The Use of Land Trusts and Business Trusts in Real Estate Transactions

 

By John C. Murray**

©2010

 

I.          Land Trusts: Definition and Uses

 

Common law trusts have been used for centuries to preserve and protect title to and minimize taxes on property. Florida[1]; Hawaii;[2] Illinois[3]; Indiana[4]; North Dakota[5]; and Virginia[6] have statutes that permit forms of land trusts, while states such as Arizona, California and Ohio have permitted the creation of land trusts through court decisions.[7] The majorities of states do not recognize, or permit the use of, land trusts. Land trusts are unique because the duties and powers of the trustee are limited, but they are still considered to be trusts and generally are governed by the principles that are applicable to all other trusts.

A land trust has been defined as follows:

A land-ownership arrangement by which a trustee holds both legal and equitable title to land while the beneficiary retains the power to direct the trustee, manage the property, and draw income from the trust  -- Also termed Illinois land trust; naked land trust.[8]

      An Illinois land trust, which is a unique legal entity, is a creature of common law (going back to railroad acquisitions of property in the l850s) with an overlay of statutory approval and constraints. For example, an Illinois statute provides the following definition of “land trust”:

"Land trust" means any express agreement or arrangement whereof a use, confidence or trust is declared of any land, or of any charge upon land, for the use or benefit of any beneficiary, under which the title to real property, both legal and equitable, is held by a trustee, subject only to the execution of the trust, which may be enforced by the beneficiaries who have the exclusive right to manage and control the real estate, to have possession thereof, to receive the net proceeds from the rental, sale, hypothecation or other disposition thereof, and under which the interest of the beneficiary is personal property only.[9]

Another Illinois statute defines “beneficial interest” as follows:

"Beneficial interest" means any interest, regardless of how small or minimal such interest may be, in a land trust, held by a trustee for the benefit of beneficiaries of such land trust.[10]

Furthermore, this statute defines “Holders of the power of direction” as follows:

 [T]he persons or entities having the authority to direct the trustee to convey, execute a mortgage, distribute proceeds of sale or financing, and execute documents incidental to the execution of a land trust.[11]

The Illinois Appellate Court, in Levine v. Pascal,[12] explained the nature of an Illinois land trust as follows:

The Illinois Land Trust, by its very nature, is characteristically different from common law land trusts. While the common law accomplishes a split between the legal title in the trustee and the equitable title in the beneficiary, in an Illinois land trust, the trustee has both legal and equitable title. By placing with the trustee the ‘full, complete and exclusive title to the real estate, both legal and equitable,’ the beneficiary in an Illinois land trust is left with a personal property interest only (citations omitted).[13]

 

II.        Application of Illinois Mortgage Foreclosure Law and Uniform Commercial Code

 

The Illinois Mortgage Foreclosure Law (“IMFL”)[14] provides the following definition of “land trust":

"Land trust" means any trust arrangement under which the legal and equitable title to real estate is held by a trustee, the interest of the beneficiary of the trust is personal property and the beneficiary or any person designated in writing by the beneficiary has (i) the exclusive power to direct or control the trustee in dealing with the title to the trust property, (ii) the exclusive control of the management, operation, renting and selling of the trust property and (iii) the exclusive right to the earnings, avails and proceeds of the trust property.[15]

Any collateral assignment of the beneficial interest in a land trust may be foreclosed under the provisions of the IMFL;[16] and a secured party, as defined in Article 9 of the Uniform Commercial Code (“UCC”), may elect to enforce its security interest in a foreclosure under the IMFL if the interest was created by a collateral assignment of a beneficial interest in a land trust.[17]

A non-standard provision of Article 9 of the Illinois Uniform Commercial Code ("UCC")[18] provides that a security interest in the beneficial interests in an Illinois land trust may be perfected by control of the collateral, which control is accomplished by serving a Notice of Collateral Assignment on the land trustee and obtaining a written receipt from the land trustee.[19] Another section of the Illinois UCC provides that perfection of a security interest in the beneficial interest in a land trust may be perfected by filing,[20] but this is no longer necessary to perfect a security interest in a collateral assignment of a beneficial interest in a land trust. Although a UCC-l financing statement is not required to perfect the lender's security interest,[21] it still may be a good idea, as a precautionary matter, to file a UCC-l financing statement as well as obtain perfection by control as described above. The local law of the State of Illinois governs perfection, the effect of perfection or non-perfection, and the priority of a collateral assignment of, or other security interest in, a beneficial interest in an Illinois land trust.[22] This implements the important interest of the state in matters associated with the administration of Illinois land trusts created for the principal purpose of owning an interest in Illinois land and the regulation of restrictions on the transfer of beneficial interests in, and of the power of appointments under, such trusts.

Rights and Obligations of Parties to Illinois Land Trust

 As noted above, in Illinois a land trust is a legal arrangement in which the trustee holds legal and equitable title to real property, thus making transfer of title to the property much easier. But all managerial, decisional, and operational powers over the trust assets remain under the control of the trust beneficiaries, pursuant to the land trust agreement. Unlike other trusts, the land trustee’s sole purpose is to take and hold title to the real property, i.e., the trustee is merely a nominee to hold title.  The trustee takes action only when directed to do so by the beneficiaries.[23]

Numerous Illinois court decisions have validated and construed the land trust.[24] Since a beneficial interest in an Illinois land trust is personal property, the conveyance (or transfer) of it for security purposes is usually effected by means of an assignment of beneficial interest ("ABI"). A sample ABI is attached hereto as Appendix A. Under the original version of Article 9 in Illinois, a secured party was "automatically" perfected when it was granted a security interest in the beneficial interest in a land trust. As a result, a UCC-l financing statement usually was not filed by the secured party. As noted above, Illinois law now specifically allows perfection by control.[25]

Large banks in Illinois historically acted as trustees under Illinois land trusts, but very few do so currently. (A title company in Illinois has set up a land-trust company to perform this specific function as successor trustee to many banks that formerly acted as land trustees.) The trustee will not hold title to an Illinois land trust for property that is out-of-state. Title companies have no problem insuring title to property held in a land trust in those states where that form of ownership is permitted. A limited liability company (“LLC”), or any other form of business entity, may be the beneficiary of a land trust.

 

II.        Title Insurance Considerations

 

Assuming a title insurer is willing to consider insuring a transaction where title is vested in a land trust, the following are typical “checklist” items that must be obtained or complied with:

1.       Compliance with state statutes, including requiring notice to beneficiaries of transfer of the trust assets.

2.       Written evidence of the identities of all parties holding any beneficial or other interest in the trust, including spouses.

3.       Copies of any assignment of any interest, including the beneficial interests, under the trust.

4.       Written consent to the proposed transaction by all parties holding any beneficial or other interest in the trust, including spouses.

5.         Written consent to the proposed transaction by the borrower on any existing mortgage or deed of trust (who probably made the transfer into the land trust) unless that party confirms in writing that the deed into the land trust was an absolute conveyance and that the grantor has no further interest in the property or in the trust.

6.         Possible lien of the real estate excise (transfer) tax and interest and penalties, if any, arising from the deed into the land trust or arising from any assignment of any beneficial interest under the trust.

Also, for title-insurance and recording purposes, the land trust would need to be the grantor on the deed, and the deed would need to be signed by the trustee in its capacity as trustee under the trust agreement, similar to the following:

 

_______________ BANK NATIONAL ASSOCIATION, not personally but as trustee under Trust Agreement dated ___________, 20__ and known as Trust Number ________________.

 

By: __________________________________________________

            [Authorized Signature]

 

III.       Advantages and Disadvantages of a Land Trust

 

A.        Advantages of a Land Trust.

Land trusts are perceived by many to possess distinct advantages over other methods of ownership of real property. The following is a summary of the creation of a land trust and its advantages:

Often, trustee action is limited to the conveyance of the property when the trust terminates. Land trusts are unique because the duties and powers of the trustee are so limited, but it is still considered a trust and generally governed by the principles that are otherwise applicable to all other trusts.

The land trust is created through two documents -- a deed into land trust and the trust agreement. The deed into land trust typically establishes the rights and responsibilities of the trustee. It usually states that the beneficiary's interest is a personal property interest and that the beneficiary does not hold title of any kind to the real property. The land trust usually provides that the beneficial interest holders are able to direct the trustee in all matters of title and management of the real estate.

The land trust has attained its popularity and wide use because of the practical elements that the beneficial interest provides:

  • the interests of the beneficiaries will not be disclosed without order of court;
  • the interests are not subject to partition;
  • the beneficial interest is personal property and, therefore, avoids ancillary probate requirements;
  • transferability of beneficial interest is simple
  • the beneficial interest can be used as collateral; and testamentary dispositions can be set out within the trust agreement, thereby avoiding probate.[26]

            The following is another description of the benefits of land trusts:

The advantages from the use of a land trust, particularly where there is to be multiple ownership of real estate, have been described by many writers. For example, record title in the trustee is not affected by the death or incapacity of a beneficiary. Conveyancing is simplified since the beneficiary's interest is not subject to dower and personal judgments against the beneficiary do not become liens on the trust's real estate. Financing is facilitated, either by the trustee obtaining mortgage loans secured solely by the trust property, or by the beneficiary pledging his beneficial interest treated as personal property, and both trustee and beneficiary can be exonerated from personal liability. Privacy of ownership is provided since the sole document recorded is the trust deed showing only the number of the confidential trust agreement in which the identities of the beneficiaries are disclosed. Where carefully drafted, the land trust will avoid the tax disadvantage of a corporation whereby both the corporation and the shareholders receiving distributions are subject to federal income tax. 

In addition there are estate plan advantages to ownership of beneficial interests in real estate held in a land trust rather than the real estate itself. The beneficiary may dispose of his interest by a gift, sale or by testamentary disposition without affecting trust title to the real estate or causing termination of the trust or partition of the real estate. [27]

B.        Disadvantages of a Land Trust.

The use of land trusts in Illinois is not nearly as common as it once was, especially in commercial transactions (although they still are sometimes used in connection with tenancy-in-common transactions). Many people believe that a land trust protects them in some way, as beneficiaries, from disclosure or liability with respect to creditors, judgments, taxes, etc. This is generally not true today (although judgments against beneficiaries do not create a lien against the real estate, which can facilitate the transfer of real estate).[28]

Land trusts also make a sometimes poor substitute for a will or living trust, because the trustee will insist on strict interpretation and construction of the provisions of the trust agreement before the property can be dealt with.  Also, the trust rarely deals with the possible contingencies in the detail that a will or living trust does.

As noted above, land trusts have some legitimate purposes, but not as many as most people believe.  A land trust can be a convenient and inexpensive way to hold and convey title. It may sometimes be useful (subject to the caveats mentioned above) for individual estate planning and to hide the identity of developers assembling a development property bringing a number of parcels together.   In Illinois, however, it does nothing to shield the real owners of the property -- the beneficiaries of the trust -- from tort liability, although it can shield them from contractual liability if the contracting party is sufficiently trusting or naive to accept a contract without personal guarantees or some other method to bring one or more of the beneficiaries into the transaction -- such as a sufficient monetary deposit. But it generally won't even protect the privacy of the beneficiaries should a new building collapse or an old building be charged with building violations because the litigation will go directly to the beneficiaries, as the trustee will instantly disclose same should it be so ordered by a court (see discussion below). Also, ownership as a land trust says nothing about the operations of the trust, except that the trustee has a duty (its only real duty) to convey upon the instructions of those named in the trust agreement as holders of the power of direction.

An LLC, as noted earlier, may be the beneficiary of a land trust, with the managing director of the LLC, e.g., having the power of direction of the trust.  And there may be good reason to adopt such a structure.  But if the goal is to protect against tort liability, the “naked” land trust is clearly not the way to go.

 

IV.       Proper Party in Land Trust Litigation

 

In litigation involving a land trust, the issue often arises as to who is the proper party for liability purposes; the land trustee or the beneficiary(ies). This in turn will depend on the rights, duties and obligations set forth in the trust agreement, as well as the degree of control of the trust assets exercised by the land trustee or the beneficiaries. Generally, true ownership in a land trust lies with the beneficiaries even though title lies with the trustee. See, e.g., Wachta v. First Federal Savings and Loan Association of Waukegan,[29] which typifies the judicial treatment of the land trust vehicle for litigation purposes. In this case, the court stated as follows:

The owner of the beneficial interest in a land trust is accorded four basic powers: (1) to possess, manage and physically control the real estate; (2) to receive all income generated by the property; (3) to direct the trustee in dealing with title to the real estate; and (4) to receive the proceeds of any sale of the property made pursuant to the power of direction.

