Friday, January 25, 2013

FYI: Ill App Ct Upholds Judicial Sale, Despite Low Sales Price, Absent Fraud or Other Irregularity

The Illinois Appellate Court, First District, recently held that a forced judicial sale under the so-called "Illinois Levy Statute," which the Court noted enumerates virtually identical standards for the confirmation of judicial sales under the Illinois foreclosure statute, was neither unjust nor unconscionable to justify denying confirmation of the sale.  In so holding, the Court reiterated and applied the rule that a low sale price alone was not sufficient to conclude that the sale was unconscionable.
Shortly after having summary judgment entered against her in a case involving a single-family home located in Chicago, Illinois, a judgment debtor ("Judgment Debtor") and her husband ("Spouse") executed a quitclaim deed conveying the property to themselves as tenants by the entirety.   Prior to executing the quitclaim deed, Judgment Debtor and Spouse had owned the parcel as tenants in common.
About five years later, the lower court entered a judgment against Judgment Debtor, now deceased, and in favor of the opposing party (the "Toms").  However, supposedly as a result of the tenancy by the entirety insulating Spouse from attempts to collect on the judgment, the judgment was never satisfied.
The Toms then filed an action to set aside the quitclaim deed, naming Spouse as a defendant.  In that case, the lower court set aside the quitclaim deed, ruling that it was fraudulent and done with the sole intent to avoid Judgment Debtor's judgment debt obligation to the Toms.   Accordingly, the lower court ruled that Judgment Debtor's estate and Spouse only held title to the subject property as tenants in common.
As part of the effort to collect on the judgment, a levy sale of Judgment Debtor's one-half interest in the property was conducted at which the Toms were the only bidders.  Their bid of $20,000 was thus the successful bid.  Before the Toms moved to confirm the sale, Spouse moved to set aside the sale, arguing that the sale price, supposedly far too low in relation to the appraisal, rendered the sale unconscionable and unjust. 
Finding in part that the low sale price stemmed from the fact that the winning bidder would only obtain an undivided one-half interest in the property, the lower court denied Spouse's motion and accordingly confirmed the sale.   Spouse appealed.  The Appellate Court affirmed.
As you may recall, the Illinois levy statute provides that a sale to satisfy a judgment shall be confirmed "[u]nless the court finds that (i) notice as required by law was not given, (ii) the terms of the sale were unconscionable, (iii) the sale was conducted fraudulently, or (iv) justice was otherwise not done. . . . In making these findings, the court shall take into account the purchase price at the sale in relation to the fair market value of the property less the value of any mortgages and liens."  735 ILCS  5/12-144.5(b) ("Levy Statute").
In addition, the Illinois Mortgage Foreclosure Law enumerates virtually identical standards for the confirmation of judicial sales following a mortgage foreclosure.  See 735 ILCS 5/15-1101 et seq. ("IMFL").
Noting that the Levy Statute's four enumerated standards for not confirming a sale are virtually identical to those set forth in the IMFL, and that there is little case law construing the Levy Statute, the Appellate Court relied on both the plain language of the Levy Statute and on case law interpreting the IMFL's sale confirmation provision to determine what constitutes an "unconscionable" or "unjust" property sale within the context of a sale to collect on a judgment debt.  
Analogizing to the IMFL, the Court observed that both the Levy Statute and the IMFL relate to the sale of defendants' property to satisfy a judgment against them, and that the first three enumerated standards constitute "normal defenses in a contract case."  The Court thus focused on the fourth enumerated "justice was not otherwise done" defense that gives a court some small measure of discretion in rejecting judicial sales. 
In so doing, the Court recognized that there is no bright-line definition of what may constitute an "unjust" judicial sale and that the unconscionability of the terms of a sale is another, separate basis on which a court may decline to confirm a sale.  See Aurora Loan Services, Inc. v. Craddieth, 442 F.3d 1018, 1023 (7th Cir. 2006)(reasoning that a court's discretion to reject a judicial sale based on the justice test is not "so open-ended as to make the interest conferred by a foreclosure-sale certificate illusory."); Graffam v. Burgess, 117 U.S. 180, 191-92 (1886)(stating that "a sale will not be set aside for inadequacy of price, unless the inadequacy is so great as to shock the conscience.").  The Court ultimately concluded that the "justice was not otherwise done" test did not apply in this case because Spouse had failed to allege serious defects in the actual sale process. 
Turning to Spouse's specific argument that the sale was unconscionable and thus invalid because the sale price of the undivided one-half interest was over $100,000 less than its appraised value, the Court stressed that factors such as the likelihood of further litigation between the parties, the potential risk of properties being "snatched back" from successful bidders, and the fact that the auction was merely for the undivided one half-interest in the property all contributed to the low sale price in this case.    
The Court further pointed out that "[i]nadequacy of sale price is not a sufficient reason, standing alone, to deny confirmation of a judicial sale" and that absent fraud or other irregularity, the sale price is the conclusive measure of a property's value.  The Court also observed that Spouse never came forward to purchase the one-half interest and thus had forfeited his redemption right.
Accordingly, ruling that the judicial sale process under the Levy Statute was just and that the sale price was not unconscionable, the Appellate Court concluded that the lower court properly confirmed the sale.

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