The Appellate Court of Illinois, First District, recently affirmed a trial court’s order appointing a receiver as to a mixed-use property in foreclosure, because the foreclosing mortgagee established a reasonable probability that it would prevail in a final hearing and the defendant mortgagors failed to show good cause as to why a receiver should not be appointed.
A copy of the opinion in McHenry Savings Bank v. Daniel is available at: Link to Opinion.
The defendants in the foreclosure, a trust and an individual who was also the successor trustee of the trust, filed an interlocutory appeal from an order of the trial court appointing a receiver and placing the mortgagee in possession of certain real estate.
On appeal, the defendants argued that the trial court erred because (1) the Illinois Mortgage Foreclosure Law (IMFL) (735 ILCS 5/15-1101 et seq.) does not allow the real estate to be divided into residential and commercial units, (2) the mortgagee did not show a reasonable probability that it would prevail in a final hearing, and (3) the defendants showed “good cause” as to why a receiver should not be appointed.
The Appellate Court noted that the clear and unambiguous language of section 15-1701(b)(2) of the IMFL states that, in foreclosure matters other than those involving residential real estate, a mortgagee upon request shall be placed in possession of the real estate prior to the entry of a judgment of foreclosure if the mortgagee shows: (1) the mortgage documents authorize such possession, and (2) “there is a reasonable probability that the mortgagee will prevail on a final hearing of the cause.” 735 ILCS 5/15-1701(b)(2). Where the two requirements of section 15-1701(b)(2) are satisfied, the burden then shifts to the mortgagor to object and show good cause as to why the mortgagor should be entitled to remain in possession. Id.
By contrast, section 15-1701(b)(1) provides that the mortgagor of residential real estate has possession absent the mortgagee’s objection and showing of good cause. 735 ILCS 5/15- 1701(b)(1); Travelers Insurance Co. v. LaSalle National Bank, 200 Ill. App. 3d 139, 143 (1990).
The defendants argued that the trial court erred in appointing a receiver for five of the six units in the real estate because they claimed that the real estate was not a mixed-use nor a stand-alone structure rendering it amenable to a split between residential and commercial property.
The defendants asserted that: 1) the real estate contained six residential units that operated independently from each other; 2) the mortgagor of the real estate was the trust, whose trustee executed the mortgage document and promissory note on its behalf; and 3) the sole income beneficiary of the trust occupied one of the dwelling units as her primary residence. Essentially, the defendants contended that section 15-1701(b)(1) of the IMFL applied here as the real estate was residential rather than commercial and, therefore, the defendants as mortgagors were entitled to possession during foreclosure.
However, the Appellate Court pointed out that section 15-1701(b)(1) also states that “[i]f the residential real estate consists of more than one dwelling unit, then for the purpose of this Part residential real estate shall mean only that dwelling unit or units occupied by persons described in clauses (i), (ii) and (iii) of [s]ection 15-1219.” 735 ILCS 5/15-1701(b)(1). Section 15-1219, in relevant part, defines “residential real estate” as:
“[A]ny real estate, * * * which * * * is occupied as a principal residence either (i) if a mortgagor is an individual, by that mortgagor, that mortgagor’s spouse or that mortgagor’s descendants, or (ii) if a mortgagor is a trustee of a trust * * *, by a beneficiary of that trust,” *** or (iii) if a mortgagor is a corporation, by persons owning collectively at least 50 percent of the share of voting stock.” 735 ILCS 5/15-1219.
Accordingly, the Appellate Court determined that if a real estate consists of multiple units, as was the case here, only the dwelling unit occupied by the trust beneficiary would be deemed residential. Here, only one of the units was occupied by the beneficiary.
Therefore, the Appellate Court held that the trial court did not err in finding that a receiver may be appointed for all parts of the real estate except for the first floor, which was occupied by the beneficiary.
Having found that the five units were not residential for purposes of section 15-1701 of the IMFL, the Appellate Court next addressed whether the mortgagee had satisfied the two requirements set forth in section 15-1701(b)(2) which would entitle it to possession of the units.
