The Appellate Strategist

Insights on appellate issues, trial consultations, and evaluating appeals

Illinois Supreme Court Agrees to Decide Constitutionality of Property Tax Exemption for Aviation Firm

By Kirk Jenkins on December 3, 2015 Posted in Illinois

It’s not at all uncommon for state and local governments to use targeted tax breaks as a tool for encouraging economic growth, giving various types of businesses – and sometimes, single major employers – incentives to expand their operations. On the final day of the November term, the Illinois Supreme Court agreed to decide the constitutionality of one such tax break in Moline School District No. 40 Board of Education v. Quinn.

Moline School District arises from Public Act 97-1161, which amended the Property Tax Code to exempt aeronautical firms called fixed based operators – “FBOs” – from property taxes on leasehold interests and improvements at the Rock Island County Metropolitan Airport. At the time of the amendment, the Metropolitan Airport Authority leased property to only one FBO, who paid $150,000 in property taxes a year. The legislative history of Public Act 97-1161 suggests that the bill was intended to encourage that FBO to expand in Illinois instead of Nebraska, Missouri or Iowa – states where the plaintiff pays no property taxes.

The plaintiff school district filed a complaint for injunctive and declaratory relief, arguing that Public Act 97-1161 violated the “special legislation” clause of the Illinois Constitution, which provides that “The General Assembly shall pass no special or local law when a general law is or can be made applicable.” The plaintiff alleged that it would suffer irreparable harm from the loss of funding triggered by the property tax exemption. The plaintiff filed a motion for summary judgment, and the FBO intervened in the action and filed a cross-motion. The trial court denied the plaintiff’s motion for summary judgment, holding that no other FBOs in Illinois were similarly situated to the intervenor, and the legislature could constitutionally enact legislation to address a unique situation.

The Third District of the Appellate Court reversed. The special legislation clause prohibits the conferring of special benefits or exclusive privileges on a person or group to the exclusion of others similarly situated. Two factors are relevant: (1) a discrimination between two groups which are similarly situated; and (2) the classification is arbitrary. A classification is upheld if it is rationally related to a legitimate state interest.

The Court held that the Act fell under the second factor. The Court found that there was no justification for singling out FBOs at the airport from other FBOs or indeed, any other businesses in Illinois. The Court noted the hope that the intervenor would use the money saved to expand, but found that nothing required it to do so. One could just as easily speculate, the Court commented, that giving a similar tax break to any other FBO or business would encourage it to expand its operations.

The intervenor argued that it was uniquely situated because it was located on the border of states with no property taxes, and had options to expand in those states. The Court found that neither point was sufficient – the tax break was extended to any FBO choosing to locate in the State, not just the intervenor, and there was no reason to believe that other FBOs and businesses around the State didn’t have competitors in no-property-tax states. Because the Court found no rational relation between the Act and a legitimate state interest, the Court held that it violated the special legislation clause.

We expect Moline School District to be decided in eight to ten months.

Image courtesy of Flickr by Glasseyes View (no changes).

Illinois Supreme Court Agrees to Revisit 67-Year-Old Precedent Holding that Temporary Flooding Cannot Constitute a Taking

By Kirk Jenkins on December 3, 2015 Posted in Illinois

On the final day of the November term, the Illinois Supreme Court agreed to hear Hampton v. Metropolitan Water Reclamation District of Greater Chicago. Hampton poses a simple question: should the Court overrule its 1948 decision in People ex rel. Pratt v. Rosenfield holding that temporary flooding caused by government action can never constitute a compensable taking?

Hampton arises from flooding which occurred following a heavy rainfall in the Chicago area in late July 2010. The plaintiffs sued the defendant Water Reclamation District, alleging that its control and management of the Chicago Area Waterways System was the cause of the flooding, which resulted in serious damage and/or destruction of their property. The plaintiffs purported to state claims under the Metropolitan Water Reclamation District Act (70 ILCS 2605/19) and the Takings Clause of the Illinois Constitution.

The defendant moved to dismiss. The Circuit Court granted the motion with respect to Count I under the Act. However, the Court denied the motion with respect to Count II under the Takings Clause, holding that the Illinois Supreme Court’s holding in Pratt had been effectively overruled by the U.S. Supreme Court’s 2012 holding in Arkansas Game and Fish Commission v. United States. The trial court then certified pursuant to Supreme Court Rule 308 the question of whether Pratt survived Arkansas Game and Fish Commission.

Division Five of the First District held that it did not. The court noted that although the plaintiffs did not invoke the Federal takings clause in their complaint, the Illinois clause was actually broader in scope because it expressly covers “damage” to property, not just a “taking” of it. Nevertheless, in Pratt the Illinois Supreme Court held that a property owner was not entitled to bring condemnation proceedings under the Clause where flooding allegedly occasioned by government conduct had receded, since the property owner could not allege that the invasion was permanent.

After reviewing the Illinois authorities, the Appellate Court turned to Arkansas Game and Fish Commission. There, the U.S. Supreme Court had found that although the duration of a physical invasion is a factor in determining a compensable taking, the mere fact that floodwaters had receded did not create an automatic exemption from a finding that a taking had occurred. The court held that because Pratt was based on the proposition that floodwaters could never result in a compensable taking, the Illinois Supreme Court’s decision in Pratt was effectively overruled by Arkansas Game and Fish Commission.

We expect Hampton to be decided in eight to ten months.

Image courtesy of Flickr by Tatters (no changes).

Illinois Supreme Court Appears Inclined to Strike Down Chicago Public Pension Fix

By Kirk Jenkins on December 3, 2015 Posted in Illinois

During its just-ended November term, the Illinois Supreme Court heard oral argument in Jones v. Municipal Employees’ Annuity and Benefit Fund of Chicago, a sequel of sorts to In re Pension Reform Litigation from earlier this year. This time, the Court is reviewing a decision from the Circuit Court of Cook County striking down SB 1922, a bill aimed at saving the Chicago public employees pension system. Based on the distribution and content of the Court’s questions, it appears likely that the Chicago pension fix will suffer the same fate that the statewide fix did earlier this year. Our two-part data analytic preview of the oral argument in Jones, including a detailed summary of the underlying facts and holdings, is here and here.

