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ILLINOIS INSTITUTE OF CONTINUING EDUCATION

May 8, 2002
Par-A-Dice Hotel & Casino, East Peoria, Illinois
May 14, 2002
Hyatt Regency, Chicago, Illinois

"THE 'NUTS & BOLTS' OF RESIDENTIAL MORTGAGE FORECLOSURE

PRACTICE"

By Steven B. Bashaw

Steven B. Bashaw, P.C.

Suite 1012
1301West 22nd Street
Oak Brook, Illinois 60523
Tel.: (630) 472-9990
Fax.: (630) 472-9993
e-mail: sbashaw@bashawlaw.com

Introduction:

A plaintiff/lender's mortgage foreclosure case is a statutory process consisting of a definite

number of steps .....

Representation of the plaintiff revolves around knowing how to move through that process and
when to take the case out of the "ordinary course". Representation of the defendant revolves
around knowing the process, and anticipating the next step to keep the case out of the
"ordinary course".
1. Pre-Complaint:

There are a number of conditions precedent contained in the mortgage documents, federal
regulations, and statutory limitations which should be considered prior to filing of the complaint.

MORTGAGE DOCUMENTS & REGULATIONS:

Plaintiff's attorneys should carefully review the terms of the mortgage and note relating to
acceleration to assure compliance with the exact provisions of the debt instruments.
Defendant's attorneys, of course, should assure that the lender has strictly complied with all
provisions of the mortgage and note, as well as any federal or state regulations, which may be a
condition precedent to foreclosure. Bankers Life v. Denton, (3rd Dist. 1983) 120 Ill.App.3d
576, 76 Ill.Dec. 64, 458 N.E.2d 203, and FNMA v. Moore, (N.D.Il.,1985) 609 F.Supp. 194,
provide that all federal regulations relating to remedial assistance and servicing are conditions
precedent to the filing of a foreclosure complaint and the basis for affirmative defenses.

FAIR DEBT COLLECTION PRACTICES:

If the attorney is sending the acceleration letter or attempting to collect the debt, the Fair Debt
Collection Practices Act (15 U.S.C. Section 1692 et seq.) may apply, and should be strictly
followed. Your failure to comply with the requirements of that Act may subject your firm, as any
"collection agency", to liability for (a) actual damages, (b) a sum not to exceed $1,000, and (c)
an award of reasonable attorney's fees and costs under Section 1692(k). (See: George W.
Heintz v. Darlene Jenkins, (U.S. 1996), 115 S. Ct. 1489, 131 L.Ed. 395, and Shapiro and
Meinhold v. Zartman, (Colo. 1992) 823 P.2d 120). Local cases of note are Newsom v. Lawrence
Friedman, (7th Cir. 1996) Case No. 95-1453, reported Chicago Daily Law Bulletin, page 3, Feb.
6, 1996, (holding that Cook County's municipal districts are not "judicial districts" under the Act),
Keele v. Norman Paul Wexler, (N.D. 111. 1996) Case No. 95 C 3483, Simon v. Wexler &
Wexler, (Cir. Ct. Cook County 95 CH 1367), Ryan v. Wexler & Wexler, (N.D. 11. 1996) Case
No. 96 C 1806, reported Chicago Daily Law Bulletin, page 3, April 8, 1996, and Raul Avila v.
Albert Rubin and Van Ru Credit Corp., reported Chicago Daily Law Bulletin page 1, May 17,
1996, Case Nos. 95-2881, 95-2895, 95-3905 and 95-3978 consolidated, ($105,000 judgment in
unfair debt collection lawsuit nets class members about $25 each"). For a good "overview"
see "The Lawyer's Post-Heintz Guide to the Fair Debt Collection Practices Act". Wilson and
Nagle, Illinois Bar Journal, Sept. 1995, p. 483, and Tolentino v. Friedman, (7th Cir. 1995), 46
F.3d 645, where the Court hold that a lawyer engaged in consumer debt collection was a "debt
collector" and not exempt from the requirements of the Act when writing a letter to the debtor.

An unpublished decision from the Michigan Court of Appeals, however offers an interesting
divergence. In a real estate mortgage foreclosure context, the Court ruled that the Plaintiff's
attorneys were NOT 'debt collectors' as defined in FDCPA because they "were engaged in the
enforcement of a security interest, not the collection of a debt. ...we believe that these enforcers
of security interests are not otherwise included within the broader definition of 'debt collectors-".
See Ronald C. Winiemko v. G.E. Capital Mortgage Services, Inc., Riley and Roumell, P.C., and
Wilber M. Brucker, (Mich. Ct. of Appeals No. 177827, decision issued Jan. 17, 1997). Another
divergence can be found in Transamerica Financial Services, Inc. v. Mary E. Sykes v. Ira T.
Nevel, (N.D. Il., 3/25/99, No. 98-2586), 171 F.3d 553, in which the Plaintiff's attorney in a
foreclosure action was the subject of a FDCPA counterclaim brought by the mortgagor who
claimed that the mortgage was a forgery and that she owed no money to the Plaintiff. Sykes
appealed only the summary judgment on the Fair Debt Collection Practices Act issues. In
affirming summary judgment, the Court noted that the pertinent section of FDCPA applies to
circumstances where there are attempts to collect a fee or charge for which the contract itself
does not provide or is not authorized by law; (i.e., the collection of forced placed auto insurance
premiums not authorized by the agreement as in Jenkins v. Heintz, 124 F.3d 824, or attempted
collection of a time barred debt as in Kimber v. Federal Financial Corp., 668 F.Supp. 1480). In
this case, the mortgage authorized the collection efforts undertaken by the attorney, and the
Court reasoned that the forgery had no bearing, given the fact that none of the documents given
to Nevel by Transamerica suggested a forgery and Nevel had no notice that the debt
instruments might be forgeries.

Almost all firms that engage regularly in mortgage foreclosure representation of lenders attempt
to comply with the notice requirements of the Fair Debt Collection Practices Act. Many of them
have telephone greetings reminding callers that "This Firm is a Debt Collector, and any
information obtained will be used to that end." It is also common to see similar FDCPA notices
on all letters and pleadings. The "safe harbor" language for compliance with FDCPA can be
found in Judge Posner's decision in Bartlett v. Heibl, (7th Cir., 1997) 128 F.2d 497, 501-502. It
is important to note that this language creates a "safe harbor" if used by one who "does not add
other words that confuse the message." The Seventh Circuit also ruled in Miller v. McCalla,
Raymer, Padrick, Cobb, Nichols and Clark, LLC, No. 98 C 4280, 1999 WL 284788, (ND Il.
4/26/1999), also noted at (7th Cir., 2001), 198 FRD 503. That a law firm engaged in collection of
a mortgage debt violated its duty under the FDCPA to state the amount of the debt where the
firm's collection letter indicated the amount of the principal balance, but then noted that this sum
did not include interest, late charges, escrow advances or other charges, and invited the
mortgagor to telephone for complete figures.

PRE-COMPLAINT REINSTATEMENT:

Prior to the filing of the complaint, if possible, is the best time for a defendant to cure the default
and reinstate the mortgage. While this may not avoid the necessity of including payment of
reasonable attorney's fees, it may save significant court costs. See Diawa Bank v. LaSalle
National Trust, 229 Ill.App.3d 366, 593 N.E.2d 105, Copalman v. Frawley, 182 Ill.App.3d 821,
538 N.E.2d 630, Harris Trust v. American National Bank, 230 Ill.App.3d 591, 594 N.E.2d 1038,
and Kaiser v. NEPC, 164 Ill.App.3d 978, 518 N.E.2d 424, for a discussion of attorney's fees,
costs, and tenders both before and after filing the complaint.

Chicago Title & Trust Co. v. Chicago Title & Trust Co., (1st Dist., 1993), 248 Ill.App.3d 1065,
618 N.E.2d 949, 188 Ill.Dec. 379, states that the reasonableness of attorney's fees in a
mortgage foreclosure action is a matter peculiarly within the discretion of the trial court, and will
not be disturbed on appeal absent an abuse of discretion. Curing the default prior to the filing of
a complaint also avoids the statutory limitation that a defendant can only exercise his right to
reinstate a mortgage once every five years which is statutorily provided in 735 ILCS 5/15-1602.
First Federal Savings and Loan Association v. Walker, (1982), 91 Ill.2d 218, 437 N.E.2d 644, 62
Ill.Dec. 956 First Federal Savings and Loan Association v. Gillespie, (1st Dist., 1980) 89
Ill.App.3d 248, 411 N.E.2d 889, 44 Ill.Dec. 523.

2. Complaint:

The process begins with the filing of a complaint.

The complaint form is statutorily prescribed with deemed allegations, (735 ILCS Section 5/15-
1504), which include debt and default presumptions, presumed allegations relating to fees and
costs, and allegations included in a request for foreclosure, deficiency judgment, and
possession or Receiver. (See: City National Bank of Hoopestown v. Langley, (1987), 161
Ill.App.3d 266, 514 N.E.2d 508, for a discussion of defective complaint allegations.)

NECESSARY AND PERMISSIBLE PARTIES:

Both the Plaintiff and Defendant's attorneys should review the Complaint carefully. Regardless
of from which vantage point you come to the foreclosure, it is the basis from which the Plaintiff
proceeds by adjudicating the interest of all lien holders and parties in interest in order to obtain
clear title as a result of foreclosure and the salient facts which the Defendant must examine to
defend. It is noteworthy that Public Act 88-265 (Senate Bill 650), effective January 1, 1994,
amended Section 15-1501(d) of the Code of Civil Procedure to provide that the making of a
lessee a party to a foreclosure action does not, in itself, terminate the leasehold interest unless
the Court specifically orders the interest foreclosed in the judgment. The statutory complaint
form was also amended by adding subsection 15-1504(T) to provide that the Plaintiff can allege
the names of defendants whose right to possess the real estate is sought to be terminated.
Accordingly, all practitioners should review their foreclosure complaints and judgments to
incorporate such specific allegations and findings.

A commonly asked question relating to the complaint is whether the Plaintiff should make other
subordinate or prior mortgage lien holders a party to the case in the complaint and what effect
this has on that lien-holder. While the plaintiff certainly may do so, has no duty to join all parties
with an interest or liens on the property as defendants to the foreclosure. See Marino v. United
Bank of Illinois, N.A., (2nd Dist. 1985), 484 N.E.2d 935. The only "necessary parties" are the
mortgagor and persons who owe payment of the indebtedness secured by the mortgage. 735
ILCS 5/15-1501(a). Drafting the complaint begins with a consideration of the priority of the lien
being foreclosed and the relative priority position of that lien to other claims against the real
estate. The next logical consideration is the effect of foreclosure or extinguishing the various lien
interests. Often there will be multiple liens against property, and any practical approach to
those liens must be concerned with the result that legal action to enforce one lien will have on
another. Foreclosure of a mortgage, provided other subordinate lien holders are joined in the
case, will result in the extinction of the junior lien interests. 735 ILCS 5/15-1504, BCGS, L.L.C.
v. Jaster, (2nd Dist., 1998) 299 Ill.App.3d, 700 N.E.2d 1075, 233 Ill.Dec. 367, Bald v. Chicago
Title Insurance Co., (1st Dist. 1983), 113 Ill.App.3d 29, 446 N.E.2d 1205, 68 Ill.Dec. 808. The
Plaintiff, of course, will want to extinguish subordinate liens in order to obtain a clear title to the
foreclosed premises to covey at the subsequent sale in order to recoup its indebtedness. The
Defendant must review and consider the impact of the various liens on the "equity" he or she
has in the premises from which to fashion a resolution.