The first requirement pertains to whether the terms of the mortgage or other written instrument authorize possession of the real estate by the mortgagee. 735 ILCS 5/15-1701(b)(2). Here, the mortgagee submitted to the trial court copies of the loan documents, including the mortgage document and promissory note. Failure to pay taxes constituted an “event of default” under the loan documents, entitling the mortgagee to possession of the real estate. As such, the Appellate Court held that the mortgagee satisfied the first requirement.
The Appellate Court then turned to the second requirement under section 15-1701(b)(2), whether “there is a reasonable probability that the mortgagee will prevail on a final hearing of the cause.” 735 ILCS 5/15-1701(b)(2). Here, the mortgagee alleged that the defendants defaulted by failing to pay real estate taxes. In support, the mortgagee offered its complaint and the affidavit of the mortgagee’s chief credit officer. See 735 ILCS 5/15-1706(a) (a motion requesting that “the mortgagee be placed in possession or that a receiver be appointed *** shall be supported by affidavit or other sworn pleading.”).
The defendants argued that the complaint was unverified and, therefore, did not prove default. Even without considering the complaint, the Appellate Court held that the affidavit was sufficient to establish default because the chief credit officer averred that the trust “failed to make the payment of the real estate taxes on the property for the years 2017, 2018 and 2019, which constitutes an event of default under both the Note and the Mortgage.” He further stated that “[the bank] declared the Note and Mortgage to be in default on October 1, 2020” and had accelerated the promissory note.
Additionally, in Mellon Bank, N.A. v. Midwest Bank & Trust Co., 265 Ill. App. 3d 859 (1993), the court found that an affidavit from a mortgagee’s vice president stating that the mortgagor failed, inter alia, to pay real estate taxes and was in default was sufficient for the purposes of section 15-1701(b)(2). Id. at 869.
As such, the Appellate Court here found that the affidavit of the bank’s chief credit officer was sufficient to prove default as to the taxes and to show that the bank would prevail “on a final hearing of the cause.”
Finally, section 15-1701(b)(2) of the IMFL allows a mortgagor to remain in possession of real estate subject to the foreclosure proceedings based on a showing of “good cause.” 735 ILCS 5/15-1701(b)(2). The defendants contended that they made a showing of good cause and the trial court should have denied the appointment of a receiver because the real estate had an appraised value of $1.2 million in 2017, and the principal loan balance was $250,000. As such, the defendants asserted that “the value of the [real estate] was more than sufficient security for the loan *** [and thus,] substantiating ‘cause’ for retaining the right of Possession in the Trust, as a mortgagor.”
Second, the defendants argued that they established good cause because the payment of the receiver’s fees resulted in a “substantial diversion of funds otherwise utilized to assist in the payment of [the beneficiary’s] support.”
With respect to the defendants’ argument that the appraised value of the real estate was greater than the balance of the loan, the Appellate Court noted that the mortgage document clearly provided that the “right to the appointment of a receiver shall exist whether or not the apparent value of the [real estate] exceeds the indebtedness by a substantial amount.” By executing the mortgage, the Court concluded that the defendants acknowledged that the right to appoint a receiver existed regardless of the value of the real estate. See Bagley v. Illinois Trust & Sav. Bank, 199 Ill. 76, 79 (1902).
Additionally, the Appellate Court observed that, in nearly every foreclosure case, the appointment of a receiver will involve payment of receiver fees and, thus, the financial burden associated with it. The Court decided that if it were to hold that a mortgagor can establish good cause simply by showing that the appraised value of the real estate is greater than the loan balance or that the payment of the receiver’s fees in the appointment of a receiver resulted in financial hardship, such “exception would swallow the rule.” CenterPoint Properties Trust v. Olde Prairie Block Owner, LLC, 398 Ill. App. 3d 388, 396 (2010). Therefore, the Appellate Court held that the defendants failed to meet their burden of showing good cause.
Accordingly, the Appellate Court affirmed the judgment of the trial court.