Counsel for the City began the argument by saying that the case hinges on two undisputed facts – first, the funds will inevitably go bankrupt in the relatively near future absent some sort of fix; and second, the Act under review dramatically increases the City’s employer contributions and for the first time imposes a legal obligation to fund the system on the City (rather than the funds). Counsel argued that the case presents an issue not before the Court in In re Pension Reform. There, counsel argued, the State conceded that the Act impaired benefits. Here, the City argues that the Act benefits employoees and retirees by saving and stabilizing the funds. Counsel argued that no prior case had involved legislation imposing a substantial new funding obligation. Justice Thomas asked how the promise of funding matters when the Constitution guarantees that benefits must be paid. Isn’t that promising to do what the Constitution already guarantees? Counsel responded that the Constitution does not in fact guarantee funding. Instead, the Pension Protection Clause tried to prod the legislature to fund pensions by protecting benefits. According to counsel, it was undisputed that before the Act, only the funds were legally obligated to pay the funds’ obligations. Justice Theis noted that the Court has always held that the purpose of the Clause was to ensure receipt of benefits rather than controlling the political branches’ funding decisions. But the City appeared to argue that there was never an obligation to pay for the benefits. How did the City reconcile those points? Counsel answered that there was an obligation to pay, but the issue was whose obligation. Previously, the obligation was only on the funds. Justice Theis asked whether the City was contending that the Clause no longer applies if the funds run out of money. Counsel responded that it depends on the pension contract. The Pension Protection Clause protects the rights and obligations found in the Pension Code. Most funds have a provision that somebody other than the fund backstops the fund’s obligations; but that has not historically been true with the City’s employee funds. Even if the Court accepted the plaintiffs’ arguments, counsel insisted, both employees and retirees were obviously better off after the Act – that was proven by the fact that the fund trustees and twenty-seven of the thirty-one impacted unions supported the City. Counsel argued that absent the Act, participants’ only option was a highly uncertain lawsuit to force funding once the funds were on the verge of default. Justice Thomas noted that the Court was dealing with a statute, not a collective bargaining agreement – any agreement is merely part of the history of how the statute came to be enacted. But if the statute is clear and unambiguous, what did the history matter? Counsel answered that one basis for reversing was finding that the changes in benefits were a bargained-for exchange for consideration. Justice Thomas asked whether the City was arguing that all affected parties had consented. Counsel said no, but that didn’t foreclose the bargain-for consideration argument. All 75,000 of the affected employees and retirees would never agree to anything. Counsel concluded by arguing that even if the Pension Protection Clause is an individual right, there was nothing preventing the Court from applying a reasonable and common sense approach to allow unions to negotiate a fix on their members’ behalf.

Counsel for the fund trustees was next. According to counsel, overwhelming evidence in the record showed that the funds were facing bankruptcy. The Act benefits the funds by insulating them from investment shocks, as well as by making the City the guarantor of the funds’ obligations. The imposition of that obligation is a significant benefit to all participants, counsel argued, as was the mandamus action authorized by the Act. Justice Theis asked whether future legislation could modify all these changes. Counsel said no, the funding obligations were now a benefit of pension system membership, protected by the Pension Protection Clause. Justice Theis asked whether the Constitution protects this kind of thing, and counsel said yes, that was the legislature’s intent in passing the Act. Counsel concluded by arguing that the funds could not invest their way out of their problems, and without the Act, the unfunded liabilities would continue to grow.

Counsel for the funds briefly concluded, arguing that the Act confers security and certainty. Without the City’s guarantees, the funds can’t raise taxes, can’t increase contributions – they can’t raise any funds at all.

Counsel for the first group of plaintiffs was next. He argued that there was no dispute that members would receive smaller pensions under the Act. According to counsel, the Act was the result of years where employer contributions hadn’t matched the funds’ obligations. Now that the result of that has become intolerable, counsel argued, the City didn’t want to pay – but that’s exactly the option the Pension Protection Clause bars. Counsel argued that the City’s position was merely an end run around In re Pension Reform Litigation. Setting aside money to pay for something already guaranteed by the Constitution was not a benefit, counsel said. The City says this time around, the General Assembly really means it, according to counsel – but that rings hollow too, since the Act allows courts to change the funding schedule for the same reasons the Act had become necessary in the first place. Chief Justice Garman asked whether unions could bargain for diminishment in return for some sort of guarantee. Counsel answered that the rights involved were individual, and would have to be modified individually. Chief Justice Garman commented that then it’s really impracticable for individual benefits to ever be changed, even with consideration. Counsel answered that the City could have negotiated something to individuals an opt-in choice, but those would have to be fair contracts. No participant in the funds was present for any negotiation, and that City offered no evidence, according to counsel, that the union representatives had authority to represent their members in the discussions, let alone retirees. Counsel argued that no union has taken a position on the legislation as ultimately enacted, so there was no basis for finding an agreement. Counsel concluded by arguing once again that putting aside money to pay for benefits already guaranteed wasn’t a benefit within the meaning of the clause.

Counsel for the second group of plaintiffs was next, arguing that this case involved the same issues and arguments, and should involve the same result, as In re Pension Reform Litigation. Counsel argued that the City had made no employer contributions at all for the years 2000-2006, but employees still had to pay the same withheld contributions. Counsel claimed that the City had conceded that it couldn’t accomplish this result through a Collective Bargaining Agreement. Counsel concluded by noting that at any time in the past ten years, the trustees could have gone to court to force City contributions, but they had failed to do so.

