LLC’s Attempt to Void Foreclosure Judgment Rejected; ‘BFP’ Protected – IL First Dist.

A New Mexico LLC’s attempt to collaterally attack a mortgage foreclosure judgment five years after its entry fell flat in US Bank v. Laskowski, 2019 IL App (1st) 181627.  The case discusses the elevated level of proof required to successfully contest service of process when the property rights of a bona fide purchaser for value (a “BFP”) are at stake.

In 2009, the lender plaintiff filed a mortgage foreclosure suitagainst an individual borrower.  That borrower defaulted and in 2010 the trial court entered a foreclosure judgment.  The lender eventually sold the subject property to the BFP in 2011.

In 2016, the LLC, a non-party affiliated with the borrower that recorded an equitable interest in the property several years prior, sought to vacate the foreclosure judgment and the pertinent orders leading up to it.

The LLC moved under Code Section 2-1401(f) – the statute that allows a litigant to challenge a judgment as void for lack of jurisdiction.  The movant arguedthat since it was only served by publication – a method disallowed by the Illinois LLC Act – the trial court lacked personal jurisdiction over the LLC.

The property owner successfully moved to dismiss the LLC’s petition and the LLC appealed.

Affirming dismissal, the First District first considered whether the petitioning LLC was a necessary party to the foreclosure case.

The necessary parties to a mortgage foreclosure suit include the mortgagor and other persons (not guarantors) “who owe payment of indebtedness or the performance of other obligations secured by the mortgage and against whom personal liability is asserted.” 735 ILCS 5/15-1501(a).

Other persons, such as mortgagees or claimants, may be joined, but they don’t have to be.  A failure to include a permissive party to a foreclosure suitwill not impact a trial court’s jurisdiction.  [¶18]

Here, the operative foreclosure complaint named only the individual borrower as a defendant.  Since the LLC was neither the mortgagor nor someone against whom personal liability was asserted, the LLC was not a necessary party to the foreclosure suit. (and not the LLC).

The court further held that the LLC’s equitable interest in the property did not transform its interest into that of a mortgagor (who would have been a necessary party).  The Court defined a beneficial interest as an expectancy interest only: it does not rise to the level of legal title. [¶ 20]

Next the Court considered whether the BFP property’s current owner was immunized from the LLC’s attempt to vacate the judgment.

Section 2-1401(e) protects BFPs from void judgments affecting real estate title.  A BFP is protected so long as the defect in service is not apparent from the face of the record and the BFP was not a party to the original action. Where there is no defect on the face of the record, the BFP is insulated from a challenge to an otherwise faulty judgment. [¶ 25]

Here, the record reflected the LLC was properly served.  While the LLC claimed the wrong entity was served (a similarly named Illinois business was served according to the return of service on file), a third party would not have known this (i.e, it would not have been readily apparent) from the four corners of the record.

Instead, discovering the service infirmity would have required a BFP to go “beyond the face of the record”: it would have to cross-reference New Mexico’s Secretary of State records with Illinois’s to learn that the wrong entity was served.

Since it would have been such a time-consuming and laborious task to unmask whether the proper LLC was served, the Court protected the BFP and denied the LLC’s petition.

Afterwords:

This case reiterates that only a mortgagor and non-guarantors subject to personal liability under a mortgage are necessary parties to a foreclosure suit.  Laskowski also reaffirms that a BFP is a favorite of the law.  For while a void judgment can be attacked at any time, courts will side with a BFP who could be harmed by a nullified foreclosure judgment.

 

Don’t Confuse Joint Tenancy with Tenancy-By-Entirety Ownership – Indiana Court Cautions

Title to real estate is typically held in one of three ways: tenancy in common, joint tenancy and tenancy by the entirety.

The salient characteristic of tenancy in common is that each owner holds a ½ interest in the property and that upon an owner’s death, his/her share passes to his/her heir.

Joint tenancy’s hallmark is its survivorship feature: when a joint tenant dies, his/her share passes to the surviving joint tenant. The deceased’s interest will not pass to an heir.

With tenancy by entirety (“TBE”) ownership, sometimes described as “joint tenancy with marriage,” the property is immune from one spouse’s creditor’s judgment lien. This means the creditor of one spouse cannot foreclose on the TBE property. However, to qualify for TBE protection, the parties must be married and live in the property as a primary residence. If the property owners are married but do not use the home as the marital homestead, TBE won’t shield the property from creditor collection efforts.

In Flatrock River Lodge v. Stout, 130 N.E.2d 96 (Ind. Ct. App. 2019), an Indiana appeals court delved into the joint tenancy vs. TBE dichotomy and how the difference between the two realty title vehicles dramatically impacts a judgment lien’s enforceability.  The trial court denied the creditor’s motion to foreclose a judgment lien because the subject real estate was held in joint tenancy. On appeal, the Court considered whether a judgment creditor could foreclose on joint tenancy property, force its sale, and apply the proceeds against the judgment.

The judgment debtor owned real estate in joint tenancy with his daughter. The debtor died during pendency of the lawsuit and by operation of law, the title to the property vested in the daughter. Before the debtor died, however, the plaintiff/creditor recorded its judgment lien against the property.

The creditor moved to foreclose its judgment lien against the property. The debtor’s daughter argued the property was exempt from execution by Indiana’s tenancy-by-entirety statute (the TBE statute). Indiana Code Section 34-55-10-2(c)(5).  The trial court agreed with debtor’s daughter and denied the creditor’s motion.

