Gibbons, Gibbons & Associates

Attorneys at Law
Seattle, Washington
Riverside, California

Thursday, February 7, 2002

Mr. Bill J. Gatten,CEO

North American Realty Services, Inc.
17939 Chatsworth Street, #226
Grenada Hills, California
USA, CA 91344

Attention: Mr. Gatten

RE: Legal Opinion re -- 1) Right of beneficiary-directed Title-Holding Trust

Beneficiary(ies) to direct the sale and transfer of the trust property as the sole
signatory(ies), and 2) Effect of state and/or federal tax lien against a land trust settlor
(i.e., as former title holder and transferor of title to real property vested with a third-
party trustee for an Illinois-type title-holding land trust)

Opinion

Dear Mr. Gatten,

This letter is my professional opinion with respect to the question of whether a federal tax
lien would adversely affect title to real property held in a California land Trust. Whereas,
our discussions have convinced me that you have specialized education and
understanding of Illinois type land trusts; where possible I will avoid discussion of basic
trust concepts.

In order to focus on the predominate question, an understanding of the fundamentals of

trust law and California Land Trusts will be presumed. At the end of this letter there are
references to authoritative materials on the subject. Therefore, for the remainder hereof, it
we be assumed that the reader understands that the terms Settlor, Grantor, or Creator are
synonyms with respect any bona fide trust, in so much as all trusts must have a Settlor,
Trustee, and one or more Beneficiaries for whose benefit the trust exists. It shall be
further assumed the reader understands that a trust may be structured as being fully
managed and directed by its settlor (grantor), its trustee or by it beneficiary(ies): the trust
form in question being fully so directed (i.e., by its beneficiaries).
Like all trusts a land trust requires the four essential elements for its creation, i.e: i) A
valid expression of trust intent. ii) Specific trust property, the trust res or corpus. iii)
Designation of the parties. And, iv) A valid trust purpose.

In general, as with all trusts, whether inter vivos or testamentary, revocable, or

irrevocable, with the exception of the land trust, full legal title to the trust res with
plenary powers of management, control, acquisition and disposition over the corpus, is
vested in the trustee. The trustee is held to a fiduciary standard of care to manage the trust
property for the benefit of the beneficiaries. The beneficiaries are held to have equitable
interest or title to the trust property and as such may assert equitable challenges against
the trustee and the property directly. Challenges by a beneficiary usually take the form of
law suits sounding in equity.

Typically such beneficiary actions as well as those brought by third-party claimants rely
on the "doctrine of equitable conversion" where the terms of the trust may require the
trustee to sell real property and invest or tender the proceeds of sale, for the benefit of, or
to the beneficiary. In such a case, the beneficiary's equity is held to be converted to an
equitable interest in personalty (the proceeds of the sale) rather than realty. Conversely, if
the trustee was directed to liquidate an estate comprised of personalty for the purpose of
acquiring real estate, then the equitable interest of the beneficiary is converted by the
trust indenture to an equity in real estate. The outcome of litigation by beneficiaries and
third-party claimants to trust property is often controlled by application of the doctrine of
equitable conversion. [Hitchens v Safe Deposit & Trust Co., 66 A.2d 93 (Md. 1949)]

The land trust, as you know, presents a different paradigm. In a land trust, the trust
indenture specifically states that both the legal and equitable title to the trust property is
vested in the trustee. However, the trustee has no authority to act beyond specific actions
identified in the trust indenture, and as specifically directed by the beneficiaries. So, in
essence the trustee has full title, both legal and equitable, but no authority to act. This
represents a significant departure from the general notion of trusts. The obvious legal
question becomes; what rights may a beneficiary or third-party assert against the trustee
or trust property. If the beneficiary has no legal title and no equitable title, what does he
have? What remedy is available to a beneficiary if he has no legal recourse and no
equitable recourse? What remedy would be available to a creditor of the beneficiary or a
lien-holder?
 Land Trust / Tax Lien Opinion

Fortunately, these questions have been long settled in both Illinois and California. In
essence, the land trust creates dual equities. The trustee holds all equitable rights to the
land held in trust, while the beneficiary acquires, through the doctrine of equitable
conversion, an interest in personalty which is manifest in the power to direct and control
the trustee as to what actions to take with respect to the property, if any. Thus, a land trust
settlor cedes legal and equitable title to the trustee and creates a legal and equitable title
in personalty in the beneficiary. The beneficiary holds legal tile to the shares of beneficial
interest in the trust and equitable powers of control over the actions of the trustee. In
many ways the land trust takes on the same legal and equitable character as a corporation
holding real property. A corporation may have full legal and equitable title to real
property owned by the corporation, but the stockholders have legal title to the shares
issued and equitable powers of control over the board of directors. Understanding these
distinctions is essential to understanding land trust title questions.