Counsel for the City concluded in rebuttal, arguing that Justice Thomas’ question about the plain language of the Act begged the real question – whether an Act giving overwhelming benefits to participants violated the Pension Protection Clause. Justice Thomas asked what the “overwhelming benefit” was. Counsel answered that the benefit was billions of dollars to pay benefits as they came due. Justice Thomas asked whether that benefit was merely the result of the practicalities of where the funds are today, and didn’t the Pension Protection Clause already grant the same benefit? Counsel answered that the plaintiffs’ position proceeds from the false assumption that there is some obligation to fund the funds. According to counsel, the Clause says that employees get the benefit of the bargain that was on the books when they were hired. At all relevant times, the terms said that the funds themselves – not the City – were obligated to pay benefits. Justice Theis asked whether the City was arguing that employees should have known from the beginning that benefits might not be there. Counsel answered that funding was adequate until about ten years ago. The Pension Code says that no contributions were required when the funds were overfunded, which they were until about ten years ago. Did the parties know that the provision saying only the funds were liable was inadequate? No, counsel argued, but that was neither a breach of contract nor unconstitutional. Justice Thomas asked whether the Act means that all parties will get less than originally promised. Counsel answered no, it depends on the circumstances. According to counsel, it would be ironic if the Court declared that adequate funding – exactly what the framers of the Constitution were trying to cause by guaranteeing benefits – was unconstitutional. Justice Thomas asked whether there was anything else the General Assembly or City could have done to make sure funding was adequate aside from the Act. Counsel said no, but that wasn’t issue before the Court. Counsel argued that the only real alternatives were the Act – or fund bankruptcy in 10-13 years. Justice Thomas posed a hypothetical – in ten to thirteen years, the funds are bankrupt. Are the pensioners any less entitled to what they were promised? Counsel responded that the promise to retirees had a limitation. Justice Thomas asked whether retirees would have any recourse at that point to ensure they were paid. Counsel said that the City had been asking the plaintiffs what their alternative is. The only response has been a possible uncertain lawsuit to force funding once the funds were on the edge of bankruptcy. Counsel insisted that participants are better off with the Act than with the results of a speculative and uncertain lawsuit. Chief Justice Garman asked whether the City was saying that impairment is separate from funding. Counsel said it depends on the circumstances of a particular fund. The Clause protects benefits of membership in the retirement system. To define those “benefits,” one looks at what the legislature has put in the Pension Code. In most cases, that includes a guarantor, but these funds don’t have such a provision. Counsel concluded by arguing that the true threat going forward isn’t reducing benefits, it’s that the money simply won’t be there.

We expect Jones to be decided in three to five months.

Image courtesy of Flickr by Catarina Oberlander (no changes).

Illinois Supreme Court Debates Requiring Attorneys in Administrative Hearings

By Kirk Jenkins on December 3, 2015 Posted in Illinois

During the recently concluded November term, the Illinois Supreme Court heard oral argument in Stone Street Partners, LLC v. City of Chicago Department of Administrative Hearings, a decision from the First District of Division One. Stone Street poses a question with possibly serious implications for administrative law in Illinois: do corporations have to be represented by attorneys in administrative hearings? Our data analytic preview of the oral argument in Stone Street is here. Our detailed summary of the underlying facts and lower court opinions is here.

Stone Street began in 1999 when a Chicago City building inspector found various building code violations in one of the plaintiff’s buildings. The City sent the notice of violation to the property address, rather than to the plaintiff’s business address or registered agent. Nevertheless, someone – a non-lawyer – did appear at the hearing on the plaintiff’s behalf. The plaintiff was found liable and fined. The administrative judgment was filed with the Circuit Court in 2004 and recorded in 2009. The plaintiff claimed to have found out about all this in 2011 when it obtained a copy of the judgment via a FOIA request. The plaintiff moved to set aside the administrative order based on lack of notice, claiming that the person who appeared at the administrative hearing had no authority to represent the plaintiff. The administrative hearing officer refused to disturb the judgment, and when the plaintiff sought administrative review, the circuit court granted defendant’s motion to dismiss. The Appellate Court reversed in part, holding as a non-attorney, the corporation’s purported agent couldn’t validly represent the corporation in the 1999 hearings.

Counsel for the City led off the argument at the Supreme Court, noting that Department of Administrative Hearings handles half a million hearings a year. Counsel argued that the Appellate Court’s holding that corporations must be represented by attorneys in all cases was a senseless burden on Illinois business. The proceedings are simple – there are very few motions, a presumption against discovery, and the issues are largely factual. For that reason, counsel argued, the proceedings do not typically call for specialized legal skill. Counsel compared the hearings to small claims court, where non-lawyers are allowed to appear even though legal issues of tort and contract arise. Chief Justice Garman asked whether a nonlawyer could represent an individual. Counsel answered yes, although the Appellate Court’s decision was specific to corporations, the rules governing the hearings are the same for all parties. Counsel argued that the average judgment in the Department is $454, and 87% of all judgments are under $10,000. For that reason, there was no justification for a different rule than the one which prevails in small claims. Justice Karmeier wondered whether anyone could appear, claim to be representing the corporation, and admit violations. Counsel argued that that isn’t a concern, since an appearance is a representation under oath that the person has authority to represent the corporation. Counsel pointed out that the Appellate Court hadn’t argued that the plaintiff’s representative lacked authority – it held that the person couldn’t appear at all since he wasn’t an attorney. If somebody did appear without authority, counsel argued, the corporation would have a remedy against that person directly.

