IL Underwriting References

Agency

Powers of Attorney

An agent does not have to be an individual. For example, it can also be a partnership or a corporation. But in this situation, the examiner may have to review corporate resolutions or partnership agreements in order to determine the identity and authority of the person or persons who may properly execute the documents on behalf of the agent.

Corporate Authority

Last effective date: November 17, 2019 All statutes checked through November 17, 2019

See generally the Business Corporation Act of 1983 (hereafter “the Act”), which is found in the Illinois statutes at 805 ILCS 5/1 et seq.

A domestic corporation is incorporated under the laws of Illinois. A foreign corporation is organized under laws other than the laws of Illinois. See 805 ILCS 5/1.80(b).

The Business Corporation Act of 1983 gives a corporation broad powers. For example, it can sell, convey, mortgage, or otherwise dispose of its assets. See 805 ILCS 5/3.10. A corporation, however, does not have unlimited authority to do this. Consequently, the Company has adopted various underwriting practices when insuring the mortgage or sale of corporate property.

Note that the use of a corporate seal is no longer mandatory. See 805 ILCS 5/3.10(c); see also 805 ILCS 105/103.10(c).

Fees and Charges

Both domestic and foreign corporations have to pay license fees and franchise taxes. See 805 ILLCS 5/15.05. A license fee covers regulations costs. A franchise tax is a tax on the privilege of carrying on business in the nature of a corporation. See 805 ILCS 5/15.20 and 805 ILCS 5/15.35. If these charges are not paid, the following can result:

• The Secretary of State can administratively dissolve any domestic corporation. See 805 ILCS 5/12.35.

• The Secretary of State can revoke the certificate of authority of a foreign corporation. See 805 ILCS 5/13.50(h).

• A domestic corporation cannot maintain a civil action in Illinois until the charges are paid. See 805 ILCS 5/15.85(c). The Secretary of State can refuse to file any articles, certificates, or other documents relating to a domestic or foreign corporation until all fees are paid. See 805 ILCS 5/15.85(a).

• The annual franchise tax of a corporation is a prior and first lien on the real property of the corporation. See 805 ILCS 5/15.80(d). It is enforceable for seven years after the date the annual report was filed for the period that gave rise to the franchise tax lien. See 805 ILCS 5/15.90(a).

When insuring the sale or mortgage of corporate real estate by a domestic corporation, the title examiner wants to be sure that all taxes, fees, and charges have been paid. This exception probably does not have to be raised when the examiner is dealing with an established corporate customer that management knows to be financially sound.

A certificate of authority must be obtained by a foreign for-profit corporation before it can transact business in Illinois. Once the certificate is revoked, the foreign corporation no longer has the authority to transact business in Illinois and is prohibited from doing so. Also, the foreign corporation cannot maintain a civil suit in any court in Illinois. However, it can defend an action in Illinois. See 805 ILCS 5/13.05, 805 ILCS 5/13.55(c), 805 ILCS 5/13.70, 805 ILCS 5/13.75.

Clearance for a Domestic Corporation

• A corporation has the power to sell and mortgage property. See 805 ILCS 5/3.10(e).

• The examiner should obtain and review a certificate of good standing. See 805 ILCS 5/15.95(e). The certificate is not necessary if dealing with an established corporation that is financially sound. (In lieu of obtaining a certificate of good standing, the examiner may confirm the good standing of a corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com.)

• How important is the certificate of good standing? The Illinois Secretary of State will administratively dissolve a corporation if, for example, it has not paid any fee or its franchise tax. See 805 ILCS 5/12.35(c). The dissolution of a corporation terminates its corporation existence. A dissolved corporation cannot carry on any business except what is necessary to wind up its affairs. See 805 ILCS 5/12.30.

• Each corporation shall have a board of directors, and the business and affairs of the corporation shall be managed by the board of directors. See 805 ILCS 5/8.05.

• A majority of the number of directors fixed by the by-laws, or in the absence of a by-law fixing the number of directors, the number stated in the articles of incorporation or named by the incorporators, shall constitute a quorum for the transaction of business unless a greater number is specified by the articles of incorporation or the by-laws. See 805 ILCS 5/8.15(a).

• The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless the act of a greater number is required by the articles of incorporation or the by-laws. See 805 ILCS 5/8.15(c).

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, is evidence of board authorization of the proposed deed or mortgage. See 805 ILCS 5/8.50.

• When the title company is insuring the sale or mortgage of all or substantially all of the corporate assets of the corporation, and the transaction is made in the usual and regular course of business of the corporation, the examiner must obtain the authorization of the board of directors. Shareholder consent is not needed, however. See 805 ILCS 5/11.55.

• Even if the title company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage. See 805 ILCS 5/8.50.

• The resolution should be executed by a quorum of the board of directors, thus evidencing the board’s approval of the proposed transaction. However, note that 805 ILCS 5/8.50 does state that “one officer, in this Act generally referred to as the secretary, shall have the authority to certify the by-laws, resolutions of the shareholders and board of directors and committees thereof, and other documents of the corporation as true and correct copies thereof.”

• If the proposed conveyance is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the examiner must obtain approval from the holders of at least 2/3 of the outstanding voting shares of stock (as well as a corporate resolution). See 805 ILCS 5/11.60(c).

Execution of the Deed or Mortgage by a Domestic Corporation:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares. See 805 ILCS 5/1.10(b)(2). (The wording of this statute indicates that a deed or mortgage need be executed by only one authorized party. Naturally, the specific requirements of the corporation, as detailed in, e.g., its resolution, may differ from those set forth in this statute.)

• If the corporate resolution does not indicate the names of the people who are to sign the documents, the examiner should ask for a copy of the by-laws; see 805 ILCS 5/8.50. As a last resort, the examiner should ask for a copy of the articles of incorporation; see 805 ILCS 5/2.10; see especially 805 ILCS 5/2.10(8)(b)(2)(ii).

• 805 ILCS 5/1.10(b)(2)(v) provides that if the corporate assets are in the possession of a receiver, trustee or other court appointed officer, then the documents should be signed by the fiduciary or the majority of them if there are more than one.

• Note that the use of a corporate seal is no longer mandatory. See 805 ILCS 5/3.10(c); see also 805 ILCS 105/103.10(c).

Clearance for a Foreign Corporation (805 ILCS 5/13.05 et seq.)

Clearance:

• The examiner should not ask for an Illinois certificate of good standing. Instead, the examiner should request evidence that the foreign corporation is in good standing in its home state.

• It is certainly true that a foreign corporation has to pay license fees and franchise taxes. However, these fees have to be paid by the foreign corporation as a condition to doing business in the State of Illinois. See 805 ILCS 5/13.50(h); 805 ILCS 5/15.50 and 805 ILCS 5/15.65.

• As set forth in the Act, merely owning real estate, in and of itself, does not constitute doing business in Illinois. See 805 ILCS 5/13.75(9). For a list of “activities that do not constitute transacting business,” see 805 ILCS 5/13.75.

• “Owning, without more, real or personal property” is not transacting business in Illinois. “Conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature” is not transacting business in Illinois. See 805 ILCS 5/13.75(9); 805 ILCS 5/13.75(10).

• Is the selling, buying, and mortgaging of several lots in a series of closings transacting business? Perhaps it is. If the examiner is concerned about a foreign corporation transacting business in Illinois, the examiner should check to see if the Illinois Secretary of State has filed the foreign corporation’s application for authority to transact business in Illinois as a foreign corporation. This filed application is evidence that the foreign corporation can transact business in Illinois. Alternatively, the examiner should consult an underwriter. See 805 ILCS 5/13.05; 805 ILCS 5/13.15; 805 ILCS 5/13.20.

• Article 13 of the Business Corporation Act (805 ILCS 5/13.05 through 805 ILCS 5/13.75) concerns foreign corporations. Unlike the statutes concerning domestic corporations, Article 13 contains no provisions for corporate resolutions or shareholder approval. The examiner will have to look to the laws of the state of the foreign corporation for guidance in this area. As a last resort, and with underwriter approval, the examiner can accept a corporate resolution that has been passed by the board of directors of the foreign corporation in order to insure a deed or mortgage executed by a foreign corporation.

Execution of a Deed or Mortgage by a Foreign Corporation

• Article 13 contains no provision for document execution. The examiner will have to look to the laws of the state of the foreign corporation for guidance in this area. As a last resort, and with underwriter approval, the examiner can rely on 805 ILCS 5/1.10(b)(2). That is, the deed or mortgage of a foreign corporation should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares.

Corporate Clearance for the All-Cash Transaction

Assume that a corporation is purchasing property in an all-cash transaction. One might think that in this situation, the examiner does not have to be concerned about obtaining the appropriate corporate clearance, that if a claim were to arise, the claim would be an “act of the insured,” which is excluded from policy coverage pursuant to Exclusion 3(a) of the 2006 ALTA owner’s title policy.

However, it is Company policy that the examiner obtain the evidence that the corporation exists as a valid corporation, even in an all-cash transaction. The reasoning is as follows:

If a corporation were not in good standing in Illinois, it would not be able to maintain a lawsuit in Illinois courts. See 805 ILCS 5/15.85(c). This would deprive the Company of its right to subrogation under the owner’s title policy.

That is, if the Company settled a claim on behalf of its insured corporation and then wished to sue in Illinois on behalf of the corporation for recoupment, it would not be able to do so. The Company had “stepped into the shoes of the corporation” and so would not be able to maintain the lawsuit.

Rule of Title Practice—A Summary

Generally speaking, an examiner should request a copy of a corporate resolution when insuring a conveyance or mortgage of a foreign or domestic corporation.

A resolution is not needed if the proposed transaction is within the ordinary scope of business of the corporation. Consider, for example, a relocation company selling a home.

The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors of the corporation to execute the document. However, the resolution should offer guidance in the execution of the document(s).

In the event the contemplated conveyance or mortgage comprises a sale or mortgage of all or substantially all of the assets of the corporation, the examiner must obtain both a corporate resolution and also written evidence of the shareholders’ approval of the transaction.

Dissolution of Corporations (805 ILCS 5/12.05 et. seq.; 805 ILCS 105/112.05 et seq.)

If a domestic corporation does not pay its franchise tax or file its annual report, the Illinois Secretary of State can administratively dissolve the corporation. See 805 ILCS 5/12.35. Corporate dissolution is evidenced by the Secretary of State issuing a certificate of dissolution, which is filed with the Illinois Secretary of State and mailed to the registered office of the corporation. See 805 ILCS 5/12.40(b).

In the alternative, the shareholders can consent in writing to dissolving the corporation. See 805 ILCS 5/12.10; 805 ILCS 105/112.10. Furthermore, all members of a corporation, or a quorum of members of a not-for-profit corporation, can vote to dissolve the corporation. See 805 ILCS 5/7.10; 805 ILCS 105/107.10.

A circuit court can dissolve a corporation if the Attorney General shows that the corporation abused its authority or violated the law. See 805 ILCS 5/12.50; 805 ILCS 105/112.50. Furthermore, a circuit court can also dissolve a business corporation if a creditor proves that it has a judgment that cannot be satisfied by the corporation’s assets. See 805 ILCS 5/12.50.

If a court enters an order of dissolution, it will supervise the “winding up” of the corporation’s business. See 805 ILCS 5/12.65; 805 ILCS 105/112.65; 805 ILCS 5/12.40(c).

Years ago, when a corporation dissolved, a corporation’s assets vested in the shareholders of the corporation. This has not been the case since July 1, 1984. Now, the dissolution of a corporation does not transfer title. Instead, upon dissolution of the corporation, title to the land remains in the corporation. See 805 ILCS 5/12.30(c)(1).

“Winding Up” the Corporation’s Business

Upon dissolution, the corporation cannot carry on any business except that necessary to “wind up” its affairs. See 805 ILCS 5/12.30. 805 ILCS 5/12.30(b) states that “after dissolution, a corporation may transfer good and merchantable title to its assets as authorized by its board of directors or in accordance with its by-laws.” See also 805 ILCS 105/112.30, which concerns the dissolution of not-for-profit corporations.

Therefore, a corporation can be dissolved and still convey real estate to an Insured. Because the Act allows a dissolved corporation to “wind up” its affairs, the dissolved corporation does not have to pay any unpaid license fees and franchise taxes before it conveys real estate.

However: Any request to insure a conveyance by a dissolved corporation as part of the “winding up” process when the corporation has been dissolved for more than a year should be referred to an underwriter. The underwriter may decide that a long-dissolved corporation can no longer wind up its affairs. Instead, the corporation may have to be reinstated.

Rule of Title Practice for Dissolved Corporations

• Upon dissolution of a corporation, title to the land remains in the corporate name. Title does not vest in the names of the shareholders. See 805 ILCS 5/12.30(c)(1).

• Upon dissolution, a corporation cannot carry on any business except what is necessary to “wind up” its affairs. Thus, it does not appear that a dissolved corporation can mortgage its corporate property. See 805 ILCS 5/12.65.

• After dissolution, the corporation may transfer title to its assets “as authorized by its board of directors or in accordance with its bylaws.” See 805 ILCS 5/12.30(5)(b).

• The examiner will obviously be unable to obtain a certificate of good standing. However, the examiner should ask for a resolution that not only authorizes the proposed conveyance, but also indicates that the deed is part of the “winding up” process of the corporation. See 805 ILCS 5/8.05(a); 805 ILCS 5/8.50; 805 ILCS 5/11.55; 805 ILCS 5/12.40(c).

• When examining title to land that is held by a dissolved corporation, the examiner should show the certificate of dissolution as a Schedule B exception on the title commitment. Upon a sale of the land, the certificate can be waived for any policy issued.

Execution of deed:

• The deed should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares. See 805 ILCS 5/1.10(b)(2).

• If the corporate resolution does not indicate the names of the people who are to sign the deed, the examiner should ask for a copy of the by-laws; see 805 ILCS 5/8.50. As a last resort, the examiner should ask for a copy of the articles of incorporation; see 805 ILCS 5/2.10; see especially 805 ILCS 5/2.10(8)(b)(2)(ii).

Other Matters Concerning Dissolved Corporations

See the 2012 Illinois Supreme Court case Pielet v. Pielet, 2012 IL 112064; this case indicates that in order to sue a dissolved corporation, the cause of action must exist prior to the time of dissolution. This case concerns Section 12.80 of the Business Corporation Act, or 805 ILCS 5/12.80.

Because of this case, the examiner should not accept a personal undertaking when it is executed by a corporation. Instead, the undertaking should be executed by one or more shareholders. (See also A Plus Janitorial Corp. v. Group Fox, Inc., 2013 Ill. App. (1st) 120245.)

Example: Land is owned by ABC Corporation. The corporation is in financial difficulty. It wants to sell the building it is constructing. At the closing, the Company agrees to accept a personal undertaking from the corporation for possible mechanics lien claims. Three months later the corporation is dissolved. Four months later a mechanics lien is recorded, and the claimant immediately begins foreclosure proceedings. Five months later the Company is tendered the defense of the mechanics lien claim. The Company immediately tenders the defense of the claim to the corporation, but it is now dissolved. A court might conclude that the cause of action arose after the corporation was dissolved, and that therefore, the corporation has no legal obligation to honor the personal undertaking.

Once a corporation pays its delinquent fees and charges, the Secretary of State can reinstate the corporation. See 805 ILCS 5/12.45; see also 805 ILCS 105/112.45.

Once reinstated, the corporate existence shall be deemed to have continued without interruption from the date of the issuance of the certificate of dissolution. That is, the corporate existence “relates back” to the time the certificate of dissolution was issued. Once reinstated, it is as if the certificate was never issued. See 805 ILCS 5/12.45(d).

Not-for-Profit Corporations

See the General Not-for-Profit Corporation Act of 1986, which is codified as 805 ILCS 105/101.01 et seq.

In General

A not-for-profit corporation is a corporation whose income is not distributable to its members. See 805 ILCS 105/106.05. A not-for-profit corporation may be organized for charitable, religious, or educational purposes, or for any one or more of the other purposes outlined in 805 ILCS 105/103.05. A not-for-profit corporation has the power to sell or mortgage any or all of its property or assets. See 805 ILCS 105/103.10(e) and 805 ILCS 105/111.55.

Clearance for a Not-for-Profit Corporation

• A not-for-profit corporation has the power to sell and mortgage its property. See 805 ILCS 105/103.10(e).

• A not-for-profit corporation can be involuntarily dissolved for, among other things, failing to file its annual report or failing to pay any fees and charges. See 805 ILCS 105/112.35(a) and 805 ILCS 105/112.35(c). For this reason the examiner should either ask for a certificate of good standing or confirm the good standing of the corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com.

• The examiner should review the bylaws of the corporation to see if there are any limitations on the corporation’s power to sell and mortgage its property. The examiner may also want to look at the articles of incorporation. See 805 ILCS 105/101.80(c); 805 ILCS 105/101.80(e); 805 ILCS 105/102.10; 805 ILCS 105/102.25.

• When insuring the sale of mortgage of all or substantially all of the corporate assets of the corporation, when made in the usual and regular course of business of the corporation, the examiner will need the authorization of the board of directors. See 805 ILCS 105/111.55.

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, is evidence of the consent of the board of directors. See 805 ILCS 105/108.50(b).

Even if the Company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage. See 805 ILCS 105/108.50(b).

• If the proposed conveyance or mortgage is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the transaction is authorized in the following manner: If the corporation has no members or no members entitled to vote on the proposed conveyance or mortgage, then the majority vote of the directors in office can authorize the conveyance or mortgage. See 805 ILCS 105/111.60.

But if the corporation has members entitled to vote on the proposed conveyance or mortgage, then the board of directors has to adopt a resolution recommending the sale or mortgage. The members then have to vote at either an annual meeting or a special meeting to authorize the deed or mortgage. A two-thirds affirmative vote of a quorum (a quorum being members holding one-tenth of the votes entitled to be cast) is needed. See 805 ILCS 105/107.60; 805 ILCS 105/111.60.

Execution of deed or mortgage:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other authorized officer. If there are no such officers, then the document should be executed by a majority of the directors or by such directors as may be designated by the board of directors. If there are no such officers or directors, then the document should be executed by the members or such members as may be designated by the members at a lawful meeting. See 805 ILCS 105/101.10.

Corporate Merger (805 ILCS 5/11.05)

The statute provides as follows:

Any two or more corporations may merge into one of such corporations or consolidate into a new corporation in the following manner:

The board of directors of each corporation shall, by resolution adopted by a majority vote of the members of each such board, approve a plan of merger or consolidation setting forth various items. These are set forth in the statute. They include the following:

• The names of the corporations proposing to merge or consolidate, and the name of the corporation into which they propose to merge, which is hereinafter designated as the surviving corporation or to consolidate, which is hereinafter designated as the new corporation;

• The terms and conditions of the proposed merger or consolidation and the mode of carrying the same into effect;

• A statement of any changes in the articles of incorporation of the surviving corporation to be effected by such merger or a statement of the articles of incorporation of the new corporation;

• Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

The Illinois Entity Omnibus Act

See also the Illinois Entity Omnibus Act, codified as 805 ILCS 415/101 et seq. This Act provides for conversions and domestications.

Conversion involves Illinois and foreign entities of different types. Domestication concerns Illinois and foreign entities of the same type.

Examples of Conversion

An Illinois corporation can become an Illinois limited liability company. A Delaware corporation can become an Illinois limited liability company.

Examples of Domestication

An Illinois corporation can become a Delaware corporation. A Delaware corporation can become an Illinois corporation.

To create a conversion or domestication, a statement of conversion or a statement of domestication must be filed with the Illinois Secretary of State.

Corporations and Judgments

A corporation is a legal “person.” Thus, it can sue and be sued; it can incur liability in its own name. See 805 ILCS 5/3.10(b) and 805 ILCS 5/3.10(d).

Employees of the corporation manage the corporation, but under agency law, the employees are not personally liable for their actions. Instead, the corporation is liable for the employees’ actions. See 805 ILCS 5/3.10(p). Therefore, only judgments against the corporation (and not judgments against an employee or shareholder) have to be shown on the title commitment for property owned by a corporation. See 805 ILCS 5/3.10(b); 805 ILCS 5/3.10(p). See also 805 ILCS 105/103.10(b); 805 ILCS 105/108.70.

Municipal Corporations

See 65 ILCS 5/11-76-1 et seq. (Sale or Lease of Real or Personal Property)

Home Rule Municipalities

Until 1970 units of local government were deemed to be creatures of the state. It was thought that all of their powers must be specifically granted by the Constitution or by state statute, or must be necessarily implied from that grant of power.

But then the 1970 Illinois Constitution created home rule. Home rule municipalities are governed by Article 7, Section 6, of the Illinois Constitution, which provides that “a home rule unit may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals, and welfare, to license, to tax, and to incur debt.”

Compare these broad powers to non-home rule units. Article VII, Section 7 of the Illinois Constitution states that “counties and municipalities that are not home rule units shall have only powers granted to them by law. . . .” These powers include the right to make local improvements by special assessment; to adopt, alter, or repeal their forms of government by referendum; to provide for the selection of their officers; to incur debt, and to levy taxes.

Home rule units are municipalities with over 25,000 people. Municipalities can opt in or out of home rule status by referendum. A county that has a chief executive officer elected by the electors of the county is also a home rule unit. Home rule units are not special districts, like a park district.

The website of the Illinois Municipal League contains a list of all of the home rule municipalities in Illinois. Go to www.iml.org and then search “home rule.” Then click on, “Home Rule Municipalities.”

The Sale of Municipal Property by a Home Rule Unit

Home rule units can adopt whatever rules they choose in selling their property. Thus, home rule units have two alternatives:

• They can adopt by ordinance whatever rules they choose, or,

• They can follow the statutes.

Rule of Title Practice for Home Rule Municipalities

The examiner should ask for a copy of the ordinance for the sale of property, and then follow the ordinance. See below for a sample title exception:

In order to insure the sale of municipal property pursuant to an ordinance drafted pursuant to the municipality’s home rule status, we should be furnished a copy of said ordinance. This commitment may be subject to additional exceptions after our review of said ordinance.

Non-Home Rule Municipalities

Non-Home Rule municipalities do not have the option of drafting their own ordinances to sell property. Instead, they must follow the Illinois statutes. These various statutes are outlined below. (Unless otherwise stated, the following underwriting rules apply to non-home rule municipalities.)

The Sale of Municipal Property by a Non-Home Rule Municipality

A city or village has the power to convey real estate when, in the opinion of the corporate authorities, the real estate is no longer needed by the city or village. This power shall be exercised by an ordinance passed by three-fourths of the corporate authorities of the city or village then holding office, at either a regular meeting or a special meeting. See 65 ILCS 5/11-76-1.

This ordinance shall specify the location of the real estate, the use thereof, and such conditions with respect to further use of the real estate that the corporate authorities deem necessary. See 65 ILCS 5/11-76-2.

But before the corporate authorities sell the land by virtue of the ordinance, notice of the proposal to sell the land shall be published once each week for three consecutive weeks in a daily or weekly paper published in the city or village, and if there is no such paper, then in some paper published in the county in which the city or village is located. The first publication shall be not less than thirty days before the day provided in the notice for the opening of bids for the real estate. The notice shall contain an accurate description of the property, state the purpose for which the land is used, and state at what meeting the bids will be considered and opened. See 65 ILCS 5/11-76-2.

The corporate authorities may accept the high bid or any other bid determined to be in the best interest of the city or village by a vote of three-fourth of the corporate authorities then holding office. However, by a majority vote of those holding office, they may reject any and all bids. See 65 ILCS 5/11-76.2.

The deed conveying this property is signed by the mayor or president and also the municipal clerk. See 65 ILCS 5/11-76-3.

Sale of Land by the Resolution of a Non-Home Rule Municipality

The corporate authorities may also authorize the sale of surplus real estate by resolution. See 65 ILCS 5/11-76-4.1.

The value of the real estate is determined by an appraisal. The resolution is published “at the first opportunity following its passage” in a newspaper published in the municipality or, if none, then in a newspaper published in the county where the municipality is located. The corporate authorities may accept any contract proposal determined by them to be in the best interest of the municipality by a vote of two-thirds of the corporate authorities then holding office. In no event, however, shall the price by less than 80% of the appraised value. See 65 ILCS 5/11-76-4.1.

A Non-Home Rule Municipality’s Alternative Means of Selling Surplus Property

See 65 ILCS 5/11-76-4.2. This section of the Act applies if a municipality has a population of less than 20,000 and is in a county with an unemployment rate that is higher than the national average for at least one month during the six months preceding the adoption of the resolution to sell the real estate.

If the ordinance (65 ILCS 5/11-76-2) or resolution (65 ILCS 5/11-76-4.1) has failed to work, then the corporate authorities may by a different resolution (65 ILCS 5/11-76-4.2) authorize the sale of surplus land by either the staff of the municipality, by listing with a real estate agency, or by public auction.

The resolution must be published once each week for three successive weeks in a newspaper (in the same manner outlined earlier). No sale may be conducted until at least thirty days after the first publication. The corporate authorities may accept any offer or bid by a vote of 3/4 of the corporate authorities then holding office.

Rule of Title Practice

When insuring the sale of municipal property, consider a generic exception similar to the following:

In order to insure the sale of municipal property, we should be furnished the following, and our commitment and policy may be subject to additional exceptions after our review of these materials:

If the municipality is a home rule municipality, we should be furnished a copy of the appropriate ordinance. If the municipality is not a home rule municipality, (or if it is, but it follows the procedure outlined in the Illinois Compiled Statutes), then we should be furnished a copy of the appropriate ordinance (together with the number of “yes” and “no” votes as to its passage); a copy of the published notice, including evidence as to when the notice was published; and a statement as to the number of “yes” and “no” votes that approved the winning bid. If the sale was by resolution, we should be furnished a copy of the appraisal, a copy of the corporate resolution, evidence of publication, and a statement as to the number of “yes” and “no” votes that approved the contract to purchase the real estate pursuant to said resolution.

The Purchase of Municipal Property by a Non-Home Rule Unit

See 65 ILCS 5/11-76.1-1 et seq.

The corporate authorities of each municipality having a population of less than 500,000 people can purchase real estate for public purposes. To do so they must pass an ordinance; they need an affirmative vote of two-thirds of the corporate authorities. See 65 ILCS 5/11-76.1-1.

After the ordinance has been passed, it shall be published in a newspaper that is published (or if not published, then circulated) in the municipality at least twice within thirty days after its passage. In municipalities with less than five hundred people in which no newspaper is published, then publication can be had by posting a notice in three prominent places within the municipality. The ordinance shall not become effective until thirty days after its second publication. See 65 ILCS 5/11-76.1-3.

The Exchange of Real Estate

See 65 ILCS 5/11-76.2-1 et seq.

For an exchange of real estate, there first must be a public hearing pursuant to a three-fourths vote of the members of the corporate authorities. Notice of the public hearing must be published in a newspaper of general circulation. The notice must be published not less than fifteen days or more than thirty days prior to the date of the hearing. The notice shall include a legal description of all properties and the terms and conditions of the exchange.

After the public hearing, the corporate authorities may authorize the exchange. In order to do so they need a three-fourths vote. If the exchange is authorized, the authorization is by ordinance, and the ordinance should include the following:

• That the land to be exchanged in no longer needed by the municipality for the public interest;

• That the land to be received will prove useful to the municipality and will be for the public interest;

• And that the total value of the land to be received is approximately equal to or exceeds the value of the land being traded.

Note that the wording of the statute indicates that land can be exchanged between a municipality and an individual, legal entity, or other non-municipality. For the transfer of real estate between municipalities, see below.

The Transfer of Real Estate between Municipalities

See 50 ILCS 605/1 et seq.

This statute is called the Local Government Property Transfer Act. The “transferee municipality” has to declare by ordinance that it is necessary or convenient for it to use, occupy or improve any real estate held by the “transferor municipality.”

The transferor municipality can convey the land to the transferee municipality by a deed signed by the mayor, president, or other chief executive of the transferor municipality, attested by its clerk or secretary and sealed with its corporate seal, all authorized by a resolution passed by a two/thirds vote of the members of the legislative body of the transferor municipality.

A municipality has the power upon resolution passed by a two-thirds vote of the members of its legislative body then holding office to transfer property to the State of Illinois. The term “State of Illinois” includes the state or any department, commission, board or other agency of the state.

The Local Government Property Transfer Act includes provisions for the releasing of easements and restrictions.

Home Rule Issues

The title examiner should be cautious about relying on a municipality’s status as a home rule municipality.

Example: An attorney contacts the title examiner. The attorney represents a home rule municipality. He wants the city to vacate a road pursuant to 65 ILCS 5/11-91-1. This statute requires the approval of at least three/fourths of the alderman, trustees, or commissioners. The attorney argues that because the city is home rule, the city can enact an ordinance that allows for merely a simple majority to approve the vacation. Is the attorney correct?

Some underwriters feel that he is not correct. They claim that the law has made it clear that there are certain matters of law that cannot have local variations. The determination of the extent and ownership of fee title to real estate is one of them. Rather, this determination is more properly an affair of the state.

But on the other hand, Oak Park, Downers Grove, and Peoria all have ordinances that allow for this type of vacation.

For example, this is the current Oak Park ordinance:

22-11-1: Vacation of Streets and Alleys: Streets and alleys may be vacated by the Board of Trustees pursuant to the provisions and procedures set forth in division 91 of the Illinois Municipal Code (65 ILCS 5/11-91-1 and 5/11-91-2), provided, however, pursuant to the home rule powers of the Village as set forth in Article VII, Section 6 of the Illinois Constitution, an ordinance vacating a street or alley shall be effective upon being passed by the affirmative vote of a majority of the Board of Trustees (1981 Code).

Furthermore, consider this analysis: The Illinois Supreme Court in Schillerstrom Homes, Inc. v. The City of Naperville, 198 Ill.2d 281, 762 N.E.2d 494 (2001) said this:

This court has formulated a three-part inquiry for evaluating the constitutionality of exercise of home rule power. First, we must determine whether the disputed exercise of local government power falls within section 6(a) [of Article VII of the Illinois Constitution]—that is, whether the local government’s activity is a function pertaining to its government and affairs. If so, we must determine whether the General Assembly has preempted the use of home rule powers in this area. If not, then we must determine ‘the proper relationship’ between the local ordinance and the state statute.

That is, these three factors are as follows:

• Does the contemplated exercise of local government power pertain to the government and affairs of the local government?

• If so, has the General Assembly preempted the use of home rule powers in this area? That is, does the statute in question contain specific language that would preempt home rule under Article VII, Section 6(h), of the Illinois Constitution?

• If the statute does not contain such specific language, is the state statute an attempt to declare the subject an issue that requires exclusive state control?

The Illinois Supreme Court states the following as to the first factor:

An ordinance pertains to local government and affairs where it addresses local, rather than state or national, problems. . . . . Whether a particular problem is of statewide rather than local dimension must be decided not on the basis of a specific formula or listing set forth in the Constitution but with regard for the nature and extent of the problem, the units of government which have the most vital interest in its solution, and the role traditionally played by local and statewide authorities in dealing with it. [Citation omitted] Municipal development regulations . . . undoubtedly pertain to local affairs.

One might argue that the vacation of a right-of-way certainly pertains to local government and affairs.

Secondly, the vacation statute (65 ILCS 5/11-91-1) does not contain specific language that would preempt home rule under Article VII, Section 6(h), of the Illinois Constitution.

But as to the third factor: This seems rather nebulous. What is “the proper relationship” between the local ordinance and the state statute?” What does this statement mean?

The Schillerstrom court goes on to say:

This court has upheld the right of local governments to enact their own solutions to various local problems in the face of less stringent or conflicting State regulation, following a determination that the State’s expression of interest in the subject as evidenced by its statutory scheme did not amount to an express attempt to declare the subject one requiring exclusive State control.

In this regard, the case of The City of Wheaton v. Robert A. Sandberg, 215 Ill.App.3d 220, 574 N.E.2d 697, 158 Ill. Dec. 584 (1991) is illuminating. In this case the City of Wheaton wanted to condemn property. Wheaton is a home rule municipality. The defendant claimed that Wheaton’s enabling ordinance on which the condemnation action was based was invalid because it was preempted by the uniform state statutes created by the Commercial Renewal and Redevelopment Areas Act of the Illinois Municipal Code.

Specifically, the defendant claimed that the enabling ordinance was invalid because its definition of a “blighted area” differs from the definition of “blight” found in the state Act. That is, the state statute specifies that excessive vacancies may be one of the five elements necessary for a finding of blight, while the ordinance merely provides for vacancy alone in all or any part of the building as sufficient for a finding of blight.

The court concluded that there was no evidence indicating the necessity for uniform standards under the Commercial Renewal and Redevelopment Areas Act. Nor did the court perceive an overriding policy interest on the part of the state in keeping these standards uniform. Thus, the court maintained that the City of Wheaton could enact an enabling ordinance that did not conform to the state statute. (However, the court later said that although the ordinance was not preempted by the state statute, it was invalid on constitutional grounds.)

How does the holding of this case affect the issue relative to a right-of-way vacation? Again, the statement from the Schillerstrom case seems to be the key:

This court has upheld the right of local governments to enact their own solutions to various local problems in the face of less stringent or conflicting State regulation, following a determination that the State’s expression of interest in the subject as evidenced by its statutory scheme did not amount to an express attempt to declare the subject one requiring exclusive State control.

It does not appear that the State of Illinois’ requirement of a 3/4 vote as set forth in 65 ILCS 5/11-91-1 is an “express attempt” by the state to maintain exclusive control over the means of a right-of-way vacation.

However, this Schillerstrom statement does refer to a condition precedent of “a determination that the State’s expression of interest” does not amount to an attempt by the State of asserting exclusive state control of the matter. Who makes this so-called “determination?” If the court has not yet made a determination that the statutory requirement of a 3/4 vote is not an attempt to declare the subject of right-of-way vacations a matter that requires exclusive state control, could a disgruntled homeowner bring suit because of a home rule right-of-way vacation?

But is it up to the court to make this determination? In the alternative, can the municipality make this determination in its ordinance? That appears doubtful.

Rule of Title Practice

Any request to insure a municipal real estate transaction pursuant to a home rule ordinance when a corresponding state statute already exists that also governs this transaction should be referred to an underwriter. Is there a chance of an adjoining homeowner being upset by the proposed transaction? The underwriter may want to ask for a personal undertaking for defense costs in the event there is litigation.

Other Statutes

• For the transfer of real estate from a municipality to the State of Illinois, see 50 ILCS 605/4.

• For the sale of school district real property, see 105 ILCS 5/5-22 et seq.

• Note that there does not appear to be a statute that governs the purchase of school district property. In that regard, the title examiner should request a copy of the real estate contract and a copy of the minutes of the meeting of the board of education wherein that contract for the purchase of the real estate has been approved. For gifts or donations to school districts, see 105 ILCS 5/5-21.

• For the sale of land by a forest preserve district in a county of less than 550,000 people, see 70 ILCS 805/6e.

• For the sale or exchange of land owned by a fire protection district, see 70 ILCS 705/10a.

• For the conveyance of park district property, see 70 ILCS 1205/10-1 et seq.

• For the acquisition of real estate by the Illinois State Toll Highway Authority, see 605 ILCS 10/9 et seq.

• For the acquisition of real estate by the Cook Country Forest Preserve District, see 70 ILCS 810/8; 70 ILCS 810/10; 70 ILCS 810/38.

• For the acquisition, finance, and sale of township property, see 60 ILCS 1/85-10(c); 60 ILCS 1/105-10.

• For the sale of public library property, see 75 ILCS 5/4-7(6) and 75 ILCS 5/4-16.

• For the mortgage of public library property, see 75 ILCS 5/5-6 and 75 ILCS 10/7(12).

• For the purchase of public library property, see 75 ILCS 5/4-7(4), 75 ILCS 5/5-6, 75 ILCS 10/7(4) and 75 ILCS 10/7(11).

Park Districts

See 70 ILCS 1205/1-1 et seq.

Can a Park District Mortgage Its Property?

It is not clear. Note that 70 ILCS 1205/6-2 states that the park district can “pledge its property,” but this is somewhat ambiguous.

70 ILCS 1205/9.3-5 indicates that a park district can mortgage an indoor or outdoor recreational facility under certain circumstances, but again, this is not a clear mandate.

The issue concerning a park district of other unit of government is: what happens when the loan is foreclosed? There is a basic underlying concept that a unit of government cannot lose its property.

Before insuring a mortgage of park district property, consider having the park district first obtain a declaratory judgment that it can mortgage the property in question.

Can a Municipality Mortgage Its Property?

• There are at least two statutes that refer to a municipality mortgaging its property. See 65 ILCS 5/11-74-4(5), which concerns an “industrial project.” 65 ILCS 5/11-74.4-4(c) indicates that a municipality can mortgage property within a “redevelopment project area.” However, what happens if the mortgage is foreclosed? There is a basic underlying doctrine or concept that a unit of government cannot lose its property.

But on the other hand, consider the broad wording of 65 ILCS 5/11-74.4-4(c), which provides as follows:

[Within a redevelopment project area, a municipality may] own, convey, lease, mortgage or dispose of land and other property, real or personal . . . . No conveyance, lease, mortgage, disposition of land or other property owned by a municipality, or agreement relating to the development of such municipal property shall be made except upon the adoption of an ordinance by the corporate authorities of the municipality. Furthermore, no conveyance, lease, mortgage, or other disposition of land owned by a municipality or agreement relating to the development of such municipal property shall be made without making public disclosure of the terms of the disposition and all bids and proposals made in response to the municipality's request.

• If asked to insure the mortgage of municipal property, the examiner should talk to an underwriter. The examiner may need to insist that the corporate municipality obtain a declaratory judgment that it can mortgage its property.

• 65 ILCS 5/8-1-3.1 provides that a municipality may borrow money from a bank or other financial institution, but the money must be repaid within ten years from the time the money is borrowed.

• 65 ILCS 5/8-1-6 and 65 ILCS 5/8-1-7 provide that a municipality cannot incur an expense unless an appropriation has been previously made pursuant to an appropriation ordinance. 65 ILCS 5/8-1-7(a) further states as follows: “Any contract made, or any expense otherwise incurred, in violation of the provisions of this section shall be null and void as to the municipality, and no money belonging thereto shall be paid on account thereof.” This statute illustrates a potential problem in insuring a mortgage of municipal property.

Can a Township Mortgage Its Property?

See 60 ILCS 1/85-10(c) and 60 ILCS 1/85-10(d). However, 60 ILCS 1/85-10(c) states that a township may finance the purchase of real estate by the use of “finance contracts.” This suggests that a township can mortgage property. However, see Attorney General Opinion Number 97-010, which states: “It has long been the rule in this State that a unit of local government may not legally execute a mortgage without express statutory authority to do so. (1933 Ill. Att’y Gen. Op. 758.)”

The Public Trust Doctrine

Customers will occasionally ask a title company to underwrite restrictions that benefit the public and not private parties. See, e.g., Morgan County v. Braner, 71 Ill. 546 (1874); Huntley Fire Protection District v. Huntley Development Limited Partnership, 338 Ill. App. 3d 609, 788 N.E.2d 355, 273 Ill. Dec. 46 (2003).

Example: In 1987 Landowner deeded Blackacre to Village. The deed includes a covenant that the property “is to be used for public park purposes.” For more than thirty years Blackacre has been used for a park. But in 2019 Village wants to enter into an inter-governmental agreement with School District, whereby Blackacre will be traded to School District in exchange for Whiteacre. School District indicates that after the two properties are exchanged, Blackacre will no longer be used as a public park. Can the 1987 covenant be endorsed over, providing coverage to School District over the violation?

It appears that in this instance the “public trust doctrine” is applicable. This tenet stands for the proposition that units of government own “trust resources,” like parks, as a trustee, and that these resources cannot be conveyed if the transfer would diminish or defeat traditional public access to and the use of those resources.

See Paepcke v. Public Housing Commission of Chicago, 46 Ill.2d 330, 263 N.E.2d 11 (1970); “Illinois Central and the Public Trust Doctrine in State Law,” 15 Va. Envtl. L.J. 713 (Summer 1996).

In order to endorse over this covenant, the Company will probably request that an appropriate government official contact the Attorney General’s office for an opinion, consenting to the violation of the covenant.

Factors to be considered by the Attorney General’s office would include: Is there another park near Blackacre? Will Whiteacre be used as a park?

Example:

In 2019 the Company was asked to insure the sale of the existing Geneva Public Library to a private party. The library was subject to a decades-old covenant that restricted the use of the land to a public library. The Company was asked to underwrite this covenant.

In this situation, the Company considered the Public Trust Doctrine. The Company agreed to endorse over the covenant upon the satisfaction of the following conditions:

• The new public library had to be relatively close to the old library. (The two buildings were six blocks apart.)

• The new library had to be at least as big as the old library. (The new library was substantially bigger.)

• The Company would not issue the endorsement until the old library was sold to a purchaser for value, a certificate of occupancy had been issued for the new library, and the new library was open for business.

Agreement for Deed

Last effective date: June 18, 2019

The Installment Contract for Deed

By

Richard F. Bales

Part I: The Installment Sales Contract Act

Introduction

An installment contract to purchase real estate is sometimes called articles of agreement for warranty deed, articles of agreement for deed, or a contract for deed. It is an agreement between a seller and purchaser of real estate. Pursuant to the contract or agreement, the purchaser agrees to pay to the seller the purchase price of the land plus interest, but payable in installments over a set period of time. After the parties execute the contract, the buyer (sometimes called the contract purchaser) will usually go into immediate possession of the land. However, the seller retains legal title to the property until the buyer pays the full purchase price. The contract normally provides that the seller will deliver the deed to the buyer once the final payment is made. See 735 ILCS 5/15-1214 for a statutory definition.

The Installment Sales Contract Act

Public Act 100-416 (SB 885), effective January 1, 2018, created the Installment Sales Contract Act, to be codified at 765 ILCS 67/1 et seq. The Act is intended to be a consumer protection device for buyers who purchase residential real estate under installment sales contracts from sellers who engage in the business of selling real estate portfolios through installment sales contracts.

