PRICE SET AT FORECLOSURE SALE NEED NOT REFLECT FAIR MARKET VALUE

July 23, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

Although a catchall provision in the Illinois Mortgage Foreclosure Act empowers a judge to decline to confirm a foreclosure sale if "justice was otherwise not done," the fact that the property sold for only 69 percent of its fair market value does not mean the sale was unjust. Firstar Bank, NA v. Goldman, 2004 WL 1212099 (N.D. Ill., June 2).

Firstar Bank filed a lawsuit to foreclose on a mortgage it held on a condominium unit in Chicago, at 2208 W. Diversey Ave., that was owned by M. Michael Goldman and Dorris Prizant. A default judgment was entered against Goldman and Prizant in the amount of $364,725, and they failed to redeem the property before the statutory deadline.

A court-appointed special commissioner conducted a public sale of the property by auction. Firstar opened with a bid of $367,294. But another group, referred to as "the intervenors," won the property by bidding a buck more than Firstar.

When Firstar moved to confirm the sale, the defendants, Goldman and Prizant, filed a "petition to disrupt confirmation of sale."

According to the defendants, the fair market value of the property was $530,000. Since it was auctioned for only $367,385, or nearly 30 percent less than the fair market value, Goldman and Prizant argued that the sale should not be confirmed, because "justice was otherwise not done" under the Mortgage Act.

Here are some highlights of Judge Charles R. Norgle's opinion denying the petition to disrupt and confirming the sale (with various omissions not noted in the quoted text):

"Under Illinois law, a judicial foreclosure sale is not complete until it has been approved by the trial court. The high bid received at a judicial sale is merely an irrevocable offer to purchase the property, and acceptance of the offer takes place upon judicial confirmation. Until the court confirms the judicial sale, there is not a true sale in the legal sense.

"The Illinois Mortgage Foreclosure Act provides that the trial court shall confirm a foreclosure sale unless: (1) proper notice was not given; (2) the terms of the sale were unconscionable; (3) the sale was conducted fraudulently; or (4) justice was otherwise not done. 735 ILCS 5/15-1508(b).

"A court is justified in disapproving a judicially mandated foreclosure sale if unfairness is shown which is prejudicial to an interested party. The party opposing the sale bears the burden of proving that grounds to disallow the sale exist. Trial courts have broad discretion in approving or disapproving sales made at their direction; however, this discretion is not without its limits.

"Defendants concede that the first three elements of 735 ILCS 5/15-1508(b) are not at issue. They acknowledge that notice was proper, the terms of the sale were not unconscionable, and the sale was not conducted fraudulently. Defendant's sole basis for disrupting the sale is that justice will not be served if the court confirms the sale."

One of the arguments Goldman and Prizant made was that because the auction price "was significantly below the property's fair market value, defendants, who are both over 70 years of age, stand to lose their life savings."

As Norgle recounted, "Defendants purchased the property approximately six years ago. It is located in a developing area within the city of Chicago where real estate values have significantly increased over recent years."

An appraisal submitted by Goldman and Prizant concluded that the fair market value of the property was approximately $530,000. "At the auction, intervenors purchased the property for $367,385. The purchase price exceeded the amount of the debt in which defendants owed plaintiff by one dollar.

"Assuming the property is valued at $530,000, the purchase price was 69.3 percent of its fair market value. Defendants offer no authority to suggest that absent any irregularities in the sale process itself, a purchase price approximately 30 percent below market value is unjust.

"Under Illinois law, there is no requirement that foreclosed property be sold for its appraised value, which may or may not reflect the price that could be obtained upon sale of the property.

"It has long been recognized that property does not bring its full value at forced sales, and that price depends upon many circumstances from which the debtor must expect to suffer a loss.
"In the absence of mistake, fraud or violation of duty by the officer conducting the sale, mere inadequacy of sales price is not a sufficient reason to disturb a sale. This rule is premised on a policy of providing stability and finality to judicial sales. The interest of finality instills confidence in the process, encouraging parties to bid at judicial sales.

"In this case, defendants concede that the sale was conducted properly. There are no allegations that Firstar, [the] special commissioner or intervenors did anything inappropriate. Absent such a claim, a sales price of $367,385 was neither unjust nor unconscionable. See Lyons Savings and Loan Association v. Gash Associates, 189 Ill.App.3d 684 (1989) (finding that a sales price of 68.9 percent of the subject property's appraised value is not grossly inadequate); see also Illini Federal Savings and Loan Association, 162 Ill.App.3d 768 (1987) (holding that absent fraud or mistake, a sales price of 71.4 percent of the subject property's appraised value is not unjust or unconscionable).

"In addition, the fact that defendants stand to lose a significant amount of the equity in their home, which they claim was their only asset, does not by itself make the sale unjust.

"Firstar brought this foreclosure proceeding on July 31, 2002, and defendants were served with process shortly thereafter. Prior to this date, defendants knew that they were not meeting their obligations under the terms of the original mortgage agreement. They also knew that they did not meet their obligations under the terms of the forbearance agreement.

"On Dec. 5, 2003, the court entered a judgment of foreclosure and sale in the amount of $364,726, with the right of redemption extending to March 6, 2004. Defendants acknowledge that they were aware of the foreclosure suit prior to March 6, 2004.

"Throughout this entire period, they made no attempt to sell the property and were unable to timely refinance. Thus, knowing there was a significant amount of equity in the home, defendants had almost two years to remedy the situation. The fact that they did not do so, or that their efforts failed, does not make the sale unjust."

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