Opinion ID: 2103782
Heading Depth: 2
Heading Rank: 1

Heading: Bona Fide Purchaser Defense

Text: Daniels sought, inter alia, the specific performance of his right of first refusal of the Contiguous Parcel. Specific performance refers to the very (hence specific) thing required by a contract. This equitable remedy stands in contrast to the remedy at law, which is the payment of money as a substitute for performance. Specific performance is based on the desire to do more perfect and complete justice, which the remedy at law would fail to give. Further, specific performance is generally not available as a matter of right. Again, the remedy rests in the sound discretion of the trial court, based on all of the facts and circumstances in evidence. Rothner v. Mermelstein (1991), 219 Ill. App.3d 502, 507, 162 Ill.Dec. 208, 579 N.E.2d 1022 (and authorities cited therein). A contractual right of first refusal is a valuable prerogative. A landowner is under a duty not to sell to any third person without first offering the land to the promisee. The promisee has an enforceable right to such forbearance. (11 W. Jaeger, Williston on Contracts § 1441A, at 949-50 (3d ed. 1968); 5A A. Corbin, Corbin on Contracts § 1197, at 377 (1964).) If the owner offers or accepts an offer to sell the land to a third person, thereby breaching the contract, the promisee may obtain specific performance. This would compel the owner to convey to the promisee on the same terms as with the third person, as long as there is no contract with an innocent purchaser. (Emphasis added.) 5A A. Corbin, Corbin on Contracts § 1197, at 377-78 (1964). Zografos raises the defense that he was an innocent, or bona fide, purchaser. A bona fide purchaser is a person who takes title to real property in good faith for value without notice of outstanding rights or interests of others. A bona fide purchaser takes such title free of any interests of third persons, except such interests of which he has notice. Guel v. Bullock (1984), 127 Ill.App.3d 36, 42, 82 Ill.Dec. 264, 468 N.E.2d 811; Kovacevic v. City of Chicago (1977), 47 Ill.App.3d 674, 678, 7 Ill.Dec. 819, 365 N.E.2d 104; accord 8 J. Grimes, Thompson on Real Property § 4312 (1963). Zografos testified that he did not know of Daniels' right of first refusal until Daniels' wife told him in June 1986. By that time, Zografos had already contracted to buy the Contiguous Parcel and had paid $40,000 of the $60,000 purchase price. The trial court found that Zografos was not a bona fide purchaser based solely on this June 1986 notice. In the appellate court, Zografos contended that he was a bona fide purchaser of the Contiguous Parcel despite his June 1986 notice of Daniels' interest. Zografos invoked the doctrine of equitable conversion in support of his bona fide purchaser defense. He argued that although he did not take legal title to the Contiguous Parcel until August 1986, he became the equitable owner of the Contiguous Parcel in September 1985, when he entered into the contract. (See Shay v. Penrose (1962), 25 Ill.2d 447, 449, 185 N.E.2d 218; accord 5 S. Symons, Pomeroy's Equity Jurisprudence §§ 368, 372 (5th ed. 1941); 8A J. Grimes, Thompson on Real Property § 4447 (1963).) Thus, Zografos reasoned, he became a bona fide purchaser because he took equitable title prior to receiving the June 1986 notice of Daniels' interest. The appellate court concluded that Zografos waived this theory. 252 Ill.App.3d at 299, 191 Ill.Dec. 773, 624 N.E.2d 1151. Zografos repeats this theory before this court. We agree with the appellate court that Zografos did not assert this theory in any pleading, memorandum, argument, or post-trial motion in the trial court. Rather, Zografos raised this theory for the first time on appeal. It has frequently been held that the theory upon which a case is tried in the lower court cannot be changed on review, and that an issue not presented to or considered by the trial court cannot be raised for the first time on review. Kravis v. Smith Marine, Inc. (1975), 60 Ill.2d 141, 147, 324 N.E.2d 417; accord Bryant v. Lakeside Galleries, Inc. (1949), 402 Ill. 466, 473-74, 84 N.E.2d 412. Zografos attempts to avoid this prohibition. He argues that although he may not have used the label equitable conversion, his presentation in the trial court encompassed the doctrine. He asserts that the parties addressed exhaustively the issue of when he received notice of Daniels' right of first refusal. He reasons that this was sufficient to preclude a finding of waiver. See, e.g., Nassar v. Smith (1974), 21 Ill.App.3d 462, 467, 315 N.E.2d 692. Zografos' attempt to avoid the waiver rule fails. Although the parties addressed the issue of when Zografos received notice of Daniels' right of first refusal, the doctrine of equitable conversion goes to when Zografos owned the Contiguous Parcel. The record shows that Zografos did not contend in the trial court that he had already owned the Contiguous Parcel prior to the June 1986 notice. Rather, he argued that the June 1986 notice, in the context of all of the circumstances, was insufficient to deny him the status of a bona fide purchaser. Indeed, Zografos argued that, after receiving the June 1986 notice, he was prudent to proceed to close the transaction in August. He did not argue that the transaction already occurred in September 1985 when he entered into the contract. We agree with the appellate court that Zografos' advancement of the [equitable conversion] doctrine constitutes a new theory of defense which he never raised below. 