Raising the Bar for Vacating Foreclosures: Illinois Supreme Court Clarifies Standards for Opening Defaults

The Illinois Supreme Court recently decided Wells Fargo Bank, N.A. v. McCluskey, 2013 IL 115469 and clarified the standards for vacating a default in a foreclosure case. In particular, the court held that the more liberal standard for vacating a default found in the Illinois Code of Civil Procedure at Section 2-1301(e) applies before a motion to confirm a judicial sale has been filed. But after the such a motion has been filed, the more exacting terms of Illinois Mortgage Foreclosure Law at Section 15-1508(b) govern. The opinion resolved a split between two appellate districts. And by drawing the lines clearly between the two standards for opening a default, the decision provides greater certainty in foreclosure proceedings for lenders.

In McCluskey, after defaulting on her mortgage, the borrower did not respond to a foreclosure complaint, and an order of default and judgment of foreclosure was entered. Seven months later, the borrower filed a motion to vacate the default under Code Section 2-1301(e), but then withdrew the motion while attempting a loan modification with the lender. When that attempt failed, the borrower refiled the motion two weeks after the actual judicial sale, but before the borrower had filed a motion to confirm the sale. The trial court denied the motion to vacate the default, and the borrower appealed. Id. at ¶ 6.

The appellate court reversed and ruled that the more liberal terms for opening a default under Section 2-1301(e) applied even after a judicial sale. Those terms included a showing of whether any lack of diligence could be excused and whether there was a meritorious defense. Id. at ¶ 8. The appellate court remanded the case to reconsider the motion to vacate the default under the standards of the Code of Civil Procedure. Id.

The Supreme Court reversed the appellate court. In doing so, the Supreme Court stated that the Code Section 2-1301(e) and the Foreclosure Law apply at different stages of foreclosure proceedings. The court explained that the Code of Civil Procedure itself states that it applies to the Foreclosure Law “except as otherwise provided,” and thus the question was whether applying the Code would be inconsistent with the judicial sale procedures. Id. at ¶ 15. In analyzing this question, the court noted that while Section 2-1301(e) provides a more liberal standard for vacating a default, the Foreclosure Law (at Section 15-1508(b)) has a more demanding test that looks to whether sale was the result of a lack of notice, fraud, or whether the lender’s own conduct interfered with the borrowers’ ability to protect their property rights. Id. at 18-22.

The court also explained that the dividing line between the two tests stems from how the Foreclosure Law seeks to balance the rights of all parties involved in the process. The court noted that when the General Assembly enacted the Foreclosure Law, it “set out a carefully crafted procedural process” to protect the interests of lenders in enforcing their liens, while at the same time protecting borrowers and their ability to protect the equity in their property. Id. at ¶ 24. That balancing of interests includes providing borrowers with rights to reinstate their mortgages, rights of redemption, and the right to notice of a judicial sale. Id. Given those protections for borrowers, once the lender moves to confirm the sale, the Foreclosure Law governs. Id. at ¶ 25. To do otherwise, the Supreme Court pointed out, would “circumvent the times limitations” for redemption and reinstatement of a loan and would allow for a revival of those rights contrary to the express terms of the statute. Id. But before such a motion to confirm the sale is filed, the Code’s more liberal standard applies. In McCluskey, the borrower had filed her motion after the sale, but before the lender had moved to confirm it, and as such, the Code applied. But even under this more lenient test, the borrower was still not entitled to open the default, since the Supreme Court concluded that her 10-month delay in seeking to vacate the judgment was too long and without justification, especially when the borrower “actively participated in the proceedings” and did not raise any defects earlier.

The McCluskey decision provides clarity as to when and how a default may be opened in a foreclosure case. And it also provides additional guidance as to what those standards require and how they are to be applied. By drawing a clear line as to when each standard applies, the opinion provides greater stability for the foreclosure process — which ultimately benefits both those who lend and those who borrow.

If you have questions about the subject matter of this update, please contact E. King Poor at (312) 715-5143 / king.poor@quarles.com, Vincent Angermeier at vincent.angermeier@quarles.com, or your Quarles & Brady attorney.