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City of Chicago v. Elm State Property LLC

Court of Appeals of Illinois, First District, Fourth Division

December 22, 2016

THE CITY OF CHICAGO, a Municipal Corporation, Through Its Department of Finance, Plaintiff-Appellee,
v.
ELM STATE PROPERTY LLC, and THE CITY OF CHICAGO DEPARTMENT OF ADMINISTRATIVE HEARINGS, Defendants-Appellants. THE CITY OF CHICAGO, a Municipal Corporation, Through Its Department of Finance, Plaintiff-Appellee,
v.
HALSTED WEST, LLC, and THE CITY OF CHICAGO DEPARTMENT OF ADMINISTRATIVE HEARINGS, Defendants-Appellants.

         Appeal from the Circuit Court of Cook County. Nos. 14 L 50273 14 L 50274 Honorable Carl A. Walker, Judge Presiding.

          JUSTICE HOWSE delivered the judgment of the court, with opinion. Presiding Justice Ellis and Justice Burke concurred in the judgment and opinion.

          OPINION

          HOWSE, JUSTICE

         ¶ 1 The city of Chicago has imposed a tax "upon the privilege of transferring title to, or beneficial interest in, real property located in the city, " known as the City of Chicago Real Property Transfer Tax Ordinance (transfer tax). Chicago Municipal Code § 3-33-10 (added Dec. 15, 1992). In this case, defendants Elm State Property LLC (Elm State Property) and Halsted West, LLC (Halsted West) purchased loans and were assigned mortgages to real estate located in Chicago. At the time the defendants acquired the mortgages, the mortgagors were in default. Defendants later acquired deeds in lieu of foreclosure to those properties from the mortgagors. The city subsequently assessed a tax on the assignments of the mortgages alleging that an assignment of a mortgage was an assignment of a beneficial interest in real property under the tax ordinance and subject to the transfer tax. The defendants protested the assessments and an administrative law judge (ALJ) vacated the tax assessment, ruling that the mortgage assignments did not transfer a beneficial interest in real property. On petition for writ of certiorari filed by the city, the circuit court reversed the decision of the ALJ and the defendants filed this appeal. The issue presented in this case is whether the assignment of a mortgage on Chicago real estate can be taxed as an assignment of a beneficial interest in real property under the transfer tax ordinance. For the following reasons we find that an assignment of a mortgage is not subject to the Chicago real estate transfer tax as an assignment of a beneficial interest in real property. Therefore, we reinstate the administrative decision and reverse the decision of the circuit court.

         ¶ 2 BACKGROUND

         ¶ 3 The city seeks to impose a tax, under provisions of the transfer tax ordinance, on assignments of mortgages to both defendants. Chicago Municipal Code § 3-33-10 (added Dec. 15, 1992). The city argues that the assignment of a mortgage constitutes an assignment of a beneficial interest. Section 3-33-030(A) of the Chicago Municipal Code (Code) states: "Except as otherwise provided in this chapter, a tax is imposed upon the privilege of transferring title to, or beneficial interest in, real property located in the city ***." Chicago Municipal Code § 3-33-030(A) (amended Nov. 16, 2011). According to the Code:

"A. 'Beneficial interest in real property' includes, but is not limited to:
(1) The beneficial interest in an Illinois land trust;
(2) The lessee interest in a ground lease (including any interest of the lessee in the related improvements) that provides for a term of 30 years or more when all options to renew or extend are included, whether or not any portion of the term has expired; or
(3) The indirect interest in real property as reflected by a controlling interest in a real estate entity." Chicago Municipal Code § 3-33-020(A) (amended May 8, 2013).

         Defendants alleged that a mortgage is not a beneficial interest under the ordinance and filed this appeal from the decision of the circuit court. The relevant history of the transactions in this appeal are described below.

