Real Estate Not Subject To Conversion Claim – IL 2nd Dist.

The Illinois Second District recently reversed a trial court’s imposition of a constructive trust and assessment of punitive damages in a conversion case involving the transfer of real property.

In In re Estate of Yanni, 2015 IL App (2d) 150108, the Public Guardian filed suit on behalf of a disabled property owner (the “Ward”) for conversion and undue influence seeking to recover real estate – the Ward’s home – from the Ward’s son who deeded the home to himself without the Ward’s permission.

The trial court imposed a constructive trust on the property, awarded damages of $150K (the amount the Ward had contributed to the home through the years) and assessed punitive damages against the defendant for wrongful conduct. Defendant appealed.

Reversing, the appeals court held that the trial court should have granted the defendant’s Section 2-615 motion to dismiss since a claim for conversion, by definition, only applies to personal property (i.e. something moveable); not to real estate.

The court first addressed the procedural impact of the defendant answering the complaint after his prior motion to dismiss was denied. Normally, where a party answers a complaint after a court denies his motion to dismiss, he waives any defects in the complaint.

An exception to this rule is where the complaint altogether fails to state a recognized cause of action. If this is the case, the complaint can be attacked at any time and by any means. This is so because “a complaint that fails to state a [recognized] cause of action cannot support a judgment.”

However, this exception allowing complaint attacks at any time doesn’t apply to an incomplete or deficiently pled complaint – such as where a complaint alleges only bare conclusions instead of specific facts in a fraud claim. For a defendant to challenge a complaint after he answers it, the complaint must fail to state a recognized theory of recovery.

Here, the trial court erred because it allowed a judgment for the guardian on a conversion claim where the subject of the action was real property.  In Illinois, there is no recognized cause of action for conversion of real property. A conversion claim only applies to personal property.

Conversion is the wrongful and unauthorized deprivation of personal property from the person entitled to its immediate possession. The conversion plaintiff’s right to possess the property must be “absolute” and “unconditional” and he must make a demand for possession as a precondition to suing for conversion. (¶¶ 20-21)

The court rejected the guardian’s argument that the complaint alleged the defendant’s conversion of funds instead of physical realty.  The court noted that in the complaint, the guardian requested that the home be returned to the Ward’s estate and the Ward be given immediate possession of it.

The court also pointed to the fact that the defendant didn’t receive any funds or sales proceeds from the transfer that could be attached by a conversion claim. All that was alleged was that the defendant deeded the house to himself and his wife without the Ward’s permission. Since there were no liquid funds traceable to the defendant’s conduct, a conversion claim wasn’t a cognizable theory of recovery.

Afterwords:

This case provides some useful reminders about the nature of conversion and the proper timing to attack a complaint.

Conversion only applies to personal property. In an action involving real estate – unless there are specific funds that can be tied to a transfer of the property – conversion is not the right theory of recovery.

In hindsight, if in the plaintiff guardian’s shoes, I think I’d pursue a constructive trust based on equitable claims like a declaratory judgment (that the defendant’s deeding the home to himself is invalid), unjust enrichment and a partition action.

 

No Fiduciary Duty Owed Lender By Closing Agent in Botched Real Estate Deal

In Edelman v. Belco Title & Escrow, LLC (http://law.justia.com/cases/federal/appellate-courts/ca7/13-2363/13-2363-2014-04-25.html) the plaintiffs sued an escrow agent after investing $3M in a failed real estate deal.

The plaintiffs invested the monies directly with the developers of a mixed-use project.  The plaintiff never met with nor spoke to the defendant escrow agent and there was no document that formalized the relationship between plaintiffs and defendant other than some boilerplate closing forms.

Plaintiffs sued when they lost their entire investment after a prior mortgage lender foreclosed on the subject development, wiping out plaintiffs’ entire investment.

Affirming summary judgment for the escrow agent, the court first addressed a procedural pleading issue.  FRCP 8(b)(6) provides that a complaint allegation is admitted if that allegation isn’t denied.  The purpose of a responsive pleading is to put everyone on notice of what a defendant admits and what it intends to contest.

Here, since defendant answered plaintiff’s earlier versions of the complaint which contained identical allegations to the current version, plaintiffs were on notice of what allegations were admitted and which ones were not.

On the merits, the Court found that the defendant escrow agent didn’t owe a fiduciary duty beyond its specific instructions from the plaintiffs.

In Illinois, a principal and agent stand in a fiduciary relationship as a matter of law.  The agent occupies a position of trust towards the principal and he (the agent) must act in the utmost good faith and apprise his principal of all key facts within the agent’s knowledge that could affect the principal’s legal relationships.

Illinois law is clear that an escrowee, like a trustee, owes a fiduciary duty to act only according to the specific escrow instructions.  No Illinois court has held that an escrowee in defendant’s position is tasked with an obligation to seek additional instructions from parties to a real estate deal.

Here, the plaintiffs and defendant never met nor communicated.  The defendant wasn’t party to the underlying loan agreement that documented plaintiffs’ $3M investment.  The loan agreement parties were the plaintiffs and the developers (who weren’t named as defendants).

Also, the disbursement agreement wasn’t signed and offered no details of the plaintiff-defendant relationship.  The Court also pointed out that the plaintiffs never deposited any funds with the defendant: plaintiffs paid the $3M directly to the developers.

The Seventh Circuit bolstered its no fiduciary duty finding with a policy argument.  It held that escrow transactions would be “destabilized” if an escrow agent like defendant could be legally liable in circumstances like here, where it didn’t know what responsibilities it owed and to whom.

Take-aways:

– an escrowee or closing agent only owe duties spelled out in instructions given him by his lender-principal;

– it will be difficult for a real estate lender to prove a fiduciary duty claim where there is no physical or paper connection between the lender and escrow agent and where the lender doesn’t fund a loan through the escrow agent.