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Mortgage Loan Acceleration Provisions Require Strict Compliance, Court Rules

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No. 139   Perspectives on Developments in the Law from Sharp-Hundley, P.C.     December 2016

Mortgage Loan Acceleration Provisions Require Strict Compliance, Court Rules

            By John T. Hundley, John@sharp-hundley.com, 618-242-0200

Mortgagees and their counsel had better pay close attention to the acceleration terms of their mortgages before foreclosing as a result of a recent decision of the Appellate Court in Chicago.

            Purchasers at foreclosure sales had better pay attention to the issue, too, as a result of the recent decision in Cathay Bank v. Accetturo, 2016 IL App (1st) 152783.

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            Cathay Bank involved mortgage provisions substantially identical to those in the standard Illinois single-family mortgage form of the Federal Home Loan Mortgage Corp. (Freddie Mac), so the decision has ramifications for literally thousands of Illinois mortgages.  

            The decision sends at least two important messages out like shock waves: (1) when applying the acceleration and remedies provisions of what now is ¶ 22 of the standard Freddie Mac mortgage, the required disclosures must be sent prior to acceleration and not just prior to filing the foreclosure action, and (2) foreclosure counsel should review the file closely to make sure that notices have provided all of the specific detailed information which ¶ 22 of the current Freddie Mac form (¶ 21 of the mortgage involved in Cathay Bank) requires — and when it was required to be provided.

            Failure to follow these provisions strictly in Cathay resulted in vacation of a foreclosure judgment and reversal of the confirmation of sale, even though the property had been deeded to the purchaser in the interim.

            When it comes to acceleration and foreclosure, Cathay teaches that good intentions do not matter.  The bank in that case in fact sent five notice letters to the debtor, but none provided all the information the mortgage required.  Moreover, the one which informed the debtor about acceleration stated it in the past tense – so it was not pre-acceleration notice as the mortgage required. 

            The court cast compliance with the acceleration provisions as a condition precedent to foreclosure, and hence to judgment and sale. 

            “A condition precedent is an act that must be performed or an event that must occur before a contract becomes effective or before one party to an existing contract is obligated to perform,” the court said.  “When a contract contains an express condition precedent, strict compliance with such a condition is required, and the contract does not become enforceable or effective until the contract is performed or the contingency occurs. . . . [C]ourts will enforce express conditions precedent regardless of the potential for harsh results for the noncomplying party.” 

            Emphasizing the multiple times in which the subject paragraph uses the word “shall”, the court ruled that “notice of acceleration is a condition to foreclosure under the Illinois Mortgage Foreclosure Law” (735 ILCS 5/15-1101 et. seq.) and the bank “had a mandatory duty to send a notice of acceleration to Accetturo prior to accelerating the mortgage.”  Because the bank did not comply with the subject paragraph, the court held that (1) the bank had no right to file the foreclosure action, (2) the bank was not entitled to judgment, and (3) “all related orders, including the final order approving the report of sale and distribution, are vacated.” 

            As noted above, Cathay Bank has implications for thousands of mortgage foreclosure cases.  A procedural issue may limit the frequency with which those implications may arise, however.

            The Mortgage Foreclosure Law provides that a short-form complaint includes an unstated allegation “that any and all notices of default or election to declare the indebtedness due and payable or other notices required to be given have been duly and properly given.”  735 ILCS 5/15-1504(c)(9).  If a defendant wishes to dispute this or any of the other “deemed included” allegations set forth in § 15-1504(c), the burden is on it to raise the issue.  Compare Illinois Supreme Court Rule 133(c) (“In pleading the performance of a condition precedent to a contract, it is sufficient to allege generally that the party performed all the conditions on his part; if the allegation be denied, the facts must be alleged in connection with the denial showing wherein there was a failure to perform”).  Defendant in Cathay Bank did this via an affirmative defense (which the trial court improperly dismissed). 

            But most foreclosure defendants do not even know of the “deemed included” allegations – let alone how to dispute them.  Harsh as it may be, it would seem the issue of inadequate notice is waived if not raised in an answer to the foreclosure complaint. 

This reasoning is especially forceful when one considers those who rely upon the granting of a judgment in a foreclosure case.  Because the notice letters will not ordinarily be available in the court file, any other approach would leave foreclosure sale bidders with no way of knowing whether they are acquiring good title. 

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