Introduction

On June 4, 2010, the Illinois Supreme Court issued its opinion, stating that a mortgagee must name a personal representative for a deceased mortgagor in a mortgage foreclosure proceeding in order for the circuit court to acquire subject matter jurisdiction. This article will discuss the facts and ramifications of this case.

Facts of the Case

This appeal concerned two cases, ABN AMRO Mortgage Group, Inc. v. McGahan and Charter One Bank v. Hunter. Both cases contained similar fact situations.

ABN AMRO Case

ABN AMRO gave a mortgage to McGahan, who defaulted. ABN AMRO filed foreclosure proceedings and later found out that McGahan had died. Although ABN AMRO was granted leave to file a petition to name a personal representative on behalf of McGahan, ABN AMRO declined to do so. The circuit court then dismissed ABN AMRO’s complaint pursuant to its order entered in the circuit court case, Wells Fargo v. McQueen, No. 05-CH 12846.

Wells Fargo v. McQueen

The facts of Wells Fargo v. McQueen are similar to those of McGahan. In Wells Fargo, the circuit court noted that generally speaking, a circuit court lacks subject matter jurisdiction when a lawsuit is filed against a deceased person because such a suit is a nullity. To avoid this situation and to confer jurisdiction on the circuit court, a plaintiff may proceed under section 13-209 of the Code of Civil Procedure and substitute the deceased party’s personal representative.

This statute (735 ILCS 5/13-209( c )), provides as follows:

If a party commences an action against a deceased person whose death is unknown to the party before the expiration of the time limited for the commencement thereof, and the cause of action survives, and is not otherwise barred, the action may be commenced against the deceased person’s personal representative if all of the following terms and conditions are met:

(1) After learning of the death, the party proceeds with reasonable diligence to move the court for leave to file an amended complaint, substituting the personal representative as defendant.

(2) The party proceeds with reasonable diligence to serve process upon the personal representative.

(3) If process is served more than 6 months after the issuance of letters of office, liability of the estate is limited as to recovery to the extent the estate is protected by liability insurance.

(4) In no event can a party commence an action under this subsection (c) unless a personal representative is appointed and an amended complaint is filed within 2 years of the time limited for the commencement of the original action.

Wells Fargo argued, however, that this rule did not apply because foreclosure proceedings are in rem actions and it is unnecessary to name a human defendant, i.e., the mortgagor, in such actions.

The circuit court concluded that mortgage foreclosure proceedings were quasi in rem in nature and that thus, pursuant to the Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1501), the mortgagor is a necessary party who has the right to defend against the action. Therefore, the circuit court determined that a lender is required to name a personal representative for a deceased mortgagor.

In light of the Wells Fargo ruling, the circuit court held in the McGahan case that because ABN AMRO failed to name a personal representative as a substitute for McGahan, the court lacked subject matter jurisdiction. Accordingly, ABN AMRO’s complaint was dismissed.

Charter One Bank v. Hunter

The facts in this case are basically the same as those in the McGahan case. Again, pursuant to the circuit court’s decision in the Wells Fargo case, the circuit court dismissed Charter One’s complaint for lack of subject matter jurisdiction.

Both Charter One and ABN AMRO appealed and the cases were consolidated. No one appeared on behalf of the deceased mortgagors. However, the appellate court granted leave to the Chicago Volunteer Legal Service Foundation to file an amicus curiae brief in support of the trial court’s decision.

The appellate court reversed and remanded, finding that this court has consistently labeled foreclosures as in rem actions. The Illinois Supreme Court granted the Foundation’s petition for leave to appeal instanter as amicus curiae. The court later granted the Cook County public defender leave to file an amicus brief as well.

The Supreme Court’s Discussion of ABN AMRO Mortgage Group v. McGahan

As noted above, Section 15-1501 of the IMFL (735 ILCS 5/15-1501(a)) indicates that a mortgagor is a “necessary party” in a mortgage foreclosure case. The IMFL does not suggest a course of action when the mortgagor is deceased. One would then normally look to the rules of civil procedure. However, both Charter One and ABN AMRO contend that this is not necessary, because mortgage foreclosure cases are in rem actions and that therefore, neither a deceased mortgagor’s estate nor a personal representative needs to be named.

