FYI: First Cir Rejects Borrower's Counsel's Attempts to Enforce Attorney's Fee Lien Against Short Sale Proceeds

The U.S. Court of Appeals for the First Circuit recently upheld the denial of a motion to enforce an attorney’s lien filed by borrower’s counsel pursuant to Mass. Gen. Law. ch. 221, §50 in an underlying mortgage dispute, where a third-party short sale was negotiated without the borrower’s counsel’s assistance.

 

In so ruling, the Court held that the borrower’s counsel was not entitled to enforce its attorney’s lien against the short sale’s proceeds, where the sale was agreed upon outside the context of the litigation, and the borrower’s counsel did not “successfully secure” the value realized by the borrower in selling her home.

 

A copy of the opinion is available at: http://media.ca1.uscourts.gov/pdf.opinions/13-1476P-01A.pdf

 

In June 2011, the lender commenced this action in the U.S. District Court for the District of Massachusetts against the borrower to collect on a $2.5 million loan secured by property on Nantucket.  In May 2012, the borrower retained counsel and agreed to a fee arrangement that would provide either a contingent fee as a percentage of proceeds from her counterclaim against the lender, if any, or a flat fee of $25,000 ($15,000 paid up front). 

 

Counsel for the borrower entered his appearance and filed an amended counterclaim against the bank, which moved to dismiss the counterclaim.  Shortly after his appearance, the borrower’s counsel briefly left the state, and was partially granted a stay of proceedings; however, the court held that the non-judicial foreclosure of the borrower’s property would proceed regardless of counsel’s availability. 

 

The borrower hired additional counsel who entered a limited appearance for the purpose of filing an emergency motion to enjoin the foreclosure sale.  The emergency motion was denied and again defeated in a subsequent interlocutory appeal, and the district court ordered the parties to mediation.

 

In June 2012, the borrower notified her counsel that she received a third-party offer to purchase the property, and the lender was offering to forgive the loan and settle the case pursuant to the short sale agreement.  After the borrower refused to pay the additional $10,000 allegedly owed to her counsel pursuant to the flat fee arrangement, borrower’s counsel filed a notice of attorney’s lien in accordance with MA Gen. Law. ch. 221, §50 (“Section 50”). 

 

Three days later, as a result of the court-ordered mediation (and allegedly unbeknownst to borrower’s counsel), the borrower and lender reached settlement pursuant to a stipulation that the lender would receive $1.9 million of the $2.24 million short sale, and the remaining proceeds would be left to the borrower.  Once the borrower settled her debts to her additional counsel and in order to transfer clear title to the property, over $175,000 in proceeds remained.

 

After the stipulation of dismissal was submitted to the trial court through her additional counsel, the borrower’s counsel moved to enforce the attorney’s lien against all parties, seeking almost $100,000, in accordance with the contingency fee provision.  

 

The trial court denied the motion to enforce the lien, holding: (1) that the settlement reached in this case did not constitute a “judgment, decree or other order in the borrower’s favor within the meaning of Mass. Gen. Law. ch. 221, §50 (“Section 50”); (2) that the borrower received no “proceeds” upon which a lien could attach, and; (3) that the fees requested were not shown to be reasonable.  After the district court denied borrower’s counsel’s subsequent motion for reconsideration, this appeal followed in order to review the district court’s determination that the attorney’s lien was not enforceable under Section 50.

 

Section 50 provides, in pertinent part, that “[f]rom the authorized commencement of an action, counterclaim or other proceeding in any court, or appearance in any proceeding before any state or federal department, board or commission, the attorney who appears for a client in such proceeding shall have a lien for his reasonable fees and expenses upon his client's cause of action, counterclaim or claim, upon the judgment, decree or other order in his client's favor entered or made in such proceeding, and upon the proceeds derived therefrom.”

 

Considering the issue of “judgment” under Section 50, the First Circuit observed that MA courts have consistently held that “for purposes of [Mass. Gen. Laws ch. 221, § 50], a ‘judgment’ includes a stipulation of dismissal.” Ne. Avionics, Inc. v. City of Westfield, 63 Mass. App. Ct. 509, 827 N.E.2d 721, 725 (Mass.App.Ct.2005).  Accordingly, borrower’s counsel was correct in his assertion that the stipulation of dismissal could have provided the basis for its attorney’s lien. 

