Illinois court rejects mortgagor’s attempt to thwart foreclosure by claiming a sham LLC he set up was not properly served

In an “ignoble attempt to discredit the foreclosure judgment” the mortgagor in U.S. Bank, Nat’l Ass’n as Tr. for Credit Suisse First Bos. CSFB 2005-11 v. Laskowski, 2019 IL App (1st) 181627 (July 16, 2019), belatedly sought to avoid the foreclosure by attacking the decree on behalf of an LLC he set up shortly before foreclosure proceedings began, contending the LLC was not served. His efforts were in vain.

The mortgagor stopped making payments on his mortgage in October 2008. The next month he set up an LLC in New Mexico in which he was the sole member. With his execution of a “Memorandum and Affidavit of Equitable Interest”, he purported to grant the LLC an equitable interest in the property. The memorandum, which only the mortgagor signed, stated, “[a]n Agreement was entered into between the undersigned [i]n the amount of $350,000.” The memorandum does not identify the LLC’s mailing address, its registered agent, or the state wherein it was formed. The memorandum was not recorded until December 2010.

In the meantime, the mortgagee began foreclosure proceedings. The complaint named the mortgagor and the LLC as defendants. The mortgagee could not personally serve the defendants. So, in accordance with the applicable rules, it filed an affidavit for service by publication, stating that, after diligent inquiry, it was unable to locate them. It then properly published the notice, filed it with the court, and mailed a copy to the mortgagor at four different addresses. The mortgagee’s special process server filed an affidavit stating he had served the LLC’s supposed authorized agent for service at an Illinois address. Neither the mortgagor nor the LLC appeared, so the trial court entered an order of default and a judgment of foreclosure.

The property was eventually sold to the mortgagee at a sheriff’s sale. The property was thereafter conveyed several more times, eventually to a bona fide purchaser.

More than five years later, the LLC came forward to claim it had an equitable interest in the property that was not foreclosed. It filed a petition to quash service of process and to vacate all void orders. The LLC averred that the trial court did not have jurisdiction over it because the method of service—publication—was not allowed under the Limited Liability Company Act (“LLC Act”). It also argued that the mortgagee had served the wrong entity. The entity that was served had no connection with the similarly named New Mexico LLC.

The trial court dismissed the petition, finding that under the Code of Civil Procedure and the “catchall” provision of the LLC Act, service by publication was permitted. The ruling was affirmed on appeal.

The appellate court did not have to consider all the arguments that were asserted in support of dismissal because the argument that the LLC was not a necessary party carried the day.

A trial court’s jurisdiction will be affected only if a “necessary party” to the foreclosure was not served. Other parties may be joined but they are not necessary.The LLC argued that its purported equitable interest was tantamount to the interest of a mortgagor, which is a necessary party. The court disagreed. Under the foreclosure law, a mortgagor is indeed a “necessary party”, but so are “other persons (but not guarantors) who owe payment of indebtedness or the performance of other obligations secured by the mortgage and against whom personal liability is asserted.”

A mortgagor is “(i) the person whose interest in the real estate is the subject of the mortgage and (ii) any person claiming through a mortgagor as successor.” The LLC was neither of these. Its purported equitable interest as a result of the recorded memorandum did not give it an interest in the property that was the subject of the mortgage. Moreover, the mortgagee sought only a deficiency judgment against the mortgagor. That meant the LLC was not a party “against whom personal liability is asserted.” Instead, the LLC was merely a “permissive party”, which meant the failure to join it as a party – or to serve process on it — did not divest the trial court of authority to enter the foreclosure judgment and confirm the sale.

Even had the LLC’s interest in the property not been foreclosed, the interest of the bona fide purchaser was protected. A bona fide purchaser’s interest in real property gains protection as long as the defect in service is not apparent from the face of the record and the bona fide purchaser was not a party to the original action but acquired title before the filing of the petition.

The court declined to address whether an LLC can be served by publication, because it found that a person would have to go beyond the face of the record to determine that the LLC that was served (by service on its purported agent) was different from the mortgagor’s LLC. The only way to know that would be to check the Illinois Secretary of State’s corporation records. The purchaser also would have had to search New Mexico records to determine the LLC’s registration in that state. “This information would have been extremely difficult to ascertain, as the memorandum of equitable interest does not provide an address for [the LLC] or indicate where it was registered. Unquestionably, a purposeful decision on [the mortgagor’s] part.”

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