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Illinois App. Court (1st Dist) Holds Borrower Barred from Challenging Foreclosure After Vesting of Title in Third Party

foreclosure saleThe Illinois Appellate Court, First District, recently held that a homeowner was barred from challenging a foreclosure where the deed to the property had vested to a third party.

A copy of the opinion in Deutsche Bank National Trust Co. v. Cortez is available at:  Link to Opinion.

A mortgagee filed a foreclosure against a homeowner, a default judgment of foreclosure was entered, and a judicial sale was noticed for August 2018. The day before the sale, the homeowner through counsel filed an emergency motion to stay the sale arguing he was under a loan modification with the mortgagee. The mortgagee voluntarily rescheduled the judicial sale for September 2018, and the homeowner withdrew his motion.

Just before the September sale, the homeowner filed a pro se motion to stay the sale, which was granted, and the sale was stayed until at least Nov. 9, 2018.  The property was sold to a third-party bidder for $205,000 in June 2019.

On June 12, 2019, the homeowner filed an emergency motion to stay and vacate the sale, arguing that he believed he was in a modification agreement with the mortgagee who had allegedly been accepting his monthly mortgage payments.

On June 21, 2019, the third-party bidder filed a motion to confirm the sale. At the hearing on the motion to confirm the sale, the homeowner’s motion to vacate and the homeowner’s counsel’s appearance, as well as the third-party bidder’s motion, were stricken.

In July 2019, the mortgagee filed a motion to confirm the sale. In response to the motion, the homeowner through counsel asserted that the sale should not be confirmed under the “justice was not otherwise done” clause of section 15-1508(b)(iv) of the Illinois Mortgage Foreclosure Law.

As you may recall, under the Illinois Mortgage Foreclosure Law (IMFL), the trial court shall confirm the sale of the property unless it finds that one of four grounds exist to disapprove the sale: “(i) a notice required in accordance with subsection (c) of Section 15-1507 was not given, (ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently, or (iv) justice was otherwise not done.” 735 ILCS 5/15-1508(b); Mortgage Electronic Registration Systems, Inc. v. Barnes, 406 Ill. App. 3d 1, 4 (2010). The IMFL expressly provides that when “shall” is used, it means that something is mandatory and not permissive. 735 ILCS 5/15-1105(b).

In support of his motion, the homeowner argued that he had applied and was approved for a trial payment plan which he completed. Further, he signed and retuned the final modification agreement to the mortgagee and made two payments pursuant to the agreement before the third was returned.  The homeowner attached an unsigned copy of the trial period plan offered by the bank, but no affidavit was attached to the homeowner’s response.

The mortgagee acknowledged that the homeowner made all the required payments under the trial payment plan but maintained the final modification agreement was never signed and returned, which allowed the mortgagee to proceed with the judicial sale. No affidavit was attached to the mortgagee’s reply.

The homeowner appeared pro se at the hearing on the motion to confirm the sale, as his counsel had withdrawn from the case. There was no record of proceeding on the hearing for the motion to confirm the sale. However, the trial court allowed the homeowner to enter into the record a handwritten letter that provided background on his ownership of the property and his desire for a loan modification.

The trial court entered the order approving the sale providing for a $24,598.35 surplus which did not appear to include any credits for the payments made by the homeowner during and after the trial payment period.

The homeowner appealed.

Initially, the Appellate Court rejected the mortgagee’s argument that the lack of a report of proceedings of the hearing on the order approving the sale requires the Appellate Court to presume that the trial court’s order had a sufficient factual basis and that it conforms with the law. The Appellate Court found that the parties’ arguments on appeal are substantially similar to those presented to the trial court and the documents attached to those pleadings presented for consideration are the same.

On appeal, the homeowner argued that the trial court erroneously confirmed the sale of the property where justice was not otherwise done under section 15-1508(b)(iv) of the IMFL.  The mortgagee responded that section 15-1508(b)(iv) is inapplicable to situations involving loan modifications.

The Appellate Court began its analysis noting that the Illinois Supreme Court has explained that a borrower seeking relief under section 15-1508(b)(iv) must demonstrate “either the lender, through fraud or misrepresentation, prevented the borrower from raising his meritorious defenses to the complaint at an earlier time in the proceedings, or the borrower has equitable defenses that reveal he was otherwise prevented from protecting his property interests.” Wells Fargo Bank, N.A. v. McCluskey, 2013 IL 115469, ¶ 26.

The parameters for what constitutes an injustice under section 15-1508(b)(iv) according to McCluskey, “[appear] to merely codify the long-standing discretion of the courts of equity to refuse to confirm a judicial sale” noting this discretion “ ‘must be exercised in accordance with established principles of law’ ” and cannot be used to protect an interested party “ ‘against the result of his own negligence.’ ” McCluskey, 2013 IL 115469, ¶ 19.

