Thursday, September 17, 2015

Foreclosure Law vs. Probate Act - Which One Wins?

The Illinois Appellate Court Second District's recent opinion In Re Estate of LaPlume provides an interesting case of foreclosure law and the Probate Act in conflict - which one wins? The foreclosure statute at issue was the Mortgage Foreclosure Act, and the plaintiff was a bank who had filed a mortgage foreclosure action separately from the decedent owner’s probate estate. The bank’s lien totaled about $165,000, and the total of liens and mortgages encumbering the property was more than $207,000.  The executor meanwhile found a potential buyer willing to pay $200,000 for the property, and filed a petition in the probate court under section 20-6 of the Probate Act, asking the court to order a short sale as per the offer.  The two cases were then consolidated in the probate court and during briefing of arguments, the executor received a revised offer to pay $205,000 for the property. The trial court ruled for the bank and dismissed the executor’s petitions, while noting on the record that the court would welcome clarification from the Appellate Court between the two laws at issue. 

The portion of the Probate Act at issue, in Section 20-6, states: 
“In any proceeding to sell or mortgage real estate the court may:  …
(b) direct the sale or mortgage of the property free of all mortgage, judgment or other liens that are due, provide for the satisfication of all those liens out of the proceeds of the sale or mortgage and settle and adjust all equities and all questions of priority among interested persons;
(c) with the assent of the owner of a mortgage lien that is not due, direct that the property be sold or mortgaged free of the lien and provide for the satisfaction of the lien out of the proceeds of the sale or mortgage.

   The appellate court noted subparagraph (c) would apply when the decedent and administrator have kept the payments current on the loan and mortgage, while subparagraph (b) applies where, as in LaPlume, the payments are past due and in default on the loan.  As to (b), the court noted that where this provision applies, the court need not obtain the assent of the mortgagee lienholder to sell the property.

The bank argued that the “first in time, first in right” doctrine should apply – the bank filed its foreclosure complaint before the executor filed the petition to sell the real estate under Section 20-6 of the Probate Act.  The executor in turn did not dispute the doctrine but pointed out that the estate was opened and letters of office issued first, before the bank’s suit.  The appellate court considered this and found that the bank’s action would have priority over the 20-6 petition as first in time, but that who filed first in this context was merely a factor for the probate court to consider in the 20-6(b) inquiry.  The “touchstone,” “paramount” factor according to the court was “whether agreed sale, between the estate and a buyer and overseen by the court, is necessary for the proper administration of the decedent’s estate.”  In addition to priority between competing claims as another factor, other factors referenced by the court could include “maximizing the value of the estate’s assets; maximizing the recovery of the estate’s creditors; and the public policy underpinning a secured creditor’s ability to recover its debt from the estate.”  The appellate court left the application of these factors in LaPlume to the trial judge to determine on remand.  However, it is clear that the “first in time” priority issue, which would normally govern in the foreclosure context, was a mere subservient factor in this case to the “paramount,” “touchstone” factor – is the sale necessary for the proper administration of the estate?  In that sense, one could conclude the court sided with the Probate Act over the foreclosure law. 

 Perhaps the Probate Act “won” this initial round, but did the foreclosure laws really “lose” in LaPlume?  Not necessarily.  Lien priority and protecting the secured creditor’s interests are still factors in the analysis, and although secondary to the “touchstone” factor, one can imagine the immense challenge facing an executor who seeks to use this opinion to justify a sale in probate that is unreasonable in terms of the lienholders’ interests.  Bear in mind, in LaPlume the “short sale” offer was for $205,000 where the total of liens and mortgages was $207,500, a mere difference of $2,500, and the opinion includes the probate court’s note that this figure did not include realtor commission, attorney fees, or other typical closing costs and estate administration costs.  The disparity between the offer and the mortgage would certainly appear to be relevant to the factor analysis and differentiate this case from many other "under water" cases.

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