That in turn leads to the means of determining the proper party litigant in a land trust situation (Just Pants v. Bank of Ravenswood, 136 Ill. App. 3d 543, 547, 483 N.E.2d 331, 335, 91 Ill. Dec. 49 (1st Dist. 1985) (citations omitted)):

In an action involving a land trust, the question of whether the beneficiary or the trustee is the proper party depends on the nature of the action in light of the rights and duties established by the trust agreement. . . . The beneficiary in a land trust is the proper party to litigation involving his rights and liabilities of management, control, use and possession of the property.[30]

See also Newey v. Newey,[31]in which the Illinois Appellate Court stated that, with respect to potential liability of land-trust trustees for certain actions:

The issue of a trustee as agent of the beneficiary of the trust was discussed in Just Pants v. Bank of Ravenswood (1985), 136 Ill. App. 3d 543, 547, 483 N.E.2d 331, 335, and Kessler, Merci, & Lochner, Inc. v. Pioneer Bank & Trust Co. (1981), 101 Ill. App. 3d 502, 505-06, 428 N.E.2d 608, 611. Under Just Pants and Kessler, where the beneficiary has full management power and control, the trustee acting at the direction of the beneficiary will be deemed his agent for the purpose of liability in contract or in tort arising from such acts or omissions. However, unlike the nature of the agency discussed in Just Pants and Kessler, the issue here is not whether the trustees were the agents of the defendant beneficiary for the purpose of imposing upon him vicarious liability for acts or omissions in connection with the operation and management of the trust property, but rather whether the trustees were the agents of the beneficiary for service of process. The mere fact that a trustee may be deemed to act for the beneficiary in connection with the operation of the trust property will not suffice to render the trustee an agent of the beneficiary for service of summons. This point was persuasively made in Robinson v. Chicago National Bank (1961), 32 Ill. App. 2d 55, 176 N.E.2d 659.

If real property intended to be sold is owned by an Illinois land trust, the trust (i.e., the trustee), as exclusive holder of legal title to the real estate, would be a necessary party in an action for specific performance by the purchaser. The trust would also be a necessary party with respect to a foreclosure action against the subject property.[32]

 However, the trust and trustee will not have any personal liability and the trustee's sole duty, if the purchaser prevails, would be to convey title to the property to the purchaser. But the beneficiaries, although holders of personal property interests and not title to the real estate, likely also would be added as parties to the action.[33] If the purchaser prevails, the beneficiaries would have to direct the trustee to convey title to the property to the purchaser. With respect to the standing of land trust beneficiaries in a lawsuit, the court in 23-25 Building Partnership v. Testa Produce, Inc.[34] stated that:

The beneficiary of a land trust has standing in litigation involving his rights and liabilities with respect to management and control, use, or possession of the property pursuant to the trust agreement. Azar v. Old Willow Falls Condominium Ass'n, 228 Ill.App.3d 753, 756, 170 Ill.Dec. 694, 593 N.E.2d 583 (1992). One test for determining the beneficiary's standing is whether the trustee can protect the beneficiary's interests. Azar, 228 Ill.App.3d at 756-57, 170 Ill.Dec. 694, 593 N.E.2d 583. Standing is determined as of the date the lawsuit is filed. CSM Insurance Building, Ltd. v. Ansvar America Insurance Co., 272 Ill.App.3d 319, 323, 208 Ill.Dec. 544, 649 N.E.2d 600 (1995).[35]

See also Chicago Title & Trust Co. v. Baskin-Robbins, Inc.,[36] in which the court in a lease-termination dispute (where the landlord was an Illinois land trust) cited the Just Pants case, supra, with approval and rejected the beneficiary’s argument that he could not be personally liable because he was not a party to lease and did not sign the lease. The court noted that while the beneficiary did not sign the lease, he did sign an “Effective Date Agreement” in connection with the lease, initialed all the changes to the original lease, signed a “Non-Disturbance Agreement” as an exhibit to the lease, and was prominently identified in the lease. According to the court, the Land Trust Agreement between the title company and the beneficiary clearly stated that the beneficiary had the sole right to possess, manage and physically control the real estate and to direct the actions of the land trustee with respect to the real estate. The court ruled that in this case the beneficiary of the land trust was a proper party litigant and stated that “[w]here . . . the beneficiaries retain control over the trustee and the management of the business, the trustee is regarded as the agent of the beneficiaries and they will be liable upon his contracts.”[37]

In an unpublished Illinois appellate-court decision involving the issue of standing, American Nat’l Bank & Trust Co. of Chicago v. Potash Corp. of Saskatchewan Sales Ltd.,[38] plaintiff American National Bank & Trust of Chicago (“American National”) held title to a commercial building (beginning August 1, 1984) pursuant to an Illinois land trust. Harms Road Associates Limited Partnership (“Harms Road”) was the beneficiary of the land trust. On March 31, 2000, American National sold its land trust business to LaSalle National Bank, N.A. (“LaSalle”), and LaSalle thus became the successor trustee to the land trust containing the building. On March 1, 2001, American National filed a complaint for breach of lease against Potash Corporation of Saskatchewan Sales. Ltd. (Potash Sales), the sole tenant in the building, and Potash Corporation of Saskatchewan, Inc. (Potash Inc.), Potash Sales’ parent corporation, which guaranteed the lease. Potash Sales had ceased paying rent and had abandoned the building. On August 8, 2001, American National filed a second amended complaint naming Harms Road (the trust beneficiary) as co-plaintiff, and later filed a fourth amended complaint alleging breach of lease, breach of lease guaranty, interference with contract, and common law fraud. In response,  the defendants filed an answer and three affirmative defenses, one of which alleged lack of standing to pursue the claims asserted because the plaintiffs no longer held any right, title or interest in the building. On August 8, 2008 (seven and one-half years after the case was filed), defendants sought summary judgment on their affirmative defense that the plaintiffs lacked standing to bring the action. The circuit court ruled that at the time the suit was filed, American National lacked standing because it had sold its land-trust business to LaSalle. The appellate court approved this holding by the trial court, and also approved the finding of the circuit court that “American National could not remedy the lack of standing by arguing that the second amended complaint, naming Harms as co-plaintiff, related back to the original complaint,” and that the defendants did not waive their right to challenge the lack-of-standing issue where they raised the issue for the first time as an affirmative defense in a motion for summary judgment prior to the commencement of trial.”[39] The appellate court noted that “Plaintiffs . . . had knowledge of defendants’ affirmative defense for four years prior to defendants’ motion for summary judgment.”[40] The appellate court also noted that a defect based on lack of standing is “not merely one of form” and that “the lack of standing applies to American National’s original complaint as well as to its later amended complaints.”[41]

This decision by the Illinois appellate court has not been formally published as of the date of this article, and the court’s Order contains a notice that the text of the Order “may be changed or corrected prior to the time for filing of a Petition for Rehearing or the disposition of the same.”[42] The author has been informed that American National plans to appeal this decision to the Illinois Supreme Court if the appellate court does not grant American National’s Petition for Rehearing. Nonetheless, this decision serves a true cautionary tale where title to real property is held by a land trust and the land trust later conveys its interest in the trust to a third party. The decision does not mention whether American National informed Harms of this transfer at the time it occurred, but it appears that it did not. In any event, as a result of the appellate court’s ruling, it may be good practice for the beneficiary(ies) of a land trust to determine for certain that the land trust remains in title to the real property that is the subject of the land trust before commencing or defending any legal action with respect to the trust property, and that the land trust beneficiary(ies) (is) (are)  named as additional parties when necessary to pursue or defend the action.

Notwithstanding the Illinois appellate court’s decision in American Nat’l Bank & Trust Co. of Chicago v. Potash Corp. of Saskatchewan Sales Ltd., supra, it has generally been accepted practice that conveyance of a land trust business does not affect any particular trusts’ title to property, or impair, diminish or impact the rights of the trustee as the sale of a land trust business would only change the fiduciary/agent of the trust itself; i.e., the land trustee acts on behalf of the land trust in a fiduciary capacity and, pursuant to the terms of the trust agreement, the beneficiary does not act as an agent of the land trustee.  Any sale of a land trust business normally includes an assignment of the seller-trustee’s right, title and interest in the land trust accounts sold, not an assignment of rights in or conveyance of the specific properties held in the trust.

A land trust is an entity separate and apart from the trustee. The Federal Tax ID number of the land trust is recorded as the same Federal Tax ID number of the beneficiary(ies), not the land trustee.  The appellate court’s Order appears to treat the land trustee as indistinguishable from the land trust itself, although they are not the same entity. If the ruling in American Nat’l Bank & Trust Co. of Chicago stands (as of now it is unreported), and the acquisition of a line of trust business is considered an outright conveyance and is treated no differently than the sale of a single property to a third party, this could have a major impact on the rights, duties and liabilities of land trustees and the land trust industry in general.[43]

 In an Indiana case, Freidline v. Thomalla,[44] the Indiana appellate court reached a conclusion similar to the Wachta and Newey cases, supra, regarding the liability of a land trust beneficiary. The court held that while title to the trust corpus was transferred to a land trust that owed a judgment debt, it appeared that a garnishee (the beneficiary of the land trust) retained true ownership of the property. Accordingly, the court found that the garnishee possessed nonexempt property and obligations subject to proceedings supplemental to execution pursuant to the applicable Indiana statute. The court affirmed the ruling of the trial court, which held that Freidline, as the beneficiary of the land trust, was personally responsible for the debt owed by the land trust to the third-party judgment holder. The trust corpus of the land trust consisted of a single office building and Freidline was listed as the sole beneficiary. The judgment creditor filed a garnishment action against Freidline, as beneficiary under the land trust, to enforce its unpaid judgment against the land trust. Freidline admitted to collecting the rents and profits from the trust corpus and including this information on his personal income tax returns. He also paid the utility bills for the building and made the mortgage payments. According to the court, “while the title to the trust corpus was transferred to the Land Trust, it appeared that Freidline retained absolute control of the management of the trust corpus and received all the proceeds from it.”[45]  

But see Citicorp v. Bank of Lansing,[46] where the Indiana federal district court first discussed the history of land trusts (based on Illinois land trusts), and then addressed the issue of whether a judgment against real property, owned by a land trust, could attach to the interests of the beneficiaries. The court stated that:

A brief historical perspective is necessary for this analysis. The use of the land trust, which had developed in Illinois, became relatively routine in northwest Indiana prior to the adoption of the Indiana Trust Code in 1971. In fact, the use of the Illinois land trust appears to have been the catalyst which brought about the implementation of Indiana Trust Code provisions relating to land trusts. The Indiana Trust Code Commission Comments state that:

Notwithstanding the lack of authority, the use of the land trust began to grow in northwestern Indiana, spilling over from the Chicago areas. Indeed, when the commission began to investigate its use, it found that a surprisingly large number of commercial and multi-family residential tracts in Lake and Porter Counties were owned as land trusts. The commission decided that it should recommend that Indiana follow other states, such as Florida, by enacting the statute validating the land trust. ind. code ann § 30 (West 1984-85 Supp. p. 83).

It is clear that in Illinois the beneficiary of a land trust has no interest, either legal or equitable, in the real estate held in the land trust. Sterling Savings & Loan Association v. Schultz, 71 Ill.App.2d 94, 218 N.E.2d 53, 60 (Ill.App.1966). It is equally apparent that under Illinois law a beneficiary's interest in a land trust is personalty. Chicago Title & Trust Company v. Mercantile Trust & Savings Bank, 300 Ill. App. 329, 20 N.E.2d 992 (1939). Thus it has been held that since the only interest of a beneficiary under a land trust is considered to be personal property, a judgment cannot attach to such interest. The Court in SterlingSavings & Loan Association v. Schultz, stated that:

The Illinois Statute relating to judgments against real estate specifically states that a judgment is a lien on real estate. It makes no mention of personal property, nor of the interest of a beneficiary under a land trust.[47]

 

V.           Definition of Business Trust; Eligibility for Relief under the Bankruptcy Code

 

There is no universal definition of “business trust”; the laws of each state in which a business trust is involved in a transaction must be consulted.[48] As a general matter, trusts are not eligible for relief under the Bankruptcy Code (“Code”). The definition of a "corporation" in § 10 1 (9)(A) of the Code includes, at § 101 (9)(A), a "business trust." But the Code does not further define a business trust. Furthermore, under § 303(a) of the Code, only a "person" may be an involuntary debtor under Chapter 7 or Chapter 11, and the definition of "person" under § 101 (41) does not include a business trust.

Numerous bankruptcy cases have defined what constitutes a business trust, and these cases indicate that each situation should be examined individually and a determination made that the trust is actively conducting business of some kind in order to qualify as a debtor under the Code. Bankruptcy cases customarily consider the following factors, among others, in determining whether or not a trust is eligible to file a bankruptcy petition: whether the trust conducts business; whether its purpose is to generate profits; whether it has the attributes of a corporation; and whether the beneficial interests in the trust are transferable.

