Legal Case Studies May 2014

Legal Case Studies

Research and analysis by Todd Turner, Sorling Northrup Attorneys

Even though the Buyer received only a partially completed Residential Real Property Disclosure form, that did not waive the Buyer’s right to recover under the Residential Real Property Disclosure Act. Messerly v. Boehmke, (2014 Ill.App.4 130397). In August 1998, the Seller filled out the disclosure report prior to the sale. The Seller answered questions 1 through 17 as “No,” but for question 4, which states “I am aware of material defects in the basement or foundation (including cracks and bulges),”  The Seller answered “Yes” to this question and in the space on the form to give an explanation, the Seller stated “No damages from water in basement from crack.”  There was no response given by the Seller for questions 17 through 22. Question 17 dealt with whether the Seller was aware of mine subsidence, underground pits, settlement, sliding, upheaval, or other earth stability defects on the premises. The Seller signed and dated the disclosure form August 8, 1998, and the Buyers signed the form as well, and dated their signature as August 25, 1998. The Buyers encountered stability problems with the home and submitted a claim to their insurance carrier, State Farm. State Farm responded with a letter dated October 30, 1991, stating that they had received a report for the Illinois Mine Subsidence Insurance Fund.  The Fund indicated that after investigation of the claim, they concluded that the damage to the home did not result from mine subsidence but was rather settling. “Settling” was specifically excluded from the homeowner’s insurance policy.

During his deposition, the Buyer stated that within two days of moving into the house his children took a shower downstairs and that water was leaking “all over the place.”  Water was coming out of the wall and leaking down into the basement floor. The Buyers called a plumber who told them that the problem was poor craftsmanship and that the only way to fix it was to tear it all out. The Buyer did not fix the shower. The plumber also found other repairs that needed to be made, some of which he believed were problems that violated health codes. An inspection by the Illinois Department of Public Health found 21 different violations. The house also suffered from a bad odor. The Buyer also found cracks in the basement which leaked water that were covered by shelving and a plaster type finish. He believed that the Seller tried to hide the cracks or at a minimum knew about the cracks, but did not disclose that water leaked into the basement from those cracks. The Buyers called HelioTech who investigated the foundation and basement walls and indicated that repairs would be costly.

Both the Buyer and the Seller filed Motions for Summary Judgment in their favor. The Seller also filed an Affidavit that denied knowledge of material defects in the plumbing system of the home. The Seller admitted that he had made a claim on his mine subsidence insurance, but was denied because the property was merely “settling” as opposed to moving due to mine subsidence. At the Trial Court level the Seller won. The Trial Judge ruled that the record contained no evidence that, “Defendant knowingly disclosed false information or failed to disclose any known material defects in the residence.”  Further, the Trial Judge held that the Buyer had waived any right under the disclosure form because the Buyer had accepted the form even though it was incomplete. The Buyers took the position that because the Seller did not answer question 17, Seller failed to comply with his duty under the Act. The Seller argued that his affirmative response to question 4 that stated he was aware of material defects in the basement of the foundation satisfied his duty to disclose defects related to cracks in the basement. The Appellate Court, however, disagreed and said that, “A Seller who discloses some information can be subject to liability under the Act if the Seller knows the information disclosed contains a material error, inaccuracy or omission.”  Further, as to the argument the Seller made stating that the Buyers had waived their right under the Residential Real Property Disclosure Act by accepting an incomplete disclosure form, the Court discussed at some length the waiver issue. The Seller contended that under the Act the Buyers had the right to terminate the contract if they were not satisfied with the disclosure statement, and since they did not terminate the contract, their rights under the Act were waived. The Court, however, held that the provisions of the Act cannot be waived. The Court noted under Section 20 of the Act:

A seller of residential real property shall complete all applicable items in the disclosure document described in Section 35 of this Act. The seller shall deliver to the prospective buyer the written disclosure statement required by this Act before the signing of a written agreement by the seller and prospective buyer that would, subject to the satisfaction of any negotiated contingencies, require the prospective buyer to accept a transfer of the residential real property.