Counsel for the plaintiff was next. This was not a minor ticket for parking in front of a fire hydrant, counsel argued. Counsel explained that because notice had been sent to the property rather than the plaintiff, the caretaker for the incapacitated owner of the company had wound up appearing. No one knew much about what had happened at the hearing, since the record had been destroyed. Justice Thomas asked whether affirming would establish a blanket rule for all corporations. Counsel suggested that although such a rule might be proper, the case could also be decided in a way limited to its facts. Justice Thomas asked whether the plaintiff was arguing lack of authority, or that the caretaker’s appearance had amounted to the practice of law. Counsel responded that the appearance was the practice of law, but it was nevertheless possible for the Court to resolve the case narrowly. Justice Thomas asked counsel what a narrowly tailored decision would look like. Counsel said that the Court might hold that on the facts of the case, an appearance amounted to the practice of law. Justice Thomas said that he was still having trouble seeing how an affirmance would be anything other than a blanket rule. Counsel answered that the Department’s jurisdictional limit was $50,000. Fourteen percent of their cases involve judgments over $10,000 – 80,000 cases in 2013. Small claims cases don’t require an attorney, but that rule is made pursuant to the rulemaking authority of the Supreme Court. Chief Justice Garman asked whether, if this was unauthorized practice of law, the judgment was void or voidable. Counsel answered void, although he didn’t think the Court ever needed to reach that issue, since the plaintiff was never properly served. The unauthorized practice of law can’t waive improper service. Justice Theis asked whether every Department hearing where a non-attorney appeared for a corporation resulted in a void judgment. Counsel said yes. Chief Justice Garman asked about the caretaker’s entry of appearance. Counsel suggested that the Court look at the small claims statute. In order to represent a corporation, a person must be an officer or director. The Department’s rule just says an “agent” of the corporation may appear, without requiring any proof of authority – and there was no evidence in the record that the plaintiff had given the caretaker any authority. Justice Thomas asked whether any of the cross-claim issues were addressed by the Appellate Court, and counsel answered no. Justice Thomas asked whether the Court could send the matter back to the Appellate Court. Counsel said yes, although the plaintiff would prefer that the Court resolve all issues itself.

In rebuttal, counsel for the City argued that the administrative record had been destroyed in comformance with the Local Records Act, and both the plaintiff and the Appellate Court agreed that everything necessary to decide the case was still available. Counsel argued that if the case was ultimately decided strictly on its facts, the judgment of the Appellate Court must be vacated, since the Court held that all corporations must be represented at all times in hearings by attorneys. According to counsel, parties concerned about possible significant exposures are always free to retain an attorney – they just aren’t required to. Counsel concluded by noting the statement of plaintiff’s counsel that all decisions of the Department where corporations were represented by non-lawyers were void. He argued that the plaintiff has a putative class action pending against the City making that claim.

We expect Stone Street to be decided in four to six months.

Image courtesy of Flickr by UmJaneDoan (no changes).

Illinois Supreme Court Affirms Judgment Against Buyer in Foreclosure for Pre-Sale Condo Assessments

By Kirk Jenkins on December 3, 2015 Posted in Illinois

Can the person or entity buying a condominium in a foreclosure sale ever be held liable for condominium assessments which accrued prior to the sale? This morning, a unanimous Illinois Supreme Court held in 1010 Lake Shore Association v. Deutsche Bank National Trust Company that the answer was “yes.” Our detailed summary of the facts and underlying court opinions in 1010 Lake Shore is here. Our report on the oral argument is here.

1010 Lake Shore began in 2010 when the defendant bought a condominium unit at a judicial foreclosure sale. A year and a half later, the plaintiff Association mailed the defendant a demand for more than $62,000 in unpaid assessments on the unit. Roughly $43,000 of the total had accrued before the defendant bought the unit. Two months after sending the bill, the plaintiff filed a forcible entry and detainer action against the the defendant, seeking possession of the unit and a judgment for its unpaid assessments. The plaintiff moved for summary judgment, which the Circuit Court granted. The First District of the Appellate Court affirmed.

In an opinion by Justice Kilbride, the Supreme Court affirmed as well. The Court began by considering the defendant’s first argument – that plaintiff’s proper remedy was an action to foreclose its lien, rather than an entry and detainer action. The Court held that the argument had been waived, since the defendant had raised it for the first time in a petition for rehearing after the Appellate Court had affirmed the judgment.

The Court then turned to the central issue in the case, which involved the construction of Section 9(g)(3) of the Condominium Act (765 ILCS 605/9) and its conflict – if any – with the Foreclosure Act. The Court explained that the first sentence of Section 9(g)(3) requires a buyer in foreclosure to pay all assessments against the unit beginning in the month following the foreclosure sale. If the buyer (1) names the Association as a party to any action to extinguish the lien; and (2) pays all assessments accruing after the sale, then the lien the Association has to secure payment of assessments accruing before the sale is extinguished. The Court rejected the defendant’s argument that the two steps of the process were specified in the alternative, meaning that a buyer could extinguish the liens by paying post-sale assessments only.

The Court noted that although the Condominium Act doesn’t require notice to a buyer of the prior owner’s unpaid assessments, a mortgagee is entitled to request written statements setting forth the unpaid assessments on the unit under 765 ILCS 605/9.

Defendant argued that if Section 9(g)(3) of the Condominium Act required it to take the two-step process to extinguish the lien, it conflicted with Section 15-1509(c) of the Foreclosure Act, which provides that foreclosure of a mortgage automatically extinguishes junior lien interests of parties joined in the action. The Court disagreed, holding that because Section 9(g)(3) speaks of “confirming” the extinguishment of the lien, it presumes that the lien has been extinguished in the foreclosure action. Construing the two statutes in harmony, Section 9(g)(3) simply adds an additional step for foreclosing mortgagees of condominium units.

Although the defendant claimed to have joined the Association as a party to the foreclosure action, the Court noted that the underlying foreclosure papers were not in the record. Nevertheless, even if the defendant had done so, it failed to confirm the extinguishment of the Association’s lien by paying assessments on the unit as they came due following the sale. As a result, the lien remained viable and the defendant was liable for the pre-sale assessments.

Image courtesy of Flickr by DennisM2 (no changes).

Illinois Supreme Court Holds That Flaws in Tax Sale Notices Don’t Void the Tax Deed

By Kirk Jenkins on December 3, 2015 Posted in Illinois

Is an order issuing a tax deed void where the statutory take notices to the owner are missing certain information required by the statute? Does due process require that the buyer at the tax sale demonstrate that the former owner of the property actually received the notices? This morning, in an opinion by Justice Thomas, a unanimous Illinois Supreme Court held in DG Enterprises, LLC –Will Tax, LLC v. Cornelius that the answer to both questions was “no.” Our detailed report on the underlying facts and lower court opinions and the oral argument at the Supreme Court is here.

