Purchasers of Properties that have gone through Judicial Sales Should be Cautious

Adam M. Ansari's article, "Purchasers of properties that have gone through judicial sale should be cautious", was originally included in the December 2015 Illinois State Bar Association's Section on Real Estate Law Section newsletter, and republished in the Commercial Banking, Collections, and Bankruptcy Section. Please click here to review the original publication. 

The Illinois Appellate Court in Concord Air, Inc. v. Malarz, 2015 IL App (2d) 140639 has increased the due diligence necessary for properties that have gone through a foreclosure sale.

Modified on the denial of rehearing, on October 15, 2015, the Illinois Appellate Court posted its ruling in Concord Air, Inc. v. Malarz, 2015 IL App (2d) 140639. The case arose after Harris Bank filed a foreclosure action (Harris foreclosure) against a home in Lake Forest, Illinois, and named the borrower and Concord Air, Inc. (Concord Air) as a defendant/junior lienholder. Concord, at ¶ 1. Concord Air defaulted, and Harris Bank was the successful bidder at the judicial sale and the trial court confirmed the sale. Id. Thereafter, Chicago Title, as trustee for a land trust (Chicago Title), relying on a title report, which indicated Concord Air’s interest had been extinguished by the Harris foreclosure, purchased the subject property.

A little less than a year later, upon learning of the foreclosure proceeding and the default entered against it, Concord Air moved to quash service for a lack of personal jurisdiction. The trial court vacated the judgment of foreclosure as to Concord Air only and left intact the order approving sale. Concord Air then initiated its own foreclosure action (Concord foreclosure) against the subject property. Chicago Title responded with a Motion to Dismiss arguing bona fide purchaser status. The trial court agreed with Chicago Title and additionally cited the public policy of finality and stability of judicial sales as a basis for its decision. Concord, at ¶ 48.

On appeal, Concord Air argued that Chicago Title was on inquiry notice of the lack of jurisdiction, because the affidavits on the record at the time Chicago Title purchased the property, indicated service was attempted only once, at an address other than the registered agent's, and by a different process server than the one listed on the affidavit of due diligence. Concord, at ¶ 40. Concord Air identified potential noncompliance with Sec. 2-206 and Sec. 2-202 of the ILCS in support of its argument. Concord, at ¶ 40. The Appellate Court agreed with Concord Air concluding that Chicago Title was on inquiry notice of Concord Air’s potential outstanding interest, as the defect in personal jurisdiction over Concord Air was apparent on the face of the Harris foreclosure record.

In addition to its bona fide purchaser argument, Chicago Title argued that because Concord Air was a junior lienholder and not a prior borrower or owner of the subject property, Concord Air should not be allowed to pursue a claim against the property itself, and Concord Air’s requested relief should be limited to the proceeds of the foreclosure sale. Concord, at ¶ 49. In response, the Appellate Court opinioned that the judicial sale did not result in a surplus and therefore the value of the property, roughly $1.7 million, and the status of the Harris foreclosure required a balancing of the equities on remand. Concord, at ¶ 50.

Transactional Attorneys Beware

Although difficult to glean from the Appellate Court’s opinion, the holding places a significant burden on real estate purchasers interested in properties that have gone through a judicial sale.

Regardless of the number of years or the number of times a piece of property has exchanged hands, purchasers and their attorneys are considered to be on constructive notice of potential jurisdictional defects in a foreclosure record, irrespective of whether the defect concerns a prior owner or a junior lienholder. Now, beyond a review of the title commitment, transactional attorneys are expected to obtain and review the foreclosure record before blessing the purchase of an affected property. This is especially onerous in light of the time, money, and effort needed to acquire a foreclosure record, not to mention the expertise needed to actually identify the potential jurisdictional defect once the record is obtained.

Although the newly enacted Sec. 15-1603.5 may provide a statutory framework for extinguishing a subordinate interest when that interest was not named in the original foreclosure action, it remains to be seen whether the code section, enacted August 26, 2014, will be applied to situations where a junior lienholder was named in the foreclosure, but jurisdiction was nonetheless found to be improper.

With the minimal fees, the time constraints placed on attorney review, and the prospect of more junior lienholders filing similar actions as Concord, some attorneys may begin thinking twice about their willingness to be retained on residential transactions with a prior foreclosure.