(emphasis added). 756 ILCS 77/20. The Court, as had a previous court in the case of Curtis Investment Firm Limited Partnership v. Schuch, determined that the word “shall” required “a mandatory reading of the provision,” noting the statute did not list any exceptions. Since this is a mandatory duty of the Seller under the Act, this cannot be waived by the Buyer. The mandatory language of the Act “requires the seller to complete the entire form.”  “To allow a seller to ignore his obligations under the Act and avoid reporting a material defect, thereby defeating the buyers’ subsequent claim, would only encourage the evils the legislature sought to remedy. Plaintiffs’ [Buyers’] claim is not defeated because they continued with the closing, as such an outcome would allow the Defendant to fail to perform his duty and complete the entire disclosure form with impunity.”  In other words, the Court said that there should not be circumstances that allow a seller to provide incomplete or misleading information and get away with it. The Appellate Court found that there were enough facts in dispute regarding the condition of the plumbing system defects and whether they were properly disclosed and questions regarding the foundation and whether those defects were adequately disclosed. Therefore, Summary Judgment was denied and the case, procedurally, should go to trial in order for the Court or jury to make a determination as to whether defects actually existed and whether they were actually and properly disclosed. 

The Illinois Supreme Court has held that unit owners cannot withhold assessments because of issues with repairs and maintenance of the common elements of a condominium. Spanish Court Two Condominium Association v. Carlson (214 IL 115342, March 20, 2014). First, the Court sought to distinguish the landlord-tenant relationship and the unit owner-condominium association relationship. The Court said that the landlord-tenant relationship was mainly contractual whereas the condominium association’s relationship with unit owners is mainly a creature of the Condominium Act (765 ILCS 605/1). In a landlord-tenant relationship, a tenant has the right to deduct from the rent the cost of any repairs made by the tenant that the landlord refused to make. However, under the Condominium Act, things are different. In February 2010 the condominium association filed an eviction complaint against one of its unit owners, Lisa Carlson (“Carlson”). The Association alleged that Carlson had failed to pay monthly assessments for the preceding six months. The Association sought a money judgment and an order of possession of the unit, thus evicting Carlson. Carlson defended the action based upon the allegation of water damage to her unit and that the Association failed to properly maintain the roof above her unit. Carlson also claimed that the Association destroyed property within her unit without justification. Carlson alleged that the Association breached covenants by failing to maintain the roof and the brickwork directly above her unit which resulted in water damage and that the Association failed to repair or replace the toilet in her unit that was not working. Carlson said that because the Association had breached its duties set forth in the condominium declaration, the Association was not entitled to her monthly assessment.

The Association argued that Carlson could not use her defenses as a counterclaim in their case against her to collect money and evict her from her unit. In other words, the Association argued that the defenses and counterclaims that Carlson was raising were not “germane” to the forcible entry and detainer proceeding as required by the forcible entry and detainer statute. (735 ILCS 5/9-106(a)). The Trial Court denied Carlson’s counterclaim and defenses and awarded possession of the unit to the Association.

Carlson appealed, arguing that her defenses and counterclaim were germane to the forcible entry and detainer action and she appealed the money judgment and possession of the unit that the Trial Court had awarded to the Association. The Appellate Court held that the unit owner may claim that her duty to pay assessments is diminished by the failure of the Association to repair and maintain common elements. The Appellate Court also reasoned that if a tenant could raise an affirmative defense in an eviction proceeding the fact the landlord had failed to maintain the leased premises, a condominium unit owner should also be able to raise the same defense. Thus the Appellate Court overruled the Trial Court. The Association appealed to the Illinois Supreme Court which decided to take the case.

The Illinois Supreme Court framed the issue as “whether an association’s purported failure to repair or maintain the common elements is germane to [an eviction case] against a unit owner [for] unpaid assessments, and thus be raised [as a defense to an eviction case].”  The Association again argued that a unit owner’s obligation to pay assessments is independent of the Association’s obligation to maintain and repair common elements, therefore, the unit owner’s claim against the Association for failure to make repairs is to be considered a separate case from the action for eviction of a unit owner for failure to pay assessments.

