Appeal from the Circuit Court of Cook County; the Hon.
Reginald J. Holzer, Judge, presiding.
JUSTICE WHITE DELIVERED THE OPINION OF THE COURT:
This case involves interests in real property located at 229 Marengo Street in Forest Park. In 1970, this land and a 63-unit apartment building located thereon were owned by Stanley K. DeFurgalski and Brenda DeFurgalski, his wife. On December 19, 1972, Stanley DeFurgalski entered into a written agreement with Dr. Hans Seifert and Ronald Rynes whereby DeFurgalski was to convey the property to Seifert and Rynes. The parties agree that the total value that Seifert and Rynes were to pay for the property was $915,000. Paragraph 12(a) of the agreement provided that DeFurgalski shall convey to Seifert and Rynes "good and marketable fee simple title, free and clear of all liens, encumbrances, restrictions, easements and leases of any nature whatsoever." Paragraph 5 of this agreement provided that DeFurgalski "represents and warrants that the 1971 Real Estate taxes [on the subject real estate] were $2,117.02." Other evidence in the record shows that the taxes for 1970 and 1972 were $2,081.50 and $2,196.34, respectively. On December 26, 1972, DeFurgalski and his wife, Brenda, conveyed title to Seifert and Rynes by warranty deed. In partial payment for the real estate, on December 29, 1972, Seifert and Rynes executed a promissory note payable to bearer in the face amount of $105,000, payable over 15 years and bearing interest at the rate of 9% per annum. This note was secured by a trust deed on the subject property executed the same day, and a rider attached to the trust deed provided that it was a junior mortgage expressly subordinate to an earlier mortgage not involved in this appeal. Both the note and the trust deed expressly provided that Seifert and Rynes would not be personally liable under the note and that all sums due under the note would be payable only out of the real estate described in the trust deed. On January 20, 1973, Seifert, Rynes, and each of their wives transferred the property to the Oak Park Trust and Savings Bank, as land trustee under trust No. 6743, with Seifert and Rynes named as beneficiaries. Since April 1973, Katherine Sipal, as an officer of Sipal Realty, Inc., was in charge of management of the apartment building for and on behalf of Seifert and Rynes, and her duties included the payment of all mortgage payments, taxes and expenses in connection with the property.
On December 30, 1974, DeFurgalski sold and assigned to Inland Real Estate Corporation his interests in the $105,000 note. Payments by Sipal to Inland on the note and second mortgage, which began in March 1975 and continued for 53 consecutive months through July 1979, totaled $56,445. The payments ceased in August 1979.
On May 31, 1977, the county assessor sent to Sipal Realty a notice of his intention to back tax omitted assessments. The notice stated that the assessment against the real property involved herein was defective because the assessment of the building was omitted for the years 1970 through 1976 and that a hearing would be held on June 14, 1977, at the assessor's office. Neither Sipal Realty nor Seifert or Rynes appeared at the scheduled hearing. Subsequently, on April 5, 1978, J. Douglas Donnenfeld, an attorney for Sipal Realty, appeared at a hearing in the assessor's office. On October 16, 1978, the county assessor imposed back taxes, interest and penalties totaling $128,584.51 for the years 1970, 1971 and 1972.
As noted above, no payments were made on the note secured by the second mortgage after July 1979. On November 8, 1979, Inland filed its complaint to foreclose the second mortgage. The named defendants in this action included Oak Park Trust and Savings Bank, as trustee under trust No. 6743, Hans Seifert, Eleonore Seifert, Ronald Rynes, Sipal Realty, and First Savings and Loan Association of South Holland, the first mortgagee. On December 21, 1979, Oak Park Trust and Savings Bank, Hans Seifert and Eleonore Seifert filed an answer to the complaint. The answer contained a "set-off and counterclaim," in which the bank and the Seiferts alleged that the back taxes for 1970 through 1972 were for years when the DeFurgalskis owned the building and claimed that they were entitled to set off the amount of the back taxes against the debt represented by the note and second mortgage. They also claimed that they were entitled to "repayment of all sums heretofor paid under said note to plaintiff herein [Inland] for and on behalf of the DeFurgalskis in amount sufficient to pay for balance of back taxes, interest, and attorney's fees incurred." The answer also contained a third-party claim by the bank and the Seiferts against Stanley DeFurgalski, which sought recovery in the amount of the back taxes. Ronald Rynes filed an answer which contained a counterclaim and a third-party claim similar to those of the bank and the Seiferts. On April 10, 1980, Sipal Realty, as agent for the Seiferts, paid back taxes, interest and penalties for the years 1970, 1971 and 1972 in the amount of $123,584.81, without protest.
On July 18, 1980, Inland filed its answer to the counterclaim of Rynes. Inland denied liability on the counterclaim and raised certain affirmative defenses. *fn1 Inland also filed a third-party action against the DeFurgalskis for the amount of any setoff or judgment obtained by the bank and the Seiferts against Inland.
On December 18, 1980, Inland filed a third-party complaint against Thomas C. Hynes, in his official capacity as Cook County assessor, and Edward J. Rosewell, in his official capacity as Cook County treasurer and collector. The complaint alleged: "Counterclaimants [Oak Park Trust and Savings Bank, as trustee, Hans Seifert, Eleonore Seifert and Ronald Rynes] and Inland, as subrogee, are entitled to return of all tax payments received by the Collector, as a result of the subject real estate being back-taxed for the years 1970, 1971 and 1972." The prayer for relief asked for judgment in favor of Inland and against the county defendants "for the amount of the tax payments, plus interest received, as a result of the subject real estate being back-taxed for the years 1970, 1971 and 1972."
