Saturday, May 11, 2013

FYI: Ill App Ct Rules Foreclosure Against Corporation Voided Due to Potential Improper Service

The Illinois Appellate Court, First District, recently ruled that, although the lower court had personal jurisdiction over the individual defendants through personal and substitute service, a question remained as to the propriety of service on a defendant corporation that was the mortgagor of commercial property subject to a default judgment and order of foreclosure and sale. 


In so ruling, the Court noted in part that defendants' affidavits challenging corporate service specifically denied that service had been effectuated on an agent of the corporation and, moreover, that, because defendants based their challenge to the default judgment solely on lack of jurisdiction due to improper service, their petition for relief comprised a motion to quash service and thus did not need to satisfy the state procedural requirements for petitions for relief from judgment and was not barred by the related two-year limitations period.


The Court also concluded that the later sale of the property to a bona fide purchaser was secondary to the question whether the lower court had personal jurisdiction to effectuate its default judgment and order of foreclosure and sale.



Plaintiff bank ("Bank") filed a mortgage foreclosure action against a corporate defendant ("Corporation") and two individual defendants (respectively, Lela and Berce) regarding commercial property located in Cook County, Illinois.  Corporation was the listed mortgagor on the property. 


Bank used a special process server ("SPS") to serve the summons and complaint through corporate service on an alleged agent of Corporation, substitute (abode) service on Berce, and through personal service on Lela.  Almost six months later, Bank moved for a default judgment of foreclosure against Defendants due to their failure to appear, answer, or otherwise respond to the complaint.  Bank attached affidavits of service signed by the SPS stating how service was accomplished and providing descriptions of the persons served. 


The lower court granted Bank's motion, entered a default judgment against the defendants and a judgment of foreclosure and sale, stating that it specifically found that all the defendants had been properly served with summons and complaint and that it had personal and subject matter jurisdiction.   Giving the defendants three months to redeem the property, the court also noted that the balance due on the loan was over $2 million and that the defendants could be personally liable for any deficiency. 


Over two years later, the defendants filed a petition for relief from the default and foreclosure judgments pursuant to Section 2-1401 of the Illinois Code of Civil Procedure, arguing that service in the foreclosure action had been improper.  The defendants attached to their petition the affidavits submitted by the SPS, as well as affidavits signed by the same SPS in another foreclosure action against the same defendants but on a different property.   The affidavits for the second foreclosure gave inconsistent physical descriptions of the persons served even though the SPS served the identical persons. 


The defendants also attached their own affidavits to their 2-1401 petition, asserting that the lower court's judgment of foreclosure was void due to lack of personal jurisdiction.   Citing significant inconsistencies and errors in the SPS's affidavits, the defendants asserted that they had not been served, that the person served as the Corporation's agent never acted in that capacity, and that the descriptions of the individuals allegedly served failed to match their physical characteristics, including gender.


In response, Bank submitted copies of the real estate contract for the sale of the property from Bank to a third party real estate developer and the recorded special warranty deed, arguing that the defendants were barred from seeking relief from the foreclosure judgment at such a late stage, because the property had been sold to a bona fide purchaser and their petition was untimely.  


The lower court denied the defendants' petition.  The defendants appealed.


The Appellate Court, although ruling that Bank properly served Berce and Lela, nevertheless reversed and remanded, finding that a question of fact remained as to the propriety of service on Corporation.   


As you may recall, Section 2-1401 of the Illinois Code of Civil Procedure allows a party to challenge a trial court's final judgment beyond 30 days of entry if there is a meritorious defense or claim, the party exercised due diligence in pursuing that claim before judgment, and exercised due diligence in pursuing the claim or defense after judgment.  735 ILCS 5/2-1401.  In addition, an action under Section 2-1401 must be filed no later than two years after the entry of the original order or judgment.  735 ILCS 5/2-1401(c).   See Malkin v. Malkin, 301 Ill. App.3d 303, 310 (1998). 