Furthermore, the Illinois Supreme Court also acknowledged that the statutory framework of the IMFL reveals that “once a motion to confirm the sale under section 15-1508(b) has been filed, the court has the discretion to see that justice has been done, but the balance of interests has shifted between the parties. At this stage of the proceedings, objections to the confirmation under section 15-1508(b)(iv) cannot be based simply on a meritorious pleading defense to the underlying foreclosure complaint.” McCluskey, 2013 IL 115469, ¶ 25.

“To vacate both the sale and the underlying default judgment of foreclosure, the borrower must not only have a meritorious defense to the underlying judgment, but must establish under section 15-1508(b)(iv) that justice was not otherwise done because either the lender, through fraud or misrepresentation, prevented the borrower from raising his meritorious defenses to the complaint at an earlier time in the proceedings, or the borrower has equitable defenses that reveal he was otherwise prevented from protecting his property interests.” Id. ¶ 26.

The Appellate Court found that here, the homeowner “is not asserting that [the mortgagee] prevented him from raising a meritorious defense to the complaint but maintains that he was prevented from protecting his property interests where he had entered into a final loan modification agreement with [the mortgagee].”

The question unanswered was “whether the signed, final loan modification agreement was sent by [the homeowner] and whether any error on the part of [the mortgagee] contributed to the failure of the final loan modification agreement from being executed.” Accordingly, confirming a judicial sale where such an agreement was in place would be inequitable and would arguably fall within the “justice not otherwise done” clause of section 15-1508(b)(iv).

The Appellate Court observed that where, as is the case in the present matter, there is a question as to whether the parties entered into a loan modification agreement, the equitable result is to, at a minimum, conduct an evidentiary hearing on the issue. Neither the homeowner nor the mortgagee provided affidavits to authenticate their positions as to the status of the loan modification.

Accordingly, the proper course of action here would have been for the trial court to conduct an evidentiary hearing regarding the status of the homeowner’s loan modification prior to confirming the sale.

Furthermore, the Appellate Court next noted that “[d]elivery of the deed executed on the sale of the real estate *** shall be sufficient to pass the title thereto.” 735 ILCS 5/15- 1509(b) and any vesting of title by deed pursuant to section 15-1509(b), unless otherwise specified in the judgment of foreclosure, “shall be an entire bar of (i) all claims of parties to the foreclosure and (ii) all claims of any nonrecord claimant who is given notice of the foreclosure.” 735 ILCS 5/15-1509(c).

The Appellate Court noted that here, the deed conveying title to the property was executed following the confirmation of the sale and recorded by the Cook County Recorder of Deeds on Oct. 9, 2019. Pursuant to section 15-1509(c) of the IMFL, the title to the property has vested by deed to a third party and, therefore, “all claims of the parties to the foreclosure” are barred. Accordingly, pursuant to section 15-1509(c), the Court held that it was precluded from vacating the order approving the sale in this case as it pertains to the homeowner’s loan modification argument. See 735 ILCS 5/15-1509(c).

Next, the Appellate Court examined the homeowner’s challenge to the amount of the surplus awarded in the order approving the sale. The mortgagee argued that the homeowner forfeited his argument by failing to raise the issue before the trial court.

The Appellate Court acknowledged that issues not raised in the trial court generally are forfeited and may not be raised for the first time on appeal. Village of Lake Villa v. Stokovich, 211 Ill. 2d 106, 121 (2004). The forfeiture rule, however, is an admonition to the parties and not a limitation on the jurisdiction of this court. Pennymac Corp. v. Jenkins, 2018 IL App (1st) 171191, ¶ 23.  An appellate court may overlook forfeiture where necessary to obtain a just result or maintain a sound body of precedent. Id.  Accordingly, where it is possible that the homeowner paid the mortgagee upwards of $7,800 toward his mortgage obligation that was not accounted for, the Court chose to excuse the homeowner’s forfeiture in order to obtain a just result.

Finally, the Appellate Court noted an exception to the bar presented by section 15-1509(c) referenced earlier exists if there is a dispute involving the surplus proceeds from the sale. Brewer, 2012 IL App (1st) 111213, ¶ 15; 735 ILCS 5/15-1509(c). Here, the homeowner was separately disputing the amount of the surplus provided in the order approving the sale, and therefore, this exception applied. The Appellate Court recognized neither party had presented competent evidence as to the exact amount of funds paid and allocation of those funds, but held that there was sufficient evidence in the record to warrant a hearing regarding the proper amount of the surplus.

Accordingly, the Appellate Court affirmed the judgment of the trial court, confirming the sale of the property, and remanded the matter for further proceedings regarding the amount of the surplus.

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Ryan Grotz practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in all phases of commercial litigation, including motion practice, written discovery, depositions, mediations, and bench and jury trials. Ryan received his Juris Doctor from the Chicago-Kent College of Law, where he was an associate editor on the Access to Justice Student Editorial Board. He was awarded his Bachelor of Business Administration degree from the University of Iowa. Ryan is licensed to practice law in Illinois and the U.S. District Court for the Northern District of Illinois. For more information, see https://mauricewutscher.com/attorneys/ryan-grotz/

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