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.

 

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PaulP

Litigation attorney at Bielski Chapman, Ltd. representing businesses and individuals in business litigation, post-judgment enforcement, collections and real estate litigation.