Monday, November 25, 2013

FYI: Ill Sup Ct Rules in Favor of Lender/Mortgagee on Significant Illinois Foreclosure Procedure Issues

The Illinois Supreme Court recently ruled that the trial court properly denied a motion to vacate a default judgment of foreclosure, where the foreclosing lender had not yet filed a motion to confirm the sale and the borrower had ample opportunity to challenge the underlying action.   


In so doing, the Court concluded that once a motion to confirm the judicial sale is filed, the Illinois Mortgage Foreclosure Law ("IMFL") applies to a motion to vacate a default judgment of foreclosure, because the IMFL provides that the property interests of the borrower are terminated by judicial sale, "provided the sale is confirmed."   


A copy of the opinion is available at:


Defendant borrower ("Borrower") defaulted on the home mortgage loan she obtained from plaintiff bank ("Bank").  Bank initiated foreclosure proceedings under the Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1101 et seq. ("IMFL"), but Borrower did not answer or otherwise respond to the complaint.  


The trial court entered a default judgment, indicating the expiration of the redemption period and the time the property would be sold at a judicial sale.  On the date set for the judicial sale, Borrower sought to stay the sale and to vacate the default judgment.  The parties subsequently agreed to postpone the judicial sale to allow Borrower time to negotiate a loan modification agreement with Bank.  


Attempts at a loan modification failed, and Bank later purchased the property at the ensuing judicial sale.  Borrower filed a new motion to vacate the default judgment and to set aside the sale pursuant to Section 2-1301(e) of the Illinois Code of Civil Procedure (the "Code of Civil Procedure"), asserting that Borrower had meritorious defenses to the foreclosure. 


The trial court denied Borrower's motion to vacate, concluding that she had waived her objections to the default and had agreed with Bank to allow the foreclosure sale to go forward if she failed to obtain a loan modification.  The trial court also confirmed the judicial sale, finding that the foreclosure was conducted properly.  Borrower appealed.


The Appellate Court reversed, rejecting the reasoning in Mortgage Electronic Registration Systems, Inc. v. Barnes, 406 Ill. App. 3d 1 (2010) and ruling that the IMFL did not preclude granting relief under the Code following a judicial sale if the moving party can present a valid excuse for lack of diligence and a meritorious defense to the underlying judgment.  The Appellate Court remanded to the lower court to consider Borrower's motion pursuant to the standards under Section 2-1301(e) of the Code. 


Bank petitioned the Illinois Supreme Court for leave to appeal, which the Court granted. 


The Illinois Supreme Court reversed, concluding that once a motion to confirm the judicial sale is filed, the IMFL provides the only basis for non-confirmation of the sale, but that prior to the filing of a motion to confirm foreclosure sale, a borrower may seek to vacate under the standards set forth in the Code.  


Section 15-1508(b) of the IMFL provides "[u]pon motion and notice in accordance with court rules applicable to motions generally, which motion shall not be made prior to sale, the court shall conduct a hearing to confirm the sale.  Unless the court finds that (i) a notice [of the sale] . . . was not given, (ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently or (iv) that justice was otherwise not done, the court shall then enter an order confirming the sale."  735 ILCS 5/15-1508(b) ("Section 1508(b)").   


Section 2-1301(e) of the Code, however, is generally available to seek relief from a default judgment.  Specifically, that provision sets forth the terms under which the court may exercise its discretion to set aside any default:   "The court may in its discretion, before final order or judgment, set aside any default, and may on motion filed within 30 days after entry thereof set aside any final order or judgment upon any terms and conditions that shall be reasonable."  735 ILCS 5/2-1301(e).


Noting that the IMFL controls procedures in a foreclosure action where it is inconsistent with the Code, the Illinois Supreme Court undertook to determine whether the standards applicable to a motion to vacate a default judgment under the Code are "inconsistent" with the sale confirmation procedures under Section 15/1508(b) and must accordingly yield to the IMFL.  In so doing, the Court pointed out that the order confirming a judicial sale, rather than the foreclosure judgment, operates as the final and appealable order in a foreclosure case.  See EMC Mortgage Corp. v. Kemp. 2012 IL  113419, ¶ 11. 