Once additional, "permissible parties" (735 ILCS 5/15-1501(b) are joined in the foreclosure,
however, some interesting issues ensue. In the case of Mid-America Federal Savings v. Liberty
Bank , (2nd Dist, 1990), 562 N.E.2d 1188, a junior lienholder in second position lost in its priority
battle with a third position lienholder for failure to file its answer in a foreclosure by a first
mortgagee after being made a party and having been served with the complaint. The Court
ruled the second lien-holder failed to act diligently whereas the third lienholder had come forth
and thereby improved its position! This case is followed by a most unusual ruling in Orloff v.
Petak, (3rd Dist., 1992) 224 Ill.App.3d 638, 587 N.E.2d 37, 167 Ill.Dec. 155. In that case, the
Court found that a junior lienor who was omitted from a senior lienor's foreclosure action must
equitably redeem before he may foreclose his own lien. This was the law under the prior
foreclosure statute as set forth in the case of Baldi v. Chicago Title Insurance Co., (1983), 113
Ill.App.3d 29, 446 N.E.2d 1205, 68 Ill.Dec. 808, but NOT the anticipated result under the new
law given the fact that statutorily a junior lienor does not have a right to redeem under Section
5/15-1603(a) and Section 5/15-1212, (it is difficult to discern how it could "equitably redeem" as
mandated by the Court in Orloff), but the law appears to be that only IF it redeems from the first
mortgage can a junior mortgagee THEN foreclose his junior lien along with the senior lien from
which he redeemed. There are statutory provisions and case law that provide some protection
to lien holders who are subordinate to a mortgage that is being foreclosed that should be
reviewed if the issue of priority is being considered. 735 ILCS 5/15-1505 states that when real
estate is subject to a senior lien, during foreclosure and prior to a sale, any other lien holder
may pay installments of principal, interest, real estate taxes or other obligations due under the
senior mortgage. This is supplemented by the following provision found outside of IMFL in the
Mortgage Act, (765 ILCS 905/l, at seq.):

PRIOR MORTGAGES:

Any person who has a mortgage lien upon any land against which there exists a prior mortgage
may pay any interest or any installment of the principal or interest which may be in default upon
any such prior mortgage and all such sums so paid shall become a party of the! debt secured by
such junior mortgage, shall bear interest from the date of payment at the same rate as the
indebtedness secured by such prior mortgage and shall be collectable with, as party of and in
the same manner, as the amount secured by such junior mortgage." 765 ILCS 905/13.

MARSHALLING THE ASSET:

 A review of Joliet Fed. Sav. & Loan Assn v. Bloomington Loan Co., (3d Dist. 1970), 131
Ill.App.2d 619, 265 N.E.2d 400, will lead one to be very wary of the holding in another Third
District case which clearly states that there will be no "marshalling of the assets" at the
confirmation of sale of the foreclosure of a subordinate mortgage to provide for the payment of a
prior lien. In that recent case, Members Equity Credit Union v. Duefel, (3rd Dist. 1998), 295
Ill.App.3d 336, 692 N.E.2d 865, 229 Ill.Dec. 876, the Third District ruled that surplus proceeds
from a foreclosure sale must be awarded to the foreclosed mortgagor rather than be applied to
payoff an outstanding, prior mortgage lien as requested by the third party bidder. The
foreclosure was of a junior mortgage on residential real estate. The first mortgage lien holder
was not a party to the suit. At sale, a third party bidder bid a sum resulting in a surplus, and
then, at confirmation of the sale, petitioned the trial court to direct the surplus be paid to satisfy
the outstanding first mortgage. The trial court granted the petition and the borrowers appealed.
On appeal, the Third District considered, but rejected, the bidder's argument that to award the
surplus proceeds to the mortgagors would result in a windfall to them because they had no
equity in the property over the first mortgage, noting that "Illinois law mandates that a buyer at a
judicial foreclosure sale takes the property subject to any outstanding debts which may
encumber the property subsequent to the sale." All bidders are deemed to bid with constructive
notice of liens on the property offered for sale. Competitive bidding at foreclosure sales
promotes the public policy goal of maximizing the selling price. Accordingly, the Court reasoned,
application of any surplus to liens that the property was sold "subject to" would undermine that
goal and render the competitive bidding process 'practically meaningless". The Court found that
the trial court abused its discretion by directing payment to the first lender, which was a non-
party to the case and over whom it did not have jurisdiction, and interfered with the contractual
relationship between the first lender and its borrower by directing the surplus award.

PRIORITY ADJUDICATION AND EQUITABLE/CONVENTIONAL SUBORDINATION:

The case of Mountain States Mortgage Center v. Allen, (1st Dist., 1993) 257 Ill.App.3d 372, 628
N.E.2d 10521, 195 Ill.Dec. 588, has an interesting holding by the Court to the effect that failure
to plead priority of mortgage lien as an affirmative defense constitutes a waiver of priority and
inclusion in the judgment of foreclosure is res judicata relating to any subsequent proceeding by
the same party to establish a priority lien interest.

In Aames Capital Corporation v. Interstate Bank of Oak Forest,(2nd Dist. July 31, 2000), 315
Ill.App.3d 700, 734 N.E.2d 493, 248 Ill.Dec. 565, Court's decision begins with a deceptively
simple statement that "This appeal arises from a dispute concerning lien priority in a mortgage
foreclosure proceeding. The issue is whether a mortgagee that pays off a priority mortgage
pursuant to a refinancing agreement is entitled to be subrogated to the priority lien recorded by
the original mortgagee." The mortgagor was a builder in DuPage County not well favored in the
last few years. He and his wife made a mortgage in 1986 to Hinsdale Federal that was later
assigned to Standard Federal. (The "first mortgage".) Thereafter, he made four mortgages to
Suburban Bank during the period from 1988 through 1991. In 1996, the Appellee, Interstate
Bank, obtained and recorded a judgment against the builder for $75,89.06; (a sixth position
priority). Thereafter, the builder executed a mortgage to Pacific Thrift and Loan Company
pursuant to a refinancing agreement which paid off the mortgages of Standard Federal and
Suburban Bank. This mortgage was assigned to the Appellant Aames Capital. (The mortgage
instrument assigned was a standard Fannie/Mae/Freddie Mac Uniform Instrument.) This
mortgage was recorded subsequent in time to the recording of the Interstate Bank
memorandum, and the lender incorrectly assumed there were no prior liens. When Aames
began foreclosure, Interstate answered, raising the their judgment lien and the issue of priority.
Both parties came before the trial court on motions for summary judgment on the issue of
priority. The trial court ruled in favor of Interstate based on the theory that the prior recording of
its memorandum of judgment entitled it to a superior lien, and rejected Aames' theory that even
though Interstate's lien predated its mortgage, it was entitled to priority because it was
subordinated to the position of the Standard Federal and Suburban mortgage liens it paid off
during the refinancing. Interstate countered on this issue with the argument that the doctrine of
subrogation will only apply where there is an express agreement that the refinancing mortgage
will assume the priority position of the debt it satisfies.

The Appellate Court begins its decision reversing the trial court by noting that "The doctrine of
first in time, first is right is not always as clear and obvious as it may seem", and "blind
adherence to the first in time, first in right doctrine is sometimes insufficient to determine lien
priority." Noting that "Subrogation is a method whereby one who had involuntarily paid a debt of
another succeeds to the rights of the other with respect to the debt paid.", the Court makes an
important factual distinction in this case: no release of the original mortgages had been
recorded and there was no indication that those liens had been extinguished when Interstate
recorded its judgment. Because Interstate had constructive notice of the prior, unreleased
mortgages when it recorded its judgment, there was "no reason why the doctrine of first in time,
first in right would require us to reject...Aame's argument that subrogation may apply."
Accordingly, the Court appears to be saying that because the prior mortgages were of record,
and Interstate had constructive notice of them, merely subrogating Aames to that position would
not harm Interstate, but would "comport with the purpose of the recording requirement, namely,
to provide notice of liens to third parties.".

Turning to a comparison between equitable and conventional subrogation, the decision

distinguishes conventional subrogation as that arising out of contract, whereas equitable
subrogation is that which arises in common law to prevent unjust enrichment and depends on
the facts of each particular case. Conventional subrogation requires an express agreement.
The Court, however, states "we decline to analyze the present case under equitable
subrogation and, instead, consider whether conventional subrogation...may be applied."

Noting that Firstmark Standard Life Insurance Co. v. Superior Bank, 271 Ill.App.3d 345 (1995)
held that there must be an express agreement that the refinancing mortgage be give the priority
position of the mortgage it pays off, the Court distinguishes Firstmark; (but not until reiterating
that it did not appear that the decision in that case considered the distinction between equitable
and conventional subrogation), and "resurrects" the theory set forth in Homes Savings Bank v.
Bierstadt, (1897!), 168 Ill.618, 624. In Firstmark there was specific language in the mortgage
that it was subject to the mortgage held by the appellee, and therefore there was no express
agreement of subrogation that would overcome the priority of that mortgage. In the instant case,
however, the mortgage instruments were the standard FNMA/FHLMC Uniform Instruments and
they contained language that the mortgagors were to discharge any liens that had a priority over
the mortgage; indicating an agreement of the parties that the mortgage would be a first priority
lien. Conforming to the rule in Bierstadt that "the subrogee is entitled to the benefit of the
security that he has satisfied with the expectation of receiving an equal lien.", and based upon
an express agreement found to be present in the subject mortgage documents, the Court ruled
that: "The holding in Bierstadt fits the precise definition of a mortgage refinancing" situation.

As a clear caveat, the Court notes that its application of conventional subrogation would not
apply "if the original mortgagee files a release of lien prior to the recordation of the refinancing
mortgagee's lien and if a third party records its lien after the release is recorded but before the
refinancing lien is recorded," AND, "Nothing in our holding, however, limits the court from
considering whether the doctrine of equitable subrogation may apply."

It is finally noteworthy that the case was remanded to determine the amount to which Aames is
subrogated; i.e., limited to the amount remaining on the original mortgages secured at the time
of its perfection of its subrogated lien.

Not long after the ink was dry on the decision in Aames Capital Corporation v. Interstate Bank of
Oak Forest, the First District filed a decision adding it to the supporters of the application of the
doctrine of conventional subrogation in LaSalle Bank v. First American Bank, (1st Dist.,
September 12, 2000), 316 Ill.App.3d 515, 736 N.E.2d 619. This case also revolved about
priority in a mortgage foreclosure proceeding. LaSalle filed against the holder of legal title, First
American Bank, As Trustee u/t/a No. F89-130. The beneficiary of the trust was Brandess Home
Builders, which had entered into a contract with Daniel Lopez to build and sell a custom home
on the subject property. Lopez paid Brandess $120,033 in earnest money on a contract for a
total of $519,042.

Brandess then applied to LaSalle for a construction loan of $385,000 to finance the building of
the custom home; (the application noted that Lopez had contracted to purchase the completed
structure and land). Its land trustee gave LaSalle the mortgage sought to be foreclosed. LaSalle
funded $199,400 of the construction financing; $150,000 of which was used to payoff the prior
mortgage of Parkway Bank which had been used to purchase the land for development well
before either Lopez or LaSalle had any interest in the property. When Brandess stopped
construction the building was approximately 50% complete. Brandess defaulted in payments to
LaSalle and its subcontractors, resulting in the foreclosure, counterclaims for mechanic's liens,
and Lopez' counterclaim seeking specific performance and a declaration that his Vendee's lien
for the earnest money was a prior and superior lien to that of LaSalle.

