Purchasers of Properties that have gone through Judicial Sales Should be Cautious

Adam M. Ansari's article, "Purchasers of properties that have gone through judicial sale should be cautious", was originally included in the December 2015 Illinois State Bar Association's Section on Real Estate Law Section newsletter, and republished in the Commercial Banking, Collections, and Bankruptcy Section. Please click here to review the original publication. 

The Illinois Appellate Court in Concord Air, Inc. v. Malarz, 2015 IL App (2d) 140639 has increased the due diligence necessary for properties that have gone through a foreclosure sale.

Modified on the denial of rehearing, on October 15, 2015, the Illinois Appellate Court posted its ruling in Concord Air, Inc. v. Malarz, 2015 IL App (2d) 140639. The case arose after Harris Bank filed a foreclosure action (Harris foreclosure) against a home in Lake Forest, Illinois, and named the borrower and Concord Air, Inc. (Concord Air) as a defendant/junior lienholder. Concord, at ¶ 1. Concord Air defaulted, and Harris Bank was the successful bidder at the judicial sale and the trial court confirmed the sale. Id. Thereafter, Chicago Title, as trustee for a land trust (Chicago Title), relying on a title report, which indicated Concord Air’s interest had been extinguished by the Harris foreclosure, purchased the subject property.

A little less than a year later, upon learning of the foreclosure proceeding and the default entered against it, Concord Air moved to quash service for a lack of personal jurisdiction. The trial court vacated the judgment of foreclosure as to Concord Air only and left intact the order approving sale. Concord Air then initiated its own foreclosure action (Concord foreclosure) against the subject property. Chicago Title responded with a Motion to Dismiss arguing bona fide purchaser status. The trial court agreed with Chicago Title and additionally cited the public policy of finality and stability of judicial sales as a basis for its decision. Concord, at ¶ 48.

On appeal, Concord Air argued that Chicago Title was on inquiry notice of the lack of jurisdiction, because the affidavits on the record at the time Chicago Title purchased the property, indicated service was attempted only once, at an address other than the registered agent's, and by a different process server than the one listed on the affidavit of due diligence. Concord, at ¶ 40. Concord Air identified potential noncompliance with Sec. 2-206 and Sec. 2-202 of the ILCS in support of its argument. Concord, at ¶ 40. The Appellate Court agreed with Concord Air concluding that Chicago Title was on inquiry notice of Concord Air’s potential outstanding interest, as the defect in personal jurisdiction over Concord Air was apparent on the face of the Harris foreclosure record.

In addition to its bona fide purchaser argument, Chicago Title argued that because Concord Air was a junior lienholder and not a prior borrower or owner of the subject property, Concord Air should not be allowed to pursue a claim against the property itself, and Concord Air’s requested relief should be limited to the proceeds of the foreclosure sale. Concord, at ¶ 49. In response, the Appellate Court opinioned that the judicial sale did not result in a surplus and therefore the value of the property, roughly $1.7 million, and the status of the Harris foreclosure required a balancing of the equities on remand. Concord, at ¶ 50.

Transactional Attorneys Beware

Although difficult to glean from the Appellate Court’s opinion, the holding places a significant burden on real estate purchasers interested in properties that have gone through a judicial sale.

Regardless of the number of years or the number of times a piece of property has exchanged hands, purchasers and their attorneys are considered to be on constructive notice of potential jurisdictional defects in a foreclosure record, irrespective of whether the defect concerns a prior owner or a junior lienholder. Now, beyond a review of the title commitment, transactional attorneys are expected to obtain and review the foreclosure record before blessing the purchase of an affected property. This is especially onerous in light of the time, money, and effort needed to acquire a foreclosure record, not to mention the expertise needed to actually identify the potential jurisdictional defect once the record is obtained.

Although the newly enacted Sec. 15-1603.5 may provide a statutory framework for extinguishing a subordinate interest when that interest was not named in the original foreclosure action, it remains to be seen whether the code section, enacted August 26, 2014, will be applied to situations where a junior lienholder was named in the foreclosure, but jurisdiction was nonetheless found to be improper.

With the minimal fees, the time constraints placed on attorney review, and the prospect of more junior lienholders filing similar actions as Concord, some attorneys may begin thinking twice about their willingness to be retained on residential transactions with a prior foreclosure.

New Procedure to Extinguish an Omitted Subordinate Interest

Effective as of August 26, 2014, Public Act 98-1099 provides a new statutory framework for extinguishing a subordinate interest on a foreclosed property when that interest was not named in the original foreclosure action (see 735 ILCS 5/15-1603.5). The new procedure applies only in circumstances where: (1) the property is the subject of a foreclosure action; (2) a motion to confirm the judicial sale is pending or has been granted; (3) the interest attached prior to filing or recording the notice of foreclosure; and (4) the person with the interest was not named in the foreclosure complaint.

