FYI: Ill Sup Ct Rejects Borrowers' Attempt to Assert Defect in Service to Void Foreclosure Judgment

The Supreme Court of Illinois recently rejected two borrowers' efforts to use a supposed defect in service of process to void a foreclosure judgment entered against them.

 

In so ruling, the Court held that:

 

1-  The third-party purchaser of the foreclosed property was a "bona fide purchaser", and this barred the borrowers' efforts to void the foreclosure judgment;

 

and

 

2-  The defense of laches can be raised in proceedings to void a judgment under section 2-202(a) of the Illinois Code of Civil Procedure.

 

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

 

The appeal arose out of a foreclosure action initiated by a bank ("Bank") against husband and wife borrowers ("Borrowers"). After Borrowers failed to appear, default and judgment of foreclosure and sale were entered. The property was sold at a judicial sale and the court subsequently confirmed the sale. Third-party respondent ("Purchaser") purchased the property.

 

More than seven years later, Borrowers filed a petition for relief from void judgments. Borrowers argued the orders entered against them were void ab initio because the court lacked personal jurisdiction over them.

 

Specifically, Borrowers claimed they were never properly served as the process server had not been appointed by the court at the time of service, thus violating section 2-202(a) of the Illinois Code of Civil Procedure.  735 ILCS 5/2-202(a).

 

Purchasers and Bank both filed motions to dismiss Borrowers' petition. Purchaser argued they were protected as bona fide purchasers as they were unaware of the alleged jurisdictional defect and the defect was not apparent on the face of the record, that the petition was barred by laches and requested improper relief. Bank argued the petition was barred by laches, was moot and requested improper relief. The trial court granted the motions to dismiss, and the appellate court affirmed.

 

On appeal to the Illinois Supreme Court, Borrowers argued that the dismissal was improper because (1) Purchasers did not qualify as bona fide purchasers; and (2) laches did not apply to petitions challenging a judgment as void.

 

The Court first addressed Illinois Code of Civil Procedure section 2-1401, which allows a party to seek relief from a final judgment, by filing a petition more than 30 days after judgment is entered. See Sarkissian v. Chicago Board of Education, 201 Ill. 2d 95, 101-02 (2002); 735 ILCS 5/2-1401(a).

 

Petitions filed under this section generally must be filed within 2 years of the entry of judgment and allege certain factors.  Smith v. Airoom, Inc., 114 Ill. 2d 209, 220-21 (1986).  However, petitions for relief on the ground that the judgment was void do not need to comply with these procedural requirements. Sarkissian, 201 Ill. 2d at 104; 735 ILCS 5/2-1401(f).

 

Even if a judgment is void for lack of jurisdiction, the petitioner may be precluded from relief from a third-party purchaser pursuant to Illinois Code of Civil Procedure section 2-1401(e). In re Application of the County Collector, 397 Ill. App. 3d 535, 549 (2009).

 

Section 2-1401(e) protects bona fide purchasers' interests in property where (1) the defect in service is not apparent from the record, (2) the purchaser wasn't a party to the original action, and (3) they acquired title before the filing of the petition. U.S. Bank National Ass'n v. Rahman, 2016 IL App (2d) 150040, ¶ 26.

 

Thus, a party challenging a judgment as void where the rights of an innocent third-party purchaser has attached, can only obtain relief if the alleged personal jurisdictional defect affirmatively appears in the record. JP Morgan Chase Bank, N.A. v. Robinson, 2020 IL App (2d) 190275, ¶ 22.

 

The Illinois Supreme Court noted a lack of personal jurisdiction is apparent on the record when no inquiry beyond the face of the record is required. State Bank of Lake Zurich v. Thill, 113 Ill.2d 294, 314 (1986). The Court agreed with the appellate court's finding that the record alone did not provide "any reason to suspect that service was not in compliance with section 2-202(a)." The Court noted that the two affidavits of service in the record described the manner and date of service, but did not state the county in which service was made.

 

Borrowers argued Purchasers had constructive notice based on the order appointing the special process servicer and the proof of service. Borrowers relied on C.T.A.S.S. & &. Federal Credit Union v. Johnson, 383 Ill. App. 3d 909 (2008), where the court found that the defect was apparent on the record because the record showed "that the special process server served process before being appointed to do so" which the court found sufficient to notify third-party purchasers of a potential jurisdictional defect. Id. at 913.

 

However, the Illinois Supreme Court easily distinguished Johnson by noting that in Johnson there was no question as to the fact that service took place in Cook County. In the instant matter, the case was filed in DuPage County and there was nothing in the record that specified in which county service was made.

 

Thus, the Court found the trial court's order appointing the special process server, standing alone, did not show a jurisdictional defect because there was nothing in the record to indicate that the appointment of the process server was required for service to be effective.