Subsequently, the Seiferts moved for summary judgment in their favor and against Inland on Inland's complaint to foreclose and for summary judgment in their favor and against Inland on their counterclaim for setoff. Inland also moved for summary judgment in its favor on its complaint to foreclose and for summary judgment in its favor on the Seiferts' counterclaim. In addition, the county defendants, Hynes and Rosewell, moved for summary judgment in the third-party action against them. Inland also filed a motion for summary judgment in its favor in this third-party action. In response to these motions, the circuit court entered the final judgment order from which this appeal is taken. The circuit court ruled as follows:
"(1) INLAND's motion for summary judgment and entry of a decree of foreclosure and sale against HANS and ELEONORE is denied, and INLAND's Complaint for Foreclosure is dismissed;
(2) HANS' and ELEONORE's motion for summary judgment against INLAND is granted and the Court adjudges that HANS and ELEONORE are entitled to set-off $128,584.51 against the balance of purchase price due under the trust deed and note. The lien of the subject trust deed is void and cancelled of record;
(3) Judgment in favor of HANS and ELEONORE is entered against INLAND for $23,584.51 (the difference between the amount of their set-off and the face value of the $105,000 note);
(4) HANS' and ELEONORE's motion for entry of a judgment for $56,445 plus interest and costs against INLAND for repayment of sums paid to INLAND by HANS and ELEONORE is denied;
(5) HYNES' and ROSEWELL's motion for summary judgment is granted, INLAND's Third Party Complaint directed against them is dismissed, and HYNES and ROSEWELL are dismissed as third parties Defendant herein."
In reaching these conclusions the circuit court apparently reasoned that the unpaid 1970, 1971 and 1972 taxes on the property violated the terms of the DeFurgalski agreement of December 19, 1972, to convey the property free and clear of all liens and violated the terms of the warranty deed that followed, and that the back taxes on the property encumbered the title that Seifert and Rynes obtained from the DeFurgalskis.
Inland's first argument on appeal is that there was no breach of the Defurgalskis' warranty of no encumbrances. The warranty deed given to Seifert and Rynes was substantially in the form set forth in section 9 of "An Act concerning conveyances" (Ill. Rev. Stat. 1973, ch. 30, par. 8), and accordingly, contained three statutory covenants: the covenant of seisin and of good right to convey; the covenant against encumbrances; and the covenant of quiet enjoyment. We also observe that by the express terms of the written agreement between Stanley DeFurgalski and Seifert and Rynes, DeFurgalski agreed to convey title free and clear of all encumbrances.
Relying on the well-settled rule that a covenant against encumbrances is a covenant in praesenti, that is breached, if at all, at the moment it is made (Firebaugh v. Wittenberg (1923), 309 Ill. 536, 543, 141 N.E. 379; Meyers v. Veres (1923), 245 Ill. App. 127, 130; see Fechtner v. Lake County Savings & Loan Association (1975), 33 Ill. App.3d 307, 308-09, 337 N.E.2d 193, rev'd (1977), 66 Ill.2d 128), Inland contends that there was no breach of that covenant because the sales agreement was executed and the warranty deed delivered in 1972, and the back taxes were not imposed until 1978. According to Inland, since at the time the warranties in this case were made there were no tax liens of record, no back taxes levied or unpaid, no reassessment of the premises, and no notice of intention to back tax, the covenant against encumbrances was not breached and the Seiferts had no defense to its foreclosure action.
• 1 In our opinion, Inland takes too narrow a view of the covenant against encumbrances. In Brown v. Lober (1979), 75 Ill.2d 547, 551, 389 N.E.2d 1188, our supreme court defined an incumbrance as "any right to, or interest in, land which may subsist in a third party to the diminution of the value of the estate, but consistent with the passing of the fee by conveyance." In this regard, we also note that in Firebaugh, our supreme court recognized that an inchoate right of dower was a valuable right and one that affected the market value of land, and that in popular understanding was an incumbrance. (Firebaugh v. Wittenberg (1923), 309 Ill. 536, 544.) *fn2 We hold that if the claim of the county defendants for back taxes was a lawful claim or demand enforceable against the Seiferts, then the unexercised authority of these defendants to impose the back taxes constituted an incumbrance on the property at the time of transfer from the DeFurgalskis to Seifert and Rynes.
• 2 Inland next argues that even if the unpaid back taxes breached the DeFurgalskis' covenant, Inland could not be held responsible for the breach. It gave no warranty deed to Seifert and Rynes, made them no guarantees and gave no assurances. Rather, it merely purchased and was assigned a note and mortgage from a creditor of Seifert and Rynes. Thus, in Inland's view, this defense which the Seiferts might have raised in a foreclosure action by the DeFurgalskis was not available to them in this foreclosure action by Inland. We disagree.
It is a well-established general rule that the assignee of a trust deed in the nature of a mortgage takes it subject to the same defenses that existed between the original parties to the instrument. In King v. Harpster (1922), 306 Ill. 202, 209, 137 N.E. 823, our supreme court stated:
"The doctrine of an innocent purchaser for value, which applies to commercial paper, has no application to a mortgage. The assignee of a mortgage takes it subject to the same equities it was subject to in the hands of the assignor. The assignee of a mortgage knows that it is not assignable at common law but only in equity and that he takes it subject to all equities existing in favor of the mortgagor. It is ...