Stable Investment Partnership v. Vilsack, No. 12 C 5556, 2014 U.S. Dist. LEXIS 34565 (N.D. Ill. Mar. 17, 2014)
The District Court for the Northern District of Illinois has ruled that the definition of “owner” for purposes of Farm Service Agency (FSA) payments through the Direct and Counter Cyclical Payment Program (DCP) does not include the beneficial owner of an Illinois Land Trust.
An “Illinois Land Trust” is one method for owning real estate in which title to the real estate is in the name of the trustee of the trust, but the beneficiary has all of the rights inherent in ownership. Importantly, there is no public disclosure of the beneficiary’s interest in the trust. In addition, the beneficiary doesn’t have any interest in the real estate (in terms of title to the property), but has an interest in personal property denoted by the ownership of the beneficial interest in the trust. The beneficiary has full management and control over that beneficial interest. Often people enter into Illinois Land Trusts to keep their ownership private, for creditor protection, for ownership succession, and for simplicity in conveying the property and ease of disposing of a partial interest in the property.
But, there can be downsides to such a trust. This case points out one of the shortcomings.
The case arose when two Chicago lawyers purchased a farm through an Illinois land trust. The lawyers formed an investment partnership which entered into a contract with a bank that held both legal and equitable title to the farm through the Illinois land trust. The partnership held only a personal property interest. Pursuant to the contract with the bank, the partnership retained all rights and benefits of the property, including control.
After completing the purchase, the partnership entered into a crop-share lease with a farmer, who agreed to farm the land and share the profits. On behalf of himself and the partnership, the farmer applied for federal farm benefits under the DCP. The local FSA initially approved the application and sent the partnership a check for $448, representing the partnership’s share of benefits for the crop year. The FSA later changed its mind, however, concluding that the partnership was not eligible for the benefits because only the bank, as trustee of the land trust and holder of legal title, could be considered the “owner” for purposes of receiving DCP benefits.
The partnership unsuccessfully challenged the decision through the available administrative appeals process. It then filed its action in federal district court. Agreeing that the issue was purely legal, both parties moved for summary judgment.
In affirming the administrative decision, the district court focused its analysis on the definition of “owner” in 7 C.F.R. § 718.2, of the federal farm regulations. The parties agreed to the following summary definition:
An owner is one who has legal ownership, including:
The partnership first argued that Illinois courts considered the beneficiary of a land trust to be the legal owner because the beneficiary had broad powers of control, and the party having control should logically be viewed as the owner. The court was not persuaded by the argument, stating that it did not find any Illinois cases establishing the precise critical point of whether a land trust beneficiary is a “legal owner.” The court stated that the word “legal” was presumably added to the more general word “owner” in the definition to limit it in some way. Because the court found no case law providing direction, the court looked to the following dictionary definitions of “legal owner” and “beneficial owner.”
Legal owner: One recognized by law as the owner of something; esp., one who holds legal title to property for the benefit of another.
Beneficial owner: One recognized in equity as the owner of something because use and title belong to that person, even though legal title may belong to someone else; esp., one for whom property is held in trust.
The court found that these definitions provided support for the FSA's interpretation that the legal owner is the party actually holding title, while the beneficial owner would be characterized as the party with control.
The court then rejected the partnership’s second argument, which was that the five specific examples set forth in §718.2 were merely illustrative of the types of entities deemed to be “legal owners.” Because the beneficiary of an Illinois land trust was similar to those five, in terms of having legal control without holding legal title, the partnership argued that the beneficiary of an Illinois land trust should be included in the definition of “owner.”
Although the court found the argument “not unreasonable,” it stated that a more persuasive interpretation was that the five listed cases were exclusive. The court stated that the doctrine of expressio unius est exclusio alterius supported this view. It was also not clear to the court that the five listed cases were linked by the larger principle of control-without-title.
Finally, the court rejected what it called the partnership’s “best argument,” that the FSA has allowed the beneficiary of a deed of trust to qualify as an owner. The partnership argued that this situation—where individuals buying property with a mortgage use a deed of trust in which the bank holds title as security for the loan and the buyer is the beneficiary—was similar to an Illinois land trust.
The court did not find this argument enough to overturn the FSA ruling as “arbitrary and capricious.” The FSA had consistently stated that the reason it placed more importance on title rather than control was because it was the easiest way to verify ownership. Allowing Illinois land trust beneficiaries to qualify as legal owners would mean that the FSA would have to examine private documents—such a partnership agreements—which the FSA argued were ripe for fraud. As such, the court granted summary judgment for the FSA and denied summary judgment for the partnership.
Although this case involved only $448 in benefits, the partnership pointed out that the FSA ruling impacts numerous farmers who have used Illinois land trusts for over a century as a way to hold real property.
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