Thursday, August 30, 2012

FYI: Ill App Ct Rules Forbearance Agreement Precluded Borrower's Challenge to Prior Default Judgment

The Illinois Appellate Court, First District, recently held that a forbearance agreement executed after default judgment was entered and providing for waiver of any defenses to a foreclosure action, including improper service of process, was valid and applied retroactively, such that the borrower could not challenge the prior default judgment in the foreclosure action.
A mortgagee ("Bank") initiated a foreclosure action against a couple of borrowers (collectively, "Defendants").   Bank allegedly served the Defendants by substitute service by leaving a copy of the summons and complaint at their residence with "a member of the household."  The Defendants never answered the complaint, or otherwise appeared.  The lower court entered a default judgment against them.    
One of the Defendants ("Borrower") subsequently entered into a forbearance agreement with Bank, whereby Bank agreed to modify the loan and not pursue foreclosure if Borrower complied with the payment schedule set forth in the agreement.  The forbearance agreement also provided that Borrower waived all "defenses, set-offs, or counterclaims to any foreclosure proceeding."  Borrower also acknowledged in the forbearance agreement she had been "properly served in the foreclosure action" and further agreed to the entry of a foreclosure judgment and sale if she defaulted under the terms of the forbearance agreement.
Borrower defaulted on the forbearance agreement, and the property was later sold at a judicial sale. When Bank moved to confirm the sale, both Defendants moved to quash service in the initial foreclosure proceeding, claiming that they had not been properly served, because the person who purportedly had been given a copy of the summons supposedly was not at the property on the date of service. 
The court denied Borrower's motion based on her waiver of service in the forbearance agreement, but granted the motion as to the Defendant who had not signed the agreement.   Following the court's denial of Borrower's motion for reconsideration, Borrower appealed.  The Appellate Court affirmed.
Rejecting Borrower's argument that service cannot be waived by private contract but only under the waiver of service provisions in the Illinois Code of Civil Procedure, the Appellate Court noted both the strong public policy favoring the enforcement of contracts and that Illinois courts have historically allowed parties to waive all defenses and to acknowledge service of process through private contracts.  See, e.g., National Equipment Rental, Ltd. v. Polyphasic Health Sys., Inc., 141 Ill. App. 3d 343, 347(1986)(recognizing service of process through contractual agreement in which defendants waived personal service of process); RBS Citizens Nat'l Ass'n. v. RTG-Oak Lawn, LLC, 407 Ill App. 3d 183, 186 (2011)(ruling that claims were barred by a forbearance agreement containing a provision waiving all defenses and counterclaims in original foreclosure action). 
Pointing out in part that lenders would be less likely to enter into forbearance agreements if their provisions were not enforceable, the Court ruled that Borrower had waived all defenses to the foreclosure action and had acknowledged service of process in that proceeding.
Notably, the Court similarly rejected Borrower's assertion that the waiver of service of process in the forbearance agreement operated only prospectively and thus could not serve to validate the prior default judgment in the foreclosure action.  In so doing, the Court observed that a waiver of objections to jurisdiction operates both retroactively as well as prospectively.  See GMB Fin. Group, Inc. V. Marzano, 385 Ill. App. 3d 978 (2008)(analyzing amended section 2-301 of the Illinois Code of Civil Procedure, titled "Objections to jurisdiction over the person" and ruling that under that section once a party has waived jurisdiction, the waiver operates both prospectively as well as retroactively).
Accordingly, the Court concluded that by acknowledging in the forbearance agreement that she had been properly served in the foreclosure action, Borrower had submitted to the jurisdiction of the trial court when she was served by substitute service and that the default judgment against her was valid since the waiver of objections to personal jurisdiction applied both prospectively and retroactively.

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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