The Act at 765 ILCS 67/5 defines “installment sales contract” or “contract” as follows:

‘Installment sales contract’ or ‘contract’ means any contract or agreement, including a contract for deed, bond for deed, or any other sale or legal device whereby a seller agrees to sell and the buyer agrees to buy a residential real estate, in which the consideration for the sale is payable in installments for a period of at least one year after the date of sale, and the seller continues to have an interest or security for the purchase price or otherwise in the property. ‘Installment sales contract’ does not include a financing arrangement that for religious or cultural reasons does not allow the imposition or collection of interest and that is offered by a person, partnership, association, limited liability company, or corporation doing business under and as permitted by any law of this State or the United States relating to banks, savings and loan associations, savings banks, or credit unions.

“Residential real estate” means land containing 1 to 4 dwelling units.

“Date of Sale” means the date on which buyer and seller have signed the contract.

Most importantly, the Act defines “seller” as:

An individual or legal entity that possesses a legal or beneficial interest in real estate and that enters into an installment sales contract more than 3 times during a 12-month period to sell residential real estate.

The Act deems a seller who holds title to multiple properties under multiple legal entities (e.g., various LLCs or land trusts) a single seller. Thus, the Act clearly applies only to individuals or entities who sell residential real estate on installment sales contracts as a business. For example, the Act will apply to a business entity that acquires REO properties in bulk from lenders and re-sells properties individually under installment sales contracts.

See all definitions at Section 5 of the Act.

The Act only applies to qualifying contracts executed on or after January 1, 2018. See Section 90 of the Act.

Section 10(c) of the Act requires that all qualifying installment sales contracts must “clearly and conspicuously” disclose a set of 28 required contract elements. Many of these required elements would most likely be included in any installment sales contract under any circumstances—whether required by statute or not. For example, one of the required elements demand an accurate description of the subject property. Others require correct disclosure of the financial terms and conditions of the transaction.

Additional required elements relate to disclosures of routine matters, such as taxes, insurance, and liens on the property, if any. Some required elements are designed to be consumer protection provisions. For example, the contract must include a certification of compliance with local building codes (or a warranty in lieu of certification), notice of the rights to obtain an appraisal and an inspection prior to signing, and so on.

A complete list of 28 required contract elements at Section 10(c)(1) through Section 10(c)(28) of the Act. These 28 items are also shown below:

(1) The address, permanent index number, and legal description of the residential real estate subject to the contract. (2) The price of the residential real estate subject to the contract. (3) The amount, if any, of any down payment applied to the price of the residential real estate subject to the contract and the resulting principal on the loan. (4) The amount of the periodic payment, any grace periods for late payments, late payment fees, and to whom, where, and how the buyer should deliver each payment. (5) The interest rate being charged, if any, expressed only as an annual percentage rate. (6) The term of the loan expressed in years and months and the total number of periodic payments due. (7) The amount, if any, of any balloon payments and when each balloon payment is due. (8) A statement outlining whether the seller or the buyer is responsible for paying real estate taxes and insurance and how responsibilities of the buyer and seller change based on the time period the residential real estate subject to the contract is occupied by the buyer and what percentage of the principal is paid down. In all circumstances not defined in the disclosure required by this subsection, the seller has the responsibility for paying real estate taxes and insurance. (9) The amount that will be charged periodically, if any, for the first year to pay real estate taxes. (10) The amount that will be charged periodically, if any, for the first year to pay insurance. (11) A statement that the amounts listed in items (9) and (10) of this subsection are subject to change each year. (12) The fair cash value as defined in the Property Tax Code and set forth on the real estate tax bill for the year immediately prior to the sale, and the assessed value of the property as set forth on the real estate tax bill for the year immediately prior to the sale. (13) The amount of real estate taxes for the year immediately prior to the sale. (14) Any unpaid amounts owing on prior real estate taxes. (15) The amount of the annual insurance payment for the year immediately prior to the sale. (16) The type of insurance coverage, including, but not limited to, property insurance and title insurance, for the buyer and seller that will be required or provided. (17) The seller's interest in the structure being sold. (18) Any known liens or mortgages or other title limitations existing on the property. (19) An explanation as to when the buyer will obtain the title. (20) A statement defining what repairs the buyer is financially responsible for making to the residential real estate subject to the contract, if any, and how responsibilities of the buyer and seller to repair the property change based on the time period the residential real estate subject to the contract is occupied by the buyer and what percentage of the principal is paid down by any repairs made by the buyer. In all circumstances not defined in the disclosure required by this subsection, the seller has the financial responsibility for all repairs required to be made pursuant to the installment sales contract. (21) A statement defining what, if any, alterations of the property must be approved by both the buyer and the seller prior to the alterations being made, including requirements to provide evidence of proper permits, insurance, and lien waiver agreements. (22) Any additional charges or fees due at the time of the date of sale or at a later date. (23) An amortization schedule, as defined in Section 5. (24) A certificate of compliance with applicable dwelling codes, or in the absence of such a certificate: (i) an express written warranty that no notice from any municipality or other governmental authority of a dwelling code violation that existed with respect to the residential real estate subject to the contract before the installment sales contract was executed had been received by the seller, his or her principal, or his or her agent within 10 years of the date of execution of the installment sales contract; or (ii) if any notice of a violation had been received, a list of all such notices with a detailed statement of all violations referred to in the notice. (25) A statement, in large bold font stating in substantially similar form: "NOTE TO BUYER: BEFORE SIGNING THE CONTRACT THE BUYER HAS THE OPTION OF OBTAINING AN INDEPENDENT THIRD PARTY INSPECTION AND/OR APPRAISAL SO THAT THE BUYER CAN DETERMINE THE CONDITION AND ESTIMATED MARKET VALUE OF THE RESIDENTIAL REAL ESTATE AND DECIDE WHETHER TO SIGN THE CONTRACT.” (26) If the residential real estate or any dwelling structure thereon that is subject to the contract has been condemned by the unit of government having jurisdiction, the contract shall include a statement, in large bold font stating in substantially similar form: "NOTE TO BUYER: THE RESIDENTIAL REAL ESTATE BEING SOLD THROUGH THIS CONTRACT HAS BEEN CONDEMNED BY THE UNIT OF GOVERNMENT HAVING JURISDICTION." (27) A statement that the seller provided the buyer the installment sales contract disclosure prepared by the Office of the Attorney General as required under Illinois State law. The statement shall include the date on which the buyer was provided with the disclosure, which must be at least 3 full business days before the contract was executed. (28) A statement that: (i) if the buyer defaults in payment, any action brought against the buyer under the contract shall be initiated only after the expiration of 90 days from the date of the default; and (ii) a buyer in default may, prior to the expiration of the 90-day period, make all payments, fees and charges currently due under the contract to cure the default.

The buyer cannot waive any of these 28 required contract provisions. See Section 10(d) of the Act.

It is possible that an installment sales contract that fails to include any 1 or more of the 28 required contract provisions may be void and unenforceable. Section 50 of the Act states, “Any contractual provisions or other agreements contrary to this Act are void and unenforceable.” (emphasis added)

The Act creates a “cooling-off” period during which neither buyer nor seller is bound for 3 days after an unexecuted contract, in final form, is accepted by buyer and seller. See Section 70 of the Act.

The Act provides that each party (buyer and seller) has a right of rescission until both parties receive an executed copy (with notarized signatures of buyer and seller) of the contract. If either party rescinds the contract under this provision, seller must return all earnest money deposits to buyer. See Section 10(b) of the Act.

Section 20 of the Act requires the seller to record the installment sales contract or a memorandum thereof. The recording must occur within 10 business days of the date of sale and “prior to any subsequent sale or other transfer of any interest in the . . . contract . . .” Presumably, this means that the seller must record within 10 business days of the date of sale and within 10 business days prior to any assignment of the contract or any conveyance or mortgage of the real estate.

If the seller chooses to record a memorandum rather than the full contract, Section 20(a) of the Act sets out minimum requirements for the form and content of the memorandum. These requirements are set forth below:

A memorandum of the contract shall be titled "Memorandum of an Installment Sales Contract" either in capital letters or underscored above the body of the memorandum. At a minimum, the memorandum of the contract shall include: the address, permanent index number, and legal description of the residential real estate subject to the contract; the names of the buyer and seller; and the date the contract was executed. The memorandum of the contract shall be signed by the buyer and the seller with the signatures notarized. However, any provision in an installment sales contract that forbids the buyer to record the contract or a memorandum of the contract is void and unenforceable.

As indicated above, Section 20 voids any contract provision prohibiting buyer from recording the contract or memorandum. See Section 20(a) of the Act.

If the seller fails to timely record, the buyer has a right of rescission until such time as the seller does record. If the seller’s failure to timely record is coupled with a title defect that impairs the seller’s ability to convey marketable title to the buyer, then the buyer has an additional right of rescission for 90 days after discovering the title problem. If the buyer properly exercises the right of rescission under Section 20 of the Act, then the seller must return to the buyer “all money paid to the seller as of the date of rescission.” See Section 20(c) of the Act (Note that the seller must return all money paid by the buyer, not just earnest money.)

Section 85 of the Act declares that any violation of the Act constitutes an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq.

Finally, the Act directs the office of the Attorney General to develop a consumer protection disclosure form with respect to installment sales contracts. See Section 75(a) of the Act. Required contract element (27), set forth above, requires the seller to include in the contract a statement that the Attorney General’s disclosure form has been delivered to the buyer and the date on which it was delivered. (This is consistent with Section 70(d) of the Act.) The parties cannot waive delivery of this disclosure form. See Section 70(b) of the Act.

This is how Section 75 reads:

(a) The Office of the Attorney General shall develop the content and format of an educational document providing independent consumer information regarding installment sales contracts and the availability of independent housing counseling services, including services provided by nonprofit agencies certified by the federal government to provide housing counseling. The document shall be updated and revised as often as deemed necessary by the Office of the Attorney General.

(b) The document describe in subsection (a) of this Section shall include the following statement: ‘IMPORTANT NOTICE REGARDING THE COOLING-OFF PERIOD: Illinois State law requires a 3-day cooling-off period for installment sales contracts, during which time a potential buyer cannot be required to close or proceed with the contract. The purpose of this requirement is to provide a potential buyer with 3 business days to consider his or her decision whether to sign an installment sales contract. Potential buyers may want to seek additional information from a HUD-approved housing counselor during this 3-day period. The 3-day cooling-off period cannot be waived.’

The seller must deliver a copy of the Attorney General’s disclosure form prior to acceptance of the contract by both parties. See Section 70(c).

P.A. 100-416 also amends the Illinois Mortgage Foreclosure Law (IMFL), the Condominium Property Act, and the Consumer Fraud and Deceptive Business Practices Act to include references to the new Installment Sales Contract Act.

Upon default, the amendment to the IMFL will apparently require sellers to foreclose most contracts governed by the Installment Sales Contract Act. See amended 735 ILCS 5/15-1106(a)(2) and new 15-1106(g). The amendment deletes IMFL’s original requirement that foreclosure is mandatory if the payment period on an installment contract exceeded 5 years. As amended, all installment sales contracts for residential property must be foreclosed pursuant to the IMFL on default if the amount owed at time of default is less than 80% of the original purchase price. In all other cases, sellers may elect to foreclose under IMFL but are not required to do so.

This is how revised 735 ILCS 5/15-1106(a)(2) now reads:

From and after July 1, 1987, (the effective date of Public Act 84-1462) the following shall be foreclosed in a foreclosure pursuant to this Article: any real estate installment contract for residential real estate entered into on or after July 1, 1987 (the effective date of Public Act 84-1462) the amount unpaid under the terms of the contract at the time of the filing of the foreclosure complaint, including principal and due and unpaid interest, at the rate prior to default, is less than 80% of the original purchase price of the real estate as stated in the contract.

This is how new 735 ILCS 5/15-1106(g) reads:

The changes made to this Section by this amendatory Act of the 100th General Assembly apply to real estate installment contracts for residential real estate executed on or after the effective date of this amendatory Act of the 100th General Assembly.

COMMENTARY: This bill was advocated by Lisa Madigan and consumer protection groups as a means of offering consumer protection to people considering buying a home through what one of the groups called a “rent-to-own contract.” After the foreclosure crisis, there was a resurgence of predatory installment contracts—that is, contracts resulting in people buying homes in extremely bad condition at highly inflated purchase prices and high loan interest rates. This legislation offers protection from predatory contract terms.

One wonders how often the new Installment Sales Contract Act will actually apply. How many consumers will be able to take advantage of its disclosure and other protections? Will, for example, REO sellers avoid regulation by switching to some other form of seller financing, such as purchase money mortgages? In any event, there may be one unexpected consequence arising from this Act. Buyers may be encouraged to record sale contracts, whether the contracts are covered by the Act or not. Attorneys and title examiners will have to study any recorded contract to determine whether it represents a valid interest in the property in question.

As discussed later in Part II, the Illinois Supreme Court in Shay v. Penrose, 25 Ill.2d 447, 185 N.E.2d 218 (1962) discusses the doctrine of equitable conversion—that is, upon the execution of a contract, the contract purchaser becomes the equitable owner of real estate, subject only to the lien of the contract seller for the unpaid balance of the purchaser price. It is possible to negate equitable conversion in an installment contract. When equitable conversion is negated, the contract purchaser no longer has an interest in the land. Instead, the purchaser is more like a tenant with an option to purchase. As discussed in more detail in the materials, being an equitable owner of the land is a benefit to the contract purchaser, but the Act does not address this issue.

Some attorneys have maintained that the definition of “installment sales contract” or “contract” is broad enough to cover purchase money mortgages taken back by the seller. Title companies insure the validity and priority of purchase money mortgages. Does this mean that title companies have to make sure that, e.g., the twenty-eight points outlined above are covered in the mortgage?

It is easy to see why attorneys might feel this way. Consider again the definition of an installment sales contract. See the underlined words below. See especially the words that provide that “the seller continues to have an interest or security for the purchase price.” Don’t these words suggest a seller taking back a purchase money mortgage?

Any contract or agreement, including a contract for deed, bond for deed, or any other sale or legal device whereby a seller agrees to sell and the buyer agrees to buy a residential real estate, in which the consideration for the sale is payable in installments for a period of at least one year after the date of sale, and the seller continues to have an interest or security for the purchase price or otherwise in the property.

Ultimately, though, the definition is not that broad. The definition refers to a document “whereby a seller agrees to sell and the buyer agrees to buy” the real estate. A purchase money mortgage is not such a document. That is, the mortgage is not the document that creates the installment contract.

As indicated above, the Act defines “seller” as:

An individual or legal entity that possesses a legal or beneficial interest in real estate and that enters into an installment sales contract more than 3 times during a 12-month period to sell residential real estate.

Thus, it seems clear that the Act applies only to individuals or entities who sell residential real estate on installment sales contracts as a business. For example, the Act will apply to a business entity that acquires REO properties in bulk from lenders and re-sells properties individually under installment sales contracts.

Therefore, it is quite possible that the real estate attorney may never have to be concerned with the provisions of the Installment Sales Contract Act. That is, unless the attorney is representing a party in a transaction wherein the land is being sold on contract and the owner of the land is a “serial contract seller,” the attorney may never have to concerned that, for example, section 10(c) of the Act requires that all qualifying installment sales contracts must “clearly and conspicuously” disclose the aforementioned set of 28 required contract elements. Nonetheless, this Act may generate a renewed interest in the sale of property via an installment contract.

Part II: Issuing the Contract Purchaser’s Title Insurance Policy

Facts: Assume that Sam Seller owns lot 1 in Blackacre Subdivision, Aurora, Illinois. His attorney drafts a real estate installment contract for deed wherein Sam Seller agrees to sell the property to Benjamin Buyer via an installment contract, also known as Articles of Agreement for Warranty Deed.

A title commitment for lot 1 discloses these Schedule B items:

• Sam Seller’s purchase money mortgage that he executed when he bought lot 1;

• A platted utility easement;

• A platted building line;

• Real estate tax information.

The attorney also prepare a memorandum of contract, which he records on February 28, 2019.

Question: How does the title examiner prepare a title policy for this transaction?

Answer: The examiner can prepare a 2006 ALTA owner’s title policy. Further details are set forth below.

Schedule A

In the early 1980s title companies would issue contract purchaser’s title insurance policies wherein they would name both the contract seller and the contract purchaser as the insured parties, but they would be named “as their interests may appear.” Today, it is more appropriate to insure only the contract purchaser. Thus, the “name of insured” in Paragraph 1 of Schedule A of the owner’s policy would be: “Benjamin Buyer.” In Paragraph 3 of Schedule A, title could be shown as being vested in this Insured as well.)

Years ago title company computer systems had hardcoded commitment and policy forms. As a result, examiners could not change the boilerplate of the title insurance policy. Thus, the examiner could not change the wording of paragraph 2 of Schedule A of the owner’s policy to read anything but:

The estate or interest in the land that is insured by this policy is: fee simple, unless otherwise noted.

This meant that the examiner had to be creative in drafting his legal description, as the examiner would describe the contract purchaser’s interest within the legal description. For example:

The right to purchase and occupy, pursuant to the terms of an installment contract, Lot 1 in Blackacre Subdivision, Kane County, Illinois, as described in a memorandum of articles of agreement for deed recorded February 28, 2019, as document 2019-4589, Kane County, Illinois.

With today’s computer systems, the examiner should be able to amend the policy boilerplate. Therefore, the examiner may not have to amend the legal description. Instead, the examiner can modify Paragraph 2 of Schedule A of the owner’s policy to read, for example, as follows:

The estate or interest in the land that is insured by this policy is: The right to purchase and occupy the land described in Schedule A, pursuant to the terms of an installment contract referenced herein.

Schedule B

The examiner should raise the following exceptions in Schedule B of the title policy:

• Terms, conditions, and provisions of the articles of agreement for deed, Sam Seller, contract seller, and Benjamin Buyer, contract purchaser, a memorandum of which is recorded February 28, 2019, as document 2019-4589. (See the footnote below for examples of “generic” title policy exceptions relating to the articles of agreement for deed.)

• Sam Seller’s mortgage. (Note that it is not necessary that Sam Seller’s lender consent to the sale of the land via installment contract. The reason for this is that the title company is not insuring this mortgage; the title company is showing the mortgage in Schedule B of the owner’s policy);

• The platted utility easement;

• The platted building line;

• Real estate tax information.

Endorsements—Installment Contract Purchaser Endorsement “A”

Title companies can offer two endorsements that can be appended to title policies that insure a contract purchaser. Installment Contract Purchaser Endorsement “A” reads as follows:

Installment Contract Purchaser Endorsement “A”

1. The contract to purchase shown in Schedule B is an interest covered by this policy vested in the insured contract purchaser. The Company insures against loss or damage sustained by the contract purchaser by reason of:

A. The unenforceability of the right to receive a deed under the contract, unless the insured contract purchaser does not fulfill the terms of the contract, and

B. The refusal of a trustee, in the event of the seller’s or record title owner’s bankruptcy, to issue a deed under the terms of the contract, unless the insured contract purchaser is not in possession of the land.

2. This policy does not insure against loss or damage sustained by the insured contract purchaser by reason of:

A. Matters that first affect title to the land after the policy date.

B. Failure of the insured contract purchaser to do everything necessary:

(A) To secure proper deeds from the seller, seller’s successor in interest or the record title owner;

(B) To secure releases from other persons then having an interest in the title or a lien on the land, or;

(C) To secure a final court order that determines the persons then entitled to receive payment from the insured.

C. Costs, attorneys’ fees and expenses to secure the final court order referred to above in paragraph 2.B.( C ) or to enforce the contract.

D. A foreclosure of any mortgage executed by an owner of the fee simple interest in the Land.

Installment Contract Purchaser Endorsement “A”—A Discussion

This endorsement gives assurances to the installment purchaser of a 1-4 unit residential property that:

• the contract is valid;

• the right to receive a deed under the installment contract is enforceable if the purchaser’s obligations have been met, and;

• the trustee in a seller’s bankruptcy may not refuse to issue a deed if the purchaser is in possession of the land.

Installment Contract Purchaser Endorsement “B”

The second endorsement is similar to the first endorsement, but with one important additional coverage. Paragraph 1.C. adds protection over possible future judgments against the contract seller of 1-4 residential property as long as the contract purchaser remains in actual physical possession of the property. This protection arises pursuant to the doctrine of equitable conversion, which is discussed below.

Installment Contract Purchaser Endorsement “B”

1. The contract to purchase shown in Schedule B is an interest covered by this policy vested in the insured contract purchaser. The Company insures against loss or damage sustained by the contract purchaser by reason of:

A. The unenforceability of the right to receive a deed under the contract, unless the insured contract purchaser does not fulfill the terms of the contract, and

B. The refusal of a trustee, in the event of the seller’s or record title owner’s bankruptcy, to issue a deed under the terms of the contract, unless the insured contract purchaser is not in possession of the land.

C. Entry of any court order that constitutes a final determination enforcing the lien of any judgments for monetary damages against the contract seller, or his successors or assigns, rendered after the date hereof and while the insured contract purchaser continues to occupy the insured premises.

2. This policy does not insure against loss or damage sustained by the insured contract purchaser by reason of:

A. Matters that first affect title to the land after the policy date.

B. Failure of the insured contract purchaser to do everything necessary:

(A) To secure proper deeds from the seller, seller’s successor in interest or the record title owner;

(B) To secure releases from other persons then having an interest in the title or a lien on the land, or;

(C) To secure a final court order that determines the persons then entitled to receive payment from the insured.

C. Costs, attorneys’ fees and expenses to secure the final court order referred to above in paragraph 2.B.(C) or to enforce the contract.

D. A foreclosure of any mortgage executed by an owner of the fee simple interest in the Land.

Installment Contract Purchaser Endorsement “B”—A Discussion

Equitable Conversion

The Illinois Supreme Court in Shay v. Penrose, 25 Ill.2d 447, 185 N.E.2d 218 (1962) defines equitable conversion as follows:

Equitable conversion is the treating of land as personalty and personalty as land under certain circumstances. Hence, as between the parties and those claiming through them, when the owner of land enters into a valid and enforceable contract for its sale he continues to hold the legal title, but in trust for the buyer; and the buyer becomes the equitable owner and holds the purchase money in trust for the seller. The conversion takes place at the time of entering into the contract. It stems from the basic equitable principle that equity regards as done that which ought to be done. The doctrine of equitable conversion has been recognized in Illinois, as it has in practically every other jurisdiction, since earliest times. 25 Ill. 2d at 449.

Shay v. Penrose sets forth the doctrine of equitable conversion, that upon the execution of a contract, the contract purchaser is the equitable owner of real estate, subject only to the lien of the contract seller for the unpaid balance of the purchase price.

This doctrine has tremendous ramifications for the contract purchaser. It means that although subsequent judgment creditors of the contract seller who have notice of the equitable rights of the contract purchaser have an interest in the property, this interest is subject to the contract purchaser’s interest.

Example: Adam owns a single family home located on lot 1. Adam and Baker enter into articles of agreement in 2019 wherein Baker agrees to buy lot 1 via an installment contract. Baker’s attorney orders a title insurance commitment, and at the closing he gives the closer a memorandum of the contract and asks her to record it after the closing. He asks the closer to issue Installment Contract Purchaser Endorsement “B.” The closer records the contract and issues the owner’s title insurance policy. Baker moves into the home. Two years later, in 2021, a judgment is recorded against Adam. In 2024 Baker is prepared to get a mortgage and make a final “balloon payment” of the amount he still owes to Adam.

Question: Baker’s attorney orders a title commitment and only then discovers the judgment against the seller that was recorded in 2021. Is there a problem?

Answer: No, there is no problem. Once Baker executed the installment contract, Baker became the equitable owner of the land. By taking possession of the house and by recording a memorandum of the contract, third parties, such as Adam’s judgment creditor, had notice of Baker’s equitable interest—an interest that is prior to the lien of the 2021 judgment. The title company can issue the owner’s title policy, showing the judgment in Schedule B, but endorsing over the judgment.

The concept of notice of an installment contract is illustrated in Reuss v. Nixon, 272 Ill. App. 219 (1933):

The contract of purchase was on record at the time the judgment was taken and the vendee was then in possession of the real estate. Conceding for the sake of discussion that the judgment creditor has a lien on the legal title remaining in the vendor after the execution of the contract of purchase, such lien is subject to the equities and rights of the vendee. . . . The time for the performance of the contract has arrived and as against the holder of the legal title and as against judgment creditors claiming a lien on the legal title bound by notice of the vendee’s rights, the vendee is entitled to a deed conveying the real estate to him clear of any liens which do not secure any debts or liability of the vendee. 272 Ill. App. at 224, 227.

The key to this protection for the contract purchaser is two-fold. One, the contract purchaser must be the equitable owner of the land, and two, there must be notice—that is, notice to third parties of the rights of the equitable owner. Note that in Reuss v. Nixon, notice was by both recorded document and possession. The effect of recording as notice to third parties is set forth in 765 ILCS 5/30:

All deeds, mortgages and other instruments of writing which are authorized to be recorded, shall take effect and be in force from and after the time of filing the same for record, and not before, as to all creditors and subsequent purchasers, without notice; and all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchasers, without notice, until the same shall be filed for record.

Notice by possession is discussed in Burnex Oil Co. v. Floyd, 106 Ill. App. 2d 16, 245 N.E.2d 539 (1969):

The parties agree on the general rule that a bona fide purchaser of real property from the record owner acquires good title thereto free and clear of any interest therein except such interest of which he has notice. . . . Such notice may be actual or constructive and contemplates the existence of circumstances or facts either known to a prospective purchaser or of which he is chargeable with knowledge which imposes upon such purchaser the duty of inquiry. Where real estate is in the possession of someone other than the record owner, such possession is generally regarded as notice to the world of the interest represented thereby and is legally equivalent to the recording of such interest (Citations omitted). A purchaser is bound to inquire of the person in possession by what tenure he holds and what interest he claims in the premises (Citations omitted). Possession having the same effect as recording, charges a prospective purchaser with notice of all legal and equitable claims of the occupant (Citations omitted). Because possession has such substantial significance and consequences it follows that the possession or evidence of continuing acts of ownership thereof must be visible, open, exclusive and unambiguous. 106 Ill. App.2d at 21, 22.

Burnex Oil Co. v. Floyd makes it clear that possession of the property is equivalent to the recording of the installment contract. As long as the contract purchaser remains in possession of the property, one might conclude that title companies should be able to give the coverage set forth in paragraph 1.C. of the endorsement without requiring that the contract be recorded. On the other hand, in light of current statutory law (see below), which requires the recording of the contract, or memorandum thereof, a title company might prefer that the contract be recorded as a condition to offering this coverage. If the parties do not wish to record the contract or memorandum, then the examiner should raise an appropriate exception: “Consequences arising from the failure to record the contract described in Schedule A, or memorandum thereof, in the public records.”

Recording the Contract or Memorandum Thereof

As for recording the contract, or memorandum thereof, see 765 ILCS 70/2, which provides as follows:

After the effective date of this Act all contracts for the sale of a dwelling structure may be recorded or registered with the recorder or the Registrar of Titles in the same manner as a deed or other document relating to the title of the real estate to be sold. Any provision in a contract for the sale of a dwelling structure which forbids the contract buyer to record the contract or provides that recording shall not constitute notice or provides for any penalty for recording is void.

In addition, see section 20(a) of the Installment Sales Contract Act, or 765 ILCS 67/20(a). (Again, though, that this Act applies only to “serial” contract sellers. 765 ILCS 67/5 defines “seller” as “an individual or legal entity that possesses a legal or beneficial interest in real estate and that enters into an installment sales contract more than 3 times during a 12-month period to sell residential real estate.”)

765 ILCS 67/20(a) is as follows:

Within 10 business days of the date of sale of any residential real estate subject to an installment sales contract, and prior to any subsequent sale or other transfer of any interest in the residential real estate or contract by the seller, the seller shall record the contract or a memorandum of the contract with the county recorder of deeds. A memorandum of the contract shall be titled "Memorandum of an Installment Sales Contract" either in capital letters or underscored above the body of the memorandum. At a minimum, the memorandum of the contract shall include: the address, permanent index number, and legal description of the residential real estate subject to the contract; the names of the buyer and seller; and the date the contract was executed. The memorandum of the contract shall be signed by the buyer and the seller with the signatures notarized. However, any provision in an installment sales contract that forbids the buyer to record the contract or a memorandum of the contract is void and unenforceable.

Finally, see 765 ILCS 5/28:

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; but if such county is not organized, then in the county to which such unorganized county is attached for judicial purposes. No deed, mortgage, assignment of mortgage, or other instrument relating to or affecting the title to real estate in this State may include a provision prohibiting the recording of that instrument, and any such provision in an instrument signed after the effective date of this amendatory Act shall be void and of no force and effect.

This endorsement is usually issued to 1-4 residential property. With underwriter approval, the examiner can consider issuing it for other types of real estate. Note that if the property is vacant land, and the buyer desires this coverage, then the contract must be recorded. See Beals v. Cryer, 99 Ill. App. 3d 842, 426 N.E.2d 253 (5th Dist. 1981). This case concerns a dispute between the contract purchaser and a creditor of the contract seller. The purchaser argued that his acts of possession—cutting the grass—were sufficient notice of his interest in the land. The court rejected the purchaser’s contention that this “possession” constituted notice.

A purchaser of vacant land should always insist that the contract, or memorandum thereof, be recorded. The recording puts third parties on notice of the contract purchaser’s interest in the land. If the contract or memorandum is not recorded, a subsequent judgment creditor of the seller might not have any notice of the contract purchaser’s interest in the land. With no notice of this interest, the judgment creditor might be able to foreclose his judgment, free and clear of the installment contract.

Example: Seller and Buyer enter into an installment contract to purchase vacant land. Buyer makes a substantial down payment towards the contract. Neither the contract nor a memorandum of contract is recorded. After the contract is executed, a judgment against the seller is recorded. The judgment is quickly foreclosed. Because no evidence of the contract was recorded, and because the buyer was not in possession of the vacant land, the foreclosure of the judgment resulted in the extinguishing of the installment contract.

Other Matters

In order to obtain Endorsement B” coverage, the contract purchaser must be the equitable owner of the land. If asked to consider this endorsement, the title company will want to examine the installment contract. It is possible to negate equitable conversion by adding appropriate language to the contract. For example:

No right, title, or interest, legal or equitable, in the premises, or any part thereof, shall vest in Purchaser until the delivery of the deed aforesaid by Seller, or until the full payment of the purchase price at the times and in the manner herein provided.

 If a “no equitable conversion” clause has been added to the contract, the title examiner should decline to extend this coverage to the contract purchaser. When a “no equitable conversion” clause is added to the contract, the contract purchaser is more like a “lessee with an option to buy” and less like an installment contract purchaser who has an equitable interest in the land.

An Additional Title Policy Exception

In the 1980s title companies would usually raise the following exception on a policy when insuring a contract purchaser:

The rights of the Insured under this policy shall be subject to the defenses, if any, the Company might have against the party in title to the estate or interest described in Schedule A.

This exception relates to matters known to the contract seller but not disclosed to the contract purchaser. An example might be an undisclosed contract to perform work on the land, resulting in the recording of a mechanics lien claim. If the title company were insuring the fee simple owner of land, and this owner let a contract that resulted in the recording of a mechanics lien claim, the title company would probably deny the tender of a title claim as a matter “created, suffered, assumed, or agreed to by the Insured Claimant.” That is, the matter would normally be excluded from title policy coverage pursuant to Exclusion 3(a) of the ALTA 2006 Owner’s Title Insurance Policy.

This exception should be raised on any contract purchaser’s owner’s title insurance policy. Any request to waive the exception should be referred to a title company underwriter.

Insuring the Mortgage of a Contract Purchaser

An examiner might be asked to insure the mortgage of a contract purchaser. This can be done; however, an underwriter should be consulted. The underwriter will want to make sure that the contract does not negate equitable conversion. Also, the underwriter will want to make sure that the loan policy is subject to the contract to purchase. The underwriter will also want to make sure that the lender’s closing instructions do not contain the traditional “first lien” language.

This is an important consideration. When insuring the mortgage of a contract purchaser, the lender will never have a so-called “first lien.” The loan policy will always be subject to the contract to purchase, and normally the lender will not want to have its policy subject to this prior contract to purchase. The reason for this is that if the contract purchaser fails to make payments pursuant to the contract, the contract seller can foreclose this contract pursuant to the Illinois Mortgage Foreclosure Law, extinguishing the lien of this mortgage in the process.

Of course, if the parties were to subordinate the contract to the lien of the mortgage, the contract to purchase could be shown in Part II, Schedule B of the loan policy.

Part III: The Installment Contract, Equitable Conversion, and Lien Protection

Consider another example of equitable conversion:

Issue: Post-Contract Judgments Recorded Against the Contract Seller

Example Number One: Seller owns a single family residence. In 2019 Seller enters into an installment contract to sell the residence to Buyer. The contract has a three-year balloon payment. In 2022 Seller’s attorney orders a new title insurance commitment to bring down title prior to the execution of a deed of the residence from Seller to Buyer. Seller’s attorney discovers that in 2021 a judgment creditor recorded a $50,000 memorandum of judgment against Seller.

This example is similar to the previous example, but with one crucial difference. In this example, assume that the contract contains a “no equitable conversion” provision such as outlined above and set forth below:

No right, title, or interest, legal or equitable, in the premises, or any part thereof, shall vest in Purchaser until the delivery of the deed aforesaid by Seller, or until the full payment of the purchase price at the times and in the manner herein provided.

With this provision in the contract, Buyer is no longer an equitable owner of the land. Indeed, he has no interest in the land; Buyer is essentially “renting to own” the home while he has been in possession of the home. Even though Buyer had executed an installment contract to buy the land, he had no equitable interest in the land that was superior to the interest of Seller’s subsequent judgment creditor. Because the buyer had no equitable interest in the land, the lien of Seller’s judgment, although subsequent to the installment contract, was a lien on the land that was superior to the installment contract. See Hayes v. Carey, 287 Ill. 274, 122 N.E. 524 (1919), and Vereyken v. Annie’s Place, Inc., 964 F.2d 593 (Mich., 1991), which are discussed below.

Issue: Post-Contract Judgments Recorded Against the Contract Purchaser

Now consider a second example:

Facts, Example Number Two: Seller owns a single family residence. In 2019 Seller enters into an installment contract to sell the residence to Buyer #1. Buyer #1 goes into possession of the residence. The contract has a three-year balloon payment due in 2022. In February of 2021 Buyer #1 stops making installment payments to Seller. In June of 2021 Buyer #1 moves out of the home during a weekend, abandoning the property. In August of 2021 Seller finds a new buyer for the home—Buyer #2. Seller’s attorney orders a new title insurance commitment to bring down title to the home. When Seller’s attorney receives the title insurance commitment, he discovers that in 2020 a judgment creditor recorded a $50,000 memorandum of judgment against Buyer #1, the previous contract purchaser.

The abbreviated facts of the second example are as follows:

Seller owns a single family residence. Seller sells the residence to Buyer #1 on installment contract. Buyer #1 defaults on the contract and moves out of the residence. Seller agrees to sell the residence to Buyer #2. Seller orders a new title insurance commitment. Seller discovers that a creditor has recorded a judgment against Buyer #1. Question: How can Seller now sell the home to Buyer #2 free of the judgment?

Assume that in this case the installment contract did not negate equitable conversion. Does this mean that Buyer #1 is the equitable owner of the land? If Buyer #1 is the equitable owner of the land, can a recorded judgment against Buyer #1 attach to Buyer #1’s equitable interest in the land?

The answer to both questions is yes. Consider both the following case law and this question: What is the effect of the contract purchaser’s judgment liens on the contract seller’s legal interest in the land being sold via installment contract?

See Farmers State Bank v. Neese, 281 Ill. App. 3d 98, 665 N.E.2d 534, 216 Ill. Dec. 474 (1996). In July 1989 Thomas and Susan Neese contracted to purchase land from Wade on a five-year installment contract. In November 1989 they obtained a loan from the bank; they assigned their contract to the bank as security for the loan. In July 1991 the IRS filed a notice of tax lien. In June of 1992 the bank recorded both the contract and the assignment. After the IRS filed the notice, the Neeses defaulted on their loan payments, and in July 1994 the bank initiated foreclosure proceedings.

The bank argued that its security interest was prior to the IRS lien. The court disagreed; citing Shay v. Penrose, the court stated that “at the time the tax lien was filed, the Neeses had equitable title to the property in question. There was thus an interest to which the IRS lien could attach.” 281 Ill. App. 3d at 103. However, because the bank failed to record the contract and assignment prior to the recording of the IRS lien, “the bank’s interest as assignee was not perfected and was properly subordinated to the IRS lien.” 281 Ill. App. 3d at 104.

In Hayes v. Carey, 287 Ill. 274, 122 N.E. 524 (1919), Thomas and Margaret Carey executed an installment contract to buy a farm in 1912. The Careys never made a payment towards the contract, and so the parties entered into a lease in 1914, thereby allowing the Careys to remain on the farm. In 1915 the contract was inexplicably recorded. In 1916 James Cleary, a judgment creditor of Mr. Carey, attempted to levy on Carey’s interest in the farm.

The court determined that because Carey had abandoned the contract, he had no equitable interest in the farm, and that therefore, there was no equitable interest to which the judgment could attach. The court stated that “since Carey had lost all right to enforce the contract by its abandonment and forfeiture, a sale of his interest in the land under the execution would convey no title, and could have no other effect than to cloud the title of the defendants in error.” 287 Ill. at 279.

But because Carey never made a contract payment, he did not have any equity in the property. This is the same fact pattern in Vereyken v. Annie’s Place, Inc., 964 F.2d 593 (Mich., 1991). In Vereyken the court stated that “although the government may be correct in saying that its liens attached to the land contract interest of the vendee, the vendee’s equitable title was in effect worthless in dollar terms since there was nothing to which the liens attached, except perhaps the vendee’s right to a deed upon full payment.” 964 F.2d at 594-95.

These cases illustrate two important concepts: one, a judgment can attach to a contract purchaser’s interest in land, but two, in order for said lien to attach, the contract purchaser must have some equity in the land. These two points are set forth in the following case, Orme v. United States, 269 F.3d 991 (Montana, 2001).

The federal court in Orme distinguished the Vereyken decision. In Orme v. United States the Ormes sold property to Mr. and Mrs. Burgess in 1989 pursuant to an installment contract. In 1994, the United States filed a federal tax lien against the Burgesses. In 1997 the Burgesses forfeited the contract, the contract was terminated, and the Ormes recorded a quit claim deed that had been held in escrow.

When the Ormes attempted to sell the property to another buyer, they discovered the federal tax lien. The Ormes then filed a quiet title action in state court, and the United States removed the case to federal court. The district court granted the Ormes’ motion for summary judgment, and the United States appealed.

Citing Drye v. United States, 528 U.S. 49, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999); 26 U.S.C. Section 6321; and applicable state law, the U.S. Court of Appeals, Ninth Circuit, held that a federal tax lien may attach to the equitable interest of a contract purchaser. The court also cited 26 U.S.C. Section 7425(b): “A nonjudicial sale of property is made ‘subject to and without disturbing federal tax liens if (1) the federal tax liens were filed more than 30 days before the sale, and (2) notice of the sale is not given to the IRS in accordance with Section 7425(c)(1).” 269 F.3d at 994. The 9th Circuit Court of Appeals concluded:

Because the Ormes terminated the contract without giving notice as required under Section 7425(b) and because the federal tax lien was filed more than 30 days before the termination, the federal tax lien survived the Ormes’ forfeiture of the land sales contract (citations omitted). Furthermore, when the Ormes recorded the quit claim deed to the property on July 11, 1997, the Burgesses had built up $13,457.44 of equity, leaving a balance of $11,542.56 in principal on the $25,000 purchase price. Indeed, when the Government filed its lien, the Burgesses had already established approximately $10,000 in equity. Thus, unlike in Vereyken, where the vendee had built up no equity, the Government’s lien in the amount of $5,312.22 could be fully satisfied by the Burgesses’ equitable interest in the property. 269 F. 3d at 996.

General Observation

It seems clear that if Buyer #1 has any equity in the land at all, the title company cannot automatically waive a recorded judgment that is recorded against Buyer #1 when preparing to issue a title policy in favor of Buyer #2.

Equitable conversion is a two-edged sword that cuts both ways. It protects the contract purchaser against the enforcement of any judgments against the contract seller that are recorded during the pendency of the contract. But equitable conversion also creates a real property interest to which the contract purchaser’s judgments can attach.

The Basic Problem

Facts

Seller owns a single family residence. Seller wants to sell the residence to Buyer via an installment contract. Sam is the attorney for Seller, and Bob is the attorney for Buyer.

Issue

Sam represents Seller, and he is concerned about judgments recorded against Buyer. Sam wants the installment contract prepared so that equitable conversion is negated. This way, if a lien is recorded against Buyer during the pendency of the contract, and then Buyer later defaults, Sam can convince the title company that the contract was basically a “rent to own” contract—that is, since the judgment against Buyer could not attach to the land because Buyer had no equitable interest in the land, then if Sam found a new buyer of the property, the title company could insure New Buyer free and clear of the judgment against the original buyer.

But Bob represents Buyer, and he is concerned about liens recorded against Seller. Bob wants the installment contract drafted so that Buyer is the equitable owner of the land—that is, he does not want the contract to include a “no equitable conversion” provision. If Buyer is the equitable owner of the land, and if a memorandum of contract is recorded, Bob can ask the title company to issue its policy insuring Buyer, but with the additional policy endorsement, insuring against post-policy (and post-contract) judgments recorded against Seller.

In other words:

Sam represents Seller, and he does not want equitable conversion in the contract. Bob represents Buyer, and he wants equitable conversion in the contract.

Question

Is there a solution to this dilemma?

Answer

Yes, there is. There are actually two possible solutions.

First, the contract could be prepared so that it contains provisions for equitable conversion. However, the contract purchaser would be an Illinois land trust. Thus, the risk of post-contract/post-policy judgments being recorded against Buyer, individually, would be minimized. If a memorandum of contract is also recorded, the title company could issue its title policy endorsement to Buyer, thus offering insurance over Seller’s possible post-contract judgments.

But the second solution is simpler, easier, and better. Buyer can execute the contract as contract purchaser. The contract should not negate equitable conversion. If a memorandum of contract is recorded, the title company could issue its title policy endorsement to Buyer, thus offering insurance over Seller’s possible post-contract judgments. If a post-contract judgment is recorded against Buyer, Seller can foreclose its installment contract like a mortgage, thus wiping out any post-contract judgment against Buyer. In this regard, see 735 ILCS 5/15-1106(3)(c).