For example, in Shawmut Bank Connecticut v. First Fidelity Bank (In re Secured Equip. Trust of Eastern Air Lines, Inc.),[49]the Second Circuit Court of Appeals held that a trust created to facilitate aircraft financing for Eastern Airlines did not qualify as a business trust under § 101(9)(A)(v) of the Code and, therefore, could not be a debtor. The trust had entered into a "Secured Equipment Indenture and Lease Agreement" with Eastern Airlines as the lessee. The trust then sold $500 million in trust certificates to investors, and used the proceeds to purchase a portion of Eastern Airlines' fleet of aircraft. The aircraft were then leased back to Eastern Airlines in exchange for rental payments equaling the amount of the principal, premium, and interest on the certificates. Under the lease agreement, Eastern Airlines was entitled to a return of any rental payments exceeding the amounts owed the certificate holders under the trust indenture. The lease agreement also stated that, upon full payment of the lease obligations, title to the leased aircraft would be reconveyed to Eastern Airlines. The court found "no dispute that [the lease transaction] was a secured financing."[50] After Eastern Airlines filed a Chapter 11 bankruptcy petition, holders of a portion of the trust certificates filed an involuntary Chapter 11 petition against the trust. The court, noting that it was deciding an issue of first impression, held that the trust was not a business trust within the meaning of the Code because it was not created to generate a profit or transact business, but rather existed solely to preserve and protect the security interest of the certificate holders in the assets of the trust (i.e., the aircraft collateral) and to facilitate the secured financing transaction sought by Eastern Airlines. In a strong dissent, Judge Kearse, believing that the trust qualified as a business trust under New York law, argued that the certificate holders "expected to earn a profitable return on their investment," and that "this trust is not a typical trust for the simple preservation of assets," and should, therefore, be deemed a business trust within the meaning of   § 101(9)(A)(v) of the Code.[51]

In In re Sung Soo Rim Irrevocable Intervivos Trust,[52]the California bankruptcy court held that the voluntary Chapter 11 bankruptcy petition filed by the trust, the only asset of which was a multi-unit retail project that was transferred to the trust shortly before an imminent foreclosure of the project, must be dismissed because (1) the trust did not qualify as a business trust under California law, (2) it did not conduct any business as that term is commonly understood, (3) it was controlled exclusively by the trustee, and (4) it had been created solely for the benefit of family members. Judge Fenning explicitly rejected the reasoning of the Second Circuit in Shawmut, supra.

In In re Gonic Realty,[53]the New Hampshire bankruptcy court held that a trust could be a debtor under Chapter 11. The court found that the trust in question undertook many operations relating to the property that constituted business activity, and that the trust was, therefore, engaged in more than just the ownership of real estate. As a result, this case appears to be distinguishable from Illinois and Florida cases (cited and discussed below) that have held that a true passive land trust is not a business trust eligible for relief under the Code.

Because of the availability of income tax deductions for investors and the simplicity of documentation in Massachusetts, the use of a nominee trust is common in connection with the ownership, development, and financing of commercial real estate. In In re Medallion Realty Trust,[54]the Massachusetts bankruptcy court, after observing that "the decisions are sharply, and perhaps hopelessly divided on the issue of the meaning of a ‘business trust,”[55]  held that the trust in question was created for the purpose of transacting business and was, therefore, eligible for Chapter 11 relief. The court found that the traditional Massachusetts business trust (under which the trust's day-to-day operations are run by directors elected by the certificate holder), as well as a nominee trust (under which the beneficiaries are investors in a business enterprise), are both eligible for treatment as a business trust under the Code.[56]

 

VI.       Eligibility of Land Trusts for Relief under the Bankruptcy Code

 

A true passive land trust is not a business trust eligible for relief under the Code. Because the primary purpose of a land trust is to hold title to real property, and not to operate a business or commercial activity for profit, the land trust does not conduct a business activity capable of being reorganized under Chapter 11 of the Code. Several Illinois cases have analyzed the applicability of the Code to land trusts, and have held that a land trust may not be a debtor under the Code.[57]

Bankruptcy courts in Florida also have held that a land trust may not be a debtor under the Code.[58] The Florida cases used reasoning similar to the Illinois bankruptcy courts, generally finding that where the trust was created solely to preserve and protect the trust assets for the beneficiary and not to actively manage a going-concern business, it would not be deemed to be a business trust eligible for protection under the Code. With respect to the rights of a land trust beneficiary as a debtor under the Code, see Matter of Drewry.[59]  In this case the court held that the debtor, as the beneficiary under a land trust, could enter into a lease agreement with a third party without notifying the land trustee, and that the debtor’s execution of an ABI to a lender as security for a personal loan did not have sufficient legal effect to deprive him of his right to receive rents under the lease. According to the court:

The law concerning land trusts in Indiana does differ from Illinois law in some ways. Namely, in Illinois, the beneficiary of a land trust holds neither legal nor equitable title in the trust; the beneficiary holds a personal property interest [citation omitted]. Since the beneficiary's interest is personal property, judgments cannot attach [citation omitted]. Under Indiana law, the beneficiary takes an equitable interest in the trust property. ind. code § 30-4-2-7. And under Indiana law, the beneficiary's equitable interest is subject to a judgment lien [citation omitted].  However, both Illinois and Indiana law classify the beneficiary's interest in the trust property as personal property, and both states recognize the beneficiary's power to control, manage and use the property in the trust. It is the feature of management and control that dictates the beneficiary's right to lease and receive rents [citations omitted]. Therefore, the validity of the Drewrys' lease to BFI [the lessee] was not affected by the fact that the Drewrys failed to direct the trustee, Whiting Bank, to execute the lease instead of simply executing the lease themselves.[60]   

Another issue for land trusts, as demonstrated in a Georgia bankruptcy case, Hamblen v. Hamblen Family Irrevocable Trust,[61] is whether a non-lawyer trustee of a land trust can represent the trust in a bankruptcy proceeding. In this case, the bankruptcy court held that under Georgia law, a non-lawyer trustee of purported land trusts could not represent the trusts in an adversary proceeding to recover real property for the bankruptcy estate, even though the trustee held legal title to the properties and was the trusts’ sole beneficiary, i.e., the defendant trusts could not appear as pro se litigants.

The Chapter 7 trustee had brought an action to avoid certain transfers and to recover three pieces of real property for the bankruptcy estate. The land trust trustee argued that the defendant trusts were land trusts rather than business trusts, and that they should be deemed natural persons rather than artificial entities and thus should have “the same rights under law as an individual, including that of pro se representation in court.”[62] Both parties agreed that case law clearly provides “that only a licensed attorney may represent an artificial entity such as a corporation, partnership, association, or trust in federal court.”[63]

The land trustee argued that business trusts can file for bankruptcy protection but land trusts cannot. He also argued that trusts should be allowed to appear in court without counsel because they “are organized under the authority of the Georgia Trust Act as ‘Land Trusts.’”[64] But the court found that the Georgia Trust Act[65] clearly was a statute regarding business trusts (which can only appear in court through a licensed attorney) and not land trusts, and that nowhere in the Act was there any language deeming a trust to be a “natural person” or allowing a trust to appear in court pro se.  The court noted that “cases in jurisdictions recognizing land trusts contradict [the land trustee’s] argument that a land trust can appear without counsel in court.”[66]

The court concluded that there was no support for the proposition that trusts formed under the Georgia Trust Act were like Illinois land trusts, and that even if the trusts in the present case were land trusts, “land trusts have beneficiaries and are not entitled to self-representation.”[67] Id. Thus, the court ruled that the land trust trustee could appear on his own behalf, but could not appear as an attorney for any other party. As the court stated, “His status as a trustee is necessarily a fiduciary status, and the defendant trusts can only appear in court through a licensed attorney admitted to practice law in this Court.”[68]

The basic jurisdictional defect in Hamblen was astutely raised by the bankruptcy trustee and prevented the non-lawyer land trustee from filing a pro se bankruptcy petition on behalf of the purported land trust or being represented by him as its non-attorney trustee, thereby resulting in dismissal of the case. It is puzzling why the land-trust trustee did not elect to cure this defect simply by hiring counsel and re-filing the petition.  It is interesting to speculate as to what the result would have been if the bankruptcy trustee had not asserted this defect, i.e., could (or would) the court have raised and decided this issue sua sponte?  Could or would the issue have been raised via an appeal? What if the jurisdictional issue had not been raised during the bankruptcy court proceedings, and there was court approval of the conveyance of the real property to the land trusts? Would title insurance protect the grantee land trusts if it were later determined that the bankruptcy court did not in fact have subject matter jurisdiction?

If the jurisdictional issue had not been raised by anyone before the conveyance of the properties to land trusts of which the land-trust trustee was the sole trustee and no specific exception had been taken by the title insurer in the title policy issued to the land trusts, then any subsequently asserted jurisdictional defects would appear to be covered under the policy’s insuring provisions against loss from “any defect, lien, or encumbrance on the title” and “unmarketability.”  A title insurer would probably not wish to create a blanket exception for the “effect of the bankruptcy” of the debtor that conveyed the properties to the land trusts as purchasers, because the conveyance would arise out of the bankruptcy proceeding and the coverage provided would be “illusory.”

 

VII.     Delaware Statutory Trusts

 

 Delaware has had in effect since October 1, 1988, the Delaware Statutory Trust Act (formerly known as the "Delaware Business Trust Act"),[69] which expressly recognizes the Delaware statutory trust (“DST”) as an alternative form of entity. A DST has been used in the place of a common law trust in many forms of structured financing transactions. The certainty of using an entity that is governed by statutory law rather than the common law is an obvious advantage. The principal purpose of the DST Act is to modernize the common law and provide certainty by codifying Delaware law with respect to the use of trusts in business transactions. A DST provides flexibility similar to a limited liability company (“LLC”), i.e., it permits the trust agreement to establish whatever rights and obligations of the trustees, the beneficial owners and other persons as may be considered desirable (including voting rights) and which are not contrary to the DST Act.[70] It also may provide rights to any other person, including a person who is not a party to the trust agreement.[71] It further has advantages as a "bankruptcy-remote entity." The DST Act states that the statutory trust is a separate legal entity, and that no creditor of a beneficial owner has “any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the statutory trust.”[72] In addition, the DST Act states that no beneficial owner has any interest in specific statutory trust property and may not terminate or revoke the trust except in accordance with the trust agreement.[73] Thus, creditors of and other interested persons in the DST have greater protection from the possibility of a partition of trust property or the premature termination of the DST upon the insolvency or bankruptcy of a beneficial owner than in the case of an ordinary common law trust.

A DST may merge or consolidate with, or convert into, any other corporation, limited partnership, or limited liability company pursuant to the trust agreement or if the trust agreement is silent then in accordance with the statutory procedures contained in the DST Act.[74] There is no Delaware franchise tax on DSTs formed under the DST Act. The trust will be taxed for income tax purposes as a corporation, a partnership, or a trust or otherwise as elected by the parties in accordance with the Internal Revenue Code. The DST Act provides that at least one trustee must be a Delaware resident; although, this requirement can be satisfied by engaging a trust company with its principal place of business in Delaware.

It is unclear to what extent any particular state, other than Delaware, recognizes the ability of a DST to bring suit in its own name.  Pursuant to Delaware law, a statutory trust is a separate legal entity and has the explicit authorization to sue and be sued in its own name.[75]  The ability to sue in another state would be determined by that specific state's recognition of Delaware law, although it would seem that under the principles of comity other states should respect Delaware law concerning the right of a DST to bring lawsuits.

The following should be kept in mind by title insurers with respect to insuring DST transactions:

1.  The DST is treated as a separate and distinct legal entity, and unlike the situation with some other types of trusts, the DST would sign title documents in the following manner:

     XYZ Trust, a Delaware statutory trust, by ____________________, not in its individual capacity but solely as Trustee

2. If the governing instrument of a DST so provides, a “Manager” could be designated to execute documents on behalf of the DST.

3. Every DST must have a Delaware resident trustee, i.e., a DST certificate of trust filed with the Secretary of State must state the name of the DST and the name and business address of the Delaware resident trustee and must be executed by all trustees.

4. A DST is not required to execute its governing instrument. (A DST is bound by its governing instrument whether or not the statutory trust executes the governing instrument.)

5.  There may be, within the DST (as set forth in the governing instrument), separately designated series of trustees, beneficial owners or beneficial interests having separate rights, powers or duties with respect to specified property or obligations of the DST.

 

VIII.   Like-Kind Exchanges of Land Trust and DST Property

 

Sec. 1031(a)(1) of the Internal Revenue Code (“IRC”) provides that gain or loss is not recognized when property held for productive use in a trade or business, or for investment, is exchanged for like-kind property to be held for productive use in a trade or business, or for investment. Without IRC Sec. 1031)(a)(1), the income tax consequences of any exchange would be the same as those of a sale, i.e., the amount of gain or loss would be determined by calculating the difference between the adjusted basis of the asset relinquished and the fair market value of the property received.[76] Section 1031(a)(1) is an exception to the requirement that gain or loss be recognized on the disposition of property. The land trust itself does not file a tax return, because the beneficiary(ies) of the trust (is) (are) considered the true owner(s).[77]

In a 1992 Revenue Ruling,[78] the Internal Revenue Service (“IRS”) held that a taxpayer’s interest in an Illinois land trust (or similar arrangements under the laws of other states) could be exchanged for other real property without recognition of gain or loss under Sec. 1031 of the IRC. The 1992 Revenue Ruling states as follows:

A taxpayer's interest in an Illinois land trust constitutes real property which may be exchanged for other real property without recognition of gain or loss under section 1031 of the Code, provided the requirements of that section are otherwise satisfied. This holding is not applicable if an arrangement involving an Illinois land trust creates an entity (such as a partnership).