 

However, for the attorney’s lien to attach, there must be ““proceeds derived’ from a ‘cause of action’ as a result of a settlement.” Ropes & Gray LLP v. Jalbert, 454 Mass. 418, 910 N.E.2d 339 n. 12 (Mass.2009).  Here, the proceeds were not derived from the counterclaim against the borrower, which was dismissed as part of the settlement, but rather from a third party in the short sale transaction effectuated outside the context of the litigation.

 

The Court next addressed borrower’s counsel’s claim that the borrower experienced a “windfall” as a result of the sale price exceeding the amount paid to the lender.  Borrower’s counsel likened the sale of the home to the sale of patents and patent applications which the Supreme Judicial Court of Massachusetts found to generate attachable “proceeds” in Ropes & Gray, 910 N.E. 2d at 338.

 

The First District rejected this argument due to the borrower’s counsel’s admittedly nonexistent involvement in the short sale or settlement process, that did not “successfully secure” the value realized by the borrower in selling her home.

 

Accordingly, the First Circuit affirmed the denial of borrower’s counsel’s motion to enforce the attorney’s lien.

 

 

 

 

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
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: Ill App Ct Rules Borrower's Grounds to Challenge Foreclosure Are Severely Limited In Illinois After Motion to Confirm Sale Is Filed

The Illinois Appellate Court, First District, recently held that once a motion to confirm a foreclosure sale is filed, a borrower cannot raise any defenses to the underlying foreclosure and can only seek to set aside the sale by raising one or more of the four limited bases provided under 735 ILCS 5/15-1508(b) (“Section 15-1508”).

 

As you may recall, Section 15-1508(b) states that a court shall confirm the sale unless it finds that:  “(1) proper notice was not given; (2) terms of the sale were unconscionable; (3) the sale was conducted fraudulently; or (4) justice was otherwise not done.”  735 ILCS 5/15-1508(b).

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/1stDistrict/1123176.pdf

 

In 2006, the mortgagee (“Mortgagee”) filed a complaint to foreclose on property owned by the borrower homeowner (“Borrower”).  On May 1, 2006, the trial court entered an order of default against the Borrower.  The Borrower proceeded to retain an attorney who filed a motion to vacate the default order, which the trial court granted. 

 

The Mortgagee then moved for summary judgment asserting =, among other things, that it was the current holder and owner of the note and mortgage.  The Borrower failed to respond, and thus the trial court granted the motion for summary judgment. The Borrower then filed a petition to vacate the sale.  The trial court vacated the order approving the sale.

 

Five years after all proceedings were terminated, including a related federal court action, the Borrower filed an emergency motion to stay the sale, which the trial court granted.  The foreclosure sale occurred thereafter, and the Mortgagee was the successful bidder.  The trial court confirmed the sale, and issued an order stating: “all notices required by statute were given; said sale was fairly properly made; the sale proceeded in accordance with the terms of the court’s judgment; and that justice was done.”

 

The Borrower filed a motion to vacate the trial court’s order confirming the sale, claiming “the sale was unconscionable because she allegedly received word that the sale would not precede on May 10, 2007, so she did not have someone at the sale representing her.”  The trial court noted that nothing in the record indicated the sale was being continued.  Moreover, the Borrower’s right of redemption had passed.  Accordingly, the trial court denied the motion to vacate. The Borrower proceeded to file the instant appeal. 

 

On appeal, the Borrower argued that the Mortgagee lacked standing to bring the foreclosure action in the first place.  The Appellate Court noted that the Borrower’s right of redemption had passed and the judicial sale already occurred.  As a result, the Court determined that Borrower’s appeal is controlled by the recent Illinois Supreme Court case of Wells Fargo Bank, N.A. v. McCluskey, 2013 IL. 115469 (“McCluskey”).

