Saturday, March 30, 2013

FYI: Ill App Ct Rules Forged Release of Mortgage Did Not Negate Lis Pendens as to Same Mortgage

The Illinois Appellate Court, Second District, recently held that a notice of foreclosure and lis pendens, recorded prior to the extension of a loan by another bank that was secured by the same property, gave constructive notice to any subsequent lien holders of an adverse interest in the property, despite the existence of a recorded "release" of the mortgage. 


Explaining in part that under Illinois law, property owners are not required to record a correction to a purported release in order to continue to assert a lien interest in real property, the Court ruled that the first bank's lien was superior in light of its recorded notice of foreclosure, even though the later bank had foreclosed on its own lien and obtained a judgment of foreclosure in its favor shortly before first bank obtained a competing foreclosure judgment against the same property in another proceeding.  


Given the historical procedural and factual complexity of this case, the Court included a chronological "flow chart" for the readers' reference.  


A copy of the opinion is available at:


Defendant borrower ("Borrower") obtained a home mortgage loan, secured by a first lien against his property (the "Property"), from a mortgage company that sold the loan to plaintiff bank ("First Bank").  About a year later, a forged release of the mortgage was recorded, but Borrower continued making payments on his loan, now owned by First Bank, for another two years.  Meanwhile, Borrower obtained another mortgage loan that was also purportedly secured by a first lien on the Property.  The second mortgage loan was later sold to a different bank ("Second Bank").  Borrower later defaulted on Second Bank's loan.  Accordingly, Second Bank commenced a foreclosure action against the Property, but failed to name First Bank as a party to its foreclosure action.  Second Bank obtained a foreclosure judgment against Borrower, and sold the Property to third parties ("Property Purchasers") who also obtained a mortgage against the Property. 


In the interim, Borrower also defaulted on First Bank's loan.  Almost three years after Borrower's default, First Bank learned of the existence of the forged release, obtained an affidavit from the original mortgage lender to the effect that the release was in fact forged.  First Bank filed its complaint for foreclosure against the Property and, a few days later, recorded a notice of foreclosure lis pendens.


Several weeks after First Bank filed its foreclosure action and recorded its notice of foreclosure, the Property Purchasers obtained a line of credit from a bank that subsequently assigned the line of credit loan to another bank, the intervenor in this case ("Intervenor Bank").  The line of credit was similarly secured by a mortgage against the Property.  Property Purchasers later defaulted on their line of credit and, almost two years after First Bank filed its notice of foreclosure, Intervenor Bank obtained a judgment of foreclosure and order of sale against Property Purchasers.


Following extensive litigation in First Bank's foreclosure proceeding over the state of title to the Property, the lower court ultimately entered a judgment of foreclosure and sale in favor of First Bank, ruling in part that the purported release was a forgery and that First Bank's notice of foreclosure obviated the need to name Intervenor Bank's assignor as a necessary party to the foreclosure proceeding.    Neither First Bank nor the original mortgage lender recorded a correction to the forged mortgage release and the forged release was never mentioned in First Bank's foreclosure action or its notice of foreclosure.


A few days before the expiration of the redemption expired in First Bank's foreclosure action, Intervenor Bank, having obtained a judgment of foreclosure and sale involving the Property in its favor about eight months earlier, intervened in First Bank's foreclosure proceeding, seeking a determination that its mortgage was prior and superior to First Bank's mortgage.  Initially denying Intervenor Bank's motion for a determination that its mortgage was superior to First Bank's, the lower court ultimately concluded that First Bank's mortgage had priority over Intervenor Bank's mortgage.   


In so ruling, the lower court concluded that Intervenor Bank would have discovered First Bank's adverse interest in the Property if it had conducted a reasonable inquiry.  Intervenor Bank appealed.  The Appellate Court affirmed.


The Appellate Court rejected Intervenor Bank's various assertions, including its arguments that: (1) Property Purchasers were bona fide purchasers who took title free of First Bank's lien when they took out a mortgage with Intervenor Bank's assignor, because each party in the chain of title, being unaware that the mortgage release was a forgery, received title free and clear of First Bank's mortgage; and (2) First Bank was equitably estopped from asserting its lien interest because it failed to record a correction to the forged mortgage release. 


In so doing, the Appellate Court disagreed with a number of First Bank's assertions as to the applicability of the bona fide purchaser doctrine to this case, instead ruling that because the other parties had notice, actual or constructive, of First Bank's adverse interest in the Property by virtue of the recorded notice of foreclosure, Intervenor Bank, as assignee of the line of credit loan to Property Purchasers, similarly had notice of First Bank's adverse interest.   


The Appellate Court stressed that First Bank's lien would take priority over any subsequent purchaser with notice or anything to put that purchaser on inquiry, because under Illinois law, every proceeding involving real property serves, as of the date of filing of the lis pendens, as constructive notice to every person subsequently acquiring an interest in or lien on the property.  See 735 ILCS 5/2-1901; Security Savings & Loan Ass'n v. Hofmann, 181 Ill. App.3d 419, 422 (1989).   Further, the Court explained that Second Bank's foreclosure action did not completely extinguish First Bank's mortgage as against subsequent lienholders with constructive notice of the adverse lien, in part because First Bank was not made a party to Second Bank's foreclosure action. 


Moreover, the Appellate Court rejected Intervenor Bank's equitable estoppel argument, because both Intervenor Bank and its assignor ignored obvious facts available through First Bank's notice of foreclosure, the recorded release notwithstanding.   In the Court's view, reliance on the forged release was unreasonable in light of the constructive notice provided by the lis pendens filing.


The Appellate Court affirmed the lower court's ruling that First Bank's mortgage was superior.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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