 

Accordingly, the Illinois Supreme Court found the jurisdictional defect complained of did not affirmatively appear on the face of the record and that section 2-1401(e) protected Purchasers' rights in the property despite the alleged defect. See Rahman, 2016 IL App (2d) 150040, ¶ 42. The Court also found this applied equally to the Purchasers' new mortgage as it was also entitled to bona fide purchaser status and the protections of section 2-1401(e).

 

The Illinois Supreme Court next turned to the laches defense.

 

Laches bars relief for a litigant whose unreasonable delay in bringing the action prejudices the other party. Richter v. Prairie Farms Dairy, Inc., 2016 IL 119518, ¶ 51. Borrowers argued that laches could never apply to a petition seeking relief from a void judgment as such a judgment may be attacked at any time, asserting that the application of laches under the instant circumstances would effectively impose a due diligence requirement on jurisdictional challenges to void orders.

 

However, the Illinois Supreme Court found this argument confused the procedural requirements for bringing a petition under section 2-1401 with the defense of laches, noting that Borrowers' argument failed to recognize that, "in resolving a laches issue, the merits of the [section] 2-1401 petition are not a consideration." Federal National Mortgage Ass'n v. Altamirano, 2020 Ill. App (2d) 190198, ¶ 21.

Borrowers next argued that an equitable defense could not be asserted against a petition which raised a purely legal question. However, the Court found no support for this assertion, especially where Borrowers were seeking both legal and equitable relief. Thus, the Court rejected the argument.

 

The Illinois Supreme Court found that the face of the record clearly established both elements of laches. The first element "encompasses the plaintiff's delay in bringing the action while having notice or knowledge of defendant's conduct and the opportunity to file suit." Tillman v. Pritzker, 2021 IL 126387, ¶ 26 (citing Pyle v. Ferrell, 12 Ill. 2d 547, 553 (1958)). It was not disputed that Borrowers received actual notice of the foreclosure in 2011 nor that Borrowers did nothing to protect their rights for more than seven years after receiving notice. Further, Borrower's offered no explanation for their delay.

 

As to the second element, a party suffers prejudice where he or she "incurs risk, enters into obligations, or makes expenditures for improvements or taxes" while the other party remains passive. Pyle, 12 Ill. 2d at 555.

 

The Court found Bank was prejudiced because the delay increased Borrowers damages, resulting in Bank selling the property to a bona fide purchaser and prevented Bank from being able to recover the property as security for Borrowers' loan and Purchasers were prejudiced as they purchased the property for value and expended considerable sums to build their home and pay taxes and insurance.

 

Thus, the Illinois Supreme Court affirmed the trial court's judgment and the ruling of the appellate court.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 4th Cir Vacates Bankruptcy Civil Contempt Order Against Creditor, Holds Taggart Standard Applies

The U.S. Court of Appeals for the Fourth Circuit recently held that the "no fair ground of doubt" standard established by the Supreme Court of the United States in Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), a case involving alleged violation of a Chapter 7 discharge order, governed civil contempt proceedings for violation of a confirmed reorganization plan under Chapter 11.

 

Under Taggart, "civil contempt should not be resorted to where there is a fair ground of doubt as to the wrongfulness of the defendant's conduct."  The Taggart standard is objective, and "a party's subjective belief that she was complying with an order ordinarily will not insulate her from civil contempt if that belief was objectively unreasonable."

 

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

 

Two borrowers ("Debtors") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.  The Bankruptcy Court confirmed a reorganization plan for Debtors' debts which included several properties that had significant mortgage balances.

 

Under the confirmation order, Debtors were able to maintain possession of one of the mortgaged properties ("Property"), while the creditor ("Creditor") retained a securing claim for the total outstanding mortgage balance. The confirmation order provided a date that the first payment was due, but did not provide a payment amount or provide for how the payment would be calculated. The order further provided that Debtors were entitled to "ten days written notice" before the creditor could "exercise its state court remedies with respect to the collateral" should Debtors default.

 

Several years later, Defendant ("Servicer") took over servicing of Debtors' account. Servicer believed the account to be past due because of the payments missed prior to the bankruptcy proceedings, and as a result sent Debtors letters and notices of default which showed increasing amounts owed and past due. Debtors attempt to correct the account without success.

 

Five years later, Servicer acknowledged that the prior servicer "did not adjust the loan in accordance with the Confirmed Chapter 11 Plan." However, two weeks later, Servicer began foreclosure proceedings on the Property.

 

Upon learning of the foreclosure proceedings, Debtors filed an emergency motion for contempt in the bankruptcy court, alleging Servicer violated the confirmation order by placing the account in default and seeking to foreclose on the Property despite Debtors having paid on time under the confirmed plan. Servicer argued that (1) its actions were justified under the confirmation order; and alternatively (2) the terms of the order were confusing and ambiguous, so it could not be held in contempt.

