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September 2015
33
Bank
notes
Community Bankers Association of Illinois
T
he Illinois Appellate Court for the Second District’s
recent (June 30) opinion in the case of
Concord Air,
Inc. vs. Malarz
concluded that if the trial court in a
foreclosure action failed to have personal jurisdiction over
the necessary parties at the time of foreclosure judgment
and sale, the foreclosure was not enforceable against a
party that had not been properly served; as a result, even
though the foreclosure resulted in a foreclosure judgment
and subsequent sheriff ’s sale that was confirmed by the trial
court, the foreclosure remained voidable as to the party that
had not been properly received service of process in the
original foreclosure litigation.
In
ConcordAir, Inc. vs. Malarz
, Harris Bank (“First Mortgagee”)
made a commercial loan secured by a mortgage on commercial
real estate. Concord Air, Inc. (“Junior Mortgagee”) was also
a creditor of the borrower, with a second mortgage on the
commercial real estate. When the borrower defaulted, First
Mortgagee initiated a foreclosure action in the trial court
pursuant to the mortgage foreclosure privisions of Illinois’
Code of Civil Procedure. In an effort to secure clear title,
First Mortgagee sought to foreclose the interests not only of
the borrower, but also of Junior Mortgagee.
After Junior Mortgagee learned that a default judgment had
been entered against it, Junior Mortgagee went back to court
and successfully moved that service of process against Junior
Mortgagee be quashed because it had not received personal
service of a summons regarding the pending foreclosure
litigation. In fact, First Mortgagee’s process server had
attempted personal service on the wrong person at the
wrong address (actually, even in the wrong suburb). Having
failed to accomplish personal service on Junior Mortgagee,
First Mortgagee attempted service by publication; however,
service by publication is generally only permitted following
failure to accomplish personal service after “due diligence.”
The sloppy and error-plagued attempt to serve Junior Mortgagee
at the wrong address when its registered agent and the agent’s
correct address were available in easily accessible Secretary of
State records failed the “due diligence” test and so the trial
court granted Junior Mortgagee’s motion to quash service by
publication; however, the case proceeded as to the foreclosure
against the borrower/mortgagor and a judgment of foreclosure
was entered in favor of First Mortgagor. At the ensuing sheriff ’s
sale, First Mortgagee was the successful bidder and the trial
court entered an order confirming the sale in April of 2012.
Thereafter, First Mortgagee sold the property to Chicago
Title. Prior to that transaction, Chicago Title obtained a title
commitment that revealed no outstanding clouds on the title.
Chicago Title subsequently sold the property to Malarz.
Junior Mortgagee then filed a complaint to foreclose its junior
mortgage against Chicago Title and Malarz (collectively
referred to hereafter as “Defendants”), claiming that Junior
Mortgagee’s interest had never been extinguished in the
original foreclosure action (because of the quashed service
of process). Defendants argued that they were bona fide
purchasers for value because Chicago Title’s purchase
from First Mortgagee was innocent of any knowledge or
notice that there may be a defect in the chain of title. The
trial court agreed that Chicago Title had been a bona fide
purchaser and that public policy favored not retroactively
disrupting commerce by reversing land sales when the
purchaser(s) had been innocent of any wrongdoing. The trial
court thus dismissed Junior Mortgagee’s foreclosure action
against Defendants.
On June 30, the Appellate Court reversed the trial court’s
dismissal of Junior Mortgagee’s action, ruling that jurisdiction
over the necessary party(ies) is an absolute, mandatory
condition of any foreclosure action and that fundamental due
process at the origin of the litigation outweighs the equitable
or “fair and innocent” claims of subsequent purchasers.
Furthermore, the Appellate Court concluded that it would
have been very easy for Chicago Title to have discovered (or at
least to have been put on constructive notice of) the cloud on
the title merely by reviewing the record of the trial court with
respect to quashing notice by publication to Junior Mortgagee.
Because that defect, or potential defect, was readily apparent
in the record, it defeated Chicago Title’s claim that it was
entitled to treatment as a bona fide purchaser.
n
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banking-related legal and regulatory questions, contact Jerry Cavanaugh
in the “Members Only” section of the CBAI web site,
.
Jerry Cavanaugh, CBAI General Counsel, Springfield, IL
LEGAL LINK
Three Years and Two Owners Later,
Judicial Foreclosure Sale Unwound