In denying Lopez' motion for summary judgment, the trial court applied the doctrine of
conventional subrogation to find that LaSalle, as subrogee of Parkway had a mortgage lien
superior to Lopez. The construction loan agreement and the mortgage both contained an
agreement between Brandess and LaSalle that LaSalle's mortgage was to have a priority over
all other liens. Accordingly, LaSalle was conventionally subrogated to the prior lien of Parkway's
mortgage, and defeated Lopez to the extent it paid off Parkway. In affirming the trial court's
award of summary judgment in favor of LaSalle, the First District noted that "Contrary to the
assertions of Lopez, the doctrine of conventional subrogation does not require either that
LaSalle obtain Lopez' consent to subordinate Lopez' purported lien, or that LaSalle obtain an
assignment of the Parkway mortgage." The Court also denied any importance to the fact that
Parkway released its mortgage, (a distinction that was preserved in the Aames Capital case),
and stated that "LaSalle's knowledge of Lopez' purchase contract with Brandess is immaterial to
the application of the doctrine of conventional subrogation." Instead, Justice McBride's decision
emphasizes that Lopez gave Brandess his earnest money knowing that Parkway had a superior
mortgage lien, and takes the position that Lopez is left in the same position that he was when he
first contracted by virtue of the application of the doctrine of conventional subrogation; "In such
a case, the doctrine may be applied." The Court's decision also rejected Lopez' argument
based on the doctrine of equitable conversion. Noting that the contract with Lopez was entered
into by Brandess (the beneficiary of the land trust) rather than the legal title owner (First
American Bank), McBride states "The doctrine of equitable conversion has traditionally been
applied where there was a contract between and owner and a purchaser. Thus, Lopez, in
essence, asks us to expand the doctrine to include holders of a beneficial interest in a land trust.
This we decline to do."

In a somewhat confusing turn of the tale, the Court then rejects Lopez' argument that LaSalle's
lien should be limited to the principal payment it made to Parkway under conventional
subrogation, (i.e., $150,000 rather than the $220,000 awarded in the trial court, which included
interest, late charges, attorney's fees and costs), based on the fact that it need not apply the
doctrine of conventional subrogation at all. Disregarding the lengthy discussion of the doctrine of
conventional subrogation, the previous statement that "We thus find that the trial court properly
applied the doctrine of conventional subrogation", and highlighting that the trial court failed to
determine if Lopez had a vendees lien, the decision states "Where Lopez had no lien, LaSalle
did not even need to rely on the equitable doctrine of conventional subrogation to gain priority
over Lopez...The trial court did not err in granting LaSalle its contractual attorney's fees, costs,
late charges and interest."

MECHANIC'S LIEN CLAIMS:

A mechanic's lien claimant is subordinate to the lien of a prior recorded mortgage unless there
has been strict compliance with the Illinois Mechanic's Lien Act. (770 ILCS 60/1 et seq.) The Act
requires that the lien claimant must (a) file a notice of claim for lien within four months of the last
date of substantial work or delivery of materials, (770 ILCS 60/7), (b) commence a lien
enforcement proceeding within two years, (JoJan Corporation v. Brent, (1st Dist., August 25,
1999, modified on rehearing October 20,1999), 307 Ill.App.3d 496, 718 N.E.2d 539, 240 Ill.Dec.
906, AND THEN, (c) will have a priority over a prior recorded mortgage only to the extent of
enhancement, (i.e., the increased market value of the premises by virtue of the lien claimants,
contribution). Mutual Services, Inc. v. Ballantrae Development Company, (1st Dist. 1987), 159
Ill.App.3d 549, 510 N.E.2d 1219, Steinberg v. Chicago Title Trust Co., (1st Dist. 1986) 142 111.
App.3d 601, 491 N.E.2d 1294, and Lyons Savings v. Gash Associates, (1st Dist. 1996), 665
N.E.2d 326.) A subcontractor must also serve a 90 day notice upon the owners and mortgagee
under Section 24 of the Mechanic's Lien Act to preserve a priority, and failure to give notice to
the lender compromised the right to that priority. Petroline Company v. Advanced
Environmental Contractors, (1st Dist., April 27, 1999, No. 1-98-2026), 305 Ill.App.3d 234, 711
N.E.2d 1146, 238 Ill.Dec. 485. In addition to the priority of lien according to enhancement, the
mechanic's lien claimant may be also entitled to include attorney's fees in his total debt pursuant
to the amended effective August 8, 1995 to the Illinois Mechanic's Lien Act if the court
specifically finds that the owner who contracted for improvements made failed to pay without
just cause. (770 ILCS 60/17, Mirar Development, Inc. v. Kroner,(3rd Dist., August 13, 1999),
http://www.state.il.us/court/Opinions/AppellateCourt/1999/3rdDistrict/August/HTML/3980761.ht
m.

The issue of enhancement may be reserved and proved after the foreclosure sale if the parties
are certain the proceeds will be sufficient to satisfy the liens. 735 ILCS 5/1506(h) and 735 ILCS
5/15-1508(B)(3). When dealing with a mechanics lien claim and a good likelihood that the real
estate has substantial equity, an excellent practical approach to the lien priority issue may very
well lie in the reservation of determination by the Court until the confirmation of sale - when
there are sufficient proceeds to satisfy the lien claims. See NBD Highland Park Bank N.A. v.
Wien, (2nd Dist., 1993), 251 Ill.App.3d 512, 622 N.E.2d 123, 190 Ill.Dec. 713, appeal denied,
154 Ill.2d 561, 631 N.E.2d 710, 197 Ill.Dec. 488.

LEASEHOLD TENANTS:

A mortgagee's lien interest is subject to leases entered into prior to the recording of the
mortgage and free and clear of leases entered into after the mortgage. (See Kelley/Lehr &
Associates, Inc. v.O'Brien, (2nd Dist. 1990), 194 Ill.App.3d 360, 551 N.E.2d 419,141 Ill.Dec.
426, and Silverstein v. Schak, (2nd Dist. 1982) 107 Ill.App.3d 641, 437 N.E.2d 1292.)
Amendments to the Illinois mortgage Foreclosure Law have specifically provided that the
interest of a tenant is not terminated unless the tenant is a party to the foreclosure proceedings,
735 ILCS 5/15-1504(t), the Judgment of Foreclosure specifically terminates the leasehold
tenants interest, 735 ILCS 5/15-150`1(d). At confirmation of the foreclosure sale, the Court may
order possession to be granted to the successful bidder, 735 ILCS 5/15-1508, and after the
confirmation an alternative procedure to obtain possession from occupants is set forth in 735
ILCS 5/15-1701(h). While Plaintiff's foreclosure attorneys have long grappled with the problem
of obtaining possession at the end of the foreclosure action from persons in possession over
whom the foreclosure court does not have jurisdiction, there are, however, no short-cuts such
as naming "unknown occupants" or "unknown tenants" as parties to the case to obtain an order
of possession over such parties. This is a common situation where either the plaintiff in the
foreclosure was not diligent in inspecting the premises and advising their counsel of the names
of occupants during the foreclosure, or the persons in possession come into possession during
the pending proceeding and are truly "unknown occupants" or interlopers. In Rembert v.
Sheahan, (N.D. Il., 1994) No. 92 C 67, Judge Holdermans entered an order often cited by the
Sheriff of Cook County in support of his position that he can not evict "unknown occupants" (or
anyone that is not fully and completely named in an order for possession at the end of a
foreclosure case). In response, many foreclosure attorneys have resorted to proceeding
separately in forcible entry to obtain jurisdiction over those "unknown occupants" for eviction
following foreclosure. In the case of Norwest Mortgage Inc. v. Ozuna, (1st Dist., 12/28/98), No.
1-98-1481, 302 Ill.App.3d 674, 236 Ill.Dec. 110, 706 N.E.2d 984, the Court ruled that the
Rembert v. Sheahan injunction applied only to orders for possession entered in mortgage
foreclosure actions, and not to forcible entry and detainer actions. The Court ruled that the
Plaintiffs failure to comply with the provisions of the Code of Civil Procedure relating to
publication against unknown owners, (735 ILCS 5/2-413), rendered the order of possession
against the generically named defendants "void ab inito", but found that while the Sheriff was
not justified in refusing to execute the orders for possession based on the distinction between a
foreclosure and a forcible proceeding the refusal to evict was not contemptible because the
Sheriff acted in good faith to obtain review of the order and application of the Rembert
injunction.

INTERNAL REVENUE LIENS:

The Internal Revenue service's lien priorities are established pursuant to state law with
reference to specific federal law provisions relating to redemption. 26 USC 7425(a).
Accordingly, despite the common misconception that IRS liens somehow have a "special status"
or priority, they attach as any other lien relative to a mortgage; entirely dependent upon the date
of recording.

A mortgage foreclosure, however, in order to terminate a lien of the United States must comply
with the provisions of 28 USC 2410 mandating that a judicial sale be held and providing a right
to redeem during the longer of the period provided by the state law or, 120 days from the date of
sale for internal revenue liens, or for a period of a one year from the date of sale for liens other
than revenue liens.

As a practical matter, however, the United States of America has never redeem from a
foreclosure sale over the last twenty years to this author's knowledge. Most importantly, from a
practical point of view is the little noticed fact that there is an administrative procedure for
obtaining a release of an IRS lien which is a "junior lien' on the real estate. For liens of the
United States the administrative release provision is statutorily set forth at the end of 28 USC
2410:

(e) Whenever any person has a lien upon any real or personal property, duly recorded in the
jurisdiction in which the property is located, and a junior lien, other than a tax lien, in favor of the
United States attaches to such property, such person may make a written request to the officer
charged with the administration of the laws in respect of which the lien of the United States
arises, to have the same extinguished. if after appropriate investigation, it appears to such
officer that the proceeds from the sale of the property would be insufficient to wholly or partly
satisfy the lien of the Untied States, or that the claim of the United States has been satisfied or
by lapse of time or otherwise has become unenforceable, such officer shall so report to the
Comptroller General who may issue a certificate releasing the property from such lien."

STATE OF ILLINOIS LIENS:

The State of Illinois lien rights can be terminated in a mortgage foreclosure proceeding with
relative ease. Section 15-1501(b)(6) provides that the State or any political subdivision may be
made a party to a foreclosure which involves real estate for which it claims a lien and
specifically provides that there is no immunity. 735 ILCS 5/15-1501(b)(6). This same section
also provides for a simplified method for service of process employing registered or certified
mail sent to the Illinois Attorney General. 735 ILCS 5/15-1501(g).

UNKNOWN OWNERS:

A discussion of the concept, interests and rights of "unknown owners and non-record claimants"
can be found in Uptown Federal v. Vasavid, (1st Dist. 1981), 94 Ill.App.3d 531, 49 Ill.Dec. 811,
418 N.E.2d 831. Naming unknown owners and nonrecord claimants in a foreclosure complaint
is a routine, but little understood concept. In Teerling Landscaping, Inc. v. Chicago Title and
Trust Company, (2nd Dist. 1995), 271 Ill.App.3d 856, 208 Ill.Dec. 482,, 649 N.E.2d 538, the
court has given us ample incentive for continuing this practice in its finding that a mechanics lien
claimant, that had not yet recorded its lien claim at the time the mortgagee commenced its
foreclosure, was a "nonrecord claimant", which could be notified of the proceeding by
publication, despite actual knowledge by the plaintiff of the lien claimants interest, and be
thereby foreclosed.

