Mortgage Law Roundup

SharpThinking

No. 76  Perspectives on Developments in the Law from The Sharp Law Firm, P.C.  November 2012

Forbearance Agreements Are Enforceable, Court Rules

            Forbearance agreements, including waivers of defenses and other concessions which the lender sought in exchange for forbearing, are legally enforceable, even against consumers, a panel of the Illinois Appellate Court has ruled.

            In Eastern Savings Bank, FSB v. Flores, 2012 IL App (1st) 112979, plaintiff had commenced a mortgage foreclosure suit and allegedly effected service which defendant later claimed was defective.  As a part of loan modification negotiations, lender and defendant entered into a forbearance agreement under which plaintiff agreed to suspend the foreclosure if defendant made certain payments; upon the payment of those payments, the loan was to be modified.  However, the agreement further provided that if it was not so performed defendant waived all “defenses, set-offs, or counterclaims to any foreclosure proceeding except as to the non-existence of a default under this agreement” and that she “consent[ed] to the entry of foreclosure judgment and any foreclosure sale that may be conducted by lender in the event that Borrower defaults”.  

            After defendant defaulted, she tried to avoid the forbearance agreement and to contest the service that had allegedly been made.  However, the appellate panel found that contest barred by the waivers in the forbearance agreement.  “This court has . . . made clear that ‘Illinois (law) permits a party to contractually waive all defenses,’” the court wrote, rejecting an attempt to limit previous authority to sophisticated commercial entities.  “[T]he waiver of defenses and the acknowledgment of service of process are valuable consideration that a lender seeks in exchange for entering into a forbearance agreement, and for these provisions not to be enforced would diminish the incentive for lenders to enter into forbearance agreements,” it said.  “[T]he forbearance agreement does not conflict with the public policy of Illinois.”            

Caveat Emptor:  § 2-1401 Applies to Plaintiff’s Motion to Vacate Sale

            Section 2-1401 of the Illinois Code of Civil Procedure (735 ILCS 5/2-1401) applies when a plaintiff/judgment creditor has “buyer’s remorse” and seeks to vacate the foreclosure sale through which it acquired the subject property, an Illinois Appellate Court panel has held.

            Among other things, that means that when the motion to vacate the sale is brought more than 30 days after confirmation of the sale, the plaintiff must “allege[] facts that would have prevented entry of the judgment if they had been known by the trial court,” said the court in CitiMortgage, Inc. v. San Juan, 2012 IL App (1st) 110626. 

            At issue there was an apartment unit in a cooperative that was undergoing conversion to a condominium.  It appears that plaintiff and/or its counsel lacked a grasp of the nature of the former, and that they did not communicate about the latter.  The result was that after the sale was confirmed, plaintiff learned that it would have to pay $18,934.79 in past-due assessments, charges and fees to the co-op and another $60,000 to $176,000 to purchase the unit as part of the conversion to a condominium.  Deciding it did not want those liabilities, it petitioned to vacate confirmation of the sale in its favor.  It contended the requirements of § 2-1401 should not apply to it, because it was the plaintiff. 

            Rejecting that distinction, the panel found that any petitioner under § 2-1401 must set forth specific factual allegations as to the existence of a meritorious defense or claim and as to its due diligence in presenting that claim or defense.  It equated the meritorious defense or claim element to alleging facts that would have prevented entry of the judgment if they had been known by the trial court.

            Rejecting the argument that the past-due assessments, charges and fees constituted newly discovered evidence justifying vacation of the sale, the panel said plaintiff had agreed to a recognition agreement (which in essence subordinates mortgage claims to the cooperative’s claims against the unit) and it “had the duty to exercise due diligence to remain abreast of the amount of fees accruing throughout the proceedings and cannot successfully assert its lack of knowledge . . . as a meritorious defense or claim.” 

            As to the conversion, the court contrasted CitiMortgage’s remorse with facts which would have prevented the court from entering the confirmation order.  “CitiMortgage’s allegations all have the common element that it potentially would not have made the decision to continue with the foreclosure and sale proceedings had it known about the amount of assessments in arrears and the conversion,” the panel said.  “CitiMortgage, however, does not establish that the trial court would not have entered the judgment or order confirming the sale had it known about the same information.”  

Evidentiary Hearing Should Have Been Held on Publication Service

              A trial court should have held an evidentiary hearing to determine whether diligent inquiry and due inquiry were conducted in an effort to locate the defendant, an appellate panel in Chicago has held.

            In a case where the defendant presented detailed affidavits impeaching the process server’s alleged efforts and findings, the panel went on to discuss what should be found before a foreclosure court permits the creditor to proceed by publication.  CitiMortgage, Inc. v. Cotton, 2012 IL App (1st) 102438.

            “(S)trict compliance with statutes governing service of process is required,” the court said.  “The plaintiff must conduct both ‘diligent inquiry’ in ascertaining the defendant’s residence and ‘due inquiry’ in ascertaining the defendant’s whereabouts before the plaintiff can properly execute an affidavit stating that the defendant cannot be found.”  It said the whereabouts inquiry “requires ‘an honest and well-directed effort to ascertain the whereabouts of a defendant by an inquiry as full as circumstances can permit.’” 

                                                                       –John T. Hundley, 618-242-0246, Jhundley@lotsharp.com

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