Is Forfeiture of the Installment Contract an Alternative Remedy? (The short answer is no.)

Back in the early 1980s the late Peter A. Hess wrote a treatise on contract forfeitures. At that time, the pamphlet was required reading for every real estate attorney.

Question: Can’t the attorney simple declare a forfeiture of an installment contract and eliminate post-contract liens that are recorded against a contract purchaser who is in default of the contract?

Answer: Forfeiture is an appropriate remedy for eliminating the interest of a defaulting contract purchaser. However, it cannot eliminate post-contract liens. In the event the attorney forfeits a contract and then discovers one or more judgments recorded against the contract purchaser, the title examiner must determine if the contract purchaser has any equity in the land. The examiner must obtain a copy of the original contract between the buyer and seller. The examiner must also request an affidavit from the seller that sets forth the original amount of the contract; the amount of money the buyer has paid towards the contract; when the buyer stopped making payments on the contract; the amount of the unpaid contract balance; and the amount of any defaults (e.g., if the seller has paid insurance, taxes, attorney's fees, which can be charged to the buyer). If the contract purchaser has any substantial equity in the land, then the examiner cannot waive any judgments recorded against the purchaser. Instead, the liens must be underwritten in the conventional fashion. (See Part IV for further discussion.)

Additional Thoughts on Equitable Conversion

In Eade v. Brownlee, 29 Ill.2d 214, 193 N.E.2d 786 (1963), the Supreme Court was asked to consider a contract that contained a “no equitable conversion” clause. In Eade the court looked to the intent of the parties, as evidenced in this clause, in determining that there was no equitable conversion.

But in Cox v. Supreme Savings and Loan, 126 Ill. App. 2d 293, 262 N.E.2d 74 (1970), the appellate court ruled on the rights of parties under a contract that had a “no equitable conversion” clause identical to the clause of the contract litigated in Eade. Here, as in Eade, the court looked to the intent of the parties, but held that the clause was not controlling, as a rider attached to the contract expressed an intent that was contrary to the “no equitable conversion” clause of the contract:

The buyer went into possession on the date of the contract, collected the rents, issues and profits, paid the taxes and insurance, leased the apartments and performed whatever repairs were done to the building. . . . The rider [to the contract] also required the purchasers to ask for consent and approval of the seller for any capital or major expenditures before any contract for such expenses could be made. The contract required the purchasers to correct five code violations at their own expense. . . . It seems almost axiomatic that this rider to the contract is attached to alter, modify or change the normal course of events as described in the articles of agreement. Indeed the contract is expressly stated to be ‘subject to a rider agreement attached hereto.” . . . . In the face of the rider to this contract, it is abundantly clear that paragraph five [the ‘no equitable conversion’ clause] was in fact and in law nullified by the rider. It is fictional rather than factual to hold that the purchasers here under paragraph five of their agreement had nothing but a possessory right. To so hold is to fly into the face of the language and the conduct of both parties. 126 Ill. App. 2d at 295-97, 301.

As Michael J. Rooney points out in his article, “Installment Contracts: The Illinois Perspective,” published in the October 1980 issue of the Illinois State Bar Association’s Real Property newsletter:

In other words, even if the parties provide that the purchaser has no equitable interest, when they also provide that the purchaser must maintain insurance, pay taxes, be entitled to possession, and exercise such other dominion and control as would be exercised by an ‘owner’ of real estate, how may it be said that the purchaser does not have an interest in the premises? Can an attorney convert a horse into a zebra simply by changing its name?

Negating Equitable Conversion when Drafting the Installment Contract

Assume, after all of this, that the attorney nonetheless wants to effectively draft an installment contract that negates equitable conversion. As noted above, the contract in Cox v. Supreme Savings and Loan contained a “no equitable conversion” clause, but the court determined that the rider to the contract, which made it clear that the purchasers had more than a mere possessory right to the property, nullified this clause.

Note, however, that the court in Cox cites City of Chicago v. Mandoline, 26 Ill.App.2d 480, 168 N.E.2d 784 (1st Dist. 1960). If the attorney uses both Cox and Mandoline as a guide in drafting the contract, then perhaps the attorney might be able to negate equitable conversion.

In the Mandoline case Mandoline sold property on contract to Powe. The contract contained a “no equitable conversion” clause. A few months later, the City of Chicago filed a statement of claim against both Mandoline and Powe, charging them with twenty-four separate violations of the Municipal Code.

Mandoline argued that when Powe moved into the property, Powe assumed exclusive control of it. Because Mandoline was neither in possession or control, Mandoline had no duty to comply with the ordinances.

The appellate court determined that Mandoline, the contract seller, was the owner of the land, and that under the articles of agreement he had complete control of the property to the exclusion of Powe, the contract purchaser.

The court noted such factors as the following:

• Powe was not permitted to record the contract.

• Powe could not sublet the property without Mandoline’s permission.

• Powe could not make any repairs that would constitute a lien on the premises, and he was required to submit to Mandoline every contract, together with the plans, for any improvement to the property.

The court concluded by stating the following:

Actually, all that Powe received under the agreement was the right to occupy the premises as long as he made the specified monthly payments. He could not obtain control until he received the deed. . . . It thus appears that Mandoline was not only the owner of the property and thus liable under the ordinances for any violations, but that under the articles of agreement he had complete control of the property to the exclusion of the contract purchaser, Powe. 26 Ill.App.2d 483-84.

But in Cox v. Supreme Savings and Loan Association, the court noted that the contract purchasers had much more than the mere right of occupation:

The buyer went into possession on the date of the contract, collected the rents, issues and profits, paid the taxes and insurance, leased the apartments and performed whatever repairs were done to the building. . . . The rider [to the contract] also required the purchasers to ask for consent and approval of the seller for any capital or major expenditures before any contract for such expenses could be made. The contract required the purchasers to correct five code violations at their own expense. . . . In the case at bar, the purchasers exercised all of the rights of an owner and performed all the duties of an owner and were prohibited only from making major or capital improvements without authority of the seller. The purchasers’ rights here far exceeded the right to possession only. They, not the seller, exercised all of the prerogatives of ownership with the limitation as to capital improvements previously noted. 126 Ill.App.2d 295-97.

It appears that these two cases may offer guidance in drafting an installment contract so as to avoid the application of the doctrine of equitable conversion. It seems that in order to avoid triggering the doctrine, the contract must be drafted so that the contract purchaser is given, in the words of the Cox court, “the right to possession only.”

That is, Cox and Mandoline represent two opposite ends of the equitable conversion spectrum. The more the contract is drafted like the one in Cox, the more likely a court will find that the equitable conversion doctrine applies. Conversely, the more the contract is written with Mandoline in mind, the more a court might conclude that there is no equitable conversion.

Putting It All Together

Consider this example:

Sellers sells a home via installment contract to Buyer #1. A memorandum of contract is recorded against the home. Buyer #1 defaults on the contract and abandons the property. Seller prepares to sell the home to Buyer #2. A title search discloses a $10,000 judgment recorded against Buyer #1. What can seller do? Can the home be sold to Buyer #2 free and clear of the judgment?

In this case, assume that the installment contract negated equitable conversion. But per Cox v. Supreme Savings and Loan and City of Chicago v. Mandoline, the contract should be reviewed to make sure that the terms of the contract do not negate the “no equitable conversion” provisions of the contract. But what if the contract did not negate equitable conversion? In that event, the seller should furnish the title company a statement as to how much equity (i.e., money) Buyer #1 had in the land. In both Hayes v. Carey and Vereyken v. Annie’s Place, Inc. the court determined that if the equitable owner has no equity in the land, then there is no real equitable title to which a lien could attach. See, e.g., Vereyken , where the court stated that “although the government may be correct in saying that its liens attached to the land contract interest of the vendee, the vendee’s equitable title was in effect worthless in dollar terms since there was nothing to which the liens attached, except perhaps the vendee’s right to a deed upon full payment.” (Furthermore, note that it is possible that any equity the contract purchaser might have had in the land might have dissipated due to the possible contract-mandated payment of maintenance costs, utilities, and taxes. Furthermore, the payment of attorney’s fees resulting from Buyer #1’s abandonment of the property might also result in the loss of the contract purchaser’s equity.)

Thus, if it is clear that Buyer #1’s contract (both in form and substance) negates equitable conversion, the title company may be willing to waive the judgment that was recorded against Buyer #1.

Second, in the alternative, if Buyer #1’s contract did not negate equitable conversion, resulting in Buyer #1 being the equitable owner of the land, but if it can be shown that Buyer #1 had no real equity (i.e., money) in the land, the title company may be willing to waive the judgment that was recorded against Buyer #1.

Equitable Conversion and the Installment Sales Contract Act

The Installment Sales Contract Act, codified at 765 ILCS 67/1 et seq., does not contain a provision that prohibits the addition of a “no equitable conversion” clause to the contract. That is, the Act does not contain a provision such as:

Any provision in an installment sales contract that negates the doctrine of equitable conversion or otherwise provides that the Purchaser shall acquire no right, title, or interest, legal or equitable, in the land until the delivery of the deed or until the full payment of the purchase price is void and unenforceable.

Is this a problem?

Example: Owner sells a single family residence to Buyer via an installment contract. The purchase price is $100,000. The contract contains the afore-mentioned provision that negates equitable conversion. Six months after the contract was executed, a $12,000 judgment is recorded against Buyer. Fifteen months after the contract was executed, after Buyer has paid $15,000 towards the contract price, Buyer defaults on the contract. Seller comes to the title company and tells the examiner that he has a new contract purchaser for the property. Seller points to the provision in the contract that was signed by Buyer that negates equitable conversion. Seller tells the examiner that the contract is essentially a “rent to own” contract. That is, since Buyer acquired no interest in the land pursuant to this provision, the Buyer was basically a tenant, and therefore, the examiner should be able to waive the judgment that was recorded against Buyer.

Question: If the contract did not contain such a provision, would the examiner have been less willing to waive the recorded judgment? Instead, would the examiner have insisted that the contract be foreclosed, thus providing for the lien to be foreclosed out through foreclosure and providing for maximum protection of Buyer (who might still be in possession of the land?)

Equitable Conversion and the Title Company

Example Number One

Charles owns a parcel of real estate. In 2016 Charles executes an installment contract in favor of Baker. A memorandum of contract is recorded. It is now 2019. Baker is ready to get a mortgage and buy out his contract. Unfortunately, a $10,000 judgment has been recorded against Charles, the contract seller.

Summary of the Facts

Charles owns the real estate in fee simple. Baker is buying the real estate pursuant to an installment contract. A judgment has been recorded against Charles.

Question

Can Baker somehow acquire title to the property free and clear of this judgment that has been recorded against Charles, the owner of the land?

Answer

Possibly yes. The title company needs more information before making a determination. What is the nature of the land? If the land is improved, who is in possession of the property? Who is paying the real estate taxes? The title company must review a copy of the contract. Does the contract negate equitable conversion? Furthermore, the examiner must consider the facts of the Cox and Mandoline cases, discussed above. The more the contract is drafted like the one in Cox, the more likely a court will find that the equitable conversion doctrine applies. On the other hand, the more the contract is written with Mandoline in mind, the more a court might conclude that there is no equitable conversion.

Assume that in this example, a memorandum of contract was recorded, and thus third parties have been put on notice of Baker’s interest in the land. The examiner must verify that the contract and any amendments thereto do not contain a “no equitable conversion” clause. The examiner must look at the terms of the contract. The examiner must make sure the contract is not like a Mandoline contract—that is, a contract giving the contract purchaser possession only. If the contract is not like a Mandoline contract, the examiner may be able to insure title in Baker, the contract purchaser, free and clear of the judgment against Charles, the owner and contract seller.

Example Number Two

Facts A person buys a home pursuant to an installment contract. During the pendency of the contract, a judgment is entered against the contract purchaser for $10,000. A memorandum of judgment is recorded. The contract purchaser is now in the process of obtaining a mortgage to pay off the contract so he can acquire fee title to the property. The contract purchaser has paid $30,000 to the contract seller pursuant to the installment contract. Question

Is this mortgage considered a purchase money mortgage, or a refinance? If the mortgage is a purchase money mortgage, the title company can show the judgment in Part II, Schedule B of the loan policy. But if the mortgage is a refinance, then the judgment will have to be paid off or otherwise satisfactorily underwritten.

Answer The examiner must look at the copy of the contract. Did the contract waive equitable conversion? If so, then it is possible that this mortgage will truly be a purchase money mortgage.

But the examiner must also make sure that the terms of the contract do not negate the "no equitable conversion" clause.

If there is no equitable conversion, then the examiner can treat the mortgage as a purchase money mortgage and show the judgment in Part II, Schedule B of the loan policy.

On the other hand, if the contract did not waive equitable conversion, then, pursuant to Shay v. Penrose, the contract purchaser became the equitable owner of the land, and that is an interest to which the judgment could attach.

In this case, the contract contained a “no equitable conversion” clause, and there were no contrary contract provisions. The examiner must now conduct further analysis.

A true purchase money mortgage is a mortgage used in a situation where, “but for” the mortgage, the property could not be purchased.

In this case, the property was being purchased via an installment contract. However, the contract purchaser had paid only $30,000 towards the purchase price of $100,000. Thus, the contemplated mortgage is in fact a purchase money mortgage.

Yes, the contract purchaser had paid $30,000 towards the purchase price, but this does not mean that the contract purchaser has $30,000 worth of equity in the property. Remember, the contract contained a “no equitable conversion” clause.

Because the contract had a “no equitable conversion” clause, it is as if the contract purchaser was a tenant with no equitable interest in the land who was making “rent to own” payments. Thus, the situation is as if the contract purchaser has made a $30,000 down payment towards the purchase of property and now needs a purchase money mortgage to buy the property.

In this case, because the contract had a “no equitable conversion” clause, resulting in the contract purchaser being akin to a tenant making “rent to own” payments, the mortgage is a purchase money mortgage. The examiner can show the judgment in Part II, Schedule B of the loan policy, and show the judgment in Schedule B of the owner’s policy.

Again, if the contract did not waive equitable conversion, then, pursuant to Shay v. Penrose, the contract purchaser became the equitable owner of the land. Thus, the mortgage is not a true purchase money mortgage. That is, a purchase money mortgage answers the issue, “but for the mortgage, the purchaser could not purchase the land. But in this case, the contract purchaser IS the equitable owner of the land, and thus, the mortgage is not a purchase money mortgage.

Part IV: Insuring Title after the Forfeiture of the Installment Contract

Introduction

Under an installment contract, the seller has to convey title to the land once the purchaser has paid the purchase price. The contract may state that the buyer has to pay the entire price, or, the contract may state that once the buyer has paid a certain amount, the seller will execute a deed and take back a purchase money mortgage. The purchaser will usually make contract payments, which are made up of principal and interest, just like a mortgage.

But: if the purchaser does not keep current with the payments, the contract may provide for the termination of the purchaser's interest. In addition, the contract may allow for the seller to re-enter the land and take possession of it.

But in order to do this, the contract must provide for this option. That is, the contract must contain a provision that allows the seller to declare a forfeiture of the contract in the event the purchaser defaults.

If the contract does not provide for forfeiture as a remedy, then the seller's only right is one of rescission - i.e., the seller must refund the purchaser's payments, less a fair amount of rent. See People ex rel. Smith v. Mersinger, 18 Ill. 2d 486, 165 N.E.2d 308 (1960).

Thus, there is a big difference between forfeiture and rescission. In forfeiture, the seller keeps all the money. In rescission, the seller has to give some of the money back.

The Installment Contract and the Illinois Mortgage Foreclosure Law

If the title company is asked to insure title after a forfeiture of contract, the first thing the title company will want to do is to examine the contract to determine if the contract contains a provision that provides for a forfeiture.

Any discussion of forfeitures of contracts must be done under the umbrella of the Illinois Mortgage Foreclosure Law, or IMFL.  (735 ILCS 5/15-1101 et seq.) Why?  Under the IMFL, certain installment contracts are deemed to be mortgages and are required to be foreclosed as such.

IMFL divides installment contracts into three different types:

1. Those contracts that must be foreclosed under IMFL, and thus cannot be forfeited;

2. Those contracts that may be foreclosed under IMFL, and thus may instead be subject to forfeiture;

3. Those contracts that cannot be foreclosed under IMFL, and thus must be subject to forfeiture or some other remedy.

• As to contracts that must be foreclosed as mortgages under the IMFL, all three of the following requirements must be met; see 735 ILCS 5/15-1106(2):

1. The contract must be entered into after July 1, 1987 (the effective date of the IMFL);

2. The contract must be for residential real estate;

3. The unpaid amount of the contract must be less than 80% of the original price. In other words, the contract purchaser must have already paid down 21% or more of the price. In this regard, see also 735 ILCS 5/9-102(a)(5).

Thus, if all three factors are present, the contract seller must foreclose the contract as a mortgage. But if even one factor is missing, then the contract can be forfeited.

• Contracts that may be foreclosed under the IMFL:

Any contract entered into after July 1, 1987.  Thus, the contract can either be foreclosed or it can be forfeited.  See 735 ILCS 5/15-1106(3)(c); see also 735 ILCS 5/15-1107(c).

• Contracts that may not be foreclosed under the IMFL:

Pre-July 1, 1987, contracts. Thus, one could either forfeit the contract or one could foreclose it under the "old" mortgage foreclosure law. See 735 ILCS 5/15-1106(3)(c).

Illinois Mortgage Foreclosure Law Procedural Issues

Procedurally, the foreclosure of a contract is similar to the foreclosure of a mortgage. That is, one would file the complaint and record the notice of foreclosure.

The Mortgage Foreclosure Act provides for reinstatement, a chance for the buyer to cure defaults. If the contract is foreclosed, there is a 90 day period of reinstatement, commencing upon service of the complaint on the buyer. See 735 ILCS 5/15-1602.

The contract purchaser would have the right to redemption under the IMFL. If the property is not redeemed, a sale is held and a deed can eventually be issued. See 735 ILCS 5/15-1603.

A Synopsis of the Steps of Analyzing a Forfeiture Problem

1. Read the contract. Is there a default under the terms of the contract? Does the contract provide for forfeiture as a remedy?

2. If the answer to both of the above questions is yes, then a warning notice (see below) must be prepared and served on the contract purchaser.

3. Once the warning notice is served, and the proper time period has elapsed, and the buyer has not cured the default, then a declaration of forfeiture must be prepared and recorded.

4. If the buyer is still in possession, then a forcible entry and detainer action pursuant to 735 ILCS 5/9-101 et seq. is commenced. This action seeks possession of the property.

5. If the contract seller is successful, and the buyer is still in possession, then a court order is issued, asking that the sheriff physically eject the purchaser from the property.

Step One—The Warning Notice

The warning notice serves three purposes:

1. It reinstates the "time is of the essence" provision of the contract. Many contract sellers are too lenient—that is, they accept late payments. If a seller accepts such payments, courts have ruled that the seller has waived his right to now insist on prompt payments. This is the case, unless the seller gives the buyer notice that in the future he intends to demand strict adherence to the contract. See Hill v. Alber, 261 Ill. 124, 103 N.E. 612 (1913); Fox v. Grange, 261 Ill. 116, 103 N.E. 576 (1913); Kirkpatrick v. Petreikis, 44 Ill. App. 3d 575, 358 N.E.2d 679, 3 Ill. Dec. 281 (1976).

2. It also gives the purchaser the statutorily mandated time period of “at least 30 days” to cure all defaults. See 735 ILCS 5/9-104.1(a); Chrisman v. Miller, 21 Ill. 227 (1859); Given v. Lofton, 359 Ill. 228, 194 N.E. 512 (1935). Note that the statute states that "at least 30 days" is necessary. This is not the same as "within 30 days."

3. It is a condition precedent for the forcible entry and detainer action—that is, one can maintain an action for possession only when a signed written demand has been made. See 735 ILCS 5/9-104.1(a); 735 ILCS 5/9-102(a)(5). Thus, this demand serves this statutory requirement. See Brannen v. Seifert, 2013 IL App (1st) 122067, 1 N.E.3d 1096, 377 Ill. Dec. 209 (1st Dist. 2013)

All interested parties must be served with notice of the demand. If the parties are husband and wife, they each should be served individually. Personal service is best. If this is not possible, use registered mail or certified mail, return receipt requested. See 735 ILCS 5/9-104.1(c).

Elements of the Warning Notice

1. The warning notice should be addressed to and served upon all interested parties.

2. It should recite the particulars of the making of the original contract and all assignments, if any.

3. It should correctly describe the property.

4. It should recite the default or forfeiture provisions of the contract.

5. It should set forth all of the defaults of the contract purchaser.

6. It should notify the purchaser of the seller's intention to declare a forfeiture if the purchaser does not cure the defaults and the seller's intention to file suit under the Forcible Entry and Detainer Act to obtain possession.

7. It must be signed by the seller or his agent.

8. It must be notarized.

9. An affidavit of service must be attached to the warning notice.

Step Two—The Declaration of Forfeiture

After the time set forth in the warning notice has expired, and the purchaser has not cured the defaults set forth in the notice, the declaration of forfeiture should be prepared. The elements of the declaration are:

1. The declaration must contain a description of the original contract.

2. The particulars of the service of the warning notice must be included.

3. The declaration must set forth the defaults of the purchaser.

4. It must state that the purchaser has failed to cure the defaults.

5. It must state that because of these defaults, and that because the purchaser has failed to cure these defaults, a forfeiture is declared.

6. The declaration must contain the legal description of the property.

7. The seller should sign the declaration, and the signature should be notarized.

8. The affidavit of service should be attached to the declaration of forfeiture.

9. The warning notice should be attached to the declaration of forfeiture.

The declaration of forfeiture should be served in the same way that the demand notice is served. It should be served on the same parties.

The declaration of forfeiture should be recorded, if the contract requires it, or if the contract was previously recorded. If the contract has a clause in it, stating that the recording of the declaration of forfeiture is conclusive evidence of a forfeiture, then the declaration should be recorded. See Forest Preserve Real Estate Improvement Corp. v. Miller, 379 Ill. 375, 41 N.E.2d 526 (1942).

Step Three—The Demand for Possession

The demand for possession is not necessary unless the contract purchaser remains in possession after the forfeiture has been declared. The demand for possession addresses the issue of possession; it does not concern matters of title. The demand is governed by the provisions of the Forcible Entry and Detainer Act, which is set forth at 735 ILCS 5/9-101 et seq.

Provisions of the Forcible Entry and Detainer Act

There are various provisions of the Forcible Entry and Detainer Act. As indicated above, this comes into play when the purchaser is still in possession. See Reid v. Arceneaux, 63 Ill. App. 2d 113, 211 N.E. 2d 24 (1965).

If it appears that the plaintiff is entitled to the possession of the land, judgment for the possession thereof and for costs shall be entered in favor of the plaintiff. See 735 ILCS 5/9-110.

However:

If the contract was entered into after July 1, 1962, the court may stay any enforcement of a judgment, giving possession to the seller, for a period of not to exceed sixty days from the date of judgment. See 735 ILCS 5/9-110.

If the unpaid balance of the contract is less than 75% of the purchase price, the court shall stay the enforcement of the judgment for a period of 180 days from the date of the judgment. However, the court may grant a stay of less than 180 days (but in no event, less than sixty days), if the seller had previously granted extensions to the buyer to pay the amounts due, or for other good cause shown. See 735 ILCS 5/9-110.

If during the period of stay, the buyer pays the entire amount due up to that time--in other words, if the buyer cures all defaults--the contract shall remain in force. But note: the buyer can only seek this protection once every five years during the pendency of the contract. See 735 ILCS 5/9-110.

Note that this is similar to the provisions relative to reinstatement that are part of the Illinois Mortgage Foreclosure Law, or IMFL. See 735 ILCS 5/15-1602.

Some commentators may feel that this statutory provision puts a burden on the seller. The seller is forced to wait up to 180 days, with no income coming in to the owner, with the possibility that the buyer, at the end of 180 days, will still not cure the defaults. But remember that this is a forfeiture—the seller gets to keep all the money that has been paid, and he gets to keep the property, too. Thus, this provision may not be as harsh as it might at first seem.

If during the 735 ILCS 5/9-110 time period, the buyer cures all the defaults, he can go into court and file a motion, asking that the judgment for possession be vacated. If the court is satisfied that this has been done, it will grant the motion. But if the defaults have not been cured, enforcement of the judgment for possession can be done as soon as the stay period has expired. All the rights of the purchaser to the real estate are terminated. See 735 ILCS 5/9-110.

But remember: Forcible entry and detainer only goes to the issue of possession. A final order in a forcible entry and detainer case does not necessarily prevent the buyer from bringing an action for equitable relief later, based on some form of equitable title theory because of a partial payment of the contract price.

Title Company Procedures and Problems Concerning Contract Forfeitures

Assume that an attorney comes into the office of the title company and tells the examiner that he wants to forfeit an installment contract. He asks the examiner, "What do you need to waive this contract from the title commitment?” How should the examiner reply? What should the examiner ask for?

1. The examiner will want a copy of the original contract. Upon receipt, the examiner should examine it, making sure that the contract allows for a forfeiture of the contract.

2. The examiner should ask for a copy of the warning notice, together with the affidavit of service.

3. The attorney should give the examiner a copy of the declaration of forfeiture, together with the affidavit of service.

4. The examiner should request a copy of the order entered in the Forcible Entry and Detainer case that gives the seller possession.

5. Most importantly, the examiner should ask for an affidavit executed by the seller that includes the following: the original amount of the contract; the amount of the unpaid balance; the amount of money the purchaser has paid towards the contract; when the purchased stopped making payments; the amount of the defaults (e.g., if the seller has paid out money to pay for insurance, taxes, attorney's fees, and other items that should be charged to the buyer); whether the buyer is still in possession of the land; if the buyer is not in possession of the land, the identity of the person who is in possession of the land; and copies of all communications that have taken place between the buyer and seller, both written and oral. (The examiner will want to review these materials to make sure that the seller has not made any representations to the buyer that may have revived the contract after the forfeiture.) Finally, the affidavit should include a statement that the seller has made no defaults on the contract.

At this point the title company is faced with two problems. The first is possession. If the buyer is still in possession of the property, the title company should not insure title free and clear of the rights of the purchaser. Rather, the title examiner should tell the customer to come back when the purchaser has been ousted. The reason is simple: how can the title company insure over or waive the purchaser's rights pursuant to a forfeiture of the contract, when the purchaser is still in possession of the property by virtue of the contract?

But even if the purchaser is out of possession of the property, there is still a second problem. This concerns the contract purchaser's equity—that is, how much money has the purchaser paid on the contract? It is possible that the contract purchaser can later go into court and seek some kind of equitable relief, which is separate and apart from the issue of possession.

For this reason, if the purchaser has paid down a lot of money on the contract, and now the contract is forfeited, the examiner may want to insist that the seller go back into court, either on a quiet title action or an action for a declaratory judgment, and ask that the court determine that the purchaser has no interest in the land.

In the alternative, the seller should obtain a quit claim deed from the buyer. Perhaps the seller could give the buyer some “moving money” in exchange for a deed.

As a last result, the seller may have to foreclose his contract.

Equitable Conversion v. Equity

The Illinois Supreme Court case, Shay v. Penrose, 25 Ill.2d 447, 185 N.E.2d 218 (1962) describes the doctrine of equitable conversion, that upon the execution of a contract, the contract purchaser is the equitable owner of real estate, subject only to the lien of the contract seller for the unpaid balance of the purchase price.

These two concepts—equitable conversion and equity—have entirely different meaning, and they are treated quite differently when underwriting issues relating to installment contracts. Consider the following examples:

Example Number One

Adam owns lot 1. Adam executes an installment contract in 2019 wherein he agrees to sell lot 1 to Baker. Baker agrees to make installment contracts over the next five years. A memorandum of contract is recorded. Because the contract does not contain a “no equitable conversion” clause, Baker becomes the equitable owner of the land, subject to the payment of the contract purchase price.

In 2021 a judgment creditor records a judgment against Adam.

In 2024 Baker is ready to make his final installment payment. His attorney orders a title commitment, and only then does the attorney discover the judgment recorded against Adam. However, because of the doctrine of equitable conversion, and because a memorandum of contract was recorded, Baker’s interest as equitable owner of the land is superior to the lien of the judgment. The title company should be able to insure Baker, endorsing over the judgment. The amount of the lien is irrelevant in this example.

Example Number Two

Same facts as above, but in this example the contract between Adam and Baker contains a “no equitable conversion” clause. An example of a “no equitable conversion” clause is:

No right, title, or interest, legal or equitable, in the premises, or any part thereof, shall vest in Purchaser until the delivery of the deed aforesaid by Seller, or until the full payment of the purchase price at the times and in the manner herein provided.

Baker has been making installment payments towards the purchase price, but in this example he is not the equitable owner of the land. His legal status is more like a tenant with an option to purchase the real estate. Because Baker has no interest in the land, the judgment against Adam is a lien on the land that is prior to Baker’s contract interest.

Example Three

Adam owns lot 1. In 2019 he sells lot 1 to Buyer #1 pursuant to a five-year installment contract. Adam records a memorandum of contract against the property. The contract contains a “no equitable conversion” clause.

Buyer #1 makes three monthly installment payments but then stops making payments. A few months later, in 2020, a judgment creditor records a judgment against Buyer #1. Buyer #1 remains in possession of the land without making any further installment payments for a few more months, but then over the course of one weekend Buyer #1 moves out of the property without telling Adam.

Adam contacts his attorney, who begins contract forfeiture proceedings against Buyer #1. Adam lists the property for sale, and eventually a new buyer is found—Buyer #2. Adam’s attorney orders a title insurance commitment, and at that time Adam and his attorney discover the judgment recorded against Buyer #1.

There are two issues in this example—one, the contract interest of Buyer #1, and two, the judgment recorded against Buyer #1.

In this example, Buyer #1 has little equity in the land—he made only three installment payments, and he later abandoned the property. Even though Buyer #1 never executed a deed or release of contract back to Adam, the chances seem great that Buyer #1 will never come back and assert that he has an equitable interest in the land—not because of equitable conversion, but because of the meager installment payments he made toward the purchase price. Note that this is not a legal argument, it is just a reasonable and common sense conclusion based on a particular set of facts.

But as for the legal reasoning, consider these two additional arguments:

Because the contract contained a “no equitable conversion” clause, Buyer #1 never became the equitable owner of the land. His interest in the land was more like a tenant with an option to buy. Because Buyer #1 never had an interest in the land, there was no interest in the land to which the judgment could attach. The title company should be able to waive the judgment.

Second, assume that the contract did not contain a “no equitable conversion” clause. Buyer #1did not pay much money towards the installment contract. Assume that what money Buyer #1 did pay towards the contract was offset by Adam’s expenses, such as his legal fees. Therefore, these circumstances suggest that Buyer #1 had no equity (i.e., money) in the land to which the judgment could attach.

Again, consider what the court said in Vereyken v. Annie’s Place, Inc., 964 F.2d 593 (Mich., 1991). In Vereyken the court stated that “although the government may be correct in saying that its liens attached to the land contract interest of the vendee, the vendee’s equitable title was in effect worthless in dollar terms since there was nothing to which the liens attached.” 964 F.2d at 594-95.

Contract Forfeiture: A Summary

When insuring title after the forfeiture of a contract, here are the two key issues that the title examiner must consider:

• One, how much money has the contract purchaser paid towards the contract?

• Two, where is the contract purchaser? Is the purchaser still in possession of the property, or has the purchaser moved out of the property?

If the examiner has a situation where the purchaser has moved out of the property, but the purchaser has paid some money on the contract, but not a lot of money (e.g., 5% of the contract price or less), then the examiner might be able to insure title after the forfeiture without requiring the seller to go to court. Instead, the examiner could ask for an unsecured title indemnity (also known as a personal undertaking) to cover defense costs in the event the purchaser files a cause of action. Before considering this option, the examiner must feel confident that the contract seller will prevail in any subsequent cause of action brought by the contract purchaser.

If the contract purchaser has paid a lot of money towards the contract, it might be advisable for the examiner to instruct the seller to foreclose the contract rather than forfeit it. By foreclosing the contract, all of the buyer's rights (not just the possessory ones) are before the court and can be adjudicated. Foreclosure has an added benefit; the seller can avoid a possible subsequent title company requirement of going to court to quiet title to the land. Also, foreclosure might be the best remedy in the event the title examiner has to face a possible third issue: what if the contract purchaser not only has some equity in the land, but has some post-contract judgments entered against him as well?

If possible, the contract seller should always consider obtaining a post-forfeiture deed from the contract purchaser, even if the seller has to throw additional money at the purchaser. If the seller essentially bribes the purchaser with “moving money” in exchange for a deed, the seller effectively cures both possessory problems and possible “buyer’s equitable title” concerns without the risk of later possibly having to defend against a court case brought by the contract purchaser wherein the purchaser asserts some type of equitable interest in the land.

Conclusion

Public Act 100-416 (SB 885), effective January 1, 2018, created the Installment Sales Contract Act, codified at 765 ILCS 67/1 et seq. Perhaps the Illinois legislature should consider some legislative amendments to other statutes.

For example, perhaps the stay provisions of section 9-110 of the Forcible Entry and Detainer Act (735 ILCS 5/9-110) should be reviewed and amended. Is 180 days (or even sixty days) too long a time for a forfeited contract purchaser to remain in possession of the land? If the legislature is unwilling to shorten these time periods, then perhaps this Act should be amended to allow for the appointment of a receiver in certain instances. If a contract seller chooses to foreclose an installment contract, he can seek the appointment of a receiver pursuant to section 15-1704 of the Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1704). But there is no similar statutory remedy available to the contract seller who chooses forfeiture instead of foreclosure. The appointment of a receiver (if not to be in actual possession of the property, but at least to have “full power and authority to operate, manage and conserve” the property, might be beneficial to the owner of land who is forced to wait out the statutorily required 180 days.

Bibliography

Peter A. Hess, Forfeiture of Installment Contracts in Illinois (Chicago: Chicago Title Insurance Company, 1981) (Note: these materials originally appeared in an edition of Real Estate Litigation, published by the Illinois Institute for Continuing Legal Education.)

Michael F. Jones, “Drafting the Installment Contract,” Chicago Bar Record (September-October 1980), pp. 97-101.

Robert Kratovil, “Forfeiture of Installment Contracts in Illinois,” 53 Illinois Bar Journal, no. 3 (November 1964), pp. 188-197.

Michael J. Rooney, “Installment Contracts: The Illinois Perspective,” Real Property 26, no. 1 (October 1980), pp. 1-7.

Bankruptcy

General

BANKRUPTCY

By

Richard F. Bales

Introduction

How Bankruptcy Works

There is a meeting with the creditors. A bankruptcy trustee is appointed. The debtor’s assets are liquidated and distributed to the creditors in order of priority, as defined in the Bankruptcy Code. (11 U.S.C. § 101 et seq.). Secured creditors have priority over unsecured creditors.

• A secured creditor is a creditor that has property pledged as security for the debt.

• An unsecured creditor has no security pledged as collateral for the debt, just the promise to repay the debt.

Once the assets are liquidated and distributed, individual debtors receive an order of discharge.

A bankruptcy timeline might look like this:

• The automatic stay is imposed as to actions against the debtor; • The debtor’s assets are collected; • Creditors must file claims or forever be barred from enforcing a claim; • Claims are allowed or disallowed as they are filed; • Preferences and fraudulent transfers, if any, are adjudicated; • Creditors receive pro rata distributions of assets; these creditors are thereafter barred by the debtor’s discharge from bankruptcy from taking any further action against the debtor.

Key Concepts in Bankruptcy

There are several key concepts that underlie virtually every type of bankruptcy case.

The Automatic Stay (11 U.S.C § 362)

The automatic stay is imposed upon actions against the debtor and the property of the debtor once a bankruptcy petition has been filed. The automatic stay gives the debtor “breathing room”—that is, the stay gives the debtor protection against the collection efforts of his creditors.

Any action, such as a mortgage foreclosure, made while this stay is in effect is void. In addition, the stay also helps for an orderly distribution of the assets of the debtor. That is, without the stay, there would be a race to the courthouse, everybody trying to be first to file his lawsuit. With the automatic stay, creditors cannot file lawsuits, enforce liens, or foreclose a lien on the debtor’s property.

The automatic stay also tolls, or temporarily halts, the statutes of limitation for the enforcement of liens against real estate.

The automatic stay is discussed in greater detail in these materials.

Limitations on the Debtor

In addition, limitations are placed on the debtor during the bankruptcy. For example, the Company will almost always (if not always) require bankruptcy court approval before insuring a conveyance, lease, or mortgage by the debtor or by a bankruptcy trustee.

Payment of the Debtor’s Obligations

The debtor’s obligations are repaid either through the liquidation of the debtor’s assets or through a court-approved reorganization or repayment plan.

The Discharge from Bankruptcy

The discharge operates as an injunction, preventing any attempts to enforce certain debts against the debtor.

Note, though, that the discharge only discharges certain types of debts. Mortgages, judgments, and other secured liens will remain as liens against the land, even after a bankruptcy discharge. (See below.)

The Bankruptcy Chapters

There are three basic types of bankruptcies that the title examiner will normally encounter:

Chapter 7 Bankruptcy Proceedings (Liquidation) (11 U.S.C. § 701 et seq.)

A chapter 7 bankruptcy occurs when a debtor’s non-exempt property is assembled by a trustee who is appointed by the court. This property is then sold and the proceeds are distributed equitable to the debtor’s creditors. The proceedings will serve to discharge the debtor’s personal obligation to pay many but not all debts.

Chapter 7 may be either voluntary or involuntary.

• Voluntary chapter 7 bankruptcy—the debtor requests a discharge from his debts.

• Involuntary chapter 7 bankruptcy—the creditors of the debtor are forcing the debtor into bankruptcy. The creditor wants to prevent the debtor from disposing of his assets; they also want a fair distribution of his property.

Once the petition is filed, non-exempt assets are surrendered to the bankruptcy trustee. The bankruptcy court thus gets jurisdiction over all of the debtor’s assets, both real and personal.

Chapter 11 Bankruptcy (Reorganization) (11 U.S.C. § 1101 et seq.)

Although individuals (except stock or commodity brokers) may file a Chapter 11 bankruptcy petition, the debtor is usually a corporation or a partnership.

The main goal of a Chapter 11 bankruptcy is to restructure the debtor so that it may continue to operate. It is to give the debtor “breathing room” so that the debtor may reorganize his business and continue to operate. Compare this with a Chapter 7 bankruptcy, where the goal is simply to liquidate all debts.

A Chapter 11 bankruptcy may be either voluntary or involuntary.

In a Chapter 11 bankruptcy, a plan of reorganization is drafted and submitted to the court. There is much latitude in the plan. The plan may provide for the repayment of claims in full or for less than the amount due. The plan may allow for the sale of property, either subject to or free of liens. A majority of creditors must approve the plan.

11 U.S.C. § 1129 concerns the confirmation of the plan. This section of the Bankruptcy Code sets out certain requirement of the plan. The plan must meet these requirements. If the plan meets these requirements, but each class of creditor does not approve the plan, then the court may force a “cramdown” of the plan if it is fair and equitable. (That is, the court may force the creditors to approve the plan.)

This plan may include the sale of mortgage of real estate. Once the plan has been confirmed by the court, jurisdiction over any real estate that falls outside the plan revests in the debtor, and the debtor is free to deal with that property as if the bankruptcy had not existed—assuming that this real estate was listed in the debtor’s schedule of assets.

After confirmation, dischargeable debts are discharged.

Sometimes the debtor retains control of the business throughout the duration of the plan. Such a debtor is called a debtor in possession.

Chapter 13 Bankruptcy (Adjustment of Debts; Payment Plan) (11 U.S.C. § 1301 et seq.)

Individuals with a regular income can seek relief by debt adjustment over a three-to-five year period rather than by liquidation. This allows a debtor who makes payments under a Chapter 13 plan to keep non-exempt assets that would otherwise be lost in a Chapter 7 proceeding. A trustee is usually appointed.

A Chapter 13 bankruptcy is only for individuals (not corporations or partnerships) who voluntarily file petitions. Chapter 13 is designed to allow a debtor to retain all or most of his property and to use future income to pay creditors at least as much, and, it is hoped, more, than they would have received in a Chapter 7 bankruptcy. Thus, this plan is for debtors with a regular income.

In Chapter 13, the debtor’s income is paid directly to the trustee. The plan usually lasts for 36 months. The court, though, may extend the length of the plan to five years. The bankruptcy concludes when the trustee has been discharged and the case closed or dismissed.

But what if the plan is not completed? In that event the examiner must be cautious. For example, the examiner would not be able to rely on an order that “avoids” or removes, a lien, if that order is predicated on the completion of the plan.

Exempt Property (11 U.S.C. § 522)

Exempt property is defined in Section 522 of the Bankruptcy Code. Exempt property is property that is not part of the bankruptcy estate. Examples of exempt property include a sole debtor’s interest in real estate as a joint tenant or tenant by the entirety. See 11 U.S.C. 522(b)(3)(B).

The Bankruptcy Schedules

The following are the schedules that are most likely to be reviewed by the Company’s underwriters:

Schedule A—List of real property Schedule C—List of property claimed as being exempt Schedule D—List of creditors holding security interests Schedule E/F—List of creditors who have unsecured claims Schedule G—List of executory contracts and unexpired leases

Debts That Are Not Discharged in Bankruptcy

Note that some debts are not discharged in bankruptcy. For example, taxes, alimony, child support, educational loans, fines, and government liens, such as state or federal income tax liens. See Section 523 of the Bankruptcy Code, or 11 U.S.C. § 523.

Example: A title commitment shows a state revenue lien against the seller. The seller argues that the lien was discharged in bankruptcy. This is not the case. State of Illinois revenue liens are not discharged in bankruptcy.

Also, note that a debt that has not been scheduled—that is, a debt that is not listed as a liability on the debtor’s bankruptcy Schedule E/F—is not discharged.

Debts that are the subject of a reaffirmation agreement—that is an agreement whereby the debtor agrees, after the filing of the bankruptcy petition, to pay the debt—are not discharged.

