The Abolition of Constructive Fraud:
A New Era For Property Taxation in Illinois
A Historical Perspective
On March 19, 1998, the Illinois Supreme Court issued a landmark 4-3 decision upholding the constitutionality of the statute which abolished the 125 year old doctrine of "constructive fraud" in Tax Objection lawsuits.
"Constructive fraud" was created by the Illinois Supreme Court in 1874 in order to provide a day in court for property taxpayers who were otherwise without a legal remedy because the 1870 Illinois Constitution provided that sole authority over property taxation would rest with the Legislature. Over the next 100 plus years the Doctrine was twisted by various Appellate and Supreme Court decisions into one which, rather than providing a legal remedy, denied taxpayers the relief to which they could otherwise be clearly entitled.
In 1981, the United States Supreme Court, in the case of Rosewell v. LaSalle National Bank, 450 U.S. 503, came within one vote of overturning the entire process in Cook County based on the premise that Cook County property owners were being discriminated against as compared to other Illinois taxpayers. This 5-4 decision is historically noteworthy for several reasons. The deciding vote was cast by Justice Harry Blackman who wrote a short concurring opinion which sounded as if he just as easily could have sided with the taxpayer. Also, the dissent was written by Justice John Paul Stevens, the only Illinois representative on the Supreme Court, who knew the severity of constructive fraud. Although difficult to comprehend, the subsequent decisions in Illinois in the 1980’s and early 1990’s made the situation even worse for taxpayers.
As a result of the Illinois Supreme Court’s decision in, In re Application of County Collector of Cook County v. Ford Motor Co.,131 Ill.2d 541, 546 N.E.2d 506 (1989), and the Illinois Appellate Court’s decision in Rosewell v. Atlas Corp., 261 Ill.App.3d 494, 198 Ill.Dec. 937, 633 N.E.2d 778 (1993), constructive fraud was eventually interpreted by a Cook County Circuit Court Judge to mean that a taxpayer had no legal remedy. The Atlas decision basically indicated that it was insufficient for a taxpayer to prove, clearly and conclusively, that his property was grossly overassessed. In order to establish constructive fraud, according to Atlas, the taxpayer was also required to establish that, when the assessor made the assessment, there was a failure to exercise honest judgment.
Constructive fraud became a nationally recognized villain of the taxpayer in Illinois. In 1994, Marty Katz was moderator and speaker on a panel at the annual conference of the Institute of Property Taxation in California. The subject was the effect of different burdens of proof on taxpayers. The panel also consisted of taxpayer’s attorneys from New York, Dallas and Seattle. The premise was that the owner of a portfolio of office buildings across the United States who had identical downtown properties in each city (including Chicago) with equal overassessments and the same evidence to support the appeals could win everywhere except Chicago as a direct result of constructive fraud.
Following the Atlas decision, the Chicago Bar Association appointed a special legislative committee and the Civic Federation of Chicago selected a special tax task force to propose legislation abolishing constructive fraud. As a member of the Bar committee, Marty Katz enlisted the assistance of our American Property Tax Counsel member law firms across the United States and Canada. We requested that our members send us an overview of the taxpayer’s burden of proof in their state courts and how efficiently it operated as compared to constructive fraud. A number of the responses were extremely interesting and thought provoking.
Bill Siegel, of Siegel Fenchel & Peddy in New York, wrote that "on the concept of fundamental fairness to a taxpayer and a scale of 1 to 10, New York is almost a 10 and Cook County is a zero" due to constructive fraud. Stan Fineman, of Wilkes Artis Hedrick & Lane in Washington D.C., after describing the court regulated mediation process in D.C. which results in 85% of cases being successfully resolved and a small case backlog, stated that "your system is totally bizarre - I’ve never heard of anything like it." Bill Ikard, of Popp & Ikard in Austin, Texas, told of the statutory abolition of a doctrine similar to constructive fraud in 1982 by the Texas Legislature which created a new "preponderance of the evidence" burden so that taxpayers and assessors walk into court equally, as in most civil cases. Bill indicated that opponents of the legislation predicted that the Texas courts would be inundated with cases resulting from too extreme a liberalization of taxpayer’s rights. Instead, the number of lawsuits filed decreased because assessors felt a necessity to do a better and fairer job of valuation.
Does the abolition of constructive fraud mean that it will now be simple to obtain tax relief for property owners In Illinois? The answer is a definite "no!" Although it will now be possible to prevail in court, we must await the initial interpretation of the new "clear and convincing evidence" standard by the Appellate and Supreme Courts.
Also, in addition to the elimination of constructive fraud, the same legislation gave Cook County taxpayers the right to appeal to the State of Illinois Property Tax Appeal Board (PTAB) for the first time. This right has been given to all Illinois property owners outside of Cook County for many years.
The right to appeal at the PTAB is positive in that the burden of proof is "equity and the weight of the evidence", clearly an easier burden than "clear and convincing evidence." However, the PTAB creates the added risk of potential intervention by taxing bodies, primarily school districts, and requests by township and county authorities for increases over and above the assessment actually being appealed. This risk of an increase does not exist in Tax Objection proceedings. Particularly affected are those properties which have recently been acquired for "total" purchase prices higher than the current assessor’s fair market value basis for assessment.
Specifically, acquisitions by REITs and of properties such as hotels and regional shopping malls which arguably include intangible, non-taxable assets, create a precarious dilemma in the election of remedies decision making process.
We, at Fisk Kart and Katz, view all of this as an enormous opportunity for our clients and as a tremendous challenge to us to be more creative and aggressive in our advocacy and in promoting taxpayers’ rights. Through American Property Tax Counsel, our promise is to properly advise our clients in structuring acquisitions, to refine valuation methodologies with the appraisal community and to provide state of the art technology through our MultiPoint National Property Tax Information database system, all geared toward one stop representation for property tax management and control on all properties in a client’s portfolio across the United States and Canada.