Legal Case Studies January 2014 | Illinois Association of REALTORS®

Legal Case Studies January 2014

LegalCase Studies

Research and analysis by Lisa Harms Hartzler, Sorling Northrup Attorneys

Multiple Listing Services win injunctions against copyright infringements but face antitrust counter-claims. In 2012, a federal court in Minnesota awarded a preliminary injunction against American Home Realty Network (AHRN) for copyright infringement of a regional MLS’s photographs and unique descriptive narratives about properties, but not for non-creative, factual information like how many rooms or baths a home contained. In a sequel to that case, Regional Multiple Listing Service of Minnesota, Inc. v. American Home Realty Network, Inc., --F. Supp.2d--, 2013 2 Trade Cases P 78,452 (D. Minn., July 5, 2013), the court held AHRN in contempt for violating the 2012 order by continuing to use copyrighted photographs and awarded attorneys fees and expenses as a sanction; however, the court refused to dismiss AHRN’s new counterclaims against the MLS for antitrust violations. The court ruled that AHRN had sufficiently alleged that the MLS engaged in a plausible conspiracy with other multiple listing services and the National Association of REALTORS®.

In its allegations, AHRN pointed to thirty cease and desist letters sent to AHRN after an NAR national meeting at which possible action to shut down AHRN was discussed, NAR’s funding of the pending action and other legal actions against AHRN, and NAR and MLS instructions to third-party syndicators to refuse to extend licenses for data to AHRN. The court held those allegations were sufficient to support the existence of a possible group boycott or sufficient anticompetitive effects in violation of antitrust laws. The court’s denial of the MLS’s motion to dismiss these antitrust claims means only that AHRN adequately made a case that could go to trial, not that the MLS or NAR in fact engaged in antitrust activities.

In a similar case, Metropolitan Regional Information Systems, Inc. v. American Home Realty Network, Inc., 722 F.3d 591 (Fourth Cir., July 17, 2013), a federal appeals court upheld a preliminary injunction obtained by an east coast regional MLS against AHRN for taking listing data from the MLS and making it directly available to consumers on its real estate “referral” website. By uploading data and text to the MLS automated database and electronically agreeing to the site’s “Terms of Use Agreement,” brokers and agents agreed to transfer copyright ownership to the MLS, which compiled the information in its multiple listing service made available to members. The court held that the MLS had properly registered the compilation with the Copyright Office and could sue AHRN for infringement.

Just a month before the appellate court upheld that preliminary injunction for copyright infringement, the district court handling the case at the trial level dismissed AHRN’s counterclaims for antitrust violations, but allowed AHRN to file amended counterclaims, which it did. In Metropolitan Regional Information Systems, Inc. v. American Home Realty Network, Inc., --F.Supp.2d-- (D.Maryland, November 1, 2013), the court found that this time AHRN plausibly alleged a combination or conspiracy and the existence of anti-competitive harm as elements of antitrust claims that were sufficient to withstand dismissal. Associations, multiple listing services, brokers and agents will want to follow these cases in Maryland and Minnesota for further developments.

Federal appellate court upholds century-old interpretation of recording statute while St. Clair County Circuit Court disagrees. Union County, Illinois v. Merscorp, Inc., 735 F.2d 730 (Seventh Circuit, November 14, 2013). In a class action suit filed by Illinois counties, the federal court of appeals sitting in Chicago held that mortgages in Illinois do not have to be recorded. The defendant, Merscorp, which operated an online system called MERS for tracking mortgage assignments, took “assignments” of mortgages from banks, but was not a substantive lender—it had zero financial interest in the mortgage and simply enabled repeated de facto assignments of the mortgage by successive mortgagees. The process facilitated successive interbank sales of mortgages, often to create mortgage-backed securities (among the culprits responsible for the 2008 financial crisis). Such unrecorded mortgage transfers made it difficult for a mortgagor to discover who owned and serviced his mortgage, a serious problem when a mortgagor wanted to renegotiate or challenge the validity of the mortgage.
According to the court, however, the counties were not complaining about the concealment of mortgage holder identities. Rather, they were primarily interested in the revenue they lost by the lack of recording fees. They argued that the Illinois’ Conveyances Act (765 ILCS 5/28), providing that “deeds, mortgages, powers of attorney, and other instruments relating to or affecting the title to real estate in this state, shall be recorded in the county in which such real estate is situated,” required all mortgage transfers to be recorded. The court said that the statute did not require recording but meant only that IF a mortgage was recorded, it had to be recorded in the county in which it was situated. The court pointed to Illinois Supreme Court cases decided more than a century ago that clearly held that recording was not mandatory.

