Members Equity Credit Union v. Duefel

No. 3--96--1051

IN THE

APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 1998

MEMBERS EQUITY CREDIT UNION, ) Appeal from the Circuit Court
) for the 12th Judicial Circuit
Plaintiff, ) Will County, Illinois
)
v. )
)
KEVIN DUEFEL and CATHY ) No. 96--CH--1180
DUEFEL, )
)
Defendants-Appellants, )
)
(Bill Martinson, ) Honorable
) William Penn,
Petitioner-Appellee). ) Judge Presiding

JUSTICE HOMER delivered the opinion of the court:

Members Equity Credit Union foreclosed on the junior
mortgage it held on the residential property of Kevin and Cathy
Duefel. At the time the judicial sale was confirmed, the trial
court granted a motion filed by the successful bidder, Bill
Martinson, requesting that the surplus from the judicial sale be
distributed to him. Subsequently, the trial court modified the
order of distribution to require Martinson to use the surplus to
pay the first mortgage on the property which had not been
adjudicated in this action. The Duefels appeal. Following our
careful review, we reverse.

FACTS
Members Equity Credit Union commenced this action by filing
a complaint to foreclose the junior mortgage it held on the
Duefels' residence. The judgment of foreclosure provided that
any surplus should be remitted "to the mortgagor or as otherwise
directed by the court." The property was also subject to a first
mortgage held by First Chicago, although the first mortgage was
not identified in the complaint or judgment of foreclosure.
Martinson purchased the subject real estate at the judicial
sale, having submitted the successful bid of $58,000.00. After
payment of the junior mortgage and court costs, there remained a
surplus of $21,396.82. The trial court granted a motion filed by
Martinson awarding him the surplus. According to an exhibit
attached to Martinson's motion, the first mortgage held by First
Chicago had a balance of approximately $28,000.00. Subsequently,
the Duefels moved to vacate the order and asked the trial court
to award the surplus to them. After a hearing, the trial court
ordered Martinson to apply the surplus to the first mortgage
indebtedness. The Duefels then filed this appeal.

