Chicago Title Insurance Co. v. Aurora Loan Services (IL)

Summary: A special warranty deed limits the liability of the grantor to the encumbrances that the grantor creates and not to the encumbrances by previous title owners.


Chicago Title Insurance Co. v. Aurora Loan Services, LLC, 2013 IL App (1st) 123510.


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Facts: On June 22, 2007, Salta Group, Inc. purchased delinquent special assessment taxes and recorded a lis pendens notice against the subject property. On September 9, 2008, Aurora Loan Services obtained title to the subject property from Intercounty Judicial Sales Corporation. Aurora paid the special assessment taxes owed in 2009 and 2010 but did not redeem the 2007 tax sale owned by Salta.

On February 22, 2010, Salta filed a petition for a tax deed under the 2007 tax sale. The next day, February 23, 2010, Aurora conveyed title to Waterside Partners LLC by special warranty deed. The special warranty deed provided that Aurora “does covenant, promise and agree, to and with Waterside, their heirs and assigns, that it has not done or suffered to be done anything whereby the said premises herby granted are, or may be, in any manner encumbered or charged.” The special warranty deed was recorded on March 11, 2010 and Chicago Title issued an owner's policy of title insurance on the same day to Waterside.

On March 2, 2010, Salta served Aurora with notice of the petition for issuance of a tax deed. However, because the subject property had already been conveyed, Aurora did not notify Waterside of Salta’s petition. On October 29, 2010, Salta received the tax deed and recorded it on November 17. Waterside was subsequently divested of its interest in the subject property.

On December 6, 2010, Chicago Title paid Waterside the policy limit and appraised value of the subject property. Thereafter, Chicago Title filed suit against Aurora for failing to notify Waterside of the existence of the tax sale and alleged that Aurora breached the covenant against encumbrances for failing to redeem the 2007 tax sale and for failing to notify Waterside of the petition for a tax deed. Aurora moved to dismiss under section 2-619 of the Illinois Code and the circuit court granted Aurora's motion to dismiss, with prejudice. Chicago Title appealed.


Holding: Affirmed. On appeal, the court upheld the circuit court’s decision to grant Aurora’s motion for dismissal. The appellate court reasoned that the special warranty deed freed Aurora from liability or encumbrances not created by Aurora’s own action. Unlike general warranty deeds, special warranty deeds do not warrant against defects in the title that existed before a grantor was deeded the property. The court found that the special warranty defined the scope of Aurora's liability, and placed Waterside on notice that Aurora warranted only against title defects that were caused or created by Aurora’s conduct. Therefore, Aurora was not responsible for defects arising before it took title.

First, the appellate court addressed Chicago Title’s argument that Aurora only excluded “taxes due and owing” for the special warranty, therefore making Aurora liable for the tax sale encumbrance. The court found the argument unpersuasive and ruled that Aurora did not do anything to cause the encumbrance. The court reasoned that the lis pendens notice was not an encumbrance and that the tax lien, not the tax sale, was the encumbrance. Aurora did not permit or allow the tax sale to occur because it did not receive title to the property until 2008 and the tax sale occurred in 2007. Further, Aurora did not permit or allow the tax lien encumbrance because it had not caused the occurrence of the tax sale, which was caused by the prior owner not paying the special assessment tax.

The appellate court next addressed Chicago Title’s argument that Aurora’s failure to redeem the tax sale after receiving notice, and/or its failure to notify Waterside of Salta’s petition for tax deed constituted a breach of the special warranty deed. The court once again found the arguments unpersuasive. Aurora’s covenant against encumbrances was satisfied when the deed was delivered, and the basis of any alleged breach could only be supported by events occurring when Aurora held title. Salta's tax deed did not issue until after Aurora had conveyed away the property to Waterside. Consequently, Chicago Title’s assertion that Aurora failed to redeem the taxes or notify Waterside could not constitute a breach.

Furthermore, the appellate court found that the lis pendens recorded by Salta served as notice to anyone who purchased the property that there could be a tax deed claim. Moreover, 35 ILCS 200/21-345 permitted redemption of property from a tax sale by “any owner or person interested in the property.” After Aurora conveyed the property, only Waterside could redeem it. Because Aurora could not legally redeem the property after the conveyance, Chicago Title’s breach claim was dismissed.

The appellate court concluded its opinion by addressing Chicago Title’s contention that the special warranty deed permitted liability for back taxes by excepting “taxes not yet due and payable,” implying the special warranty covered past unpaid taxes. Despite immediately dismissing the argument because Chicago Title failed to bring the issue in the lower court, the appellate court also found that the argument was legally and logically untenable. First, when a tax sale occurs, the lien shifts from the county to the tax purchaser, and “[e]ffectively, the taxes have been paid, therefore, no taxes are due and owing for that tax period and an encumbrance in favor of the tax buyer remains until redeemed or until a tax deed issues.” Under such circumstances, there were no taxes for Aurora to pay. Second, because property taxes are billed for the past year and not the current year in Illinois, “by custom and practice, unless the parties agree otherwise, the land purchaser typically receives a credit at closing for unpaid prior years’ taxes and the pro-rata share of current year estimated taxes through the date to closing.” Therefore, Chicago Title’s exception argument clearly applied to taxes levied during 2010 and not yet payable at the time of conveyance. However, the taxes sold in 2007 were due and payable long before Aurora conveyed the property to Waterside. Those taxes were not within the special warranty deed exception.


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By: ATG Underwriting Department | Posted on: Thu, 02/05/2015 - 11:41am