Wednesday, October 16, 2019

FYI: Ill App Ct (1st Dist) Holds Equitable Owner Not Necessary Party in Mortgage Foreclosure

The Illinois Appellate Court, First District, recently held that an entity with only a purported equitable interest in a property was only a permissive party to a foreclosure and not a necessary party, and therefore the plaintiff mortgagee was not required to serve the entity with process.  Thus, the allegedly defective service did not provide a basis to vacate the judgments entered against it.  


Additionally, the Court held that because lack of proper service was not apparent from the face of the record, the foreclosure sale buyer's interest in the property was protected.


Accordingly, the First District affirmed the ruling of the trial court dismissing the petition to vacate all orders under 735 ILCS 5/2-1401. 


A copy of the opinion is available at:  Link to Opinion


In October 2005, a bank ("Bank") extended a mortgage loan ("Loan") to an individual ("Borrower"), which loan was secured by residential property ("Property").  The Borrower stopped making payments on the Loan in October 2008.


On November 22, 2008, the Borrower executed a "Memorandum and Affidavit of Equitable Interest" that purported to grant a limited liability company ("LLC") an equitable interest in the Property.  The Memorandum was filed with the recorder of deeds in December 2010.  However, the Memorandum did not identify the LLC's mailing address, registered agent, or where it was formed.  Records later filed in the trial court revealed that the LLC was formed in New Mexico, and the Borrower was its sole member.


In 2009, the Bank filed a complaint to foreclose mortgage naming the Borrower and the LLC as defendants.  The Bank filed an affidavit of service by publication on the Borrower and the LLC saying that, after diligent inquiry, it was unable to locate them.  Notice was subsequently published, filed in the circuit court, and mailed to the Borrower at four different addresses.


The Bank subsequently filed an affidavit of special process server, stating that an Illinois limited liability company with the same name as the defendant LLC was served by leaving a copy of the summons and complaint with its registered agent.


In October 2009, the Bank filed a motion for default order against the Borrower and the LLC.  In May 2010, after the Borrower and LLC failed to answer or otherwise plead, the trial court entered an order of default and judgment of foreclosure.  The Property was subsequently sold at a sheriff's sale, and the trial court entered an order approving sale.  The Property was then conveyed to the Bank by judicial sales deed. 

After several conveyances, in August 2011, the Property was conveyed to the current homeowner ("Homeowner").


More than five years later, in November 2016, the LLC filed an appearance and petition to quash service and vacate all orders under section 2-1401 of the Illinois Code of Civil Procedure ("Code") (735 ILCS 5/2-1401).  In its petition, the LLC argued that the Bank served the wrong entity, and therefore it was never properly served and the orders entered against it were void.


The Bank and Homeowner moved to dismiss, arguing (1) the LLC had been properly served by publication, (2) the LLC could not bring the petition having never registered to do business in Illinois, (3) the LLC lacked standing to challenge the judgment as it had no bona fide interest in the Property, (4) the LLC was on notice of the foreclosure because its sole member, the Borrower, appeared, and (5) section 2-1401(e) of the Code protects the interest of the Homeowner because he is a bona fide purchaser for value. 


In response, the LLC argued that (1) the Limited Liability Company Act ("LLC Act") does not permit service by publication, (2) it was not required to register under the LLC Act because merely owning property in Illinois does not constitute transacting business under the Act, (3) the special process server did not serve it, (4) its standing to challenge the foreclosure judgment arises from an equitable interest in the Property, (5) a void judgment may be attacked at any time, and (6) the Homeowner was not a bona fide purchaser and his interest was not protected under section 2-1401(e) because lack of jurisdiction was apparent from the record.


The trial court granted the motions, finding that the Code and the "catchall" provision of the LLC Act permitted service by publication.  The matter was appealed. 


On appeal, the Bank and Homeowner argued for the first time that the LLC was not a necessary party to the foreclosure, and therefore the trial court did not err in dismissing the LLC's petition.  The First District determined that because the factual basis for the appellee's argument - that the LLC had not valid interest in the Property - was before the trial court, it could consider the necessary party argument for the first time on appeal.


In analyzing the issue, the Court noted that the Illinois Mortgage Foreclosure Law provides that the necessary parties to a mortgage foreclosure action are "(i) the mortgagor and (ii) other persons (but not guarantors) who owe payment of indebtedness or the performance of other obligations secured by the mortgage and against whom personal liability is asserted."  735 ILCS 5/15-1501(a).  Moreover, "[o]ther person, such as other mortgagees or claimants, may be joined, although they are not necessary parties."  735 ILCS 5/15-1501(b).


In its complaint, the Bank sought a deficiency only against the Borrower, which meant that the LLC was not a party "against whom personal liability is asserted."  Moreover, the LLC's purported equitable interest in the Property did not transform it into a mortgagor.


Thus, the LLC "may have been a permissive party, not a necessary party," and therefore "the failure to make [the LLC] a party did not divest the trial court of authority to enter the foreclosure judgment and confirm the sale." 


Accordingly, "[the Bank] was not required to serve process on [the LLC] and the trial court did not err in dismissing the section 2-1401 petition to quash service and vacate the default judgment." 


Additionally, the First District determined that "a bona fide purchaser for value, like [the Homeowner], is protected by section 2-1401(e) of the Code." 


Section 2-1401(e) protects third-party purchasers of a property from the effects of an order setting aside a judgment affecting title to a property as long as the defect in service is not apparent from the face of the record. 


The Court determined that the Homeowner "could not tell from the record that the trial court did not have jurisdiction over [the LLC] due to improper service until [the LLC] filed its section 2-1401 petition, attaching as exhibits the Illinois Secretary of State documents and the New Mexico documents."


Accordingly, "[b]ecause [the Homeowner] was a bona fide purchaser, [the LLC] cannot collaterally attack the foreclosure judgment."




Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
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