In addition, a debt that is incurred after the filing of the bankruptcy petition is not discharged.

As will be discussed later, judgments against the land may not be discharged.

Corporations, limited liability companies, and partnerships do not obtain a discharge in a Chapter 7 case. Instead, they merely go out of business.

A Chapter 7 bankruptcy is concluded when the court enters an order discharging the trustee and closing or dismissing the case.

Rule of Title Practice

The examiner should not assume that he can waive a lien from the title commitment because the customer brings in a bankruptcy discharge. The examiner should make sure that it is a type of lien that can be discharged. The examiner must also make sure that the lien is scheduled—that is, that the lien is listed on the bankruptcy schedule of debts.

Examining Practice—Pending Bankruptcies

How can the title examiner become aware of a bankruptcy?

• The customer may tell the examiner.

• If the land has been scheduled as an asset of the debtor’s estate, Section 549(c) of the Bankruptcy Code, or 11 U.S.C. § 549(c), provides that a notice of bankruptcy should be recorded in the county in which the subject land is located. This notice is similar to a lis pendens. (It appears, however, that many trustees do not record such a notice.)

• Many times the bankruptcy trustee will file a notice with the tax collector. This notice will be posted in the tax records. The filing of such a notice prevents the real estate taxes from being sold at a tax sale.

• It is possible that a name search may indicate the existence of a bankruptcy. This is why some title companies may search the names of the beneficiaries of a land trust, if they can be determined, when preparing a title commitment.

• A bankruptcy filing might be disclosed in another pending proceeding, such as a mortgage foreclosure case.

Examining Practices—Title Vesting

When the examiner determines that the owner of the land has filed for bankruptcy (any chapter), the examiner should show the title finding as follows:

John Smith, subject to proceedings in the U.S. Bankruptcy Court for the _____ District of Illinois entitled In Re: John Smith, Debtor, case number _____, wherein a petition was filed.

There are two reasons for showing the vesting this way:

• One, the vesting emphasizes the importance of the pending bankruptcy to both the customer and to other examiners.

• Two, the vesting serves as a reminder of the possibility that any conveyance or mortgage of the land by the debtor should not be insured without the bankruptcy court’s approval. (See 11 U.S.C. § 541(a)(1), which is discussed below.)

Additionally, an exception to the pending bankruptcy should be shown in Schedule B of the title commitment and to the rights of the trustee. For example:

Any matters arising out of or by virtue of that certain bankruptcy case:

Name of Debtor: Date of Filing: U. S. District Court: State: Case No.: Chapter:

And the rights of the trustee in and to the land arising pursuant to said bankruptcy case.

Contrary to popular belief, title to real estate does not automatically vest in the bankruptcy trustee once the bankruptcy petition has been filed. This is the case, even in Chapter 7 bankruptcy. The Bankruptcy Code makes it clear that the duties of the trustee are to collect and administer the property, not take title to property. In other words, the bankruptcy trustee simply has jurisdiction to administer the real estate of the debtor. In this regard, see 11 U.S.C. § 704(a)(1):

The trustee shall—collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.

See 11 U.S.C. § 541(a)(1). All non-exempt property, as defined in the Bankruptcy Code, belongs to the bankruptcy estate upon the filing of the bankruptcy. The bankruptcy case trustee is the trustee over this estate. One bankruptcy commentator has compared a bankruptcy estate to a decedent’s estate. This is a very appropriate comparison. That is, the executor or administrator of a decedent’s estate has the power to administer the assets of the decedent.

Pursuant to the Probate Act, the executor or administrator has the power to sell the land of a decedent. See 755 ILCS 5/20-4 and 755 ILCS 5/28-8(a). However, the executor or administrator do not own the property; they have only the right to administer the property.

Similarly, see 11 U.S.C. § 363(b)(1). The bankruptcy trustee also has the right to administer the property. Although the bankruptcy trustee does not own the debtor’s land, the trustee still has the right to sell the land:

See 11 U.S.C. § 363(b)(1): The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate. . . .

Note that the trustee cannot sell the land unless there is first notice and a hearing. Thus, the rights of a bankruptcy trustee are more akin to the rights of the executor or administrator of a supervised estate and not an independent administration estate.

See also Bankruptcy Rule 6004(a): “Notice of a proposed use, sale, or lease of property, other than cash collateral, not in the ordinary course of business, shall be given pursuant to. . . .”

What Constitutes Property of the Estate of the Debtor?

See 11 U.S.C. § 541(a)(1). The property of the estate of the debtor is “all legal or equitable interests of the debtor in property as of the commencement of the case.” The beneficial interest of an Illinois land trust has been held to be the property of the estate of the debtor. (11 U.S.C. § 541(a)(1) does include some exceptions.)

Property recovered by the bankruptcy trustee or debtor-in-possession because of a preference or fraudulent transfer (see below) also becomes the property of the estate.

If a debtor acquires property within 180 days after filing the bankruptcy petition, this property becomes the property of the estate if it was obtained by bequest, devise, or inheritance, as a result of a property settlement or divorce decree, or as a beneficiary of a life insurance policy or death benefit plan. See 11 U.S.C. § 541(a)(5).

Example: On June 1 John Smith files for bankruptcy. A month later his father dies and John inherits a fortune. This money that John inherited is an asset that is under the jurisdiction of the bankruptcy court and may be used to pay John’s creditors.

The Automatic Stay (11 U.S.C § 362)

When a debtor files bankruptcy, the debtor receives the protection of an automatic stay pursuant to 11 U.S.C. § 362(a)1), which stays “the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor.” This is an automatic stay on the commencement or continuation of proceedings, such as mortgage foreclosures, against the debtor and his estate. The automatic stay remains in effect until the bankruptcy court disposes of the case or grants relief from the stay (i.e., “lifts” the stay). Actions taken in violation of the state are generally void.

Because of this automatic stay, the statute of limitations for the enforcement of liens are tolled, or temporarily halted, by the bankruptcy. This means that bankruptcies must be taken into account when an examiner is asked to waive a lien because the lien is extinguished pursuant to the applicable statute of limitations.

When does the automatic stay terminate? See 11 U.S.C § 362(c):

• When the stay is lifted pursuant to court order.

• When the property ceases to be the property of the estate. This happens if the property is abandoned or is exempt.

• Upon the earliest of any of the following events: the closing of the bankruptcy case, the dismissal of the bankruptcy case, or at the time a discharge of bankruptcy is either granted or denied.

Example: On February 1, 2019, a judgment is entered against Owner. On June 1, 2020, Owner files for Chapter 13 bankruptcy. Owner is discharged from bankruptcy exactly two years later, on June 1, 2022. The automatic stay was never lifted. The stay was, however, terminated when the case was dismissed.

The statute of limitations for a judgment is seven years from the entry of the judgment. Because of the bankruptcy, the statute of limitations has been tolled for two years—that is, the duration of the bankruptcy. Therefore, the judgment cannot be waived on the basis of the statute of limitations until February 1, 2028.

The Effect of the Automatic Stay on Other Proceedings

The effect that a bankruptcy has on other proceedings depends on when the bankruptcy was filed.

The Effect of the Automatic Stay—When was the bankruptcy filed? Assume that the bankruptcy is filed before a mortgage foreclosure is filed.

In this event, the examiner should raise the following exception:

An order should be entered in the bankruptcy proceeding noted herein that authorizes the filing of the foreclosure proceeding.

This order will lift the automatic stay and allow the proceeding to go forward.

When will the court lift the automatic stay and allow the proceeding go forward? See 11 U.S.C. § 362(d):

• The court will lift the stay for cause;

• The court will lift the stay if the court determines that the debtor does not have any equity in the property and the property is not necessary for the reorganization of the debtor.

The Effect of the Automatic Stay—When was the bankruptcy filed? Assume that the bankruptcy is filed after the mortgage foreclosure complaint is filed but before the expiration of the mortgage foreclosure redemption period.

Remember the eight basic elements of the foreclosure process under the Illinois Mortgage Foreclosure Law:

The complaint is filed; Notice is served on all parties; The reinstatement period begins, runs, and ends; The judgment of foreclosure is entered; The redemption period begins, runs, and ends; The judicial sale is held; The confirmation hearing is held; The judicial deed is entered.

The automatic stay enjoins, or prevents, not only the commencement of actions against the debtor but also the continuation of any actions. This means that service of process against a debtor while the stay is in effect is void.

This means that if a mortgagor is in bankruptcy and the bankruptcy petition is filed after the foreclosure complaint is filed but prior to the expiration of the redemption period (see above), the examiner must ask that the bankruptcy stay be annulled, and not merely lifted, and that actions taken in violation of the stay be ratified.

In this event, the examiner should raise the following exception:

An order should be entered in the bankruptcy proceeding noted herein annulling the automatic stay and ratifying all actions taken in said foreclosure proceeding in violation of the stay.

Because the automatic stay tolls, or temporarily halts, the running of the redemption period, the examiner must make sure that any foreclosure sale took place after the redemption period expired, taking into consideration the period of time during which the redemption period was tolled by the stay.

The Effect of the Automatic Stay—When was the bankruptcy filed? Assume that the bankruptcy is filed after the expiration of the redemption period but prior to the recordation of the sheriff’s deed.

This should not be a problem, because a bankruptcy that is filed after the mortgagor’s redemption period has expired will not extend or revive the redemption period.

The Effect of the Automatic Stay—When was the bankruptcy filed? Assume that the bankruptcy is filed after the recordation of the sheriff’s deed.

This example raises the issue—can a mortgage foreclosure sale be set aside by a bankruptcy court as a fraudulent transfer? See 11 U.S.C. § 548; see also 740 ILCS 160/1 et seq.

The U.S. Supreme Court decided this issue in BFP v. Resolution Trust Corporation, 511 U.S. 531, 128 L. Ed. 2 556, 114 S. Ct. 1757 (1994). In this case the U.S. Supreme Court ruled that assuming there is a mortgage foreclosure sale that was conducted consistently with the requirements of the state’s foreclosure law, then, absent irregularities in a mortgage foreclosure proceeding or a sales price so low that it would “shock the conscience of the court,” a subsequent bankruptcy filed by the mortgagor may be safely ignored.

Issues Concerning the Automatic Stay

Example: John files for bankruptcy on January 2nd. An Illinois revenue lien against John is recorded on March 2nd. He is discharged from bankruptcy on June 2nd. During all this time, the automatic stay is never lifted. The attorney comes in and tells the examiner to waive the lien because it was recorded in violation of the automatic stay. The attorney points to 11 U.S.C. § 362(a)(4), which states that the filing of a bankruptcy petition operates as a stay of “any act to create, perfect, or enforce any lien against property of the estate.” Thus, it does appear that even the recording (i.e., the “creating”) of the lien was in violation of the stay.

Should the examiner waive the lien? The coverage of the 2006 owner’s and loan title policies includes the cost of defense. (See Condition 5 of the 2006 ALTA owners title policy.) The examiner should not waive the lien. Instead, the examiner should ask that the bankruptcy court enter a final and non-appealable order, holding that the lien is void because of the violation of the automatic stay. (The examiner should also consider asking for evidence of service on the State of Illinois of the motion for the order.)

Bankruptcy Rule 4001(a)(3)

Bankruptcy Rule 4001(a)(3) provides as follows:

An order granting a motion for relief from an automatic stay made in accordance with Rule 4001(a)(1) is stayed until the expiration of 14 days after the entry of the order, unless the court orders otherwise.

Entry of the order means “entry on the docket.” Thus, if an examiner is given an order that lifts the automatic stay, the examiner should treat the stay as being lifted only after such order is entered on the docket, fourteen days or such lesser or greater time as the court has specifically directed has expired, and no appeal from the order has been filed.

Discharge of the Debt

• In Chapter 7 cases, a debt is discharged when the individual is discharged from bankruptcy. See 11 U.S.C. § 727; 11 U.S.C. § 524.

• In Chapter 11 cases, a debt is discharged occurs when the plan is confirmed, unless the plan or the order confirming the plan say otherwise. See 11 U.S.C. § 1141.

• In Chapter 13 cases, a debt is not discharged until after the debtor pays all debts as required by the plan. See 11 U.S.C. § 1328.

Judgments and Bankruptcy

Judgments against the Seller

Example:

2014—Adam buys Blackacre. 2018—A judgment against Adam is recorded. 2019—Adam files bankruptcy, creditor is scheduled, debt is discharged. 2020—Adam decides to sell Blackacre.

A title examiner performs a title search and finds the judgment. The examiner shows the judgment on the commitment. Adam’s attorney comes in to meet with the examiner. The attorney claims that the judgment should be waived because it was “taken care of” in the bankruptcy.

Question: Is the attorney correct? Should the examiner waive the judgment?

Answer: No, the attorney is not correct. All that the bankruptcy did was eliminate the judgment debtor’s personal liability; it did not eliminate the lien on the land. Illinois law is clear that a lien on real estate survives the bankruptcy discharge unless a specific bankruptcy court order declares the lien void.

Generally speaking, pre-bankruptcy judgments against an owner of land cannot be waived after the owner is discharged from bankruptcy unless:

• The land is sold free and clear of all liens;

• There is a specific court order, issued upon motion and notice to the creditor, removing the lien from the property. This order is usually called an “order avoiding the judicial lien.” See 11 U.S.C. 522(f).

Rule of Title Practice

Unless there is a specific bankruptcy court order voiding an identified lien, then a lien on the land, perfected prior to the filing of a bankruptcy proceeding, is not affected by the debtor’s discharge from bankruptcy.

The examiner should tell the attorney that the lien can be waived when the bankruptcy court issues an order avoiding the judicial lien.

That is, the attorney should file a motion for an order avoiding the judicial lien with the bankruptcy court, asking that the court remove the lien from the home. If the bankruptcy court grants the motion and issues the order, the judgment creditor’s lien will be extinguished. (There should not be a problem with the bankruptcy court granting the motion and issuing the order if the judgment debt is scheduled in the bankruptcy petition.)

The examiner must remember that he cannot immediately waive a title exception pursuant to this “order avoiding the judicial lien.” Bankruptcy Rule 8002 provides for an appeal period of fourteen days from the date of docketing—the date of the entry of the order. Note that the date of the entry of the order is not the same as the date of the order. The examiner must first wait out this appeal period before waiving the lien.

Alternatively, the bankruptcy court could order the property sold free and clear of all liens.

But on the other hand: What if the seller/judgment creditor has no equity in the land; the seller is getting no money back? Then one could argue that the order “avoiding the judicial lien” is not necessary; there is nothing for the judgment creditor to attach.

That is true. But on the other hand, the judgment creditor could still enforce its lien against the new equity in the land, now that the new buyer owns it. However, most creditors give up, once the bankruptcy is filed.

But having said all this, with underwriter approval, the examiner may nonetheless consider waiving the lien in the event certain factors are present. Consider the following:

• The judgment creditor must be named in the bankruptcy proceeding;

• The amount of the judgment must be relatively small, perhaps $5,000 or less;

• The judgment is fairly old;

• The nature of the lien should be considered. (For example, it is usually safe to waive a small judgment filed by a credit card company. It is usually not safe to waive even a small judgment in favor of an attorney.) Note though, that if the judgment has been sold or assigned to a third party collection service, the examiner should not waive the judgment.

The following statute and court cases support the Company’s position regarding bankruptcy and judgments: 11 U.S.C. § 522(f)(1), 11 U.S.C. § 522(f)(2)(a), and 11 U.S.C. § 524(a); Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L.Ed.2d 66 (1991); First National Bank in Toledo v. Adkins, 272 Ill.App.3d 111 (4th Dist. 1995).

Example: But now change the facts slightly:

2015—A judgment creditor records a judgment against Adam. 2017—Adam files bankruptcy, creditor is scheduled; Adam is discharged. 2018—Adam buys Blackacre. 2019—Adam signs a contract to sell Blackacre. 2019—A title commitment is issued that shows the judgment.

The examiner examines title to Blackacre. The examiner sees the judgment and shows it on the title commitment. Adam’s attorney makes an appointment to see the title examiner; the attorney believes that the examiner should waive the judgment because liability for the judgment was discharged in bankruptcy.

Question: With these set of facts, can the examiner waive the judgment?

Answer: Assuming that the judgment creditor was scheduled in the bankruptcy proceeding, the examiner can waive the judgment. Why? In this set of facts Adam acquired Blackacre after the judgment and the bankruptcy. Because Adam acquired Blackacre after the judgment and after the bankruptcy, the judgment never became a lien on the land.

Example: And now change the facts again.

January, 2019—Baker buys a home. October, 2019—A judgment is entered against Baker. November, 2019—Baker files for bankruptcy December, 2019—A memorandum of judgment is recorded against Baker

Question: What is the issue in this example?

Answer: Here, unlike in the first example, the lien on the land was not perfected prior to the filing of the bankruptcy petition.

In this example, the recording of the memorandum of judgment would be in violation of the automatic stay of the bankruptcy.

Assuming that the debtor (Baker) is discharged from bankruptcy, the personal liability of the judgment has been eliminated. There is no lien on the land.

Therefore, can the examiner waive the judgment? What is the amount of the judgment? If it is a large amount, the judgment creditor may still attempt to sue to enforce the judgment, and the Company would be forced to pay defense costs. The examiner should consider this issue when underwriting the waiving of a judgment in these circumstances. For example, perhaps the Company might want a personal undertaking from a well-heeled indemnitor for defense costs. Or, as noted earlier, the examiner could ask that the bankruptcy court enter a final and non-appealable order, holding that the lien is void because of the violation of the automatic stay.

Reminder: A debtor’s bankruptcy tolls, or temporarily suspends, the running of the statute of limitations for a judgment.

Example: A judgment is entered against Charles in 2019. Six months later Charles files for bankruptcy protection against creditors. When he files bankruptcy an automatic stay comes into effect. This stay protects Charles from suits filed by creditors or creditors otherwise attempting to enforce their liens against Charles. A month after Charles files bankruptcy, the automatic stay is lifted. The statute of limitations for the judgment is seven years plus one month.

Other Options Other Than an Order Avoiding the Lien

A judgment is a lien on the debtor's property for seven years from the date the judgment is rendered (not from the date any memorandum of judgment is recorded.  See 735 ILCS 5/12-101. If the statute of limitations has almost expired, the examiner may want to consider waiving the judgment.  The examiner could consider a personal undertaking or a title indemnity.

If the debtor has filed a Chapter 13 bankruptcy, consider the following steps. If all of these steps have taken place, it would be a fairly risk-free proposition to waive the judgment:

• The creditor was scheduled in the Chapter 13 petition;

• The creditor was given notice of the hearing to confirm the debtor’s plan of reorganization;

• The plan, as confirmed, makes provisions for payment of the debt in full (if treated as secured) or in part (if treated as unsecured or partially secured/unsecured);

• All payments due under the plan have been made.

If the judgment is fairly old and fairly insubstantial ($5,000 or less), and the examiner is issuing only a loan policy, the examiner could consider a personal undertaking and endorsing over the judgment. (However, if there is an assignment of a judgment to a third party debt collector, the examiner should first talk to an underwriter before agreeing to endorse over the judgment, even with a personal undertaking.)

Judgment against the Buyer

If the judgment is against the buyer, not the seller, there is no issue at all. The personal obligation was discharged in bankruptcy. The buyer does not yet own the land, and thus there is no land to which the lien could attach.

Example

2013—Adam buys Blackacre . 2016—A judgment is entered against Baker. 2017—Baker files bankruptcy; the judgment creditor is scheduled. 2018—Baker is discharged from bankruptcy. 2019—Baker now wants to buy Blackacre from Adam, the current owner of Blackacre. There is no problem. The judgment cannot attach to Blackacre; the lien of the judgment has already been extinguished. That is, the lien was extinguished before the proposed sale of Blackacre. The Company can issue a commitment, showing Baker as the proposed insured. The examiner should not show the judgment in Schedule B of the commitment.

Summary

In other words: A judgment against an owner of land may be a problem, even though the owner has been discharged from bankruptcy. On the other hand, a judgment against a buyer may not be a problem if the buyer files for bankruptcy, the judgment creditor is scheduled, and the buyer is discharged from bankruptcy, all before buyer signs a contract to buy the land.

Selling Real Estate through Bankruptcy—Introduction

The sale of real estate through bankruptcy can arise in any bankruptcy case. For example:

• A bankruptcy trustee could sell a debtor’s property (Chapter 7) to liquidate the estate for the benefit of creditors.

• A debtor could sell his own property. For example, a debtor in a Chapter 7 case could sell his house as part of a short sale.

• A debtor might sell his house in a Chapter 13 case as part of a job transfer.

• In Chapter 11, the debtor may function as the trustee of his own estate (called a “debtor in possession” under the supervision of the trustee, sometimes called the “U.S. Trustee”) to fund his plan to reorganize.

The Sale of Real Estate—The Court Order

The bankruptcy trustee can sell the property, or the debtor can sell the property. In either case, and regardless of what bankruptcy chapter the debtor has filed, the examiner should have a court order authorizing the sale of the land. The judge (not the trustee) is the authority in this matter. It is possible that the court could authorize the sale of a debtor’s property despite the trustee’s objection to the sale. (For example, a trustee might object in a Chapter 7 sale, thinking that the sales price was too low and that the property had value to creditors.)

Note that in a Chapter 13 sale, the trustee would probably require that all non-exempt proceeds be turned over to him.

In cases where the trustee is selling the real estate, the court order is necessary for two practical reasons:

The debtor may claim that the trustee does not have the right to sell the property. For example, the debtor may be a married individual who has filed bankruptcy alone, and the trustee wants to sell the house owned in tenancy by the entirety. Does the tenancy by the entirety protect the home from being sold by the trustee? A court order would solve this potential problem.

The only money that the creditors may get from a Chapter 7 liquidation sale may come from the real estate, and so the creditors have an interest in getting the maximum value for the land. The Bankruptcy Code requires both notice and a hearing on any proposed sale to protect both the debtor’s rights and the creditors’ rights. The Bankruptcy Code states that the trustee may sell the land only after notice and a hearing, and this sale should then be had pursuant to a court order. The court order, issued after notice and a hearing, protects the rights of both the debtor and the creditor.

Most court orders do not specifically state that the automatic stay is lifted with respect to the land being sold. However, if the order states that the sale is approved and that the debtor or trustee is authorized to convey the property, the stay falls with that court approval.

However, having said all of this: there may be situations when the examiner will be asked to approve a “debtor in bankruptcy” transaction without a court order. For example, perhaps the debtor has filed a Chapter 13 bankruptcy, the debtor is selling his home, the trustee has approved the sale, all mortgages or other liens will be paid off at closing, the trustee has been paid all his fees, and all sale proceeds are being turned over to the trustee for payment to creditors.

Any request to insure such a transaction should be approved by an underwriter.

Selling Real Estate through Bankruptcy—the Types of Sales

Section 363 of the Bankruptcy Code (11 U.S.C. § 363) governs the procedure for sales through bankruptcy. This section is augmented by various Bankruptcy Rules (BR).

The various types of sales discussed here are:

• Sales in the ordinary course of business

• Sales not in the ordinary course of business

There are two sub-types of sales not in the ordinary course of business:

• Sales subject to liens

• Sales free and clear of liens

Also, sales not in the ordinary course of business can be:

• Public sale (auction)

• Private sale (contract)

Sales in the Ordinary Course of Business—See 11 U.S.C. § 363(c)(1)

Such sales will rarely be encountered by the title examiner. These sales usually occur when, for example, the debtor is a developer who is selling off lots.

Title Clearance for a Sale in the Ordinary Course of Business

The examiner should make sure that the sale is indeed “within the ordinary course of business.”

The examiner should get a court order (with evidence of proper notice, as set forth below.) This order must state that the sale is in the ordinary course of business.

Sales Not in the Ordinary Course of Business—See 11 U.S.C. § 363(b)

This is the type of sale the examiner will usually encounter. The purpose of this sale is to bring in cash to pay off the debts of the creditor.

There are two types of sales not in the ordinary course of business:

• Sales subject to liens

• Sales free and clear of liens

Sale Subject to Liens—See 11 U.S.C. § 363(b)

A sale can be had subject to liens pursuant to 11 U.S.C. § 363(b). A sale subject to liens is merely a sale that is not a sale free and clear of liens. (A sale free and clear of liens is described in Section 363(f) of the Bankruptcy Code.)

A sale subject to liens usually occurs when:

• There are no liens affecting title (usually very seldom);

• The liens will be paid off at closing, pursuant to a bankruptcy court order; or;

• The terms of the sales contract (or auction sale conditions) provide that the buyer is to take title subject to all liens.

Real property can be sold subject to liens after notice has gone out to all interested parties and there are no objections or requests for a hearing. Generally, no order is necessary unless there are objections.

Sale Free and Clear of Liens—See 11 U.S.C. § 363(f)

Note: If the sale is a sale free and clear of “interests”; see 11 U.S.C. § 363(f).

Note that while sales under Section 363(f) are usually referred to as sales “free and clear of liens,” the statute uses the word “interest” and not “lien.” This, then, is a much broader term.

Consider the following title commitment exception:

In the event title is to be conveyed by the trustee in bankruptcy pursuant to an order for sale free and clear of liens pursuant to Section 363 (f) of the Bankruptcy Code we should be provided with: a. Copy of the motion for sale free and clear; b. Proof of service of motion on any parties whose interests are being affected by the sale; c. Copy order entered for sale free and clear; d. Copy of bankruptcy court docket sheet; e. Schedule of creditors. Upon review of the above requested documents this commitment will be subject to such further exceptions as are then deemed necessary. Note: Provisions of Bankruptcy Rule 8002 and Bankruptcy Rule 6004(h) prevent any sale from being insured until the 14 days from the entry of the order for sale on the docket.

Why should one have such a sale? This type of sale allows the bankruptcy trustee or the debtor in possession to sell the property as quickly as possible before it declines in value. Otherwise, secured creditors would be haggling over how much money they should get and what is the priority of their claims.

Section 363(f) of the Bankruptcy Code provides as follows: The trustee may sell property free and clear of any interest in such property of an entity other than the estate, only if:

• Applicable non-bankruptcy law permits sale of such property free and clear of such interest;

• Such entity consents;

• Such interest is a lien and the price at which such property is sold is greater than the aggregate value of all liens on such property;

• Such interest is in bona fide dispute; or

• Such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Although the section does not mandate it, most orders approving sales free and clear of liens provide that the liens attach to the proceeds of the sale. The lien holders can then argue later about who gets what.

There are three main areas of concern to a title examiner when asked to insure title through a bankruptcy:

• Has a proper notice of sale been delivered to the parties entitled to notice?

• Does the order that authorizes the sale contain sufficient information to allow the title company to insure the transaction?

• Is the purchaser protected from a reversal of the order upon any appeal?

The Notice of Sale

Notice of the sale must be given to the debtor, all co-owners, all lienholders, and all interested parties.

Bankruptcy Rule 2002(a) requires that a twenty-one-day notice (unless the court shortens it) be given by mail to the above parties. This is a twenty-one-day notice for the purpose of giving the creditors a chance to file any objections.

Bankruptcy Rule 2002(c)(1) states that the notice “shall include the time and place of any public sale, the terms and conditions of any private sale and the time for filing objections.”

Bankruptcy Rule 2002(c)(1) that the notice is sufficient if it “generally describes” the property. Therefore, although a street address may be sufficient, a legal description is preferred. A street address might not be sufficient if one is dealing with a large commercial tract of land. Also, what if an easement is also being transferred? If so, an address might not be sufficient in that instance, either.

If the notice is to be free and clear of all liens, the notice must also include the following:

• A statement that the sale will be free and clear of all liens (See the notes to Bankruptcy Rule 6004 under the caption, “Notes of Advisory Committee on Rules—1987 Amendment, which are set forth in the footnote below) and

• A statement of the statutory basis for the authority to sell free and clear of all liens. (Again, see the notes to Bankruptcy Rule 6004, which are set forth in the footnote below).

This statement of the statutory basis for the authority to sell free and clear of all liens must be one of the following, which were noted above:

• Applicable non-bankruptcy law permits the sale of such property free and clear of such interest;

• Such entity consents;

• Such interest is a lien and the price at which such property is sold is greater than the aggregate value of all liens on such property;

• Such interest is in bona fide dispute; or

• Such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

The Hearing

There must be a hearing by the bankruptcy court on the motion to sell the real estate. This is the case regardless of whether it is a sale subject to liens or free and clear of liens.

The Order to Sell the Real Estate—Introduction

After the hearing, there will be a court order that authorizes the sale.

The Order to Sell the Real Estate—Private Sales

The order to sell the real estate should name the buyer. The order should indicate whether or not the sale is free and clear of liens.

If this is a sale free and clear of liens, the title examiner should decide beforehand what liens will be waived. For example, the examiner should probably not waive a building violation case.

The order should indicate to whom the proceeds of sale are to be paid. If the order is silent, then the closer should pay all the proceeds to the grantor in the deed--normally the bankruptcy trustee or the debtor in possession. Note that this could be a problem, as the seller’s attorney might want the title company to pay taxes, broker’s commission, attorney’s fees, etc.

Similarly, consider this problem when dealing with a sale free and clear of liens: What if there are not enough proceeds to pay all lienholders, but the attorney for the seller has promised the first mortgagee, for whose debt there are sufficient proceeds, that it will be paid in full?

Unless there is a provision in the order for this type of arrangement, there is no such authority to make such a payment.

How can the title examiner avoid these kinds of problems?

The order should specifically address the distribution of sales proceeds. While general language provides some guidance (e.g., “all necessary closing costs will be paid at closing”), it is preferable to identify the type of payment—for example, broker’s commission, attorney’s fees—even if the order cannot list an exact amount due.

In fact, exact amounts may tie the hands of the closer, as there are always last-minute adjustments to disbursements.

The Order to Sell the Real Estate—Public Sales

The procedures for public sales are essentially the same as for private sales. The main difference is that the examiner will want to see two orders:

• One order authorizing the auction and setting forth its terms;

• One order confirming the sale to the successful bidder.

Taxes

Section 363(f) of the Bankruptcy Code states that “[t]he trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate. . . .” This language suggests that a sale free and clear of liens may include a sale that is free and clear of tax sales and delinquent real estate taxes. Generally speaking, however, the Company is reluctant to rely on an order authorizing the sale free and clear of liens that includes such broad language. Any request to insure a bankruptcy sale free and clear of taxes must be referred to a senior underwriter. (The underwriter may require, for example, that the tax warrant books be appropriately marked so that the taxes do not go to tax sale after the closing and after the title policy is issued. There is precedent for such a request. See, e.g., 35 ILCS 200/21-100.)

Appeals

The right to appeal a bankruptcy order does not begin when the judge signs the order. The appeal period starts when the order is entered on the bankruptcy clerk’s docket.

Bankruptcy Rule 8002(a) provides for an appeal period of fourteen days from the date of docketing—the date of the entry of the order. Therefore, if the closing takes place after such fourteen day period, the examiner can delete any exception for the right to appeal.

But what about closings that take place within this fourteen day period?

The attorney for the purchaser will undoubtedly tell the closer about Section 363(m) of the Code, which provides in part:

The reversal or modification on appeal of an authorization . . . of a sale . . . does not affect the validity of a sale . . . to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such . . . sale . . . [was] stayed pending appeal.

This section does appear to protect the purchaser. However, if there were an appeal filed after closing, the Company would have to defend against the appeal. Furthermore, the court can grant a stay of the order approving the sale pursuant to Bankruptcy Rule 8005.

In the event the examiner is asked to underwrite a sale prior to the expiration of the 14-day appeal period, the examiner should consider the following:

• The examiner should obtain a personal undertaking signed by the purchaser.

• The examiner should ask for a statement from the attorney for the seller, indicating that he or she has received no notice of an appeal. This is especially useful if the examiner is closing in the latter half of the fourteen day appeal period.

• Is this a public sale or a private sale? If this is a public sale, were there other bidders? If there were other bidders, this could be a problem, as a disgruntled bidder could contest the closing. It is better to have a private sale, as there would be no possibility of a disgruntled bidder.

• The examiner should also seek senior underwriter approval. In addition, see the following section on “Problems with the Appeal.”

Example: In one case, the Company was asked to close the sale of a single family home after only four days had passed of the fourteen-day appeal period. The proposed sale was not a sale “free and clear of all liens.” Rather, notice was given to all creditors of the proposed sale, and no one objected, although they had twenty-one days to object. The first lender was scheduled to be paid 100% of what it was asking for in its mortgage payoff letter. The second lender asked for $12,000, and it was scheduled to receive $11,500, or 95.83%, of the amount set forth in its mortgage payoff letter. The property had been on the market for about a year-and-one-half, and this was only the second offer to purchase. (The first offer fell through because of bankruptcy issues.)

These additional facts make it clear that the order authorizing the sale would have virtually no impact on any claim, lien, or interest that was recorded prior to the filing of the bankruptcy petition. Therefore, there would be almost no risk to us in agreeing to go forward with the closing prior to the expiration of the fourteen-day appeal period.

Note, though, that in situations like this, a senior underwriter should always be consulted. § Summary of Appeal Issues

Bankruptcy Rule 8002(a) provides for an appeal period of fourteen days from the order’s entry on the docket to file an appeal from an order. When the final day of a deadline falls on a Saturday, Sunday or holiday for the federal court involved, the final day becomes the next day the court is open for business.

Bankruptcy Rule 6004(h) provides for a stay of an order authorizing the sale of property until the expiration of fourteen days from the order’s entry on the docket.

Bankruptcy Rule 8017 provides for a stay of any court order until the expiration of fourteen days from the order’s entry on the docket.

Note that a court may lift the Bankruptcy Rule 6004(h) and Bankruptcy Rule 8017 automatic stay, but the court cannot lift the Bankruptcy Rule 8002(a) appeal period. The appeal period runs concurrently with the automatic stay.

Problems with the Appeal

The court addressed the issue as to whether or not a purchaser is protected under 11 U.S.C. § 363(m) in In re CGI Industries, Inc., 27 F.3d 296 (1994). In this case the court held that, under the facts of the case, the purchaser was protected.

In this case, though, the closing took place four days after the order approving the sale became appealable. The court specifically said that it was not ruling on the situation where the closing took place immediately after the order became appealable.

Why would the court say this? Because if the purchaser were to successfully argue that he was protected when the closing takes place immediately after the order is entered, then the right to appeal becomes meaningless.

How much time must elapse between the date the order becomes appealable and the date of closing so that a purchaser is protected? The court in In re CGI Industries, Inc., does not answer this question.

Thus, one should not just assume that the Company will insure a sale to a purchaser within the appeal period without raising a “right of appeal” exception. Any requests to waive this exception should be directed to a senior underwriter.

Selling the Property—Abandonment (11 U.S.C. § 554)

A seller can sell property if the bankruptcy trustee has abandoned the property.

See 11 U.S.C. § 554(a):

After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

See 11 U.S.C. § 554(b):

On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

Thus, the trustee may choose to abandon property, or the court may order the trustee to abandon property.

If the property has been abandoned, the closer or examiner should, under normal circumstances, be dealing with a situation where there is a large secured creditor, taxes are being paid off, and the debtor is receiving little or no proceeds.

If there are a lot of net proceeds, this probably should not be abandoned property. In this event, the examiner should consult an underwriter.

In order to insure the sale of abandoned property, there must be a court filing or order indicating that the trustee has abandoned the property. A lifting of the 11 U.S.C. § 362 automatic stay would be a sufficient court filing.

Selling the Property—No Asset Finding

The term, “no asset finding” is not found in the Bankruptcy Code. However, the term simply means that the Chapter 7 bankruptcy trustee has determined that either the debtor has no non-exempt assets or the debtor’s non-exempt assets are not enough to make for a reasonable distribution to creditors after the liquidation of said assets and the payment of case expenses.

With a no asset finding, there will be an order of a no asset finding by the bankruptcy trustee. As indicated above, there may be assets, but the assets are so tied up with secured creditors that the trustee is essentially stating, “I have no assets to work with; there is no equity in the property.”

In a transaction concerning a no asset finding, the examiner or closer should look for little or no net proceeds of sale.

Question: Many times a review of bankruptcy cases will disclose a statement as to the following: “Trustee’s report of no assets approved and trustee discharged.” However, the debtor will not be discharged. Is this a problem?

Answer: Generally speaking, the Company can waive the bankruptcy exception, even though the debtor has not been discharged. But the examiner should look at the total picture. Does it make sense that the trustee has apparently abandoned the property?

The examiner should be concerned if the seller of the land has filed Chapter 7 bankruptcy, the bankruptcy trustee has made a “no asset” finding, but the property being sold is not shown as an asset of the debtor. The examiner could consider having the bankruptcy trustee furnish a statement indicating that the trustee knew that the debtor owned the home in question at the time the trustee made the “no asset” finding. The alternative is holding back all sale proceeds from the closing until the bankruptcy trustee can be contacted for verification that the trustee was aware that the debtor owned the property being insured.

The no asset finding is not the same as a finding of abandonment, in that with a no asset finding, the bankruptcy trustee can essentially “change his mind” and find otherwise at any time. Nonetheless, the Company will consider an initial finding of no assets in its determination of risk, but the Company will not rely on a no asset finding as being the same as an order of abandonment.

Variations of the No Asset Finding.

Facts: Husband and wife own the land. They file a Chapter 7 bankruptcy. There is a “no asset” finding posted on the docket. They are discharged from bankruptcy, but the case is still pending. An order is entered in the bankruptcy case that lifts the automatic stay, but the stay is lifted to permit a mortgage foreclosure. But then suddenly the sellers find a short sale buyer. There is no order permitting the short sale, and the bankruptcy trustee refuses to authorize a deed. Why? The trustee says that the land is not an asset of the estate. However, the land was scheduled as an asset.

Question: What can the examiner do? The order that lifted the automatic stay was to permit the mortgage foreclosure, but the order said nothing about a short sale. There is no order that lifts the automatic stay to permit the short sale.

Answer: In this example the Company accepted a deed from the husband and wife. The Company did not require a court order. Why? The order lifting the stay to permit the foreclosure required a finding that the debtor has no equity in the land. Essentially, then, the property had been abandoned by the bankruptcy trustee.

A bankruptcy trustee was once asked if a debtor in chapter 13 bankruptcy needed a court order to sell his home. He replied as follows:

My office would only take a position in this matter if the transaction were to decrease the chances that they would successfully complete their plan or if it were to generate net proceeds that should be distributed to unsecured creditors.

For example, if they sold their house to buy another house with a higher mortgage payment, there would be a negative impact on their cash flow and thus their ability to make plan payments. If the sale generated net proceeds to Mr. and Mrs. Smith in excess of their combined $30,000 homestead exemption, then the excess should be paid to my office for distribution to unsecured creditors.

I believe it is proper for Mr. and Mrs. Smith to seek permission of the Bankruptcy Court to sell their real estate.

Conversely, then, if the sellers have no equity in the home, if they are getting no sale proceeds from the sale of the home, perhaps they may even have to come to closing with cash in order sell the home, then with underwriter approval, the sellers can sell the home without approval from the Chapter 13 bankruptcy court. However, the underwriter should make sure that the trustee has been paid all of his fees.

Buyer Bankruptcy Issues

Question: Assume that a title search reveals that the proposed insured has filed for bankruptcy. The proposed insured will be executing a mortgage that the Company will be insuring. What should the examiner do?

Answer: The examiner should verify that the debtor has been discharged.

Question: What if the debtor has not been discharged?

Answer: If the buyer has filed Chapter 7 bankruptcy, the trustee should consent to the proposed purchaser and mortgage.

If the buyer has filed Chapter 11 or Chapter 13 bankruptcy, the examiner should confirm that the proposed purchase and mortgage are consistent with the Plan. If the examiner is unable to confirm this, the examiner should consult an underwriter. In this regard, see the next question and answer.

Question: The proposed insured has gone through Chapter 13 bankruptcy. The Company has been asked to insure the mortgage of the proposed insured. What should the examiner do?

Answer: Chapter 13 bankruptcy is designed to allow individual debtors to retain most of their property and to use future income to pay off creditors. In order to do this, the individual debtor must submit a plan to the court. Such a plan will usually last for three years, but may be extended to five years.

It is possible, therefore, that this mortgage is part of the debtor’s plan. The examiner should obtain a copy of the plan and review the plan to make sure that the proposed mortgage is part of the plan. If the proposed mortgage is not part of the plan, the examiner should insist on a bankruptcy court order approving the plan. Most, if not all, plans, contain language indicating that the bankruptcy court retains jurisdiction to handle situations such as this.

The issue is this: How will this new mortgage affect the debtor’s ability to successfully complete the plan? Even if this new mortgage were to pay off the existing mortgages, could this new mortgage give the debtor a higher monthly mortgage payment? Could this new mortgage make it harder for the debtor to complete the plan? This is why the examiner has to review the plan to make sure that the mortgage is consistent with the plan.

On the other hand, what if the attorney for the debtor were to give the examiner evidence that this new mortgage has a lower interest rate and a lower principal and thus the debtor’s mortgage payments would be lower than they are now?)

In the alternative, with underwriter approval, the examiner can consider waiving the bankruptcy exception if the examiner one, can verify that the new mortgage payments are less than any previous mortgage payments, and two, can verify that the borrower is not getting any cash back at the closing. But if the borrower is getting money back at the closing, then the bankruptcy trustee has to direct the Company as to who is to be paid the money. The trustee may insist that any cash back be given to him, to be turned over to the creditors.

Miscellaneous Bankruptcy Issues

Can a Mortgage be Discharged in Bankruptcy?

Question: An examiner is examining a title file where the mortgage was allegedly “discharged in bankruptcy.” In fact, the lender is scheduled on the list of creditors. The examiner contacts the lender, and the lender tells the examiner that the debt has been discharged. The examiner knows, however, that generally speaking a mortgage is a lien on the land (and not just a personal debt) and thus not usually dischargeable in bankruptcy. What does the examiner do?

Answer: There are several options:

• First of all, an order could be entered in the bankruptcy file that would “avoid” the lien of the mortgage.

• Second, the bankruptcy case could be opened up and there could be a sale free and clear of all liens.

• Third, the lender believes that its mortgage is unenforceable and the debt is discharged. Perhaps the lender will issue a release of mortgage. (This option is probably not realistic. The lender was not paid. Why would a lender voluntarily release its mortgage when the mortgage debt was not repaid?)

