Daily Development for
Monday, January 26, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

"You can never be too careful." Here are two recent Seventh Circuit decisions involving two very different constructive notice issues. The cases are contributed by Jack Schroeder of Indiana, the Seventh Circuit Reporter for the ABA RPPT Section's Quarterly Reports.

HAZARDOUS SUBSTANCES; STATE LAWS; STATUTE OF LIMITATIONS: A cause of action accrues, and the statute of limitations begins to run, when an owner is first advised that waste products from a gas plant located on property adjacent to owner's property are also affecting the owner's property.

Vector-Springfield Prop. v. Central Illinois Light, 108 F.3d 806 (7th Cir. 1997).

CILCO and its predecessors in title owned real estate upon which a coal gas manufacturing plant was operated for about 70 years until 1925. The real estate lies adjacent to property owned by Vector which it bought in 1987 to develop. Vector entered into discussions to sell the real estate. Prospective purchaser obtained a preliminary report from an engineer that stated "investigations at similar former gas plant sites have revealed contamination of soils and groundwater, in some cases well beyond the site boundaries" and recommended that further investigations be conducted to assess whether the area has actually been impacted by the gas plant waste.

This information was forwarded to Vector on May 9, 1989. A follow up report concluded that the site was significantly impaired. This information was sent to Vector on June 12, 1989. The property became essentially unmarketable and Vector sold it for significantly less than it would have received absent the contamination. Vector instituted suit against CILCO alleging claims for trespass, nuisance and strict liability for ultra-hazardous activity. The five-year statute of limitations under Illinois law incorporates a discovery rule which postpones the accrual of a cause of action until a person knows or reasonably should know of his injury and also knows or reasonably should know that it was wrongfully caused.

Vector asserted that it accrued on June 12, 1989 when it was confirmed that there was significant environmental impairment. The trial court found that the earlier date applied and dismissed the complaint.

On appeal: held: Affirmed: The Seventh Circuit agreed that the first report did give sufficient information to put Vector on inquiry.

Comment: Note that we're talking here about a difference of five weeks. The original report, at best, suggested to Vector that it was worth looking further to see if there was contamination. It did not state that there was contamination. One would assume that some reasonable time thereafter would be necessary for Vector, even if acting prudently, to react to this information and arrange for a further inspection. The Statute should not have started to run until that point in time when Vector should have known, by reasonable inspection, that its property had definitely been injured.

RECORDING ACTS; NOTICE; INQUIRY: A recitation in a deed that title was subject to federal estate taxation was sufficient to require parties dealing with the real estate to investigate the existence of a federal tax lien.

Municipal Trust and Sav. Bank v. U.S., 114 F.3d 99 (7th Cir. 1997).

The Unz estate owed $800,000 in taxes. The estate owned an interest in a partnership which owned stock in a corporation which owned the beneficial interest in an Illinois land trust whose asset was a parcel called "Briarcliff Estates." Under an Illinois land trust, there is a separation between ownership of the beneficial interest and ownership of the real estate.

Because the title was held in a land trust, a search of the land records would not have disclosed a federal estate tax owed by the Unz estate. The estate sold the partnership interest and accepted a promissory note secured by the Briarcliff tract. When the buyer did not pay, the developer conveyed the Briarcliff tract to Brad individually, an heir of the estate.

The effect of this was to distribute the estate's property leaving the tax debt unsatisfied. However, the deed to Brad recited that the transaction was subject to federal estate and Illinois inheritance taxation. Brad then created a land trust and developed the land as a residential subdivision.

A parcel was sold to an individual who gave a mortgage to a bank which it foreclosed. Before the bank could sell the parcel, the U.S. intervened claiming an interest superior to the bank. District court granted summary judgment to the bank.

On appeal: Held: Reversed. If Brad had received only the beneficial interest in the land trust instead of title to the land, then the lien would only affect the beneficial interest rather than the land. Bank could have protected itself by searching the land records which would have disclosed the deed to Brad, revealing the connection to the Unz estate and the federal estate tax obligation. The court discusses another interesting issue. When the first tax lien was filed, a box on the form was incorrectly completed and indicated that the last day for the refiling of the lien was about six months prior to the date that the lien was actually filed. Two subsequent liens, however, were refiled. The court recognized that if someone had relied upon the language of the first lien before it was subsequently refiled, an argument could be made for protection from the tax lien based on detrimental reliance. However, in this case, since the bank never traced the title to the land records, it is not entitled to such a defense.

Comment: Again, the function of inquiry notice is to put a purchaser in the same position that it would have been in had it conducted reasonable inquiry. If, as suggested here, reasonable inquiry would not have produced the critical information, then there should be no finding of notice, regardless of whether the party in question actually undertook such inquiry. The court's finding, however, is somewhat more subtle. It suggests that a reasonable party likely would have found out about the lien if it looked. There is a slight argument that a "trap" in the records would have prevented the discovery of the lien, but the court holds that in order to make that argument, the buyer must show that it in fact had been so "trapped." This seems to be a reasonable requirement.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org

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