 

In McCluskey, the mortgagor filed a motion to vacate the default judgment 10 months after a judgment of foreclosure was entered, and after the judicial sale of the property was conducted.  The mortgagor alleged that plaintiff lacked standing to bring the foreclosure suit.  The trial court denied the defendant’s motion to vacate.  The defendant appealed the denial of the motion to vacate, but not the order confirming the sale.

 

On appeal, the McCluskey Court held that a borrower could not challenge a default judgment through a motion to vacate after the judicial sale has occurred. Id. ¶ 25. The Illinois Supreme Court explained that once a motion to confirm the sale has been filed, it is no longer sufficient to raise meritorious defenses to the underlying foreclosure complaint because the balance of interests has shifted between the parties.  Id. ¶¶ 25 & 26.

 

Moreover, the Illinois Supreme Court held that after a judicial sale and a motion to confirm the sale have been filed, “a party seeking to set aside the sale at this point is limited to the three specified grounds related to defects in the sale proceedings, or the fourth ground, that ‘justice was not otherwise done.”’ Id. ¶ 18.  In order to demonstrate that “justice was not otherwise done,” a borrower must show that the lender, through fraud or misrepresentation, prevented the borrower from raising meritorious defenses to the complaint, or that the borrower was otherwise prevented from protecting his or her property interests.  Id. ¶ 25.

 

The Appellate Court in the case at had applied McCluskey, and held that the Borrower could not challenge the Mortgagee’s standing because the redemption period had passed and the judicial sale had already taken place.  Thus, the Borrower could only challenge the judicial sale by alleging one of the specified grounds listed in Section 15-1508. 

 

The Court explained that the trial court had already determined that pursuant to Section 15-1508 “all notices required by statute were given; said sale was fairly properly made; the sale proceeded in accordance with the terms of the court’s judgment; and that justice was done.”

 

Moreover, the Borrower failed to raise any fraud allegations or challenge the order confirming the sale.  Instead, the Borrower raised a meritorious defense to the underlying foreclosure, after a motion to confirm the sale has been filed, which was improper.

 

Accordingly, the Appellate Court upheld the trial court’s order approving the sale and judgment of foreclosure. 

 

 

 

 

 

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
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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FYI: Ill App Ct Holds Non-Titled Spouse in Possession Has No Homestead Right

The Illinois Appellate Court, Second District, recently held that a non-titled spouse who maintains his/her primary residence at the property could not claim a homestead exemption under Illinois law.

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/2ndDistrict/2130938.pdf

 

As you may recall, Section 12-901 states:

 

“Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence, or in a cooperative that owns property that the individual uses as a residence.  That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts or other purposes and from the laws of conveyance, descent, and legacy, except as provided in this Code or in Section 20-6 of the Probate Act of 1975 . . . If 2 or more individuals own property that is exempt as a homestead, the value of the exemption of each individual may not exceed his or her proportionate share of $30,000 based upon percentage of ownership.”

 

 

In 2003, the husband borrower (“Titleholder Spouse”) purchased the Subject Property with a $244,900 purchase-money mortgage.  The Titleholder Spouse’s wife (“Non-Titleholder Spouse”) (collectively the “Spouses”) never had a formalized interest in the Subject Property.  The Titleholder Spouse refinanced twice and the note was subsequently sold to another entity (“Foreclosure Plaintiff”).

 

On November 2, 2011, the Foreclosure Plaintiff filed a complaint seeking a judgment of foreclosure against the Titleholder Spouse.  The Foreclosure Plaintiff joined the Non-Titleholder Spouse as a defendant due to the possibility that she may claim an interest in the Subject Property. 

 

The Spouses filed an answer to the foreclosure complaint and alleged three affirmative defenses, including unclean hands.  Specifically, the Non-Titleholder Spouse claimed her signature on a waiver of homestead rights was forged, and that she was not present at the time of closing. 

 

On November 6, 2012, both spouses filed a counterclaim for partition raising the same allegations contained in their unclean hands affirmative defense.  They further claimed that at the time the Title Holder Spouse refinanced, the Subject Property was the Non-Titleholder Spouse’s primary residence, that she had homestead rights, and thus was entitled to a $15,000.00 estate of homestead.