PRAYER FOR RELIEF and DEFICIENCY JUDGMENTS:

The Complaint's prayer for relief is set forth in the short form statutory complaint discussed
above. It is important, of course, to give some consideration to and provision for relief in addition
to that generally requested. For instance if there is a potential for a deficiency judgment should
the sale result in proceeds less than the debt, that relief must be specifically requested in the
complaint or subsequent amendment filed with Supreme Court Rule 105 notice. In Parrish v.
Glen Ellyn Savings and Loan Association, (2nd Dist. 1990) 193 Ill.App.3d 629, 550 N.E.2d 413,
the borrower noted that the complaint did not pray for a deficiency judgment and the plaintiff
failed to give notice pursuant to Supreme Court Rule 105 of an intent to seek additional relief in
the form of a deficiency following the default judgment. In order to support a deficiency
judgment the plaintiff must have an executed note, guaranty, or separate undertaking, followed
by in personam jurisdiction, a sale resulting in a deficiency, without a discharge in bankruptcy
and, of course, a prayer for that relief. Heritage Standard Bank and Trust Co. v. Heritage
Standard Bank and Trust Company, (2nd Dist. 1986), 149 Ill.App.3d 563, 500 N.E.2d 60, and
Barkley Properties, Inc. v. Balcor Pension Investors, II, (1st Dist. 1992), 227 Ill.App.3d 992, 592
N.E.2d 63.).

LIS PENDENS:
Contemporaneous with the filing of the complaint, Plaintiff's attorney should record a Notice of
Foreclosure, commonly referred to as a "Lis Pendens". 735 ILCS 5/15-1503. Every person
who claims a lien or interest in real estate which arises subsequent to the recording of a lis
pendens is bound by the proceeding as if he or she was a party thereto. Agribank, FCB v. Rodd
Farms, Inc., 251 Ill.App.3d 1050. In Equitable Real Estate Investments, Inc. v. United States
Department of Housing and Urban Development, (N.D.Il. 1998), 14 F.Supp.2d 1058, the Court
ruled that when property was sold in foreclosure, a purported purchaser of the property who
had constructive notice of the foreclosure could not recover for improvements to the property
under the theories of either unjust enrichment nor equitable lien for the value of the
improvements. The ruling underscores the applicability of the "doctrine of lis pendens" and the
concept of constructive notice of the foreclosure proceeding imparted by the recording of the lis
pendens. (See First Midwest v. Pogge, (4th Dist. 1997), 293 Ill.App.3d 359,678 N.E.2d 1195,
227 Ill.Dec. 713.)

3. Jurisdiction/Venue/Defenses:

IN PERSONAM JURISDICTION:

The key element in every foreclosure process from the Plaintiff's point of view is obtaining
jurisdiction over the parties whose interests are sought to be foreclosed. While there are a
limited number of defenses to foreclosures, an attack on the court's jurisdiction clearly appears
to be the most effect and most commonly used defense. For an understanding of how important
jurisdiction can be in a foreclosure, review the following cases: State Bank of Lake Zurich v.
Thill, (1986), 113 111.2d 294, 497 N.E.2d 1156, 100 Ill.Dec. 794, Mid-America Federal v.
Kosiewicz, (2nd Dist. 1988), 170 Ill.App.3d 316, 524 N.E.2d 663, 120 Ill.Dec. 633, and
Margaretten v. Martinez, (2nd Dist, 1990), 193 Ill.App.3d 223, 550 N.E.2d 8; 140 Ill.Dec. 526,
appeal denied 132 Ill.2d 546, 555 N.E.2d 377, 144 Ill.Dec. 258. If the Court lacks jurisdiction
over the Defendant, the judgment is void rather than voidable and can be attacked at any time.
JoJan Corporation v. Brent, (1st Dist., August 25, 1999, modified on rehearing October
20,1999), 307 Ill.App.3d 496, 718 N.E.2d 539, 240 Ill.Dec. 906.

PUBLICATION/IN REM JURISDICTION:

Publication Jurisdiction requires a diligent inquiry evidenced by an appropriate affidavit of

publication as is discussed in City of Rockford v. LeMar, (2nd Dist. 1987), 157 Ill.App.3d 350,
510 N.E.2d 128. Plaintiff's attorney should be most concerned with perfecting jurisdiction, and
the matter of lack of diligence in obtaining jurisdiction by publication in foreclosure cases is of
common concern with the Court to result in a special local rule:

"Pursuant to 735 ILCS 5/2-206(a), due inquiry shall be made to find the defendant(s) prior to
service of summons by publication. In mortgage foreclosure cases, all affidavits for service of
summons by publication shall be accompanied by a sworn affidavit by the individuals making
"due inquiry" setting forth with particularity the action taken to demonstrate an honest and well
directed effort to ascertain the whereabouts of the defendants(s) by inquiry as full as
circumstances permit prior to placing any service of summons by publication." Circuit Court of
Cook County Rule 7.3

See also Home Savings Association v. Powell, (1st Dist. 1979) 73 Ill.App.3d 915, 392 N.E.2d
598, 29 Ill.Dec. 901, and Household Finance v. Velvet, 227 Ill.App.3d 453, 592 N.E.2d 98, and
for a discussion of what DOES constitute "due inquiry". In First Bank and Trust Company of
O'Fallon v. Janet King, (5th Dist., March 17, 2000), 311 Ill.App.3d 1053, 726 N.E.2d 621, 244
Ill.Dec. 646, the trial court granted summary judgment in favor of the bank and against King on
her motion to set aside the judgment of foreclosure on publication jurisdictional grounds, vacate
the foreclosure sale to the bank, and declare the bank's subsequent conveyance to third party
as void. Turning first to the jurisdictional issue, the Court noted that the record indicated the
bank had filed affidavits supporting the fact that they had made repeated, unsuccessful attempts
to locate Janet King and had an inspection of the premises conducted by a private investigator
which indicated that the property was vacant. Since the bank met the statutory requirements for
alleging due diligence, the Court reasoned, "it became incumbent upon King to file an affidavit
that upon 'due inquiry' she could have been found." Since King did not properly challenge the
bank's affidavits, the trial court's finding that they did diligently inquire was affirmed noting:
"Although King appears to suggest that notice by publication is never appropriate, even when a
property owner cannot be located, the legislature has determined otherwise. See 735 ILCS 5/2-
206. We also reject King's argument that notice by publication is a violation of due process.
Numerous cases are found in which similar contentions have been made and decided
adversely. These cases hold that service by publication satisfies the requirement of due process
of law."

JURISDICTION IN RE: REINSTATEMENT AND REDEMPTION DATES:

The date and form of jurisdiction is also important due to the fact that the date upon which the
Court obtains jurisdiction over the mortgagor/owner is the measuring point from which the time
periods during which the right to reinstate, (735 ILCS Section 5/15-1602), and redeem, (735
ILCS Section 5/15-1603), are calculated. The right to reinstate, (cure the default by tendering
past due payments, late charges, court costs and attorney's fees), runs for a period of 90 days
from the date the court obtains jurisdiction. The right to redeem is statutorily dependent upon
the type of property being foreclosed, (7 months for residential and 6 months for non-
residential), and runs from the date of jurisdiction as well; although it is important to note from
the Defendant's viewpoint that the date of the entry of judgment is also a limitation inasmuch as
the standard redemption will not expire until no sooner than 90 days from the date of the entry
of the judgment. Accordingly, if the Defendant can keep the judgment from being entered until
after 4 months from the date of jurisdiction, each date thereafter "lengthens" the Defendant's
time period to resolve the matter by pushing back the redemption period.

VENUE:
Venue is proper in the county in which the property is located (735 ILCS Section 5/2-103).

In a divorce setting, Defendants have considered consolidation of foreclosure into the

dissolution proceeding and then moved the Court to enjoin or stay the foreclosure proceeding in
order to "preserve the marital asset". See the case of In Re the Marriage of Schweihs, (1st Dist.
1991), 222 Ill.App.3d 887, 584 N.E.2d 472, 165 Ill.Dec. 293, where the Trial Court hearing the
dissolution proceeding was authorized to join mortgagee THREATENING foreclosure in the
dissolution proceeding and then enjoined initiation of a separate foreclosure proceeding in a
different division. However, also see In Re the Marriage of Elliott, (1st Dist. 1994), 265
Ill.App.3d. 916, 203 Ill.Dec. 46,1 638 N.E.2d 1172, where the Court ruled, as a matter of law,
that a request for an order restraining foreclosure within the divorce proceeding must be denied
for failure to allege (1) that a real estate contract or other reasonable indicia of an imminent sale
exists, (2) that any provision has been or will be made for the payment of ongoing obligations
accruing to the mortgagee, (3) that any provision has or will be made for the posting of a bond
to assure the availability of funds to cover the debt if the property's value decreases, or (4) that
any provision has or will be made for protection of the mortgagee's interest during an indefinite
delay of its recovery for its defaulted loan herein. In this case, the Court's decision provided that
the Court must "deal with the property in question in a manner most equitable to all parties
concerned." Also note that the dissent of Judge Scariano in this case most interestingly states
that the trial court need not have gone to such great lengths, but could have simply achieved
this same result by 'managing its docket' due to the "inherent power' of our courts, governed not
by rule or statute but by the control necessarily vested in courts to manage their own dockets.

Filing in Federal District Court is, of course, an alternative available provided the sum in
controversy exceeds $75,000.00 and diversity is not destroyed by naming Unknown Owners as
a "necessary party".

For an excellent discussion of the 'advantages and disadvantages of filing foreclosures in

federal court see "Federal Foreclosure Actions-Advantages and Disadvantages for Lenders", by
John C. Murray, 83 Illinois Bar Journal, February 1994, P. 80; and Comments by Steven B.
Bashaw contained in "Letters to the Editor", Vol. 84 Illinois Bar Journal, March, 1995.

