Thursday, July 19, 2012

FYI: Ill App Ct Holds Alleged Technical Defect in Pre-Foreclosure Notice Would Not Invalidate Foreclosure

The Illinois Appellate Court, Second District, recently held that a pre-foreclosure notice sent pursuant to the Illinois Mortgage Foreclosure Law that supposedly incorrectly identified the mortgagee did not warrant vacating a foreclosure judgment, where the mortgagor received actual notice, suffered no prejudice, and all the substantive requirements were satisfied.
The Court also ruled that the mortgagor's petition to vacate was not subject to a "diligence" requirement, because mortgagor's claim derived from an alleged legal error rather than newly discovered facts, or improper service of process.
A copy of the opinion is available at: 
Defendant borrower ("Borrower") defaulted on her home mortgage loan.  Consequently, the loan servicer ("Servicer") sent Borrower a so-called "grace period notice" ("Notice") pursuant to section 1502.5 of the Illinois Mortgage Foreclosure Law, which requires a "mortgagee" to mail a notice to a defaulted mortgagor about the existence of approved housing counseling prior to filing a foreclosure complaint.  The Servicer identified itself as the "mortgagee" in the Notice.
About a year after mailing the Notice, Servicer filed a foreclosure complaint against Borrower, identifying itself as the assignee of Mortgage Electronic Registration Systems, Inc. ("MERS").   Attached to the foreclosure complaint were copies of a "Corporate Assignment of Mortgage" from MERS to Servicer, and the Notice that Servicer had mailed to Borrower.  Borrower did not dispute having received the Notice. 
Servicer obtained a judgment of foreclosure against Borrower.  The property was later sold at a sheriff's sale.  The trial court approved the sale and granted Servicer's motion for an order of possession of the property.   
Borrower subsequently filed a petition under section 2-1401 of the Illinois Code of Civil Procedure ("Section 2-1401") to vacate the order approving the foreclosure sale and granting Servicer possession.  In her petition, Borrower argued that, because Servicer was not formally the assignee of the mortgage when it sent the Notice, the Notice was flawed and the foreclosure action and judgment against her were thus improper.
The trial court denied Borrower's motion to vacate based on Borrower's failure to act with sufficient diligence, noting among other things that Borrower had counsel in the bankruptcy proceeding, was present when the court approved the sale, and had been granted additional time in the property.
Borrower appealed, arguing that the trial court had erred in denying her motion to vacate, and arguing that she had been diligent and had a meritorious defense.  The Appellate Court affirmed, ruling in part that the technical error in the Notice did not compel dismissal of the foreclosure action.
As you may recall, section 15-1502.5 of the Illinois mortgage foreclosure statute provides that "(b) . . .[N]o mortgagee shall file a complaint to foreclose a mortgage secured by a residential real estate until the requirements of this Section have been satisfied.  (c) . . . [I]f a mortgage secured by residential real estate becomes delinquent by more than 30 days the mortgagee shall send via U.S. mail a notice advising the mortgagor that he or she may wish to seek approved housing counseling. . . (d) Until 30 days after mailing the notice provided for under subsection (c) of this Section, no legal action shall be instituted under [this statute]. . . ." 735 ILCS 5/15-1502.5(b),(c)(d).
In addition, Section 15-1502 provides for a further 30-day extension if the mortgagor gets approved housing counseling, and also prohibits a foreclosure action as long as the mortgagor is in compliance with any resulting sustainable loan workout agreement between the mortgagor and mortgagee.  735 ILCS 5/15-1502.5(e).
Noting the lack of specific standards for granting relief from judgments in section 2-1401, the Appellate Court determined that Borrower had presented no new facts or raised any errors of law apparent on the face of the record.   See 735 ILCS 5/2-1401. 
Following Illinois case law, the Appellate Court ruled that Borrower's petition to vacate, being based on an alleged error of law, was thus not subject to a diligence requirement.  See, e.g., Collins v. Collins, 14 Ill. 2d 178 (1958)(explaining that errors of law apparent from the record provided basis for relief from judgment);  Hanson v. De Kalb County State's Attorney's Office, 391 Ill. App. 3d 902 (2009)(ruling that relief was available under section 2-1401 when judgment was contrary to statutory provision).  Rephrasing Borrower's petition to be consistent with the type presented in Collins, the Court explained that Borrower's argument for vacating the judgment was that the Notice, which supposedly incorrectly identified Servicer as the mortgagee, was legally inconsistent with the entry of the foreclosure judgment.  
The Appellate Court ruled, however, that the alleged violation of section 1502.5 did not invalidate the foreclosure action.  In so ruling, the Court noted that, as required by the foreclosure statute, Servicer had alleged in its complaint that all notice requirements had been satisfied and that all grace and redemption periods had expired.  The Court also observed that Borrower had acknowledged receipt of the Notice, and that Servicer had plainly become the mortgagee prior to filing the foreclosure action, which Servicer filed almost a full year after mailing the Notice. 
Accordingly, the Appellate Court ruled that, because Borrower had suffered no prejudice as a result of the flawed Notice, and all substantive requirements had been met, the technical defect in the Notice supposedly misidentifying the mortgagee did not require vacating the judgment of foreclosure

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