ANALYSIS
The sole issue on appeal is whether the trial court erred in
ordering that the surplus resulting from the foreclosure of the
junior mortgage be applied to payment of the first mortgage. A
trial court's order of distribution of the surplus from a
judicial foreclosure sale will not be disturbed on appeal absent
a showing of an abuse of discretion. See Kankakee Federal
Savings & Loan Ass'n v. Mueller, 134 Ill. App. 3d 943, 481 N.E.2d 332 (1985); Grubert v. Cosmopolitan National Bank of Chicago, 269
Ill. App. 3d 408, 645 N.E.2d 560 (1995).
Section 15--1512 of the Mortgage Foreclosure Act provides:
"The proceeds resulting from the sale of real estate
under this Article shall be applied in the following
order:
(a) the reasonable expenses of sale;
(b) the reasonable expenses of securing possession
before sale ***;
(c) if the sale was pursuant to judicial foreclosure,
satisfaction of claims in the order of priority
adjudicated in the judgment of foreclosure or
order confirming sale; and
(d) remittance of any surplus to be held by the person
appointed by the court to conduct the sale until
further order of the court. If there is a
surplus, such person conducting the sale shall
send written notice to all parties to the
proceeding advising them of the amount of the
surplus, and that the surplus shall be held until
a party obtains a court order for its distribution
or until, in the absence of an order, the surplus
is forfeited to the State." (Emphasis added.) 735
ILCS 5/15--1512 (West 1994).
The foreclosure judgment in the instant case contained
virtually the same language as the statute with respect to
payment of expenses and satisfaction of claims. However, the
judgment provided that any surplus was to be remitted "to the
mortgagor or as otherwise directed by the court." (Emphasis
added.)[fn1]
The Duefels argue that the trial court should not have
allowed Martinson, the successful bidder, to recoup his own funds
for the purpose of paying a superior lien which remained on the
property. They point out that Martinson had notice, either
actual or constructive, of the prior lien when he purchased the
property. Further, the Duefels argue that because the first
mortgage was not adjudicated in this foreclosure action, the
court had no authority to order the surplus funds be applied to
its repayment.
In response, Martinson argues that because the statute
contains no legislative preference for the distribution of the
surplus, the trial court's decision to award the funds to him was
a proper exercise of its discretion. He asserts that it would be
inequitable for the surplus funds to be awarded to the Duefels,
because prior to the foreclosure they had no equity in the
property and awarding the proceeds to them would result in an
unjust windfall.
The parties have not cited, and we have not found, any
authority determining who is entitled to surplus funds resulting
from a junior mortgage foreclosure sale. Therefore, we consider
this issue a matter of first impression in Illinois. For the
reasons that follow, we hold that the trial court abused its
discretion when it ordered that the surplus be applied to the
repayment of the first mortgage.
Illinois law mandates that a buyer at a judicial foreclosure
sale takes the property subject to any outstanding debts which
may encumber the property subsequent to the sale. Heritage
Federal Credit Union v. Giampa, 251 Ill. App. 3d 237, 239, 622 N.E.2d 48, 49 (1993). Therefore, Martinson clearly purchased the
property subject to the outstanding first mortgage held by First
Chicago. Martinson points out that the first mortgage was not
identified in the complaint, judgment, or notice of sale.
However, we will not consider whether Martinson had actual notice
of the first mortgage because:
"All deeds, mortgages and other instruments of writing
which are authorized to be recorded, shall take effect
and be in force from and after the time of filing the
same for record, and not before, as to all creditors
and subsequent purchases, without notice ***."
(Emphasis added). 765 ILCS 5/30 (West 1994).
It is not disputed that the first mortgage was of record at the
time of the judicial sale, and Martinson, as a subsequent
purchaser, is deemed to have had notice of its existence.
Furthermore, a foreclosure sale must proceed on the
assumption that bidding will be competitive. Community Savings &
Loan Ass'n v. Cosmopolitan National Bank of Chicago, 72 Ill. App.
2d 202, 209, 219 N.E.2d 103, 107 (1966). Competitive bidding at
a foreclosure sale promotes the public policy goal of maximizing
the selling price, which in turn, lessens the chance that there
will be insufficient proceeds to pay the judgment creditors or
that a deficiency judgment will be taken against the mortgagors.
The trial court's decision rendered in the instant case
substantially undermines that goal.
Martinson presumably bid an amount he believed the property
to be worth despite the existence of the first mortgage. If the
trial court's order is allowed to stand, the competitive bidding
process utilized in this case would be rendered practically
meaningless. In effect, Martinson would have purchased this
property for the amount of the foreclosed mortgage plus costs
regardless of the actual amount of his bid. Based upon the trial
court's decision, a bidder would have every incentive to bid an
excessive amount at a judicial sale because he, as the highest
bidder, would be able to petition the court to recoup the
surplus. Following this reasoning, the sheriff could have simply
announced that the first person to appear at the sale with funds
equalling the amount of the foreclosed mortgage would prevail.
Under the circumstances, we believe that principles of
equity dictate that the Duefels should have been awarded the
surplus funds. See 735 ILCS 5/15--1106(e) (West 1994) (providing
that "[g]eneral principles of law and equity, ***, supplement
this Article unless displaced by a particular provision of it").
Martinson points out that even after the judicial sale, the
Duefels remained liable for the full amount of the first mortgage
based upon the promissory note secured by the mortgage.
Therefore, the Duefels received a direct benefit when the trial
court ordered the surplus applied to the payment of their first
mortgage obligation. However, just as the Duefels would have
been personally responsible for any deficiency resulting from
this judicial sale, they should be entitled to any surplus. See
Central Republic Bank & Trust Co. v. Bent, 281 Ill. App. 365
(1935).
We recognize that the trial court was attempting to complete
the transaction between the Duefels and First Chicago in an
effort to clear the property of the prior encumbrance and to
satisfy the Duefels' remaining obligations to First Chicago.
However, we find that the trial court abused its discretion by
interfering with that contractual relationship. The record
contains little information about the terms and status of the
First Chicago mortgage. Since First Chicago was not a party to
this action, its interest was not affected by the foreclosure
proceedings because it held a superior lien on the property.
Therefore, First Chicago remained in a position following the
judicial sale to protect its interest, by initiating collection
proceedings against the Duefels, or foreclosure proceedings
against the real estate, if the loan was in default. See
generally Heritage Federal Credit Union, 251 Ill. App. 3d at 239,
622 N.E.2d at 49-50. We refuse to speculate as to the status of
the first mortgage or to make a determination that First Chicago
and the Duefels wanted to accelerate the remaining payments under
that instrument and underlying note.
We distinguish our prior holding in Kankakee Federal Savings
& Loan Ass'n v. Mueller, 134 Ill. App. 3d 943, 481 N.E.2d 332
(1985). In Mueller, we affirmed a trial court's decision to
distribute the surplus to the successful bidder at the judicial
sale. However, that case involved the foreclosure of a first
mortgage, and the party which received the surplus was not only
the successful bidder at the judicial sale, but was also a named
defendant as holder of a junior mortgage on the property. The
successful bidder in the instant case was neither a party to the
foreclosure nor had any interest in the property prior to the
judicial sale.
Martinson also argues that this court should consider his
detrimental reliance on the trial court's original order awarding
him the surplus because he incurred expenses at that time for
improvements and repairs to the property. However, the Duefels
filed a timely motion to vacate that order and have sought this
court's review of the modified order in accordance with the
procedures proscribed by Illinois Supreme Court Rules. Martinson
will not now be heard to argue that the trial court's order is
beyond review due to the fact that he may have incurred expenses
on the property prior to final adjudication of the trial court's
initial order.
We hold that the trial court abused its discretion in
ordering that the surplus funds from the judicial sale be applied
to the payment of the first mortgage on the property. The
surplus funds should have been awarded to the Duefels, as the
foreclosed mortgagors.

CONCLUSION
For the foregoing reasons, the judgment of the circuit court
of Will County is reversed and the case is remanded for further
proceedings consistent with this opinion.
Reversed and remanded.
BRESLIN, J., concurred.
[fn1] The language of the foreclosure judgment reflects a
prior version of section 15--1512(d) of the Mortgage Foreclosure
Act which was amended to its current form by Public Act 86--974,
effective July 1, 1990. Previously, section (d) provided:
"remittance of any surplus to the mortgagor or as otherwise
directed by the court." 735 ILCS 5/15--1512, Historical &
Statutory Notes, at 639 (Smith-Hurd 1992).