DEFENSES:

GOOD FAITH AND FAIR DEALING:

A most common "defense" presented in foreclosure cases is that the lender did not deal in
"good faith with the borrower. There is precedent for this duty found in Chemical Bank v. Paul,
(1st Dist. 1993), 155 Ill.App.3d 772, 185 Ill.Dec. 302, 614 N.E.2d 436, where the Court held that
there is a covenant of good faith and fair dealing implied in every debt contract absent a clear
and unequivocal express disavowal. While there have been a good number of recent cases
dealing with the implied duty of good faith and fair dealing in contract actions, (and especially
relating to that duty on behalf of lenders), the recent case of Voyles v. Sandia Mortgage Corp.,
(2nd Dist., November 4, 1999), No. 2-98-0753,
http://www.state.il.us/court/Opinions/AppellateCourt/2000/2ndDistrict/February/HTML/2980753.
htm, appears to be the first to recognize this as a basis for a cause of action in tort. "Defendant
properly notes that no Illinois cases have heretofore explicitly recognized the independent
existence of a tort action for breaching the duty of good faith and fair dealing.... Recent
decisions, however, have shown that courts have implicitly accepted the existence of the tort."
Ms. Voyles purchased a single-family residence in Springfield, Illinois, but then rented it to her
attorney when she moved to Chicago to find employment. As a result of personal problems,
she made arrangement with her tenant/attorney for him to make the monthly mortgage
payments directly to the lender. Following an all too familiar course of events, the lender was
taken over by the RTC and then the servicing of the loan was transferred to Fleet Mortgage.
Fleet refused to accept payments from the tenant based on a suspected violation of the due on
sale clause, and then increased the monthly mortgage payments to reflect the annual property
tax. (Neither of these actions or the basis for their decisions was communicated to Ms. Voyles.)
A convoluted series of tenders and refusals culminated when Ms. Voyles attempted to refinance
her residence in the Chicago area and was denied based upon a pending foreclosure initiated
by Fleet Mortgage in Springfield. Before the foreclosure could be resolved, Ms. Voyles was
unexpectedly terminated from her job, and the refinancing fell through. She filed suit against
Fleet alleging negligent reporting of credit information (Count I), negligent failure to correct
falsely reported credit information (Count II), breach of contract (Count III), breach of the duty of
good faith and fair dealing (County IV), and for punitive damages based on willful conduct. The
Trial Court granted Fleet's motion for summary judgment and the Appellate court reversed. The
Court's decision begins with a restatement of the implied duty of good faith and fair dealing,
then finds that the actions of the lender relating to the credit reporting were "intentional" as
"purposeful and directed" rather than "negligent" as "careless or accidental", and finally rejects
the Moorman doctrine and proximate cause as a defense. While the decision was expressly
"Based on the narrow circumstances of this case", there can be no doubt that the court found a
cause of action exists for breach of the duty of good faith and fair dealing, and lenders whose
conduct approaches that of Fleet Mortgage here had best beware. After the November 1999,
publication of the opinion in the case of Voyles v. Sandia Mortgage Corporation, n/k/a Fleet
Mortgage Corporation, (2nd Dist. November 4, 1999) No. 2-98-0753, however, the decision was
withdrawn for re-hearing. The importance of the court's own observation that no Illinois case
had heretofore explicitly recognized the independent existence of a tort action in favor of a
borrower for a lender's breach of the covenant of good faith and fair dealing also recommended
the decision for reconsideration. Which the Illinois Supreme Court undertook by granting leave
to appeal to the lender shortly thereafter reversing the Second District in Voyles v. Sandia
Mortgage Corp., (May 24, 2001),
http://www.state.il.us/court/Opinions/SupremeCourt/2001/May/Opinions/Html/89201.htm --
leaving borrowers' attorneys with an empty quiver in their arsenal. The Supreme Court
specifically ruled in favor of the lender's argument that the Second District erred in recognizing
an independent cause of action in tort for breach of an implied duty of good faith and fair dealing
arising from the mortgage contract: "...we decline to recognize the cause of action in the
circumstances of this case. Until the decision below, appellate court panels which had squarely
addressed the question had consistently refused to recognize an independent tort for breach of
the implied duty of good faith and fair dealing in a contract." The Court's decision was based on
three things it did not find present in the case: (1) it did not find that the lender intended to
create a credit controversy, (2) it did not find that it is advisable to recognize a cause of action
for breach of the implied duty of good faith and fair dealing in these cases, and (3) it did not find
a need to expand the reach of the limited cause of action created in insurance policy duty-to-
settle cases to mortgagor-mortgagee cases.

Lender's counsel will especially appreciate the finding by the Court that the lender need not
provide a detailed explanation of an increase in monthly mortgage payments; given the
language of the mortgage. Sending a new payment booklet showing the increased payment
was sufficient. There was no 'false statement' in the reports to the credit agencies to support
defamation. There was no intentional and unjustifiable interference to support the tort of
interference with economic advantage.

ORAL CREDIT AGREEMENTS:

The next most commonly suggested defense is a purported forbearance agreement between an
officer of the lender and the borrower. Any such agreement of the lender, however, must in
writing rather than oral in order to be enforceable. See FDIC v. O'Malley, (1994), 163 Ill.2d 130,
643 N.E.2d 825, 12 U.S.C. 1823(e), Staunton v. McBride Chevrolet, (4th Dist. 1994), 642 N.3.2d
138, relating to the Illinois Credit Agreements Act, 815 ILCS Section 160/0.01. Under the Credit
Agreements Act, the "defense" of an allegation of an extension by conduct on the part of the
lender or "reformation" based on a purported oral agreement with a loan officer is unavailing.
The further cases of Home Federal Savings v. LaSalle National Bank, (1St Dist. 1970), 130
Ill.App.2d 285, 264 N.E.2d 704 and Bank of Naperville v. Holz (2nd Dist. 1980), 86 Ill.App.3d
533, 41 Ill.Dec. 604, 407 N.E.2d 1102), also appear to have emasculated these defenses based
on the statutory requirement that any modification of a credit agreement must be in writing to be
enforceable. See also Klem v. First National Bank of Chicago, (2nd Dist. 1995) 655 N.E.2d
1211. Although the cases upholding the application of Illinois Credit Agreements Act, (815 ILCS
160/1), have consistently barred borrowers from asserting counterclaims and affirmative
defenses against lenders based on alleged oral agreements to restructure a loan or forbear, it
appears that defendants have not grown weary of this defense; or appeals based upon it. In the
most recent case, Teachers Insurance and Annuity Association of America, (2nd Dist. 1998)
295 Ill.App.3d 61, 691 N.E.2d 881, 229 Ill.Dec. 408, the Court considered and rejected the
borrower's numerous arguments that (1) the mortgagor-mortgagee relationship is a fiduciary
arrangement allowing avoidance of the oral agreements limitation under theories of equitable or
promissory estoppel similar to those employed to avoid the impact of the Statute of Frauds, (2)
the Credit Agreements Act violates the borrower's right to equal protection, and (3) the Credit
Agreements act is "special legislation or "dual purpose legislation", in order uphold the
constitutionality and application of the law. It would certainly appear that the courts are
convinced that the Credit Agreements Act IS a bar to defenses based on alleged oral
statements made by lenders to borrowers, and even these fairly inventive arguments are
unpersuasive.

AFFIRMATIVE DEFENSES:
If there is an affirmative defense or counterclaim, the Defendant should allege it as part of the
answer. Failing to do so may constitute a waiver. See Mountain States Mortgage v. Allen, (1St
Dist. 1993), 257 Ill.App.3d 372,628 N.E.2d 1052, 195 Ill.Dec. 588, where the purported first
lender's failure to allege their priority as an affirmative defense constituted a waiver.

4. Reinstatement and Judgment:

By the entry of the judgment, the Plaintiff establishes its right to foreclose, the amounts due to it,
the rights and priorities of the various defendants, the timetable for the remainder of the case,
and provisions for the conduct of the sale. 735 ILCS 5/15-1506.

735 ILCS Section 5/15-1602 sets forth the statutory right to reinstate or cure the default and
obtain a dismissal of the foreclosure proceeding. Section 5/15-1603 sets forth the entire
statutory scheme for redemption. The distinction between reinstatement and redemption is one
with which laypersons and attorneys unfamiliar with this area of the law seem to continually
have a problem. In addition to the obvious practical differences between the having to pay a
loan in full rather than simply tender the past due payments, late charges, fees and costs, it
should be noted that Section 15-1602 contains the provision that a mortgagor can only avail
himself of the right of reinstatement following acceleration and the filing of a foreclosure
complaint once every five years. It should be noted by both Plaintiff's and Defendant's attorneys
however, that in order to activate this statutory limitation, the mortgagee's counsel in the prior
proceeding must have specifically incorporated the prohibition in the dismissal order. It would
seem only prudent then (if not actually necessary to avoid malpractice) for plaintiff's attorney to
include such a limitation in any order of dismissal entered by virtue of reinstatement in a
foreclosure case in order not to waive this important limitation provision

In Lomas & Nettleton Co. v. Humphries, (N.D. 111. 1989), 703 F.Supp. 757, the Court ruled that
mortgagors would be permitted to reinstate pursuant to Section 15-1602, regardless of the fact
that they did not tender a sum sufficient for a "curing of all defaults ... by paying all costs and
expenses required by the mortgage ... prior to the expiration of 90 days from the date... of
jurisdiction." This ruling was based upon special circumstances where the mortgagors raised a
good faith dispute concerning the appropriateness of charges included by the mortgagee and
then filed a motion before the trial court to determine the amount necessary to reinstate before
the expiration of the statutory reinstatement period. (For case which deals with a perhaps
"related" issue of collection of attorney's fees see Petkus v. St. Charles Savings and Loan
Association, (1989), 538 N.E.2d 766, where the Court ruled that a release of mortgage and
cancellation of note only served to extinguish the lien of the mortgagee and right to foreclosure
but did NOT extinguish the right provided for payment of attorney's fees.) Finally, see First
Federal Savings and Loan Association of Chicago v. Walker, 91 Ill.2d 218, 437 N.E.2d 644,
relating to the right of the lender to deny successive reinstatements under the statutory
provision restricting a borrower's right to elect to reinstate to once every five years under 735
ILCS 5/15-1602.
IMFL provides for a statutory method of establishing the debt amounts through an accounting by
affidavit, (Section 5/15-1506(a)), provides for the method of sale of the premises to satisfy the
debt, (Section 5/15/1506(f)), and begins the running of the redemption period, (Section 5/15-
1603(b), which is dependent upon the type of real estate being foreclosed. The Illinois Mortgage
Foreclosure Law also provides that the court MAY include "Special Matters" or provisions in the
judgment if sought by any party. Such special matters are enumerated and the law envisions a
number of alternatives to the present standard of a sheriff sale conducted in the courthouse.

There are also statutory alternatives whereby the redemption period can be shortened to 30
days after the entry of judgment, (regardless of the date of jurisdiction is obtained and
regardless of the type of real estate at issue), due to the fact that the premises are abandoned.
This provision of the law is set forth at Section 15-1603(b)(4), and should be invoked by
plaintiff's counsel whenever the property is vacant. The Defendant, of course, should note that
"abandonment" rather than "vacancy" is the operative term in the statutory scheme, and
"abandonment" may reasonably be argued to refer to the Defendant's intent rather the
occupancy status of the premises.

Additionally, Section 15-1603(b)(3) further provides that the redemption period shall be
shortened to 60 days in the event that value of the real estate is found by the court to be less
than 90% of the total mortgage debt, (which includes all interest, fees and costs as set forth in
Section 15-1603(d)). This particular section has not see implementation too frequently in the
past by mortgagee's counsel simply because the trend for decades has been in favor of real
estate values increasing over time to a point that the mortgage debt seldom if ever approached
the value of the real estate. In the wake of recession or real estate value depreciation, however,
we have all witnessed market values decline to the point where the presumptions of the past
should not serve to allow the attorney for a mortgagee to overlook this important provision in the
law.

Counsel for both parties should seriously consider the alternatives to a standard foreclosure
sale set forth in the statute. These alternatives range from having an "brokered sale listing" in
lieu of a foreclosure sale, to an "open house" on the property prior to sale, to simply assuring
that signs are posted on the front lawn indicating that it will be offered for sale. The flexibility
provided to the Court in the statute relating to sales can be summed up to be: "such other
matters as approved by the Court to ensure sale of the real estate for the most commercially
favorable price for the type of real estate involved". 735 ILCS 15-1506(h)(14).