"The rights which they (beneficiaries) hold are in personam, enforceable

against the trustee, rather than in rem against the trust property.... the holder
of the certificate in every practical aspect stands in the same relationship to
the land as the stockholder of a land-owning corporation. We think the
certificates constitute intangible personal property..." [Estate of Tutules v
Cranston 204 Cal.App.2d 427, 485 (1962)]

The Tutules decision made clear that California not only recognizes the enforceability of
land trust contracts, but specifically acknowledges the alienation of both legal and
equitable title from the settlor to, and in favor of, the trustee. The California legislature
has gone further to codify the character of beneficial interest in a land trust as that of
personal property by enacting California Probate Code ¤ 10200 which states in relevant
part as follows:

Cal.Prob.Code ¤ 10200 Securities; definition; sale or surrender for

redemption or conversion; notice of hearing and of sale or redemption
(a) As used in this section, "securities" means "security" as
defined in Section 70, land trust certificates, certificates of beneficial
interest in trusts, investment trust certificates, mortgage participation
certificates, or certificates of deposit for any of the foregoing, but does not

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5198 Arlington
Avenue, Suite 364 • Riverside, California
USA, CA 92504-2603 • Phone 909-779-6512
 include notes secured by a mortgage or deed of trust ... [Emphasis added]

Obviously security interests are in personam rather than in rem. The court in Tutules
went on to say:

This relegates us to state law for a definition of the status--as personalty or

realty--of the beneficial interests in question. The law of Illinois is
definitely settled to the effect that the interest of a beneficiary in the
customary Illinois Land Trust is personal property.... Illinois authorities
relative to the characteristics of such a trust are abundant and consistent in
recognizing the validity of such a device to place in the trustee the full title
to the real estate, both legal and equitable. The interest of the beneficiary is
a personal property interest only. [Citations] The intentions of the parties
are to be determined from the language of the trust agreement and will be
given effect unless contrary to law or public policy. Far from being contrary
to public policy, trusts of this type have long been upheld as a means of
enabling third parties to deal with real estate in reliance upon the record
title of a trustee. As a result, the Illinois land trust has made for itself over
the years an important place in the holding and marketing of title to real
estate, in parcels large and small. It is self-evident that this development
could not have taken place had not purchasers and lenders considered
themselves safe when investing many millions of dollars on the sole
security of land trustees' titles to real estate. In this they were repeatedly
assured by courts of review that the trust beneficiaries had no interest in the
real estate, and that even so strong a charge as a judgment lien against a
trust beneficiary was, therefore, no encumbrance against the real
estate title. [Estate of Tutules v Cranston 204 Cal.App.2d 427, 489 -490]
[Emphasis added]

There are abundant decisions from California, Illinois, and elsewhere that reaffirm the
conclusion that a land trust beneficiary holds an interest in personalty exclusively.

With the understanding of the in personam nature of beneficial interests in land trusts, the
decisions relating to tax liens against land trusts are more easily understood.In the Tutules
decision supra, the court was considering the question of whether the state of California
could impose an inheritance tax on the beneficial interest in an Illinois land trust which
 Land Trust / Tax Lien Opinion

was held by the estate. If the interest was in rem, then it could only be taxed in state of
situs, if the interest was in personam then it could be taxed by the state with jurisdiction
over the estate. The Tutules court is unequivocal as to the application of the doctrine of
equitable conversion to the California land trust with respect to taxes.

