Improperly Indexed Tax Liens, Definition of Wetlands, and Other Recent Real Property Cases
The U.S. Court of Appeals for the Seventh Circuit has recently decided several cases involving Illinois and Indiana real property. The May 2019 FLASHPOINTS contained an article that discussed United States v. Z Investment Properties, 921 F.3d 696 (7th Cir. 2019). In that case, the court ruled that federal tax liens properly filed in the Lake County Recorder’s Office but that were improperly indexed constituted constructive notice to subsequent purchasers. The liens were filed against a man named Carroll V. Raines, but the index showed the liens as being against Carrol V. Raines, eliminating the second letter “L” in the man’s first name. Due to the manner in which the computerized records were searched, the system did not report any liens. However, the court pointed out that Chicago Title Insurance Company was able to find the liens and that a correct search of the computerized records would have disclosed the liens. Thus, subsequent purchasers had constructive notice of the liens and those lines were enforceable against them.
Another recent Seventh Circuit case arose out of Illinois law surrounding property held in tenancy by the entirety of a bankrupt. In re Jaffe, 932 F.3d 602 (7th Cir. 2019). Mr. Jaffe was an Illinois attorney who was sued for legal malpractice. He permitted a default judgment to be entered against him. At the time, Mr. Jaffe and his wife owned their principal residence as tenants by the entirety. The judgment creditor in the malpractice case recorded a memorandum of judgment in the county where the real estate was located. The general rule, in that instance, is that the judgment lien may not be enforced against the nondebtor spouse.
However, while the bankruptcy case was pending, Mr. Jaffe’s wife died, and he filed a motion in the bankruptcy court arguing the property was exempt under 11 U.S.C. §522(b)(3)(B) because of the tenancy by the entirety protection afforded under the Illinois statute. The judgment creditor argued to the contrary that, while Illinois law on tenancy by the entirety did protect the current property interests of both husband and wife while both tenants by the entirety were living, Illinois law did not exempt Jaffe’s contingent future in real estate, and that once the wife passed away, Jaffe’s interest was no longer exempt. The district court held in favor of Mr. Jaffe.
The Seventh Circuit reversed and held that the lien could attach to and be enforced against Jaffe. The opinion found that the Illinois Supreme Court had not ruled on this particular issue; thus, it was required to apply the law in a manner the Illinois Supreme Court would rule if presented with the issue. The Seventh Circuit opinion points out that each of the tenants by the entirety, in addition to the current interest in the land as tenants by the entirety, also held contingent future interests as a tenant in common in the event of divorce, an interest as a joint tenant in the event of establishing another homestead, and a survivorship interest in the entire property in the event of the other tenant’s death.
There is extended discussion of the Illinois statutes concerning judgment liens and tenancies by the entirety and the case deserves to be read in full in order to appreciate the court’s rationale. Importantly, the Seventh Circuit pointed out that the law in Indiana is different from the law in Illinois when it comes to judgment liens and tenancy by the entirety property and that the difference is established in the statutory language of each state. The interplay between state law concerning the interests protected by the Illinois tenancy by the entirety statute and the exemptions provided under the federal bankruptcy law is important, as are the different conclusions the court identifies as flowing from that interplay in Illinois as compared to Indiana.
Another recent Seventh Circuit opinion delves extensively into the definition of wetlands, hydric soils, and hydrophytic vegetation. Boucher v. United States Department of Agriculture, 934 F.3d 530 (7th Cir. 2019). The case traced the saga of an Indiana farmer and his widow involved in a dispute because the USDA asserted that the removal of nine trees on the family farm converted several acres of wetlands into croplands, and subsequently found the entire farm ineligible for any USDA benefits that would otherwise be available. The district court agreed with the USDA. On appeal, the Seventh Circuit reversed and remanded with instructions to enter an order in favor of the widow Boucher, awarding all appropriate relief. The appellate opinion found the actions of the USDA to be arbitrary, capricious, and an abuse of discretion. In a dispute that covered nearly two decades, the USDA lost its battle to prove that the removal of nine trees from an entire farm had somehow converted wetlands into croplands.
Lest one think that the case is of interest only to those who represent farmers or others who own large tracts of land, there is a variety of federal, state, and local governmental units interested in the concept of protecting wetlands, either as a way to discourage development in general, to retain “open space,” or because of a legitimate concern over what is an actual conversion of true wetlands. There are thousands of acres in the northeast quadrant of Illinois in what most folks would call “the greater Chicago metro area” where similar issues arise on a regular basis. Urban and suburban lawyers who represent landowners facing similar issues would do well to read the Boucher opinion and the regulations it discusses.
Attorneys who own title insurance agencies or who operate through their law firms as attorney-agents for title insurance companies should be cautioned as a result of another recent Seventh Circuit opinion. In Fifth Third Mortgage Co. v. Kaufman, 934 F.3d 585 (7th Cir. 2019), the plaintiff sued the defendant and others (including Traditional Title, the title agency Kaufman owned) for mortgage fraud. Nine different borrowers purchased 26 condominiums in a building at 4725 S. Michigan Avenue in Chicago. In each case, 4725 S. Michigan, LLC, was the seller and Ira Kaufman was the attorney for the closings that were conducted by Traditional Title and took place at Kaufman’s law office. There were numerous misrepresentations in the loan applications about borrowers’ employment status, assets, and income and false representations that each unit was to be occupied by the purchaser as his or her personal residence. The plaintiff’s lender’s closing instructions required Traditional Title to refuse to close and to notify the plaintiff if it knew that a borrower did not intend to occupy the property.
