New Procedure to Extinguish an Omitted Subordinate Interest

Effective as of August 26, 2014, Public Act 98-1099 provides a new statutory framework for extinguishing a subordinate interest on a foreclosed property when that interest was not named in the original foreclosure action (see 735 ILCS 5/15-1603.5). The new procedure applies only in circumstances where: (1) the property is the subject of a foreclosure action; (2) a motion to confirm the judicial sale is pending or has been granted; (3) the interest attached prior to filing or recording the notice of foreclosure; and (4) the person with the interest was not named in the foreclosure complaint.

If the above requirements are met, then the holder of the certificate of sale or purchaser of the foreclosed property may file a strict foreclosure action naming the omitted subordinate interest as defendant. The court will then enter a judgment to extinguish the omitted subordinate interest, subject to the objection of the defendant. If the defendant objects to the judgment, their only available recourse is redemption of the property within the statutory redemption period of 30 days. The redemption shall be the sum bid at the prior foreclosure sale plus costs and fees incurred subsequent to the sale for the payment of taxes, preservation of the property, or any other actions taken by the holder of the certificate of sale to protect its interest in the property. This enactment denies a person whose omitted subordinate interest was not terminated by a prior foreclosure action the right to file a strict foreclosure action, though they are still entitled to make a claim for the surplus in the proceeds from the sale of the property.

Generally, plaintiffs include subordinate lienholders as parties in a foreclosure action in order to extinguish the subordinate interest. Accordingly, an unnamed subordinate interest's claim would not be extinguished by the confirmation of the judicial sale. Therefore, this procedure provides plaintiffs with an opportunity to extinguish the interest of a subordinate lienholder who was not named in the original foreclosure complaint while at the same time giving the omitted lienholder an opportunity to redeem the property.