The Illinois Supreme Court ruled in favor of the Association. The Court reasoned that the relationship between a landlord and a tenant is different from a relationship between an Association and a unit owner; therefore, the failure of landlord to make repairs is a valid defense in an eviction case between a landlord and tenant; however, failure of an association to make repairs is not a valid defense for failing to pay condominium association assessments. The Court pointed out that the relationship between landlord and tenant is a contractual relationship, whereas the relationship between the association and a unit owner is not only found in the association’s governing documents but is also found in the Condominium Property Act. Therefore, the duty to pay assessments is an obligation and is therefore a legal obligation separate and apart from the legal obligation of the condominium association to make repairs to the property. The Court also pointed out that while an Association can evict a person from their unit, that person is still the owner of the unit, unlike the situation between a landlord and an evicted tenant.

Novel theory by another Illinois county to try and recover lost recording fees from Merscorp falls flat. Macon County, Illinois v. Merscorp, Inc. (742 F.3d 711) (January 30, 2014).  In this case the U.S. 7th Circuit Court of Appeals in Chicago ruled against another Illinois county in its attempt to try and recover recording fees that the county believes they lost, unfairly, to Merscorp and the Mortgage Electronic Registration System (“MERS”). As reported in recent Legal Case Studies, an Illinois County had sued Merscorp for lost recording fees under the theory that Illinois law requires that a mortgage and any assignment thereof or assignment of loan documents is required to be recorded with the County Recorder. Both State Courts and Federal Courts in Illinois have rejected this theory and have stated that the law does not require a mortgage to be recorded, but instead, if it is recorded, it should be recorded in the county where the real estate is located. Understanding that this was settled law, Macon County came up with a new theory to try and recover recording fees. The theory was that when the Defendants used the MERS system and did not pay recording fees and promissory notes were transferred, the Defendants were being unjustly enriched in violation of common law of Illinois.

As we have learned over the past few years the MERS system was designed to facilitate a more streamlined method of assignment of loans between banks which also carry the benefit of not having to pay local recording fees. A bank that makes a mortgage loan can register it on MERS and also assign a mortgage to Merscorp. Merscorp then records the original mortgage with the proper County Recorder, but Merscorp has no interest in the mortgage or the loan. Merscorp then is able to repeatedly assign the mortgagor’s mortgage or promissory note and loan documents to successive lenders. These subsequent assignments are not recorded with the County Recorders but instead are simply registered with MERS.

The result is that MERS streamlines and facilitates multiple interbank sales of mortgage notes. This system allows the successive banks to avoid the need to record the assignments. Because of previous failures of County Recorders’ arguments to recover perceived lost recording fees, Macon County came up with a new theory that the MERS system was unjustly enriching Merscorp and the banks that use Merscorp. Even the 7th Circuit Appellate Court stated that “The argument [being made by Macon County] is difficult to understand. However, the argument went like this:

Defendants have been unjustly enriched with the use of the MERS system to claim the protection of recording-protection that is apparently valuable, because they used to pay for it - but are able to do so only by naming MERS as a placeholder mortgagee and through the use of the legal fiction that mortgage transfers are not assignments. Plaintiffs allege that if MERS did not exist, the mortgages would be assigned-not ‘transferred’ on MERS confidential electronic registry; the assignees would record the assignments through the county offices to ensure they had first lien mortgages and the other protection provided through recordation; and the banks would pay the associated fees. Because Defendants are unwilling to pay these fees, they created MERS to serve as a placeholder, which games the system and artificially freezes the chain of title with MERS, despite numerous ‘transfers’ of the underlying note. It is the use of this system as a whole that Plaintiff alleges is unjust because Defendants are obtaining the protection that recording affords without paying the fees they would otherwise owe to Plaintiff in order to obtain that protection.”