The court noted that the legal fiction underlying an in rem proceeding is that the “property” and not the “owner of the property” is liable to the complaining party.

On the other hand, a quasi in rem proceeding is an in rem action that affects only the interests of particular persons in a certain thing. Unlike an in rem action, a quasi in rem action operates only as between the parties to the proceedings.

In other words, in an in rem proceeding, the court determines rights to the property as against the whole world, but in aquasi in rem proceeding, the court determines rights to the property only in respect to specific individuals.

Prior decisions have characterized a mortgage foreclosure as both in rem and quasi in rem proceedings. Accordingly, the Illinois Supreme Court analyzed as follows:

One of the differences between in rem and quasi in rem actions is whether the defendant is the property or a named person. With in rem actions, the property is the defendant. In quasi in rem actions, a named party is the defendant.

In a mortgage foreclosure case, the property is not the defendant. Rather, the mortgagor is the defendant. The IMFL has deemed the mortgagor to be a necessary party to a mortgage foreclosure case. This means that in a foreclosure action, the proceeding must be brought against a named party. Therefore, a foreclosure action is a quasi in rem proceeding.

The court also noted that in a foreclosure case, the property did not cause the wrong, nor is the property responsible for the plaintiff’s injury. The mortgagor is the person who caused the wrong. It is the mortgagor who defaulted on the mortgage.

Therefore, because the mortgagor is a necessary party in a foreclosure action, there must be personal service on the mortgagor.

In reaching a conclusion that a foreclosure proceeding is an in rem action, the appellate court relied on Financial Freedom v. Kirgis, 377 Ill. App. 3d 107, 877 N.E.2d 24, 315 Ill. Dec. 537 (1st Dist. 2007). This case also involved a lender filing a foreclosure case against a deceased mortgagor. In this case the appellate court held that a foreclosure case was an in rem action. The Illinois Supreme Court states in McGahan that “we reject Financial Freedom, and to the extent that decision and any statements in our prior cases are contrary to our holding here, they are hereby overruled.”

Accordingly, the supreme court reversed the appellate court’s decision and affirmed the judgment of the circuit court. That is, the supreme court stated that a mortgagee must name a personal representative for a deceased mortgagor in a mortgage foreclosure proceeding in order for the circuit court to acquire subject matter jurisdiction.

Analysis of the ABN AMRO decision

The court fails to apply existing statutory law in addressing the facts and issues of the case. For example, the court writes in its decision that IMFL does not indicate a course of action when the mortgagor is deceased. But is that really true? The court emphasizes the fact that Section 5/15-1501 of the IMFL indicates that a mortgagor is a “necessary party” in a mortgage foreclosure case. But Section 5/15-1209 of the IMFL defines mortgagor as “the person whose interest in the real estate is the subject of the mortgage and any person claiming through a mortgagor as successor [emphasis added].” Thus, one would think that serving the “heirs and legatees” of the deceased mortgagor personally if discovered by diligent inquiry or serving them by publication if not discovered would be a course of action that falls within the IMFL’s purview. (In other words, pursuant to the rules of descent and distribution set forth in the Probate Act at 755 ILCS 5/2-1, the heirs or legatees of the decedent would be Section 5-1501’s mortgagor).

Rather than insisting on the appointment of a personal representative, the supreme court could have followed the lead of the appellate court in In Re Application of County Treasurer, 216 Ill. App. 3d 162, 576 N.E.2d 255 (1st. Dist. 1991). This was a tax deed case. Here the court stated that the tax purchaser has an obligation to make a “diligent inquiry” to find and serve all owners and parties interested in the real estate. This includes naming the beneficiaries of the land trust in title when the recorded deed in trust indicates that the grantors of said deed are very likely the land trust beneficiaries.