Otherwise, the examiner should not even consider waiving a mortgage under this set of facts without consulting an underwriter. What if, for example, the mortgagor has “reaffirmed” the mortgage by continuing to make mortgage payments after the bankruptcy?

The lender’s right to foreclose its mortgage does not go away just because the owner has filed for bankruptcy (although the automatic stay will temporarily stop the foreclosure).

A mortgage is both a personal obligation (as represented by the note) and also a lien on the land (as represented by the mortgage). A chapter 7 discharge may eliminate the mortgage debt, but it does not eliminate the mortgage lien. If it did, then everyone would mortgage their property, file bankruptcy, and then own their homes free and clear of the mortgages.

Once an owner files bankruptcy, the lender, as a secured creditor, will probably ask the court to lift the automatic stay so that it can foreclose its mortgage. Or, the trustee might sell the home. Or, the lender might wait until the bankruptcy ends and then proceed with foreclosure. Or, the owner could convert a chapter 7 bankruptcy into a chapter 13 bankruptcy and then file a repayment plan

For further information, see the section on “Lien Stripping in Chapter 13 Bankruptcy Cases” and “Mortgage Cramdowns.”

Question: John and Mary Smith own their home. They have filed for Chapter 13 bankruptcy. Now they are selling their home. Is there a problem?

Answer: There possibly is a problem. As indicated earlier, when a Chapter 13 trustee was asked to give his opinion about this fact situation, he replied with the following statement:

My office would only take a position in this matter if the transaction were to decrease the chances that they would successfully complete their plan or if it were to generate net proceeds that should be distributed to unsecured creditors.

For example, if they sold their house to buy another house with a higher mortgage payment, there would be a negative impact on their cash flow and thus their ability to make plan payments. If the sale generated net proceeds to Mr. and Mrs. Smith in excess of their combined $30,000 homestead exemption, then the excess should be paid to my office for distribution to unsecured creditors.

I believe it is proper for Mr. and Mrs. Smith to seek permission of the Bankruptcy Court to sell their real estate.

Note that some title company underwriters argue that the approval of the bankruptcy court is not needed as long as the sale is not inconsistent with the Chapter 13 bankruptcy plan. (In this situation, the risk may be more with non-residential property than with residential property.) Other underwriters believe that once the plan is confirmed, the debtor may sell his home without getting the approval of the bankruptcy trustee, as long as the examiner makes sure that the bankruptcy trustee has been paid all of his fees.

However, even if the plan provides for the sale of the home, the plan typically does not spell out the details of the sale. It is always better to make sure that the bankruptcy court approves the sale of the debtor’s home.

Question: An examiner has been asked to insure a transaction (deed, lease, or mortgage) in a pending Chapter 11 action before the plan has been confirmed. Do local recording fees and transfer tax stamp charges have to be paid for at closing?

Answer: 11 U.S.C. § 1146(a) provides that “the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 or 1191 of this title, may not be taxed under any law imposing a stamp tax or similar tax.”

The Supreme Court has made it clear that the exemption for the payment of these fees applies only when the plan has been confirmed. (Prior to this time, there were conflicting lower federal circuit court opinions.)

Rule of Title Practice: If the transaction in a Chapter 11 is to take place before the plan is confirmed, recording fees and transfer taxes must be collected. This is true even in those jurisdictions that previously relied on a federal circuit court decision holding otherwise. Any such holding has been overruled by the U.S. Supreme Court case, Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 128 S. Ct. 2326, 171 L. Ed. 2d 203 (U.S. Supreme Court, 2008).

Any recording issues with the county have to be resolved prior to closing. Otherwise, the Company risks the exposure of an ever-widening title “gap” while the parties work things out. The documents must be recorded as soon as possible after the closing.

Chapter 13 Bankruptcy—Mortgaging the Property

Question: The owner of the land has filed Chapter 13 bankruptcy. The plan has been confirmed by the court. Now he wants to mortgage the property. His attorney feels that now that the plan is confirmed, he does not need court approval to mortgage the property. Is the attorney correct? Is there a problem?

Answer: Yes, there could be a problem.

What does the plan say? Does the plan provide for the mortgaging of the property? Some title company underwriters feel that even though the plan may authorize a post-plan mortgaging of the land, the details of the plan may not be specific enough to pass title company scrutiny. The examiner should consult an underwriter. Even if the plan describes the mortgaging of the land in broad and general terms, this may be sufficient for title insurance purposes.

On the other hand, what if the plan is silent as to the mortgaging of the land. Perhaps the plan refers to the paying off of an old mortgage, but says nothing about a new mortgage.

Perhaps the plan contains language like,

Upon confirmation, the Debtor shall be vested with his assets, subject only to the terms and conditions of this Plan. The Debtor shall be entitled to continue to operate and manage his businesses and financial affairs without further order of this Court as set forth in the Plan.

Such language makes it clear that the debtor is limited by the terms and conditions of the plan, and the plan makes no mention of him getting a new mortgage.

Perhaps the plan contains language like the following:

The bankruptcy court retains jurisdiction to, among other things, enter order to further consummation of the Plan; approve modifications of the Plan upon motions brought before the Bankruptcy Court in accordance with 11 U.S.C. § 1127.

This language indicates that the bankruptcy court has retained jurisdiction to approve, among other things, a mortgage of the debtor’s land.

Again, as indicated above, a bankruptcy trustee was once asked if a debtor in chapter 13 bankruptcy needed a court order to sell his home. He replied as follows:

My office would only take a position in this matter if the transaction were to decrease the chances that they would successfully complete their plan or if it were to generate net proceeds that should be distributed to unsecured creditors.

For example, if they sold their house to buy another house with a higher mortgage payment, there would be a negative impact on their cash flow and thus their ability to make plan payments. If the sale generated net proceeds to Mr. and Mrs. Smith in excess of their combined $30,000 homestead exemption, then the excess should be paid to my office for distribution to unsecured creditors.

I believe it is proper for Mr. and Mrs. Smith to seek permission of the Bankruptcy Court to sell their real estate.

This answer is appropriate to the facts of this situation. That is, the true issue is this: How will this new mortgage affect the debtor’s ability to successfully complete the plan? Even if this new mortgage were to pay off the existing mortgages, could this new mortgage give the debtor a higher monthly mortgage payment, making it less likely for the debtor to complete his plan?

But on the other hand, what if the attorney were to give the examiner evidence that this new mortgage has a lower interest rate than the debtor’s existing mortgage, and an amount that is less than the amount of the existing mortgage? What if the debtor’s proposed monthly mortgage payments are less than the debtor’s existing mortgage payments?

Lien Stripping in Chapter 13 Bankruptcy Cases

The Company has received requests to insure sale transactions out of a Chapter 13 bankruptcy free and clear of a junior mortgage or other lien. This is sometimes called “lien stripping.” See 11 U.S.C. § 506, 11 U.S.C. § 1322(b)(2), and 11 U.S.C. § 1327.

“Lien stripping” involves the bankruptcy attorney obtaining an appraisal that establishes that the value of the property is not adequate to secure even the senior encumbrance, and that therefore, on a practical basis, the junior lien is unsecured. (That is, the fair market value of the land is less than the amount of the senior encumbrance; therefore, the junior lien is essentially unsecured.) An order is then entered that the junior lien is unsecured.

However, note that the junior lien is not actually voided until the debtor requests that the lien be voided upon the entry of the debtor’s successful completion of the Plan and after the debtor is discharged. There is then a second order voiding the lien. This second order should be recorded to clear the lien of record.

Unfortunately, the Company is often asked to waive the lien upon the issuance of the first order, not the second order.

Furthermore, we are seeing situations where we asked to waive a junior mortgage after the first order, and after the completion of the Plan, but without a second order. Any request to waive a junior lien under these circumstances should be directed to an underwriter.

Note that some debtors are following up their Chapter 7 bankruptcy cases with a Chapter 13 case to strip off their second mortgage. This is informally called a Chapter 20 bankruptcy case. (Chapter 7 + Chapter 13 = Chapter 20.) Note that some bankruptcy judges feel that this is not allowed, as a debtor ordinarily must wait four years after his Chapter 7 discharge to file a new Chapter 13 case.

Rule of Title Practice

In order to waive a junior lien pursuant to the “lien stripping” doctrine, the examiner must make sure that the debtor has completed the Plan and the second order has been issued and recorded. Otherwise, there must be a sale “free and clear of all liens” pursuant to 11 U.S.C. § 363(f). This statute is discussed in these materials.

Also, for further information, see Underwriting Bulletin No. 2012-RC-01.

Mortgage Cramdowns

A mortgagor can use a Chapter 13 bankruptcy to “cram down” a mortgage on investment property, such as rental residential property or commercial property. One cannot use this process on one’s residence. (To “cram down” a mortgage means to reduce the outstanding indebtedness of the mortgage.)

Assume that someone buys an investment property for $300,000, executing a purchase money mortgage at closing. Later, though, the property goes down in value to $150,000. Unfortunately, the borrower still owes $250,000 on the mortgage.

The borrower can cram down the mortgage to $150,000 (the current value of the property) through the Chapter 13 plan and pay that to the mortgage lender instead of the entire $250,000. Pursuant to court order, the remaining $100,000 becomes unsecured debt and is treated as such in the bankruptcy. This means that the borrower may end up paying a small amount of this debt through the Chapter 13 plan and the rest of the debt will be discharged at the completion of the plan.

Note that with a cram down (and unlike a mortgage foreclosure), the borrower is not liable for any deficiency. That is, if a mortgagor crams down a loan through a Chapter 13 bankruptcy, and the property is later foreclosed on, the borrower is not liable for the amount that has become unsecured debt. (This amount is usually equal to the foreclosure deficiency.)

Post-Bankruptcy Issues

Once the bankruptcy has been closed or dismissed and the trustee, if any, has been discharged, the bankruptcy is no longer pending. Therefore, generally speaking, unlike other proceedings, the examiner does not have to raise a commitment exception relative to the “rights of appeal” of the debtor.

There are, however, exceptions to this general rule:

• When the order closing or dismissing the case was entered on the docket within the last fourteen days. (Again, note that the time to file an appeal or motion runs from the date when the order has been entered on the bankruptcy clerk’s docket and not from when the order was entered by the court.)

• When the real estate that is owned by the debtor was not scheduled as an asset of the estate.

Question: What is the legal significance of land owned by a debtor that is neither abandoned by the bankruptcy trustee nor administered by the bankruptcy court?

Answer: The land remains property that is subject to the jurisdiction of the bankruptcy estate.

If the creditors later learn of this property that was neither abandoned nor administered, the bankruptcy may be re-opened and the debtor’s discharge may be set aside.

Trustee Avoidance of Post-Bankruptcy Transfers of Real Estate

Section 549 of the Bankruptcy Code, or 11 U.S.C. § 549, allows the bankruptcy trustee to avoid—that is, set aside—post-petition transfers of the land by the debtor. Although Section 549(b) and Section 550(b) gives some protection to those who take title without knowledge of the pending bankruptcy, how does one establish good faith and a lack of knowledge of the bankruptcy? Admittedly, the trustee may fail to record a notice of the bankruptcy, as set forth in Section 549(c) of the Code. But on the other hand, the Insured cannot claim lack of knowledge when the title commitment contains an exception for the pending bankruptcy or shows the name of the bankruptcy debtor in Schedule A.

Bankruptcy Review Online: The PACER System

Bankruptcy files can be reviewed online. Go to: www.ilnb.uscourts.gov. This is the link to the U.S. Bankruptcy Court for the Northern District of Illinois.

When reviewing a case on PACER, the examiner should look for references to other proceedings that might have an impact on title.

Practical Bankruptcy Advice for the Title Examiner—Owner Issues Concerning 1-4 Residential Property

Caveat: Remember the Appeal and Stay Periods: Bankruptcy Rule 8002(a) provides for an appeal period of fourteen days from the order’s entry on the docket to file an appeal from an order. When the final day of a deadline falls on a Saturday, Sunday or holiday for the federal court involved, the final day becomes the next day the court is open for business.

Bankruptcy Rule 6004(h) provides for a stay of an order authorizing the sale of property until the expiration of fourteen days from the order’s entry on the docket.

Bankruptcy Rule 8017 provides for a stay of any court order until the expiration of fourteen days from the order’s entry on the docket.

A court may lift the Bankruptcy Rule 6004(h) and Bankruptcy Rule 8017 automatic stay, but the court cannot lift the Bankruptcy Rule 8002(a) appeal period. The appeal period runs concurrently with the automatic stay.

Vesting, all chapters

Chapter 7: John Smith, subject to proceedings in the U.S. Bankruptcy Court for the _____ District of Illinois entitled In Re: John Smith, Debtor, case number _____, wherein a petition was filed.

Chapter 11: John Smith, subject to proceedings in the U.S. Bankruptcy Court for the _____ District of Illinois entitled In Re: John Smith, Debtor, case number _____, wherein a petition was filed.

Chapter 13: John Smith, subject to proceedings in the U.S. Bankruptcy Court for the _____ District of Illinois entitled In Re: John Smith, Debtor, case number _____, wherein a petition was filed.

Chapter 7

Chapter 7—Seller Has Filed for Bankruptcy and is Selling the Home

The trustee has the power to sell the property, either subject to liens or free and clear of all liens. If free and clear of all liens, see the above section, “Selling Real Estate through Bankruptcy.”

However, if the trustee is selling the land, the examiner still needs the court order authorizing the sale of the land. The examiner does not have to be concerned with lifting the Bankruptcy Rule 8017 automatic stay.

If the homeowner is selling the land, then the examiner also needs a court order. This may be an order of abandonment, indicating that the trustee has abandoned the property. With a court order, the examiner does not have to be concerned about lifting the Bankruptcy Rule 8017 automatic stay.

Chapter 7—Owner Has Filed for Bankruptcy and is Mortgaging the Home

An owner/debtor should not be mortgaging property when the owner has filed for Chapter 7 bankruptcy. Chapter 7 is the liquidation of assets, not the acquisition of more liabilities.

Chapter 11

Chapter 11—Seller Has Filed for Bankruptcy and is Selling the Home

Does the Chapter 11 plan allow for the sale of the property? Note that a debtor in possession who is operating a business is authorized to sell property if it is in the ordinary course of his business. In this case, all liens should be paid off, just as in a conventional closing.

Some underwriters feel that if the plan contemplates the sale of the property, then the examiner does not have to worry about lifting the automatic stay. However, most plans are not very specific. This is why a court order should be obtained in a sale pursuant to Chapter 11. If, on the other hand, the plan is very specific, then, with underwriter approval, the examiner can consider insuring a sale of the property without a court order.

Chapter 11—Owner Has Filed for Bankruptcy and is Mortgaging the Home

Does the plan allow for the mortgaging of the debtor’s property?

If the plan contemplates the mortgaging of the property, then with underwriter approval, the examiner can consider insuring the mortgage without a court order.

Obviously, if the mortgaging of the property is not contemplated by the plan, the examiner should obtain a court order.

Chapter 13

Chapter 13—Seller Has Filed for Bankruptcy and is Selling the Home

Even if the Chapter 13 Plan provides for the sale of the home, the plan typically does not spell out the details of the sale. It is always better to make sure that the bankruptcy court approves the sale of the debtor’s home. That is, the examiner should obtain a court order authorizing the sale of the home, even in a Chapter 13 bankruptcy.

Note, though, that some underwriters feel that if the debtor has filed a Chapter 13 bankruptcy, the debtor is selling his home, the trustee has approved the sale, all mortgages or other liens will be paid off at closing, the trustee has been paid all his fees, and all sale proceeds are being turned over to the trustee for payment to creditors, then the Company can insure the transaction without a court order. In this situation, an underwriter should be consulted.

Chapter 13—Owner Has Filed for Bankruptcy and is Mortgaging the Home

Does the plan allow for the mortgaging of the debtor’s property? If so, then with underwriter approval, the examiner can insure the mortgage without a court order.

Obviously, if the mortgaging of the property is not contemplated by the plan, the examiner should obtain a court order.

Other Seller Issues

Seller Has Filed Bankruptcy—Liens

Bankruptcy court orders removing specific liens from specific property may be relied on in waiving title exceptions for these liens.

In this situation, the examiner must review the bankruptcy file to make sure that the debt was scheduled and notice was given to the creditor. In addition, the examiner must wait 14 days, as measured from the entry of the order on the docket, before waiving the exception.

Seller Has Filed Bankruptcy—Who Executes the Deed?

Chapter 7:

In a Chapter 7 bankruptcy, the debtor will execute the deed if the land has been abandoned by the trustee.

Example: If the owner of the land has filed for Chapter 7 bankruptcy, the transaction is a short sale, the owner may execute the land as long as the trustee has abandoned the property in question. Otherwise, generally speaking, the trustee will execute the deed. However, keep in mind that either the debtor or the trustee may convey, depending on the circumstances and depending on the approval of the court.

Generally speaking, the title examiner will need either a court order approving the sale or a court order compelling the abandonment of the asset from the bankruptcy estate.

Again, consider the circumstances. If there is a court order approving the sale, the bankruptcy trustee might ask the court to lift the 11 U.S.C § 362 automatic stay and ask the court that the debtor be authorized to convey the land free of the automatic stay and free of the bankruptcy estate.

Chapter 13:

In a Chapter 13 bankruptcy, the examiner will almost always see deeds executed by the debtor. The sale will be approved by the court and sold free of the § 362 automatic stay and the bankruptcy estate. Instead, all the proceeds of sale (if any) will attach to the interest of the bankruptcy estate. The court will require that all non-exempt proceeds go to the Chapter 13 trustee.

Seller Has Filed Bankruptcy—Abandonment

A seller can sell land if the trustee has abandoned the property.

In order to insure “abandoned” property, there must be a court filing in the bankruptcy file indicating that the trustee has abandoned the property.

Practical Bankruptcy Advice for the Title Examiner—Buyer Issues Concerning 1-4 Residential Property

Chapter 7

Chapter 7—Buyer Has Filed for Bankruptcy and is Buying the Home

The examiner must verify that the proposed purchaser has been discharged from bankruptcy.

Chapter 11

Chapter 11—Buyer Has Filed for Bankruptcy and is Buying the Home

Is the proposed purchase and mortgage consistent with the Plan? If not, the examiner should consult an underwriter. With underwriter approval, the examiner should verify that the borrower is not getting any cash back at the closing. If the borrower is getting money back at the closing, then the bankruptcy trustee has to direct the Company as to who is to be paid the money. The trustee may insist that any cash back be given to him, to be turned over to the creditors.

Chapter 13

Chapter 13—Buyer Has Filed for Bankruptcy and is Buying the Home

Is the proposed purchase and mortgage consistent with the Plan? If not, the examiner should consult an underwriter. With underwriter approval, the examiner should verify that the borrower is not getting any cash back at the closing. If the borrower is getting money back at the closing, then the bankruptcy trustee has to direct the Company as to who is to be paid the money. The trustee may insist that any cash back be given to him, to be turned over to the creditors.

Other Buyer Issues

Buyer Has Filed Bankruptcy—Liens

If a general lien is recorded against a purchaser, and the purchaser has filed bankruptcy, is the creditor listed in the schedule of creditors? Before waiving the lien, the examiner must make sure that the debt was both scheduled and discharged. Remember, certain types of debts cannot be discharged. For example: criminal fines and student loans.

Title Examination Bankruptcy Scenarios

Scenario Number One

Facts:

John Smith files a petition for Chapter 7 bankruptcy. He is discharged. Unfortunately, a judgment creditor pursuant to a recorded judgment was mistakenly not listed as a creditor on the bankruptcy schedule.

John Smith now wishes to buy a home, and the title search has revealed this recorded judgment.

John Smith’s attorney argues that the judgment should be waived. He points out that the debtor’s case was a no “asset” case. That is, the trustee filed a “no asset” report and that there were no dividends to divide among the creditors. He states that in Chapter 7 “no asset” cases, bankruptcy courts have ruled that there is no purpose served by reopening a case to allow a debtor to add an omitted creditor to his schedules unless that debt falls under Sections 523(a)(2), 523(a)(4), or 523(a)(6)—that is, debts incurred by false pretenses, false representation, or actual fraud; debts incurred by fraud or defalcation while acting as a fiduciary; and debts for willful and malicious injury. He states a creditor is prejudiced by the debtor’s failure to list the creditor in the bankruptcy schedules only if the creditor’s rights to receive his share of dividends or obtain a determination of dischargeability are compromised.

Question: Should the examiner waive the judgment?

Answer: No, the examiner should not waive the judgment.

The fact that the judgment is essentially discharged because this was a “no asset” bankruptcy is not the issue. Rather, the issue is that both the owners and loan title insurance policies include as coverage the cost of the defense. For example, see Condition Number 5 of the owner’s policy:

5. DEFENSE AND PROSECUTION OF ACTIONS

(a) Upon written request by the Insured, and subject to the options contained in Section 7 of these Conditions, the Company, at its own cost and without unreasonable delay, shall provide for the defense of an Insured in litigation in which any third party asserts a claim covered by this policy adverse to the Insured.

The examiner should not waive the judgment, even though it may not be enforceable, because the Company does not wish to have to defend against the post-policy execution and levy of this judgment by the judgment creditor.

However, because the mortgage to be insured is a purchase money mortgage, the examiner can show the judgment in “Part II, Schedule B” of the loan policy. This part of the loan policy insures that the judgment exists, but the policy insures that the judgment is inferior and subordinate to the lien of the insured mortgage.

The examiner will need the written agreement of the lender, allowing the examiner to do this.

The examiner would then show the judgment on any owner’s policy issued.

Basic Bankruptcy Title Exceptions

Some basic Schedule B title exceptions are as follows.

As indicated above, the examiner should obtain a court order when the property is being sold:

• We should be furnished an order from the bankruptcy court approving the sale of the property, and this commitment may be subject to additional exceptions.

When the debtor is selling, raise this exception:

• The right, title, and interest of _____, Trustee of the bankruptcy estate of _____ (debtor), under Chapter _____, Bankruptcy Case Number _____, filed in the Northern District of Illinois.

Note that this exception can be waived with the court order approving the sale.

When the trustee is selling, raise this exception:

• The right, title, and interest of _____, (Debtor), Debtor under Chapter _____, Bankruptcy Case Number _____, filed in the Northern District of Illinois.

Note that this exception can be waived with the court order approving the sale.

Bankruptcy and Title Policy Coverage

Some examiners may feel that after title companies adopted the 2006 title policies, bankruptcy is no longer an issue, as the 2006 title policies exclude bankruptcy matters from policy coverage. However, this is not really the case.

To understand the issue of bankruptcy and title policy coverage, one has to understand the inter-play between the Exclusions from Coverage and the Covered Risks.

Exclusions from Coverage in the 2006 title policies are those matters that are excluded from the coverage of the title policies.

Covered Risks in the 2006 title policies are those matters for which the Company insures against loss.

The title policies use the terms, fraudulent transfer and preferential transfer

Section 548 of the Bankruptcy Code describes two types of fraudulent transfers:

A subjective fraudulent transfer is a transfer made by the debtor with the intent to hinder, delay, or defraud its creditors. (Section 548(a)(1)(A) of the Bankruptcy Code)

Example: John owns a home worth $3 +00,000. He is deeply in debt. Not wanting his creditors to record judgments against his home, he deeds it to his brother; the deed is exempt under paragraph “e.” Ten months later he files for bankruptcy.

An objective fraudulent transfer occurs when the debtor receives less than “reasonably equivalent value” in exchange for said transfer and the debtor (1) was insolvent on the date of the transfer; (2) became insolvent as a result of the transfer (for example, the debtor was left with unreasonably small working capital); or (3) believes it would incur debts beyond its ability to repay them as they matured. (See Section 548(a)(1)(B) of the Bankruptcy Code.)

Example: John sells the above home to Bonnie Buyer for $100,000. Eight months later John files for bankruptcy.

Fraudulent transfers made within two years prior to the filing of the bankruptcy petition (see Section 548(a)(1) of the Bankruptcy Code) or four years under the Illinois Uniform Fraudulent Transfer Act (see 740 ILCS 160/1 et seq.) may be set aside.

A preferential transfer is defined in Section 547 of the Bankruptcy Code. This section set forth the six elements of a preferential transfer, also called a preference:

A transfer of an interest of the debtor in property, To or for the benefit of a creditor, For or on account of an antecedent (i.e., preexisting) debt, Made while the debtor is insolvent, On or within 90 days before the date of the filing of the petition (or, if the transfer was to an “insider,” within one year preceding the petition), Which transfer benefits the creditor more than a Chapter 7 bankruptcy distribution.

Example: In late 2019 Lender loans John $100,000. In early 2020 John mortgages his home with Lender in order to secure this debt. If John is insolvent at the time of the mortgage, the mortgage is subject to attack as a preference—the mortgage could be viewed as an attempt to transform the lender's status from that of an unsecured creditor to a secured creditor. (A debtor is presumed to be insolvent during the 90 day period prior to the bankruptcy).

Exclusion from Coverage 4 of the Owner’s Title Policy

The following matters are expressly excluded from the coverage of this policy, and the Company will not pay loss or damage, costs, attorneys' fees, or expenses that arise by reason of:

4. Any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction vesting the Title as shown in Schedule A, is (a) a fraudulent conveyance or fraudulent transfer; or (b) a preferential transfer for any reason not stated in Covered Risk 9 of this policy.

Commentary

It is clear that fraudulent transfers and preferential transfers are excluded from the coverage of the title policy—but only as they relate to the “transaction vesting the Title.”

Covered Risk 9 of the Owner’s Title Policy

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B, AND THE CONDITIONS, CHICAGO TITLE INSURANCE COMPANY, a Nebraska corporation (the “Company”) insures, as of Date of Policy and, to the extent stated in Covered Risks 9 and 10, after Date of Policy, against loss or damage, not exceeding the Amount of Insurance, sustained or incurred by the Insured by reason of:

9. Title being vested other than as stated in Schedule A or being defective

(a) as a result of the avoidance in whole or in part, or from a court order providing an alternative remedy, of a transfer of all or any part of the title to or any interest in the Land occurring prior to the transaction vesting Title as shown in Schedule A because that prior transfer constituted a fraudulent or preferential transfer under federal bankruptcy, state insolvency, or similar creditors’ rights laws; or

(b) because the instrument of transfer vesting Title as shown in Schedule A constitutes a preferential transfer under federal bankruptcy, state insolvency, or similar creditors’ rights laws by reason of the failure of its recording in the Public Records (i) to be timely, or (ii) to impart notice of its existence to a purchaser for value or to a judgment or lien creditor.

Commentary

The Company does not exclude from coverage an earlier transaction that is “prior to the transaction vesting title” that is determined to be a fraudulent transfer or a preferential transfer.

The 2006 loan policy contains similar provisions. See Exclusion 6 and Covered Risk 13 of the ALTA 2006 loan policy.

Example

Adam owns a single family home located on lot 1. Adam owes Baker $100,000. To repay this debt Adam conveys lot 1 to Baker in January. Two months later Baker conveys the land to Charles. In April Adam files bankruptcy. Adam’s creditors file suit, alleging that the transfer from Adam to Baker should be set aside as a preference.

(The creditors claim that the deed to Baker was on account of an antecedent (i.e., preexisting) debt. See 11 U.S.C. § 547.)

Assume that Chicago Title insured both transactions:

• Chicago Title insured the conveyance from Adam to Baker. • Chicago Title insured the conveyance from Baker to Charles

What is the Company’s potential liability in both transactions?

The Company insured Baker in the first transaction, the deed from Adam to Baker. In this case the Company would probably deny any claim because of Exclusion 4. The bankruptcy issue arose out of the “transaction vesting the title.”

The Company insured Charles in the second transaction, the deed from Baker to Charles. In this case Covered Risk 9 of the owner’s policy would apply, and the Company would probably accept the claim. However, the Company would have a possible defense to the claim. Section 550 of the Bankruptcy Code protects a secondary transferee from the bankruptcy trustee’s avoidance power if that secondary transferee takes for value in good faith and without knowledge of the voidability of the transfer.

11 U.S.C. § 550:

(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from— (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee. (b) The trustee may not recover under section [1] (a)(2) of this section from— (1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or (2) any immediate or mediate good faith transferee of such transferee.

Acknowledgments

Thanks to Walt Adams of Chicago Title Insurance Company, Sam Shiel, and John Neuenkirchen of the Jordan Law Group for their assistance in the preparation of these materials.

Cemeteries

Last effective date: January 26, 2018

CEMETERY LAW

By

Richard Bales

I. Statutory citations

A. 20 ILCS 3435/01 et seq. (Archaeological and Paleontological Resources Protection Act)

B. 20 ILCS 3440/01 et seq. (Human Skeletal Remains Protection Act)

C. 55 ILCS 65/01 et seq. (County Cemetery Care Act)

D. 55 ILCS 70/01 et seq. (Grave and Cemetery Restoration Act)

E. 760 ILCS 90/01 et seq. (Burial Lot Perpetual Trust Act)

F. 760 ILCS 95/01 et seq. (Cemetery Perpetual Trust Authorization Act)

G. 760 ILCS 100/1 et seq.(Cemetery Care Act)

H. 765 ILCS 805/01 (Conveyance of Burial Places to County Act)

I. 765 ILCS 810/01 (Cemetery Company Land Not Used for Burial Act)

J. 765 ILCS 815/01 et seq. (Cemetery Association Land Not Used for Burial Act)

K. 765 ILCS 820/01 et seq. (Cemetery Land Ownership and Transfer Act)

L. 765 ILCS 825/01 et seq. (City Sale or Lease of Land for Cemeteries Act)

M. 765 ILCS 830/01 (Cemetery Removal Act)

N. 765 ILCS 835/0001 (Cemetery Protection Act)

O. 765 ILCS 835/14.5; Cemetery encroachments

P. 805 ILCS 320/01 et seq. (Cemetery Association Act)

Q. 805 ILCS 325/01 (National Cemetery Act)

II. Introduction

A. A cemetery is a place set apart for the burial of the dead and is a sacred place entitled to respect. See Village of Villa Park v. Wander’s Cemetery Co., 316 Ill. 226, 147 N.E. 104 (1925)

B. The corporate authorities of a municipality may purchase land and establish cemeteries. See 65 ILCS 5/11-49-1.

1. But note that the rules regarding the conveyance of land owned by a municipality are governed by the law of Municipal Corporations. See, in this regard, 65 ILCS 5/11-76-1 et seq. This law will not be covered in this material.

C. Religious corporations can also own cemeteries. See generally the Religious Corporation Act, 805 ILCS 110/01 et seq.; see specifically sections 42, 46f, 46j of said act. This corporate law will not be covered in this material.

C. Some municipalities have pet cemeteries. Note that there is no specific statutory reference in Illinois for pet cemeteries; the statutes merely refer in general terms to “animal disposal.”

1. “Cemetery” is defined in the Cemetery Care Act as “any land or structure in this state dedicated to and used, or intended to be used, for the interment of human remains. See 760 ILCS 100/2.

2. Example: A corporation is selling a pet cemetery. This transfer is governed by corporate law, not cemetery law.

3. For all these reasons, pet cemeteries will not be covered in this chapter.

III. The Organization of Cemetery Associations

A. Formation of a cemetery

1. Six or more persons may organize a cemetery association. They must present a petition to the Secretary of State. The petition must include the name of the appropriate county and the name of the cemetery.

2. The Secretary of State in return issues a certificate of organization. This certificate is recorded in the county where the land is located. See 805 ILCS 320/1, 2, 3.

3. Cemetery property is exempt from the payment of real estate taxes. See 765 ILCS 805/1; 805 ILCS 320/14.

B. Internal changes

1. Two-thirds of the trustees can approve a resolution to change the name of the cemetery. See 805 ILCS 320/3.

2. The persons receiving the certificate of organization must elect from their own number a board of trustees. The law concerning these trustees and the appointment of successor trustees is found at 805 ILCS 320/4.

3. Two-thirds of the trustees can approve a resolution to dissolve the cemetery association. Such dissolution must be approved by the state comptroller. If the association has any “care funds,” these must be disposed of in accordance with the Cemetery Care Act (760 ILCS 100/1 et seq.)

IV. Real Property Transactions by Cemetery Associations

A. Acquisition

1. 805 ILCS 320/5 authorizes a cemetery association to “acquire the necessary amount of land for the use of the cemetery association.”

a. The above wording becomes important when discussing limitations on subsequent sales, below.

2. A cemetery association may acquire land by purchase or by gift. The association may also accept gifts of personal property, such as money. See 760 ILCS 100/2.

3. A cemetery association may not acquire any more real property than is needed for burial purposes. Unfortunately, the statute does not indicate how one determines how much property is needed for burial purposes. See 765 ILCS 820/1.

a. Prior to 1895 the size of cemeteries was limited to twenty acres. As recently as 1961 the acquisition of more than fifty acres was upheld. See Spring Hill Cemetery of Danville v. Ryan, 20 Ill.2d 608, 170 N.E.2d 619 (1961).

b. It seems clear, though, that if lands are held by a cemetery association that do not lie within the cemetery, they must be sold. See Bushers v. Graceland Cemetery Assn. of Albion, 171 F.Supp. 205 (D. Ill. 1959).

4. But note that this limitation on the acquisition of land that is set forth in 765 ILCS 820/1 and noted above in paragraph 3 concerns land for burial purposes. 760 ILCS 100/2 seems to allow a cemetery association to acquire any land “impressed with a trust by the terms of any gift” when this land is used to produce investment income. This, then, would be land that is used for investment and not for burial purposes.

B. Disposition

1. Generally speaking, cemetery associations are prohibited from selling land dedicated for burial purposes. Once land is dedicated for burial purposes (such as by the filing of a plat), it may not be sold. See Bushers v. Graceland Cemetery Assn. of Albion, 171 F.Supp. 205 (D. Ill. 1959). (However, see below.)

2. However, cemetery associations may convey any land purchased for burial purposes when the state legislature or a municipal ordinance prohibits the use of the land for burial purposes. See 765 ILCS 810/1.

a. For example, when a subsequent zoning ordinance bars the use of newly-acquired land for cemetery purposes.

3. Note that some cemetery associations have been created by special act of the legislature. In these circumstances, the examiner must ask for a copy of the special act in question, as the legislature may have attached special powers or limitations to the creation of the corporation. See 765 ILCS 825/1; 965 ILCS 820/1.

4. Cemetery associations that own land in any cemetery in any county of less than 100,000 residents have the power to sell such cemetery land if the land is not suitable or required for burial purposes and in which no person has been buried, if:

a. The trustees first call a meeting of the lot owners in the cemetery. Notice of the meeting is by publication in a newspaper published in said county once a week for three consecutive weeks. If there is no such newspaper, then in a newspaper published nearest to such cemetery.

b. At the meeting there is a vote, and if a majority of the votes cast are in favor of selling the land, the trustees have the power to sell.

c. The land is sold at public sale to the highest bidder.

d. See, in this regard, 765 ILCS 815/1-5.

5. Cemetery associations do have the power to convey property. See generally the Cemetery Land Ownership and Transfer Act, 765 ILCS 820/1 et seq.

6. Rule of title practice: If insuring the conveyance of land in this manner, ask for a list of all lot owners, proof that notice of sale was mailed to each owner, evidence of the vote of lot owners, and evidence of publication.

V. Powers of a Cemetery Association

A. A cemetery association may accept donated personal and real property. The association has the right to sell donated real estate and also has the right to purchase real estate for investment purposes. See 760 ILCS 90/2; 95/2;100/2.

1. Rule of Title Practice: If the association is selling donated real estate, obtain a resolution executed by the cemetery association trustees or board of directors that authorizes the sale.

2. Rule of Title Practice: If the association is purchasing investment real estate, 760 ILCS 95/2 states that the purchase price of the real estate shall not exceed the fair market value thereof on the date of its purchase, as such value is determined by the board of directors or board of trustees of the association. If insuring a purchase, obtain some type of valuation letter from the association.

B. A cemetery association can condemn property that adjoins an existing cemetery, provided that the land lies outside the corporate limits of a municipality. See 805 ILCS 320/16.

C. A cemetery association can lend money, but only under the conditions set forth in 760 ILCS 100/3a and 765 ILCS 835/5a.

1. These conditions include a prohibition on lending money to any officer of the cemetery association and on lending money to secure a mortgage on any land outside Illinois.

2. Any such loan must be approved by the Illinois Comptroller and by the board of directors of the cemetery authority.

3. Rule of Title Practice: Before insuring any loan wherein a cemetery association is the lender, be sure that the provisions of 760 ILCS 100/31 and 765 ILCS 835/5a have been satisfied.

D. A cemetery association may convey a cemetery to a city, village, county, etc., and if said entity accepts the conveyance, the cemetery shall thereafter be under the control of said entity. See 765 ILCS 820/1a.

E. Power to Borrow

1. The statutes enumerated on the first page of this handout do not indicate that a cemetery association has the power to mortgage its real estate. Note that the general rule in the United States restricts cemetery associations from mortgaging its assets. See Jackson, Law of Cadavers 251 (1937).

2. Rule of Title Practice: Before offering to insure the mortgage of a cemetery association, consult an underwriter. At the very least, it would appear that you will need a resolution of the trustees and the approval of the State Comptroller. Any loan policy issued would be subject to the rights of the individual burial lot owners.

V. Sale of Cemetery Lots

A. Platting the Cemetery

1. When a county owns land for burial purposes, the county board can appoint three trustees to take charge of and control the burial grounds. See 55 ILCS 65/2; 765 ILCS 805/1; 765 ILCS 810/1.

2. These trustees may file or cause to be filed a plat of survey showing the lots, streets, and alleys of the cemetery. See 55 ILCS 65/2.

a. These trustees may “sell and make deeds of conveyance” of any lots for use for burials. See 55 ILCS 65/2, 55 ILCS 65/4. But the purchaser of these lots does not receive a fee simple interest in them. Rather, the purchaser receives only a license or an easement for burial purposes. See Steele v. Rosehill Cemetery Co., 370 Ill. 405, 19 N.E.2d 189 (1939); see also 765 ILCS 835/9, which refers to a “right or easement for burial.”

4. The trustees of a cemetery association formed pursuant to the Cemetery Association Act (805 ILCS 320/01 et seq. also has the right to plat its real estate into burial lots. The association has the right “to sell to any person or persons a lot or lots in said cemetery for burial purposes only, and to convey to such person or persons said lot by a proper deed of conveyance. . . .” See 805 ILCS 320/6.

a. But again, any purchaser of these lots does not receive a fee simple interest; rather, it is only a license or an easement for burial purposes. See Steele v. Rosehill Cemetery Co., 370 Ill. 405, 19 N.E.2d 189 (1939); see also 765 ILCS 835/9, which refers to a “right or easement for burial.”

B. Conveyance Back to the Association

1. A burial lot “owner” can convey the lot back to the association, to be held in perpetual trust for the purpose of its preservation as a place of burial. Once so conveyed, the lot becomes inalienable. The right to use the lot as a place of burial descends to the owner’s heirs, unless the deed provides that interment shall be confined to the bodies of specific persons. See 760 ILCS 90/1.

a. Note that this violates the Rule Against Perpetuities and the Rule Against Restraints on Alienation. However, because of this specific statutory approval, the violation is permitted. See Mason v. Bloomington Assn., 237 Ill. 442, 86 N.E. 1044 (1909).

VI. Rules of Title Practice:

A. In General

1. Conveyances by or to a cemetery association present innumerable problems to the title company. Besides the law in this handout, corporate law should also be consulted.

2. The following requirements must be met in order to insure the sale of real property by a cemetery association:

a. The land must not be needed for cemetery purposes.

b. There must not be any burials on the unneeded land.

c. The sale must be authorized by a majority of the trustees and lot owners.

d. The sale of the land must not interfere with the operation and maintenance of the cemetery, impair the integrity of the cemetery as a burial place, or deprive lot and grave owners of reasonable access to their lots and graves. In this regard, see Odd Fellows Cemetery v. Oakbridge Cemetery, 14 Ill.App.2d 378 (1957).

B. When insuring a tract of cemetery property and a cemetery association is in title, or when the examiner knows that the land is a cemetery, or when a conveyance from a cemetery is found in the chain of title, raise these title exceptions on the commitment:

1. Rights, interests, and easements of any and all persons who have purchased burial lots or parts thereof on the property in question.

2. Easements for driveways, alleys, walks and other ways upon and over the premises in question or any part thereof.

3. Statutory rights and powers of the State of Illinois and of the municipality or county to regulate and control the use of the premises in question as a cemetery and also to regulate and control the interment or removal of bodies in or from the premises in question or any building located thereon.

4. Legal limitations imposed by the laws of the State of Illinois upon the right of (cemetery association) to take, hold, convey, and mortgage real estate and also particularly as to the right of said association to sell, convey or mortgage lands that have been dedicated or used for cemetery purposes.

5. Taxes for the year (current year) , which are not yet due and payable. Taxes for the year (year of previous taxes) are shown in the warrant books as being exempt.

6. Easements, rights, or interests arising out of the following: the sale or transfer of lots or burial rights therein; the sale or transfer of crypts or vaults located on the premises; any interment in said land.

7. If the chain of title reveals that a cemetery association was in title but that the land has since been conveyed, raise this exception:

a. Satisfactory evidence is required that no bodies have been buried or interred on the premises in question.

VII. Ancestral Graveyards

A. In many rural areas deeds, will be found that reserve an ancestral graveyard. Because of the public policy surrounding the sanctity of buried persons, the existence of these private cemeteries cannot be ignored.

B. It is also possible in such areas to find burial plots on conveyed property even when the deed to the property does not indicate that the conveyance is “subject to” the burial grounds.

C. Rule of Title Practice:

1. When insuring property where there has been no reservation noted in a deed of record, but you have actual knowledge that bodies have been interred, raise this exception:

a. Easements, rights, or interests arising out of the following: the sale or transfer of lots or burial rights therein; the sale or transfer of crypts or vaults located on the premises; any interment in said land.

2. When insuring property where there has been a recorded reservation in a deed of record, but there has been no recorded evidence of the formation of a cemetery association, raise this exception:

b. Rights in perpetuity for the purposes of burial as created by reservation in a deed recorded _____ as document _____.

