Summary: Illinois land trusts are a vehicle for property ownership where the beneficiary retains control, and are not “third party” entities for purposes of the “fraudulent transfer to third parties” exceptions to bankruptcy discharge.

FirstMerit Bank, N.A. v. Soltys, 2015 IL App (1st) 140100.

Go to full opinion.

Facts: Janek Soltys (‘Soltys’) entered into a construction loan agreement with FirstMerit Bank’s (‘FirstMerit’) predecessor, George Washington Savings Bank. In connection with the loan, Soltys executed a construction mortgage in favor of George Washington Savings Bank on certain real property, a promissory note, and an assignment of rents.

Soltys owned other parcels of real estate at the time he obtained this loan, which he conveyed into three land trusts: the Wigupen Revocable Trust (‘Wigupen Trust’), the Bogebert Revocable Trust (‘Bogebert Trust’), and the Daseby Revocable Trust (‘Daseby Trust’). Soltys was both trustee and beneficiary of the three land trusts.

Soltys defaulted on the loan, and FirstMerit filed a foreclosure action. A judgment of foreclosure and sale was entered and the property was sold. The foreclosure court entered a deficiency judgment against Soltys. Soltys filed for chapter 7 bankruptcy, disclosing his ownership interests in the properties held in trust in the land trusts as his personal property. Soltys also listed all his creditors in the schedules with the bankruptcy petition, including FirstMerit as an unsecured creditor based on the deficiency judgment against him. The bankruptcy trustee determined that there was insufficient equity in the properties to administer on behalf of the bankruptcy estate and did not file an asset report. Soltys obtained an order of discharge and the bankruptcy case was terminated.

FirstMerit received notice of Soltys's bankruptcy filing but did not file a claim in the bankruptcy case and did not object to or challenge Soltys's discharge of its debts by the bankruptcy deadline. However, FirstMerit filed a lawsuit against Soltys, as trustee of the land trusts, alleging a violation of the Illinois Uniform Fraudulent Transfer Act (740 ILCS 160/5(a), 6 (West 2012)). Soltys filed a motion to dismiss FirstMerit’s complaint under 735 ILCS 5/2–619 (West 2012). The circuit court entered an order granting Soltys's motion to dismiss. The circuit court found that Soltys was not attempting to hide the trust properties and accurately listed these properties in his bankruptcy petition. The court ruled that, as the beneficiary of the land trusts, Soltys should be treated as the true owner of the trust properties and that since land trusts were not another party, FirstMerit could not attempt to extract the discharged debt from the land trusts.

FirstMerit appealed.

Holding: Affirmed. On appeal, the court determined that the issue was whether FirstMerit’s suit was barred by Soltys's bankruptcy discharge. Federal bankruptcy courts had concluded that the beneficiary was the owner of the real estate, based on the attributes of control where it is the beneficiary who has the right to control and manage the property and receive all the proceeds of the property, and the land trustee acts only at the direction of the beneficiary. As such, the court held that the transfers of the property into land trusts was not to a third party when the party was both the trustee and beneficiary and had complete control of the trusts, as well as being the real owner of the property. Further, 11 U.S.C.A. § 548 (Fraudulent transfers and obligations) specifically addressed self-settled trusts and did not treat such trusts as third parties. It was undisputed that Soltys had control of the land trust properties. Therefore, because FirstMerit received notice of Soltys's bankruptcy proceedings and did not timely file an adversary claim to challenge the dischargeability of its deficiency judgment claim, the circuit court did not err in granting Solty’s motion to dismiss.