Several states in addition to Illinois, including, for example, California, Florida, Hawaii, Indiana, North Dakota, and Virginia, have laws that statutorily or judicially sanction arrangements that are similar to the Illinois land trust arrangement described herein. The holding in this revenue ruling also applies to an interest in a similar arrangement created under the laws of any state, pursuant to which (1) the trustee has title to real property, (2) the beneficiary (or a designee of the beneficiary) has the exclusive right to direct or control the trustee in dealing with the title to the property, and (3) the beneficiary has the exclusive control of the management of the property, the exclusive right to the earnings and proceeds from the property, and the obligation to pay any taxes and liabilities relating to the property.[79]

The IRS has also approved the DST as a disregarded entity for holding 1031 exchange property. This is a great benefit for Sec. 1031 exchange investors because, as noted above, DSTs combine the flexibility of an Illinois land trust with the asset protection benefits of limited liability company. But there are some limitations. As one commentator has stated:

When properly formed and operated, DSTs are eligible to be treated as investment trusts and as a grantor trust under the Internal Revenue Code.  Accordingly, a beneficial interest in a qualifying DST will be treated as an interest in the underlying assets for tax purposes. Prior to 2004, questions existed as to what power could be given to the beneficial owners and the trustee while maintaining the disregarded entity treatment necessary for Section 1031.

In Revenue Procedure 2004-86, the Service finally announced the factors it deemed necessary for a beneficial interest in a DST to qualify as replacement property for purposes of Section 1031. Rev. Rul. 2004-86 provided clarity for taxpayers but also severely limited the use of DSTs for purposes of Section 1031.

The Service consented to the treatment of a DST as qualified replacement property only if the trustee(s) did not have the power to vary the investment of the Trust nor any of seven other enumerated powers—commonly referred to as the Seven Deadly Sins. They are as follows:

1. The trustee can not dispose of the trust assets and reinvest them in other assets, although the trustee can dispose of the trust assets and liquidate the trust;

2. The trustee may not negotiate extensions of leases for tenants;

3. The trustee may not enter into new leases;

4. The trustee can not negotiate or enter into new debt on the property;

5. The trustee may not renegotiate any existing debt;

6. The trustee may not invest cash received from the property in anything other than short term Treasuries or CDs that must be distributed at least quarterly; and

7. The trustee may not make any modifications (other than those required by law) to the trust assets other than minor repairs and upkeep.

Not only must the trustee not commit any of the seven deadly sins, he may not even have the power to do so. These severe restrictions greatly diminish the flexibility of the DST when used for a 1031 exchange. For example, a DST would be unlikely to own a residential apartment complex as replacement property because no new leases could be negotiated. Similarly, retail facilities which have high turn-over or property which will require significant capital improvements would not work for a DST. Finally, a DST purchasing replacement property should only use long-term purchase debt because the Trustee will have no power to negotiate new debt or refinance old debt once the structure is put in place. In certain circumstances the owners may originally buy into the DST as replacement property, then discover a need for funding or refinancing later in the ownership period. In that event, they can liquidate the DST into a partnership or LLC for purposes of refinancing or making capital improvements.

Despite the limitations on DSTs, they do have their place in the realm of 1031 exchanges. They work well for new properties with a single tenant subject to a long-term lease. DSTs also work well for all cash investments involving land speculation.

One solution to the leasing issue offered by certain sponsors is the use of a master lease with the DST. In this format, the DST owns a property and net leases the property to the sponsor to operate. The sponsor and master lessee/sub-landlord then negotiates all leases or makes necessary capital improvements. Investors in a DST with a master lease in place should be cautious in reviewing the financial capacity of the master tenant. Not only must the sponsor be capable of funding the lease payments to the DST regardless of cash flow from the sub-tenants, it must also be able to cover the cost of any capital improvements. The sponsor generally tries to calculate the amount of capital necessary in advance to protect against these risks, thus decreasing the net return to the investor.

In the proper situation, a DST provides a group of investors interested in a similar property a versatile and fluid structure to take title to the property. However, the stringent guidelines governing DSTs in conjunction with Section 1031 must be carefully reviewed for compatibility with each property. Taxpayers should look to long term net lease properties when using the DST structure and seek alternative ownership vehicles for other types of property.[80]

 

VII.       Conclusion

 

As discussed in this article, land trusts and various forms of business trusts are often perceived to offer distinct advantages over other forms of real estate ownership. For example, with respect to a land trust, the trustee’s power is strictly limited to the conveyance of the property at the direction of the beneficiary(ies), but the land trust is otherwise subject to the rules (and benefits) that apply to other forms of trusts, and the interest of the beneficiary(ies) is personal property. But many of the perceived advantages of land trusts may be illusory, and the use of land trusts (at least in Illinois) is not nearly as common today because many of these perceived benefits, such as the belief that a land trust protects the beneficiaries from disclosure or from liability with respect to creditors, judgments, taxes, etc., is no longer true. Furthermore, a land trust can be a poor estate-planning vehicle, and statutory and case law with respect to land trusts can change, and must be strictly complied with in any event. With respect to DSTs, these vehicles, as noted in this Article, have been used in the place of common law trusts in many forms of structured financing transactions and the fact that their use generally is governed by statutory law rather than the common law is certainly advantageous for many businesses. A DST provides flexibility similar to an LLC. It also may provide an advantage as a "bankruptcy-remote entity." But these vehicles may only beneficial in certain factual situations. Also, as noted above, land trusts, DSTs, and other similar forms of trusts may not qualify for relief as a “business trust” under the Code, and each situation and structure will be examined individually by the bankruptcy court. Attorneys therefore should carefully consider the advantages and disadvantages of land trusts, and business trusts such as DSTs, when advising their clients with respect to the most advantageous form of real-property ownership in a particular situation. Attorneys should also be familiar with current applicable statutory and case law regarding these types of ownership vehicles, as they are not available in many states.
 

APPENDIX A

 

COLLATERAL ASSIGNMENT OF BENEFICIAL INTEREST

 

THIS ASSIGNMENT is made this          day of                        , 20     , by                                                                                                , a                                                                         ("Beneficiary"), for the benefit of                                                                                                       , a                                                                                                       ("Lender").

 

RECITALS:

A.        Beneficiary owns one hundred percent (100%) of the beneficial interest and one hundred percent (100%) of the power of direction in, to and under that certain Trust Agreement made by and between                                                                                        ("Land Trustee") and Beneficiary dated                                       , and known as Trust No.                         (the "Trust Agreement").

B.        Simultaneously with the execution of this Assignment, Beneficiary has directed Land Trustee, to execute and deliver to Lender that certain Multifamily Note (in which Beneficiary has joined as Co-Maker) (the "Note") and that certain Multifamily Mortgage, Assignment of Rents and Security Agreement (the "Security Instrument").

C.        To induce Lender to make the loan evidenced by the Note, and as additional security for the performance of Land Trustee's and Beneficiary's obligations in connection with the Note, Beneficiary has agreed to collaterally assign to Lender all of Beneficiary's right, title, and interest in, to and under the Trust Agreement and certain other property as more fully set forth herein.  This Assignment, the Security Instrument, the Beneficiary's Undertaking (the "Undertaking"), the Combined Security Agreement and Assignment of Rents and Leases executed by Beneficiary, and all other documents related thereto shall be referred to hereinafter collectively as the "Loan Documents".

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Beneficiary hereby grants to Lender a security interest in, sells, assigns, transfers, sets over, pledges, and delivers unto Lender and to Lender's successors and assigns the following collateral (the "Collateral"), whether now owned or hereafter acquired:

(A)       all of the right, title and interest of Beneficiary in, to and under

(i)         the Trust Agreement,

(ii)        the property referred to or described in the Trust Agreement or otherwise owned by Land Trustee pursuant to the Trust Agreement (the "Property"),

(iii)       any and all proceeds or avails of the Property or any part thereof, including without limitation, all proceeds and avails from rentals, mortgages, sales, conveyances or other dispositions or realizations of any kind or character of or from such Property or any part thereof; and

(B)       the right to manage, direct and control the Property and the acts and doings of Land Trustee with respect to the Property to the full extent to which Beneficiary is entitled pursuant to the terms of the Trust Agreement.

Beneficiary further covenants and represents as follows:

 

1.         Title to Collateral

Except for the security interest of Lender, Beneficiary is the owner of all of the Collateral, free from any lien, security interest, encumbrance or other right, title or interest of any other individual or entity.  Beneficiary shall defend the Collateral against all claims and demands of all persons at any time claiming the Collateral or any interest in the Collateral adverse to Lender.

There is no financing statement now on file in any public office which refers to, describes, or includes the Collateral.  So long as any Indebtedness, as that term is defined in the Security Instrument, remains unpaid or unperformed, Beneficiary will not make any  further assignment or pledge of the Collateral in whole or in part and will not execute or file any financing statement or statements describing or attempting to describe the Collateral.

2.         Security

This Assignment is made and given as security for: (a) payment in full of all principal, interest, and other charges now or hereafter payable under the Note and/or the Loan Documents; (b) performance of all of the obligations imposed upon the Land Trustee and the Beneficiary pursuant to the Security Instrument and other Loan Documents; (c) performance by Beneficiary of all of Beneficiary's obligations pursuant to the Undertaking; and (d) payment in full of all expenses and charges, including attorneys' fees and expenses paid or incurred by Lender in realizing or protecting the Collateral or the obligations secured by this Assignment.

All funds advanced by Lender for any purpose authorized by the Note or the Loan Documents, or for the protection of the Property, the Collateral, the Supplemental Collateral (as defined in the Combined Security Agreement and Assignment of Rents) or the lien of Lender, and all expenses paid or incurred in connection therewith, including attorneys' fees, shall be additional Indebtedness secured by the security interest created in this Assignment and become immediately due and payable without notice and with interest at the applicable rate specified in the Note upon a default by Land Trustee or Beneficiary in the performance of their obligations under the Note or the other Loan Documents.

Beneficiary agrees to deliver to Lender such confirmatory instruments as Lender may reasonably request to evidence and perfect such security interest, which may include appropriate financing statements under the Uniform Commercial Code as well as any extensions, renewals and amendments which Lender may require.

3.         Restrictions on Transfer of Collateral  [NO RIGHT TO TRANSFER]

(a)        The occurrence of any of the following events shall constitute a default under this Assignment:

(1)        if Beneficiary is a limited partnership, a Transfer, as that term is defined in the Security Instrument, of (A) any general partnership interest, or (B) limited partnership interests in Beneficiary that would cause the Initial Owners, as that term is defined in the Security Instrument, of Beneficiary to own less than 51% of all limited partnership interests in Beneficiary;

(2)        if Beneficiary is a general partnership or a joint venture, a Transfer of any general partnership or joint venture interest in Beneficiary;

(3)        if Beneficiary is a limited liability company, a Transfer of (A) any membership interest in Beneficiary which would cause the Initial Owners to own less than 51% of all the membership interests in Beneficiary, or (B) any membership or other interest of a manager in Beneficiary;

(4)        if Beneficiary is a corporation, (A) the Transfer of any voting stock in Beneficiary which would cause the Initial Owners to own less than 51% of any class of voting stock in Beneficiary or (B) if the outstanding voting stock in Beneficiary is held by 100 or more shareholders, one or more transfers by a single transferor within a 12-month period affecting an aggregate of 5% or more of that stock; and

(5)        a Transfer of any interest in a Controlling Entity, as that term is defined in the Security Instrument, which, if such Controlling Entity were Beneficiary, would result in an Event of Default under any of Sections 3(a)(1) through (4) above.

Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default in order to exercise any of its remedies with respect to a default under this Section 3.

(b)        The occurrence of any of the following events shall not constitute a default under this Assignment, notwithstanding any provision of Section 3(a) to the contrary:

(1)        a Transfer to which Lender has consented;

(2)        a Transfer that occurs by devise, descent, or by operation of law upon the death of a natural person;

(3)        the grant of a leasehold interest in an individual dwelling unit for a term of two years or less not containing an option to purchase; and

(4)        a Transfer of obsolete or worn out Personalty or Fixtures, as those terms are defined in the Security Instrument, that are contemporaneously replaced by items of equal or better function and quality, which are free of liens, encumbrances and security interests other than those created by the Loan Documents or consented to by Lender.