3. If a deed in the chain of title discloses special provisions relating to the cemetery, be sure to show those provisions as a Schedule B exception. Here is an actual exception for some Cook County property:

a. Covenants, conditions, and limitations contained in the warranty deed from the Des Plaines Avenue Cemetery Association to Ziditshover Cemetery Association recorded June 7, 1935, as document 11629705 that relate to the use of the land as a Jewish cemetery; the upkeep of the cemetery, contribution for the payment of the cost of repairs of driveways and the installation of a water system, the construction of fences, and the assessment of a maintenance fund.

VIII. Abandonment (765 ILCS 835/9 et seq.)

A. When a burial lot owner fails to pay maintenance fees to a cemetery association for a period of thirty years or more, there is a presumption that the lot has been abandoned.

1. If abandoned, the lot can be sold.

B. A cemetery association first has to file a petition in the office of the circuit clerk in the county in which the cemetery is located. The petition has to pray for an order determining that the lot (or portion thereof) has been abandoned.

1. 765 ILCS 835/10 sets forth the necessary elements of the petition. One of them is the name of the owner or owners of the lot (or portion thereof), if known.

C. All parties named in the petition are served notice of the proceeding “in the same manner as is now or may hereafter be required in other civil cases.” See 765 ILCS 835/11.

D. If the owner or his heirs or legatees under a will appears and answers, there is no longer a presumption of abandonment, and the court sets the matter for a hearing.

E. If the defendant or defendants fail to appear and answer the petition, or if they do appear, but the court determines from the evidence that there has been a continuous failure to pay the maintenance fees for a period of thirty years or more preceding the filing of the petition, then in either event an order shall be entered determining that the lot (or part thereof) has been abandoned, and that the “right or easement for burial” will be subject to sale at the expiration of one year from the date of entry of the order.

F. If within this one year period the owner or his or her heirs pays all the delinquent charges, pays the association for the costs of the suit, and contracts for the future care and maintenance of the lot (or portion thereof, hereafter just “lot”), then the lot will not be sold, and the order of abandonment will be vacated.

G. But if after one year from the date of the order, the fees have not been paid, the cemetery association has the right to sell the lot at a public sale and to grant an easement for burial purposes to the purchaser at the sale, subject to the interment of any human remains theretofore placed within the lot.

1. The cemetery association has the right to bid at the sale.

H. Notice of the sale is published once in a newspaper of general circulation in the county no less than thirty days prior to the date of sale.

IX. Removal of Cemeteries (The Cemetery Removal Act; 765 ILCS 830/1)

A. Whenever any cemetery is within the limits of any town, the corporate authorities may “for any good cause” cause the remains of all persons interred to be removed to some other suitable place.

B. The corporate authorities must first obtain the assent of at least a majority of the cemetery trustees.

C. Rule of Title Practice: If asked to insure a former cemetery wherein the remains have been removed pursuant to this Act, confirm two issues: one, that all bodies have been removed from the cemetery, and two, that the cemetery has been properly vacated.

1. Example: When the Village of Oak Brook wanted to develop a cemetery in 1962, it passed two ordinances. Ordinance No. S-46 was an “Ordinance for Removal of Thurston Cemetery.” Ordinance No. S-47 was an “Ordinance Authorizing Removal of Certain Bodies from Thurston Cemetery.”

X. The Archaeological and Paleontological Resources Protection Act (20 ILCS 3435/01 et seq.)

A. Many people will walk farmers’ fields in the spring, after a spring rain, looking for American Indian artifacts.

1. While this can be done on private property, one can not do this on public property unless one first obtains a permit from the Illinois Historic Preservation Agency.

2. “Archaeological resource” means any significant material remains or localities of past human life or activities on public land, including but not limited to artifacts, historic and prehistoric human skeletal remains, mounds, earthworks, shipwrecks, forts, village sites, or mines.

3. “Paleontological resource” means any significant fossil or material remains on public lands, including traces or impressions of animals or plants that occur as part of the geological record that are known and are included in the files maintained by the Illinois State Museum.

XI. The Human Skeletal Remains Protection Act (20 ILCS 3440/01 et seq.)

A. Any person who discovers human skeletal remains subject to this Act must promptly notify the coroner.

1. An example would be the discovery of an ancestral graveyard in a rural area.

B. The purpose of this Act is to discourage the “mining of prehistoric and historic Indian, pioneer, and Civil War veterans’ graves. . . . There is an immediate need for legislation to protect the graves of these earlier Illinoisans from such desecration.”

XII. Cemeteries and Claims

A. In the past title companies have faced claims relating to cemeteries. These claims usually arise after a landowner discovers buried human remains on his or her property.

B. What are the issues concerning these claims? How are these claims addressed?

C. Years ago a state hospital sold land to a municipality. A title company insured the sale of the land to a developer. As the developer started digging up the ground, he discovered that a portion of it was a “Potters Field.” The developer tendered a claim to the title company.

1. There is no claim here, as the Potters Field is not a defect of title. Nonetheless, the title company did get involved in the claim for public relations purposes.

D. A title company insured some property in DuPage County many years ago. As the road in front of the house was widened, bodies were uncovered. The owner of the home tendered a claim to the title company, as the title policy contained no exception for a cemetery.

1. Again, the title company was very concerned about public relations. However, it ultimately denied the claim.

2. There was a plat of the cemetery recorded. (See, e.g., 55 ILCS 65/4; 805 ILCS 320/6). However, this plat dated back to the late 1800s, but was not recorded until 1962. Thus, the plat was not in the chain of title and accordingly missed by the title searcher.

3. Also, the municipality properly vacated the cemetery. Section 2 of the vacation ordinance reads: “In order to abate said nuisance and pursuant to the powers vested in the village by the laws of the State of Illinois, said burial and cemetery grounds are hereby removed and vacated.”

a. Thus, the cemetery was not a lien or encumbrance on the title of the insured’s property.

XIII. Conclusion

A. It seems to me that there are two main concerns that we especially have to be concerned with when dealing with cemetery property.

1. The first is that we have to be concerned with whether or not the property has been dedicated for burial purposes.

2. As discussed above, generally speaking, cemetery associations are prohibited from selling land dedicated for burial purposes. Once land is dedicated for burial purposes (such as by the filing of a plat), it may not be sold. See Bushers v. Graceland Cemetery Assn. of Albion, 171 F.Supp. 205 (D. Ill. 1959).

a. However, cemetery associations may convey any land purchased for burial purposes when the state legislature or a municipal ordinance prohibits the use of the land for burial purposes. See 765 ILCS 810/1.

b. For example, when a subsequent zoning ordinance bars the use of newly-acquired land for cemetery purposes.

3. The second is potentially more serious, in that its effects are more subtle. As noted above, there is Illinois case law that provides that the sale of the land must not interfere with the operation and maintenance of the cemetery, impair the integrity of the cemetery as a burial place, or deprive lot and grave owners of reasonable access to their lots and graves. In this regard, see Odd Fellows Cemetery v. Oakbridge Cemetery, 14 Ill.App.2d 378 (1957).

a. Have you been asked to insure the sale of non-burial property that is adjacent to the cemetery burial plots? What if the access road to the burial plots is through this land? If so, these access rights can not be disturbed.

b. This issue must be considered whenever we are asked to insure the sale of cemetery property.

4. On the other hand, the insurance of the “sale” of individual cemetery plots should be avoided. Most likely this is not a true deed, but more in the nature of a license or easement. The fine print of the “conveyance” document may indicate that the document is not even an interest in land.

XIII. Conclusion

A. The attached newspaper article appeared in a Virginia newspaper on January 23, 2003. It concerns the cemetery where six McCoys (as in the famed Hatfields and McCoys) are buried.

1. These McCoy graves are on land owned by a Hatfield descendant. The McCoy descendants claim that they have been unable to visit the cemetery because the driveway leading to the graves has been marked “No Trespassing.”

B. The attorney for the McCoy descendants states that “relatives have an unquestionable right to visit the graves.” Is this true?

1. Possibly not. Assume that there is no recorded grant of easement. At the very least, the McCoys might have had an easement based on prescription.

2. An easement by prescription is created when someone uses someone else's land in an adverse manner for a prescriptive period of at least twenty years. The use of the land must not be permissive; it must be adverse to the rights of the true owner. See Page v. Bloom, 223 Ill.App.3d 18 (1991); McRaven v. Charles, 7 Ill.App.3d 55 (1972).

2. But an easement can be extinguished by abandonment.

3. Non-use alone does not terminate the easement. To have abandonment, there must be non-use, coupled with circumstances indicating that it was the intent of the owner of the easement (the dominant estate) to abandon the use of the easement. See Beloit Foundry Co. v. Ryan, 28 Ill.2d 379 (1963); Chicago Title & Trust Co. v. Wabash-Randolph Corporation, 384 Ill. 78 (1943).

a. Thus, an easement that has been dormant through nonuse, but with no intentional abandonment, can be revived. See Finn v. Williams, 376 Ill. 95 (1944).

4. It would seem that the circumstances that would indicate the abandonment of an easement of access to a family cemetery plot would be different from the circumstances that would indicate the abandonment of an easement of access to one’s home.

a. For example, the fencing off of an easement of access to one’s home for a period of six months, with no complaint from the holder of the easement, might indicate abandonment of the easement.

b. On the other hand, the fencing off of an easement of access to a family cemetery plot for a period of six years, with no complaint from the holder of the easement, still might not be sufficient to clearly indicate abandonment on the part of the easement holder.

c. But sixteen years? That might be different; that might be sufficient to indicate an abandonment of the easement.

5. Therefore, it would seem that the statement that “relatives have an unquestionable right to visit the graves” might be presumptuous.

Churches

Church (Standard Religious Corporation)

Statute: 805 ILCS 110/0.01 et seq. (Religious Corporation Act)

Clearance:

• The real property of a standard religious corporation is vested in the corporation. The property may be sold or mortgaged. See 805 ILCS 110/41.

• The trustees of the church have the care, custody, and control of the church’s real property, but this power is subject to the direction of the congregation. See 805 ILCS 110/43.

• 805 ILCS 110/36, 805 ILCS 110/46b, and 805 ILCS 110/46g refer to the recording of an affidavit that memorializes the election or appointment of church trustees or officers.

• 805 ILCS 110/36 indicates that a church may change its name or otherwise amend its “original affidavit of incorporation” by approving a resolution in accordance with the church rules and recording an affidavit.

• Examples of this type of church would include the smaller incorporated “storefront” churches.

• When insuring the deed or mortgage of this type of religious corporation, the examiner must deal with the following issues, none of which are addressed in the statute: matters regarding the sufficiency of notice to members of the congregation; the number of members needed to be present at a meeting in order to have a quorum; the number of members of the quorum who must approve the deed or mortgage; the number of trustees who must sign the deed or mortgage. (Note, however, the church’s bylaws or charter may provide guidance in this area. If these documents are silent in this regard, see below.)

• As indicated above, the Religious Corporation Act does not indicate how many members of the church have to be present at the meeting (i.e., a quorum) to vote on the proposed deed or mortgage after notice has been delivered to all the members. This statute does not indicate how many members of those members present have to approve the proposed deed or mortgage. However, Article XI, section 64, of Robert’s Rules of Order suggests that a quorum would be a majority of the voting members of the church. Article VIII, Section 46, of Robert’s Rules of Order suggests that a simple majority of the quorum can approve the deed or mortgage. See www.robertsrules.org.

• The Religious Corporation Act does not indicate how many days’ notice the congregation must have before meeting to approve the proposed deed or mortgage.

• Article XI, section 64, of Robert’s Rules of Order refers to “reasonable notice of a meeting.” What is reasonable notice?

• If the church were an unincorporated association, the members would be entitled to ten days’ notice. See 765 ILCS 115/2, which is part of the Property of Unincorporated Associations Act. Thus, it appears that ten days’ notice would be reasonable notice.

• However, the church’s charter or bylaws may provide guidance in this area.

• The examiner should ask for the following documents and information, together with a certificate executed by the custodian of the records of the church, under the seal of the religious corporation, certifying that the documents and information are true and correct: A copy of the bylaws of the corporation; the number of trustees elected to the board of trustees of said corporation; the names of all persons elected to the board of trustees of said corporation; the total number of the members of the church entitled to vote on any conveyance or mortgage of church property; a statement that notice of the proposed mortgage or sale was properly given to all such members in accordance with the bylaws; the number of members present at the meeting to consider the sale or mortgage; the minutes of said meeting; the actual “yes” or “no” vote of the members present at the meeting; the resolution as adopted by the members of the church; the number of trustees (and their names) who are authorized to sign the proposed deed or mortgage.

• The examiner may be able to obtain information about the church by searching the name of the church in www.google.com .

Execution of the deed or mortgage:

• When directed by the congregation, the deed or mortgage is executed by the trustees of the religious corporation. See 805 ILCS 110/43.

Church (Religious Corporation Subject to Higher Ecclesiastical Body)

Statute:

805 ILCS 110/46a through 805 ILCS 110/46h, inclusive

Clearance:

• A church subject to the control of a higher ecclesiastical body can incorporate. Title to real estate would be vested in this religious corporation, but the power to convey or mortgage the real estate would be subject to the “patronage, control, direction, or supervision” of the governing ecclesiastical body. See 805 ILCS 110/46a; 805 ILCS 110/46e; 805 ILCS 110/46f.

• The power to convey or mortgage church property would be vested in the church trustees, but because the trustees’ right to convey or mortgage property is subject to the authority of a higher ecclesiastical body, the examiner should obtain a certified copy of the governing “rules, regulations, articles of association, constitution, bylaws, or canons” of this superior body. The document(s) should be examined to make sure that all requirements for the conveyancing or mortgaging of local church property are met. See 805 ILCS 110/46a.

• As the local church may have bylaws with additional requirements, the examiner should obtain and review a copy of any local bylaws. See 805 ILCS 110/46e.

• 805 ILCS 110/46a through 805 ILCS 110/46h do not refer to the meeting, notice, and quorum requirements of the local church. This should not be a problem. The power of the local church to convey or mortgage property is tempered by the authority of the governing ecclesiastical body. Therefore, the examiner should not have to be concerned about the requirements of the local church—unless the bylaws of the local church provide otherwise.

• As indicated above, the governing ecclesiastical body should approve the deed or mortgage. See 805 ILCS 110/46a; 805 ILCS 110/46e.

• Examples of this type of church appear to be the Lutheran Church—Missouri Synod, the United Methodist Church, and the Presbyterian Church (U.S.A.).

• The United Methodist Church is governed by the 2016 Book of Discipline. Section 2539 concerns the purchase of property for the United Methodist Church. Section 2541 concerns the mortgaging or selling of United Methodist Church property. The 2016 edition of the Book of Discipline is readily available for review online.

Execution of the deed or mortgage:

• Any deed or mortgage should be executed by the trustees of the religious corporation. See 805 ILCS 110/46a; 805 ILCS 110/46e.

Church (Corporation Sole)

Statute:

• None

Clearance:

• A corporation sole is a legal entity consisting of a single (“sole”) incorporated office that is occupied by a single (“sole”) man or woman. See “Associational Structures of Religious Organizations”, by Patty Gerstenblith, Brigham Young Law Review, May 1995, pp. 439-480 at pp. 454-55.

• The Roman Catholic Church is an example of a corporation sole. Title to property conveyed to this church is taken in the name of the bishop. For example, in the Archdiocese of Chicago, the corporation sole is “The Catholic Bishop of Chicago.” According to the bylaws of this corporation sole, “by that name said bishop, and his successors in office . . . may acquire, hold and convey property, real, personal and mixed. . . .” See Illinois Private Laws 1861, p. 78.

• Thus, title conveyed or devised to the Roman Catholic Church is taken in the name of the bishop or archbishop of the ecclesiastical district in which the property is located.

• A corporation sole may buy, sell, lease, and mortgage property in the same manner as a natural person. Thus, the examiner needs no special documentation to insure a mortgage or deed executed by a corporation sole.

• However, the Catholic Bishop of Chicago (and perhaps other Roman Catholic corporation soles) does not have unilateral authority to sell real estate. Rather, there are two limitation levels that should be considered when the church is selling real estate of a significant value ($1,000,000 or more). The College of Consultors to the Archdiocese must first approve the transaction. Then, the Holy See (Vatican) must approve the sale. It does so by issuing a letter of approval called “Nihil Obstat,” which is Latin for, “let nothing stand in the way.” When it issues the letter, it also assesses a small percentage tax (the “taxa”) on the sale proceeds

• But note that when asked to insure a sale or mortgage of land owned by the Roman Catholic Church, the bishop or archbishop may delegate the execution of documents to a third party. In that event, the examiner should review the applicable power of attorney.

• The Church of Jesus Christ of Latter-day Saints (Mormons) also uses the corporation sole entity for its president. This corporation sole is legally titled as, “The Corporation of the President of the Church of Jesus Christ of Latter-day Saints.”

• The use of the corporation sole may be gaining favor with sovereign citizen groups. An examiner must consult an underwriter if asked to insure a transaction involving a corporation sole other than a Roman Catholic Church corporation sole or a Church of Jesus Christ of Latter-day Saints corporation sole.

Church (Unincorporated Association)

Statute:

• 765 ILCS 115/0.01 et seq.

Clearance:

A church can be an unincorporated association. See “Associational Structures of Religious Organizations”, by Patty Gerstenblith, Brigham Young Law Review, May 1995, pp. 439-480 at p. 444.

• In order to acquire, mortgage, and convey property in its own name, the church must be chartered by its “parent” entity. The examiner must obtain and review a copy of this charter. The examiner should make sure that the charter contains no limitations on the church’s power to convey and mortgage property. See 765 ILCS 115/1; 765 ILCS 115/2.

• The proposed deed or mortgage must be authorized by a vote of the members present at a regular meeting held by the organization, after at least ten days notice has been given to all members of the organization. Notice is by mail to the last known address of all the members. See 765 ILCS 115/2.

• 765 ILCS 115/1 et seq. does not indicate how many members of the church have to be present at the meeting (i.e., a quorum) to vote on the proposed deed or mortgage after ten days’ notice has been delivered to all the members. This statute does not indicate how many members of those members present have to approve the proposed deed or mortgage. Article XI, section 64, of Robert’s Rules of Order suggests that a quorum would be a majority of the voting members of the church. Article VIII, Section 46, of Robert’s Rules of Order suggests that a simple majority of the quorum can approve the deed or mortgage. See www.robertsrules.org. However, the church’s charter or bylaws may provide guidance in this area.

• 765 ILCS 115/2 refers to the “officer in charge of the records.” The examiner should request and review a certificate executed by said officer, certifying that the following documents and information are true and correct: A copy of the notice sent out to all members of the church; the date the notice was mailed; the date the meeting was held; the number of voting members of the church; the number of members present at the meeting to consider the deed or mortgage; the number of “yes” and “no” votes of those members present at the meeting.

Execution of deed or mortgage:

• The presiding officer of the church and the secretary or other officer keeping the records may execute a deed or mortgage. Any deed or mortgage should be in the name of the church. See 765 ILCS 115/2.

Church (Not-for-Profit Corporation)

Statute:

• 805 ILCS 105/101.01 et seq.; 805 ILCS 105/103.05(a)(8)

Clearance:

• A not-for-profit corporation has the power to sell and mortgage its property. See 805 ILCS 105/103.10(e).

• A not-for-profit corporation can be involuntarily dissolved for, among other things, failing to file its annual report. See 805 ILCS 105/112.35. For this reason, the examiner should ask for a certificate of good standing of the church. (It does not appear that the examiner can confirm the good standing of the corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com, as this website is designed to disclose business-related information.)

• The examiner should review the bylaws of the corporation to see if there are any limitations on the church’s power to sell or mortgage its property. The examiner may also want to look at the articles of incorporation. See 805 ILCS 105/101.80(c); 805 ILCS 105/101.80(e); 805 ILCS 105/102.10; 805 ILCS 105/102.25.

• When insuring the sale of mortgage of all or substantially all of the corporate assets of the corporation, when made in the usual and regular course of business of the corporation, the examiner must obtain the authorization of the board of directors. See 805 ILCS 105/111.55.

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, would be evidence of this consent.

• Even if the title company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage.

• If the proposed conveyance or mortgage is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the transaction is authorized in the following manner: If the corporation has no members or no members entitled to vote on the proposed conveyance or mortgage, then the majority vote of the directors in office can authorize the conveyance or mortgage. See 805 ILCS 105/111.60.

• But if the corporation has members entitled to vote on the proposed conveyance or mortgage, then the board of directors has to adopt a resolution recommending the sale or mortgage. The members then have to vote at either an annual meeting or a special meeting to authorize the deed or mortgage. A two-thirds affirmative vote of a quorum (a quorum being members holding one-tenth of the votes entitled to be cast) is needed. See 805 ILCS 105/107.60; 805 ILCS 105/111.60.

• But why would a church be conveying or mortgaging its property in a transaction that is not in its usual and regular course of business? An examiner should consider working with an underwriter when insuring title under this set of facts.

Execution of deed or mortgage:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other authorized officer. If there are no such officers, then the document should be executed by a majority of the directors or by such directors as may be designated by the board of directors. If there are no such officers or directors, then the document should be executed by the members or such members as may be designated by the members at a lawful meeting. See 805 ILCS 105/101.10.

Church (Generic)

What if the examiner or closer is not sure about what type of church is in title to the land he or she is insuring? The following is a good generic “catch all” exception that can be used in an attempt to collect as much information as possible:

In connection with the proposed conveyance or mortgage, we should be furnished a certificate by the custodian of the records under the seal of the church in title accompanied by the following:

(a) A copy of the by-laws or governing regulations or articles of the church; (b) The number of all trustees elected to the board of trustees of said church, together with the names of said trustees; (c) The total number of the members of the church entitled to vote on any conveyance or mortgage of church property; (d) A statement that notice of the sale or mortgage was properly given to all such members in accordance with the by-laws or governing regulations or articles; (e) The number of members present at the meeting to consider the sale or mortgage; (f) The minutes of said meeting; (g) The actual “yes” or “no” vote of those members present at said meeting; (h) The resolution as adopted by the members of the church.

If said church is governed by a higher ecclesiastical body, then we should be furnished a certified copy of the governing articles of this higher ecclesiastical body to which transactions by or with the church in title are subject. All limitations and requirements contained therein must be met.

This commitment is subject to such additional exceptions, if any, as may then be deemed necessary after an examination of these materials.

Church, Presbyterian

For information concerning the sale of Presbyterian church property, see the Book of Order 2017—2019. See in particular these sections of the Book of Order:

G-1.0502(d): With adequate notice, congregations can have meetings to discuss the “buying, mortgaging, or selling real property.”

G-3.0303: The “presbytery” and the “session” are two higher groups in the church.

G-4.0101: The congregation can form a corporation. The corporation has the power to “receive, hold, encumber, manage, and transfer property, real or personal, for and at the direction of the council.”

G-4.0206(a): “A congregation shall not sell, mortgage, or otherwise encumber any of its real property and it shall not acquire real property subject to an encumbrance or condition without the written permission of the presbytery transmitted through the session of the congregation.”

United Methodist Church

The United Methodist Church is governed by the 2016 Book of Discipline. Section 2539 concerns the purchase of property for the United Methodist Church. Section 2541 concerns the mortgaging or selling of United Methodist Church property. The 2016 edition of the Book of Discipline is readily available for review online.

Condominiums - PARKING SPACES - LCEs

The Creation of the Condominium Parking Space

Condominium developers have traditionally established parking spaces in one of three ways:

• as parts of the common elements (that is, as either easements or licenses);

• as limited common elements;

• as separate units (or parts of condominium units).

Parking Spaces—As Easements or Licenses over the Common Elements

The creation of a parking space as part of the common elements (but not as a limited common element) is usually accomplished by the granting of an exclusive easement or license of the common elements. Courts have accepted this, as long as such exclusive use is set forth in the declaration. Otherwise, the grant of the use of the common elements could be considered a diminution of the common elements that is contrary to Section 4(e) of the Condominium Property Act. This statute, codified as 765 ILCS 605/4(e), states that the percentage interests in the common elements shall remain constant unless otherwise provided for in the Act or by agreement of all the unit owners. See Parello v. 1300 Lake Shore Drive Condominium, 103 Ill.App.3d 810 (1981).

The examiners may encounter this type of parking scheme in arrangements where the garage is part of the common elements. The condominium board assigns (and bills for) parking spaces pursuant to user agreements. This type of parking arrangement is used in the condominiums at Chicago’s Carl Sandburg Village.

Rule of Title Practice:

But user agreements are not easements! When parking is on the common elements, but the parking scheme is not buttressed by a recorded easement, the parking is not insurable.

Parking Spaces—As Limited Common Elements

Parking spaces are often established as limited common elements. As a limited common element, a parking space is appurtenant to the unit and can be used to the exclusion of the other unit owners. See 334 Barry in Town Homes, Inc., v. Farago, 205 Ill.App.3d 846 (1990). 765 ILCS 605/4(g) provides that the declaration must indicate the manner of the assignment of the limited common elements to the units. This is usually accomplished in one of three ways:

• Parking spaces can be assigned in the written text of the declaration.

• The recorded condominium plat that is attached to the text of the declaration may set out the assignment of parking spaces.

• The developer’s deeds to the initial purchasers of the units may include assigned parking spaces.

Parking Spaces—As Separate Units (or Parts of a Unit)

A parking space can be created as either a separate unit or as part of the condominium unit.

The Parking Space as a Separate Unit

As a separate unit, the space is easily transferable and the owner of the condominium “living unit” can easily acquire additional parking spaces. When a parking space is a separate unit, the parking space will be separately assessed for real estate taxes. That is, the parking space will have its own individual permanent index number for tax assessment purposes.

The Parking Space as Part of the Unit

On the other hand, consider a townhouse type of structure in which the upper portion of the unit is living quarters and the lower portion is the parking area. In this case the parking space would be part of the unit. The permanent index number would affect both the parking space and the unit.

Insuring the Condominium Parking Space

Insuring the Parking Space—As Part of the Common Elements

As noted earlier, Illinois courts appear to recognize an exclusive easement or license to a unit owner of a parking space over common elements if such exclusive use is set forth in the declaration.

Therefore, if the declaration provides for this use, and the easement is granted by the developer (or condominium board if the declaration so provides), then the easement can be insured as a separate interest in Schedule A. See below for an example. (Note that this “easement” is described below as a “right to use.” This is because the easement is over the common elements. All of the unit owners own an interest in the common elements, and one cannot have an easement over one’s own property.)

The right to use parking space ____, as set forth in the declaration of condominium recorded _____ as document _____ and as granted by deed recorded _____ as document ______, all in __________ County, Illinois.

Insuring the Parking Space—As a Limited Common Element (Introduction)

A parking space can be insured as a limited common element if the declaration provides for the creation of parking spaces. Ideally, the declaration will specify which parking space has been assigned to each unit. Many times, however, the declaration will not include this information.

Insuring the Parking Space—As a Limited Common Element (New Units)

The Company is often asked to insure the conveyances and mortgages of all of the units in a new condominium development. Section 4(g) of the Condominium Property Act requires only that the declaration indicate “the manner” of the assignment of the limited common elements to the units. (That is, the Act does not require the surveyor to assign specific parking spaces in the condominium declaration.) Sometimes the developer will not want to indicate in the declaration (either in the text or the plat) the actual assignment of spaces. The reason for this is that the developer wants to let his purchasers choose their own parking spaces.

The insurance of parking spaces that are not assigned in the declaration involves some risks—a developer may inadvertently assign the same parking space to two different parties. This has resulted in claims to the Company. What can the examiner do to lessen these claims?

• The examiner can maintain a master file; as units and parking spaces are sold, the examiner should keep track of them in this file, noting the order number, the condominium unit number, and the parking space number.

• The examiner could have the developer sign a personal undertaking for “any and all loss, including attorney’s fees, due to the individual parking spaces of __________ Condominium being assigned to more than one unit owner.”

• The examiner could consider having the developer fund a title indemnity for, e.g., $10,000.00. The indemnity would be for the same exception as noted above. The money could be refunded to the developer once he has recorded an amendment to the condominium declaration that sets forth a completed assignment of all the spaces. The examiner might consider not returning the money until six months after the last unit has been sold, thereby verifying, as much as possible, that there are no claims of individual parking spaces being assigned to more than one party.

Insuring the Parking Space—As a Limited Common Element (Existing Units)

The Company has also suffered claims in its insurance of condominium parking spaces for existing condominium units. These claims arise when more than one person is attempting to use the same parking space. When asked to insure a parking space of an existing unit, the examiner should attempt to obtain the following:

• A letter from the condominium association wherein the association states that its records indicate that parking space number _____ has been assigned to unit ___________;

• An affidavit executed by the unit owner, describing both the owner’s parking space and the owner’s living unit, indicating that the owner had been using the parking space for ___ years and during all this time, no one has attempted or is attempting to assert rights in and to the parking space.

As a limited common element, the parking space is automatically transferred with the conveyance of the appurtenant unit. Although the space does not have to be included in the deed of the unit, the Company prefers that the deed include the parking space.

Insuring the Parking Space—As a Separate Unit or Part of a Unit

If the declaration creates separate parking space units, (that is, if the declaration creates parking space units that are separate fee simple ownership interests in land), a parking space can be insured by adding it to Schedule A as a separate parcel.

Naturally, a separate search must be done, including a tax search. The parking space is then conveyed by a deed.

A parking space can also be part of the unit. The parking space is insured when the unit itself is transferred and insured. (For example, the unit owner lives in the west half of a unit and parks his car in the east half of the unit.)

Corporations

Last effective date: November 17, 2019 All statutes checked through November 17, 2019

See generally the Business Corporation Act of 1983 (hereafter “the Act”), which is found in the Illinois statutes at 805 ILCS 5/1 et seq.

A domestic corporation is incorporated under the laws of Illinois. A foreign corporation is organized under laws other than the laws of Illinois. See 805 ILCS 5/1.80(b).

The Business Corporation Act of 1983 gives a corporation broad powers. For example, it can sell, convey, mortgage, or otherwise dispose of its assets. See 805 ILCS 5/3.10. A corporation, however, does not have unlimited authority to do this. Consequently, the Company has adopted various underwriting practices when insuring the mortgage or sale of corporate property.

Note that the use of a corporate seal is no longer mandatory. See 805 ILCS 5/3.10(c); see also 805 ILCS 105/103.10(c).

Fees and Charges

Both domestic and foreign corporations have to pay license fees and franchise taxes. See 805 ILLCS 5/15.05. A license fee covers regulations costs. A franchise tax is a tax on the privilege of carrying on business in the nature of a corporation. See 805 ILCS 5/15.20 and 805 ILCS 5/15.35. If these charges are not paid, the following can result:

• The Secretary of State can administratively dissolve any domestic corporation. See 805 ILCS 5/12.35.

• The Secretary of State can revoke the certificate of authority of a foreign corporation. See 805 ILCS 5/13.50(h).

• A domestic corporation cannot maintain a civil action in Illinois until the charges are paid. See 805 ILCS 5/15.85(c). The Secretary of State can refuse to file any articles, certificates, or other documents relating to a domestic or foreign corporation until all fees are paid. See 805 ILCS 5/15.85(a).

• The annual franchise tax of a corporation is a prior and first lien on the real property of the corporation. See 805 ILCS 5/15.80(d). It is enforceable for seven years after the date the annual report was filed for the period that gave rise to the franchise tax lien. See 805 ILCS 5/15.90(a).

When insuring the sale or mortgage of corporate real estate by a domestic corporation, the title examiner wants to be sure that all taxes, fees, and charges have been paid. This exception probably does not have to be raised when the examiner is dealing with an established corporate customer that management knows to be financially sound.

A certificate of authority must be obtained by a foreign for-profit corporation before it can transact business in Illinois. Once the certificate is revoked, the foreign corporation no longer has the authority to transact business in Illinois and is prohibited from doing so. Also, the foreign corporation cannot maintain a civil suit in any court in Illinois. However, it can defend an action in Illinois. See 805 ILCS 5/13.05, 805 ILCS 5/13.55(c), 805 ILCS 5/13.70, 805 ILCS 5/13.75.

Clearance for a Domestic Corporation

• A corporation has the power to sell and mortgage property. See 805 ILCS 5/3.10(e).

• The examiner should obtain and review a certificate of good standing. See 805 ILCS 5/15.95(e). The certificate is not necessary if dealing with an established corporation that is financially sound. (In lieu of obtaining a certificate of good standing, the examiner may confirm the good standing of a corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com.)

• How important is the certificate of good standing? The Illinois Secretary of State will administratively dissolve a corporation if, for example, it has not paid any fee or its franchise tax. See 805 ILCS 5/12.35(c). The dissolution of a corporation terminates its corporation existence. A dissolved corporation cannot carry on any business except what is necessary to wind up its affairs. See 805 ILCS 5/12.30.

• Each corporation shall have a board of directors, and the business and affairs of the corporation shall be managed by the board of directors. See 805 ILCS 5/8.05.

• A majority of the number of directors fixed by the by-laws, or in the absence of a by-law fixing the number of directors, the number stated in the articles of incorporation or named by the incorporators, shall constitute a quorum for the transaction of business unless a greater number is specified by the articles of incorporation or the by-laws. See 805 ILCS 5/8.15(a).

• The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless the act of a greater number is required by the articles of incorporation or the by-laws. See 805 ILCS 5/8.15(c).

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, is evidence of board authorization of the proposed deed or mortgage. See 805 ILCS 5/8.50.

• When the title company is insuring the sale or mortgage of all or substantially all of the corporate assets of the corporation, and the transaction is made in the usual and regular course of business of the corporation, the examiner must obtain the authorization of the board of directors. Shareholder consent is not needed, however. See 805 ILCS 5/11.55.

• Even if the title company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage. See 805 ILCS 5/8.50.

• The resolution should be executed by a quorum of the board of directors, thus evidencing the board’s approval of the proposed transaction. However, note that 805 ILCS 5/8.50 does state that “one officer, in this Act generally referred to as the secretary, shall have the authority to certify the by-laws, resolutions of the shareholders and board of directors and committees thereof, and other documents of the corporation as true and correct copies thereof.”

• If the proposed conveyance is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the examiner must obtain approval from the holders of at least 2/3 of the outstanding voting shares of stock (as well as a corporate resolution). See 805 ILCS 5/11.60(c).

Execution of the Deed or Mortgage by a Domestic Corporation:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares. See 805 ILCS 5/1.10(b)(2). (The wording of this statute indicates that a deed or mortgage need be executed by only one authorized party. Naturally, the specific requirements of the corporation, as detailed in, e.g., its resolution, may differ from those set forth in this statute.)

• If the corporate resolution does not indicate the names of the people who are to sign the documents, the examiner should ask for a copy of the by-laws; see 805 ILCS 5/8.50. As a last resort, the examiner should ask for a copy of the articles of incorporation; see 805 ILCS 5/2.10; see especially 805 ILCS 5/2.10(8)(b)(2)(ii).

• 805 ILCS 5/1.10(b)(2)(v) provides that if the corporate assets are in the possession of a receiver, trustee or other court appointed officer, then the documents should be signed by the fiduciary or the majority of them if there are more than one.

• Note that the use of a corporate seal is no longer mandatory. See 805 ILCS 5/3.10(c); see also 805 ILCS 105/103.10(c).

Clearance for a Foreign Corporation (805 ILCS 5/13.05 et seq.)

Clearance:

• The examiner should not ask for an Illinois certificate of good standing. Instead, the examiner should request evidence that the foreign corporation is in good standing in its home state.

• It is certainly true that a foreign corporation has to pay license fees and franchise taxes. However, these fees have to be paid by the foreign corporation as a condition to doing business in the State of Illinois. See 805 ILCS 5/13.50(h); 805 ILCS 5/15.50 and 805 ILCS 5/15.65.

• As set forth in the Act, merely owning real estate, in and of itself, does not constitute doing business in Illinois. See 805 ILCS 5/13.75(9). For a list of “activities that do not constitute transacting business,” see 805 ILCS 5/13.75.

• “Owning, without more, real or personal property” is not transacting business in Illinois. “Conducting an isolated transaction that is completed within 120 days and that is not one in the course of repeated transactions of a like nature” is not transacting business in Illinois. See 805 ILCS 5/13.75(9); 805 ILCS 5/13.75(10).

• Is the selling, buying, and mortgaging of several lots in a series of closings transacting business? Perhaps it is. If the examiner is concerned about a foreign corporation transacting business in Illinois, the examiner should check to see if the Illinois Secretary of State has filed the foreign corporation’s application for authority to transact business in Illinois as a foreign corporation. This filed application is evidence that the foreign corporation can transact business in Illinois. Alternatively, the examiner should consult an underwriter. See 805 ILCS 5/13.05; 805 ILCS 5/13.15; 805 ILCS 5/13.20.

• Article 13 of the Business Corporation Act (805 ILCS 5/13.05 through 805 ILCS 5/13.75) concerns foreign corporations. Unlike the statutes concerning domestic corporations, Article 13 contains no provisions for corporate resolutions or shareholder approval. The examiner will have to look to the laws of the state of the foreign corporation for guidance in this area. As a last resort, and with underwriter approval, the examiner can accept a corporate resolution that has been passed by the board of directors of the foreign corporation in order to insure a deed or mortgage executed by a foreign corporation.

Execution of a Deed or Mortgage by a Foreign Corporation

• Article 13 contains no provision for document execution. The examiner will have to look to the laws of the state of the foreign corporation for guidance in this area. As a last resort, and with underwriter approval, the examiner can rely on 805 ILCS 5/1.10(b)(2). That is, the deed or mortgage of a foreign corporation should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares.

Corporate Clearance for the All-Cash Transaction

Assume that a corporation is purchasing property in an all-cash transaction. One might think that in this situation, the examiner does not have to be concerned about obtaining the appropriate corporate clearance, that if a claim were to arise, the claim would be an “act of the insured,” which is excluded from policy coverage pursuant to Exclusion 3(a) of the 2006 ALTA owner’s title policy.

However, it is Company policy that the examiner obtain the evidence that the corporation exists as a valid corporation, even in an all-cash transaction. The reasoning is as follows:

If a corporation were not in good standing in Illinois, it would not be able to maintain a lawsuit in Illinois courts. See 805 ILCS 5/15.85(c). This would deprive the Company of its right to subrogation under the owner’s title policy.

That is, if the Company settled a claim on behalf of its insured corporation and then wished to sue in Illinois on behalf of the corporation for recoupment, it would not be able to do so. The Company had “stepped into the shoes of the corporation” and so would not be able to maintain the lawsuit.

Rule of Title Practice—A Summary

Generally speaking, an examiner should request a copy of a corporate resolution when insuring a conveyance or mortgage of a foreign or domestic corporation.

A resolution is not needed if the proposed transaction is within the ordinary scope of business of the corporation. Consider, for example, a relocation company selling a home.

The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors of the corporation to execute the document. However, the resolution should offer guidance in the execution of the document(s).

In the event the contemplated conveyance or mortgage comprises a sale or mortgage of all or substantially all of the assets of the corporation, the examiner must obtain both a corporate resolution and also written evidence of the shareholders’ approval of the transaction.

Dissolution of Corporations (805 ILCS 5/12.05 et. seq.; 805 ILCS 105/112.05 et seq.)

If a domestic corporation does not pay its franchise tax or file its annual report, the Illinois Secretary of State can administratively dissolve the corporation. See 805 ILCS 5/12.35. Corporate dissolution is evidenced by the Secretary of State issuing a certificate of dissolution, which is filed with the Illinois Secretary of State and mailed to the registered office of the corporation. See 805 ILCS 5/12.40(b).

In the alternative, the shareholders can consent in writing to dissolving the corporation. See 805 ILCS 5/12.10; 805 ILCS 105/112.10. Furthermore, all members of a corporation, or a quorum of members of a not-for-profit corporation, can vote to dissolve the corporation. See 805 ILCS 5/7.10; 805 ILCS 105/107.10.

A circuit court can dissolve a corporation if the Attorney General shows that the corporation abused its authority or violated the law. See 805 ILCS 5/12.50; 805 ILCS 105/112.50. Furthermore, a circuit court can also dissolve a business corporation if a creditor proves that it has a judgment that cannot be satisfied by the corporation’s assets. See 805 ILCS 5/12.50.

If a court enters an order of dissolution, it will supervise the “winding up” of the corporation’s business. See 805 ILCS 5/12.65; 805 ILCS 105/112.65; 805 ILCS 5/12.40(c).

Years ago, when a corporation dissolved, a corporation’s assets vested in the shareholders of the corporation. This has not been the case since July 1, 1984. Now, the dissolution of a corporation does not transfer title. Instead, upon dissolution of the corporation, title to the land remains in the corporation. See 805 ILCS 5/12.30(c)(1).

“Winding Up” the Corporation’s Business

Upon dissolution, the corporation cannot carry on any business except that necessary to “wind up” its affairs. See 805 ILCS 5/12.30. 805 ILCS 5/12.30(b) states that “after dissolution, a corporation may transfer good and merchantable title to its assets as authorized by its board of directors or in accordance with its by-laws.” See also 805 ILCS 105/112.30, which concerns the dissolution of not-for-profit corporations.

Therefore, a corporation can be dissolved and still convey real estate to an Insured. Because the Act allows a dissolved corporation to “wind up” its affairs, the dissolved corporation does not have to pay any unpaid license fees and franchise taxes before it conveys real estate.

However: Any request to insure a conveyance by a dissolved corporation as part of the “winding up” process when the corporation has been dissolved for more than a year should be referred to an underwriter. The underwriter may decide that a long-dissolved corporation can no longer wind up its affairs. Instead, the corporation may have to be reinstated.

Rule of Title Practice for Dissolved Corporations

• Upon dissolution of a corporation, title to the land remains in the corporate name. Title does not vest in the names of the shareholders. See 805 ILCS 5/12.30(c)(1).

• Upon dissolution, a corporation cannot carry on any business except what is necessary to “wind up” its affairs. Thus, it does not appear that a dissolved corporation can mortgage its corporate property. See 805 ILCS 5/12.65.

• After dissolution, the corporation may transfer title to its assets “as authorized by its board of directors or in accordance with its bylaws.” See 805 ILCS 5/12.30(5)(b).

