investment Properties had notice of the recorded tax lien. Therefore, the government was permitted to enforce the lien against the property. The Seventh Circuit affirmed. Apparently, CTLTC should have requested that Chicago Title Insurance Company (CTIC) conduct a title search and issue a policy of title insurance before accepting title from the six heirs of Mr. Raines!

At this point, a little review of real property principles is required. There is no requirement that deeds, mortgages, easements, liens, or other interests in real property be recorded. All those instruments are valid if they are in proper form, properly executed by competent individuals, and delivered to the grantee. But (and this is a huge “but”) if those instruments are not recorded, it becomes possible that a “subsequent bona fide purchaser or mortgagee for value” will record such an instrument first and that the holder of the unrecorded instrument will either lose his or her interest or, at the very least, have that interest subordinated to the interest that was recorded first. That’s because the Illinois recording statute (765 ILCS 5/30) specifically says that written instruments affecting title to real estate shall take effect and be enforceable from and after the time of recording as against creditors and subsequent purchasers without notice.

In Illinois, we can identify three different types of notice that a creditor or subsequent purchaser might be charged with or might have. The first is actual knowledge of the existence of a conveyance or other interest. Actual knowledge or actual notice, as one might imagine, can be difficult to prove. But if the holder of a prior unrecorded interest can prove in court that the subsequent purchaser in fact knew of the holder’s unrecorded instrument, the holder of that unrecorded interest can have the interest upheld as against the subsequent purchaser who was first to record.

The second type of notice is constructive notice, and that’s the type of notice that recording one’s written instrument provides. In other words, once a deed conveying Blackacre to me is recorded, the law presumes everyone has seen it (whether they actually have seen it or not) and everyone is charged with constructive notice of my interest. In a contest between me and the holder of an unrecorded interest of which I had no actual knowledge when I recorded, I win.

The third type of notice is inquiry notice, and that’s the type of notice in which circumstances are such that a subsequent purchaser should have made further inquiry about something and he or she is charged with knowledge of whatever such an inquiry would have uncovered. For example, purchasers of real estate are under an obligation to investigate who is in possession of the real estate and are charged with knowledge that they would have uncovered had they gone to the property and inquired of anyone living on the premises by what right they claimed authority to be there. Similarly, they are charged with observing that there seemed to be a gravel road across the back of the lot that ran between the neighbor’s lot and a street adjacent to the property they wanted to buy, putting them on inquiry notice to ask about a potential easement in favor of the neighbor.

Now, it might seem unfair that a prospective purchaser is charged with constructive notice of every single instrument ever recorded affecting real estate. Who could possibly look up everything? The prospective purchaser, however, only needs to examine recorded instruments said to be in the “chain of title” to the property. The “chain of title” is defined as the successive string of instruments commencing with the government patent to the original individual owner and conveyances to each successive owner, down to and including the conveyance to the one currently claiming ownership. If A received the original patent from the government and then conveyed to B, who then conveyed to C, the “chain of title” consists of the patent to A and the two conveyances to B and then to C. If there is a deed from X to Y that is recorded, even if it properly describes the real estate, that deed is a “wild” deed and is said to be outside the chain of title. No one who wants to purchase from C needs to worry about what it contains.

Some interests in real estate, however, seem not to appear in the “chain of title” (the string of successive conveyances) and yet are effective as against subsequent bona fide purchasers for value. Anything that is a general lien falls into that category. For example, a judgment lien attaches to all the judgment debtor’s property in the county where the judgment is recorded. A judgment lien need not describe any specific property because it is a general lien that attaches to all the judgment debtor’s property in the county where the judgment lien is recorded. Similarly, a federal tax lien attaches to all the taxpayer’s property. These types of indexes are maintained separate from the index for conveyances and mortgages that affect only specific property. Because these general liens attach to all property owned by the judgment debtor or taxpayer, one searches for them by name only and such liens are considered to be within the “chain of title” if they are created and recorded during the period of time an individual or entity owned the real estate.

These concepts and others are covered in detail (including many statutory and case citations) in IICLE® CLASSICS: WARD ON TITLE EXAMINATIONS 2005 Edition (Including 2009 Supplement), which is available as part of the IICLE® Online Library here or in paper for certain of us older dirt lawyers. As noted at the outset, some of these real estate concepts have been in place and have remained the same for a very long time, so the volume does not need frequent updating, though it is always a good idea to double-check all statutory and case citations to be certain that the rule stated is still current.