A state trial court came to the opposite conclusion in St. Clair County v. Mortgage Electronic Registration Systems, Inc., (No. 12 L 267, St. Clair County Circuit Court, July 12, 2013). The federal court was dismissive of the decision:  “The court’s opinion, which adopted the County’s proposed opinion verbatim, typos and all, is not persuasive.”  It noted, however, that it sets the stage for the Illinois Supreme Court to weigh in on the topic in the future, should it decide to do so. In the unlikely event that the St. Clair County decision is upheld, it would supersede the federal court decision and would constitute a major change in long-standing Illinois law.

Adjacent property owner does not have constitutionally protected property interest for due process purposes. Residences at Riverbend Condominium Association v. City of Chicago, Case No. 13 C 4007 (N.D. Ill., November 19, 2013). Plaintiff condominium association and owners filed a complaint against the City of Chicago seeking declaratory and injunctive relief barring the development of a surface parking lot adjacent to the Plaintiff’s condominiums. The owner of the proposed Wolf Point development filed for an amendment to the applicable planned unit development to allow construction of three buildings with retail, office, residential, and hotel uses. Various commissions and committees reviewed the application, gave notice to the adjacent owners, and held hearings. The plaintiffs filed detailed reasons why the project’s application was defective. Ultimately, the application was approved. The plaintiffs filed suit against the city, claiming due process violations. The court held that in a zoning case an adjacent property owner is given procedural rights to receive notice and to be heard under state law, but those rights to challenge zoning amendments give them only the right to challenge those procedures in state court. They do not award them substantive property rights like a property owner who seeks an entitlement under the zoning laws. Further, the court found that Illinois courts do not recognize property values, air, or light as constitutionally protected property interests. Thus, the plaintiffs could not establish their own constitutionally protectable property interest in the lifting of zoning restrictions on somebody else’s property. The case was dismissed for failure to state a claim for which relief could be granted.

Fall of hammer at auction constitutes acceptance of offer; subsequent sales contract merely memorializes the agreement. American Ashland, LLC v. Robbins, 2013 IL App (1st) 122443 U. This case involved an auction of real estate and discrepancies between advertised “terms of sale” and a sample sales contract required to be executed after the auction. The terms of sale offered the property with a seller’s reserve, which was lifted at the auction, warned bidders to have an attorney review the online sales contract, and required the sales contract to be executed after the auction. The sales contract contained paragraphs regarding the seller’s right to cancel the sale after the auction. It also stated that buyer had been provided an opportunity to have an attorney review the terms. The defendant tried to justify his failure to complete the sale by arguing that the terms of sale and the sales contract conflicted and that the sales contract was actually a counter-offer that the defendant was not required to accept. Further, the defendant argued he should be able to cancel the contract because the seller did not reject his bid by the reserve deadline and the buyer’s attorney did not approve the terms of the sales contract. The buyer’s arguments failed on all counts.