(c)        Lender may consent, in its discretion, to a Transfer that would otherwise violate this Section 3 if, prior to the Transfer, Beneficiary has satisfied each of the following requirements:

(1)        the submission to Lender of all information required by Lender to make the determination required by this Section 3(c);

(2)        the Collateral and the transferee meet all of the eligibility, credit, management and other standards (including but not limited to any standards with respect to previous relationships between Lender and the transferee and the organization of the transferee) customarily applied by Lender to the approval of borrowers and collateral in connection with the origination or purchase of similar mortgages on multifamily properties;

(3)        the absence of any default under this Assignment or any Event of Default, as that term is defined in the Security Instrument;

(4)        the execution of an assumption agreement that is acceptable to Lender and that, among other things, requires the transferee to perform all obligations of Beneficiary set forth in the Note, this Assignment and any other Loan Documents, and may require that the transferee comply with any provisions of this Assignment or any other Loan Document which previously may have been waived by Lender;

(5)        Lender's receipt of all of the following:

(A)       a review fee in the amount of $________________;

(B)       a transfer fee in an amount equal to _____% of the unpaid principal balance of the Indebtedness immediately before the Transfer; and

(C)       the amount of Lender's out‑of‑pocket costs (including reasonable attorneys' fees) incurred in reviewing the Transfer request; and

(6)        All of the requirements of Section 21 of the Security Instrument shall have been satisfied.

3.         Restrictions on Transfer of Collateral [RIGHT TO ONE TRANSFER ONLY ‑‑ WITH LENDER APPROVAL]

(a)        The occurrence of any of the following events shall constitute a default under this Assignment:

(1)        if Beneficiary is a limited partnership, a Transfer, as that term is defined in the Security Instrument, of (A) any general partnership interest, or (B) limited partnership interests in Beneficiary that would cause the Initial Owners, as that term is defined in the Security Instrument, of Beneficiary to own less than 51% of all limited partnership interests in Beneficiary;

(2)        if Beneficiary is a general partnership or a joint venture, a Transfer of any general partnership or joint venture interest in Beneficiary;

(3)        if Beneficiary is a limited liability company, a Transfer of (A) any membership interest in Beneficiary which would cause the Initial Owners to own less than 51% of all the membership interests in Beneficiary, or (B) any membership or other interest of a manager in Beneficiary;

(4)        if Beneficiary is a corporation, (A) the Transfer of any voting stock in Beneficiary which would cause the Initial Owners to own less than 51% of any class of voting stock in Beneficiary or (B) if the outstanding voting stock in Beneficiary is held by 100 or more shareholders, one or more transfers by a single transferor within a 12-month period affecting an aggregate of 5% or more of that stock; and

(5)        a Transfer of any interest in a Controlling Entity, as that term is defined in the Security Instrument, which, if such Controlling Entity were Beneficiary, would result in an Event of Default under any of Sections 3(a)(1) through (4) above.

Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default in order to exercise any of its remedies with respect to a default under this Section 3.

(b)        The occurrence of any of the following events shall not constitute a default under this Assignment, notwithstanding any provision of Section 3(a) to the contrary:

(1)        a Transfer to which Lender has consented;

(2)        a Transfer that occurs by devise, descent, or by operation of law upon the death of a natural person;

(3)        the grant of a leasehold interest in an individual dwelling unit for a term of two years or less not containing an option to purchase; and

(4)        a Transfer of obsolete or worn out Personalty or Fixtures, as those terms are defined in the Security Instrument, that are contemporaneously replaced by items of equal or better function and quality, which are free of liens, encumbrances and security interests other than those created by the Loan Documents or consented to by Lender.

(c)        Lender shall consent, one time only and without any adjustment to the rate at which the Indebtedness secured by this Assignment bears interest, to a Transfer that would otherwise violate this Section 3 if, prior to the Transfer, Beneficiary has satisfied each of the following requirements:

(1)        the submission to Lender of all information required by Lender  to make the determination required by this Section 3(c);

(2)        the absence of any default under this Assignment or any Event of Default, as that term is defined in the Security Instrument;

(3)        the transferee meets all of the eligibility, credit, management and other standards (including but not limited to any standards with respect to previous relationships between Lender and the transferee and the organization of the transferee) customarily applied by Lender at the time of the proposed Transfer to the approval of borrowers in connection with the origination or purchase of similar mortgages on multifamily properties;

(4)        the Collateral, at the time of the proposed Transfer, meets all standards as to its condition that are customarily applied by Lender at the time of the proposed Transfer in connection with the origination or purchase of similar mortgages on multifamily properties;

(5)        the loan to value ratio at the time of the proposed Transfer is 70% or less ("loan to value ratio" means the ratio of (A) the outstanding principal balance of the Indebtedness to (B) the value of the Mortgaged Property, as that term is defined in the Security Instrument, as determined by Lender, expressed as a percentage);

(6)        the debt service coverage ratio for the last twelve full months preceding the proposed Transfer was 1.35 or more ("debt service coverage ratio" means the ratio of (A) the annual net operating income from the Mortgaged Property's operations during that month which is available for repayment of debt, after deducting operating expenses, to (B) the annual principal and interest payable under the Note); and

(7)        in the case of a Transfer of all or any part of the Collateral, (A) the execution by the transferee of an assumption agreement that is acceptable to Lender and that, among other things, requires the transferee to perform all obligations of Beneficiary set forth in the Note, this Assignment and any other Loan Documents, and may require that the transferee comply with any provisions of this Assignment or any other Loan Document which previously may have been waived by Lender, and (B) if a guaranty has been executed and delivered in connection with the Note, this Assignment or any of the other Loan Documents, the transferee causes one or more individuals or entities acceptable to Lender to execute and deliver to Lender a guaranty in a form acceptable to Lender;

(8)        in the case of a Transfer of any interest in a Controlling Entity, if a guaranty has been executed and delivered in connection with the Note, this Assignment or any of the other Loan Documents, the Beneficiary causes one or more individuals or entities acceptable to Lender to execute and deliver to Lender a guaranty in a form acceptable to Lender;   

(9)        Lender's receipt of all of the following:

(A)       a review fee in the amount of $_______________;

(B)       a transfer fee in an amount equal to _____% of the unpaid principal balance of the Indebtedness immediately before the applicable Transfer; and

(C)       the amount of Lender's out‑of‑pocket costs (including reasonable attorneys' fees) incurred in reviewing the Transfer request; and

(10)      All of the requirements of Section 21 of the Security Instrument shall have been satisfied.

3.         Restrictions on Transfer of Collateral  [RIGHT TO UNLIMITED TRANSFERS ‑‑ WITH LENDER APPROVAL]

(a)        The occurrence of any of the following events shall constitute a default under this Assignment:

(1)        if Beneficiary is a limited partnership, a Transfer, as that term is defined in the Security Instrument, of (A) any general partnership interest, or (B) limited partnership interests in Beneficiary that would cause the Initial Owners, as that term is defined in the Security Instrument, of Beneficiary to own less than 51% of all limited partnership interests in Beneficiary;

(2)        if Beneficiary is a general partnership or a joint venture, a Transfer of any general partnership or joint venture interest in Beneficiary;

(3)        if Beneficiary is a limited liability company, a Transfer of (A) any membership interest in Beneficiary which would cause the Initial Owners to own less than 51% of all the membership interests in Beneficiary, or (B) any membership or other interest of a manager in Beneficiary;

(4)        if Beneficiary is a corporation, (A) the Transfer of any voting stock in Beneficiary which would cause the Initial Owners to own less than 51% of any class of voting stock in Beneficiary or (B) if the outstanding voting stock in Beneficiary is held by 100 or more shareholders, one or more transfers by a single transferor within a 12-month period affecting an aggregate of 5% or more of that stock; and

(5)        a Transfer of any interest in a Controlling Entity, as that term is defined in the Security Instrument, which, if such Controlling Entity were Beneficiary, would result in an Event of Default under any of Sections 3(a)(1) through (4) above.

Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default in order to exercise any of its remedies with respect to a default under this Section 3.

(b)        The occurrence of any of the following events shall not constitute a default under this Assignment, notwithstanding any provision of Section 3(a) to the contrary:

(1)        a Transfer to which Lender has consented;

(2)        a Transfer that occurs by devise, descent, or by operation of law upon the death of a natural person;

(3)        the grant of a leasehold interest in an individual dwelling unit for a term of two years or less not containing an option to purchase; and

(4)        a Transfer of obsolete or worn out Personalty or Fixtures, as those terms are defined in the Security Instrument, that are contemporaneously replaced by items of equal or better function and quality, which are free of liens, encumbrances and security interests other than those created by the Loan Documents or consented to by Lender.

(c)        Lender shall consent, without any adjustment to the rate at which the Indebtedness secured by this Assignment bears interest or to any other economic terms of the Indebtedness, to a Transfer that would otherwise violate this Section 3 if, prior to the Transfer, Beneficiary has satisfied each of the following requirements:

(1)        the submission to Lender of all information required by Lender to make the determination required by this Section 3(c);

(2)        the absence of any default under this Assignment, or any Event of Default, as that term is defined in the Security Instrument;

(3)        the transferee meets all of the eligibility, credit, management and other standards (including but not limited to any standards with respect to previous relationships between Lender and the transferee and the organization of the transferee) customarily applied by Lender at the time of the proposed Transfer to the approval of borrowers in connection with the origination or purchase of similar mortgages on multifamily properties;

(4)        the Collateral, at the time of the proposed Transfer, meets all standards that are customarily applied by Lender at the time of the proposed Transfer in connection with the origination or purchase of similar mortgages on multifamily properties;

(5)        in the case of a Transfer of all or any part of the Collateral, (A) the execution by the transferee of an assumption agreement that is acceptable to Lender and that, among other things, requires the transferee to perform all obligations of Beneficiary set forth in the Note, this Assignment and any other Loan Documents, and may require that the transferee comply with any provisions of this Assignment or any other Loan Document which previously may have been waived by Lender, and (B) if a guaranty has been executed and delivered in connection with the Note, this Assignment or any of the other Loan Documents, the transferee causes one or more individuals or entities acceptable to Lender to execute and deliver to Lender a guaranty in a form acceptable to Lender;

(6)        in the case of a Transfer of any interest in a Controlling Entity, if a guaranty has been executed and delivered in connection with the Note, this Assignment or any of the other Loan Documents, the Beneficiary causes one or more individuals or entities acceptable to Lender to execute and deliver to Lender a guaranty in a form acceptable to Lender; and

(7)        Lender's receipt of all of the following:

(A)       a review fee in the amount of $_______________;

(B)       a transfer fee in an amount equal to _____% of the unpaid principal balance of the Indebtedness immediately before the applicable Transfer; and

(C)       the amount of Lender's out‑of‑pocket costs (including reasonable attorneys' fees) incurred in reviewing the Transfer request.

(8)        All of the requirements of Section 21 of the Security Instrument shall have been satisfied.

4.         Single Asset Beneficiary

Until the Indebtedness is paid in full, the Beneficiary  (a) shall not acquire any real or personal property other than the Property and personal property related to the operation and maintenance of the Property;  (b) shall not operate any business other than the management and operation of the Property;  (c) shall not maintain its assets in a way difficult to segregate and identify; and (d) shall not acquire or hold the beneficial interest under any trust other than the trust referred to in Recital A of this Assignment.

5.         Right to Approve

Beneficiary irrevocably directs Land Trustee to accept no further transfers or encumbrances of interest of Beneficiary in, to or under the Trust Agreement or in Beneficiary or in the Collateral or any part of the Collateral, without the prior written consent of Lender.  In addition to, and without impairing or detracting from the force and effect of the foregoing, Beneficiary grants to Lender the right to approve the execution by Land Trustee of any and all documents and instruments which in any way relate to or concern the Trust Agreement, the Property, the Collateral, or the Supplemental Collateral.

6.         Remedies of Lender

At any time that a default exists under the Note, regardless of whether or not the maturity of the principal thereof is accelerated, or at any time that a default exists under this Assignment or an Event of  Default exists under the Security Instrument, Lender

(a)        Shall have the remedies of a secured party under the Uniform Commercial Code and, at Lender's option, may exercise any one or more of the rights or remedies set forth in the Note or the Loan Documents.  Any requirement of the Uniform Commercial Code for reasonable notice shall be met if the notice is given in accordance with the requirements of Section 14, at least twenty (20) business days prior to the time of the sale, disposition or other event or thing giving rise to the requirement of notice (which period and method of giving notice is hereby agreed to be commercially reasonable).  In exercising any of its remedies, Lender may proceed against the items of real property and any items of personal property comprising the Collateral separately or together and in any order, without in anyway affecting the availability of Lender's remedies under the Code or of the remedies provided in this Agreement or any other Loan Documents.  The right of Lender to be the purchaser for its own account at any sale or other disposition of the Collateral shall not be affected by the fact that Lender is or may be now or at the time of such sale or disposition record titleholder to the Collateral, nor shall that fact in any manner affect the rights of Lender to sell, dispose of or otherwise deal with the security interest granted in this Agreement;

(b)        notwithstanding that Lender may also be record titleholder to the Property, proceed immediately to exercise each and all of the powers, rights and privileges reserved or granted to Beneficiary under the Trust Agreement, including without limitation, the right to collect and receive the proceeds from rentals and from mortgages, sales, conveyances or other dispositions or realizations of any kind or character of or from the Property or any part thereof; and/or

(c)        institute a judicial proceeding at law or in equity or otherwise, or pursue any other remedies in the enforcement of the rights of Lender to exercise Beneficiary's rights, powers, and privileges in the Property, the Collateral, and/or the Supplemental Collateral to foreclose the security interest and lien conferred by this Assignment, to seek the appointment of a receiver or receivers for the Property or any part thereof, or for the enforcement of any other proper legal or equitable remedy available under applicable law.

