Investors and home buyers of bank owned (REO – “Real Estate Owned”) property and bidders at Sheriff’s Sales must be scrupulously cautious before making a purchase of such property because of the potential for judgments being reversed as well as problems with title that might not be obvious from public records. This article will discuss the problems that have arisen from such purchases and the minimum a purchaser must do to not be the victim of the impact of a foreclosure judgment being reversed or other title problems.
When a foreclosure is filed, service must be made on the Defendant(s). In Cook County, service can be made by a licensed process server, rather than the Cook County Sheriff. Generally, Plaintiff’s counsel will, at the start of a case, get a court order authorizing the use of a licensed process server. The process server may serve the Complaint and Summons on the Defendant by putting the documents in the hands of the Defendant, an individual over the age of 13 who resides in the property with the Defendant, or relative who is in the property at the time service is made (the latter two methods are known as “substitute service”)..
If the process server cannot (or claims he cannot) serve the defendant personally or by substitute service, then the Plaintiff may provide an affidavit to the court claiming that research and efforts for serving the Defendant have been exhausted and may get a court order to publish notice to the Defendant. With that Order, the Plaintiff will generally go to the Chicago Daily Law Bulletin or another publication and publish notice that will appear in the bulletin and a copy of the notice will be mailed to the Defendant’s last known address.
But what if the Defendant could have been found and the process server did not do their due diligence? What if the Summons was faulty? The court has no jurisdiction where the summons is defective because it fails to name the defendant who is to be served.
I have effectively quashed service in the following instances:
- Process server claims to have served the defendant by serving a tenant in the subject property, which was not the property in which she resided. We were able to prove that she resided elsewhere at the time of service.
- Process server claims to have served a daughter over the age of 13, but Defendant did not reside in the property, having separated from his wife.
- Process server claims to have served the Defendant, who is a tall, Afro-American male, by serving a short, Latina woman who was the housekeeper.
And so forth. When we have quashed service, usually after judgment has been entered, sometimes after the sheriff’s sale has occurred, the judgment order is vacated. If the sheriff’s sale has occurred, there may be different issues if the lender bought the property at sheriff’s sale or a third-party bidder was the successful purchaser. If the lender was the successful bidder, then they may ultimately seek to sell the property as an REO – which I will discuss later.
A third party bidder at sheriff’s sale will need to give 10% to 25% of the purchase price as a down payment at the time that their bid is accepted. Generally, the balance of the purchase is due in 24 hours. But what has that bidder purchased? They have purchased the interest of the lender. Subordinate liens would be wiped out by the foreclosure, but prior liens would not. Therefore, if the bidder is purchasing a second mortgagee’s position, they are taking subject to a first mortgage. If there were outstanding real estate taxes at the time of the sale, they are taking subject to those taxes. (If the purchaser at sheriff’s sale does not make the first payment due to the Association after the deed transfers, they are responsible for all outstanding dues at the time the foreclosure concludes).
A purchaser of REO property, too, is purchasing the interest that the lender has, but when they make their purchase, they are going to obtain a title policy that assures that any prior liens and real estate taxes have been paid. The purchaser may be responsible for up to six (6) months of association dues that were owed at the time the foreclosure case was filed.
But what if after the sheriff’s sale or after the REO purchase, service is quashed and the judgment of foreclosure is vacated? What if it happens years later?
If the court determines that the purchaser at sheriff’s sale or the REO purchaser (who we will now call a Bona Fide Purchaser or BFP) had no reason to know that the court had no jurisdiction over the defendant, then the sale will stand. (The defendant who has quashed service may only proceed against the Plaintiff for damages).
But, if the court determines that the BFP knew or had reason to know that the court had no jurisdiction over the defendant, then the sale will be vacated. (The service on the Defendant will be deemed defective because it was served by a special process server without an Order from the Court appointing a process server, and that since that was obvious from the court record, the purchaser could have known that the Court had no jurisdiction and therefore the purchaser was not a BFP. The court will not consider the buyer a BFP if there are this and other such errors.)
It is important to remember that “a party attacking a judgment for lack of personal jurisdiction based on defective service of process is restricted by neither the time limitations nor the due-diligence.
So what is a BFP to do? How to they assure that they can buy the property without a concern that the Defendant in foreclosure will not show up at their door asking for the key? Check the court file. Did the Defendant file an appearance? Did all Defendants file appearances? If they did, they submitted to the jurisdiction of the court. Get a title search done before you purchase at sheriff’s sale. Do any parties appear of record who had not been included in the foreclosure case? Are taxes paid up? Is there a lien showing for condo dues?
Are these perfect solutions? No, but it is better than trusting to fate or the title company.
What are the consequences of not doing your due diligence or pulling title? In the case of U.S. Bank, N.A. v. Nino Giorgobiani, after the defendant obtained an Order Quashing Service, vacating all orders in the foreclosure case as being void, the Defendant pursued the purchaser, who it turned out was not a BFP (the complaint stated that Defendant was a woman; the Summons stated that service was on a man – bad service was apparent from the record). The purchaser of the property purportedly sold as an REO lost his property (there was title insurance for that), all of the money he put into the property rehabbing it (only protected by title insurance if he had a construction endorsement) and the Defendant went after the purchaser for “use and occupancy” for the period of ownership.
A purchase of property at a sheriff’s sale or as an REO may be at a reduced price. However, if you have not done your due diligence, you may lose more, much more than your purchase price.