The Illinois Appellate Court for the First District recently held that, because a tax sale occurred prior to Seller's ownership of the property, such encumbrance was not warranted against by Seller in the special warranty deed. According to the Court, any action or inaction by the seller after the conveyance was negated as a matter of law under the language of the special warranty deed.
A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1123510.pdf
A title insurance company ("Title Insurer"), as subrogee of a buyer of real property ("Buyer"), sued the seller ("Seller") for breach of a special warranty deed. Seller obtained title to the property on September 9, 2008, pursuant to a judicial sale resulting from a foreclosure action. Prior to the judicial sale, however, certain delinquent taxes were purchased in a tax sale ("2007 Tax Sale") by a third party ("Prior Lienor"), who also recorded a lis pendens notice against the property.
Thereafter, on February 22, 2010, Prior Lienor filed a petition for a tax deed under the 2007 Tax Sale. On the following day, Seller conveyed the property to Buyer by special warranty deed. Although the 2007 Tax Sale was redeemable until June 21, 2010, Seller did not redeem, nor did it notify Buyer of the 2007 Tax Sale.
After the judicial sale, Seller was served with notice of the petition for a tax deed, but did not notify Buyer of such notice. On October 29, 2010, Prior Lienor obtained title to the property by means of a tax deed, which was subsequently recorded. Buyer was divested of its interest in the property. Title Insurer paid Buyer its policy limit and the appraised value of the property, and filed suit.
The trial court granted Seller's motion to dismiss with prejudice, finding that Seller did not breach the special warranty deed because the tax encumbrance predated Seller's ownership of the property. Title Insurer appealed to Illinois' intermediate appellate court.
As you may recall, a special warranty deed is a deed in which the grantor covenants to defend the title against only those claims and demands which occur because of an act of the grantor. See 20 Am. Jur. 2d Covenants, Conditions, and Restrictions 62 (2005); ASK Realty II Corp. v. First American Title Insurance Co., 2004 U.S. Dist. Lexis 10334, at *18 (D. Md. June 7, 2004) (finding that a special warranty against encumbrances "is breached only if the grantor's own conduct creates an encumbrance on the title.").
As such, the limited warranty "does not render the grantor liable for defects in the title based on events that transpired when the property was in the hands of a prior titleholder." 20 Am. Jur. 2d Covenants, Conditions, and Restrictions 62 (2005); Woolf v. 1417 Spruce Associates, L.P., 68 F. Supp. 2d 569, 572 (E.D. Pa. 1999) (finding that a special warranty deed does not require a grantor to extinguish all encumbrances on a property in existence at the time the property is conveyed).
Even construing all facts and reasonable inferences in the light most favorable to Buyer, the Illinois intermediate appellate court affirmed the trial court's decision. According to the Court, the special warranty deed defined the scope of Seller's liability. Under the deed, Buyer was notified (i) that Seller warranted only against title defects that were caused or created by its own conduct; (ii) that it was not responsible for defects arising before it acquired title; and (iii) that it was not required to extinguish all encumbrances on the property at the time of the conveyance.
As such, the Illinois intermediate appellate court held that, because the 2007 Tax Sale occurred prior to Seller's ownership of the property, such encumbrance was not warranted against by Seller in the special warranty deed. The Court noted that it was clear from the record that Seller did not do anything to cause the encumbrance. Instead, the 2007 Tax Sale was caused by the prior owner not paying the special assessment tax.
The Court also held that the alleged breach of a special warranty deed arising from any action or inaction by Seller after the conveyance was negated as a matter of law. Without citing to any relevant legal authority in support of its contention, Title Insurer argued that Seller's failure to redeem and/or notify the Buyer of the 2007 Tax Sale after it received notice of the petition for a tax deed constituted a breach of the special warranty deed. However, the Court disagreed, reasoning that Seller's covenant was made when the deed was delivered, and that any alleged breach can only be supported by events occurring prior to that date, not at a later time. See Firebaugh v. Wittenberg, 309 Ill. 536, 543 (1923). Furthermore, after Seller had conveyed the property, only Buyer could redeem the property from a tax sale under Illinois law. See 35 ILCS 200/21-345 (West 2006).
Lastly, Title Insurer argued that Seller excepted from the special warranty deed only the taxes "not yet due and payable," which the Title Insurer argued implies that the unpaid taxes which resulted in the 2007 Tax Sale were covered. However, the Illinois intermediate appellate court rejected this argument because it was made for the first time on appeal, because the Title Insurer failed to cite any relevant legal authority in support thereof, and ultimately because the argument was legally and logically untenable. Among other reasons, the Court noted that the exception for "taxes not yet due and payable" clearly applies to taxes levied but not yet payable at the time of the conveyance to Buyer, which was not at issue in this action.
Accordingly, the Illinois Appellate Court for the First District affirmed the trial court's dismissal of plaintiff's complaint with prejudice.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
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