A law firm’s failure to scrutinize its client’s transfer of property to a land trust backfired in Radiance v. Accurate Steel, 2018 WL 1394036.
The case presents a priority fight between the plaintiff judgment creditor and the law firm who defended the debtor in post-judgment proceedings.
The Relevant Chronology
August 2013 – Defendant debtor transferred the Property to an irrevocable trust;
March 2014 – Plaintiff’s predecessor recorded its money judgment against defendant;
June 2014 – The law firm agrees to represent defendant if she mortgaged the Property to secure payment of attorney fees.
June 2015 – The law firm records a mortgage against the Property;
March 2018 – The court voids the 2013 transfer of the Property into a land trust as a fraudulent transfer.
The Trial Court’s Decision
The court ruled that the Property reverted back to the debtor and was no longer protected from its creditors. The court also found the law firm lacked actual or constructive notice that the creditor’s prior judgment lien could wipe out the firm’s mortgage.
As a result, the Court found the law firm met the criteria for a bona fide purchaser – someone who gives value for something without notice of a competing claimant’s right to the same property.
Reversing itself on plaintiff’s motion to reconsider, the Court first noted that recording a judgment gives the creditor a lien on all real estate owned in a given county by a debtor. 735 ILCS 5/12-101.
Illinois follows the venerable “first-in-time, first-in-right” rule which confers priority status on the party who first records its lien. An exception to the first-in-time priority rule is where a competing claimant is a bona fide purchaser (BFP). A BFP is someone who provides value for something without notice of a prior lien on it.
Here, the law firm unquestionably provided value – legal services – and lacked notice of the bank’s judgment lien since at the time the firm recorded its mortgage, the title to the real estate was held in trust. Where a creditor records a judgment against property held in a land trust, the judgment is not a lien on the real estate. Instead, it only liens the debtor’s beneficial interest in the trust. (See here and here.) These factors led the Court originally to find that the Firm met the BFP test under the law.
Reversing itself, the Court found the law firm was on inquiry notice that it’s mortgage could be trumped by the plaintiff’s judgment lien.
Inquiry notice means “facts or circumstances are present that create doubt, raise suspicions, or engender uncertainty about the true state of title to real estate.” In re Thorpe, 546 B.R. 172, 185 (Bankr. C.D. Ill. 2016)(citing Illinois state court case authorities).
A mortgagee has a responsibility not only to check for prior liens and encumbrances in the chain-of-title, but also to consider “circumstances reasonably engendering suspicions as to title.” Id.
In its reconsideration order, the Court noted as badges of fraud the plaintiff’s recording its judgment lien more than a year before the law firm’s mortgage and the ample proof of the debtor’s pre-transfer financial struggles.
The Court found the law firm was apprised of facts – namely, debtor’s financial problems, aggressive creditors, and gratuitous transfer of the Property into a land trust – that obligated it to dig deeper into the circumstances surrounding the transfer.
Radiance and the various briefing that culminated in the Court’s reconsideration order provide an interesting discussion of creditor priority rules, law firm retainer agreements, trust law fundamentals and fraudulent transfer basics, all in a complex fact pattern.
The case reaffirms the proposition that where property is held in trust, a judgment lien against a trust beneficiary will not trump a later recorded judgment against the trust property.
However, where real estate is fraudulently transferred – either intentionally or constructively (no value is received, transferor incurs debts beyond her ability to pay, e.g.) – a creditor of the transferee should think twice before it transacts business with a debtor and delve deeper into whether a given property transfer is legitimate.