If the above requirements are met, then the holder of the certificate of sale or purchaser of the foreclosed property may file a strict foreclosure action naming the omitted subordinate interest as defendant. The court will then enter a judgment to extinguish the omitted subordinate interest, subject to the objection of the defendant. If the defendant objects to the judgment, their only available recourse is redemption of the property within the statutory redemption period of 30 days. The redemption shall be the sum bid at the prior foreclosure sale plus costs and fees incurred subsequent to the sale for the payment of taxes, preservation of the property, or any other actions taken by the holder of the certificate of sale to protect its interest in the property. This enactment denies a person whose omitted subordinate interest was not terminated by a prior foreclosure action the right to file a strict foreclosure action, though they are still entitled to make a claim for the surplus in the proceeds from the sale of the property.

Generally, plaintiffs include subordinate lienholders as parties in a foreclosure action in order to extinguish the subordinate interest. Accordingly, an unnamed subordinate interest's claim would not be extinguished by the confirmation of the judicial sale. Therefore, this procedure provides plaintiffs with an opportunity to extinguish the interest of a subordinate lienholder who was not named in the original foreclosure complaint while at the same time giving the omitted lienholder an opportunity to redeem the property. 

Attorney Ansari Wins Appeal Reversing a Nearly $1 Million Decision

Attorney Adam Ansari Wins Illinois Appellate Decision Helping Reiterate the Importance of Procedural Due Process

In a case that will help benefit real estate related litigation defendants, Ansari & Shapiro is pleased to announce that Attorney Adam Ansari successfully argued a case in the Illinois Appellate Court that further solidified the importance of proper service of process on a party defendant to a lawsuit.

Service of process is a fundamental right afforded to both individuals and companies, and necessitates that all defendants be provided proper notice of a suit in order for a court to properly have jurisdiction over the parties. Under certain circumstances, however, Section 2-206 of the Illinois Code of Civil Procedure allows for notice to be effectuated through a newspaper publication where the action is pending. In order for a court to allow service to be performed by publication, a plaintiff, or his or her attorney, must file an affidavit with the court showing that on due inquiry the defendant cannot be found. Publication service is the least suggested method for effectuating service of process in Illinois and is reviewed under a standard of strict scrutiny.

In the case, Mr. Ansari’s Client was a junior mortgage lender and had a nearly $1 million second mortgage on a piece of property. The borrower defaulted on his obligations, and the primary mortgage lender filed foreclosure proceedings against the property and named Mr. Ansari’s Client in order to wipe out its substantial interest on the property. In order to effectuate service upon Mr. Ansari’s Client, the primary mortgage lender utilized publication service and the property was eventually sold to a subsequent Purchaser after a foreclosure auction. Thereafter, Mr. Ansari’s Client learned of the proceeding and immediately moved to vacate the judgment and vacate the sale of the property in order to assert its nearly $1 million interest. Remarkably, the trial court judge vacated the judgment, but refused to vacate the sale. This decision resulted in the peculiar circumstance where the Purchaser remained the owner of the property and Mr. Ansari’s Client had its nearly $1 million mortgage revested.

At that time, Mr. Ansari’s Client filed its own foreclosure action against the property and the Purchaser asserted the defense of Bona Fide Purchaser (“BFP”) status. Under Illinois Law, a subsequent purchaser can assert a BFP argument if it took a piece of property: (1) for value, and (2) without notice of the outstanding interest of the asserting party. The trial court agreed with the Purchaser’s BFP argument and Mr. Ansari appealed the trial court’s decision.

On Appeal, Mr. Ansari argued that the Purchaser could not have successfully asserted a BFP argument, because the Purchaser had inquiry notice that service of process on his Client may have been improper. Generally, in order for a Purchaser to have inquiry notice, there must have been something in the original foreclosure record that would have pointed the Purchaser to the fact that service on a defendant was improper. To support his argument, Mr. Ansari pointed to two documents in the original foreclosure record: (1) a corporation file detail report that indicated the Client could have be served at the registered agent’s address; and (2) the affidavit of the special process server, which indicated that the process server only attempted service at one address prior to publication service and this address was not the registered agent’s address.

After looking at the two referenced documents, the Appellate Court agreed with Mr. Ansari and determined that the Purchaser did have inquiry notice that service may have been improper and reversed the trial court’s decision and remanded the matter for further proceedings.

The case makes clear that procedural due process is a fundamental right that must be afforded to all defendants in a lawsuit, and the failure of which can have drastic consequences for both the original litigating parties and a subsequent purchaser who fails to conduct adequate due diligence.