Legal Case Studies May 2013 | Illinois Association of REALTORS®

Legal Case Studies May 2013

LegalCase Studies

Illinois Appellate Court finds unconscionable a contract to obtain mortgage foreclosure surplus and explains new procedures to protect mortgagors. Crown Mortgage Company v. Young, 2013 IL App (1st) 122363. In this case, the mortgage on a widow’s home was foreclosed in 2004, yielding a $14,000 surplus that was not claimed. Eight years later, a company called Unclaimed Funds Unit, LLC (“Unclaimed”) notified the widow that she may be entitled to money that it had located. It offered to do further research and determine the best method for obtaining the money in exchange for $50 and one-half of any money recovered. Unclaimed sent a notary to the widow’s home with a contract to that effect, which she signed. When Unclaimed appeared in court on a petition for turnover of the surplus funds, the judge declared the contract “procedurally unconscionable.”  First, there was an obvious inequality in the parties’ abilities to understand the transaction; the widow had limited reading skills and no knowledge of the simple procedures to obtain surplus money. Second, there was a vast discrepancy in bargaining power between a widow of limited education and limited means and Unclaimed, a company with enough resources to send a notary to the widow’s home with a contract it devised. Third, there was no opportunity to bargain for or change the terms of the contract. The court also held the contract to be “substantively unconscionable” because of the gaping cost-price disparity, evidenced by a fee of $7,000 for a service that the widow could have obtained for free.

The concurring opinion in the case noted that distribution of surplus funds in mortgage foreclosures arose infrequently, but often enough that the Cook County courts became concerned that unscrupulous people were combing court files to find surplus cases, impersonating mortgagors, and then trying to claim the surplus or, as in this case, companies tracking down the mortgagor and entering into contingency fee contracts to return the mortgagor’s own money. The Cook County court rules require foreclosure orders confirming surplus sales to specifically command the lender’s attorney to send a simple notice to the mortgagors, advising them of their right to claim the surplus and enclosing a fill-in-the-blank motion for them to claim their money. A mortgagor must also appear in person at the hearing to claim surplus funds. The Illinois Supreme Court recently adopted similar rules, applicable statewide, which are effective May 1, 2013.

Failure to repair common areas may be an affirmative defense to eviction for failure to pay condominium assessments—but possibly not for long. As Legal Case Studies reported in the last issue, the Second District Illinois Appellate Court held in November of 2012 that if a condominium association failed to properly maintain and repair common areas, which is the purpose of condominium assessments, then the resident could raise such failure as an affirmative defense to an eviction action for failure to pay assessments. This decision is being appealed to the Illinois Supreme Court. Spanish Court Two Condominium Association v. Carlson, 982 N.E.2d 775 (appeal allowed January 30, 2013). In February, 2013, Representatives Burke, Durkin and Sacia introduced a bill (HB2360) in the Illinois House to provide that the failure of a condominium association to maintain, repair, or replace the common elements or areas “is not a defense to a forcible entry and detainer action.”  However, a House floor amendment was recently made that changes the bill so that the statute will codify the case, i.e., the bill now specifically states that a resident does have the affirmative defense in an eviction action. This bill has been not been passed and is currently in committee.

Shutting your eyes for fear of what you might learn may be evidence of intent to defraud. United States of America v. Westerfield, 2013 WL 1405881 (7th Cir., No. 12 1599, April 9, 2013).  The U.S. Seventh Circuit Court of Appeals recently reviewed a case in which a lawyer working for a title insurance company in Illinois was convicted for facilitating fraudulent real estate transfers in a mortgage fraud scheme. The scheme used stolen identities of homeowners to “sell” houses that were not for sale to fake buyers, and then collect the mortgage proceeds from lenders who were unaware of the fraud. The defendant, who prepared title insurance policies and conducted closings, argued that the government did not present any direct evidence that she knew the scheme was illegal. A jury, however, may “infer knowledge from a combination of suspicion and indifference to the truth.”  Such inference may be found if the defendant had a strong suspicion that things were not what they seemed or that someone had withheld some important facts yet she shut her eyes for fear of what she would learn. In this case, the circumstantial evidence was adequate for the jury to conclude that the defendant had knowledge of the scheme. First, the defendant helped two individuals purchase five homes in a short period of time with financing from different lenders at high loan-to-value ratios. Borrowing from multiple lenders was a “red flag issue.”  Second, the buyers and sellers presented at the closings were clearly fake—they were often people picked up at homeless shelters or, literally, off the street by the ringleader of the scheme. Third, the defendant rushed through the closings without any explanations of the paperwork involved. Finally, the defendant arranged to have all of the proceeds of each sale directed to a third party not involved in the transaction, a rarity in a residential closing. The court determined that the evidence was adequate for the jury to conclude that if the defendant was unaware of the illegal scheme, it was only because she was deliberately ignorant. The court upheld her conviction, her sentence of six years, and the order for restitution of nearly $1 million.