There is some significant divergence in practice among various Judges in the various counties
relating to the appointment of sale officers. The three most commonly used sale officers are the
County Sheriff, Intercounty Judicial Sales Corporation, and The Judicial Sales Corporation.
Some Judges will approve the appointment of only the Sheriff, (i.e., Will and Kane counties),
and some Judges will not appoint one or the other of the corporate sales officers. In Mountain
States Mortgage Center v. Allen, (1st Dist., 1993) 257 Ill.App.3d 372, 628 N.E.2d 10521, 195
Ill.Dec. 588, the First District specifically upheld the appointment of a selling officer other than
the Sheriff.
Proof of the sums due in the Judgment is routinely by affidavit pursuant to the statutory
provision of 735 ILCS 5/15-1506. See Harris Bank-Hinsdale v. Caliendo, (1992), 235 Ill.App.3d
1013, 601 N.E.2d 1330, and Cole Taylor Bank v. Corrigan, (1992) 230 Ill.App.3d 122, 595
N.E.2d 177, for a discussion of affidavits in support of motions for summary judgment.

Finally, of course, the Judgment should specifically state the date upon which the right of
redemption expires. Nonetheless, the Second District Appellate Court has ruled that
miscalculation of the redemption date in the judgment is not fatal. See Margaretten v. Martinez,
(2nd Dist, 1990), 193 Ill.App.3d 223, 550 N.E.2d 8; 140 Ill.Dec. 526, appeal denied 132 111.2d
546, 555 N.E.2d 377, 144 Ill.Dec. 258, in which the Court ruled that in addition to "void" and
"voidable" judgments there are also "erroneous" judgments which will be enforced by the court
where otherwise appropriate pursuant to Section 2-1401.

5. Redemption:

Once expired, the right of redemption shall not be revived, there IS a specific procedure and
process for exercising redemption, and there is a special right of redemption.

It should be noted in any discussion of the redemption period as set forth in the judgment that
the legislature included strict provisions relating to the redemption period in Section 15-
1603(c)(1) which provides:

"Once expired, the right of redemption ... shall not be revived. ...Neither the initiation of any
legal proceeding nor the order of any court staying the enforcement of a judgment of foreclosure
or the sale pursuant to a judgment or the confirmation of the sale, shall have the effect of tolling
the running of the redemption period". 735 ILCS 5/15-1603(c)(1).

Language in Margaretten v. Martinez, (2nd Dist, 1990), 193 Ill.App.3d 223, 550 N.E.2d 8; 140
Ill.Dec. 526, appeal denied 132 111.2d 546, 555 N.E.2d 377, 144 Ill.Dec. 258, can also be cited
for the Court holding that the trial court was prohibited from using its equitable powers to extend
the redemption period after the judgment had been entered and the sale held.

There is also a "Special Right to Redeem" set forth in Section 15-1604 which applies only to
residential real estate where the purchaser at sale is the mortgagee and the sale price was less
than the full debt. When these circumstances coincide, the mortgagor/owner has a special right
to redeem for 30 days after the confirmation of the sale. It is noteworthy that the amount is NOT
the full debt, but the amount bid, plus statutory interest and statutory costs and expenses.

The procedure to be followed to redeem under IMFL is set forth in detail in Section 15-1603.
The statutory scheme provides that the redemption funds are to be tendered to the mortgagee
or the mortgagee's attorney of record, 735 ILCS 5/15-1603(f)(1), or, in the event of a dispute as
to the amount necessary or refusal of the mortgagee to accept the tender, the funds are to be
tendered to the Court together with written objections. 735 ILCS 5/15-1603(f)(2). The basis for
the calculation of the amount necessary to redeem is the statement of the mortgagee which is to
be prepared by its counsel rather than the sheriff or selling officer. The triggering event for the
preparation of the redemption estimate is the "written notice of... intent to redeem" which the
mortgagor MUST give to the mortgagee's attorney at least 15 days (other than Saturday,
Sunday or Court holiday) before the date designated for redemption". 735 ILCS 5/15-1603(e).
Under IMFL, Section 15-1603(f)(1) provides that the redemption funds are to be tendered to the
mortgagee or the mortgagee's attorney of record. This same section also requires that the
"Such owner of redemption shall file with the clerk of the court a certification of the giving of
such notice." (See Section 15-1603(e). This statutory provision requiring a notice of an intent to
exercise redemption rights by the mortgagor and itemization of the amount necessary to
redeem by the mortgagee seem to present difficulty for both laymen and casual practitioners in
the area. Thus far, the Courts have refused to require the filing of the notice of intent to redeem
as a pre-condition to redemption or to protect the interests of third party bidders. (See Fleet
Mortgage Corp. v. Deale, (1st Dist., 1997) 287 Ill.App.3d 385 and Commercial Credit Loans,
Inc. v. Espinoza, (1st Dist. 1997), 293 Ill.App.3d 923, 288 Ill. Dec. 410, 687 N.E.2d 282. Simply
knowing that a formal notice and response procedure exists in order to redeem seems to be
beyond many if not most practitioners in this area. The statutory provision that appears to
mandate that the notice must be given at least 15 days prior to the designated redemption date
can certainly be fraught to opportunity for malpractice and controversy before the Courts, but to
date, it appears that the Appellate Courts are not willing to require strict compliance with the
statute or believe that the interest of third party bidders are sufficiently protected or important to
protect by enforcement of this provision of the law.

Something of importance which is not readily apparent upon the first or casual reading of the
Illinois Mortgage Foreclosure Law is that only owners have the right to redeem. Second lenders,
subordinate lien holders and other creditors do not have a statutory right to redeem. For those
whose clients who are second mortgage holders, this may present a difficulty if they are
attempting to effectuate a "last minute redemption" upon finding that there is equity and the first
lender is about to foreclose this interest at its sale. The alternative is to out-bid the first lender at
the sale rather than redeem. Additionally, the statutory provisions requiring a notice of an intent
to exercise redemption rights by the mortgagor and itemization of the amount necessary to
redeem by the mortgagee seem to present difficulty for both laymen and casual practitioners in
the area.

The effect of the amendment of a judgment on the running of the statutory redemption period
has been of some speculation among practitioners in the area. It has been held, however, that
the amendment of a judgment, following the filing of a bankruptcy petition, in order to include
additional fees and expenses incurred during the stay does not extend the redemption period.
Mountain States Mortgage Center v. Allen, (1st Dist. 1993), 257 Ill.App.3d 372, 628 N.E.2d
1052, 195 Ill.Dec. 588.

REDEMPTION AND payoff FEES

In Krause v. GE Capital Mortgage Service, Inc., (1st Dist. May 30, 2000), 731 N.E.2d 302, 246
Ill.Dec. 866, Justice Frossard affirmed the trial court's summary judgment in favor of the
mortgage company allowing the mortgagee's charge to the borrower of a $15 quote fee and a
$10 fax fee for a mortgage payoff statement. Arguing that these charges were not provided for
in the mortgage instruments and constituted a prepayment penalty specifically waived by the
language of the mortgage documents, the Plaintiffs sought a finding for breach of contract in
Count I, restitution in Count II, and damages under the Illinois Consumer Fraud and Deceptive
Business Practices Act, (815 ILCS 505/1 et seq.), in Count III.

The Lender argued with supporting affidavits that the charges were not in the nature of a
prepayment penalty, but a charge for services rendered. GE Capital's affidavits provided that it
did not charge for verbal payoff quotes or the first payoff statement in writing, but did include a
$15 service or quote fee if more than one written payoff statement was requested, and an
additional $10 fee for each fax transmission.

Additionally, the automated telephone system from which borrowers ordered payoff letters
disclosed the costs for multiple payoff and fax requests. The computer records of the defendant
in this case indicated that Krause had ordered two payoff letters, both by fax, and therefore
been charged a $15 payoff fee (for the second request) and $20 for fax fees (both requests).
The other named plaintiff, Lindberg, had ordered a total of five payoff statements and requested
three of the statements by facsimile; and were charged $15 for the multiple quote and $30 for
the fax fee.

The opinion affirming the trial court's ruling for GE Capital begins by noting that "A charge is a
prepayment penalty if the charge imposed at the time of prepayment was one that would not
have been imposed if the note were paid at maturity instead of at an earlier date", and cites
recent Minnesota and Massachusetts cases. The defendants in the case at bar did not assess
these fees because the loans were paid early, but because the plaintiffs requested multiple
statements and that the statements be faxed rather than mailed. Charges imposed because of a
request for special services are not in the nature of prepayment penalties. Likewise, the fact
that the charges were disclosed on the automated phone service resulted in the Court's
determination that nothing was concealed, suppressed or hidden to form a cause of action for
Consumer Fraud.

When the facts are properly understood, the decision in this case is a foregone conclusion.
What is also worthwhile reading is the Court's distinction of other, similar cases, and handling of
the equitable maxims "expressio unius est exclusio alterius" (the mention of one thing excludes
another) and "contra proferentum" (an ambiguous contract is construed against its drafter).

6. Sale:
The notice content and conduct of the foreclosure sale is set forth in the Illinois mortgage
Foreclosure Law. 735 ILCS 5/15-1507. The publication and notice requirements are set forth in
Section 5/15-1507, and mandate the information to be given in the sale notice, (although an
"immaterial error in the information shall not invalidate the legal effect of the notice"), as well as
the timing and forum of publication. Continuance of sales from time to time are provided for in
Section 5/15-1507(c)(4), and no notice need be published in the event a sale is continued for
less than 60 days; although it is important and mandated that the sale officer announce the
continuance at the time of the sale, and whether this is limited to a single continuance or
multiple continuances, each of less than 60 days, has yet to be presented to an Appellate Court.

TERMS OF SALE, OFFICER AND THIRD PARTY BIDDERS:

The 'most commonly asked questions about sales" are the terms and what is being sold. It is
critical to make certain the terms, ("cash" "AS IS"), are set forth in the public notice. Equally
important, is to assure that "no warranties or representations" relating to the nature or extent of
title are communicated or implied. Relating to what is being sold and what representations can
be relied upon at sale, see Marino v. United Bank of Illinois, N.A., (1985), 137 Ill.App.3d 523,
484 N.E.2d 935, where a request by a bidder at a foreclosure sale for advice of status of liens
which were not being foreclosed was dealt with by the Court. The more recent case of Davis v.
Stramaglio, (1st Dist. 1991), 154 Ill.Dec. 356, 568 N.E.2d 356, extended the Court's protection
of the validity of the sale and the purchasers' interest unless the purchaser had notice of an
error or irregularity in the sale documents, (or, presumably, the conduct of the sale). A
concerted attack on the statutory scheme of foreclosure sales was mounted in the case before
the First District. Mountain States Mortgage Center v. Allen, (1993 1St Dist.) 257 Ill.App.3d 372,
628 N.E.2d 1052, 195 Ill.Dec. 588. In his decision, Justice Dom Rizzi found that the sales could
be conducted by a sale officer other than the Sheriff of the County and in a place other than the
courthouse. 735 ILCS 2-1401(e) also contains a statutory protection for the rights of third party
bona fide purchaser without notice of defects at the sale, and discussions of this law can be
found in State Bank of Lake Zurich v. Thill, (1986), 113 Ill.2d 294, 497 N.E.2d 1156, 100 Ill.Dec.
794, and Mid-America Federal v. Kosiewicz, (2nd Dist. 1988), 170 Ill.App.3d 316, 524 N.E.2d
663, 120 Ill.Dec. 633. The Second District has ruled that even where the strict publication
requirements of the Illinois Mortgage Foreclosure Law are not followed, the Court may approve
the sale IF the defendants themselves received actual notice of the sale. Cragin Federal v.
American National Bank, (2nd Dist. 1994) 161 Ill.App.3d 115, 633 N.E.2d 1011.