• The examiner will obviously be unable to obtain a certificate of good standing. However, the examiner should ask for a resolution that not only authorizes the proposed conveyance, but also indicates that the deed is part of the “winding up” process of the corporation. See 805 ILCS 5/8.05(a); 805 ILCS 5/8.50; 805 ILCS 5/11.55; 805 ILCS 5/12.40(c).

• When examining title to land that is held by a dissolved corporation, the examiner should show the certificate of dissolution as a Schedule B exception on the title commitment. Upon a sale of the land, the certificate can be waived for any policy issued.

Execution of deed:

• The deed should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other officer authorized by the board of directors, or if there are no such officers, then by a majority of the directors or by such directors as may be designated by the board, or if there are no such officers or directors, then by the holders of record of a majority of all outstanding shares, or by such holders as may be designated by the holders of record of a majority of all outstanding shares. See 805 ILCS 5/1.10(b)(2).

• If the corporate resolution does not indicate the names of the people who are to sign the deed, the examiner should ask for a copy of the by-laws; see 805 ILCS 5/8.50. As a last resort, the examiner should ask for a copy of the articles of incorporation; see 805 ILCS 5/2.10; see especially 805 ILCS 5/2.10(8)(b)(2)(ii).

Other Matters Concerning Dissolved Corporations

See the 2012 Illinois Supreme Court case Pielet v. Pielet, 2012 IL 112064; this case indicates that in order to sue a dissolved corporation, the cause of action must exist prior to the time of dissolution. This case concerns Section 12.80 of the Business Corporation Act, or 805 ILCS 5/12.80.

Because of this case, the examiner should not accept a personal undertaking when it is executed by a corporation. Instead, the undertaking should be executed by one or more shareholders. (See also A Plus Janitorial Corp. v. Group Fox, Inc., 2013 Ill. App. (1st) 120245.)

Example: Land is owned by ABC Corporation. The corporation is in financial difficulty. It wants to sell the building it is constructing. At the closing, the Company agrees to accept a personal undertaking from the corporation for possible mechanics lien claims. Three months later the corporation is dissolved. Four months later a mechanics lien is recorded, and the claimant immediately begins foreclosure proceedings. Five months later the Company is tendered the defense of the mechanics lien claim. The Company immediately tenders the defense of the claim to the corporation, but it is now dissolved. A court might conclude that the cause of action arose after the corporation was dissolved, and that therefore, the corporation has no legal obligation to honor the personal undertaking.

Once a corporation pays its delinquent fees and charges, the Secretary of State can reinstate the corporation. See 805 ILCS 5/12.45; see also 805 ILCS 105/112.45.

Once reinstated, the corporate existence shall be deemed to have continued without interruption from the date of the issuance of the certificate of dissolution. That is, the corporate existence “relates back” to the time the certificate of dissolution was issued. Once reinstated, it is as if the certificate was never issued. See 805 ILCS 5/12.45(d).

Not-for-Profit Corporations

See the General Not-for-Profit Corporation Act of 1986, which is codified as 805 ILCS 105/101.01 et seq.

In General

A not-for-profit corporation is a corporation whose income is not distributable to its members. See 805 ILCS 105/106.05. A not-for-profit corporation may be organized for charitable, religious, or educational purposes, or for any one or more of the other purposes outlined in 805 ILCS 105/103.05. A not-for-profit corporation has the power to sell or mortgage any or all of its property or assets. See 805 ILCS 105/103.10(e) and 805 ILCS 105/111.55.

Clearance for a Not-for-Profit Corporation

• A not-for-profit corporation has the power to sell and mortgage its property. See 805 ILCS 105/103.10(e).

• A not-for-profit corporation can be involuntarily dissolved for, among other things, failing to file its annual report or failing to pay any fees and charges. See 805 ILCS 105/112.35(a) and 805 ILCS 105/112.35(c). For this reason the examiner should either ask for a certificate of good standing or confirm the good standing of the corporation by searching the Illinois Secretary of State’s website, which is: www.cyberdriveillinois.com.

• The examiner should review the bylaws of the corporation to see if there are any limitations on the corporation’s power to sell and mortgage its property. The examiner may also want to look at the articles of incorporation. See 805 ILCS 105/101.80(c); 805 ILCS 105/101.80(e); 805 ILCS 105/102.10; 805 ILCS 105/102.25.

• When insuring the sale of mortgage of all or substantially all of the corporate assets of the corporation, when made in the usual and regular course of business of the corporation, the examiner will need the authorization of the board of directors. See 805 ILCS 105/111.55.

• A corporate resolution, passed by the board of directors, authorizing the deed or mortgage, is evidence of the consent of the board of directors. See 805 ILCS 105/108.50(b).

Even if the Company is insuring the sale or mortgage of less than all or substantially all of the corporate assets of the corporation, the examiner should still obtain a corporate resolution. As indicated above, this resolution is evidence of the board authorizing the proposed deed or mortgage. See 805 ILCS 105/108.50(b).

• If the proposed conveyance or mortgage is of all or substantially all of the corporate assets of the corporation, and the transaction is not in the usual and regular course of business of the corporation, then the transaction is authorized in the following manner: If the corporation has no members or no members entitled to vote on the proposed conveyance or mortgage, then the majority vote of the directors in office can authorize the conveyance or mortgage. See 805 ILCS 105/111.60.

But if the corporation has members entitled to vote on the proposed conveyance or mortgage, then the board of directors has to adopt a resolution recommending the sale or mortgage. The members then have to vote at either an annual meeting or a special meeting to authorize the deed or mortgage. A two-thirds affirmative vote of a quorum (a quorum being members holding one-tenth of the votes entitled to be cast) is needed. See 805 ILCS 105/107.60; 805 ILCS 105/111.60.

Execution of deed or mortgage:

• The deed or mortgage should be executed by the president, a vice-president, the secretary, an assistant secretary, the treasurer, or other authorized officer. If there are no such officers, then the document should be executed by a majority of the directors or by such directors as may be designated by the board of directors. If there are no such officers or directors, then the document should be executed by the members or such members as may be designated by the members at a lawful meeting. See 805 ILCS 105/101.10.

Corporate Merger (805 ILCS 5/11.05)

The statute provides as follows:

Any two or more corporations may merge into one of such corporations or consolidate into a new corporation in the following manner:

The board of directors of each corporation shall, by resolution adopted by a majority vote of the members of each such board, approve a plan of merger or consolidation setting forth various items. These are set forth in the statute. They include the following:

• The names of the corporations proposing to merge or consolidate, and the name of the corporation into which they propose to merge, which is hereinafter designated as the surviving corporation or to consolidate, which is hereinafter designated as the new corporation;

• The terms and conditions of the proposed merger or consolidation and the mode of carrying the same into effect;

• A statement of any changes in the articles of incorporation of the surviving corporation to be effected by such merger or a statement of the articles of incorporation of the new corporation;

• Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

The Illinois Entity Omnibus Act

See also the Illinois Entity Omnibus Act, codified as 805 ILCS 415/101 et seq. This Act provides for conversions and domestications.

Conversion involves Illinois and foreign entities of different types. Domestication concerns Illinois and foreign entities of the same type.

Examples of Conversion

An Illinois corporation can become an Illinois limited liability company. A Delaware corporation can become an Illinois limited liability company.

Examples of Domestication

An Illinois corporation can become a Delaware corporation. A Delaware corporation can become an Illinois corporation.

To create a conversion or domestication, a statement of conversion or a statement of domestication must be filed with the Illinois Secretary of State.

Corporations and Judgments

A corporation is a legal “person.” Thus, it can sue and be sued; it can incur liability in its own name. See 805 ILCS 5/3.10(b) and 805 ILCS 5/3.10(d).

Employees of the corporation manage the corporation, but under agency law, the employees are not personally liable for their actions. Instead, the corporation is liable for the employees’ actions. See 805 ILCS 5/3.10(p). Therefore, only judgments against the corporation (and not judgments against an employee or shareholder) have to be shown on the title commitment for property owned by a corporation. See 805 ILCS 5/3.10(b); 805 ILCS 5/3.10(p). See also 805 ILCS 105/103.10(b); 805 ILCS 105/108.70.

Municipal Corporations

See 65 ILCS 5/11-76-1 et seq. (Sale or Lease of Real or Personal Property)

Home Rule Municipalities

Until 1970 units of local government were deemed to be creatures of the state. It was thought that all of their powers must be specifically granted by the Constitution or by state statute, or must be necessarily implied from that grant of power.

But then the 1970 Illinois Constitution created home rule. Home rule municipalities are governed by Article 7, Section 6, of the Illinois Constitution, which provides that “a home rule unit may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals, and welfare, to license, to tax, and to incur debt.”

Compare these broad powers to non-home rule units. Article VII, Section 7 of the Illinois Constitution states that “counties and municipalities that are not home rule units shall have only powers granted to them by law. . . .” These powers include the right to make local improvements by special assessment; to adopt, alter, or repeal their forms of government by referendum; to provide for the selection of their officers; to incur debt, and to levy taxes.

Home rule units are municipalities with over 25,000 people. Municipalities can opt in or out of home rule status by referendum. A county that has a chief executive officer elected by the electors of the county is also a home rule unit. Home rule units are not special districts, like a park district.

The website of the Illinois Municipal League contains a list of all of the home rule municipalities in Illinois. Go to www.iml.org and then search “home rule.” Then click on, “Home Rule Municipalities.”

The Sale of Municipal Property by a Home Rule Unit

Home rule units can adopt whatever rules they choose in selling their property. Thus, home rule units have two alternatives:

• They can adopt by ordinance whatever rules they choose, or,

• They can follow the statutes.

Rule of Title Practice for Home Rule Municipalities

The examiner should ask for a copy of the ordinance for the sale of property, and then follow the ordinance. See below for a sample title exception:

In order to insure the sale of municipal property pursuant to an ordinance drafted pursuant to the municipality’s home rule status, we should be furnished a copy of said ordinance. This commitment may be subject to additional exceptions after our review of said ordinance.

Non-Home Rule Municipalities

Non-Home Rule municipalities do not have the option of drafting their own ordinances to sell property. Instead, they must follow the Illinois statutes. These various statutes are outlined below. (Unless otherwise stated, the following underwriting rules apply to non-home rule municipalities.)

The Sale of Municipal Property by a Non-Home Rule Municipality

A city or village has the power to convey real estate when, in the opinion of the corporate authorities, the real estate is no longer needed by the city or village. This power shall be exercised by an ordinance passed by three-fourths of the corporate authorities of the city or village then holding office, at either a regular meeting or a special meeting. See 65 ILCS 5/11-76-1.

This ordinance shall specify the location of the real estate, the use thereof, and such conditions with respect to further use of the real estate that the corporate authorities deem necessary. See 65 ILCS 5/11-76-2.

But before the corporate authorities sell the land by virtue of the ordinance, notice of the proposal to sell the land shall be published once each week for three consecutive weeks in a daily or weekly paper published in the city or village, and if there is no such paper, then in some paper published in the county in which the city or village is located. The first publication shall be not less than thirty days before the day provided in the notice for the opening of bids for the real estate. The notice shall contain an accurate description of the property, state the purpose for which the land is used, and state at what meeting the bids will be considered and opened. See 65 ILCS 5/11-76-2.

The corporate authorities may accept the high bid or any other bid determined to be in the best interest of the city or village by a vote of three-fourth of the corporate authorities then holding office. However, by a majority vote of those holding office, they may reject any and all bids. See 65 ILCS 5/11-76.2.

The deed conveying this property is signed by the mayor or president and also the municipal clerk. See 65 ILCS 5/11-76-3.

Sale of Land by the Resolution of a Non-Home Rule Municipality

The corporate authorities may also authorize the sale of surplus real estate by resolution. See 65 ILCS 5/11-76-4.1.

The value of the real estate is determined by an appraisal. The resolution is published “at the first opportunity following its passage” in a newspaper published in the municipality or, if none, then in a newspaper published in the county where the municipality is located. The corporate authorities may accept any contract proposal determined by them to be in the best interest of the municipality by a vote of two-thirds of the corporate authorities then holding office. In no event, however, shall the price by less than 80% of the appraised value. See 65 ILCS 5/11-76-4.1.

A Non-Home Rule Municipality’s Alternative Means of Selling Surplus Property

See 65 ILCS 5/11-76-4.2. This section of the Act applies if a municipality has a population of less than 20,000 and is in a county with an unemployment rate that is higher than the national average for at least one month during the six months preceding the adoption of the resolution to sell the real estate.

If the ordinance (65 ILCS 5/11-76-2) or resolution (65 ILCS 5/11-76-4.1) has failed to work, then the corporate authorities may by a different resolution (65 ILCS 5/11-76-4.2) authorize the sale of surplus land by either the staff of the municipality, by listing with a real estate agency, or by public auction.

The resolution must be published once each week for three successive weeks in a newspaper (in the same manner outlined earlier). No sale may be conducted until at least thirty days after the first publication. The corporate authorities may accept any offer or bid by a vote of 3/4 of the corporate authorities then holding office.

Rule of Title Practice

When insuring the sale of municipal property, consider a generic exception similar to the following:

In order to insure the sale of municipal property, we should be furnished the following, and our commitment and policy may be subject to additional exceptions after our review of these materials:

If the municipality is a home rule municipality, we should be furnished a copy of the appropriate ordinance. If the municipality is not a home rule municipality, (or if it is, but it follows the procedure outlined in the Illinois Compiled Statutes), then we should be furnished a copy of the appropriate ordinance (together with the number of “yes” and “no” votes as to its passage); a copy of the published notice, including evidence as to when the notice was published; and a statement as to the number of “yes” and “no” votes that approved the winning bid. If the sale was by resolution, we should be furnished a copy of the appraisal, a copy of the corporate resolution, evidence of publication, and a statement as to the number of “yes” and “no” votes that approved the contract to purchase the real estate pursuant to said resolution.

The Purchase of Municipal Property by a Non-Home Rule Unit

See 65 ILCS 5/11-76.1-1 et seq.

The corporate authorities of each municipality having a population of less than 500,000 people can purchase real estate for public purposes. To do so they must pass an ordinance; they need an affirmative vote of two-thirds of the corporate authorities. See 65 ILCS 5/11-76.1-1.

After the ordinance has been passed, it shall be published in a newspaper that is published (or if not published, then circulated) in the municipality at least twice within thirty days after its passage. In municipalities with less than five hundred people in which no newspaper is published, then publication can be had by posting a notice in three prominent places within the municipality. The ordinance shall not become effective until thirty days after its second publication. See 65 ILCS 5/11-76.1-3.

The Exchange of Real Estate

See 65 ILCS 5/11-76.2-1 et seq.

For an exchange of real estate, there first must be a public hearing pursuant to a three-fourths vote of the members of the corporate authorities. Notice of the public hearing must be published in a newspaper of general circulation. The notice must be published not less than fifteen days or more than thirty days prior to the date of the hearing. The notice shall include a legal description of all properties and the terms and conditions of the exchange.

After the public hearing, the corporate authorities may authorize the exchange. In order to do so they need a three-fourths vote. If the exchange is authorized, the authorization is by ordinance, and the ordinance should include the following:

• That the land to be exchanged in no longer needed by the municipality for the public interest;

• That the land to be received will prove useful to the municipality and will be for the public interest;

• And that the total value of the land to be received is approximately equal to or exceeds the value of the land being traded.

Note that the wording of the statute indicates that land can be exchanged between a municipality and an individual, legal entity, or other non-municipality. For the transfer of real estate between municipalities, see below.

The Transfer of Real Estate between Municipalities

See 50 ILCS 605/1 et seq.

This statute is called the Local Government Property Transfer Act. The “transferee municipality” has to declare by ordinance that it is necessary or convenient for it to use, occupy or improve any real estate held by the “transferor municipality.”

The transferor municipality can convey the land to the transferee municipality by a deed signed by the mayor, president, or other chief executive of the transferor municipality, attested by its clerk or secretary and sealed with its corporate seal, all authorized by a resolution passed by a two/thirds vote of the members of the legislative body of the transferor municipality.

A municipality has the power upon resolution passed by a two-thirds vote of the members of its legislative body then holding office to transfer property to the State of Illinois. The term “State of Illinois” includes the state or any department, commission, board or other agency of the state.

The Local Government Property Transfer Act includes provisions for the releasing of easements and restrictions.

Home Rule Issues

The title examiner should be cautious about relying on a municipality’s status as a home rule municipality.

Example: An attorney contacts the title examiner. The attorney represents a home rule municipality. He wants the city to vacate a road pursuant to 65 ILCS 5/11-91-1. This statute requires the approval of at least three/fourths of the alderman, trustees, or commissioners. The attorney argues that because the city is home rule, the city can enact an ordinance that allows for merely a simple majority to approve the vacation. Is the attorney correct?

Some underwriters feel that he is not correct. They claim that the law has made it clear that there are certain matters of law that cannot have local variations. The determination of the extent and ownership of fee title to real estate is one of them. Rather, this determination is more properly an affair of the state.

But on the other hand, Oak Park, Downers Grove, and Peoria all have ordinances that allow for this type of vacation.

For example, this is the current Oak Park ordinance:

22-11-1: Vacation of Streets and Alleys: Streets and alleys may be vacated by the Board of Trustees pursuant to the provisions and procedures set forth in division 91 of the Illinois Municipal Code (65 ILCS 5/11-91-1 and 5/11-91-2), provided, however, pursuant to the home rule powers of the Village as set forth in Article VII, Section 6 of the Illinois Constitution, an ordinance vacating a street or alley shall be effective upon being passed by the affirmative vote of a majority of the Board of Trustees (1981 Code).

Furthermore, consider this analysis: The Illinois Supreme Court in Schillerstrom Homes, Inc. v. The City of Naperville, 198 Ill.2d 281, 762 N.E.2d 494 (2001) said this:

This court has formulated a three-part inquiry for evaluating the constitutionality of exercise of home rule power. First, we must determine whether the disputed exercise of local government power falls within section 6(a) [of Article VII of the Illinois Constitution]—that is, whether the local government’s activity is a function pertaining to its government and affairs. If so, we must determine whether the General Assembly has preempted the use of home rule powers in this area. If not, then we must determine ‘the proper relationship’ between the local ordinance and the state statute.

That is, these three factors are as follows:

• Does the contemplated exercise of local government power pertain to the government and affairs of the local government?

• If so, has the General Assembly preempted the use of home rule powers in this area? That is, does the statute in question contain specific language that would preempt home rule under Article VII, Section 6(h), of the Illinois Constitution?

• If the statute does not contain such specific language, is the state statute an attempt to declare the subject an issue that requires exclusive state control?

The Illinois Supreme Court states the following as to the first factor:

An ordinance pertains to local government and affairs where it addresses local, rather than state or national, problems. . . . . Whether a particular problem is of statewide rather than local dimension must be decided not on the basis of a specific formula or listing set forth in the Constitution but with regard for the nature and extent of the problem, the units of government which have the most vital interest in its solution, and the role traditionally played by local and statewide authorities in dealing with it. [Citation omitted] Municipal development regulations . . . undoubtedly pertain to local affairs.

One might argue that the vacation of a right-of-way certainly pertains to local government and affairs.

Secondly, the vacation statute (65 ILCS 5/11-91-1) does not contain specific language that would preempt home rule under Article VII, Section 6(h), of the Illinois Constitution.

But as to the third factor: This seems rather nebulous. What is “the proper relationship” between the local ordinance and the state statute?” What does this statement mean?

The Schillerstrom court goes on to say:

This court has upheld the right of local governments to enact their own solutions to various local problems in the face of less stringent or conflicting State regulation, following a determination that the State’s expression of interest in the subject as evidenced by its statutory scheme did not amount to an express attempt to declare the subject one requiring exclusive State control.

In this regard, the case of The City of Wheaton v. Robert A. Sandberg, 215 Ill.App.3d 220, 574 N.E.2d 697, 158 Ill. Dec. 584 (1991) is illuminating. In this case the City of Wheaton wanted to condemn property. Wheaton is a home rule municipality. The defendant claimed that Wheaton’s enabling ordinance on which the condemnation action was based was invalid because it was preempted by the uniform state statutes created by the Commercial Renewal and Redevelopment Areas Act of the Illinois Municipal Code.

Specifically, the defendant claimed that the enabling ordinance was invalid because its definition of a “blighted area” differs from the definition of “blight” found in the state Act. That is, the state statute specifies that excessive vacancies may be one of the five elements necessary for a finding of blight, while the ordinance merely provides for vacancy alone in all or any part of the building as sufficient for a finding of blight.

The court concluded that there was no evidence indicating the necessity for uniform standards under the Commercial Renewal and Redevelopment Areas Act. Nor did the court perceive an overriding policy interest on the part of the state in keeping these standards uniform. Thus, the court maintained that the City of Wheaton could enact an enabling ordinance that did not conform to the state statute. (However, the court later said that although the ordinance was not preempted by the state statute, it was invalid on constitutional grounds.)

How does the holding of this case affect the issue relative to a right-of-way vacation? Again, the statement from the Schillerstrom case seems to be the key:

This court has upheld the right of local governments to enact their own solutions to various local problems in the face of less stringent or conflicting State regulation, following a determination that the State’s expression of interest in the subject as evidenced by its statutory scheme did not amount to an express attempt to declare the subject one requiring exclusive State control.

It does not appear that the State of Illinois’ requirement of a 3/4 vote as set forth in 65 ILCS 5/11-91-1 is an “express attempt” by the state to maintain exclusive control over the means of a right-of-way vacation.

However, this Schillerstrom statement does refer to a condition precedent of “a determination that the State’s expression of interest” does not amount to an attempt by the State of asserting exclusive state control of the matter. Who makes this so-called “determination?” If the court has not yet made a determination that the statutory requirement of a 3/4 vote is not an attempt to declare the subject of right-of-way vacations a matter that requires exclusive state control, could a disgruntled homeowner bring suit because of a home rule right-of-way vacation?

But is it up to the court to make this determination? In the alternative, can the municipality make this determination in its ordinance? That appears doubtful.

Rule of Title Practice

Any request to insure a municipal real estate transaction pursuant to a home rule ordinance when a corresponding state statute already exists that also governs this transaction should be referred to an underwriter. Is there a chance of an adjoining homeowner being upset by the proposed transaction? The underwriter may want to ask for a personal undertaking for defense costs in the event there is litigation.

Other Statutes

• For the transfer of real estate from a municipality to the State of Illinois, see 50 ILCS 605/4.

• For the sale of school district real property, see 105 ILCS 5/5-22 et seq.

• Note that there does not appear to be a statute that governs the purchase of school district property. In that regard, the title examiner should request a copy of the real estate contract and a copy of the minutes of the meeting of the board of education wherein that contract for the purchase of the real estate has been approved. For gifts or donations to school districts, see 105 ILCS 5/5-21.

• For the sale of land by a forest preserve district in a county of less than 550,000 people, see 70 ILCS 805/6e.

• For the sale or exchange of land owned by a fire protection district, see 70 ILCS 705/10a.

• For the conveyance of park district property, see 70 ILCS 1205/10-1 et seq.

• For the acquisition of real estate by the Illinois State Toll Highway Authority, see 605 ILCS 10/9 et seq.

• For the acquisition of real estate by the Cook Country Forest Preserve District, see 70 ILCS 810/8; 70 ILCS 810/10; 70 ILCS 810/38.

• For the acquisition, finance, and sale of township property, see 60 ILCS 1/85-10(c); 60 ILCS 1/105-10.

• For the sale of public library property, see 75 ILCS 5/4-7(6) and 75 ILCS 5/4-16.

• For the mortgage of public library property, see 75 ILCS 5/5-6 and 75 ILCS 10/7(12).

• For the purchase of public library property, see 75 ILCS 5/4-7(4), 75 ILCS 5/5-6, 75 ILCS 10/7(4) and 75 ILCS 10/7(11).

Park Districts

See 70 ILCS 1205/1-1 et seq.

Can a Park District Mortgage Its Property?

It is not clear. Note that 70 ILCS 1205/6-2 states that the park district can “pledge its property,” but this is somewhat ambiguous.

70 ILCS 1205/9.3-5 indicates that a park district can mortgage an indoor or outdoor recreational facility under certain circumstances, but again, this is not a clear mandate.

The issue concerning a park district of other unit of government is: what happens when the loan is foreclosed? There is a basic underlying concept that a unit of government cannot lose its property.

Before insuring a mortgage of park district property, consider having the park district first obtain a declaratory judgment that it can mortgage the property in question.

Can a Municipality Mortgage Its Property?

• There are at least two statutes that refer to a municipality mortgaging its property. See 65 ILCS 5/11-74-4(5), which concerns an “industrial project.” 65 ILCS 5/11-74.4-4(c) indicates that a municipality can mortgage property within a “redevelopment project area.” However, what happens if the mortgage is foreclosed? There is a basic underlying doctrine or concept that a unit of government cannot lose its property.

But on the other hand, consider the broad wording of 65 ILCS 5/11-74.4-4(c), which provides as follows:

[Within a redevelopment project area, a municipality may] own, convey, lease, mortgage or dispose of land and other property, real or personal . . . . No conveyance, lease, mortgage, disposition of land or other property owned by a municipality, or agreement relating to the development of such municipal property shall be made except upon the adoption of an ordinance by the corporate authorities of the municipality. Furthermore, no conveyance, lease, mortgage, or other disposition of land owned by a municipality or agreement relating to the development of such municipal property shall be made without making public disclosure of the terms of the disposition and all bids and proposals made in response to the municipality's request.

• If asked to insure the mortgage of municipal property, the examiner should talk to an underwriter. The examiner may need to insist that the corporate municipality obtain a declaratory judgment that it can mortgage its property.

• 65 ILCS 5/8-1-3.1 provides that a municipality may borrow money from a bank or other financial institution, but the money must be repaid within ten years from the time the money is borrowed.

• 65 ILCS 5/8-1-6 and 65 ILCS 5/8-1-7 provide that a municipality cannot incur an expense unless an appropriation has been previously made pursuant to an appropriation ordinance. 65 ILCS 5/8-1-7(a) further states as follows: “Any contract made, or any expense otherwise incurred, in violation of the provisions of this section shall be null and void as to the municipality, and no money belonging thereto shall be paid on account thereof.” This statute illustrates a potential problem in insuring a mortgage of municipal property.

Can a Township Mortgage Its Property?

See 60 ILCS 1/85-10(c) and 60 ILCS 1/85-10(d). However, 60 ILCS 1/85-10(c) states that a township may finance the purchase of real estate by the use of “finance contracts.” This suggests that a township can mortgage property. However, see Attorney General Opinion Number 97-010, which states: “It has long been the rule in this State that a unit of local government may not legally execute a mortgage without express statutory authority to do so. (1933 Ill. Att’y Gen. Op. 758.)”

The Public Trust Doctrine

Customers will occasionally ask a title company to underwrite restrictions that benefit the public and not private parties. See, e.g., Morgan County v. Braner, 71 Ill. 546 (1874); Huntley Fire Protection District v. Huntley Development Limited Partnership, 338 Ill. App. 3d 609, 788 N.E.2d 355, 273 Ill. Dec. 46 (2003).

Example: In 1987 Landowner deeded Blackacre to Village. The deed includes a covenant that the property “is to be used for public park purposes.” For more than thirty years Blackacre has been used for a park. But in 2019 Village wants to enter into an inter-governmental agreement with School District, whereby Blackacre will be traded to School District in exchange for Whiteacre. School District indicates that after the two properties are exchanged, Blackacre will no longer be used as a public park. Can the 1987 covenant be endorsed over, providing coverage to School District over the violation?

It appears that in this instance the “public trust doctrine” is applicable. This tenet stands for the proposition that units of government own “trust resources,” like parks, as a trustee, and that these resources cannot be conveyed if the transfer would diminish or defeat traditional public access to and the use of those resources.

See Paepcke v. Public Housing Commission of Chicago, 46 Ill.2d 330, 263 N.E.2d 11 (1970); “Illinois Central and the Public Trust Doctrine in State Law,” 15 Va. Envtl. L.J. 713 (Summer 1996).

In order to endorse over this covenant, the Company will probably request that an appropriate government official contact the Attorney General’s office for an opinion, consenting to the violation of the covenant.

Factors to be considered by the Attorney General’s office would include: Is there another park near Blackacre? Will Whiteacre be used as a park?

Example:

In 2019 the Company was asked to insure the sale of the existing Geneva Public Library to a private party. The library was subject to a decades-old covenant that restricted the use of the land to a public library. The Company was asked to underwrite this covenant.

In this situation, the Company considered the Public Trust Doctrine. The Company agreed to endorse over the covenant upon the satisfaction of the following conditions:

• The new public library had to be relatively close to the old library. (The two buildings were six blocks apart.)

• The new library had to be at least as big as the old library. (The new library was substantially bigger.)

• The Company would not issue the endorsement until the old library was sold to a purchaser for value, a certificate of occupancy had been issued for the new library, and the new library was open for business.

Homestead

Last effective date: November 15, 2019

Homestead is a real estate concept that is misunderstood by many people in the title insurance industry. It is hoped that this article will serve as a practical guide for the understanding and comprehension of those issues relating to homestead that the title insurance examiner and closer encounters on a day-to-day basis.

Statutory law relative to homestead is set forth in 735 ILCS 5/12-901, hereafter termed "the Homestead Act."

Creation of Homestead

735 ILCS 5/12-901 provides as follows:

Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence, or in a cooperative that owns property that the individual uses as a residence. That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy or judgment sale for the payment of his or her debts or other purposes and from the laws of conveyance, descent and legacy, except as provided in this Code . . . .

The individual must, one, own or "rightly possess by lease or otherwise" the land, and two, must occupy it as his residence in order to be entitled to a homestead estate. Consider the following examples and note how these two factors determine the existence and ownership of the homestead estate:

Examples of Homestead

• John and Jane both own and occupy a home. Because they both own the home and both live in it, both have a homestead estate.

• John is married to Jane. John alone owns the home in which they both live. Although both live there, only John owns it, and so, only John has the homestead estate.

• John is a bachelor who lives alone in the home he owns. John has a homestead estate.

• John and Jane are not married, but instead, they live together. John alone owns the home in which they live. Despite Justice Heiple’s concurring opinion in First National Bank v. Mohr, 162 Ill.App.3d 584 (1987), which is set forth in part in the footnote below, it is reasonable to state that only John has a homestead estate. Although both John and Jane live in the home, only John owns it.

• John and Jane are married. They both own a home in which they live. They also own a commercial building. John and Jane both have a homestead interest in their home; neither has a homestead interest in the commercial building, as they do not occupy the commercial building as their residence.

• John and Jane are married. John owns the building that they live in. John is an artist. His studio is on the first floor, and they both live upstairs on the second floor. Since in this case John and Jane do occupy this commercial building as their residence, John (because he owns the building) has a homestead interest in it.

• John rents a home from his landlord. John later gets married and Jane, now his spouse, moves in. John has a homestead interest in his rented home because he both occupies it as his residence and possesses it by lease. Jane has no homestead interest; although she lives there, she does not "rightly possess by lease or otherwise" the home.

This construction of the statute is consistent with Illinois case law. See, for example, In re Frank Carver, 2003 WL 23211627 (Bankr. S.D. Ill.), where the bankruptcy court found:

The estate in land to which the homestead right attaches must be supported by title or some ownership interest, and possession alone is insufficient to entitle an individual to claim a homestead.

See also Sterling Savings and Loan Ass’n v. Schultz, 71 Ill. App. 2d 94 (1st Dist. 1966), where the Illinois appellate court held that the non-title holding spouse was “not entitled to a homestead estate based upon naked possession, without any title or right in the real estate.”

Characteristics of Homestead

One does not need to have fee title in order to obtain homestead rights. One may have homestead in a life estate, an equitable estate created by an installment contract, or, as noted earlier, a leasehold estate.

So what exactly is homestead? How can it be defined? If one thinks of real estate as being a bundle of sticks, comprising many interests in land, such as covenants and easements, “homestead” is one of these sticks. Homestead in Illinois is both an estate and an exemption. That is, homestead is an estate (an interest in land) that is exempt from the lien of creditors. It is not just the right of occupancy.

Homestead as an Exemption

735 ILCS 5/12-901 provides that homestead is an exemption that creditors cannot seize in order to satisfy the debts of the party who possesses the homestead interest.

Example: John owns and lives in a home. He meets and eventually marries Jane. Jane moves into John's home. A year later John decides to refinance his current loan by taking out a new mortgage with the local bank. If the homestead rights of John are not properly waived by Jane in the mortgage, then, in the event the mortgage is later foreclosed, the lender might be unable to obtain the full amount of the unpaid debt. That is, $15,000, representing the homestead exemption of John, might have to be set aside.

Homestead as an Estate

735 ILCS 5/12-901 provides that homestead is an estate that is shielded “from the laws of conveyance, descent, and legacy.”

Example: John owns and lives in a home. He meets and eventually marries Jane. Jane moves into John's home. A year later John decides to sell his home. If the homestead rights of John are not properly waived by Jane in the deed or otherwise, the title to this homestead estate would not pass to the grantee of John's deed. Jane might later be able to assert her rights in this estate.

Release, Waiver, or Conveyance of a Homestead Interest

It is obvious from the above two examples that it is important for the title examiner or closer to know how the homestead exemption, or homestead estate, is properly waived. Note that this issue arises in invariably the same situation:

Example: Man and woman are married, but only one spouse owns the residence in which they live. At the closing, the "title holding spouse" wants to convey or mortgage the residence.

The issue is: Does the non-title holding spouse have to sign the deed or mortgage to waive an outstanding homestead estate or exemption? If the answer is yes, then how can this homestead estate or exemption be waived?

735 ILCS 5/12-904 provides three methods of releasing, waiving, or conveying a homestead interest:

No release, waiver or conveyance of the estate so exempted shall be valid, unless the same is in writing, signed by the individual and his or her spouse, if he or she have one, or possession is abandoned or given pursuant to the conveyance. . . .

Again, these three methods are as follows:

No release, waiver or conveyance of the estate so exempted shall be valid, unless

• One, the release, waiver, or conveyance of the estate is in writing and signed by both the individual and spouse, if applicable, or;

• Two, possession is abandoned, or;

• Three, possession is given pursuant to the conveyance. . . .

Release of Homestead: Method Number One

Except when the conveyance is from one spouse to another, any deed (or mortgage) executed by the owner spouse must also be signed by the non-owner spouse. See 765 ILCS 5/27.

Although it is not necessary, the instrument should contain a clause, releasing or waiving the right of homestead.

Note that the non-owner spouse does not have to execute this instrument. For example, if John owns the house in which both he and his wife (Mary) live, a deed or mortgage need not be executed by John and Mary, husband and wife. (Mary may not, for instance, want to warrant the condition of title to property that she does not own. Or, Mary may not want to be personally liable for any mortgage indebtedness). Rather, John alone can execute the deed or mortgage as "John, married to Mary." Then, Mary need only sign the instrument, which should contain a "release of homestead" clause in order to release the applicable homestead interest.

If for some reason the deed or mortgage does not contain such a clause, the title examiner or closer might want to consider adding such a clause, so that the instrument clearly evidences the intent to release or convey homestead and so that it conforms to statutory and case law. For example, a phrase similar to the following may be added above Mary's signature:

I, ____________________, sign this deed (or mortgage) for the sole purpose of waiving or releasing any applicable homestead interest.

Because the non-owner spouse is, in fact, waiving or releasing an interest in land, any signature of the non-owner spouse should be acknowledged.

Note that the statute states that the waiver or release must be signed by both spouses. Therefore, it is possible that a “release of homestead” executed solely by the non-title holding spouse but not part of another document executed by the title holding spouse may be invalid.

Discussion of Method Number One

Example: Bob and Carol are married and live in a home that Bob alone owns. Bob and Carol want to sell the home to Ted and Alice. As Bob owns the home, he will hereafter be called "owner spouse." As Carol does not own the home, she will hereafter be called "non-owner spouse."

As it is Bob, and Bob alone, who both lives in and owns the home, Bob owns the homestead estate. However, for Bob to effectively convey this estate, Carol must execute or otherwise sign the deed. Or, to put it another way, Carol, the non-owner spouse, must sign the deed (or, e.g., a mortgage), but not to release her homestead interest, as she has no homestead interest to release. Rather, the non-owner spouse must sign the instrument in order to waive, release, or convey the homestead interest of the owner spouse. Thus, she must sign the document in order to waive, release, or convey his homestead interest!

Thus, a properly-drafted conveyance of the property will be signed by both Bob and Carol. Bob must execute the deed, as he is owner of the property. Carol must sign the deed in order to release the homestead of Bob.

See also 765 ILCS 5/27:

No deed or other instrument shall be construed as releasing or waiving the right of homestead, unless the same shall contain a clause expressly releasing or waiving such right. And no release or waiver of the right of homestead by the husband or wife shall bind the other spouse unless such other spouse joins in such release or waiver.

An Exception to Method Number One

See 735 ILCS 5/12-904:

If a conveyance is made by an individual as grantor to his or her spouse, such conveyance shall be effectual to pass the title expressed therein to be conveyed thereby, whether or not the grantor in such conveyance is joined therein by his or her spouse.

There is one exception to the necessity of the non-owner spouse's signature. When a conveyance is made by an individual as grantor to his or her spouse, the spouse need not join in the conveyance.

The Rationale of Homestead

To appreciate the reasoning as to the requirement of the non-owner spouse's signature, one must first understand the purpose of the homestead laws. Robert Kratovil and Raymond J. Werner, in their book, Real Estate Law (8th Edition, 1983) lists three principal reasons for these laws.

• The first is the protection of the family against being evicted from its home by the enforcement of creditors' claims. (Homestead is an exemption as well as an estate).

• The second is the traditional concept of providing some protection to the widow after the death of her husband. This concept is beyond the scope of this article.

• The third and final object of the homestead laws is the historical notion of protecting one spouse against the acts of the other spouse. In the past, lawmakers have provided that one spouse cannot convey good title to one’s own home unless the other spouse signs the deed. Thus, the one spouse cannot sell the home against the wishes of the other spouse. (Or in other words, the title holding spouse cannot sell the family home without the consent of the non-title holding spouse.) It is for these reasons that a husband and wife must join in any deed or mortgage of homestead property—with a few exceptions, to be discussed later.

Release of Homestead: Method Number Two:

Homestead can also be released or waived (but not conveyed) pursuant to an abandonment of the property. (That is, the spouse of the titleholder releases the homestead interest of the titleholding spouse by abandoning the property).

Example: Adam and Betty are married but separated. Adam owns the home that he lives in. He wishes to refinance his existing mortgage. Does Betty have to sign the mortgage? Adam assures the title company that there is no hope of reconciliation and that "they will be getting a divorce soon.” Adam may claim that Betty has never lived in the property, and that therefore there is no homestead problem.

Or, to set forth the facts even more simply:

Facts: A and B are married. A buys the home in which A and B live. B moves out. Later, A wants to execute a mortgage of the home.

Issue: Does B have to sign the mortgage in order to waive homestead?

Discussion: All the facts of the situation must be considered before waiving the requirement as to the spouse's signature on the mortgage. If the couple has been separated for ten years, there is probably little risk in not requiring the spouse to execute the mortgage. But what if the couple has been separated for only ten days? What factors should the examiner consider? These include:

• Has the non-title holding spouse ever lived on the property?

• How much time has elapsed since the non-title holding spouse moved out?

• When the non-title holding spouse moved out, what were the surrounding circumstances?

• If one spouse never lived in the property (for example, perhaps one spouse moved out of the family home and bought another house, which is now being mortgaged), how long has the other spouse lived in the home?

• Is the couple’s separation permanent or temporary? What possibility is there of a reconciliation?

• Has the non-title holding spouse established a new homestead? How permanent is the homestead? For example, has the spouse changed his or her driver’s license or voter registration?)

• Is the non-title holding spouse’s present whereabouts known?

• How accurate is the information furnished the examiner? How credible is the party furnishing this information to the examiner? Is the information being furnished by a spouse or by a third party who may not have a complete knowledge of all of the facts?

• Has one of the parties filed for divorce, or are the parties “going to get a divorce?” If the parties have formally filed for divorce, and one of the parties has moved out of the home, the examiner is probably in a good position to waive the requirement as to obtaining that spouse’s signature on the mortgage.

The Ambiguity of Abandonment

There is, unfortunately, an inherent ambiguity in the concept of abandonment of a homestead. There are many old cases that seem to indicate that the intent to abandon the home is the key, that a mere moving out of the home, without the intent to truly abandon it, does not constitute an abandonment of possession. See, e.g., McBride v. Hawthorne, 268 Ill. 456 (1915) and Ketcham v. Ketcham, 269 Ill. 584 (1915).

Illinois case law is replete with unusual decisions, holding that what seems to be abandonment is not necessarily so. For example, in McBride v. Hawthorne, 268 Ill. 456 (1915), the court stated that residing on the homestead premises is not essential in order to prevent abandonment if, when the homesteader leaves, he intends to return and occupy the property. In Brokaw v. Ogle, 170 Ill. 115 (1897) the court noted that a widow does not abandon her homestead because she goes to her daughter's house to be taken care of during an illness and rents the homestead during her absence in order to obtain money to pay the expenses of said illness. In Ketcham v. Ketcham, 269 Ill. 584 (1915) the court stated that the fact that a person leases the land of his homestead after his home thereon burns down, and no longer lives on the homestead, does not constitute an abandonment when there is no evidence of an intent to abandon.

Rule of Title Practice:

Seldom should abandonment be relied upon in order to waive a homestead exception from a title commitment or policy without careful consideration.  The reason for this is the great difficulty in determining abandonment, which is a question of intent.  How does one, e.g., determine if the "separated" wife has truly left her husband and abandoned the property or just temporarily left her spouse for a few days? Title company underwriters must thoughtfully weigh all factors before deciding not to require a spouse’s signature.

An Abandonment Variation

Example: But now change the facts slightly. Unfortunately, Adam and Betty both took title to their home. Adam now wants to refinance (or sell) the home. He tells the examiner that Betty has been gone for at least ten years, and he has no idea where she lives or even if she is still alive.

This is not a homestead issue; this is a title issue. Adam may have to file some kind of quiet title action. Although a title holder can abandon possession of land, one cannot abandon title. Although it is technically possible to adversely possess land as against a true owner, this can only be accomplished by a complete repudiation of the title of this owner. See Carpenter v. Fletcher, 239 Ill. 440 (1909). Furthermore, it is doubtful that a title company would insure title pursuant to such a repudiation.