The district court held in favor of the plaintiff, and the Seventh Circuit affirmed that judgment on appeal. Although Kaufman testified that, despite closing all the transactions, he did not look at the buyers at the closings and did not realize the same buyers purchased multiple units that were allegedly to be occupied as the buyers’ principal residence. There was also testimony from others that Kaufman was aware of the fact of the fraud and that he instructed personnel from Traditional Title to continue to close the transactions. The appellate opinion found that the record in the case supported the district court’s conclusion that Kaufman was substantially involved in the scheme and that, without Kaufman’s participation, the scheme would have failed entirely.
The entire point of lender’s closing instructions, of course, is to require the settlement agent (in this case, Traditional Title) to examine the paperwork at the closing to find objectionable items the principal (in this case, Fifth Third Mortgage) would find had it not appointed an agent to conduct the closing. Lawyers who own entities that act as title agents or who themselves act as title agents while they also represent sellers or buyers in real estate transactions need to be cognizant that the duties undertaken by the title agent are well-defined and are designed to protect the lender, regardless of which party to the transaction is the lawyer’s client. Some lawyers who have been recruited by a title insurance company to serve as a title insurance agent have expressed that the salesperson has specifically told them there really is no liability and that their company has never sued an attorney-agent for errors in a closing. First, if it sounds too good to be true, it probably is! Second, what about the other principal for whom the title agent acts as an agent in addition to the title insurance company? The lender on whose behalf the title insurance agent acts when conducting the closing clearly has an expectation that its lender’s closing instructions will be followed to the letter by the lender’s agent, the title insurance agent!
In a recent probate matter, the Illinois appellate court for the Fifth District ruled that a residual legatee was not a bona fide“third party purchaser” whose offer an optionee under the will had to match. In re Estate of Siedler, 2019 IL App (5th) 180574. David Bramlet was granted an option in the decedent’s will to purchase real estate at an appraised value or for the purchase price offered by any bona fide“third party purchaser,” whichever was greater. A residual legatee under the will made an offer to purchase that was higher than the appraised value. However, the appellate court found that since the residual legatee would receive a portion of the price he was to pay, he did not qualify as a bona fide “third party purchaser.” As the court pointed out, the residual legatee was free to purchase at a sale or auction by the estate if the optionee decided not to buy, but the optionee did not have to match an offer from the residual legatee, even if it were higher than the appraised value.
A recent Third District appellate court opinion provides a cautionary tale for real estate practitioners and how to deal at a closing with the matter of encroachments. In JCRE Holdings, LLC v. GLK Land Trust, 2019 IL App (3d) 180677, the appellate court reversed a trial court order requiring the defendants to remove an encroachment from the defendants’ property onto the plaintiff’s land. The predecessors in title to the parties had entered into a party wall agreement. At some point, the defendants’ predecessor in title asked permission of the plaintiff’s predecessor in title to use the party wall to support a roof that would overhang a portion of the plaintiff’s property that contained a roof lower than what defendants would build. The plaintiff’s predecessor in title agreed, and the defendants’ predecessor in title constructed the roof which overhung the plaintiff’s property by some 32 inches.
The fact of the encroachment was not in dispute. However, the plaintiff’s suit asked that the encroachment be removed, a request the trial court granted. On appeal, the trial court was reversed. As between the predecessors in title, the original encroachment was permissive, and those predecessors would be bound by their agreement. However, the agreement itself was only for a license, not an easement. A license is not an interest in real estate, and the license terminates upon the death of either party or the sale by either party of its interest in the real estate. Therefore, the license no longer existed, and the plaintiff was entitled to some relief.
However, since the original encroachment was with the permission of the owner of the land onto which the encroachment extended, it was permissive and not hostile. Therefore, the plaintiff was not entitled to have the encroachment removed but was entitled to be paid a monetary amount for the diminution in value of his land caused by the encroachment. The opinion is interesting for the cogent analysis of the appellate court.
When it comes to real estate transactions involving encroachments, how many times do lawyers “resolve” the matter by creating a license from one party to the other to maintain the existing encroachment right where it is? Unfortunately, the license is by definition temporary, and it ceases when either party dies or sells that party’s interest in the real estate. Thus, years later the lawyer’s client may return to the lawyer with the same problem, this time with a new owner on the other side. Of course, that does not necessarily mean that a license should never be used to handle encroachment issues. It does mean that the lawyer must understand the future implications thoroughly and must explain those implications to the client so that the client can make an informed decision about how to proceed. License agreements and title insurance endorsements may be acceptable, but there may be times that require a permanent interest in real estate like an easement or an ownership interest to solve the problem permanently.
Finally, “everyone knows” that the beneficiary of an Illinois land trust cannot convey title to the real estate because the beneficiary’s beneficial interest is merely personal property and he or she only has the power to direct the land trustee to convey title — except, of course, in those instances that are exceptions to the general rule that “everyone knows.” For a recent case that did not fall into one of those exceptions, see Alward v. Jacob Holding of Ontario L.L.C., 2019 IL App (5th) 180332.
PRACTICE POINTER: Always, always, conduct a title search prior to any conveyance of real estate, no matter what the client or anyone else tells you.
For more information about real estate, see TITLE INSURANCE: LAW & PRACTICE — 2019 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.