         ¶ 4 Halsted Property

         ¶ 5 On June 7, 2007, 1950 North Halsted LLC, (North Halsted) along with a trustee, entered into a mortgage loan purchase and sale agreement with National City Bank (now PNC Bank). North Halsted financed the purchase by taking out a loan in the amount of $5, 322, 500 which was secured by a mortgage on the property. The mortgage provided that in the event of default, the mortgagee could initiate foreclosure proceedings and would have the right, "to the extent permitted by law, to collect and receive all rents." North Halsted subsequently went into default on its mortgage obligations. On December 28, 2009, PNC Bank sold that loan and assigned the mortgage securing the loan to defendant, Halsted West, for $4 million. The assignment of the mortgage was recorded on January 5, 2010. Later, on March 29, 2010, the mortgagor executed a deed in lieu of foreclosure (DIL) transferring title of the mortgaged property to Halsted West. Halsted West and the mortgagor jointly filed a property transfer tax declaration when they recorded the documents with the recorder of deeds indicating that the transaction was exempt from taxation under section 3-33-060(M) of the Code, which exempts deeds filed in lieu of foreclosure from the tax.

         ¶ 6 On January 20, 2011, the city of Chicago sent a notice to Halsted West for unpaid taxes. This initial tax assessment listed a total amount due of $78, 109.07, including interest and penalties, for the transaction dated March 29, 2010, the same day the DIL was recorded. On April 18, 2011, Halsted West paid and protested the tax assessment. The protest triggered a hearing before the city of Chicago's department of administrative hearings (DOAH). The ALJ ruled in favor of Halsted West and found that the assignment of the mortgage and other loan documents did not convey a beneficial interest in real property, that the tax was not assessed on the assignment but only on the deed in lieu of foreclosure, and that the transfer of the DIL was covered by exemption M of the ordinance. Chicago Municipal Code § 3-33-060(M) (amended May 8, 2013). The city appealed the decision of the ALJ to the circuit court on petition for writ of certiorari .

         ¶ 7 Elm State Property

         ¶ 8 Elm State LLC took out a loan from Suburban Bank & Trust Company (Suburban Bank) in 2006 for $10.5 million, which was secured by a mortgage on the property at 1149-59 North State Street in Chicago. Elm State LLC also executed an assignment of rents providing that in the event of default, the lender has the right to collect rents but must "apply the net proceeds, over and above the lender's costs, against the indebtedness." Further, if the mortgagee chooses to take possession, under the terms of the assignment of rents, the mortgagee has "the power to protect and preserve the property, to operate the property preceding foreclosure or sale, and to collect the rents from the property and apply the proceeds, over and above cost of the receivership, against the indebtedness." The parties modified the mortgage a year later to include a property at 6-10 East Elm Street. Elm State LLC subsequently defaulted on the loan.

         ¶ 9 In 2009, Suburban Bank agreed to sell to defendant, Elm State Property, "all of Suburban's right, title, and interest in the Elm State Loan" for $8.25 million. As part of the sale of the loan, Suburban Bank agreed to assign to Elm State Property the related loan documents. On December 23, 2009, Suburban Bank assigned the Elm State LLC loan documents (which included the mortgage, modification of mortgage, assignment of rents, promissory note, commercial guarantees, lender's title insurance policy, and the rights to the collateral) to Elm State Property. On April 27, 2010, Elm State LLC executed a DIL, transferring ownership of the mortgaged property to defendant Elm State Property.

         ¶ 10 On May 26, 2010, the city sent Elm State Property a tax assessment for the April 27, 2010 transaction for an amount of $103, 125.82, including interest and penalties. Elm State Property filed a protest against this tax assessment on June 28, 2010, arguing that the DIL transfer was exempt from taxation under exemption C and exemption M of the transfer tax ordinance. Chicago Municipal Code § 3-33-060(C), (M) (amended May 8, 2013). Hearings were scheduled before the DOAH. The city then filed an amended tax assessment on June 5, 2013 indicating a total tax due of $105, 906.27 for a transaction dated December 31, 2009.

         ¶ 11 In the proceedings in the DOAH, the ALJ found that Elm State Property was not liable for the tax assessment because the assignment of a mortgage does not convey a beneficial interest in the first place, and that even if it did, the assignment properly falls under exemption C. Chicago Municipal Code § 3-33-060(C) (amended May 8, 2013). The ALJ noted how the tax assessment listed the ...


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