The Court further observed in part that in considering whether to set aside a default judgment under the Code of Civil Procedure, "the overriding question is 'whether substantial justice is being done between the litigants,'" and that the defendant need not "show a meritorious defense and a reasonable excuse for failing to timely assert such defense." 


In rejecting Bank's assertion that allowing a motion to vacate a default judgment of foreclosure after the judicial sale has taken place would be inconsistent with the IMFL, the Court pointed out that only after the motion to confirm the sale is filed, the party seeking to set aside the sale must rely on the specified grounds set forth in Section 15-1508(b). 


Thus, ultimately concluding that, once a motion to confirm has been filed, objections to the sale confirmation cannot be based solely on a meritorious defense to the underlying foreclosure action and that the standards applicable under Section 2-1301(e) are then inconsistent with the more restrictive sale confirmation procedures under Section 15-1508(b), the Court observed that allowing Borrower to utilize the liberal standards under a Section 2-1301(e) motion to vacate at that point would unravel the underlying foreclosure judgment and would permit Borrower to circumvent the time limitations for redemption and reinstatement provided for under the IMFL. 


In reaching this conclusion, the Court emphasized that after a motion to confirm the sale has been filed, in order to vacate both the sale and the default judgment, a borrower must not only have a meritorious defense to the underlying judgment but must also establish that justice was not otherwise done under Section 15-1508(b)(iv).  


Noting that the term "justice was otherwise not done" is not expressly defined in the IMFL, the Court set forth examples of ways in which Illinois courts have interpreted the so-called "justice provision," observing that appellate courts have balanced the interests of lenders and borrowers by applying traditional equitable principles.  See, e.g., Fleet Mortgage Corp. v. Deale, 287 Ill. App.3d 385 (1997)(lender mistakenly foreclosed after borrowers had exercised right to redeem and sold the property to a third party); Commercial Credit Loans, Inc. v. Espinoza, 293 Ill. App. 3d 923 (1997)(concluding justice was not otherwise done where sales price, fair market value, and lender's conduct prevented borrower from pursuing right to redeem); Bayview Loan Servicing, LLC v. 2010 Real Estate Foreclosure, LLC, 2013 IL App (1st) 120711(intervenor did not show that justice was not done where the error complained of resulted from its own negligence).


The Court accordingly ruled that up until the filing of a motion to confirm the judicial sale, a borrower may seek to vacate a default foreclosure judgment under Section 2-1301(e) but that, once a motion to confirm the sale has been filed, a default judgment of foreclosure may be challenged only by filing objections to the confirmation of sale set forth under Section 15-1508(b).


Turning to the particular facts of the case, the Court noted that Borrower moved to vacate the foreclosure judgment before Bank had filed its motion to confirm the sale, rejecting Bank's assertion that the date of the judicial sale marked the point at which Borrower was divested of her property rights.  The Court stressed the language in the IMFL that the interests of the borrower are terminated by the judicial sale, "provided the sale is confirmed," thus reasoning that prior to the filing of a motion to confirm the sale, review of a motion to vacate according to the standards under the Code was not "inconsistent" with the IMFL. 


Nevertheless, the Court determined that it was proper to deny Borrower's motion to vacate in this case.  As the Court explained, Borrower had ample opportunity to raise defenses but chose not to, was properly served, was given notice of the default, notice of the judgment of foreclosure, notice of the sale, actively participated in the proceedings, and admitted that she defaulted on the loan.  The Court also noted that Borrower waited 10 months after the default judgment and after the sale to raise defenses to the foreclosure complaint.  


Accordingly, the Court reversed the Appellate Court but affirmed the ruling of the trial court. 




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois


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