If perchance the question were held to be governed by California law, the

result would be the same, namely, taxability for inheritance tax purposes by
this state. The decisions in this jurisdiction accept the expressed intent of
the parties to be the criterion for differentiating between real and personal
interests in trusts of real estate. Houghton v. Pacific Southwest T. & S. Bk.,
111 Cal.App. 509, 511, 295 P. 1079, so declares. Wright v. Security-First
Nat. Bank, 35 Cal.App.2d 264, 275, 95 P.2d 194, says: 'Not only are the
rights of third parties not involved here but the parties have clearly
expressed the intention that the trustors shall have no right, title or interest
in the property conveyed and that their interests under the trust shall be
considered as personal property. In Smith v. Bank of America, etc., Ass'n,
supra [14 Cal.App.2d 78, 57 P.2d 1363], it is said that such language is
indicative of the intention of the parties and that 'the intention is the
criterion'. In Faires v. Title Ins., etc., Co., 15 Cal.App.2d 350, 59 P.2d 428,
431, this court said: 'The declaration of trust contained the provision that
the interest of the beneficiaries should be personal and not real property. * *
* It is probably true that this affected [sic] the conversion of an interest in
real estate into personal property.' In Bank of America [etc.] Ass'n v. Sparr
Realty Corp., supra [20 Cal.App.2d 10, 66 P.2d 476], in holding that the
beneficial interests in the trust were personal property the court, after
pointing out that the language of the trust agreement and of the assignments
of beneficial interests disclosed such an intention, said: 'If the intention of
the parties was to treat the beneficial interests as a pledge in the nature of
personal property, then and in that event the intention then and there
expressed prevails throughout the entire transaction.' [204 Cal.App.2d 427,
491]

Nor do we find the question of whether Mr. Tutules had a freehold estate in
the land to be of consequence, for he had no estate whatever in it, merely
an equitable right to enforce the trust, which right is personal property

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Avenue, Suite 364 • Riverside, California
USA, CA 92504-2603 • Phone 909-779-6512
 under the laws of both Illinois and California. [Estate of Tutules v
Cranston 204 Cal.App.2d 427, 493] [Emphasis added]

Federal tax liens are assessed against the taxpayer, and even though more extensive in
geographical scope than that of a judgment lien, have the same priority as any other
creditors' lien of record. Likewise, they are not enforceable against the real estate held in
a land trust, and title to the property is protected from the effects of such a lien. [Chicago
Fed. S&L v. Cacciatore, 25 Ill.2d, 535, 185 N.E.2d 670 (1962)]: An action by the IRS to
reduce lien to judgment and order for sale was denied by the Supreme Court based on a
finding that the Trustee’s held "full, complete and exclusive title to the property" both
legal and equitable. Thus, a lien against the beneficiary in personam could not be a lien
against the real estate in rem. Conversely, the grantor’s beneficial interest could be the
subject of a federal tax lien, although such a lien would not be against the property. [U.S.
v. Lewis, 272 F.Supp. 993 (N.D.Ill. 1967)].

A Federal Tax lien does not attach to title of real estate held in a land trust and the
government need not be made a defendant in a title foreclosure action [Old Orchard Bank
& Trust Co. v. Rodriquez, 654 F.Supp. 108 (N.D.Ill. 1987)]. In such circumstances the
lien is not choate in the federal sense [Lapiana v. Farmers State Bank, 31 B.R. 738
(Banker. N.D.Ill)].

Indeed, with the exception of county property tax default liens, the land trust insulates the
property from any lien arising out of the acts of the settlor or beneficiary occurring after
the transfer of the property to the trust. Even transfers of real property to a land trust after
the recording of a lien would require an action against the settlor and the trust for
fraudulent conveyance to overcome the legal effect of vesting title in the trustee [U.S. v.
Bell 27 F.Supp.2d 1191 (1998)]. In Nelson v. Fogelstrom [5 Ill.App.3d 804, 284 N.E.2d
339 (1972)], the court upheld the insulation of property in a land trust from statutory
liens. A more recent case, St. Charles S&L v. Sundberg [150 Ill.App.3d 100, 501 N.E. 2d
322,103 Ill Dec. 301 (1986)] came to the same conclusion.