DG Enterprises began when the plaintiff bought the 2007 delinquent real estate taxes on a property in Joliet. The Property Tax Code requires that to begin the process of securing ownership, the buyer at a tax sale must deliver the preprinted form called Take Notice 1 to the clerk, “completely filled in,” for mailing to the owner. (35 ILCS 200/22-5.) The Take Notice advises the owner of the sale and provides information about how the property may be redeemed. The Take Notice delivered by the buyer in DG Enterprises did not contain the address and phone number of the Will County clerk.

Between three and six months prior to expiration of the period of redemption, the Code requires that a second notice, called Take Notice II, be sent to the owner. This form also calls for the clerk’s address and phone number, and once again, the form provided by the buyer to the clerk was missing that information.

Finally, the Property Tax Code requires that notice of the sale be published in a newspaper. The statute sets forth the information which must be included in the published notice – which does not include the address and phone number of the clerk.

In DG Enterprises, the clerk tried three times to send Take Notice I to the property via certified mail. All were returned unclaimed. The buyer hired a licensed process server, who tried eleven times to personally serve the notices, all without success. The notice was subsequently published in a Joliet newspaper on three occasions spaced two weeks apart.

In November 2011, the defendant former owner having neither appeared nor made any attempt to redeem the property, the trial court ordered issuance of a tax deed. Five months later, the defendant appeared, moving to vacate the prior order and dismiss the action on the grounds that the notices were fatally defective and the whole procedure violated due process. The trial court agreed and vacated the tax deed. A divided Appellate Court affirmed.

The Supreme Court reversed. The Court found that the Code struck a balance between competing interests – the interest of the former owner in avoiding a forced sale of the property versus the societal interest in the marketability of a tax deed. The legislature struck that balance by providing in Section 22-45 of the Property Tax Code that tax deeds may be challenged only on four grounds: (1) proof that the taxes were paid prior the sale; (2) proof that the property was tax-exempt; (3) clear and convincing evidence that the tax deed had been procured by fraud or deception; or (4) proof that a person with a recorded interest in the property had not been named as a party in the publication notice and that the purchaser had not made a diligent inquiry and effort to make service of the statutory notice on that person.

The defendant argued (and the Appellate Court had agreed) that the defects in the statutory notices meant that no notice had been accomplished at all. But nothing in Section 22-45 suggested that technical flaws in the notice were grounds for vacating the tax deed, the Court held.

Before the Supreme Court, the deceased defendant’s administrator argued that the word “and” in Section 22-45, providing that a deed may be vacated upon proof that an owner had not been named in the publication notice and that the purchaser had not diligently attempted service, could be read as “or” – meaning that a tax deed could be vacated simply because the buyer didn’t try hard enough to accomplish serve. The Court disagreed, finding no evidence that reading the statute to mean what it says – including the “and” – would defeat the purpose of the statute.

The Court then turned to the defendant’s claim that the failure of notice meant that the sale violated the owner’s due process rights. The defendant claimed that the buyer should have taken additional steps to find and notify the owner. The problem with that, the Court held, was that the buyer had taken several steps to achieve notice, ordering a title examination and commitment for title insurance and repeatedly attempting personal service, as well as causing the County Sheriff and the clerk to attempt mail service. The former owner argued that if the buyer had searched County records, it would have found a mortgage release providing an address for the owner’s administrator in Wheaton. But the Court held that the buyer had no obligation to engage in an “open-ended search for a new address” once the statutory steps failed.

The Court concluded by briefly suggesting that the former owner’s estate might still have a remedy through the indemnity fund set up by the Property Tax Code, which provides that a former owner seeking a recovery less than $99,000 may recover indemnity from the fund merely by showing equitable entitlement (irrespective of negligence or fault).

Image courtesy of Flickr by Phillip Ingham (no changes).

Illinois Supreme Court Holds Engineer’s Services on Cancelled Project Subject to Lien

By Kirk Jenkins on November 23, 2015 Posted in Illinois

An engineering firm surveys a tract of land, prepares and records a plat, conducts a wetlands survey, and provides various services for planning roads, utilities and sewers for a proposed subdivision. But ultimately, the developer declares bankruptcy and the project is cancelled. Can the engineering firm record a valid mechanics lien? In Christopher B. Burke Engineering, Ltd. v. Heritage Bank of Central Illinois, a unanimous Illinois Supreme Court answered that question “yes” in an opinion by Chief Justice Garman. Our detailed summary of the facts and underlying court opinions in Burke Engineering is here.

Burke Engineering began in 2008 when the plaintiff entered into a contract with a developer to survey a tract of land and prepare and record a subdivision plat. At the time, the tract was still owned by someone else, but a sale transaction closed several months after the engineers began work. According to her later testimony, the original owner was at least generally aware of the engineers’ work prior to the sale, but had no specific knowledge of what they were doing.

The plaintiffs continued performing various services in the months after the sale. In early 2009, after only one house had been built on the property, the new owners stopped all work on the project. The plaintiffs recorded a mechanics lien and filed suit to foreclose on the lien against the new owners of the tract, the defendant (which held a mortgage interest in the tract) and the owners of the house. The homeowners settled, and the new owners declared bankruptcy, leaving only the defendant bank active in the case. The circuit court granted the defendant summary judgment on the grounds that the plaintiffs’ work did not constitute an improvement to the property within the meaning of the Mechanics Lien Act, and that the original owner had neither induced nor encouraged the work. The Appellate Court affirmed.

The Supreme Court unanimously reversed. According to Section 1 of the Act, “Any person who shall by contract or contracts . . . with the owner of a lot or tract of land, or with one whom the owner has authorized or knowingly permitted to contract, to improve the lot or tract of land or for the purpose of improving the tract of land, or to manage a structure under construction thereon . . .” is entitled to a mechanics lien. (770 ILCS 60/1.) The Court explained that the fate of the plaintiff’s claim depended on two things: whether their services were an “improvement” or “for the purpose of improving” the tract, and whether the original owner knowingly permitted the contract.