Any and all net proceeds realized by Lender pursuant to this Section 6, after first deducting all legal or other costs and expenses incurred by Lender in effecting such realization, shall be applied to pay any or all of the Indebtedness as Lender shall deem proper, with any surplus to be returned to Assignor.  Upon full payment and performance of all Indebtedness, obligations and liabilities hereby secured, Lender agrees to release this Assignment and the lien or charge created hereby.  The recorded satisfaction or release of the Security Instrument shall automatically effect the release of this Assignment.

7.         Beneficiary Liable Under Trust Agreement

Notwithstanding anything to the contrary appearing in the Trust Agreement, the Collateral is assigned and transferred to Lender by way of collateral security only, and accordingly Lender by its acceptance of this Assignment shall not be deemed to have assumed or become liable for any of the obligations or liabilities of Beneficiary under the Trust Agreement, whether provided for by its terms, arising by operation of law, or otherwise.  Beneficiary acknowledges and agrees that Beneficiary is and remains liable under the Trust Agreement as though this Assignment had not been made.

8.         Waiver of Homestead and Redemption

Beneficiary releases and waives all rights under the homestead and exemption laws of the State of Illinois.  Beneficiary acknowledges that the Mortgaged Property does not include agricultural real estate or residential real estate as those terms are defined in 735 ILCS 5/15-1201 and 5/15-1219.  Pursuant to 735 ILCS 5/15-1601(b), Beneficiary waives any and all rights of redemption from sale under any order of foreclosure of this Assignment, or other rights of redemption, which may run to Beneficiary or any other Owner of Redemption, as that term is defined in 735 ILCS 5/15-1212.  Beneficiary waives all rights of reinstatement under 735 ILCS 5/15-1602 to the fullest extent permitted by Illinois law.

9.         Amendment of Trust Agreement

Beneficiary agrees, for the benefit of Lender, that notwithstanding any provision of the Trust Agreement requiring the Land Trustee to sell any Property remaining in the trust created by the Trust Agreement, twenty years from the date thereof or on any other specified date, if the Security Instrument has not been released of record at or prior to said date, the duration of such trust shall be extended without further action of the parties until the obligations evidenced by the Note and the Security Instrument have been paid in full.  Notwithstanding the foregoing, the provisions of this Section shall not postpone the vesting of the trust property or any portion thereof for a period of more than twenty‑one (21)  years after the death of the last to survive of the President of the United States as of the date of this Assignment, and that President's children and grandchildren living at the time of the execution of this Assignment.

10.       Transferees of Lender

As used in this Agreement, the term "Lender" includes all transferees of the Note and the Loan Documents, whether or not the original Lender shall retain any right to service the loan evidenced by the Note; provided, however, that Land Trustee shall not be required to deal with any such transferee until it has received evidence of the transfer reasonably satisfactory to Land Trustee.

11.       Remedies

All rights and remedies set forth in this Assignment or afforded by law or equity are in the alternative and are cumulative, and may be exercised concurrently, independently, or successively, in any order.

12.       No Waiver

No delay on the part of Lender in the exercise of any right or remedy shall operate as a waiver, and no single or partial exercise by Lender of any right or remedy shall preclude other or further exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Assignment be binding upon Lender except as expressly set forth in a writing duly signed and delivered on behalf of Lender.  No action of Lender permitted by this Assignment shall in any way affect or impair the rights of Lender and the obligations of Beneficiary under this Assignment except as expressly set forth in a writing duly signed and delivered on behalf of Lender.  No right or power of the Borrower, the Beneficiary, or anyone else to assert any claim or defense as to the invalidity or unenforceability of any of the Obligations shall affect or impair the obligations of Beneficiary under this Assignment.

13.       Governing Law; Severability

This Assignment shall be governed by the law of the Property Jurisdiction, as that term is defined in the Security Instrument. In the event that any provision of this Assignment conflicts with applicable law, such conflict shall not affect other provisions of this Assignment which can be given effect without the conflicting provisions, and to this end the provisions of this Assignment are declared to be severable.

14.       Notices

Except for any notice required under applicable law to be given in another manner, any notice required to be given pursuant to this Assignment shall be deemed to have been given on the second day after it is deposited with the United States postal service, postage prepaid, certified mail, return receipt requested, addressed to the party to whom such notice is required to be given at the address set forth below, or at such other place as such party may have designated in writing in accordance with this Section:

(a)        If to Beneficiary:

 

                                                   

 

                                                   

 

                                                   

 

(b)        If to Lender:

 

                                                   

 

  1. If to Land Trustee:

                                          

                                         

                                    

15.       Survival of Covenants   

The foregoing covenants shall survive any transfer of the beneficial interest in the trust, any transfer by Lender of the Note or the Loan Documents, and any conveyance of the Property by Land Trustee.

16.       WAIVER OF TRIAL BY JURY.

BENEFICIARY AND LENDER EACH (A) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS ASSIGNMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS LENDER AND BENEFICIARY THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE.  THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.

IN WITNESS WHEREOF, Beneficiary has executed this Assignment the day and year first above written.

 

 

                                                         

Beneficiary

 

 

                                                         

Beneficiary

 

 

                                                         

Beneficiary

 

 

 

LAND TRUSTEE'S RECEIPT AND AGREEMENT

Land Trustee acknowledges receipt of a duplicate original of the foregoing Collateral Assignment of Beneficial Interest (the "Assignment").  All terms used herein shall have the meaning specified in the Assignment.

In no event shall Lender be liable to Land Trustee for any claim, bills, expenses or fees incurred prior to the date upon which Lender notifies Land Trustee that it is exercising a remedy provided in the Assignment.  Notwithstanding the foregoing, Land Trustee may look to Lender for the payment of any fees due to Land Trustee under the terms of the Trust `Agreement, if such fees are incurred after the date of Lender's notice to Land Trustee that it is exercising a remedy provided in the Assignment.

Land Trustee represents that, as disclosed by its records, as of the date hereof, Beneficiary is the sole owner of the beneficial interest and power of direction under the Trust Agreement, free and clear of all liens and encumbrances other than those of Lender.  Land Trustee agrees that it will accept no further assignments, transfers, pledges, sales, conveyances, assignments or encumbrances of any of the Collateral without the prior written consent of Lender.

Land Trustee agrees that it shall not execute and deliver any document or otherwise act pursuant to any direction delivered to it from time to time by or on behalf of Beneficiary, unless Lender shall have consented in writing to such direction.

Land Trustee agrees to act, as provided in the Trust Agreement, upon the written direction of the parties as provided therein, subject to the terms, conditions, limitations, and directions of the Assignment.

Land Trustee agrees to the amendment of the Trust Agreement as provided in Section 9 of this Assignment to extend the duration of the Trust under certain circumstances.

Land Trustee will send Lender a copy of every notification sent by Land Trustee to Beneficiary and a copy of every communication received by Land Trustee from Beneficiary or any other party directing Land Trustee to deal with the title to the Property, attempting to transfer any portion of the beneficial interest in the trust, or otherwise relating to the Property, the Collateral, or the Supplemental Collateral.

Land Trustee hereby agrees to recognize the rights of Lender granted under this Assignment.

 

 

Dated this            day of                               ,         .

 

LAND TRUSTEE

 

                                                         

 

By:                                                     

 

Name:                                                 

 

Title:                                                    

 

 

 

CONSENT AND AGREEMENT OF HOLDER

OF POWER OF DIRECTION

 

 

The undersigned holder of the power of direction under the Trust Agreement hereby consents to the foregoing Assignment and agrees that the exercise of such power of direction is subject and subordinate to the provisions of the Assignment.

 

 

Dated this             day of                                 ,         .

 

 

                                                          

Name of Holder of

Power of Direction

 

By:                                                    

 

Title:                                                  

 

 

 

 

 

ACCEPTANCE BY LENDER

 

 

Lender acknowledges and accepts receipt of the foregoing Assignment this            day of                                    ,         .

 

 

LENDER

                                                    

By:                                                     

 

Name:                                                 

 

Title:                                              

 

 



* Nothing contained in this Article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This Article is intended for educational and informational purposes only. The views and opinions expressed in this Article are solely those of this Author, and do not necessarily reflect the views, opinions, or policies of this Author’s employer, First American Title Insurance Company.

** Vice President-Special Counsel, First American Title Insurance Company, Chicago, Illinois; B.B.A. 1967, University of Michigan; J.D. 1969, University of Michigan. The author wishes to acknowledge the contribution to the section of this Article on Delaware Statutory Trusts of Doneene K. Damon, a director of Richards, Layton & Finger, P.A., Wilmington, Delaware, and Addie P. Asay, an associate of Richards, Layton & Finger.

[1] west’s fla. stat. ann. § 689.071.

[2] haw r.s. ch. 558.
[3] See Illinois statutory land-trust references, infra, notes 9-20.
[4] ind. code §§ 13-11-1-115.5 and 30-4-2-13
[5] n.d. cent. code 59-03-02.
[6] va. code. § 55-17-1.
[7] See 2 Patton and Palomar on Land Titles § 414 (3d ed.) (updated through June 2010) (Although citing no particular cases, stating that “Case law has permitted [land trusts] in Arizona, Ohio and California. A Wisconsin court has recognized a modified version of the Illinois land trust”).  See also Jay Zschau, Using Land Trusts to Prevent Small Farmer Land Loss, 44 real prop. tr. & est. L.J. (2009), which contains, at the end of the article, a survey (to the best of the author’s knowledge) of the law regarding land trusts in each state.

[8] black’s law dictionary 1516 (7th ed. 1999). (Emphasis in text.) See also 90 c.j.s., Trusts, § 245 (2006), which describes land trusts as follows:

In "land trusts," both the legal and equitable title to the res are vested in the trustee, not the beneficiary. The beneficial interest consists of the beneficiaries' rights and privileges and is not characterized as a real estate interest, but as a personal property interest. However, it has also been said that a land trust is a legal fiction in which the trustee acts only in a representative capacity, and that true ownership of land subject to a land trust remains with the beneficiary, although legal and equitable title to the land lies with the trustee. Thus, it has been said that the title of trustee of a land trust has little significance, outside of relationships based on legal title. The trustee has no duties or powers other than to execute deeds and mortgages or otherwise to deal with the property as directed by the holder of the power of direction, and the power of direction, which is a property interest separable from the beneficial interest, provides the possessor with the ability to direct the trustee in the manner in which he or she is to deal with the property.

[9] 765 ILCS 415/2(a).
[10] 765 ILCS 415/2(b). See Anthony Haswell and Barbara B. Levine, The Illinois Land Trust: A Fictional Best Seller, 33 depaul l. rev. 277, 282 (1984) (noting that in Illinois, the beneficiary of a land trust holds neither legal nor equitable title in the trust; the beneficiary holds a personal property interest).

[11] Id. See also Michael P. McElroy, 3A horner probate prac. & estates (2006), § 68:48. Land Trusts – Land Trust Fiduciary Duties Act:

The Land Trust Fiduciary Duties Act [765 ILCS 435/1 et seq.] was established due to the Illinois General Assembly's finding that the Illinois judiciary system and the federal judiciary system had unclear court decisions as to whether the holders of the power of direction in a land trust have fiduciary duties to the holders of the beneficial interest in land trusts. The purpose of the Land Trust Fiduciary Duties Act was to clarify that holders of the power of direction are accountable to the holders of the beneficial interest in land trusts as declaratory of existing law. The Act is declaratory of existing law and is intended to remove any possible conflicts or ambiguities, thereby confirming the existing law pertinent to land trusts. The Act applies to all land trusts in effect before, on, or after its effective date [August 6, 1999].

[12] 94 Ill. App. 2d 43 (1st Dist. Ill. 1968). See also Ronald A. Damashek, Illinois Mortgage Foreclosure, illinois foreclosure and related bankruptcy and title issues, National Business Institute (2005), in which the author states, at Section V.B. (Foreclosing Assignments of Beneficial Interests in Illinois Land Trusts), on  P. 15:   

Under certain circumstances, the IMFL requires that an assignment of a beneficial interest in a land trust be foreclosed in the same manner as a mortgage. Under § 11 06(a)(3) of the IMFL, a lender must use the mortgage foreclosure proceeding for any assignment of beneficial interest that was (i) made after July 1, 1987; (ii) made contemporaneously with the creation of the land trust; (iii) made to secure the obligation; and (iv) which permits the real estate to be sold to satisfy the secured indebtedness. The purpose of this statutory provision is to preclude lenders from avoiding the requirements of a mortgage foreclosure proceeding simply by using the land trust device. Assuming that the assignment of beneficial interest does not fall within the scope of § 15-11 06(a)(3), a lender could choose to hold a UCC sale of that beneficial interest even if a mortgage was executed contemporaneously with the assignment of beneficial interest. See, e.g., Slovick v. All American Bank, 163 Ill. App. 3d 741, 516 N.E.2d 947 (1st Dist. 1987) (pre-IMFL case); See also Ouinn v. Pullman Trust & Sav. Bank 98 Ill. App. 2d 402, 240 N.E.2d 791 (1st Dist. 1968) (discussing pre-IMFL principles governing the determination of whether an ABI should be deemed to be a mortgage). However, the UCC procedure is not often used by lenders who prefer to clear title through a mortgage foreclosure proceeding to avoid disputes with borrowers as to whether the ABI is covered by the IMFL and to enable them to more readily market the foreclosed property.               