It is firmly established that a judgment against a beneficiary of a land trust does not
create a lien against the title of real estate held in the trust. From Kerr v. Kotz, [218
Ill.App.654 (1920)], to the most recent decisions, [Whitaker v. Scherrer, 313 Ill. 473, 135
N.E. 177 (1924): Chicago title & Trust Co. V. Mercantile Trust & Savings Bank (300 Ill.
App. 329, 20 N.E.2d 992 1938); First Federal Savings and Loan Association of Chicago
 Land Trust / Tax Lien Opinion

v. Pogue, 72 Ill.App.3d 54, 389 N.E.2d 652, 27 Ill.Dec. 588 (1979)] this has been the
universal and constant holding. Moreover, a judgment against a beneficiary is not a lien
against a beneficiary interest until a citation (charging order) has been filed and served.
Where a land trust has been created and funded by a third person, a judgment against a
beneficiary is neither a lien, nor is it enforceable against the beneficial interest. Rather,
the charging order can only attach proceeds of the trust operation or from actual
distributions made to the beneficiary, similar to the limitations on charging orders against
limited partnerships an LLCs. This is necessary and essential to the utility and the
effective administration of the land trust, in that were the effect different a judgment
against one individual beneficiary in a multiple beneficiary title holding land trust could
restrict and impede to operation of a trust property and completely frustrate its objective
for others not parties to the action giving rise to the judgment. Since the beneficiary has
no legal or equitable title or interest in the real estate vested in a land trust trustee, it
follows that judgments against beneficiaries of land trusts can in no way attach to the
legal title of the res or adversely affect the interests of other parties to the trust.

To say that a property in a land trust is completely insulated from creditors against any
beneficiary is not entirely true. There are two remedies available to creditors of land trust
beneficiaries:

1. Creditor’s Bill: The filing of a Creditor’s Bill (Abstract of Judgment and/or

Attachment Levy in California) subjects all the assets of the judgment debtor to an
equitable lien. However, this method is limited to obtaining the interest of a beneficiary
in land trust, then extinguishing that interest and liquidating the property. However, when
a judgment creditor obtains a lien against a beneficiary interest which is only one of
multiple beneficiaries in the trust, a charging order against the other parties would not be
allowed, effectively shielding the property from a creditor’s judgment enforcement
efforts (i.e., similar in the protective effect to a multiple member Limited Liability
Company or a Limited Partnership).

2. Citation Proceedings – a judgment credit could institute Citation Proceedings

(Charging Order or Attachment levy in California) against a beneficiary of a land trust,
for entry of an order to sell that beneficiary's interest in the trust with the application of
the proceeds to the debt in the same manner as would be possible under a Creditor’s Bill.
However, it is a judicial sale requiring court approval rather than an Execution Sale,

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Avenue, Suite 364 • Riverside, California
USA, CA 92504-2603 • Phone 909-779-6512
which does not require post judgment court proceedings.

Supplemental proceedings affecting land trust beneficial interests are judicial in nature,
and the beneficiary is specifically entitled to a full hearing to determine whether his
interest is to be subject to the claim asserted. In California a showing of fraudulent
transfer would have to me made, either by separate action or on post judgment motion.
Otherwise, only the charging order in multiple beneficiary trusts or attachment levy in
sole beneficiary trusts would be available, neither of which would in any way cloud the
title held by the trustee. An assignment of a beneficial interest by an insolvent debtor
without consideration and at a time when he was unable to meet his obligations is a
fraudulent conveyance and will be set aside at the instance of creditors in a Citation
Proceeding. Gary-Wheaton Bank v. Meyer, 130 Ill.App.3d 87, 473 N.E. 2d 548, 85 Ill.
Dec 180 (1984).

There is one California case which is noteworthy in regard to third-party actions against a
settlor beneficiary. In the case of Walgren v Dolan (1990) the Court of Appeal for the
Fourth District, of California held that an action for specific performance of a land sale
contract could be maintained by a purchaser against a settlor beneficiary of a California
land trust. While this decision may appear to bring a property held in a land trust within
the reach of a creditor, the court found that this remedy was only available in specific and
very limited situations, as follows:

The power specifically to enforce an agreement by the beneficiary of such

trust [title-holding land trust] to sell realty of the trust was explained in
Seaberg v. American Nat. Bank and Trust Co. of Chicago (1976) 35
Ill.App.3d 1065, 1069-70, 342 N.E.2d 751, 754 as follows:

"... [T]he beneficiary of a conventional land trust, as used in Illinois may,

under appropriate circumstances, enter into a valid contract to convey title
to the trust property. He may do so, not as agent of the trustee, but in his
capacity of [director] beneficiary. This right is limited to situations in which
the trust agreement vests in him the sole right to direct the trustee to convey
title. Such a contract will be mutually enforceable by the beneficiary as the
seller and the buyer where it expressly, or by reasonable construction,
provides for exercise by the beneficiary[ies] of the power to direct
conveyance." (Citations) We believe the Illinois authority to be on point
 Land Trust / Tax Lien Opinion

and correct. ... [276 CalRptr 577-578] And,

... Dolan had the power to direct trust conveyances, and hence had the
equitable power of entering into enforceable agreements for the sale of trust
realty.[Walgren v Dolan (1990) 276 CalRptr 554, 579] [Emphasis added]

Walgren is unique in that it involves specific performance on a real estate sales

agreement and sounds in equity rather than in law. Further, the Walgren court recognized
and accepted the equity in the property as being held by the trustee. The Walgren court
articulates and reaffirms the concept of dual equities discussed above and in the Tutules
decision, when it describes Dolan's power over the trustee as "equitable power."

I trust that this letter has adequately addressed the issues of concern to you.

Sincerely,

Peter Gibbons, Esq.

PG/nbc

Citations:
Bank of America [etc.] Ass'n v. Sparr Realty Corp., 20 Cal.App.2d 10, 66 P.2d 476
Chicago title & Trust Co. V. Mercantile Trust & Savings Bank 300 Ill. App. 329, 20 N.E.2d 992 1938
Estate of Tutules v Cranston 204 Cal.App.2d 427, 485 (1962)
Faires v. Title Ins., etc., Co., 15 Cal.App.2d 350, 59 P.2d 428, 431,
First Federal Savings and Loan Association of Chicago v. Pogue, 72 Ill.App.3d 54, 389 N.E.2d 652, 27 Ill.Dec. 588 (1979)
Gary-Wheaton Bank v. Meyer, 130 Ill.App.3d 87, 473 N.E. 2d 548, 85 Ill. Dec 180 (1984)
Hitchens v Safe Deposit & Trust Co., 66 A.2d 93 (Md. 1949)
Houghton v. Pacific Southwest T. & S. Bk., 111 Cal.App. 509, 511, 295 P. 1079
Kerr v. Kotz, 218 Ill.App.654 (1920)
Lapiana v. Farmers State Bank, 31 B.R. 738 (Banker. N.D.Ill)
Nelson v. Fogelstrom [5 Ill.App.3d 804, 284 N.E.2d 339 (1972)
Old Orchard Bank & Trust Co. v. Rodriquez, 654 F.Supp. 108 (N.D.Ill. 1987)
St. Charles S&L v. Sundberg150 Ill.App.3d 100, 501 N.E. 2d 322,103 Ill Dec. 301 (1986)
Seaberg v. American Nat. Bank and Trust Co. of Chicago (1976) 35 Ill.App.3d 1065, 1069-70, 342 N.E.2d 751, 754
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Avenue, Suite 364 • Riverside, California
USA, CA 92504-2603 • Phone 909-779-6512
Smith v. Bank of America, etc., Ass'n, 14 Cal.App.2d 78, 57 P.2d 1363
U.S. v. Bell 27 F.Supp.2d 1191 (1998)
U.S. v. Lewis, 272 F.Supp. 993 (N.D.Ill. 1967)
Walgren v Dolan (1990) 276 CalRptr 554 (1990)
Whitaker v. Scherrer, 313 Ill. 473, 135 N.E. 177 (1924)
Wright v. Security-First Nat. Bank, 35 Cal.App.2d 264, 275, 95 P.2d 194

Authorities:
Illinois land trust and its potential in California. Robert A. DeWitt, 41 Los Angeles Bar Bull. 20 (1965)
Is there such a thing as a California land trust? 1 West.St.U.L.Rev. 71 (1972)
Is there such a thing as a California land trust? Barnet Resnick, 48 Los Angeles Bar Bull. 216 (1973)