The Court found the first issue simple. The Appellate Court had held that the engineers had not improved the land, but that conclusion ignored the second half of the crucial clause, the Court found – since the work was necessary for developing the subdivision, it certainly was “for the purpose of improving” the tract. If a physical improvement on the land was necessary for professionals like engineers to be entitled to a mechanics lien, then the engineers were at the mercy of the developers’ decision as to whether or not to complete a project.

Whether or not the original owner had known of the plaintiffs’ work – a prerequisite for the plaintiffs to recover the full amount of their bill – was another matter. The Appellate Court had interpreted the statutory phrase whether the owner “knowingly permitted” a contract to mean that the property owner knew of the contract and failed to object to it or accepted the benefits of the improvements. The Supreme Court agreed that that was a reasonable interpretation of the statute. The Court concluded that there was a question of fact in the record as to whether the plaintiff could satisfy this standard with respect to the original owner, and accordingly reversed the summary judgment and remanded to the trial court.

Image courtesy of Flickr by Tim (no changes).

Illinois Supreme Court Debates Sufficiency of Notice in Tax Sale

By Kirk Jenkins on November 23, 2015 Posted in Illinois

In the closing days of its September term, the Illinois Supreme Court heard oral argument in People ex rel. McGuire v. Cornelius, which poses a potentially important question for the tax and property law bars: what notice to the current owner of a property is sufficient to grant the court jurisdiction to finalize a tax sale?

McGuire began in 2008 when the petitioner purchased the delinquent real estate taxes for 2007 on a property in Joliet at a public tax auction. A few months later, the petitioner mailed the owner the statutorily required “Notice of Sale and Redemption Rights.” (35 ILCS 200/22-5.) According to the statute, in order to be entitled to tax deed, the buyer must provide the form to the clerk “completely filled in.” The petitioner’s form omitted the address and telephone number of the county clerk.

After one six-month extension of the redemption period, the petitioner filed its petition for a tax deed on the property. The petitioner requested the county clerk to send the owner by certified mail a completed “Notice of Expiration of Period of Redemption.” Although the required format for the form is nearly identical to the Notice of Sale, once again, the contact information for the clerk was omitted. The petitioner’s process server attempted eleven times to personally serve the Notice of Expiration on the owner, and the Notice was also published in a local newspaper in accordance with 35 ILCS 200/22-20. No one associated with the property appeared at the hearing on the petition for tax deed, and the petition was granted. Five months later, the respondent appeared, objected to the court’s jurisdiction and moved for relief from the judgment ordering the tax deed to issue. The respondent’s motion was granted and the order issuing the tax deed vacated.

The Third District of the Appellate Court affirmed. The Court concluded that because neither of the statutorily required notices were “completely filled in,” and strict compliance with the Tax Code was required in order to validate a tax sale, the sale was properly overturned for lack of the statutory notice. Justice Schmidt dissented, arguing that the technical defect did not render the tax deed void.

Counsel for the buyer led off the oral argument before the Supreme Court, arguing that the Third District had erred in finding that the flaws in the notices voided the tax deed. Counsel argued that because the only necessary jurisdiction was in rem, notice to the owner was irrelevant. At best, the flaw makes the order voidable, not void, counsel argued. Counsel argued that the phone number of the clerk is relatively easy to find – that’s not the sort of error which should rise to the level of invalidating the notice. Justice Kilbride asked whether the petitioner’s purchase was for the taxes for one year, or more. Counsel answered that the purchase was one year. Justice Kilbride asked whether the taxes were paid for 2008-2010. Counsel answered that his client had redeemed all the subsequent years’ taxes. Justice Kilbride asked whether the purchaser is obliged to notify the original taxpayer within a specific time. Counsel responded that the period of redemption on the initial take notice can be extended for a period of up to three years. Justice Kilbride asked whether there was a change in title or status between 2007 and 2011. Counsel said he didn’t know whether there was a change in the mortgage status. Justice Kilbride suggested that there was a reference in the brief to a release of the mortgage on the property. Counsel responded that the mortgage release would not have triggered anything. Justice Thomas pointed out that the statute requires that the taxpayer make payment within 90 days of the order overturning the tax deed, but the trial judge didn’t do that here. Counsel answered that there was an order at the trial court – it was raised in the motion to reconsider, but the Appellate Court didn’t address it. Justice Thomas asked whether counsel would have a vehement objection if the Court were to affirm and correct that. Counsel answered that the petitioner would ask for relief under Section 22-80 of the statute if the Court affirms. Justice Thomas noted that the Court could give the owner 90 days to pay from the date a new trial court order was signed.

Counsel for the original owner was next, and began by arguing that there was a very limited chance that his client would ever see the notice in a weekly newspaper. Justice Thomas asked counsel whether notice was insufficient. Counsel responded that the notice was designed to protect the owner’s due process rights. In a Section 22-10 notice, bold letters say that the property is being sold for delinquent taxes, and that the owner is urged to redeem immediately to avoid loss of ownership. The notice in this case had none of those warnings. Counsel argued that the mandatory forms have meaning in the statute. The property owner was never served with any of the notices. The Section 22-10 notice was never published. Chief Justice Garman noted that this was more than just a missing address and phone number then. Counsel answered yes, it goes to fundamental due process. Further, there’s a conflict of interest inherent in the statute since notice is entirely left up to the party trying to get ownership of the property. Justice Karmeier asked whether the notice complied with Section 22-10 requirements. Counsel answered that Section 22-20 notice is illustrative and not a limitation. Justice Thomas asked whether counsel had problems with the Appellate Court’s rationale. Counsel answered that because the tax buyer is making the notice, the legislature wants the property owner to be able to go straight to the county clerk. Owners shouldn’t have to ferret out the county clerk’s address and phone number. Justice Karmeier asked whether counsel argued that because the notice was missing data, that was tantamount to no notice at all – and if so, since the notice wasn’t served, what was the difference. So didn’t counsel’s case hinge on whether the Section 22-20 was sufficient? Counsel agreed, and argued that the petitioner could have and should have done more to notify the owner. Justice Thomas asked what the Court should do with the word “and” in Section 22-454. Would the Court have to read “and” as “or” in order to hold for the owner? Counsel noted that he had argued in his brief that there are instances where “and” does mean “or.” Justice Thomas noted that everyone is in agreement that the publication notice was published, and that it doesn’t require the address and phone number of the county clerk. So the Court still has to do something with the “and.” Counsel answered that in this instance, the statutory intent really should imply “or” rather than “and.” The notice that the legislature intended was the one set forth in Section 22-10, which was never published. Justice Thomas asked whether Section 22-454 doesn’t apply at all? Counsel said he wasn’t saying that; the problem was that the notice published doesn’t conform to the statute. Counsel argued that the petitioners are claiming that some notice is all that’s required, and that’s contrary to the legislative scheme and due process. Public policy in Illinois is not to aid the tax buyer in the missteps they’ve made, counsel concluded. Justice Thomas asked whether counsel’s suggestion regarding the 90 days issue was the same as the petitioner’s, and counsel responded that there was a timely tender.