13 Id. at 50. (Emphasis added.) In Levine the court went on to hold that for purposes of the UCC, the beneficial interest in a land trust is most aptly described as a “general intangible,” which means “any personal property other than goods, accounts, contract rights, chattel paper, documents and instruments.” Id. at 57.  For a good basic description of a land trust, see Robinson v. Chicago Nat'l Bank 32 Ill. App. 2d 55 (Ill. App. Ct. 1961).  In this case the court described a land trust as follows:

The land trust is a device by which the real estate is conveyed to a trustee under an arrangement reserving to the beneficiaries the full management and control of the property. The trustee executes deeds, mortgages or otherwise deals with the property at the written direction of the beneficiaries. The arrangement is created by two instruments. The deed in trust conveys the realty to the trustee. Contemporaneously with the deed in trust a trust agreement is executed. The pertinent provisions of the trust agreement are summarized as follows: While legal title to the real estate is held by the trustee, the beneficiaries retain "the power of direction" to deal with the title, to manage and control the property, to receive proceeds from sales or mortgages and all rentals and avails on the property. The trustee agrees to deal with the res of the trust only upon the written direction of the beneficiaries or the persons named as having power of direction ... The trustee is not required to "inquire into the propriety of any direction" received from the authorized persons. The trustee has no duties in respect to management or control of the property or to pay taxes, insurance or to be responsible for litigation. The only specified duties upon the trustee are to "execute deeds or otherwise deal with the property upon the direction of the beneficiary or other named authorized persons." Another duty of the trustee is to sell at public auction any property remaining in the trust twenty years from the date of the agreement. The beneficiaries agree to indemnify the trustee for any expenses or outlays incurred by the trustee on account of holding legal title, including cases in which the trustee is a party to any litigation. The agreement forbids its recordation in the Recorder's Office or elsewhere and forbids the trustee to disclose the name of any beneficiary. The Illinois courts have construed the land trust as an active trust and therefore not affected by the Statute of Uses.

Id. at 58. See generally, kenoe on land trusts (1981 ed., 1985 Supp.), published by the Illinois Institute for Continuing Legal Education (considered at the time the “definitive treatise” on Illinois land trusts); 90 c.j.s., Trusts, § 254 (2006), stating that:

In a land trust, the beneficiary retains no interest, legal or equitable, in property itself, but instead holds only a personal property interest in the rents, proceeds, and profits from the property. However, it has also been said that true ownership of land subject to a land trust remains with the beneficiary, although legal and equitable title to land lies with the trustee.

[14] 735 ILCS 5/15-1101 et seq.
[15] 735 ILCS 5/15-1205.
[16] 735 ILCS 5/15-l106(a)(3).
[17] 735 ILCS 5/15-1106(b).  See also Eric T. Freyhogle, Land Trusts and the Decline of Mortgage Law, 1988 u. ill. l. rev. 67 (1988) (discussing the application of the IMFL to land trusts) .
[18] 810 ILCS 5/9-314.
[19] See 810 ILCS 5/9-107.1
[20] 810 ILCS 5/9-312.
[21] Id.
[22] 810 ILCS 5/9-306.1.

[23] For a good basic description of a land trust, see Robinson v. Chicago Nat'l Bank 32 Ill. App. 2d 55 (Ill. App. Ct. 1961).  In this case the court described a land trust as follows:

The land trust is a device by which the real estate is conveyed to a trustee under an arrangement reserving to the beneficiaries the full management and control of the property. The trustee executes deeds, mortgages or otherwise deals with the property at the written direction of the beneficiaries. The arrangement is created by two instruments. The deed in trust conveys the realty to the trustee. Contemporaneously with the deed in trust a trust agreement is executed. The pertinent provisions of the trust agreement are summarized as follows: While legal title to the real estate is held by the trustee, the beneficiaries retain "the power of direction" to deal with the title, to manage and control the property, to receive proceeds from sales or mortgages and all rentals and avails on the property. The trustee agrees to deal with the res of the trust only upon the written direction of the beneficiaries or the persons named as having power of direction ... The trustee is not required to "inquire into the propriety of any direction" received from the authorized persons. The trustee has no duties in respect to management or control of the property or to pay taxes, insurance or to be responsible for litigation. The only specified duties upon the trustee are to "execute deeds or otherwise deal with the property upon the direction of the beneficiary or other named authorized persons." Another duty of the trustee is to sell at public auction any property remaining in the trust twenty years from the date of the agreement. The beneficiaries agree to indemnify the trustee for any expenses or outlays incurred by the trustee on account of holding legal title, including cases in which the trustee is a party to any litigation. The agreement forbids its recordation in the Recorder's Office or elsewhere and forbids the trustee to disclose the name of any beneficiary. The Illinois courts have construed the land trust as an active trust and therefore not affected by the Statute of Uses.

Id. at 58. See generally, kenoe on land trusts (1981 ed., 1985 Supp.), published by the Illinois Institute for Continuing Legal Education (considered at the time the “definitive treatise” on Illinois land trusts); 90 c.j.s., Trusts, § 254 (2006), stating that:

In a land trust, the beneficiary retains no interest, legal or equitable, in property itself, but instead holds only a personal property interest in the rents, proceeds, and profits from the property. However, it has also been said that true ownership of land subject to a land trust remains with the beneficiary, although legal and equitable title to land lies with the trustee.

[24] See, e.g., Chicago Title and Trust Co. v. Mercantile Trust and Sav. Bank, 300 Ill. App. 329, 330-31 (1939) (holding that beneficiary’s interest is personal property); Conley v. Petersen, 25 Ill. 2d 271,273 (1962) (“The validity of such a land trust as is involved here is clearly settled in Illinois); Chicago Fed. Sav. & Loan Ass’n v. Cacciatore, 25 Ill. 2d 535, 543 (1962) (“The trust here is an active trust, and Cacciatore’s beneficial interest is personal property as distinguished from real estate by the terms of the recorded trust deed, the trust agreement itself, and by settled Illinois case law”).
[25] See 810 ILCS 5/9-314.
[26] The Land Trust, Young Lawyers Network, probate & property, January/February 2007, at p. 6.  See also Chicago Title & Trust Co. v. Baskin-Robbins, Inc., 1990 WL 78310 (N.D. Ill. June 6, 1990), at *2 (“The primary purpose of Land Trusts is so that legal title can be recorded in the land trustee’s name, thereby hiding the true beneficial owner from public disclosure”).
[27] George Gleason Bogert, George Taylor Bogert, and Amy Morris Hess, the law of trusts and trustees § 249 (Trusts used primarily for business purposes – Trusts used in the purchase, operation and sale of real estate) (Rev. 2d ed. 2006).

[28] See, e.g., 765 ILCS 405/2, which requires that:

Whenever any trustee of a land trust , or any beneficiary or beneficiaries of a land trust , make application to the State of Illinois or to any of its agencies or political subdivisions for any benefit, authorization, license or permit, relating to the land which is the subject of such trust , any interest therein, improvements thereto, or use thereof, such application shall identify each beneficiary of such land trust by name and address and define his interest therein. Each beneficiary shall be identified, regardless of the size of the beneficiary's interest in the land trust .

See also 765 ILCS 425/1 et seq. (Building Law Violation Ownership Disclosure Act), which contains provisions: (1) requiring a land trust holding ownership of property to disclose every beneficiary to an enforcement agency after written notice of violation of ordinances relating to health and or safety conditions at the property (765 ILCS 425/1 § 1); and (2) providing that in any case in which a property has been damaged or destroyed by fire, any fire inspector or other local officer charged with the duty of investigating fires, who has reason to believe that the damage or destruction was caused by other than accidental means, shall have the power, if title to the property damaged or destroyed by fire is held in a land trust, to require the prompt disclosure by the trustee of the beneficiaries of the land trust and the identity of all persons who have any direct or indirect interest in, or who derive any direct or indirect benefit from, the trust (765 ILCS 425/ § 1.1.(1)).

Illinois has adopted a Land Trust Recordation and Transfer Tax Act. 765 ILCS 420/1 et seq. This statute states, at 765 ILCS 420/2:

§ 2. As used in this Act:

“Beneficial interest” means any interest, regardless of how small or minimal such interest may be, in a land trust, held by a trustee for the benefit of beneficiaries of such land trust.

“Land trust” means any express agreement or arrangement whereby a use, confidence or trust is declared of any land, or of any charge upon land, for the use or benefit of any beneficiary, under which the legal title to real property is held by a trustee, which may be enforced by the beneficiaries who have the exclusive right to manage and control the real estate, to have the possession thereof, to receive the net proceeds from the rental, sale, hypothecation or other disposition thereof, and under which the interest of the beneficiary is personal property only.

This Act further states, at 765 ILCS 420.3, that:

Every trustee of a land trust who accepts any instrument which transfers the beneficial interest under such trust after January 1, 1986, other than trust documents relating to land situated in counties with a population of 2,000,000 or less which secure debt or other obligation or when the actual consideration is less than $100, shall record the instrument or a facsimile thereof with the Recorder of Deeds or Registrar of Titles of the county in which the real estate that is the subject of the trust is located. Such document shall be recorded in the same manner as a deed for such real estate would be recorded or registered within 60 days after the trustee accepts the instrument which transfers such beneficial interest. Any document which is to be recorded pursuant to this Section may be altered so as to delete or omit the name of any or all parties named in the instrument and may be modified in any other reasonable manner to prevent the disclosure of the identity of such parties. If the county board of a county adopts an ordinance imposing a tax upon the privilege of transferring a beneficial interest in a land trust, no transfer of a beneficial interest in any land trust shall be operative until such time as there is compliance with the county ordinance imposing the transfer tax.

See generally Robert S. Hunter, The Duty to Disclose Information About the Land Trust, 17 ill. prac., estate planning & admin., § 51:15 (4th ed.) (current through 2010 update).

 

[29] 103 Ill. App. 3d 174 (2d Dist. 1981).
[30] Id.at 176 (citations omitted).
[31] 215 Ill. App. 3d 993, 1002-1003 (Ill. App. Ct. 1991). 

[32] See, e.g., Dept. of Conservation v. Franzen, 43 Ill. App. 3d 374, 379 (1976) ("Illinois courts have guarded the incidents of land ownership represented by the land trust, construing the form of ownership as an active trust with legal and equitable title exclusively in the trustee"); 23-25 Building Partnership v. Testa Produce, Inc., 381 Ill. App.3d 751, 755 (2008) (“In a land trust in Illinois, the trustee’s sole purpose is to take and hold title to the trust res” (citation omitted) . . . The beneficiary manages and exercises all rights of ownership, with the exception of holding title to the property”); Kaplan v. Shure Brothers, Inc., 266 F.3d 598, 605-07 (7th Cir. 2001) (ruling that principal of corporate purchaser of real property, to whom purchaser had assigned its entire interest in land trust created in connection with financing of purchase, was not in privity of contract with seller and thus lacked standing to bring suit under Illinois law for breach of contract because assignment of beneficial interest did not transfer rights under trust agreement to principal corporation; court stated that “the Land Trust contained only the real property (and not the real estate contract rights) and . . . the assignment transferred only the rights under the Trust Agreement”); Madden v. University Club of Evanston, 97 Ill. App.3d 330, 333 (1981) (holding that individual beneficiary of land trust lacked standing in mortgage foreclosure action against subject property because he did not have legal title to the property). Cf. LaSalle Bank, N.I., v. First American Bank, 316 Ill.App.3d 515, 524 (2000) (holding that where purchase contract for sale of real property held in land trust was between land trust beneficiary and buyer, beneficiary had no interest to convey because he “was not at any time the legal or equitable owner of the property”; but acknowledging that “[i]t has been held that a land trust beneficiary may, under certain circumstances, contract to sell real property (citations omitted),” and that “a beneficiary may even, under certain circumstances, encumber the trust property with a lien (citation omitted))”; Madigan v. Buehr,  125 Ill. App. 2d 8, 17 (1970), stating that:

           It cannot be said that a beneficiary can never contract to sell the trust property. He may do so under appropriate circumstances, not because he has power to convey title or to execute a deed, or because he is the agent of the trustee or stands in its stead, but because the trust agreement gives him ‘control of the selling’ and the right to direct the trustee to convey title to whomever he designates. Since he has the power to designate conveyance he may contract to exercise that power. If the sales contract is one in which this power is explicitly exercised, or if it is one which, because of the disclosure of the trust and the beneficiary's status, can be construed as exercising this power, the contract is enforceable against both the beneficiary and the purchaser. To permit the beneficiary to contract in this manner does not encroach upon the jurisdiction of the trustee nor its function; it does not infringe upon the protection afforded a purchaser who deals with the trustee, nor does it expand the beneficiary's liability or change his status. His legal interest in the trust remains personal property; but allowing him to climax negotiations for the sale of the real estate by agreeing to have it conveyed removes some of the make-believe which hovers over land trusts and permits a realistic approach to the disposition of trust property.    