The supreme court could have adopted similar logic. For example, the court could have said that when a foreclosing lender discovers that a mortgagor is deceased, it must make a “diligent inquiry” to determine, e.g., if the mortgagor’s estate is being probated, and if so, to make the executor or administrator of the estate a necessary party to the foreclosure proceeding. But the court did not do this.

The court could have said that if the deceased mortgagor’s estate is not probated, a court could obtain jurisdiction over the unknown heirs and legatees of the mortgagor by affidavit and publication pursuant to 735 ILCS 5/2-413. But the court did not do this.

Ultimately, the logic of the supreme court seems weak. The court goes to great lengths to stress the importance of the mortgagor as a necessary party to the mortgage foreclosure. At one point it opines that “the mortgagor is the instrumentality of the wrong. It was he or she who breached the contract by defaulting on the note secured by the mortgage.” But the court’s solution to the problem of the demise of the mortgagor—appointing a personal representative--seems to be of little real value in addressing the apparent concerns of this court.

Unanswered Questions

By not discussing the rights of the heirs and legatees of a deceased mortgagor, the supreme court left unaddressed several important questions and issues—questions and issues that title insurance companies will now have to analyze and underwrite. Consider, e.g., the following scenarios. (Note that different title companies may adopt different means of underwriting the issues presented in these examples).

Example 1: A owns the land and executes a mortgage in favor of Bank. Upon default, Bank files its foreclosure proceeding. A cannot be found for personal service, and so Bank cannot determine whether A is dead or alive. Did A simply abandon the property, or is A really deceased? There is no probate for A, and Bank does not know who, if anyone, would be A’s heirs.

If it appears that A is indeed deceased, then Bank must obtain the appointment of a personal representative. Note that the ABN AMRO decision suggests that if the original mortgagor is deceased, all that the lender has to do is appoint a personal representative in order to go forward with the mortgage foreclosure. Despite this indication, the title company will probably ask that Bank discover A’s heirs or legatees and include them in the foreclosure as necessary parties. if Bank cannot discover these parties, title companies will probably require that the foreclosing lender obtain jurisdiction over and publish against the possible heirs and legatees of A pursuant to 735 ILCS 5/2-413 and 735 ILCS 5/2-206 and 5/2-207.

What if the lender fails to obtain jurisdiction over these “unknown owners?” In that event, the title company will probably raise an appropriate title exception on any policy issued to the foreclosing lender. However, unless the public record discloses a probate of A’s estate, the title company ought to be able to waive this exception pursuant to 735 ILCS 5/2-1401(e) when this lender sells the property to a purchaser for value.

On the other hand, if Bank, upon diligent inquiry, cannot locate A, but there is no indication that A is deceased, that it appears that A has simply abandoned the property, then it is possible that the title company will assume the risk that A may in fact be dead.

That is, if Bank furnishes the title company a written statement that A is not occupying the land being foreclosed, that it has looked for but cannot find A, that there is no probate of A’s estate in the county in which the land is located, and that it has no reason to believe that A is deceased, the title company may agree to insure title through the mortgage foreclosure without requiring the appointment of a personal representative. (However, the title company will probably insist that Bank obtain jurisdiction over A pursuant to 735 ILCS 5/2-206 and 5/2-207). Thus, if A is indeed deceased, the title company will assume the risk of all consequences arising from the failure to appoint the personal representative when insuring the sale of the property to a purchaser for value.

In Bank’s attempt to determine whether or not A is deceased, what would constitute a “diligent inquiry?” Bank should consider talking to A’s neighbors, conducting an Internet search using such search engines such as Google in an attempt to locate A’s online obituary (see also <www.arrangeonline.com>), and completing a Social Security Death Index search. (See <www.socialsecuritydeathindex-search.com>).

Similarly, what would be a “diligent inquiry” as to the possible existence of A’s heirs and legatees? Again, Bank should talk to A’s neighbors or conduct an Internet search.

