Thursday, October 4, 2012

FYI: Ill App Ct Thwarts Mortgagee's Effort to Undo Foreclosure as to Worthless Property

The Illinois Appellate Court, First District, recently rejected a lender's motion to vacate a foreclosure sale, which asserted that newly discovered evidence rendered its interest in the subject property worthless, and in so doing held that the lender's claim of newly discovered evidence did not constitute a "meritorious defense" under the relevant Illinois statute. 
A lender instituted foreclosure proceedings against a borrower.  The subject property was located in a cooperative building.  The owner of the cooperative building ("building corporation") filed an answer, asserting that its interest in assessments and fees had priority over the lender's interest. 
The lender filed a motion for default against the borrower, and a motion for summary judgment against the building corporation.  The lower court granted both motions, and entered the judgment of foreclosure and order of sale.  The judgment of foreclosure provided that the lender's mortgage was superior to all other liens, rights or claims on the subject property.  The lender then purchased the property at the foreclosure sale. 
The building cooperation filed a forcible entry and detainer action concerning the subject property, apparently without knowledge of the judgment of foreclosure.  When the lender brought that action to its attention, the building cooperation filed a motion to vacate the judgment of foreclosure.  The lower court granted the motion to vacate in part, and amended the judgment of foreclosure to indicate that the building cooperation's interest was superior to the lender's interest.
The lender then filed a motion to vacate the judicial sale and judgment of foreclosure entirely, pursuant to 735 ILCS 5/2-1401 ("Sec. 2-1401").  The lender stated that it had been unaware that the cooperative apartment was to be converted into a condominium, and also unaware of the amount of the past-due assessments.  According to lender, those costs rendered its interest worthless.  The lower court denied the motion to vacate, and the lender appealed. 
As you may recall, Sec. 2-1401 allows a party to obtain relief from a final judgment.  To be entitled to that relief, a petitioner must establish, among other things, "the existence of a meritorious defense or claim."  Smith v. Airoom, Inc., 114 Ill. 2d 209, 220-21 (1986). 
On appeal, the lender first argued that it was not required to comply with the "meritorious defense or claim" requirement, because the judgment it sought to vacate was in its favor.  The Court scrutinized the statutory language, as well as relevant case law, and found no support for the lender's position.  Accordingly, the Court stated that "we find no basis to create an exception to section 2-1401..." 
The lender also argued that newly discovered evidence -- specifically, the amount of unpaid assessments, and costs relating to the conversion of the building to condominiums -- constituted a meritorious defense or claim.  The building corporation disputed that the evidence was in fact newly discovered.  It referenced a recognition agreement executed by the lender which gave the building corporation priority over the lender as to "sums due under the by-laws and the lease."  The building corporation also referenced the fact that in its answer, it referenced the past-due amounts of the assessments and other charges.  Finally, the building corporation produced an email from it to the lender's counsel, wherein the conversion plan was referenced. 
The Court began by reciting that a petitioner establishes a "meritorious defense" for the purposes of Sec. 2-1401 where he alleges facts that would have prevented entry of the judgment, had those facts been known by the trial court. 
With that standard in place, the Court held that the lender "has failed to establish a meritorious defense or claim."  In so ruling, the Court agreed with the building corporation that the lender had notice of the assessments and other costs, in light of the recognition agreement and the allegations in the building cooperation's answer. 
The Court also found the lender's claims regarding the conversion process unpersuasive.  The Court observed that the lender's claimed "meritorious defense" consisted of the fact that the lender would not have proceeded with the sale had it known that the building was to be converted to condominiums.  However, the Court emphasized that this claim did not "establish that the trial court would not have entered the order confirming sale had the conversion information been presented..." 
The lender also argued that the building corporation had an affirmative duty to disclose the ongoing conversion project.  The Court again disagreed, noting that the building corporation's claims that it had in fact notified the lender of the project was part of the record, and accordingly concluded that the trial court had "reviewed and considered its contents".  Further, the Court noted that the lender did not reference case law supporting its position. 
Because "[t]he record is devoid of evidence indicating that [the lender] exercised due diligence before participating in the foreclosure sale," and is "also devoid of evidence demonstrating that [the building corporation] purposely concealed and withheld information," the Court concluded that "no change in circumstances occurred that warrants the granting of [the lender's] section 2-1401 petition."   

Ralph T. Wutscher
McGinnis Wutscher LLP
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