As counsel for the petitioner began rebuttal, Justice Thomas asked who in their right minds would try to do a Section 22-10 notice if all they had to do was a Section 22-20 notice? Counsel answered that the statute authorizes a Section 22-20 notice only after the buyer has tried and failed to get a Section 22-10 notice served. Justice Thomas asked whether the petitioner was required to do both steps. Counsel said yes, and the owner has to show failure to comply with both prongs in order to vacate the sale. Counsel argued that there is no support at all for the proposition that the owner was not named as a party in the Section 22-20 publication notice. Therefore, Section 22-454 doesn’t support vacation of the deed order. The only other possible basis for vacation is Section 22-453, but there is no suggestion of fraud or deceit. Counsel argued that if the orders are void, then there’s a serious question how viable any tax title is. Justice Kilbride asked whether the notice missing the clerk’s office information was the Section 22-20 notice. Counsel answered that the statute sets forth eight items for publication notice. There was no suggestion that the Section 22-20 notice was defective. The question was the Section 22-10 notice which petitioner tried to serve. Justice Kilbride asked what in the record shows what the petitioner did as far as diligent attempts to serve. Counsel answered that there was no hearing, so the record merely reflects the private process server’s notes on the return of service.

We expect McGuire to be decided in four to six months.

Image courtesy of Flickr by Simon Cunningham and LendingMemo.com (no changes).

Illinois Supreme Court Overturns Tobacco Verdict for Second Time

By Kirk Jenkins on November 20, 2015 Posted in Illinois

Can a lower court set aside the order of dismissal it entered on the instructions of the Supreme Court when subsequent developments appear to cast doubt on part of the Supreme Court’s decision? That was the issue pending before the Illinois Supreme Court earlier this month in Price v. Philip Morris, Inc. In an opinion by Justice Burke, a divided Court held that the answer was “no.” Our detailed report on the underlying facts and lower court opinions is here. Our report on the oral argument is here.

Unlike most tobacco litigation, Price isn’t a personal injury case – it’s a consumer law case. The plaintiff filed a putative class action alleging that the defendant had violated the Illinois Consumer Fraud and Deceptive Business Practices Act by advertising cigarettes as “light” and “low tar” – essentially complaining that cigarette smokers hadn’t gotten what they paid for. In 2003, the court entered judgment for the plaintiffs for $10.1 billion. In 2005, the Illinois Supreme Court reversed the judgment, finding that the claim was barred by Section 10b(1) of the Act, which provides that the Act doesn’t apply to conduct “specifically authorized” by any federal regulatory body. The theory was that the Federal Trade Commission had specifically authorized the use of the terms “light” and “low tar” in various consent decrees. In 2008, the FTC filed an amicus brief in an unrelated case saying it had never intended to specifically authorize the use of those terms. Shortly after that, the FTC issued a “rescission of guidance” revoking a 1966 document concerning permissible representations.

Ten days after the rescission of guidance was issued, the plaintiffs in Price filed a petition under Section 2-1401 of the Code of Civil Procedure (735 ILCS 5/2-1401), asking that the order of dismissal, entered following the Supreme Court’s remand, be set aside and the verdict reinstated, based on the actions of the FTC. The trial court denied the petition on the merits, but the Fifth District Appellate Court reversed.

The Supreme Court reversed the Fifth District. The Court began by considering whether Section 2-1401 authorized a Circuit Court to vacate the judgment of a superior court. The Court pointed out that Section 2-1401 has long been construed to require that the petition be filed in the same court which rendered the challenged judgment and, if possible, assigned to the same judge. From that, the Court concluded, it necessarily followed that a litigant can’t ask a Circuit Court to vacate the judgment of the Appellate or Supreme Court. This conclusion was further mandated by the provision in Article VI of the Illinois Constitution stating that the Supreme Court “alone can overrule and modify its previous opinion[s].” Indeed, the Court commented, if Section 2-1401 had been applicable to reviewing courts’ judgments, “serious separation of powers concerns” would be created. Instead, the only avenue available to a litigant who wishes to mount a collateral attack on a reviewing court’s judgment is to file a motion with the Court to recall its mandate and reassume jurisdiction. The Court expressed no opinion on what they might do with such a motion in Price if one were to be filed at some future date.

The Court then turned to the alternative rationale in the Appellate Court’s opinion – that the Section 2-1401 petition was challenging the trial court’s order of dismissal, not the Supreme Court’s judgment. Not so, the Court held. When the Court directs a lower court to take a certain action, the lower court’s order “is, in fact, the judgment of this court promulgated through the trial court.” The trial court’s action of following the Supreme Court’s instructions is a purely ministerial act. Besides, the Court pointed out, the plaintiffs weren’t asking the lower courts to revisit whether it had been right at the time to follow the Supreme Court’s mandate. The plaintiffs were arguing subsequent developments – leading to the inevitable conclusion that it was the Supreme Court’s judgment they were attacking.