252 Ill.App.3d at 299, 191 Ill.Dec. 773, 624 N.E.2d 1151. Moreover, as the appellate court reasoned, to permit Zografos to change his defense theory on review would not only weaken the adversarial process and our system of appellate jurisdiction, but may also prejudice Daniels. (252 Ill.App.3d at 299, 191 Ill.Dec. 773, 624 N.E.2d 1151.) Had Zografos raised the equitable conversion doctrine in the trial court, Daniels may have responded specifically to this theory with evidence and argument. Also, the trial court may have ruled on the equitable conversion theory, making findings concerning Zografos' knowledge of Daniels' interest not only in June 1986, but also in September 1985, when Zografos contracted to buy the Contiguous Parcel. (See Kravis, 60 Ill.2d at 148-49, 324 N.E.2d 417.) We uphold the appellate court's finding that Zografos has waived application of the doctrine of equitable conversion. We must next address, absent consideration of the equitable conversion doctrine, the issue of when during the executory stages of a real estate installment contract does the buyer become a bona fide purchaser. Zografos contends that, during this executory period, the buyer can rely solely on the public records and ignore even actual notice of an outstanding, unrecorded interest. This contention is erroneous. The legal principles are quite established. As we earlier noted, a bona fide purchaser, by definition, takes title to real property without notice of the interests of others. ( Kovacevic, 47 Ill.App.3d at 678, 7 Ill.Dec. 819, 365 N.E.2d 104.) A buyer who, prior to the payment of any consideration receives notice of an outstanding interest, pays the consideration at his or her peril with respect to the holder of the outstanding interest. Such a buyer is not protected as a bona fide purchaser and takes the property bound by the outstanding interest. ( Moshier v. Knox College (1863), 32 Ill. 138, 143.) The law reasons that consummation of the purchase, after notice of the outstanding interest, is a fraud upon the holder of that interest. 8 J. Grimes, Thompson on Real Property § 4321, at 416-17 (1963). Where a buyer receives notice of an outstanding interest subsequent to paying some, but prior to paying the full purchase price, authorities differ on whether the buyer is a bona fide purchaser. As the appellate court noted, some of the authorities state that partial payment of the consideration is insufficient to render the buyer a bona fide purchaser. 252 Ill.App.3d at 300-02, 191 Ill. Dec. 773, 624 N.E.2d 1151 (and authorities cited therein); 8 J. Grimes, Thompson on Real Property § 4322, at 418, 420-21 (1963). However, a majority of jurisdictions have relaxed this harsh rule. Instead, they apply a pro tanto rule, which protects the buyer to the extent of the payments made prior to notice, but no further. (R. Cunningham, W. Stoebuck, D. Whitman, Property 795 (1984); 8 J. Grimes, Thompson on Real Property § 4322, at 418-19 (1963); 5 B. Jones, Tiffany on Real Property § 1305 (3d ed. 1939).) This court recognized this pro tanto rule in dicta in Redden v. Miller (1880), 95 Ill. 336, 346. Courts have identified at least three methods to apply this pro tanto protection. First, the most common method is to award the land to the holder of the outstanding interest and award the buyer the payments that he or she made. The second method is to award the buyer a fractional interest in the land proportional to the amount paid prior to notice. The third method is to allow the buyer to complete the purchase, but to pay the remaining installments to the holder of the outstanding interest. (R. Cunningham, W. Stoebuck, D. Whitman, Property 795-96 (1984); 8 J. Grimes, Thompson on Real Property § 4322, at 418 (1984).) Courts exercise considerable latitude in these cases, taking into account the relative equities of the parties. R. Cunningham, W. Stoebuck, D. Whitman, Property 796 (1984); see, e.g., 252 Ill. App.3d at 302-04, 191 Ill.Dec. 773, 624 N.E.2d 1151, explaining Baldwin v. Sager (1873), 70 Ill. 503. In the present case, the trial court ordered Zografos to convey the Contiguous Parcel to Daniels and ordered Daniels to pay Zografos the full purchase price. The trial court also ordered Daniels to reimburse Zografos for the property taxes that Zografos had paid on the property. We agree with the appellate court that the trial court's disposition of this issue, between Daniels and Zografos, satisfied these well-settled principles of equity. (252 Ill.App.3d at 305, 191 Ill.Dec. 773, 624 N.E.2d 1151.) We cannot say that the trial court abused its discretion.