[33] As to whether land trust beneficiaries are necessary or proper parties in litigation matters involving property where legal title is held by a land trust, see Dept. of Conservation v. Franzen, supra note 32, 43 Ill. App. 3d at 379 ("[u]ndeniably, the beneficiary of an Illinois land trust has a form of property interest. The beneficial interest, however, is not a direct interest in the real estate res of the trust").
[34] Supra note 32, 381 Ill. App.3d at 755.
[35] See also Levi v. Adday Heating and Cooling Corp., 1 Ill. App. 3d 509, 510-11 (1971) (holding that clause in lease exculpting land trust landlord from liability did not afford protection to beneficial owners); Dept. of Conservation v. Franzen,  supra note 32, 43 Ill. App. 3d at 379-80 (stating that "[i]n litigation involving land trusts, the courts have determined whether a particular proceeding is properly brought by or against a beneficiary or the trustee or both by examining the nature of the action in the light of the rights and duties established by the trust agreement," and stating further that "[i]n general . . . it appears that the beneficiary is a proper party to litigation involving his rights and liabilities with respect to the management and control, use, or possession of the property pursuant to the trust agreement").
[36] Supra note 26, 1990 WL 78310 (N.D. Ill. June 6, 1990).
[37] Id. at *3. For an excellent discussion of the Baskin-Robbins case, as well as other Illinois case law and statutory law regarding land trusts in connection with landlord-tenant proceedings, see Janet M. Johnson, Landlord’s Duties and Liabilities, commercial landlord-tenant practice (IICLE, 2007, Supp. 2010), Ch. 7S, sec. E. [7S.33A] (Limitation on Damages for Landlord Breaches), pp. 7S-17 through 7S-19.
[38] No. 1-09-1598 (Ill. App. 3rd Div., July 21, 2010).
[39] Id. at P. 9.
[40] Id. at P. 12.
[41] Id. at P. 15 (internal quotation and citation omitted).
[42] Id. at P. 1.
[43] See 23-25 Building Partnership v. Testa Produce, Inc., supra note 32, 381 Ill. App.3d at 755 (“Standing is determined as of the date the lawsuit is filed” (citation omitted)).
[44] 852 N.E.2d 17 (Ind. Ct. App. 2006).
[45] Id. at 21.
[46] 604 F.Supp. 585 (D.C. Ind., 1985).

[47] Id. at 587.  See also 90 c.j.s., Trusts, § 245 (2006), which states that:

A trustee of a land trust derives all of his or her power from the beneficiary and acts solely at the beneficiary's request and solely on his or her behalf. In land trusts, both legal and equitable title to the res are vested in the trustee, not the beneficiary. The beneficial interest consisting of the beneficiaries' rights and privileges is not characterized as a real estate interest, but as a personal property interest. The trustee has no powers other than to execute deeds and mortgages or otherwise deal with the property as directed by the holder of the power of direction. The power of direction is a property interest separable from the beneficial interest and provides the possessor with the ability to direct the trustee in the manner in which he or she is to deal with the property.

[48] Some states have enacted statutes that define and describe a business trust. For example, Kentucky has a specific statute, krs § 386.370(1), which defines a business trust as:

[A]n express trust created by a written declaration of trust whereby property is conveyed to one (1) or more trustees, who hold and manage same for the benefit and profit of such persons as may be or become, the holders of transferable certificates evidencing the beneficial interest in the trust.

krs § 386.370(1) also includes real estate investment trusts within the definition of a business trust. The state of Montana, at  mca 35-5-1-101, defines “business trust” as follows:

In this chapter, unless the context otherwise requires, "business trust" means an unincorporated association or trust of the type which at common law was known as a "business trust" or "Massachusetts trust", created by an instrument under which property is held and managed by trustees for the benefit and profit of such persons as are or may become the holders of transferable certificates evidencing beneficial interests in the trust estate.

See also 15B am. jur. legal forms § 218:5 (2010):

The formal requirements to be observed in the execution and acknowledgment of a declaration of a business trust and the necessity or permissibility of recording a business trust instrument depend on the local statutes. Therefore, local statutes should be consulted concerning the requirements with respect to execution, acknowledgment and recording o f business trust instruments.

For a definition and general description of a business trust, see West’s Encyclopedia of American Law, 2nd ed. (2008), p. 193, which defines a business trust as “an unincorporated business organization created by a legal document, a declaration of trust, and used in place of a corporation or partnership for the transaction of various kinds of business with limited liability;” and states further that:

The property of a business trust is managed and controlled by trustees who have a fiduciary duty to the beneficiaries to act in their best interests. In many states, the participation of the beneficiaries in the management of the property destroys their limited liability, and the arrangement will usually be treated as a partnership. Profits and losses resulting from the use and investment of the trust property are shared proportionally by the beneficiaries according to their interests in the trusts. A business trust is considered a corporation for purposes of federal income tax and similarly under various state income tax laws.

[49] 38 F.3d 86 (2d Cir. 1994).
[50] Id. at 87.
[51] Id. at 91-92.
[52] 177 B.R. 673, 675-76 (Bankr. C.D. Cal. 1995).
[53] 50 B.R. 710, 713-14 (Bankr. N.H. 1985). See also In re G-2 Realty Trust, 6 B.R. 549, 554 (Bankr. D. Mass. 1980) (dismissing debtor's bankruptcy petition as bad faith filing where debtor transformed itself from nominee trust to business trust solely to meet Code's eligibility requirements); In re Mohan Kutty Trust, 134 B.R. 987, 989 (Bankr. M.D. Fla. 1991) (examining whether trust at issue was created in compliance with state law); In re Eagle Trust, 1998 WL 635845 (E.D. Pa., Sept. 16, 1998), at *5 (not reported in F.Supp. 2d) (finding that trust in question was not business trust because it did not possess any of common attributes of business trust, and was not established for purpose of carrying on commercial activity or business); In re St. Augustine Trust, 109 B.R. 494, 495-96 (Bankr. M.D. Fla. 1990) (finding that trust was family trust intended for personal needs, use, and benefit of family members rather than any business purpose, and was therefore ineligible for relief under Code); In re Morgantown Trust No. 1, 177 B.R. 673, 676 (Bankr. C.D. Cal. 1995) (although not dispositive, characterization under state law is significant factor in determining whether trust is eligible to be debtor under Code); Brady-Morris v. Schilling (In re Kenneth Allen Knight Trust), 303 F.3d 671, 673-75 (6th Cir. Sept. 13, 2002) (ruling that federal, not state law, applied in determining that trust, which owned house and holding company that owned four subsidiary corporations, was business trust whose primary purpose was to transact business that benefited its creator); In re Estate of the Assignment of Creditors of May, 405 B.R. 443, 450-52 (Bankr. E.D. Mich. 2008) (ruling that federal law controlled, and that activities undertaken by liquidating trust created under Michigan law by assignment for benefit of creditors in collecting and distributing individual debtor’s assets did not qualify as transaction of “business” or carrying on of any “commercial activity,” and such activities were not carried out “for the benefit of investors,” as required for trust to qualify as “business trust” under Code); Dayton Title Agency, Inc. v. White Family Cos. (In re Dayton Title Agency, Inc.), 292 B.R. 857, 878 (Bankr. S.D. Ohio 2003) ("a business trust must not only hold and disburse funds, but also be used to provide a profit to or increase in the assets of investors").
[54] 103 B.R. 8, 10-13 (Bankr. D. Mass. 1989).
[55] Id. at 10.

[56] But see In re Eastmare Dev. Corp., 150 B.R. 495, 497-98 (Bankr. D. Mass. 1993) ("recent Massachusetts decisions teach that nominee trusts are ineligible debtors [under the Code]"); In re Medallion Trust, supra note 53, 103 B.R. at 12, where the court stated that:

I]t is not the nominee trust itself that engages in business; it is the principals who engage in business activities, using the device of a nominee trust and the assistance of their trustee-agent. The relationship of the beneficiaries may be a partnership, corporation, co-tenancy or other entity. Viewed in this way, the nominee trust itself is not doing business and thus is not a business trust eligible to be a debtor because at any moment the beneficiaries may direct the trustee to alter or terminate the very business activities they are directing the trustee to perform on their behalf.

See generally, George Gleason Bogert, George Taylor Bogert, and Amy Morris Hess, The Law of Trusts and Trustees § 247 (Trusts used primarily for business purposes: the Massachusetts or business trust) (Rev. 2d ed. 2006), describing in detail the validity and uses of business trusts as well as the liability of business trusts and shareholders); Shmuel Vasser, and Richard B. Levin, The Use of a Business Trust As a Special Purpose Vehicle: Some Bankruptcy Considerations, norton bankruptcy law adviser, June 2004, Issue 6 at pp. 1-11 (describing various types of trusts and bankruptcy issues and cases with respect to trusts); John C. Murray, Business Trusts: What Are They (And Are They Bankruptcy-Proof)? available at http://title.firstam.com/resources/reference-information/john-c.-jack-murray-law-library/index.html (describing the use of business trusts as special-purpose or “bankruptcy-remote” entities to minimize risk in commercial real-estate transactions, and analyzing the factors considered by bankruptcy courts in determining whether  a trust qualifies as a business trust for eligibility under the Code).

57 See In re Dolton Lodge Trust No. 35188, 22 B.R. 918, 925 (Bankr. N.D. Ill. 1982) (“debtor as an Illinois Land Trust is not an eligible debtor under Chapter 11”); In re Old Second Nat'l Bank of Aurora, 7 B.R. 37, 38 (Bankr. N.D. Ill. 1980) (“The trust is merely a land trust, the primary purpose limited to holding title to real property. The trust does not operate any business or conduct commercial activity for profit. Thus there is no business to reorganize pursuant to the purpose of Chapter 11); In re North Shore Nat'l Bank of Chicago, Land Trust No. 362, 17 B.R. 867, 869 (Bankr. N.D. Ill. 1982) (“The issue presented is whether the land trust now before this Court is eligible as a debtor under Chapter 11 of the Code. The purpose and language of the Code compel this court to hold that it is not”); In re Citizen Bank & Trust Co. of Park Ridge, 8 B.R. 812, 815 (Bankr. N.D. Ill. 1981) (“The Court concludes that the Bankruptcy Code excludes land trusts from the class of persons who are eligible for relief under Chapter 7”).
58 See In re Treasure Island Land Trust, 2 B.R. 332, 336 (N.D. Fla. 1980); In re Cohen, 4 B.R. 201, 208 (N.D. Fla. 1980) (ruling that trustee of trust that is found not to be a business entity eligible for filing for bankruptcy relief cannot file for bankruptcy as trustee, even if trustee is a "person" as defined in the Code).
[59] 966 F.2d 236 (7th Cir. (Ind.) 1992).
[60] Id. at 241.
[61] 2006 WL 4050610 (Bankr. N.D. Ga., Dec. 20, 2006).
[62] Id. at *1. 
[63] Id.
[64] Id. at *3. 
[65] o.c.g.a.  §§ 53-12-1 to 394 (1997).
[66] Id. at *5. 
[67] Id.
[68] Id. at *6. See also Florida Bar v. Hughes, 824 So. 2d 154, 155-59 (Fla. 2002) (sanctioning non-lawyer trustee for unauthorized practice of law for counseling, advising, and preparing documents, including preparing and signing pleadings in defense of a foreclosure action); Ziegler v. Nickel, 64 Cal. App.4th 545, 547-48 (Cal. Ct. App. 1998) (ruling that non-lawyer trustee had no right to represent trust because such would constitute unauthorized practice of law); Alpha Land Co. v. Little, 238 F.R.D. 497, 2006 WL 310971 (E.D. Cal. 2006) (awarding default judgment against trustee of land trust who filed responsive pleading but was not an attorney).
[69] 12 del. c. § 3801 et seq. ("DST Act").
[70] 12 del. c. § 3806.
[71] 12 del. c. § 3806(b)(8).
[72] 12 del. c. § 3805(b).
[73] 12 del. c. § 3805(c).
[74] 12 del. c. § 3821.
[75] See 12 Del. C. §§ 3801(g) and 3804(a).
[76] IRC Sec.1001(b).
[77] Id. See Mary B. Foster, Jeremiah M. Long, Tax-Free Exchanges Under Sec. 1031, Thomson Reuters/West Publishing (2009), §2:13 (Land trusts and Delaware statutory trusts).
[78] Rev. Rul. 92-105, 1992-2 C.B. 204 (“1992 Rev. Rul.”).
[79] Id.

[80] Delaware Statutory Trusts: The Seven Deadly Sins for Section 1031 Investments, Bankers Exchange (2008), available at: http://www.bankers1031.com/pdf/Delaware_Statutory_Trusts_Article.pdf.

 

 

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