The Illinois Appellate Court, First District, recently ruled that an assignment of a borrower's surplus funds following the foreclosure sale of the borrower's property was unconscionable and thus unenforceable, given the extreme difference in bargaining power between the parties, the "gaping cost-price disparity," and the availability of free assistance at the courthouse to help mortgagors obtain any surplus funds they might be entitled to.
A copy of the opinion is available at: http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1122363.pdf
After defendant borrower ("Borrower") defaulted on her home mortgage loan, her property was sold at a foreclosure sale which yielded a surplus of over $14,000. The borrower never claimed the funds. Appellant Company ("Company"), in the business of searching records for and procuring unclaimed surplus funds, sent Borrower a solicitation letter seeking to enter into an assignment contract according to which Borrower would give Company half of her surplus funds in exchange for $50 from Company for doing "research" on her behalf in obtaining the funds. Borrower contacted Company, which sent a notary public to her home to obtain her signature on the assignment agreement, and, supposedly believing that Company was acting as her attorney, the Borrower signed the agreement.
Company subsequently petitioned the court for turnover of the funds, informing the court that it had not given Borrower notice of the court hearing on the petition. Declining to proceed absent such notice to Borrower, the court, admonishing Company about a potential unconscionablity issue with the assignment contract, explained that the contract appeared to exceed the allowable fees in mortgage foreclosure matters and that free help was available to assist mortgagors in obtaining their surplus funds.
At the subsequent hearing on the Company's petition, the Borrower testified in part that Company never told her that she could obtain the entire surplus amount without its help, and that she was to receive only $50 plus unspecified other consideration for their help. Borrower also testified that she did not understand that she could have obtained all of the money free of charge by going through the foreclosure help desk located at the courthouse.
The lower court declared the assignment contract to be unconscionable and denied Company's petition. Company filed a motion to reconsider to which it attached a copy of the assignment contract specifying that Company would give Borrower half of the surplus funds, plus $50. Company also attached a copy of its initial solicitation letter to Borrower explaining that it had located funds belonging to Borrower and that, with her approval, would conduct further "research" to help Borrower obtain the funds.
The lower court denied the motion to reconsider. Company appealed. The Appellate Court affirmed, concluding that the assignment contract was unconscionable and thus unenforceable.
Examining both "procedural" and "substantive" unconscionablity, the Appellate Court concluded that both aspects of unconscionablity were present in the assignment contract here, therefore invalidating the contract. In so doing, the Appellate Court first pointed out that procedural unconscionablity existed in the formation of the contract in this case, because: (1) given Borrower's limited education and means, there was obvious inequality in the parties' ability to understand the proposed transaction and Company preyed on this disparity; and (2) Borrower's testimony demonstrated that she was offered no opportunity to modify the contract or to meaningfully negotiate its terms.
This aspect of unconscionablity, combined with the substantive unconscionablity of requiring borrower to pay $7,000 for something she could have obtained for free was, in the Appellate Court's view, more than sufficient to invalidate the assignment contract. These terms, the Court explained, epitomized the "gaping cost-price disparity" and "overall imbalance in the obligations and rights imposed by the contract" that characterize substantive unconscionablity.
Notably, while pointing out that the number of foreclosures resulting in a surplus is very low in light of the depressed real estate market, the concurring opinion additionally highlighted various foreclosure-related court rules and procedures, stressing that various means exist to help protect homeowners throughout the foreclosure process. Specifically, the concurring opinion listed a number of resources governing foreclosures in Cook County designed to protect mortgagors like the Borrower in this case. See Cook Co. Cir. Ct. Mortgage Foreclosure Courtroom Procedures (rev. July 31, 2012)(requiring lenders to advise borrowers of their right to claim a surplus); Cook Co. Cir. Ct. G.A.O. 2003-03 (requiring mortgagors with surplus funds to either present photographic identification in presenting motions to claim their surplus funds or to appear to allow the judge to question them about the circumstances of any purported "assignment" of funds); Ill. S. Ct. R. 113(f)-(h) (eff. May 1, 2013)(facilitating the ability of mortgagors to claim surplus funds).
In sum, the Appellate Court upheld the lower court's denial of Company's petition to turnover the surplus funds, due to the gross disparity in the parties' bargaining power, and the excessive cost to Borrower in obtaining something that she could have obtained for free.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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