Lender’s attempt to avoid foreclosure in Illinois backfires

In an unpublished order, an Illinois Appellate Court held that a lender’s efforts to avoid foreclosure proceedings in Illinois by acquiring ownership of the owner’s limited liability company through court proceedings in Utah, was not res judicata in the borrower’s suit in Illinois state court challenging the legality of the loan transaction and the enforceability of the loan’s forum selection provision.

In Harris v. DHM Industries LLC, 2023 IL App (1st) 211202-U (Jan. 13, 2023) the defendant (“Lender”) agreed to finance the plaintiff’s (“Borrower”) rehabilitation project with a mortgage loan. As a condition for making the loan the Borrower had to transfer ownership of the property to a limited liability company that he controlled. (LLC). The loan also required the Borrower to complete the project within 60 days which he failed to do compelling the Lender to declare a default. The Borrower alleged that the delay was due to the Lender’s maintenance of the loan, which included withholding payments, requiring the Borrower to supplement his monthly payments, and evicting the Borrower’s tenant. As a result of the default, and pursuant to the terms of the loan agreement, the Lender brought suit in Utah to force a sale of the Borrower’s interest in the LLC. The Borrower was defaulted in that action and the Lender became the de facto owner of the property.

The Borrower filed suit in Cook County alleging the loan transaction violated public policy by allowing the Lender to take possession of the property without complying with the Illinois Mortgage Foreclosure Law (“IMFL”). The Lender moved to dismiss contending that the loan documents contained a forum selection clause such that a dispute relating to the documents and the issue of LLC’s ownership were to be adjudicated in Utah. Since a Utah state court already determined that the Lender owned the membership interest in the LLC, the Borrower’s suit was barred under res judicata. The trial court granted the motion but it was reversed on appeal.

Before deciding the appeal, the Appellate Court ordered the Illinois Attorney General’s Consumer Protection Division to file an amicus curiae brief finding under the circumstances it “has an interest in this case and can provide a unique perspective that can assist this court beyond what the parties are able to do.”

The Court first addressed whether the validity of the forum selection clause should be decided under Utah or Illinois law. It ultimately decided it did not matter because the result was the same under both state’s laws. The Borrower’s allegations that the entire transaction was illegal as part of a scheme to acquire the Borrower’s property were sufficient to render the forum selection clause unenforceable under Utah law. The Court also determined that dismissal was not proper under Illinois law because there was a question of fact whether the forum selection clauses contained in the loan and security agreements applied to the other agreements relating to the loan transaction, including the mortgage. It also concluded that there was a question of fact whether the loan transaction, and specifically the forum selection clause, was the result of an arm’s length negotiation.

The Appellate Court also determined that the Lender had not met its burden that res judicata barred the claim. The Utah court order supporting the Lender’s motion to dismiss did not sufficiently establish the causes of action were the same or that there was a final judgment on the merits of the issues that were raised in the Illinois matter. The Borrower’s claims were based on agreements other than the security agreement which allowed the Lender to sell the interest in the LLC under Utah law in Utah. In addition, The Borrower’s allegations of unlawful conduct with respect to the loan transaction and that the Lender violated the IMFL, presented questions of fact whether it would be unreasonable or unfair to apply res judicata to the circumstances of this case.


  • James Noonan

    Jim is a founding partner of Noonan & Lieberman. Jim has more than 25 years of experience in civil litigation on behalf of creditors, servicers, business and real estate owners.

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