In the case under consideration, CTLTC and Z Investment Properties claimed that they had no notice of the tax lien because the recorded notice incorrectly named “Carrol V. Raines” as the debtor and owner of the property when the correct name of the property owner and debtor was “Carroll V. Raines.” At first blush, one might wonder how that argument can be made in good faith with a straight face without blushing. In the “olden days” (oh, how my wife hates it when I say things like that!), when one examined the tax lien index by name, one would have seen an entry for “Raines” and then moved to the next column to one’s right to the first name and seen “Carrol V.” in this instance rather than the correct name, “Carroll V.” No experienced lawyer I know would have advised a client to proceed with a transaction without taking steps to deal with the tax lien described.

The appendix to WARD ON TITLE EXAMINATIONS contains a reprint, courtesy of permission from the ISBA, of the “Revised Recommended Uniform Rules for the Examination of Abstract of Title” with commentary by yours truly. The revised rules were adopted by the ISBA Board of Governors in 1977 and consist of a total of 14 numbered rules, some with sub-parts. Rule 5-1 concerns names and the concept of idem sonans, or names that sound the same, though spelled differently, that are held to refer to the same person. When the rules were proposed, I uncovered 35 Illinois cases in which differently spelled names were held to refer to the same person based on the doctrine and 17 Illinois cases in which differently spelled names were held to refer to different persons. Those case names and full citations, along with the names compared, are included in the commentary to the rules. I’m confident that one could find more examples of recent cases today. As noted earlier, older search techniques were more likely to result in finding such variances in spelling.

But the computer age has changed the way some systems conduct and report title search results. If one relies on a computerized search by name rather than a physical examination of the pages of an alphabetical paper index by last names, when one types in “Carroll V. Raines,” some systems will not even show a lien filed against “Carrol V. Raines” because it is not an exact match. Thus, the argument of CTLTC and Z Investment Properties was not that they were thrown off by the lack of one letter, but that “the system” did not report any tax lien at all, thus they had neither actual knowledge nor constructive notice of the lien and took their interest free and clear of the government’s tax lien.

Mankind has yet to invent a perfectly foolproof system of real property records (Blockchain included). Early handwritten ledgers presented problems of penmanship and smudges. Today, though the typewritten records are easier to read, it’s a matter of knowing how to conduct a search that meets the definition of a reasonable search in an electronic database. And they all work a little bit differently. For example, the ARDC database will show my registration if you type in my last name and “michael” as the first name, but shows nothing if you type in “micheal” for the first name. Even if you click the button for a phonetic search, you won’t find me if you type in “micheal” for the first name. However, if you type in my last name only or my last name and the letter “m” only for the first name, the system will find me.

In the CTLTC case, the appellate opinion pointed out that the tax lien notice was not required to be perfect, but only needed to be sufficient to provide constructive notice. The court also pointed out that the doctrine of constructive notice does not permit the subsequent purchaser to ignore signs that should have been noticed and explored. The question was whether the subsequent purchaser conducted a “reasonable and diligent search.” 921 F.2d at 700, quoting In re Spearing Tool & Manufacturing Co., 412 F.3d 653 656 (6th Cir. 2005). There is some interesting side discussion of the Federal Rules of Evidence and expert witnesses, but those issues did not decide the case. What seemed to convince the Seventh Circuit was an odd coincidence or curious happenstance.

CTLTC (as the land trustee and on behalf of the beneficiary or beneficiaries of the trust) urged that there was no notice because typing the correct name into the Lake County Recorder’s office system did not reveal the flawed notice. However, CTIC, on behalf of the IRS, performed a title search that did reveal the lien. Therefore, the district court’s holding that the lien was discoverable was affirmed. As I mentioned earlier, perhaps CTLTC should have hired CTIC to perform the title search and issue an owner’s policy to the trustee prior to accepting the deed in trust!

PRACTICE POINTER: There is a lesson here for all attorneys, and the lesson applies in situations other than a name search in a general lien index. When conducting a search in an electronic database as opposed to reviewing printed or handwritten pages in a manual index, the attorney needs to know whether he or she wants to obtain actionable information or whether meaningless data is acceptable. If all one wants is meaningless data, by all means simply type in the full correct name, accept the results, and proceed, recognizing, though, that the meaningless data is just that: meaningless data. It is likely not the answer to the client’s problem. And merely typing in the full correct name, in this instance, did not constitute a reasonable and diligent search. Not finding the recorded tax lien resulted from a defective search as much as from the original spelling error.

If the lawyer truly seeks to solve the client’s problem and to obtain actionable information, consider what is being sought and how to modify the search request to make the odds of finding the answer more likely than not. Any electronic database has its quirks, and nearly all have ways to modify a search request. It is not required to attempt to cover every conceivable spelling possibility. The requirement is to conduct a reasonable and diligent search designed to find actionable information as opposed to meaningless data.

Meaningless data or actionable information? It’s your choice. Choose wisely.

For more information about real estate, see COMMERCIAL AND INDUSTRIAL LOAN DOCUMENTATION — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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