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The “New-Default Rule” Saves Lenders from the Harsh Results of the Single Re-Filing Rule

By Thomas J. Cassady

On September 21, 2020, the Second District Appellate Court issued its opinion in Wilmington Savings Fund Society v. Barerra, 2020 IL App (2d) 190883, which gave lenders and mortgagees some relief from the harshness of the Illinois Supreme Court’s 2018 Cobo decision based on the “single re-filing rule.”

On November 29, 2018, the Illinois Supreme Court issued its decision in First Midwest Bank v. Cobo, 2018 IL 123038, holding that a foreclosing mortgagee who has voluntarily dismissed its foreclosure twice cannot re-file a third time on the same default, pursuant to 735 ILCS 5/13-217, often known as the “Single Re-Filing Rule.” Many lenders in the height of the 2008 foreclosure crisis voluntarily dismissed foreclosures for various reasons such as service transfers or pending mortgagor bankruptcies, and when the lender tried to re-file its foreclosure a third time, it was barred forever due to the Illinois Supreme Court’s strict application of the single re-filing rule in Cobo.

In Barrera, the Second District provided some relief from the Illinois Supreme Court’s unforgiving interpretation of the single re-filing rule. The foreclosing plaintiff in Barrera had previously filed three foreclosure complaints, all based on the mortgagors’ failure to make principal and interest payments. Two of those foreclosures were voluntarily dismissed, and the third was involuntarily dismissed when the Circuit Court applied the single re-filing rule. The mortgagee then filed another foreclosure based on a non-monetary default: the borrower’s failure to make real estate tax and hazard insurance payments, as well as failure to reimburse the mortgagee for tax and insurance payments made on the borrowers’ behalf. In addition to defaulting on principal and interest, the mortgagors therefore defaulted in four new ways: 1) failure to pay real estate taxes to the county 2) failure to pay hazard insurance; 3) failure to reimburse for taxes paid; and 4) failure to reimburse for insurance paid.

The Circuit Court of the Nineteenth Judicial Circuit in Lake County dismissed the new complaint based on the tax and insurance default.  The Circuit Court found that the tax and insurance complaint was based on the same default as the previous complaints, which were based on principal and interest default.  Crucially, the Circuit Court in Barrera determined that the complaint based on the tax and insurance default “arises from the same single group of operative facts” as the prior three complaints based on the principal and interest default.  The Circuit Court came to this conclusion by analyzing the River Park “transactional test” set out in River Park, Inc. v. City of Highland Park, 184 Ill. 2d 290, 302 (1998), and re-affirmed in Cobo in 2018.  The River Park test states that res judicata (the standard used for identifying whether the single re-filing rule has been violated) bars not only those claims that were actually decided in the prior proceedings, but also those that could have been decided. The Circuit Court in Barrera found that the mortgagee could have requested the taxes and insurance payments due in its prior complaints which were based on the principal and interest default.

On appeal, the mortgagee argued that 2018 tax and insurance payments could not have been adjudicated in 2012-2015 when the prior complaints were filed and prior default on principal and interest declared. The default as to tax and insurance payments only arose after the first three complaints had been dismissed, and therefore the “new default” could not have arisen prior to 2018. The Second District Appellate Court agreed and reversed the Circuit Court, finding that the “new default” rule applies when there are separate ways that a mortgagor can default under the terms of the mortgage, and a “new default” occurred subsequent to prior case dismissals. In Barrera, the Court held that a “new default” existed when the mortgagor failed to make tax and insurance payments after the prior complaints based on principal and interest were dismissed.  The most recent foreclosure (as to the tax and insurance defaults) alleged a separate, subsequent default and therefore did not violate the single re-filing rule.  The Second District therefore respected the fact that a mortgage contains many promises by the mortgagor and even if one is found to be unenforceable, the other promises are still in effect for the life of the lien. The operative facts contained in the 2018 complaint were that the tax and insurances payments were not made after dismissal of the prior complaints based on principal and interest.  Therefore, the Appellate Court held that the “operative facts” of the 2018 complaint for purposes of the River Park transactional test were not the same as the “operative facts” of the three previously-dismissed complaints.

The Barrera decision is a life raft for mortgagees who have previously voluntarily dismissed two foreclosures and are therefore procedurally prevented from bringing a third based on the single-refiling rule and the Cobo decision. Mortgagees can now confidently declare a default and file a new complaint based on language in the mortgage requiring acts other than the payment of principal and interest payments, without running afoul of the single re-filing rule. The careful practitioner will closely read the mortgage at issue to determine if any of the following common default provisions are included: failure to make tax payments to the county, failure to reimburse for tax payments to the county, failure to make hazard insurance payments, failure to provide proof of the mortgagors’ hazard insurance, failure to reimburse the lender for hazard insurance payments on the mortgagors’ behalf, and transfer of the property without the mortgagee’s permission, among many other possible provisions.  Each mortgage is different, and each may contain separate default provisions beyond payment of principal and interest. If a mortgagee has already dismissed two foreclosure complaints and has been unable to enforce its mortgage lien, counsel should examine the loan documents to determine the entire range of promises made by the mortgagor and new avenues for declaring a default that may have arisen after the dismissal of those complaints based on principal and interest.

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