However, a petition challenging a void judgment in the nature of a motion to quash need not allege the elements of a meritorious defense or due diligence and may be brought at any time.  Sarkissian v. Chicago Board of Education, 201 Ill. 2d 95, 104-05 (2002) (noting that a section 2-1401 petition challenging a void judgment in the nature of a motion to quash does not need to allege the general elements of either a meritorious defense or due diligence, and may bring the petition at any time, even beyond the two-year limitations period under section 2-1401(c))("Sarkissian").


Applying Sarkissian to this case, and noting that the petition here was based solely on a lack of jurisdiction based on service of process, the Appellate Court treated the defendants' petition for relief as a motion to quash service, as they claimed that they were never served and that the lower court thus lacked personal jurisdiction over them.  Accordingly, the Appellate Court deemed as irrelevant to this case the general elements of a Section 2-1401 petition as well as the two-year bar.  See OneWest Bank, FSB v. Topor, 2013 IL App (1st) 120010, ¶¶12-15 (discussing motion to quash service vis-à-vis a section 2-1401 petition); Sarkissian, 201 Ill. 2d at 104-05. 


Next, in relying on its recent decision in Deutsche Bank National Trust Co. v. Brewer, 2012 IL App. (1st) 111213, the Appellate Court noted that a bona fide purchaser was not protected where the underlying foreclosure and sale orders were void due to lack of proper service on the mortgagor.   In so doing, the Appellate Court noted that this case presented a virtually identical fact pattern and legal argument, and thus focused on whether Bank adequately served each of the defendants in order to effectuate personal jurisdiction over them.


With regard to personal service, the Appellate Court noted that in the context of personal service, return of summons is prima facie proof of proper service, pointing out that the defendants here presented an "uncorroborated, incredibly brief affidavit stating conclusorily" that service was not complete and contradicting the physical description presented in the SPS's affidavit.  The Appellate Court thus concluded that the bare affidavit was insufficient to set aside the trial court's determination that Bank properly served Lela. 


As to substitute service, the Appellate Court ultimately concluded that the affidavits presented by the defendants in this case were insufficient to effectively attack substitute service, noting that the same presumption of validity in the context of personal service did not exist as to substitute service and that where there is no counteraffidavit responding to an affidavit challenging service, the challenging affidavit must be taken as true and the service of summons must be quashed.  State Bank of Lake Zurich v. Thill, 113 Ill.2d 294, 310 (1986)(noting that where service of the summons and complaint is accomplished via abode, i.e, substitute, service, the return or affidavit must affirmatively state that a copy of the summons was left at the usual abode with a family member over the age of 13, that the family member was informed of the content of the summons, and that the process server mailed a copy of the summons to the defendant at his usual place of abode).


In so ruling, the Appellate Court observed among other things that the affidavits were "unbelievably short," that the defendants simply asserted that they did "not believe" they received a summons in the mail, and that they never affirmatively rebutted any of the three elements of substitute service verified in the return.   Accordingly, the Appellate Court ruled that Bank properly served Berce via abode service and that the lower court properly entered the default judgment of foreclosure as to Berce.   


However, with respect to service on Corporation, the Appellate Court noted that when a corporation is sued, a return is not conclusive as to the fact of agency and that the purported agent must have had actual authority to accept service on behalf of the corporation. See Dei v. Tumara Food Mart, Inc.  406 Ill. App.3d 856, 862 (2010) (private corporation may be served by leaving a copy of the summons or complaint with its registered agent or any officer or agent of the corporation found anywhere in the state).  The Appellate Court thus pointed out that the defendants' affidavit challenging corporate service specifically due to a lack of agency called into question the issue whether the trial court had personal jurisdiction over Corporation.   Thus, in observing that the question of agency status for purposes of corporate service was an unresolved question of fact in this case, the Appellate Court also pointed out that a question arose as to whether the lower court had personal jurisdiction to effectuate its default judgment and order of foreclosure and sale, especially in light of the fact that Corporation was listed as the mortgagor of the property.


Accordingly, ruling that the lower court erred in denying the defendants' petition, the Appellate Court reversed and remanded so that the lower court could conduct an evidentiary hearing on the question of agency as to service on Corporation.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
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