Release of Homestead: Method Number Three

The homestead can be released if possession is of the land is delivered to a purchaser of the land "pursuant to the conveyance” by the non-title holding spouse.

Example: In 2012 John buys a home in Chicago. In 2014 he marries Jane, who moves into the home. In 2019 John and Jane decide to move to Denver, Colorado. Accordingly, John and Jane put "their" home up for sale. At closing, John, the title holding spouse, delivers a warranty deed signed by John alone. Jane, the non-title holding spouse, is unable to sign the deed, as she is already in route to Denver.

In the above example, it is clear that Jane has given up possession of the property in question. By doing so, she has released her spouse’s homestead interest. On a case-by-case basis, each situation judged on its own merits, one may choose to rely on this method as a means of waiving a homestead exception from a title policy. Although it is not necessary, the parties may want to consider adding a "release of homestead" statement to the deed. For example:

Possession by the non-title holding spouse is surrendered pursuant to and concurrently with this conveyance, sufficient to convey and release homestead, as provided in 735 ILCS 5/12-904.

Before waiving an exception relating to homestead, the title examiner or closer should verify that the non-title holding spouse is giving up possession of the land.

Rule of Title Practice

For the title examiner, the issue of homestead usually arises as follows: The application for a title commitment comes in, showing that John and Jane Doe, husband and wife, are the owners. However, the title search shows that only one spouse owns the property. When the title examiner is faced with these or similar facts, the examiner should show the following exception on the title commitment:

If applicable, the spouse of the party in title should join in the conveyance or mortgage for the purpose of releasing, waiving, or conveying the title holder's homestead interest.

Note the words, "if applicable,” in the title exception. Remember that the spouse needs to join in the conveyance or mortgage only if the property is the owner's homestead. If the title search reveals that John and Jane Doe are married, and John alone owns the property, but it is established that the property is not the residence of the owner, then the spouse of the title holder does not have to join in the conveyance or mortgage. To prevent future questions as to the transaction, however, it is acceptable (but not necessary) to write on the document, "this is not homestead property" or words to that effect. By doing this, future title examiners will realize that the property is not homestead property and, therefore, not question the absence of a spouse's signature.

Example: John owns his home. He wants to convey it to his wife. Does his wife have to sign the deed in order to release any homestead interest?

No, as noted above, John’s wife does not have to sign the deed to her husband in order to waive homestead. See 735 ILCS 5/12-904, which states: “But if a conveyance is made by an individual as grantor to his or her spouse, such conveyance shall be effectual to pass the title expressed therein to be conveyed thereby, whether or not the grantor in such conveyance is joined therein by his or her spouse.”

Homestead and a Spouse Not in Possession of the Home

Sometimes a potential homestead problem may not be easy to recognize. Consider the following example:

Example: Oscar and Della Renta are husband and wife. They are separated. Oscar, while he is separated from his wife, purchases a home, paying cash for it. Oscar lives there by himself for six months. He then finds out that his employer is transferring him across the country. He puts his home up for sale. It is obvious that at the time of closing, Oscar, and only Oscar, one, bought the house, and two, lived in the house.

Question: Does Della need to sign the deed?

Answer: At first one might think that Della has to sign the deed. After all, Oscar is still married, owns the home, and lives in it, thus meeting all the statutory requirements, previously discussed, of the Homestead Act.

However, Illinois case law indicates that the spouse of the title holder must reside with the titleholder in the titleholder's home in order for the Homestead Act to be operative. For example, in Dixon v. Moller, 42 Ill. App. 3d 688 (1976), the court noted that the chief object of the homestead laws is to shelter the family. In Rendleman v. Rendleman, 118 Ill. 257 at 264 (1886), the Supreme Court stated that “the holder of the title cannot wrongfully deprive the other of the enjoyment of the homestead premises." The Supreme Court in Brod v. Brod, 390 Ill. 312 at 323 (1945) noted the following:

The law and public policy of this state, as exemplified by [the Homestead Act] and the many decisions in this state thereunder, have been and are to insure to the family the possession and enjoyment of a home.

These and other similar cases indicate that Della would not have to sign the deed. Della had never lived in Oscar's home; consequently, Oscar, by selling the property, would not be depriving her of "the possession and enjoyment of a home." And of course, Oscar, the only occupant of the home, is delivering possession of the home pursuant to the conveyance.

But again, now change the facts slightly. What if Oscar, the title holder, had abandoned the property? This would obviously be a problem. The Company needs a deed from the title holder before it can insure a sale of the property. One cannot easily abandon title to the land.

And now change the facts again:

Adam and Betty are married. Adam owns a home in DuPage County, Illinois. Betty does not own the home. Because of her job, Betty lives out of state, and she has never lived in Adam’s home. Adam now wants to refinance his purchase money mortgage. Does Betty have to sign the mortgage in order to waive homestead?

Answer: What if Betty eventually moves to Illinois and into Adam’s house a year after he signs the mortgage? And what if, a year later, the mortgage goes into foreclosure? The better practice is that Betty sign the mortgage. In the event of a mortgage foreclosure, Adam’s attorney will probably argue that $15,000, representing Betty’s homestead, should be set aside from the mortgage foreclosure.

The Homestead Checklist

It might be helpful for the closer or examiner to adopt a "checklist" in deciding whether or not a homestead problem exists. Title personnel might want to consider the following "two pronged" test and ask themselves the following:

1. Who owns the property? (Remember, all owners of the property must execute any deed or mortgage. There are no exceptions to this rule).

2. If the fact situation involves a title holding spouse and a non-title holding spouse, does the title holding spouse reside at the property?

a) If the answer to question "2" is "no," then a non-title holding spouse's signature on a deed or mortgage is not necessary.

(b) If the answer to question "2" is "yes," then, generally speaking, the non-title holding spouse should sign the deed or mortgage, conveying or releasing the homestead interest of his or her spouse.

(c) If the title holding spouse resides on the property, but the non-title holding spouse does not, then the individual facts of the situation should be considered before waiving the requirement as to the non-title holding spouse's signature on a deed or mortgage on the basis that the spouse would not be deprived of "the possession and enjoyment of a home." (Factors to consider include whether or not the non-title holding spouse had ever lived in the home, the length of time the couple had been separated, and the nature—permanent or temporary—of the separation.)

Note that part two of the above checklist refers to the requirement of the title holding spouse residing at the property. The question may arise, then: How can homestead be an issue at closing, when, invariably, the purchaser is not yet residing at the property, and hence, not satisfying this requirement of the above two-pronged test? The answer is found in Illinois case law; the purchaser of property, with the intention of occupying it as a homestead, followed within a reasonable time by the actual occupancy thereof as a residence, creates an estate of homestead, even before there is an actual occupancy of the home.

Homestead and the Illinois Land Trust

The Homestead Act is applicable to personal property. 735 ILCS 5/12-901 states:

Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property. . . .

The statute refers to personal property. The beneficial interest in a land trust is personal property. See Chicago Federal Savings and Loan Association v. Cacciatore, 25 Ill. 2d 535 (1962). Therefore, any assignment of said beneficial interest should contain, if applicable, a waiver of homestead rights.

But assume that title to the land is in an Illinois land trust:

Example: John buys a home. He takes title pursuant to an Illinois trust—the Chicago Title Land Trust Company, as trustee under trust number 12345. A year later John marries Jane. A year after they get married, John and Jane decided to have a mortgage executed of the family home. Does Jane have to sign the mortgage in order to waive homestead?

No, Jane does not have to sign the mortgage. There is, generally speaking, no homestead issue concerning land trust property. The title examiner need not worry about a mortgage or trustee's deed containing a waiver of homestead. The reasons for this are as follows:

• The beneficial interest in a land trust is personal property, and the trustee’s deed conveys real estate.

• Even assuming for the moment that the two-pronged test set forth in 735 ILCS 5/12-901 is applicable, the trustee, not the trust beneficiary, is the owner of the real estate, and he does not qualify for the homestead estate, as he does not occupy the property as his residence.

• The beneficiary, who does, most likely, occupy the property, does not own the property. The beneficiary owns only the beneficial interest in the land trust, which is a personal property interest, not a real property interest.

735 ILCS 5/12-901 sets forth the two requirements necessary in order to possess a homestead estate in real property:

• The individual must "own or rightly possess by lease or otherwise" the property;

• The individual must occupy it as his residence.

Because neither the trustee nor the beneficiary can satisfy both requirements, there is, generally speaking, no homestead issue relating to real estate conveyed via a trustee's deed out of a land trust.

Homestead and the Personal (Living) Trust

For the above reasons, it appears that this "no homestead with a trustee's deed" rule is equally applicable to both commercial land trusts and personal trusts, or living trusts.

Example: Samantha and Darrin own a home. For purposes of estate planning, Darrin owns the home as trustee of the Samantha and Darrin living trust. If Darrin, as trustee, were to convey or mortgage the property, does Samantha have to join in the deed or mortgage?

Because of 735 ILCS 5/12-901, homestead should not be an issue in this type of situation. This section deals with an individual owning land and occupying it as his or her residence. One might reasonably argue that a legal fiction is created here in that Darrin the individual is an entity separate and apart from Darrin the trustee. Darrin the individual occupies the land, while Darrin the trustee owns it. Therefore, both parts of the Section 901 two-pronged test are not met. That is, although Darrin the trustee owns the home, Darrin the individual occupies it. These are legally two separate people.

Remember that any conveyance into either an Illinois land trust or a personal trust must waive or convey any applicable homestead interest. If it does not, any subsequent trustee's deed does not "cure" the problem of the outstanding homestead interest.

Note, though, that many lenders will not allow their mortgages to be executed by land trustees. Their rationale, however, does not involve homestead. Rather, it appears to stem from the legal characteristics of the Illinois land trust. Many lenders are apparently concerned that property can be purchased and mortgaged through a land trust, and later, the beneficial interest can be assigned to a third party, with nothing ever subsequently placed of record in the property's chain of title that will alert the mortgagee that the original "owner/mortgagor" no longer has an interest in the property.

Homestead: Lender Considerations

The issue of homestead involves special considerations for the lender. This is because the problem of an outstanding homestead estate is usually not a major issue for the title insurer. Possession is virtually always surrendered concurrently with delivery of the deed; as stated earlier, this is an effective means of extinguishing any homestead interest.

The problem of an outstanding homestead exemption is, though, a different matter. Assume that John and Jane buy a home. At the closing the seller signs a deed whereby John and Jane take title to the home as tenants by the entirety. John executes the purchase money mortgage, but Jane signs the mortgage only to waive homestead. A few years later, the mortgage is foreclosed. Only then does their attorney realize that the mortgage was improperly executed. Their attorney immediately files a motion in the foreclosure proceeding, asking that the court declare the mortgage to be invalid. The title company that insured the mortgage is immediately tendered a claim.

The Common Homestead Situation Involving a Lender

Adam and Betty are husband and wife. Their friends are Charles and Dianne, who are also husband and wife. The two couples decide to get together and buy investment property. Even though it is not "homestead" property, the "spouses," since they own the property, have to execute any mortgage of the property. Otherwise, in the event of foreclosure, the lender would succeed to only a 50% interest in the property.

Clearly this is not a homestead issue. Since four people own the property, the same four people must mortgage the property. The examiner must remember the first portion of the two-pronged "homestead checklist" mentioned earlier. In any mortgage situation, all owners of the property must execute the mortgage.

The closer must be aware of this situation, as this issue often arises. Usually, the fact situation is something like this:

The Common Example: A Trap for the Unwary Closer

Example Number One:

John and Jane will take title to property as joint tenants. The property may or may not be homestead property. The title company will close the transaction. The lender’s closing instructions state that John is to execute the mortgage but that Jane may sign the mortgage, but just to waive homestead.

Example Number Two:

John and Jane will take title to property as tenants by the entirety. The property may or may not be homestead property. The title company will close the transaction. The lender’s closing instructions state that John is to execute the mortgage but that Jane may sign the mortgage, but just to waive homestead.

Example Number One: 

This is unacceptable because, under Harmes v. Sprague, 105 Ill.2d 215, 473 N.E.2d 930, 85 Ill. Dec. 331 (1984), a mortgage given by one joint tenant of his interest in the property does not sever a joint tenancy. As such, a surviving joint tenant's right of survivorship becomes operative upon the death of the joint tenant who executed the mortgage. Thus, upon the death of the joint tenant who executed the mortgage, the surviving joint tenant becomes the sole owner of the property, and the mortgage executed by the deceased joint tenant does not remain as a lien on the surviving joint tenant's property.

In other words: John and Jane buy a home, taking title in joint tenancy. John executes the purchase money mortgage, but Jane signs the mortgage only to waive homestead. A year later John dies. Jane owns the home as a surviving joint tenant, free and clear of the mortgage.

Insuring a mortgage that is executed in this manner could result in a claim for a title company.

Example Number Two:

This example is equally unacceptable. If John and Jane own their home as tenants by the entirety, then pursuant to 765 ILCS 1005/1c, the mortgage may be completely invalid! This Illinois statute states that “no deed, contract for deed, mortgage, or lease of homestead property held in tenancy by the entirety shall be effective unless signed by both tenants.”

Remember that all owners of the land must always execute the mortgage! This is the case, regardless of the tenancy by which people own property. Thus, if Adam and Betty own the land as tenants in common, joint tenancy, or tenancy by the entirety, both Adam and Betty must execute the mortgage. There are no exceptions to this rule.

Lender Issues: Exceptions to Homestead

There may be instances in which an apparent homestead problem is not really an issue at all. This stems from 735 ILCS 5/12-903:

No property shall [by virtue of the Homestead Act] be exempt. . . for a debt or liability incurred for the purchase or improvement thereof. . . .

In other words: When a transaction involves either a purchase money mortgage or the construction of improvements to vacant land, said transaction falls outside the provisions of the previously-discussed statutes relating to homestead. Consequently, the issue of homestead becomes irrelevant.

One: The Purchase Money Mortgage Exception

A purchase money mortgage is a mortgage executed for the purpose of purchasing property. 735 ILCS 5/12-903 indicates that the non-title holding spouse of a mortgagor who is executing a mortgage used to buy real estate does not have to sign the mortgage to waive homestead.

What is the Rationale for this Statute?

In a purchase money mortgage transaction, the mortgage is executed and disbursed at the same time title is transferred. The facts create a “but for” test. “But for” the mortgage, the buyer would be unable to purchase the property. Thus, the land, when conveyed to the buyer, is transferred, already burdened by the mortgage. Hence, the lien of any homestead interest that would have been created would be subordinate to the lien of the pre-existing mortgage. Because any homestead interest that would have been created would be subordinate to the mortgage, there is no reason for the mortgagor to waive this homestead exemption in said mortgage.

Note that Illinois case law indicates that if one assumes an existing mortgage to purchase property, and the assumption and the purchase are both part of the same transaction, this mortgage assumption is considered a purchase money mortgage.

Rule of Title Practice for the Purchase Money Mortgage Exception

The examiner may want to consider the following guidelines when asked to waive a possible homestead issue on the basis that the mortgage in question is a purchase money mortgage:

The purpose of the loan should be to purchase the residence. All of the mortgage proceeds must be used to buy the property and to pay for charges relative thereto, such as title fees, recording charges, and document transfer stamps. In other words, the buyer cannot directly receive any proceeds from the closing.

Why can’t the buyer receive any proceeds from the closing? The statute provides that the homestead issue is not applicable as to a mortgage for the purchase or improvement of a residence. If a mortgagor takes out a mortgage, one-half of which is used to buy a home and one-half of which is used to buy a car, the mortgage is no longer a "debt or liability incurred for the purchase or improvement [of property]."

Sometimes this doctrine is not easy to understand. Consider this following example:

Example: Adam and Betty are married. Betty is buying the family home, as Adam is out of the country. Betty takes title in her own name. She is getting a mortgage in order to buy the home. Betty made a large earnest money deposit, and as a result, she is getting cash back at closing. The cash she is getting back is less than the amount of the earnest money deposit. Is there a problem?

No, there is not a problem, as long as the amount of cash back is less than the amount of the earnest money deposit. As long as Betty is getting back less than the amount of her earnest money deposit, it is as if the mortgage is still a purchase money mortgage.

The Purchase Money Mortgage/Home Equity Mortgage Combination

Prior to 2008, lenders were funding the purchase of homes with 100% mortgage financing. Consider this example:

Adam and Betty are married. They decide to buy a home with 100% financing. Only Adam takes title to the land. At closing Adam signs two mortgages, a purchase money mortgage and a home equity mortgage. Betty does not attend the closing. Is there a problem?

Yes, there is a problem. Betty does not have to sign the purchase money mortgage because of the statutory exception. But a home equity loan has no such statutory protection. Disbursements from a home equity loan (also called a revolving line of credit) can be made months after closing. Thus, a home equity loan is not a purchase money mortgage. Betty must sign the home equity mortgage.

Two: The Construction of a Residence Exception

As there is no "residence" for the "owner" to "occupy," there is no homestead estate that arises with this type of loan. Thus, a non-title holding spouse does not have to join in the execution of this type of construction mortgage. Any final "end" loan, however, taken out to pay off the new construction mortgage, may require the signature of the non-title holding spouse.

An Issue: The Construction of Improvements to an Existing Residence Exception

Again, 735 ILCS 5/12-903 reads as follows:

No property shall [by virtue of the Homestead Act] be exempt. . . for a debt or liability incurred for the purchase or improvement thereof. . . .

The statute suggests that a mortgage funded for the construction of additional improvements to an existing residence is exempt from the statutes relating to homestead.

Such a conclusion may be erroneous. The purchase money mortgage exception and the construction of a residence exception “make sense.” It does not make sense, however, that a mortgage merely used to pay for additional improvements to an existing residence should be exempt from the homestead statutes. The statute refers to a mortgage for the improvement of property. It is very possible that this statutory language refers to the construction of improvements to vacant land and not to the construction of improvements to an existing home. Therefore, if the purpose of the loan is for the construction of improvements to an existing residence, the non-title holding spouse should join in the mortgage in order to waive a possible homestead interest.

Three: The Vacant Land Exception

There is no statutory exception for the mortgage of vacant land. Clearly, though, homestead is not an issue with vacant land. Therefore, the non-title holding spouse does not have to join in the mortgage of vacant land to waive a possible homestead interest.

The Homestead Trap: When the Non-Title Holding Spouse Must Sign the Mortgage: Example: A Refinance of an Existing Mortgage of a Residence

Assuming that the circumstances give rise to a homestead issue, the non-title holding spouse must join in the signing of the refinancing mortgage of a residence in order to waive the homestead interest. Although purchase money mortgages are exempted from the application of the Homestead Act, the Act makes no such provisions for refinancing mortgages.

Example:

John and Jane are married. In 2015 John and Jane decide to buy a home. Because Jane has credit problems, only John takes title to the home. John buys the home with a purchase money mortgage. At closing, only John executes the mortgage. Jane does not sign the mortgage. This is acceptable, because the mortgage is a purchase money mortgage. In 2019 John and Jane decide to refinance this mortgage. Because there are no homestead exceptions to a refinance mortgage, John must execute the mortgage and Jane must waive homestead.

The Homestead Trap: When the Non-Title Holding Spouse Must Sign the Mortgage: Example: A Second, Third, Etc., Mortgage of a Residence

Assuming that the circumstances give rise to a homestead issue, the non-title holding spouse must join in the signing of a second, third, etc., mortgage of a residence in order to waive the homestead interest. Although purchase money mortgages are exempted from the application of the Homestead Act, the Act makes no such provisions for a second, third, etc. mortgage.

Loan Policy Homestead Endorsements

There are two endorsements available to lenders that relate to homestead. This first endorsement insures the lender against loss in the event that its mortgage is not prior to any outstanding homestead rights of the spouse of the mortgagor. It is sometimes used in a non-purchase money mortgage situation when, for whatever reason, the title company is not requiring the spouse to sign the mortgage:

The Company hereby insures the insured against loss or damage that the insured shall sustain by reason of the entry of a final order of a court of competent jurisdiction, denying the priority of the lien of the mortgage described in Schedule A over any homestead rights of the mortgagor or the spouse of the mortgagor.

This second endorsement is often used when the title company relies on the “purchase money mortgage exception” and does not require the spouse of the mortgagor to sign the mortgage:

The Company hereby insures the insured against loss or damage that the insured shall sustain by reason of the possible outstanding homestead estate in the mortgagor or the spouse of the mortgagor by reason of the failure of the spouse of the mortgagor to sign the mortgage described in Schedule A.

Other Issues

Conveyance to Self and Third Party

Question: Husband owns the home. Husband wants to convey the home to himself and his son. Should Wife join in the conveyance?

Answer: The statute (735 ILCS 5/12-904) states that “if a conveyance is made by an individual as grantor to his or her spouse, such conveyance shall be effectual to pass the title expressed therein to be conveyed thereby, whether or not the grantor in such conveyance is joined therein by his or her spouse.”

But here the conveyance is not being made to the spouse; rather, the proposed conveyance is to the husband and the couple’s son. It would appear, then, that Wife should join in the conveyance.

Dissolution of Marriage

See 735 ILCS 5/12-905: In case of a dissolution of marriage, the court granting the dissolution of marriage may dispose of the homestead estate according to the equities of the case.”

The Homestead Checklist (set forth again for future reference)

1. Who owns the property? (Remember, all owners of the property must execute any deed or mortgage. There are no exceptions to this rule).

2. If the fact situation involves a title holding spouse and a non-title holding spouse, does the title holding spouse reside at the property?

a) If the answer to question "2" is "no," then a non-title holding spouse's signature on a deed or mortgage is not necessary.

(b) If the answer to question "2" is "yes," then, generally speaking, the non-title holding spouse should sign the deed or mortgage, conveying or releasing the homestead interest of his or her spouse.

(c) If the title holding spouse resides on the property, but the non-title holding spouse does not, then the individual facts of the situation should be considered before waiving the requirement as to the non-title holding spouse's signature on a deed or mortgage on the basis that the spouse would not be deprived of "the possession and enjoyment of a home." (Factors to consider include whether or not the non-title holding spouse had ever lived in the home, the length of time the couple had been separated, and the nature—permanent or temporary—of the separation.

Mortgage Execution and Homestead Issues

Part I: The Rule

The number one rule is: If you own it, you have to mortgage it. That is, all owners of the land must execute any mortgage of the land. An owner of the land cannot just sign the mortgage in order to waive homestead.

Example: John and Jane are married. They are buying their first home. The seller is Fred Jones. The closer looks at the deed. The deed indicates that Fred Jones, a bachelor, is conveying the land to John and Jane, husband and wife.

The closer now looks at the mortgage. The first page of the mortgage indicates that the mortgagor is John, a married person. The closer looks at the signature page of the mortgage. The closer sees that Jane is signing the mortgage, but Jane is signing only to waive homestead. Is there a problem?

Yes, there is a problem. This is not a homestead issue; this is a title issue. John and Jane are taking title to their home. All owners of the land must execute the mortgage as borrowers and mortgagors.

Why? The 2006 ALTA loan policy insures the validity of the mortgage. If John and Jane own the land, but if only John executes the mortgage, the lender has a lien on only a 50% interest in the land. If this mortgage were foreclosed, and if a sheriff’s deed were eventually issued, the deed would convey only John’s 50% interest in the land. The lender and Jane would own the home as tenants in common. This is obviously not what the lender intended when it prepared the loan documents for closing.

Court Cases

Phillips v. Phillips, 74 Ill. 2d 27, 383 N.E. 2d 973 (1978); the homestead exemption is not available as between co-tenants, even if one of the owners is otherwise entitled to the homestead exemption.

Miscellaneous

See 735 ILCS 5/12-1003; it appears that a spouse of a deceased homeowner has homestead rights:

When the head of a family dies, deserts or does not reside with the same, the family shall be entitled to and receive all the benefit and privileges which are by Part 10 of Article XII of this Act conferred upon the head of a family residing with the same.

Part II: Homestead: The Short Course

What is homestead? And when is homestead an issue?

Most people think homestead is an inchoate “right of possession” that a non-title holding spouse has in land that is owned by the title holding spouse. That is, they believe that the following example is a valid example of homestead in Illinois:

Example: John and Jane are married. Both of them live in the home that only John owns. In order for John to effectively convey or mortgage his home, Jane must sign the deed or mortgage in order to waive Jane’s homestead rights.

But this is not really the case. 735 ILCS 5/12-901 provides as follows:

Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence. . . . That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts. . . .

In other words (and broadly speaking), in order to have a homestead interest, one must both own the home and live in the home. A non-title holding spouse who only lives in the home but who has no ownership interest in the home does not have a homestead interest in the home.

The following, then, is an example of homestead:

Example: John and Jane are married. Both of them live in the home that only John owns. In order for John to effectively convey or mortgage his home, Jane must sign the deed or mortgage in order to waive John’s homestead rights.

Note, though, that the net effect is the same in both examples.

Homestead will be an issue when two people are married (or have entered into a civil union), but only one spouse or partner owns the family home in which the two people live. The following question will always be the issue:

Question: In a residential real estate transaction involving a married couple (or two people who have entered into a civil union), and only one spouse or partner owns the family home in which the two people live, does the non-title holding spouse have to sign the deed or mortgage in order to waive any applicable outstanding homestead interest?

Answer: It Depends.

Ideally, and in a perfect world, it is appropriate for the non-title holding spouse to always sign the deed or mortgage.

But we don’t live in a perfect world. And so if that spouse is not at the closing table, here are the general rules:

General Rule for the Sale of Property:

The Rule

Generally speaking, homestead should not be an issue for the sale of a home. The reason for this is not invariably both spouses are giving up possession of the home, and giving up possession is a valid way of releasing one’s homestead interest.

Facts: John and Jane are married. Only John owns the family home. The couple is selling the family home and buying a new home. Only John is at the closing; Jane is at the new home, directing the movers. John and Jane have already moved out of their old home. The old home is completely vacant.

Question: Does Jane have to sign the deed that is conveying the old home to the new purchaser?

Answer: Jane (the non-title holding spouse) does not have to sign the deed. Why? Because she has clearly given up possession of the home. The non-title holding spouse can waive homestead in a deed situation by either signing the deed or by giving up possession of the property when the title holding spouse executes the deed. The Illinois statutes provide for this. See 735 ILCS 5/12-904.

(But if the non-title holding spouse is at the closing, then there is nothing wrong in the closer asking that the non-title holding spouse sign the deed.)

And of course, all owners of property must execute the deed (or a mortgage) of the property. This is a title issue; it is not a homestead issue.

General Rule for the Execution of a Purchase Money Mortgage

The Rule

Homestead should not be an issue when the married title holding spouse is executing a purchase money mortgage and all the mortgage proceeds are being used to purchase the home and pay closing costs, attorney’s fees, etc.

Facts: John and Jane are married. They want to buy their first home. Jane has a $50,000 judgment against her, and so she does not want to take title to the home. Only John will take title to the home. The couple needs to get a “purchase money mortgage” in order to buy the property. (A purchase money mortgage is a mortgage wherein all of the mortgage proceeds are used to purchase property.) Because John will be the owner, John must execute the mortgage.

Question: But does Jane have to sign the mortgage in order to waive homestead?

Answer: Jane does not have to sign the mortgage as long as all the mortgage proceeds are being used to pay for the purchase of the home and to pay for costs relative to the home purchase, such as attorney’s fees and closing costs.

But note: If the mortgage proceeds are being used for other purposes, such as the paying off of a judgment against John, then the mortgage is not a true purchase money mortgage

Under the latter set of facts, why isn’t this mortgage a purchase money mortgage? The mortgage is not a purchase money mortgage because the mortgage money is not being used to purchase property; the money is being used to purchase property and to pay off a judgment. Therefore, Jane (the non-title holding spouse) has to sign the mortgage to waive homestead. (But again, even if the mortgage is a true purchase money mortgage, if the non-title holding spouse is at the closing, it is perfect acceptable to have that spouse sign the mortgage.)

General Rules for a Refinance Mortgage or Second, Third, etc. Mortgage:

The Rule

Homestead will always be an issue when the married title holding spouse is executing a refinance mortgage or a second or subsequent mortgage of the family home.

Facts: John and Jane are married. Their home was purchased in 2014. They have both been living in the home since 2014. At the time the home was purchased, Jane had a $50,000 judgment against her. For that reason, only John took title to their home. Because they bought their home with a purchase money mortgage, only John had to execute the mortgage. Jane did not have to sign the mortgage to waive homestead.

It is now 2019. John and Jane want to take advantage of low interest rates and refinance their existing mortgage.

Question: Does Jane (the non-title holding spouse) have to sign the new mortgage in order to waive homestead?

Answer: Yes. There are no exceptions to this rule, assuming that both John and Jane are living in the home.

Why Must the Non-Title Holding Spouse Sign a Refinance or Second Mortgage?

Review the homestead statute, which is at 735 ILCS 5/12-901:

Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence. . . . That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts. . . .

Assume that John and Jane and married, but only John owns the family home. John and Jane refinance their existing home. Assume that only John executes the mortgage, and Jane does not sign the mortgage to waive homestead. If that mortgage is later foreclosed, the lender would not obtain all of the foreclosure sale proceeds. $15,000 (representing John’s homestead interest) would have to be set aside from the proceeds of the foreclosure sale.

Furthermore, there is no exception in the statutes for a refinance or second mortgage of homestead property.

General Rule When Both the Husband and Wife Own the Home

When both the husband and wife own the home, both the husband and wife must execute any mortgage of the property and any deed of the property. Homestead is not an issue when both the husband and wife own the home—or any other property. That is, this is a title issue; this is not a homestead issue.

PART III: Mortgage Execution Problems

Part I set forth the basic problem that arises when an owner of the property does not execute a mortgage. But there are other issues, too.

Facts:

John and Jane are married. Both John and Jane own the home in which they live. The closing package is delivered to the title company office, and the lender has prepared the mortgage so that only John will execute the mortgage but Jane will waive homestead.

Question:

What are the problems?

Answer:

The one basic problem is this: Under this set of facts, both spouses own the home. Remember the one important rule, as set forth above: All owners of real estate (not just the family home, but any real estate) must execute the mortgage! It is not enough that one spouse executes the mortgage and the other spouse just signs the mortgage to waive homestead.

The other issues depend in part on how John and Jane own their home:

• If John and Jane own their home as tenants in common, then the mortgage is a lien on only 50% of the land.

• If John and Jane own their home as joint tenants, then the mortgage would also be a lien on only a 50% interest in the land. But if John (the only person who executed the mortgage) dies before Jane, then pursuant to the Illinois Supreme Court decision, Harmes v. Sprague, 105 Ill.2d 215, 473 N.E.2d 930, 85 Ill. Dec. 331 (1984), Jane would not only own the home as a surviving joint tenant, she would own the home free and clear of the mortgage.

• If John and Jane own their home as tenants by the entirety, then pursuant to 765 ILCS 1005/1c, the mortgage may be completely invalid! This Illinois statute states that “no deed, contract for deed, mortgage, or lease of homestead property held in tenancy by the entirety shall be effective unless signed by both tenants.”

Note that the problem of improper mortgage execution is not just a national title claims issue. Consider this court case; this is a DuPage County appellate court case; see Deutsche Bank National Trust Company v. Dolci, 2012 IL App (2d) 111275-U. See also GMAC Mortgage v. Arrigo, 8 N.E.3d 621 (2014).

PART IV: Some Sample Homestead Fact Patterns

Homestead issues can arise in so many different ways. Consider the following examples:

Facts: John and Jane are married. Only John owns the home in which they live. John bought the home before the couple got married, and so the one existing mortgage on the property is a purchase money mortgage that John took out as an unmarried person when he bought the property. What if . . . .

• John and Jane decide to refinance “their” mortgage. Even though only John owns the home, Jane must also sign the new mortgage to waive any outstanding homestead interest. She does not have to execute the mortgage as mortgagor; she only has to sign the new refinance mortgage.

• John and Jane decide to take out a second mortgage. Even though only John owns the home, Jane again must also sign this new second mortgage to waive any outstanding homestead interest.

• John and Jane decide to sell the home. Only John attends the closing. Jane has not pre-signed the deed. In this case, the closer should verify that Jane is delivering possession of the land pursuant to the conveyance— the closer should make sure that Jane (the non-title holding spouse) has willingly moving out of the home. (The closer should always ask to make sure that the non-title holding spouse is giving up possession of the property.) If this is the case, the closer can accept the deed, even though only John has signed it. Jane does not have to execute the deed, and Jane does not have to sign the deed to waive any outstanding homestead interest. However, if Jane, the non-title holding spouse, is at the closing, there is nothing wrong with asking Jane to sign the deed to waive homestead. (But if both John and Jane had owned the home, then both John and Jane would have to execute the deed.)

• John and Jane then decide to buy a new home. Again, only John takes title to the property. At the closing, only John is shown as the mortgagor on the mortgage. In this case, the closer should verify that all loan proceeds are being used to purchase the home and to pay for ancillary closing costs. If this mortgage is a true purchase money mortgage, it is all right if only John executes it. Jane does not have to execute the mortgage and Jane does not have to sign the mortgage to waive any outstanding homestead interest. (But the closer must remember that if John and Jane later decide to refinance or obtain a second mortgage, Jane will have to sign the mortgage in order to waive any outstanding homestead interest. Also, the closer should make sure that the new lender does not have any special requirements concerning Jane signing this purchase money mortgage.)

• Same facts as immediately above. That is, John and Jane decide to buy a new home. Only John takes title to the property. John needs to take out a mortgage in order to buy the property. During the closing, the closer realizes that the mortgage is a revolving credit mortgage. A revolving credit mortgage is not a true purchase money mortgage. Months after the closing, John could draw on this mortgage and obtain additional mortgage funds. Because it is possible that the mortgage money may not be used solely to buy the home, Jane must sign the mortgage in order to waive homestead.

• Same facts as immediately above. That is, John and Jane decide to buy a new home. Only John takes title to the property. John needs to take out a mortgage in order to buy the property. During the closing the closer realizes that there is a first mortgage and a second mortgage in the closing package. Both mortgages are being used to purchase the property. However, the second mortgage is a revolving credit mortgage. The second mortgage may not be a true purchase money mortgage. Even if the second mortgage is totally disbursed at closing, John and Jane could later repay back some of the money that was disbursed at closing. Then, months after the closing, John could draw on this second mortgage and withdraw additional mortgage funds. Because this second mortgage may not be used solely to buy the home, it may not be a purchase money mortgage. Thus, in this situation Jane does not have to sign the first mortgage. However, Jane does have to sign the second mortgage in order to waive any outstanding homestead interest. Why is this the case? The second mortgage is not a true purchase money mortgage.

• Again, same facts as above. That is, John and Jane decide to buy a new home. Only John takes title to the property. John needs to take out a mortgage in order to buy the property. As the closer examines the closing statement, the closer realizes that the closer is being asked to pay off John’s $10,000 IRS lien. As mortgage money will be used in part to pay off the IRS lien (and not just purchase the home), the mortgage is not a purchase money mortgage. Jane must sign the mortgage in order to waive homestead.

• Again, same facts as above. That is, John and Jane decide to buy a new home. Only John takes title to the property. John needs to take out a mortgage in order to buy the property. At the closing the closer realizes that John is getting cash back from the mortgage. Thus, all the mortgage money is not being used to buy the home; some of the money is being given back to John. This is not a purchase money mortgage. Jane must sign the mortgage in order to waive homestead. John’s attorney argues with the closer; the attorney offers to have John pay the excess money back to the lender as a mortgage payment. This won’t solve the problem. A purchase money mortgage is a mortgage used to purchase property; a purchase money mortgage is not a mortgage where part of the mortgage money is used to purchase the property and part of the money is used to make a mortgage payment.

• In the above situation, assume that John was getting back $1,000. Some title people feel that John’s mortgage would still be a purchase money mortgage, except for that $1,000. Thus, they argue, the title risk is a risk of no more than $1,000. Other title people are of the opinion that a mortgage either is or is not a purchase money mortgage; there is no middle ground. To them, the risk is much greater—in this example, the risk would be $15,000, or the amount of the homestead exemption.

• Now change the facts completely. John and Jane were buying a new home, but that transaction fell apart, and they are moving forward, buying a new and different home. John and Jane are taking title in joint tenancy. The lender tells the closer that only John needs to execute the mortgage as a mortgagor, but that Jane simply needs to sign the mortgage “to waive homestead.” This is incorrect. Because both John and Jane are taking title, both John and Jane must execute the mortgage as well. That is, Jane must execute the mortgage and not just sign the mortgage to waive homestead.

Rule of Title Practice: All people who own the property (any property, not just the family home) have to mortgage the property. This really isn’t a homestead issue; it is a title issue. Otherwise, in the example immediately above, the lender has a mortgage on only a 50% interest in the land.

• But again, at the last minute, this transaction also falls through, and now John and Jane decide to buy a new and different home. John and Jane decide to take title to this new home as trustees of a living trust. The mortgage presented at closing shows John and Jane, individually, as mortgagors. This is not correct. The owners’ names must be the same as the mortgagors’ names. Since John and Jane, as trustees, own the home, John and Jane, as trustees, must execute the mortgage.

Rule of Title Practice: When the closer gets the deed and mortgage, the closer must compare the grantee(s) on the deed to the mortgagor(s) on the mortgage. The names must be identical! (But see also the paragraph immediately below.)

• John and Jane’s lender will not allow John and Jane to take title as trustees of a living trust. Therefore, John and Jane decide to take title as John and Jane, individually. The lender is asking that John’s parents, Fred and Ethel, also execute the mortgage. This is acceptable. One can have more borrowers execute the mortgage than there are people who own the land, as long as all the people who own the land mortgage the land. Here, John and Jane own the land, but John, Jane, Fred, and Ethel, are the mortgagors. (But always remember: all the owners of the land must execute the mortgage!)

• But for some reason this entire transaction falls apart, and so a month later John and Jane again decide to buy a new home. But now John and Jane will be the only people who will take title to this home, and only John and Jane will mortgage the home. (In other words: John and Jane take title to the home, and John and Jane execute the purchase money mortgage.) The lender tells the closer that because John makes so much money, he is the only one who has to sign the mortgage note. That is, Jane does not have to sign the note. This is acceptable; you can have fewer people signing the note than own and mortgage the property, as long as you have the approval of the lender. And of course the lender approved this arrangement; the lender is the one who drafted the note. (But it seems that it is possible that the lender is giving up its right to seek a deficiency judgment against the person who did not sign the note in the event of a mortgage foreclosure. But that is not the Company’s concern.) So in this example, because John and Jane will take title, John and Jane must both execute the mortgage. But only John will sign the note. And that is acceptable.

• A few years later, John and Jane move into still another home. John alone takes title to this home. John executes a purchase money mortgage at the closing. Jane gets angry at her in-laws, Fred and Ethel, and Jane moves out of the home. John never hears from her again. Five years later John decides to refinance his mortgage. On a case-by-case basis, with underwriter approval, the examiner may insure this new mortgage without Jane signing the mortgage to waive any outstanding homestead interest. Why is this the case? It appears that Jane has abandoned her home, and thus she has abandoned any outstanding homestead interest in the home. (But remember that if Jane had taken title to the home, then Jane must execute the mortgage. And if John decides to sell the home, and if Jane had taken title to it, then Jane must execute the deed. If both John and Jane take title to their home, and Jane moves out of the home and disappears, a quiet title suit may be John’s only recourse if Jane is nowhere to be found and he wants to sell the home. And even then the court may require that half the sale proceeds be held in an escrow until Jane is declared legally dead.)

This “abandonment of homestead” issue arises many times in many different contexts. And sometimes the issue isn’t one of abandonment. The title person may be told that, “My spouse lives permanently in a different town; she has never lived in this house.” Or, the examiner may be told that, “John and Jane are getting divorced; Jane has moved out of the home.” These and similar fact patterns have to be treated with much deliberation. The examiner has to ask many questions, such as, “How long has Jane been gone? When was the last time you saw Jane? You said that you and Jane are getting divorced; have you filed for divorce yet? Where is Jane living now? If you and Jane have not yet filed for divorce, do you anticipate doing so, and if so, when?”

• John owns the home that he and his wife, Jane, live in. John wants to deed the land to Jane and himself. Jane does not have to sign the deed to waive homestead; see 735 ILCS 5/12-904:

If a conveyance is made by an individual as grantor to his or her spouse, such conveyance shall be effectual to pass the title expressed therein to be conveyed thereby, whether or not the grantor in such conveyance is joined therein by his or her spouse.

This statute suggests that if John wants to deed the home to his wife, or if John wants to deed the home to both himself and his wife, his spouse need not join in the deed to waive homestead. Why? Probably because it is presumed that both John and his wife are already occupying the home as their homestead.

But if John wants to convey the land into the “John and Jane Living Trust,” then Jane would have to sign the deed in order to convey any homestead interest.

• John is married to Jane. John decides to buy the family home with a home equity/revolving line of credit mortgage. (See 205 ILCS 5/5d; see also 815 ILCS 205/4.1 et seq.) Even though the mortgage is being used to buy the home, the revolving line of credit envisions possible post-closing disbursements made months after the closing. Therefore, Jane must sign the mortgage to waive homestead.

Part V: A Final Reminder

Homestead is an issue in both a conveyance situation and also a mortgage situation.

However, because of the “possession given pursuant to the conveyance” provision of 735 ILCS 5/2-904, insuring the sale of land pursuant to a deed executed solely by the title holding spouse should not normally give rise to a title claim.

A misconception as to homestead concerning proper mortgage execution, may, though, result in a title claim.

And so in this regard, the examiner and closer should remember:

• All parties who own the property have to execute any mortgage of the property. The waiving of homestead is not sufficient. Indeed, homestead is not even an issue. The fact that all owners of the land have to execute a mortgage of the land is a title issue; it is not a homestead issue.

• In a situation involving the family home and a title holding spouse and a non-title holding spouse, and the Company is closing a refinance, a second mortgage, or a home equity mortgage, the title holding spouse will have to execute the mortgage. (See the rule immediately above.) The non-title holding spouse will probably have to sign the mortgage to waive homestead.

Judgments and Liens

A judgment is a lien on the debtor's property for seven years from the date the judgment is rendered (not from the date the judgment or memorandum of judgment is recorded). See Schindler v. Watson, 2017 IL App (2d) 160126.