Illinois court holds that a mortgagee can execute on an assignment of rents provision without taking possession of property if the mortgagor agrees

An Illinois appellate court construed the applicable statute on assignment of rents and concluded that a mortgagee can enforce an assignment of rents provision without taking actual or constructive possession of the property if the mortgagee and mortgagor agree by, for example, a forbearance agreement.

In BMO Harris Bank N.A. v. Joe Contarino, Inc., 2017 IL App (2d) 160371 (Mar. 23, 2017) the judgment creditor (“Creditor”) obtained a $1.5 million judgment against the mortgagor and a guarantor.

In supplementary proceedings, Creditor issued a third-party citation upon a property management company that collected rents for different properties owned by the mortgagor. Mortgagor’s other creditors (“Adverse Claimants”) intervened in the citation proceedings to assert claims on those rents. They claimed that their interests were superior to the Creditor’s interest by virtue of the assignment-of-rents provisions in their mortgages on the other properties and separate forbearance agreements with the mortgagor.

The trial court found for the Adverse Claimants holding that the forbearance agreements were enforceable contract modifications which predated Creditor’s judgment and the citations. Creditor appealed arguing that it had a perfected judgment on the funds and that the Adverse Claimants’ rights under the mortgage and forbearance agreements are immaterial because they did not also obtain possession of the property through foreclosure.

The appellate court affirmed. It noted that the operative statute on assignment of rents, 765 ILCS 5/31.5, distinguishes between perfection and enforcement of assignment of rents provisions. Section 31.5 unambiguously provides that an assignment of rents is perfected upon recording. As between assignor (such as the Creditor) and an assignee (Adverse Claimants), the mere recording does not affect who is entitled to the rents until the assignee enforces the assignment “under applicable law” unless the parties agree otherwise. Taking possession of the property is therefore excused if the parties agreed that it was not necessary. In the case at bar, the assignments were properly enforced when, by electing to agree “otherwise” and enforce them other than under applicable law, the parties entered into the forbearance agreements to transmit the rents directly to Adverse Claimants.

The court acknowledged Illinois public policy that assignment of rents provisions will allow creditors to reach the rents so long as they take possession thereby ensuring that a mortgagee’s interests are protected, while also ensuring proper maintenance of the properties. The forbearance agreements at issue allowed for the expenses of maintenance, management, and repair of the properties to be paid from the rents. Thus, the public policy requiring a mortgagee to take actual or constructive possession of the property through court action is not implicated.

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