 

The bankruptcy court found Servicer in contempt and awarded sanctions, holding that "[a] finding of civil contempt is warranted when there is demonstration, by clear and convincing evidence, of" four factors set out in the Court's pre-Taggart decision Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir. 2000).

 

Servicer appealed and the trial court reversed. The trial court concluded that the Taggart standard applied, and "the bankruptcy court's contempt order f[ell] far short of meeting" it as Servicer "ha[d] established a fair ground of doubt with regard to the unclear terms of the confirmation order."

 

Debtors appealed to the Fourth Circuit, arguing that Taggart did not apply to violations of Chapter 11 confirmation orders, and that regardless, the bankruptcy court correctly applied the Taggart standard.

 

The Fourth Circuit disagreed, holding that there was nothing in the Taggart analysis to suggest it was limited to the violation of Chapter 7 discharge orders nor to demonstrate that the ruling turned on considerations unique to the Chapter 7 context.

 

As you may recall, in Taggart, the Supreme Court of the United States addressed the standard for "hold[ing] a creditor in civil contempt for attempting to collect a debt that a discharge order" entered under Chapter 7 of the Bankruptcy Code "has immunized from collection." 139 S. Ct. 1795, 1799 (2019).

 

In deciding Taggart, the Supreme Court of the United States first discussed general provisions of the Bankruptcy Code which provide that a discharge order "operates as an injunction," 11 U.S.C. § 524(a)(2), and that a court may "issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title." § 105(a). See Taggart, 139 S. Ct. at 1801. The SCOTUS concluded that these general statutory provisions incorporate "traditional principles of equity practice" that have "long governed how courts enforce injunctions" including "the potent weapon of civil contempt." Id. (quotation marks omitted). Thus, the SCOTUS emphasized that "[t]he bankruptcy statutes ... do not grant courts unlimited authority to hold creditor in civil contempt." Id.

 

The Taggart court ruled that the standard for civil contempt "is generally an objective one" and that such orders are inappropriate "where there is a fair ground of doubt as to the wrongfulness of the defendant's conduct." Id. at 1801-02. The SCOTUS concluded that "[t]hese traditional civil contempt principles apply straightforwardly to the bankruptcy discharge context." Id. at 1802, 1804.

 

The Fourth Circuit held that the standard set forth in Taggart, a case involving alleged violation of a Chapter 7 discharge order, governed civil contempt proceedings under Chapter 11. The Court noted that a bankruptcy court's authority to enforce its own orders derived from the same statues and general principles relied on by the SCOTUS in Taggart.

 

In so ruling, the Fourth Circuit disagreed with Debtors' argument that the bankruptcy court had applied the Taggart standard in finding Servicer in contempt. The bankruptcy court's written order did not mention Taggart nor its no-fair-ground-of-doubt standard. Instead, the bankruptcy court's order stated "[a] finding of civil contempt is warranted when there is a demonstration…of" the four factors discussed in a case that predated Taggart and had nothing to do with bankruptcy. Thus, the Fourth Circuit could not conclude the bankruptcy court applied the correct legal standard.

 

The Appellate Court also disagreed with Servicer's assertion that the trial court did not commit error in overturning the bankruptcy court's order. First, the Fourth Circuit found that the trial court erred in appearing to grant controlling weight to Servicer's request for and reliance on legal advice from outside counsel, as the Fourth Circuit has long held that the advice of counsel "is not a defense" to "civil contempt." In re Walters, 868 F.2d 665, 668 (4th Cir. 1989).

 

The Appellate Court noted this was further confirmed in Taggart where the Supreme Court explained that "[t]he absence of willfulness does not relieve from civil contempt." 139 S. Ct. at 1802.  Under Taggart, "a party's subjective belief that she was complying with an order ordinarily will not insulate her from civil contempt if that belief was objectively unreasonable," but evidence of reliance upon advice of counsel can be considered in making the determination of whether the party's conduct was objectively unreasonable.

 

The Fourth Circuit ruled that the correct remedy was for the bankruptcy court to reconsider the contempt motion under the correct legal standard, inclusive of any additional factfinding necessary. The Appellate Court emphasized that any sanction imposed by the lower court must be supported, in type and amount, by a sufficient evidentiary record.

 

In sum, the Fourth Circuit held that when a court is considering whether or not to hold a creditor in civil contempt for violating a Chapter 11 plan for reorganization of debts, Taggart also applies.

 

Thus, the Fourth Circuit vacated the order of the trial court, and remanded the case with instructions to vacate the bankruptcy court's order and for further proceedings consistent with the Appellate Court's opinion.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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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.

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