 

The Foreclosure Plaintiff filed a combined motion to strike and motion to dismiss the Spouses’ affirmative defenses and counterclaim.  The trial court granted the Foreclosure Plaintiff’s motion without prejudice.

 

The Non-Titleholder Spouse subsequently filed an amended complaint alleging she was entitled to her own homestead exemption because the Subject Property had been her primary residence since the time of the Title-Holder Spouse refinanced.  She again claimed she did not sign the waiver of homestead rights and was not present at closing. 

 

The Foreclosure Plaintiff moved to dismiss the amended complaint arguing that the Non-Titleholder Spouse cannot claim a statutory homestead exemption because she does not have any formalized interest or formalized possession of the home.  The Foreclosure Plaintiff further argued that because the Non-Titleholder Spouse had no formalized interest in the Subject Property, it was irrelevant whether or not she expressly waived her homestead rights. 

 

The trial court denied the Foreclosure Plaintiff’s motion to dismiss by relying on Brod v. Brod, 390 Ill. 312 (1945) (“Brod”).  Specifically, the trial court determined that Brod held that a spouse’s interest in property need not be formalized for the purposes of homestead rights.  However, the trial court acknowledged that more recent federal authority supported the Foreclosure Plaintiff’s position.

 

The trial court certified the following question for appeal:

 

“Whether a spouse may claim her homestead exemption when that spouse is not on title to the property but is the spouse of the title holder and maintains the property as her primary place of residence under 735 ILCS 5/12-901.”

 

On appeal, the Foreclosure Plaintiff first argued that the plain language of Section 12-901 only allowed a party with a formalized interest in property to claim a homestead exemption.  In support of its interpretation of Section 12-901, the Foreclosure Plaintiff cited bankruptcy case In re Belcher, 551 F.3d 688 (7th Cir. 2008) (“Belcher”) applying Illinois law. 

 

In Belcher, a husband and wife filed for chapter 7 bankruptcy protection and, after the trustee sold their home to satisfy their debts, both claimed they were entitled to homestead exemptions.  The trustee objected to the husband’s claim, arguing he was ineligible because his name was not on the title to the home. 

 

The Belcher court agreed with the trustee and held that the husband could not claim a homestead exemption from the home’s sale proceeds because he was not on the title and he did not have any other formalized interest in the property.  Id. at 689.

 

The Foreclosure Plaintiff next argued that the trial court erred in relying on Brod because it is factually distinguishable and addresses a pre-1982-amendment version of Section 12-901.

 

The Appellate Court agreed with the Foreclosure Plaintiff, ruling that Brod was distinguishable from the instant matter because “the couple in that case owned the property as joint tenants, the case involved a dispute between a husband and a wife and not a couple against a creditor, and, perhaps most significantly, the case did not center on Section 12-901 of the Code, which is the homestead exemption statute at issue here.”

 

The Appellate Court next rejected the Spouses’ argument that Section 12-901 and its companion statutes demonstrated the legislature’s intent to create a homestead estate in all marital property.  In support of this argument, the Spouses cited: (1) section 16 of the Rights of Married Persons Act which requires one spouse to provide a homestead for the other spouse before removing that spouse from the homestead without his or her consent; and  (2) section 27 of the Conveyances Act which requires that a spouse’s release or waiver of homestead rights be express.

 

However, the Appellate Court held that neither statute touches upon the exemptions discussed under Section 12-901, and thus have no application here.

 

Lastly, the Spouses argued that Belcher is factually distinguishable because it involved a bankruptcy and that the “application of the homestead exemption to a debtor’s bankruptcy estate differs greatly from a refinancing lender’s ability to enforce a mortgage conveyed to it by a married person without the written release of his or her spouse.”  The Court disagreed stating the distinction “does not warrant a different result.”

 

Thus, the Appellate Court held that a “spouse who is not on title to property, but is the spouse of the titleholder and maintains the property as her primary place of residence, cannot claim the homestead exemption under Section 12-901 of the Code.”

 

 

 

 

 

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
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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