First, the court held that at a private auction of real estate, the contract is made upon the fall of the hammer:  the bidder agrees to buy and pay the amount of his bid and the seller agrees to sell and convey the property at that price. The subsequent execution of the sales contract is simply a ministerial act memorializing the agreement and is not a counter-offer. It cannot change the fact that an offer was made and accepted and a valid contract existed. In this case, the terms of sale did not condition the sale on the successful execution of the sales contract. It merely required the sale to be memorialized, and the fact that the auctioneer neglected to strike out the reservation clause was a ministerial mistake that did not invalidate the agreement. Second, nothing in the terms of sale or the sales contract made the agreement contingent on an attorney’s approval, so the fact that the buyer did not have an attorney review the contract did not make the agreement void. The buyer was liable to pay the seller for the amount bid at the auction. This opinion was issued under Supreme Court Rule 23 and cannot be cited as precedent to a court. It should also be noted that the opinion contained no discussion of the Statute of Frauds, perhaps because it was not raised by the parties.

Special warranty deed limits seller’s liability to its own actions while holding title. Chicago Title Insurance Company v. Aurora Loan Services, LLC, 2013 IL App (1st) 123510. This case involved construing the extent of a seller’s liability under a “special warranty deed,” an issue apparently not previously considered by Illinois courts. A real estate tax buyer purchased unpaid taxes on the subject property in 2007, recorded a lis pendens on it, and filed a petition for a tax deed. A lis pendens is not an encumbrance, but is a notice that a proceeding exists that may affect good title to the property and, if conveyed, the grantee may be adversely affected by that proceeding. Defendant acquired title to the property in 2008 in a foreclosure sale and conveyed it by special warranty deed to the plaintiff title company’s insured in February, 2010. A month later, the 2007 tax buyer served the defendant with notice of the pending petition for tax deed. Because the tax sale was not redeemed within three years, the 2007 tax buyer obtained a tax deed to the property in October, 2010, and the insured was divested of its title. The title company paid its insured the entire title insurance policy amount of $290,000 and filed suit against the defendant for breach of warranties under the special warranty deed because it failed to redeem the property from the tax sale and failed to notify the insured of the petition for a tax deed.

The court explained the grantor of a warranty deed guarantees that title to the property will be good and that the grantor’s possession is undisturbed. In a special warranty deed “the grantor covenants to defend the title against only those claims and demands of the grantor and those claiming by and under the grantor.”  In other words, a special warranty deed is a limited form of warranty and recovery is available only if the defect in title occurred because of an act of the grantor while he held title. Thus, under a special warranty deed, claims arising due to the actions of a prior owner cannot succeed against the grantor. The “warranties” simply define the scope of the liability of the grantor for breach of covenant if less than an indefeasible title is passed. Special warranty deeds can be used when the grantor is unwilling to warrant against possible defects arising before he acquired title.
In this case, the court found that the 2007 tax sale for unpaid real estate taxes occurred prior to the defendant’s obtaining title in a foreclosure sale in 2008 and, therefore, was not warranted against by the defendant in its special warranty deed. The defendant had no duty to redeem taxes sold before it owned the property. In addition, the defendant did not breach its warranties for any action or inaction after it sold the property to the insured. Consequently, the defendant’s failure to tell the insured about the notice of the tax sale it received a month after selling the property also could not result in any liability. In this case of first impression, the court illustrated a special warranty deed’s limited value to a purchaser.

Connecticut brokers required to arbitrate under local and national REALTOR® bylaws and ethics code. Sotheby’s International Realty, Inc. v. The Relocation Group, LLC, 53 Conn. L.Rptr 849 (unpublished opinion, April 4, 2012). A case involving two Connecticut brokers claiming the same commission was dismissed because both belonged to a local association that required compliance with the Code of Ethics of the National Association of REALTORS®. Article 17 of that Code provided that in the event of disputes between REALTORS®, “they shall submit the dispute to arbitration in accordance with the regulations of their Board or Boards rather than litigate the matter.”  The local board’s bylaws defined a dispute as including issues pertaining to commissions and other compensation and stated that by becoming or remaining a member and signing an agreement to abide by the bylaws, every member agreed to submit to arbitration as defined by the Code of Ethics. Since both brokers were members of the local board, the court ruled that they had agreed to settle their dispute by arbitration and dismissed the case.  