7. Confirmation of Sale and Possession:

CONFIRMATION OF SALE

Section 15-1508 codifies the basis upon which the Court will NOT approve the sale as being
LIMITED to instances where (1) proper notice of the sale was not given, (2) the sale terms were
unconscionable, (3) the sale was conducted fraudulently, or (4) "that justice was otherwise not
done". The approval of sale, due to the fact that the redemption period will have already
expired, takes on importance in addition to confirming the sale process in that the matter of any
priorities of liens which were reserved in the judgment will be finally established by the
confirmation, (Section 15-1508(b)(3)), and the right to possession of the premises is awarded at
this hearing, stayed for 30 days. Section 15-1508(b). Additional fees and costs incurred by the
mortgagee since the entry of the judgment and a deficiency judgment will also be allowed and
ordered at this hearing. (Section 15-1508(b)(1) and 15-1508(b)(2), 15-1508(e))

Recent amendments to Section 15-1507 and 15-1508 have dealt with the difficult issue of
obtaining possession from occupants of the foreclosed premises who were not parties to the
foreclosure proceeding. Section 15-1701(d) now provides that after 30 days after the
confirmation of the sale, the purchaser at sale may bring an action within the foreclosure by
"Supplemental Petition for Possession" under subsection (h) to terminate the rights of
possession of any such occupants. New Subsection 15-1701(h) was created by Public Act 88-
265 to provide that a mortgagee-in-possession, holder of a certificate of sale, or purchaser at a
foreclosure sale can bring a supplemental petition for possession against a person NOT made a
party to the foreclosure action who became an occupant AFTER the recording of the notice of
foreclosure (lis pendens), memorandum of the judgment, or certificate of sale. The
supplemental action can be filed any time during the foreclosure proceeding and up to 90 days
after the entry of the order confirming the sale. The hearing on the supplemental petition shall
be not less than 21 days from the date of the service of notice for hearing upon the occupants.
The notice shall include the petition and a copy of the certificate of sale or deed. In effect, the
new Subsection 15-1701(h) resurrects the old "writ of assistance" procedure commonly used
prior to the passage of Illinois Mortgage Foreclosure Law. The notice time limitations contained
in Section 15-1701(h) seem particularly significant, and it is presumed that the method of
service of the notice is the same as notices of hearing in other cases except the 21-day
provisions.

The approval of the sale, long viewed by the Courts and mortgagee's attorneys as a "routine"
matter, actually has a great potential for being otherwise under the right circumstances, OR, if
so employed by able counsel. More and more, issues relating to lien priority and distribution of
surplus proceeds from the sale are being resolved at confirmation of the sale. This is, of course,
also the point at which Defense Counsel must confront the issues relating to a deficiency
judgment. The new statutory procedure designated as a "Supplemental Petition for Possession"
is of historical kinship to the old "Writ of Assistance", and will likely be so treated by the courts.
In order to terminate the leasehold rights of tenants who are parties to the foreclosure, the
complaint must have specifically included the allegation of subparagraph (T) of Section 15-
1504, and the Judgment must have a specific termination of interest finding.

The issue most litigated at the confirmation of sale in the recent cases is whether or not the
amount bid at the sale is "conscionable". In Standard Bank v. Callaghan, (2nd Dist. 1988), 177
Ill.App.3d 973, 532 N.E.2d 1015, it was held that the mortgagee who bids at a judicial sale
based on an appraisal that it knew or should have known was too low, engages in a "mistaken
practice" which renders the sale commercially unreasonable and jeopardizes its right to obtain a
deficiency judgment at confirmation. In the case of RTC v. Holtzman, (1St Dist. 1993), 248
Ill.App.3d 105, 618 N.E.2d 418, the Court ruled that IF there is an allegation of a current
appraisal or other indicia that the sale bid is unconscionably low, a hearing should be afforded
prior to the confirmation. The Second District in Cragin Federal v. American National Bank, (2nd
Dist. 1994) 161 Ill.App.3d 115, 633 N.E.2d 1011, established the probable outcome of such an
evidentiary hearing and ruled that, in order to deny confirmation of sale, unconscionably of price
alone is not enough; the law requires something more than merely "inadequate sale price", and
in this case missing one of the three sale publications was not sufficient. The Court upheld the
trial court's ruling that the sale of the property for substantially less than its actual value would
NOT be set aside and affirmed the trial court's confirmation of the sale.

This progression of the law recognizing that foreclosure sales do not necessarily result in the
property being sold for "fair market value" and that foreclosure sales should NOT be overturned
solely on that basis is reflected in the reasoning employed by the United States Supreme Court
in its decision in BFP v. RTC, (1994) 114 S.Ct. 1754. In that case, the Court's opinion states
that at a foreclosure sale the sale price IS the market value and nothing else is a reliable
valuation; especially where the bidder is a third party bona fide purchaser. In BFP v. RTC,
Justice Scalia delivered the opinion in which Justices Rehnquist, O'Connor, Kennedy, and
Thomas joined, holding that so long as a foreclosure sale is conducted in accordance with the
state law and is not collusive, then the price received at the foreclosure sale shall be deemed
the reasonably equivalent value for the purpose of the Section 548 of the Bankruptcy Code, and
thus can not be set aside as a "fraudulent transfer" if the debtor subsequently files bankruptcy.
This United States Supreme Court case, although decided in a Bankruptcy arena, will likely be
good precedent in future foreclosure cases where confirmation is attacked based on the amount
bid at the sale. Commercial Credit Loans, Inc. v. Espinoza, (1st Dist. 1997), 293 Ill.App.3d 923,
288 Ill. Dec. 410, 687 N.E.2d 282, stands, however, as a case in Illinois that anyone dealing
with the issues of "unconscionability" and "unjust result" must review. In this case, Ms.
Espinoza came to the sale with a certified check in hand to attempted redemption.
Unfortunately, her redemption period had already expired, she had a check for only the amount
of the judgment (without the additional interest and costs that had accrued in the 90 days
following the judgment), and did not speak English. The Trial Court's refusal to confirm the sale
as "unconscionable" and an "unjust result" was affirmed, and it can't be ignored that the most
often considered fact in the decision was the fact that the third party bidder would have
otherwise purchased the property for approximately 25% of its fair market value.

A good overview of the issues and cases relating to confirmation is set forth in Harold I. Levine's
article "Report of Sale and Confirmation in Foreclosure: What is a good faith bid?" which
appeared in the April, 1994 Issue of the Real Property Section Newsletter of the Illinois State
Bar Association, Vol. 39, No. 7. and see also "A Growing Trend to non-confirmation of sales
under the Illinois Mortgage Foreclosure Law", by Steven B. Bashaw, Illinois State Bar
Association, Real Estate Council Newsletter, June, 1998.

In a case that visits familiar territory to mortgage foreclosure attorneys, but with a different result
than some recent case law, World Savings and Loan Association v. AmerUs Bank,(1st Dist.,
November 16, 2000), points out that sometimes it is most important to consider whose interests
are being affected at confirmation of sale to determine what the courts may do.

The appeal was taken by a junior mortgagee from the confirmation of the sale to a third party
bidder. The sale publication notice and judgment provided that the terms of the sale were to be
"Cash". When the Plaintiff sought to confirm the sale, AmerUs Bank opposed the confirmation
and alleged that the sheriff failed to follow the terms of the sale by allowing the third party
bidder, Dorota Wasik, to pay 10% of the sale price at the time of the sale and the balance within
24 hours, while rejecting the higher bid of AmerUs because its attorney did not have cash-on-
hand at the sale. (AmerUs Bank had wired transferred sufficient funds to bid to its attorney, but
his own bank inadvertently delayed crediting the law firm's account until the day following the
sale, and as a result he had no "cash" at sale.) Even though AmerUs Bank's attorney had
obtained the plaintiff's permission to bid without cash on hand, provided he obtained the cash
before 5 pm of the same day, the sheriff's deputy determined the inability to tender cash at the
time of sale invalidated the AmerUs bid and held the sale over; resulting in the sale to Wasik on
a second round of bidding. At the hearing on confirmation, Dorota Wasik filed an affidavit
stating that in reliance upon her successful bid at the sale, she contracted to sell her current
home in anticipation of moving into the subject premises as her new home. The deputy sheriff
testified that the policy of his office was to require 10% down in the form of cash or a certified
check at the time of the sale and payment of the balance within 24 hours, and that this policy
was announced before commencing each sale. AmerUs argued on appeal that the sheriff's
conduct deprived it of its interest in the subject property without due process of law and that the
trial court erred in considering Wasik's affidavit. Section 15-1507(b) of the Illinois Mortgage
Foreclosure Law provides that the sale officer derives his authority to hold the sale from the
judgment, and it is his duty to conform to the court's order. Justice Barth, (who had last served
in the trial courts in the Chancery Division of Cook County where he regularly presided over
foreclosure cases and confirmation of sales), nonetheless notes that there was no specific
requirement of a cash sale in the judgment in this case, and reviewing cases where deviation
from the trial court's order provided cause for setting aside a judicial sale, holds that there was
no clear departure from the sale terms set forth in the judgment here. "To give a party in
[AmerUs]'s position the ability to delay a sale any time the order does not directly address an
issue which arises at the sale could have serious implications for the orderly administration of
judicial sales...Had the judgment contained more specific terms of sale...this dispute could have
been avoided. In any event, the circumstances surrounding this sale did not give rise to
irregularities which would have required the trial court to set it aside." While the trial court
should not have considered the disputed evidence regarding the sale of Wasik's residence in
reliance upon the sale, "The trial court's consideration of this evidence does not warrant a
reversal here, however... It is proper for a trial court to balance the hardship that would result to
a third party bidder if the sale is not confirmed against the hardship which would result to other
interested parties if the sale to the third-party is confirmed." Noting that "...because [AmerUs]
could attempt to recover the debt from the [owners] through other means. The hardships which
[AmerUs] and the [owners] allegedly have suffered are a natural result of any sale to a third-
party bidder." Justice Barth concludes that "Therefore, this is not a situation where the actions
of the sheriff's department had the effect of unilaterally depriving [AmerUs] of its property rights
without notice or an opportunity to be heard.", and affirmed the confirmation of the sale.

For a decision about what jurisdiction the trial court has at confirmation of sale to "correct" a
mistaken sale bid, see the case of Grubert v. Cosmopolitan National Bank, , (2nd Dist. 1995),
269 Ill.App.3d. 405, 645 N.E.2d 560, 206 Ill.Dec. 555, affirming the test set forth almost ninety
years ago in Abott v. Beebe (1907) 226 Ill. 417, 80 N.E. 991, that: "[c]ourts will not refuse to
confirm a judicial sale or order a re-sale [sic] on the motion of an interested party, merely to
protect him against the result of his own negligence..." In Grubert, the Trial Court's order
allowing the plaintiff to "revise" its bid made in error at a foreclosure sale in order to do "equity"
and "justice" was reversed on appeal.