Justice Freeman dissented, joined by Justice Kilbride. The plaintiffs’ petition had been filed “under a unique set of circumstances,” the dissenters wrote. The plaintiffs had properly filed their Section 2-1401 petition in the Circuit Court because that was who had issued the final order of dismissal. The majority had concluded that the statute didn’t apply to orders of dismissal entered on instructions from an appellate court, but the dissenters argued that the language of the statute stating that the petition “shall be available in every case” didn’t allow such a distinction. The dissenters conclude that in the “rare case,” relief should be available.

Image courtesy of Flickr by Marius Mellebye (no changes).

Divided Illinois Supreme Court Clears Way For Lawsuit Challenging Construction of Condo Development

By Kirk Jenkins on November 19, 2015 Posted in Illinois

In early November, a sharply divided Illinois Supreme Court cleared the way for claims against the developer and contractor involved in a now 19-year-old condominium development, narrowly affirming the Appellate Court decision in Henderson Square Condominium Association v. LAB Townhomes, LLC. Our detailed summary of the underlying facts and lower court opinions in Henderson Square is here. Our report on the oral argument is here.

The development at issue in Henderson Square was the result of a contract between developers and the City of Chicago to build a mixed use project, including retail space, a parking structure, loft condominiums and townhouses. Plaintiffs allege that the defendants began to market individual units in 1996, and that the units were sold through a form contract representing that they had been built substantially in accordance with the plans and specifications. After the owners began to occupy the units, certain units began to show water damage. A consultant retained by the Board concluded that the workmanship in several areas of the project was very poor, and that fixing the water problems would pretty much require reconstruction of the units. A contractor then confirmed that the defects could not have been found without extensive testing and partial demolition of the units.

The plaintiffs sued for breach of the implied warranty of habitability, fraud, negligence, breach of Chicago Municipal Code Section 13-72-030 and breach of fiduciary duty. The defendants first successfully moved to dismiss the first three counts as time-barred. The defendants later filed a second motion to dismiss, alleging that the remaining two claims were time-barred, and the fourth claim, for breach of the Municipal Code, failed to state a claim. The Appellate Court reversed, reinstating all five claims.

In an opinion by Justice Thomas for a four-three majority, the Supreme Court affirmed. The case turned on the intersection of two parts of section 13-214 of the Code of Civil Procedure, which provides both a four year statute of limitations (735 ILCS 5/13-214(a)) and a ten year statute of repose (735 ILCS 5/13-214(b).) The plaintiffs argued that their principal claims were timely because the nature of the construction defects – requiring substantial destruction to find – amounted to fraudulent concealment.

The defendants argued that plaintiffs could only prove fraudulent concealment by relying upon acts after the allegedly tortious conduct. The Supreme Court disagreed, holding that the exact timing of the relevant conduct doesn’t necessarily matter, so long as it operates to keep the plaintiff from finding his or her cause of action. The Court held that the plaintiffs’ allegations – that the defendants had deliberately cut corners on the project in such a way as to be difficult to detect – were sufficient to raise an issue of fraudulent concealment, making the plaintiffs’ claims timely.

The Court held that the plaintiffs’ fiduciary duty claim survived as well. The plaintiffs alleged that during the time the individual defendants had been on the project’s board of managers, they had failed to provide a sufficient reserve for the expensive repairs they knew were likely to be needed. All that’s needed to bring a fiduciary claim within the statute of limitations, according to the Court, is that facts necessary to indicate that the fraud was kept concealed through confidence placed in the fiduciary be pled in the complaint. Although the Court noted that the plaintiffs’ complaint was “inartfully drafted” in this respect, it was sufficient to bring the case within the rule.

In the alternative, the defendants argued that the amended complaint was time-barred under the default five-year statute of limitations set forth at 735 ILCS 5/13-205, which applies to fraud-based and fraudulently concealed claims. The defendants emphasized that the plaintiffs had admitted finding water leakage in the garden units of the development as early as the winter of 2007/2008. But the Court pointed out that the discovery rule requires that to start the statute of limitations clock running, the plaintiff must become aware both of the injury and that it was wrongfully caused. Because of the nature of the alleged construction defects, the Court found that there was a question of fact whether the plaintiffs had reasonably not known of the allegedly tortious conduct within the five year limit.

The Court then turned to the plaintiffs’ claim for violation of Section 13-72-030 of the Chicago Municipal Code, which prohibits sale of a condominium unit by “employing any statement or pictorial representation which is false.” The Court rejected the trial court’s view that the statute was analogous to garden-variety fraud, pointing out that since it related to sale of condominium units – which may occur before construction is complete – quite often, statements about future intentions might be involved. Besides, the Court noted, there is a well-recognized exception to the general rule that only statements of present fact can form the foundation of a fraud claim when the misrepresentations at issue are part of the scheme allegedly employed to accomplish the fraud. The Court concluded by rejecting the defendant’s claim that plaintiff had no private right of action, pointing out that both the amended and preamendment version of the Code section expressly confers a private right of action.

Finally, the Court turned to the defendants’ argument that plaintiffs’ fiduciary duty claim failed to overcome the business judgment rule. The Court rejected the argument, pointing to the plaintiffs’ allegations that the defendants had acted in bad faith, knowing of the allegedly poor construction.

Justice Burke dissented, joined by Justices Freeman and Karmeier. The dissenters argued that many of the statements in the building brochure which the plaintiffs focused on for their fraud claim were non-actionable puffing, including that the developers were committed to “quality construction and detail,” “quality buildings” and “successful developments.” The brochure statement about a certain type and quality of insulation was not puffing, the dissenters acknowledged, but with respect to that statement, the plaintiffs could not prove detrimental reliance. Nor could the alleged deficiencies in the reserve fund form the basis for a finding of fraudulent concealment, the dissenters concluded, since there was no allegation that any resident was even aware of the amount of the fund, let alone that the allocation had prevented him or her from discovering the construction problems. Turning to the Chicago Municipal Code, the dissenters argued that the majority’s holding amounted to saying that mere puffing was prohibited. That could not be right, the dissenters concluded, since puffery cannot be objectively proven right or wrong.

Image courtesy of Flickr by Jeffrey Zeldman (no changes).