Reversing, the Indiana appeals court first rejected the defendants’ argument that since the debtor died, the property escaped plaintiff’s lien. The court noted that the plaintiff’s judgment lien attached from the moment it recorded its judgment against the property – some two years before debtor’s death. As a result, the debtor’s daughter took the property subject to the plaintiff’s lien.

Next, the appeals court rejected the trial court’s finding that the property was immune from the plaintiff’s judgment lien.

In a joint tenancy, each tenant acquires an equal right to share in the enjoyment of the land during their lives. A joint tenant is severed where one joint tenant conveys his/her interest to another and destroys the right to survivorship in the other joint tenant(s). Once a joint tenancy conveys his/her share to another, he/she becomes a tenant in common with the other co-tenant.

Each joint tenant can sell or mortgage his/her interest in property to a third party and most importantly (for this case at least), each joint tenant is subject to a judgment creditor’s execution. [8]

TBE ownership only exists between spouses and is grounded in legal fiction that husband and wife a single unit. A TBE cannot be severed by the unilateral action of one tenant. An attempted transfer of a TBE ownership interest by only one spouse is a legal nullity. The key difference between joint tenancy and TBE is that with the latter, a creditor of only one spouse cannot execute on the jointly owned property

The Court noted that under Indiana Code 34-55-10-2(c)(5), property held in TBE is exempt from execution of a judgment lien. However, this statute applies uniquely to TBE ownership; not to joint tenancy. According to the court, “[h]ad the Indiana legislature intended to exempt from execution real estate owned as joint tenants, it would have done so.” [14]

Take-away:

This case shows in stark relief the perils of conflating joint tenancy and tenants-by-entirety ownership. If a property deed does not specifically state tenancy by the entirety, the property will not be exempt from attachment by only one spouse’s creditor.

Hotel Registration Data Considered Computer-Stored and Computer-Generated Business Records – IL Appeals Court

Super 8 and Motel 6 registration records take center stage in an Illinois appeals court’s discussion of the razor-thin difference between computer-stored and computer-generated business records.

In People v. Schwab, 2019 IL App (4th), a sexual assault defendant argued the trial court erroneously admitted his hotel check-in records during a jury trial that culminated in a guilty verdict and long prison sentence.

The prosecution offered hotel records into evidence at trial to place the defendant at a certain location and at a fixed date and time. Over the defendant’s hearsay objection, the trial court allowed the records into evidence. Defendant appealed his conviction and 25-year sentence.

Affirming, the appeals court first provided a useful gloss on hearsay rules generally and then drilled down to the specific rules governing business records.

Hearsay is an out of court statement offered to prove the truth of the matter asserted and is typically excluded for its inherent lack of reliability.  The business-records exception allows for the admission of a writing or record where (1) the writing or record was made as a memorandum or record of the event, (2) it was made in the regular course of business, and (3) it was the regular course of business to make the record at the time of the transaction or within a reasonable time thereafter.

Anyone familiar with a business can testify as to business records, and the original entrant (i.e. the person inputting the data) doesn’t have to be a witness for the records to get into evidence. [⁋ 37]

Additional foundation is required when a business record is contained on a computer.  Illinois courts recognize the distinction between (a) computer-stored records and (b) computer-generated records.

The foundation for admitting computer-generated records is less stringent than that governing computer-stored ones. Computer-generated records are deemed intrinsically more reliable than their computer-stored counterparts.

Print-outs of computer-stored records are admissible as a hearsay exception where (1) the computer equipment is recognized as standard, (2) the input is entered in the regular course of business reasonably close in time to the happening of the event recorded, and (3) the foundation testimony establishes that the source of information, method and time of preparation indicate its trustworthiness and justifies its admission. [⁋ 38]

For computer-generated records, the admissibility threshold is more relaxed: the proponent only needs to show the recording device was accurate and operating properly when the data was generated.

The Court found that the Super 8 reservation records were computer-generated (and therefore subject to less stringent admissibility rules). The hotel’s front desk clerk’s trial testimony established that the hotel’s reservation record was automatically generated by a hotel computer at the time someone books a reservation.

According to the Court, that data may have originally been input into a third-party website (like Priceline or Expedia) didn’t cast doubt on the records’ reliability.  All that mattered was that the registration record was created automatically and contemporaneously (with the on-line reservation) to qualify as computer-generated records.

The Court agreed with the defendant that two Motel 6 records offered as prosecution trial exhibits were computer-stored. The court found that the computer records created when a guest checked in required the hotel clerk to scan the guest’s identification card and to manually input the guest’s check-in and check-out times and payment information. Since this information was the end result of human data entry, the records were deemed computer-stored.

Even so, the Court found that the State sufficiently laid the foundation for the computer-stored data. The Court credited the Motel 6 hotel clerk’s testimony that the franchise’s check-in procedures were uniform and the hotel’s computer booking system was standard in the hospitality industry.  Taken together, the testimony concerning Motel 6’s integrated check-in processes and its use of industry-standard reservation software was enough to meet the computer-stored evidence admissibility threshold.

Afterwords: Despite Schwab’s disturbing fact-pattern, the case has value for civil and criminal trial practitioners alike for its trenchant discussion of business records exception to the hearsay rule and the admissibility standards for computer-generated and computer-stored records.