Should A’s personal representative be someone recommended by Bank or an impartial third party? The ABN AMRO decision offers no guidance in this regard. In addition, this opinion is silent as to the duties of this representative.

Example 2: A and B own the land as tenants in common and execute a mortgage in favor of Bank. After A’s death, B defaults on the mortgage. Here, Bank must obtain the appointment of a personal representative for A. In addition, the title company will probably ask that Bank discover A’s heirs or legatees and include them in the foreclosure as necessary parties. Again, if Bank cannot discover these parties, then the title company will probably insist that service be had by publication pursuant to 735 ILCS 5/2-413.

Example 3: A and B own the land as joint tenants (or tenants by the entirety) and execute a mortgage in favor of Bank. After A’s death, B defaults on the mortgage. Here, Bank should not have to obtain the appointment of a personal representative for A. The title company will probably determine that B is the only necessary party.

Example 4: C is a junior secured creditor on land subject to Bank’s prior mortgage. Bank initiates foreclosure proceedings and discovers that C died prior to the filing of the foreclosure case. There is no reason for a title company to require that Bank obtain the appointment of a personal representative for C. The ABN AMRO case is strictly confined to deceased necessary parties. Junior creditors are merely permissible parties. The title company will probably, however, require that Bank discover C’s heirs or legatees and include them in the foreclosure as parties to the proceeding. Again, if Bank cannot discover these parties, then the title company will probably insist that publication be had against the possible heirs and legatees of these creditors.

Example 5: Title to the land is vested in A, as Trustee under the A Living Trust. A, as Trustee, executes a mortgage in favor of Bank. After default, Bank discovers that A died prior to the filing of Bank’s foreclosure. Bank should not have to obtain the appointment of a personal representative for A. Instead, Bank should name as a party defendant and serve process on any successor trustee named in the trust agreement. If the trust agreement is silent or ambiguous as to trustee succession, or if neither Bank nor the title company have a copy of the trust agreement, then Bank should consult the title company for guidance. The title company may ask that Bank serve generally all unknown owners by publication.

Example 6: Title to the land is vested in an Illinois land trust. A is the beneficiary of this land trust. The land trust executes a mortgage in favor of Bank. After default, Bank discovers that A died prior to the filing of Bank’s foreclosure. Bank should not have to obtain the appointment of a personal representative for A. Instead, Bank should simply name and serve this Illinois land trust.

Example 7: A owns the land and executes a mortgage in favor of Bank. Upon default, Bank files its foreclosure proceeding in federal court. Bank discovers that A is deceased. There is no probate for A, and Bank does not know who, if anyone, would be A’s heirs.

Pursuant to Erie Railroad v. Tompkins, 304 U.S. 64, 58 S. Ct. 817 (1938), the federal court would apply state substantive law and ask that a personal representative be appointed. However, the title insurance company would probably insist that the heirs and legatees of A be made necessary parties to the mortgage foreclosure. As these parties would be unknown, there would be no diversity jurisdiction under 28 USC Sec. 1332.

It seems clear that in this particular fact situation, Bank would be unable to foreclose its mortgage in federal court. The probable title company requirement of making the unknown heirs and legatees of A necessary parties to the mortgage foreclosure would be fatal to this federal court example.

Conclusion

Because there was no petition for a rehearing of this decision, this case now represents the law in Illinois. A lender must have a personal representative appointed when it discovers that the mortgagor against whom it is foreclosing is deceased. This representative can be appointed in one of two ways: One, the lender can open a probate estate and have a representative appointed; or two, the lender can petition the foreclosure court to have a personal representative appointed pursuant to section 13-209 of the Code of Civil Procedure.

The devil, though, is in the details—the details ignored by the supreme court. It is these details that title companies and real estate attorneys will wrestle with in the coming years. ■

__________

The author acknowledges the assistance of Douglas M. Karlen, Regional Counsel, Chicago Title Insurance Company, in the preparation of this article.