The Second District's opinion stated that the action of the Trial Court was clearly beyond the
court's authority and stated its fear that allowing the Court to exercise such discretion to correct
the mistake of the Plaintiff at sale "would undermine the finality of the results of a properly
conducted judicial sale." Relating to another sale "held in error" by the Plaintiff when an
agreement had been made to accept payment up to a date after the sale, see Citicorp Savings
v. First Chicago Trust, (1st Dist. 1995), 645 N.E.2d 1038, which both recognized third party
bidders rights to intervene at the confirmation of sale and the trial court's authority to refuse to
confirm a sale where it determined the property had been offered for sale "by mistake". This
trend toward allowing the trial court to exercise its discretion in refusing to confirm sales based
on concepts of equity, justice or unconscionability is noteworthy and furthered by the ruling in
Fleet Mortgage v. Deale discussed above. In this case, as in Citicorp, the sale was held "in
error". The owners tendered redemption an the last day of the redemption period, but the lender
failed to notify the selling officer and the sale proceeded to a third party bidder. On appeal the
court upheld the trial court's order to vacate the sale upon a request for approval. "The highest
bid at a sale is merely an irrevocable offer to buy ... the acceptance of which does not take
place until the court confirms the sale. The trial court is justified in disapproving the sale if
unfairness is shown and reveals a prejudice against an interested party." The appeals court
rejected the bidder's argument that if there was an "injustice", it was done to the bidder, who
innocently bid and paid for the property because of the alleged negligence of the mortgagor and
mortgagee in failing to cancel the sale. The Fleet Mortgage and Citicorp case seem to indicate
a trend towards disfavoring the third party bidder, (regardless of how bona fide or innocent), and
disregard of the asserted need for sales to be final and certain to attract bidders.

There is SOME consolation for third party bidders at sale however, in the recent ruling of the
Second District court in West Suburban Bank v. Latteman, (2nd Dist. 1996), 674 N.E.2d 149. In
that case, the trial court's ruling that the sale was void based on a jurisdictional issue was
upheld. The Appellate Court, however, reversed the lower court's decision that the purchaser
was not entitled to equitable interest on the sale bid, and held that bidder receive interest as part
of "restitution" from the lender for benefits received from the erroneous judgment.

In a case of first impression, Members Equity Credit Union v. Duefel, (3rd Dist. 1998), 295
Ill.App.3d 336, 692 N.E.2d 865, 229 Ill.Dec. 876, the Third District has ruled that surplus
proceeds from a foreclosure sale must be awarded to the foreclosed mortgagor rather than be
applied to payoff an outstanding, prior mortgage lien as requested by the third party bidder. The
foreclosure was of a junior mortgage on residential real estate. The first mortgage lien holder
was not a party to the suit. At sale, a third party bidder bid a sum resulting in a surplus, and
then, at confirmation of the sale, petitioned the trial court to direct the surplus be paid to satisfy
the outstanding first mortgage. The trial court granted the petition and the borrowers appealed.
On appeal, the Third District considered, but rejected, the bidder's argument that to award the
surplus proceeds to the mortgagors would result in a windfall to them because they had no
equity in the property over the first mortgage, noting that "Illinois law mandates that a buyer at a
judicial foreclosure sale takes the property subject to any outstanding debts which may
encumber the property subsequent to the sale." All bidders are deemed to bid with constructive
notice of liens on the property offered for sale. Competitive bidding at foreclosure sales
promotes the public policy goal of maximizing the selling price. Accordingly, the Court reasoned,
application of any surplus to liens that the property was sold "subject to" would undermine that
goal and render the competitive bidding process 'practically meaningless". The Court found that
the trial court abused its discretion by directing payment to the first lender, which was a non-
party to the case and over whom it did not have jurisdiction, and interfered with the contractual
relationship between the first lender and its borrower by directing the surplus award.

Another notable confirmation of foreclosure sale cases is BCGS, L.L.C. v. Jaster, (2nd Dist.
1998), 299 Ill.App.3d 208, 233 Ill.Dec. 367, 700 N.E.2d 1075, in which the appellate court
affirmed the confirmation of a sale to the mortgagor, despite his knowledge of an outstanding
junior lien on the property, and held that the title acquired was free and clear of that lien. The
Illinois Mortgage Foreclosure Law, the court's opinion holds, expressly provides that foreclosure
extinguishes all claims for lien upon the property held by parties over whom the court has
jurisdiction in favor of the bidder at sale. Accordingly and regardless of his knowledge of the
claims, a literal reading of the statute is that any bidder, even the mortgagor, can extinguish
those liens foreclosed by being the successful bidder at sale. In her dissent, Justice Hutchinson
states that Mr. Jaster's actions were admittedly to extinguish the lien of his former wife's divorce
attorney that "reflects a showing of fraudulent conduct that the majority fails to acknowledge."
The dissent takes that position that a mortgagor "does not morph into a bona fide purchaser
upon the expiration of the redemption period.", and warns that "Future implications of this
decision are horrific and likely contrary to legislative intent. The majority's decision means that
mortgagors, when faced with an unwanted lien on their property, should simply stop paying on
their mortgage, allow the property to fall into foreclosure, allow the redemption period to pass,
and then successfully bid on the property to retake title free and clear of all junior liens."

POSSESSION

Possession issues are codified in 735 ILCS 5/15-1701, which contains presumptions relating to
possession rights based on the type of property (i.e., residential v. nonresidential) and the stage
in the foreclosure process.
The presumptions and burdens relating to possession during the foreclosure are discussed in
Travelers Insurance Co. v. LaSalle National Bank, (2d Dist. 1990), 200 Ill.App.3d 139, 558
N.E.2d 579, 146 Ill.Dec. 616, Mellon Bank, N.A. v. Midwest Bank & Trust Co.,(1st Dist., 1993),
265 Ill.App.3d 859, 638 N.E.2d 640, 202 Ill.Dec. 772, and Citicorp Savings of Illinois, F.A. v.
Occhipinti, (2nd Dist., 1985), 136 Ill.App.3d835, 483 N.E.2d 706, 91 Ill.Dec. 360.

Amendments to 15-1507 and 15-1508 have dealt with the difficult issue of obtaining
possession from occupants of the foreclosed premises who were not parties to the foreclosure
proceeding. Section 15-1701(d) now provides that after 30 days after the confirmation of the
sale, the purchaser at sale may bring an action within the foreclosure by "supplemental petition
for possession" under 15-1701(h) to terminate the rights of possession of any such occupants,
Section 15-1701(h) was added by P.A. 88-265 to provide that a mortgage-in-possession, holder
of a certificate of sale, or purchaser at a foreclosure sale can bring a supplemental petition for
possession against a person not made a party to the foreclosure action who became an
occupant after the recording of the notice of foreclosure (lis pendens), memorandum of the
judgment, or certificate of sale. The supplemental action can be filed at any time during the
foreclosure proceeding and up to 90 days after the entry of the order confirming the sale. The
hearing on the supplemental petition shall be not less than 21 days from the date of the service
of notice for hearing on the occupants. The notice shall include the petition and a copy of the
certificate of sale or deed. Id. In effect, 15-1701(h) resurrects the old "writ of assistance"
procedure commonly used prior to the passage of Illinois Mortgage Foreclosure Law. The
notice time limitations contained in 15-1701(h) seem particularly significant, and it is presumed
that the method of service of the notice is the same as notices of hearing in other cases except
for the 21-day provisions.

PREJUDGMENT PRESUMPTION

735 ILCS 5/15/1701(b)(1) states that prior to the entry of the judgment of foreclosure, the
mortgagor shall be presumptively entitled to possession of residential real estate unless:

1. The mortgage objects and shows good cause why the mortgagor should not remain in
possession;

2. The terms of the mortgage provide that the mortgagee is to have possession upon a default;
and

3. The court is satisfied that there is a reasonable probability that the mortgagee will prevail in a
final hearing in the foreclosure.

It is also noteworthy that this subsection further provides that when the residential real estate
consists of more than one dwelling unit, only the unit occupied by the mortgagor (or other
person defined in 15-1219) is to be considered "residential" for possession purposes.
Section 15-1701(b)(2) provides that prior to the entry of the judgment of foreclosure mortgagee-
lender shall be presumptively entitled to possession of nonresidential real estate provided:

1. The terms of the mortgage provide that the mortgagee is to have possession; and

2. The court is satisfied that there is a reasonable probability that the mortgagee will prevail in a
final hearing.

The statutory presumption relating to the right to possession during the prejudgment state of a
foreclosure proceeding, then, is based on whether the premises are residential or
nonresidential. In both instances, the mortgage documents must provide for possession in the
mortgagee in the event of a default, and the court must believe that there is a reasonable
probability that the lender will prevail in a final hearing. Both of these criteria should be
relatively easy to fulfill. Few mortgage documents in common use these days do not contain a
provision for possession to be granted to the mortgagee in the event of a default, and the filing
of a verified complaint setting forth the default should form the basis for a finding of reasonable
probability of the mortgagee prevailing unless the mortgagor files an answer or affirmative
defense. The clear distinction between the residential and nonresidential provisions in that the
presumption in favor of the mortgagor can be overcome by the mortgagee for "good cause" in
the case of residential property whereas the right of the mortgagee to possess nonresidential
property appears not to be subject to an objection by the mortgagor for good cause.

POST-JUDGMENT PRESUMPTION

735 ILCS 5/15-1701(c)(1) continues the presumptions found in 15-1701(b) relating to

residential versus nonresidential real estate but extends the right to object and presumptions in
favor of the mortgagee to the bidder at sale or one who is holding an assignment of the
certificate of sale.

Section 15-1701(c)(2) creates a new presumption relating to residential real estate during the
limited period from the expiration of the redemption period until 30 days after the confirmation of
sale (a date that is significant by virtue of the statutory provision found in 15-1508(g) that the
order of confirmation of sale shall contain an order for possession in favor of the bidder at sale
stayed for a period of 30 days from the date of confirmation). That presumption is that the
mortgagee shall be put into possession following the expiration of the redemption period unless
(1) the mortgagor pays the mortgagee or purchaser the fair rental value of the premises or the
interest due under the mortgage, whichever sum is less, or (2) the mortgagor shows good cause
why the mortgagee should not be put into possession.

30 DAYS AFTER CONFIRMATION

735 ILCS 5/15-1701(d) is congruent with the provision found in 15-1508(g) that the
confirmation of sale shall include an award of possession to the purchaser at sale stayed for 30
days after the confirmation. It is noteworthy that the statutory language in 15-1701(d) provides
that the purchaser at sale is entitled to possession "without further notice to any party, further
order of court, or resort to proceedings under any other statute." This is especially significant in
light of the controversy relating to possession against "unknown tenants" and the resulting
amendments to the Illinois Mortgage Foreclosure Law.

LEASEES

The remaining subsections 735 ILCS 5/15-1701 provide that leases subordinate to the
mortgage foreclosed will not be terminated simply by the mortgagee entering into possession of
the premises (15-1701(e)) and clearly require that the rights of tenants of even a subordinate
lease must be foreclosed in judgment of foreclosure (15-1701(h)). Section 15-1504(a)(3)(T)
requires that the complaint specifically name parties whose possession is sought to be
terminated in the foreclosure, and 15-1508 requires that the possession of a person not made
a party to the foreclosure must be terminated by proceeding under the forcible entry and
detainer provisions of 735 ILCS 5/9-101, et seq., or 735 ILCS 5/15-1701(h). See Kelly/Lehr &
Associates, Inc. v. O'Brien, (2nd Dist., 1990), 194 Ill.App.3d 380, 551 N.E.2d 419, 141 Ill.Dec.
426, for an interesting case about prepaid rent during a foreclosure case. The tenant prepaid
rent to the owner in the form of services rendered, and the court ruled that the mortgagee in
possession took subject to the tenant's right of setoff for the prepayment.

Conclusion:

These, then, are the "Seven Steps of Foreclosure". If the Plaintiff's counsel pursues the process
in an orderly and appropriate fashion, the remedy will be equally appropriate and timely. The
steps also hold the promise for Defendants and their attorney of a process that is
understandable and even predictable -- which is all that we can reasonably ask of the law.

***Copyright 1996, 2000, 2002 by Steven B. Bashaw. All Rights Reserved.