Offer must be accepted as required by offeror; contract will not be binding with unspecified material term. Host v. Gray, 2013 WL 1319609 (Mass. Land Ct., April 2, 2013). In this case the plaintiff made a written offer on the Massachusetts Association of REALTORS® Contract to Purchase Real Estate form to buy two lots, with Lot 18 needed for access to Lot 19. The offer recited that it would remain valid until a certain time, by which time it “shall” be signed by the seller and returned or the offer “shall” be deemed rejected. The listing broker responded on behalf of the seller, noting that the seller needed a portion of one lot for parking at an adjacent cottage. By email, she stated, “This is a conditional response until further items can be worked out to your and her benefit. She is accepting the offer for $2,450,000 but proposes working out a solution to Lot 18 that is mutually agreeable to both parties.”  This language was not acceptance and created no binding contract for two reasons. First, the court explained that the offeror (in this case the buyer) has full control over the offer and may require a particular and exclusive mode of acceptance which must be used or the acceptance will be ineffective. In this case, it was undisputed that the offer was never signed as required. Second, no contract was formed because clearly there was never a meeting of the minds about a material term. Material terms of a contract for the purchase and sale of real property include:  (1) an adequate description of the property; (2) the purchase price; and (3) the closing date. Although all terms need not be precisely specified, the parties must describe a formula or a procedure by which uncertainties are narrowed to rights and obligations. Here, the seller’s e-mail response constituted rejection of buyer’s offer. Seller’s response was “conditional”, and there was no procedure to determine what “conditional” contract would consist of except by conducting further negotiations.

Buyer Beware Clause does not extend to defects not discovered by buyer’s reasonable inspection. Kincaid v. Dess, 2013 WL 856463 (Ct. App. Kan., March 8, 2013). In this case out of Kansas, the buyers contracted to purchase an expensive home. After an inspection revealed some deficiencies, the seller corrected those problems and the buyers proceeded to close on the house. The buyers executed a rider containing a “Buyer Beware Clause” in which they agreed to fully rely on their inspections and acknowledged that the seller made no representations or warranties of any kind. They also signed an amendment titled “Resolution of Unacceptable Conditions” which contained an “as is” provision under which the buyers agreed to accept the house without correction or other action by the seller. A month after they closed, the buyers discovered numerous defects that had not been disclosed by the seller, including the type of exterior siding used on the home, water damage, defective and rotten windows, and mold contamination. The buyers could not live in the house for one year while these defects were corrected at a total cost of over $335,000. The buyers sued the seller and the real estate agent for fraud and misrepresentation. The seller argued that the buyers waived their right to rely on the seller’s representations on the condition of the house by signing the rider containing the “Buyer Beware Clause” and the “as is” amendment. The court disagreed. First, it found that the law was clear in Kansas that a contractual waiver does not bar breach of contract or fraudulent misrepresentation claims as a matter of law where a buyer’s reasonable inspection before purchasing the house did not reveal a seller’s false representations and later defects are discovered. Whether a reasonable inspection would have revealed the defects, however, was a question of fact that had to be answered by the trial court below. The court also narrowly interpreted the “as is” amendment as applying only to those defects that had been found and corrected or otherwise satisfactorily addressed by the seller. It could not extend to the defects that were not discovered during the buyers’ inspection and did not preclude the buyers’ claim against the seller for fraud and misrepresentation. This case from Kansas is not binding on Illinois courts; a decision in a case with similar facts in Illinois could well be different.

Chicago tenant need not terminate lease prior to recovering one month’s rent for landlord’s failure to disclose code violations. Ranjha v. BJBP Properties, Inc., 2013 IL App (1st) 122155 (March 27, 2013). The tenant filed a class action complaint alleging that defendant landlord violated the Chicago Residential Landlord Tenant Ordinance (“RLTO”) by failing to disclose building code citations after the tenant requested them in a written notice. The landlord asserted that RLTO required the tenant to terminate his lease and vacate the premises before he was entitled to a month’s rent or actual damages. The tenant disagreed. Both parties presented the court with reasonable interpretations of RLTO supporting their respective positions. The court concluded that the relevant sections of RLTO were ambiguous, but sided with the tenant in order to avoid absurd results that might arise from minor code violations not worth a tenant’s terminating a lease and moving. The court concluded that its interpretation would improve rental housing in Chicago because either a landlord will cure material noncompliance or compensate a tenant if the tenant does not wish to or cannot afford to move.  