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Home Fed. Savings And Loan Ass'n v. Zarkin

OPINION FILED JANUARY 21, 1982.

HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO, APPELLEE,

v.

KAREN ZARKIN ET AL. (KAREN ZARKIN ET AL., APPELLANTS; DEVON NATIONAL BANK, APPELLEE).



Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. John E. Hechinger, Judge, presiding.

JUSTICE CLARK DELIVERED THE OPINION OF THE COURT:

Rehearing denied March 25, 1982.

The facts of this case are stated in detail in the opinion of the appellate court. (90 Ill. App.3d 1002.) Briefly, in March 1976 Karen and Leon Zarkin (appellants) created a conventional Illinois land trust of their residence property in Chicago with Devon National Bank (appellee) as trustee and themselves as beneficiaries. Devon, as trustee, at the Zarkins' direction, executed a first mortgage of the trust property with Home Federal Savings and Loan Association as mortgagee.

Some time later, the Zarkins ran into financial difficulties. From May 1977 on, they made no payments to Home Federal on the first mortgage. In August 1977, they borrowed $14,000 from Devon. This, however, was insufficient to alleviate their financial plight. They were unable to repay the loan from Devon when it came due in November 1977. At this point, with their loan in default, the Zarkins assigned their beneficial interest in the land trust, of which Devon was trustee, to Devon to secure the repayment of the $14,000 loan.

In December 1977 Home Federal sued Devon, as land trustee, and the Zarkins in the circuit court of Cook County to foreclose its first mortgage. Devon, in its answer, alleged the debt due it from the Zarkins and the assignment to it of their beneficial interest. On June 8, 1978, the circuit court entered a decree of foreclosure. The decree found the mortgagee entitled to $63,254.50, and Devon entitled to a lien in the amount of $14,626.25, subordinate to Home Federal's mortgage lien. The property was ordered sold and the redemption period determined.

At the sheriff's sale on July 13, 1978, Home Federal bid in the property for the amount of its judgment plus certain costs. Devon did not bid at the sale. However, on January 5, 1979, eight days before the expiration of the redemption period, Devon, without notifying the Zarkins, purchased the certificate of sale from Home Federal.

Immediately upon learning of this action, the Zarkins filed a petition in the circuit court. It asserted that Devon's purchase of the certificate of sale from Home Federal amounted to a redemption of the property from the foreclosure sale, and that as a result the redemption period had been terminated. It further asserted that Devon's action was a breach of its fiduciary duty as trustee, and requested the circuit court either to set aside the sale to Devon and extend the redemption period to enable them to redeem, or to decree that Devon had redeemed as trustee for the Zarkins' benefit, and enjoin Devon from taking any further action with respect to the property. The circuit judge denied the petition, and the Zarkins appealed. On November 26, 1980, the appellate court, with one justice dissenting, affirmed the judgment of the circuit court. 90 Ill. App.3d 1002.

The question presented by this appeal is: What is the effect of a land trustee's purchase, after the foreclosure sale but during the redemption period, of the certificate of sale covering trust property that was sold under a decree of foreclosure?

Devon asserts that it owns the property, having purchased the certificate in its individual capacity and not as trustee. It was entitled to do so, it contends, because as a creditor of the Zarkins it was entitled to protect the collateral securing its debt. Devon further contends that, under the trust agreement, it had no duty to redeem as trustee for the Zarkins, and indeed that it could not legally have done so without their authorization. Finally, Devon argues that even if its purchase were viewed as a redemption from foreclosure by a junior lienor, the Zarkins suffered no harm, since Devon's redemption did not affect the Zarkins' right as mortgagors to redeem during the remainder of the period and obtain the certificate from Devon or whoever was holding it at the time.

The Zarkins insist to the contrary that Devon could not become owner of the property in its individual capacity. By purchasing the certificate of sale, they contend, Devon purchased its own trust property, in breach of its fiduciary duty of loyalty. The Zarkins rely on the proposition that a trustee's duty to administer the trust with complete loyalty to the interests of the beneficiary precludes it from dealing with the trust property for its individual advantage or profit, or from purchasing trust property in circumstances such as are presented here.

This court has dealt with Illinois land trusts on only a few occasions. For the most part, the cases which have arisen have involved the nature of the interests held by beneficiary and trustee, and the legal consequences of the paradoxical characterization of the beneficiary's interest as personal property, although the subject of the trust is realty. (Horney v. Hayes (1957), 11 Ill.2d 178; Chicago Federal Savings & Loan Association v. Cacciatore (1962), 25 Ill.2d 535; People v. Chicago Title & Trust Co. (1979), 75 Ill.2d 479.) A brief description of the conventional land trust arrangement can be found in our recent opinion in People v. Chicago Title & Trust Co., and lengthier discussions in H. Kenoe, Kenoe on Land Trusts (Ill. Inst. Cont'g Legal Educ. 1981), and in Turner, Some Legal Aspects of Beneficial Interests under Illinois Land Trusts, 39 Ill. L. Rev. 216 (1945).

The Illinois land trust represents an adaptation of the trust device to achieve ends not usually associated with the "traditional" private express trust. (Garrett, Land Trusts, 1955 U. Ill. L.F. 655, 659-62.) The history of trust law contains many such adaptations of the ancient form to new uses. The trust's extraordinary flexibility permits variations as diverse as the voting trust, the Massachusetts business trust, the real estate investment trust, and the Illinois land trust. (Hanley v. Kusper (1975), 61 Ill.2d 452, 461; Schumann-Heink v. Folsom (1927), 328 Ill. 321, 325-27.) As different as are their purposes, however, all these trusts have a common feature: each has a trustee (or trustees) and each has beneficiaries. We consider that, at least as to matters touching this relationship — which is, after all, the core of a trust — land trusts are to be treated no differently from any other trust. As the court observed in the Schumann-Heink case, in holding that general trust-law principles applied to a case involving a Massachusetts business trust: "Because a new use is being made of the trust does not mean new principles of law are to be applied in determining the rights of the trustees, the cestuis que trust or persons dealing with the trustees." 328 Ill. 321, 327.) Land trustees in Illinois, therefore, are subject to the fiduciary duties imposed by the law on all trustees; and the general principles of trust law regarding these duties govern the decision of this case.

It has been suggested that since the land trustee's powers are limited, under the typical land trust agreement, to acting only when and as the beneficiary directs, the trustee has no duties other than those specified by the trust agreement. We cannot agree. The fiduciary obligation of loyalty flows not from the trust instrument but from the relationship of trustee and beneficiary. The essence of this relationship is that the former is charged with equitable duties toward the latter. The law imposes the duty, whether the trust ...


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