ILLINOIS COURT AFFIRMS ORDER ALLOWING SALE OF REAL PROPERTY FREE OF MORTGAGE LIEN PRIORITIZING PAYMENT OF TAXES & ADMINISTRATOR’S FEES

The Second District Appellate Court of Illinois just affirmed a costly ruling wherein a circuit court in Lake County, Illinois, refused to grant a judgment of foreclosure to mortgagee, Carrington Mortgage Services, LLC, (Carrington), while granting the estate administrator’s request for a private sale of the deceased’s real property free and clear of Carrington’s mortgage lien pursuant to 755 Ill. Comp. Stat. Ann. 5/20-6. Carrington Mortg. Servs., LLC v. Israel, 2024 IL App (2d) 230335-U, ¶¶ 1-2.

In Israel, the deceased mortgagor borrowed $419,225 in 2010 to purchase real property located in Gurnee, Illinois.[i] The mortgagor (Green) died intestate in 2019 owing nearly $500,000 on the note and mortgage, now held by Carrington, and owing close to $200,000 in past due taxes and on a subordinate HUD mortgage loan. Carrington initiated foreclosure proceedings in August 2019.[ii] Shortly thereafter, Green’s sister and estate administrator, Israel, opened a probate estate and successfully moved to consolidate the foreclosure and the probate actions.[iii]

Israel petitioned for approval to sell the property “free and clear of all liens” under 755 ILCA 5/20-6(b) since the liens against the property exceeded the property’s estimated value.[iv] Israel and the United States reached an agreement wherein the United States would release its tax liens and HUD mortgage in exchange for priority payment for both.[v] Israel’s claims for estate-administration expenses would get their usual priority, subject only to the United States’ claims. Israel moved for summary judgment on its section 20-6 petition; Carrington opposed the motion and moved for summary judgment on its foreclosure claim.[vi]

In its opposition Carrington argued that Israel’s petition, if granted, would eliminate Carrington’s security interest and force Carrington to “file a seventh class claim as an unsecured creditor” and likely recover less than half the value of its lien.[vii] That’s what happened, but it was worse than Carrington anticipated.[viii] In the January 2022 sale order (Sale Order), the court denied Carrington’s summary judgment motion (for foreclosure), granted Israel’s petition, “vacated and removed” Carrington’s mortgage, and ordered Israel to “retain the proceeds from the sale” until further order from the court.[ix] Israel then sold the property in a private sale for $465,000, paid $27,900 in realtor commissions, $2,340 for title work and closing costs, and retained $409,244.12 from the sale for further distribution.

Later, Israel petitioned for approval to distribute the remaining sale proceeds as follows: “$129,936.16 to Israel and her counsel, $209,776.41 to the United States (pursuant to their agreement), … $27,264.69 to plaintiff,” and $50,000 was to be held for final expenses.[x]  Carrington objected to the proposed distribution arguing that its mortgage lien should be satisfied first from the sale proceeds.[xi] The court disagreed with Carrington and entered an order (Distribution Order) approving Israel’s proposed the distribution with a minor change.[xii]

The court explained that the Sale Order determined “how and in what order [Carrington] was to be paid” and since the Sale Order granted Isael’s section 20-6 petition, the claim preference was set by 755 ILCS 5/18-10. Although Carrington knew its lien would be treated as a seventh class claim under section 18-10, Carrington failed to appeal the Sale Order and was prohibited from challenging the findings in that order by challenging the distribution of the sale proceeds. Carrington then appealed the Distribution Order.

On appeal Carrington argued that the probate court committed reversible error based on the following: (1) The court improperly concluded Carrington’s lien was “satisfied” even though only a portion of the secured amount was paid to Carrington as a seventh class claimant, (2) The sale proceeds should not have been made a part of the estate until after Carrington’s lien was satisfied from the sale proceeds, and (3) The realtor commissions should not have been paid prior to satisfaction of Carrington’s lien.[xiii] Israel’s primary rebuttal to Carrington was that all these arguments were forfeited because Carrington failed to appeal the Sale Order.[xiv] The Second District agreed with Israel.[xv]

The Court explained that Carrington’s failure to appeal the Sale Order or the order which denied Carrington’s summary judgment motion was fatal because those orders “disposed of the question whether the property would be sold via foreclosure proceedings or pursuant to section 20-6(b) of the Probate Act.”[xvi] The Court also found Carrington’s lien was removed by the Sale Order and since Carrington received “something” the requirement under section 20-6 that the lien be satisfied by the sale proceeds was met.[xvii] Lastly, the Court explained because the Sale Order extinguished Carrington’s lien it was proper for the sale proceeds to pass into the estate for distribution.[xviii]

Although a harsh result and costly lesson, it could have been avoided. Considering the Court’s commentary and analysis, it seems likely an appeal of the Sale Order would have been successful. Further, unlike in Israel, our firm was successful in arguing that proceeds from a section 20-6(b) sale should first be used to satisfy the bank’s mortgage lien.[xix] Our firm was able to secure an order wherein the probate court awarded our client the majority of the 20-b(6) proceeds, $548,827.47 out of $591,938.17, from the sale of the property.

[i] Israel, at ¶4. Future references to this case are to this citation until indicated otherwise.

[ii] Israel, at ¶5.

[iii] Israel, at ¶¶5, 7.

[iv] Israel, at ¶6.

[v] Israel, at ¶7.

[vi] Israel, at ¶8. Future references to this case are to this citation until indicated otherwise.

[vii] Israel, at ¶8.

[viii] Israel, at ¶¶9-10.

[ix] Israel, at ¶9.

[x] Israel, at ¶11.

[xi] Israel, at ¶12-14. Future references to this case are to this citation until indicated otherwise.

[xii] Israel, at ¶¶12, 15. Future references to this case are to this citation until indicated otherwise.

[xiii] Israel, at ¶17.

[xiv] Israel, at ¶18.

[xv] Israel, at ¶22.

[xvi] Israel, at ¶23.

[xvii] Israel, at ¶31.

[xviii] Israel, at ¶33.

[xix] Our firm filed a foreclosure action in US Bank v. Estate of Amiran, (Case No. 2022 CA 09234) which was consolidated with Estate of Amiran, Cook County, Illinois Probate Division Case No. 2021 P 04672. This case was factually similar to Israel and addressed the same probate code regulations and similar legal arguments.