Trying to decipher argument, the Court stated that the County was asserting that it is unjust that the MERS system resulted in the loss of County revenues it would have otherwise received. The Court was dismissive of this argument and handed yet another defeat to the Illinois Counties. The Court stated that the argument made by the County was “equivalent to saying that lawfully underselling a competitor is ‘unjust’ because it deprives the competitor of revenue he would otherwise enjoy. The Court stated that ‘competition is not a grounds for a lawsuit at common law.’  The Court further stated that ‘a firm is not required to charge a price for its goods or services that enables a competitor to prosper. No more are Merscorp and the banking industry required to adopt a system of mortgage protection that generates revenues for a state or local government . . .”. The Court reasoned that the Defendants were free to completely bypass the County’s recording system because there is no requirement that the mortgage or subsequent assignments must be recorded in the first place. Therefore, the users of MERS and Merscorp are not somehow being unfairly and unjustly enriched at the expense of the County. Judgment was granted in favor of Merscorp and the lawsuit filed by the County was dismissed by the Court. The Court referred to the users of the MERS process, “. . . lawful free riders.”  The Court wrote that the answer to this lawsuit was so clear that it decided the case  without having the parties file briefs and present oral argument because it would be a “. . . waste [of the parties’] money and the Court’s time.”

Buyers’ agent found liable for nondisclosure. McGonigle v. Asle Realty, (2013 WL 3819458) (U.S. Dist. Ct. Kansas). In this case arising in Kansas, a buyers’ agent represented Buyers who were interested in a home and large parcel of land on which the home sat. A physical characteristic of the property, however, was that it contained a dam. The earthen dam was built by the Soil Conservation Services in 1951. The Seller’s bought the property in 1981, and at the time of that purchase they entered into an agreement with a city that required the then purchaser to care for the dam and repair the dam at their own expense. In 2008, the original purchaser who had entered into the agreement to maintain the dam listed the property for sale. Between 1981 and 2008 the now Sellers received multiple notices and warnings from the city as well as the Kansas Department of Water Resources stating that they were in breach of the agreement by failing to maintain the earthen dam. Over those years, the Seller simply ignored the notices and neither the city nor the Kansas Department of Water Resources took any action to force the Sellers to maintain the dam nor did they take their own steps to care for the dam. Buyers became interested in the property and hired a buyers’ agent. The listing agent and the buyers’ agent met and discussed the property before an offer was made. The two agents discussed the existence of the dam and the listing agent made the buyers’ agent aware of the agreement and the obligation to care for the dam. The buyers’ agent failed to disclose the existence of the agreement to the Buyers. After the Buyers purchased the property they became aware of the existence of the agreement that the owner of the property must maintain the dam. The Buyers sued both the listing agent and their buyers’ agent after an inspection by the Buyers with a State Engineer revealed that their obligation to work on the dam ranged from $300,000 to over $1,000,000 based upon bids that the Buyers obtained. It was ultimately decided in the case that the Buyers claim against the Seller’s agent was unsuccessful because the Seller’s agent owed no duty to make such a disclosure directly to the Buyers under Kansas law.

Under the Kansas Brokerage Relationships and Real Estate Transactions Act, a seller’s agent owes no duty to a buyer except to disclose all adverse material facts actually known by the agent, including environmental hazards, physical conditions of the property, and material defects. However, the seller’s agent has no duty to conduct an independent inspection of the property or to verify the accuracy or completeness of any statement made by the seller. The Court reasoned that this meant the Seller’s agent had no duty to verify what the Seller had said to her and had no duty to go and retrieve the agreement herself. She only had to pass on what she actually knew. She did this when she met with the buyers’ agent. The Buyers alleged several theories against the buyers’ agent including breach of contract with respect to the Buyers’ agency agreement between the Buyers and buyers’ agent. The Court found that the buyers’ agent had a contractual duty to make a disclosure regarding the agreement to the Buyers, but had failed to do so. The Court entered a judgment in the amount of $202,500 against the buyers’ agent and the buyers’ agent’s brokerage firm. 