Commercial Aspects of Foreclosure

This article describes crucial differences between residential and commercial foreclosure actions, such as the likelihood and procedure for appointing a receiver and the relationship amongst mortgagees and mechanics lien claimants. Also discussed in this article are real estate reorganizations in Chapter 11 bankruptcy cases. This article is the subject of a April 10, 2015 presentation by Ariel Weissberg, Erica Minchella and Samuel H. Levine for the Illinois Institute for Continuing Legal Education (IICLE).

I. Differences Between Residential And Commercial Real Estate

There exists a different psychology between residential and commercial mortgagors and mortgagees. The foreclosure process is different in the foreclosure of a commercial mortgage. Differences are found in the right of the mortgagee to possession, redemption and personal liability. A commercial mortgagor is likely to encounter a receiver. Guaranty liability is an issue.

II. Applicability of Supreme Court Rules 113 and 114

Supreme Court Rules 113 regarding practice and procedure in mortgage foreclosure cases is applicable to commercial foreclosure cases. The cautious approach is to comply with Rule 114 regarding the loss mitigation affidavit. Rule 114(a) states that for all actions filed under the Illinois Mortgage Foreclosure Law,. and where a mortgagor has appeared or filed an answer or other responsive pleading, Plaintiff must, prior to moving for a judgment of foreclosure, comply with the requirements of any loss mitigation program which applies to the subject mortgage loan. However, the Form Loss Mitigation Affidavit refers to the residential mortgage loan that is the subject of the pending foreclosure case. As a result of this inconsistency, I recommend compliance with Supreme Court Rule 114.

III. Possession

The Illinois Mortgage Foreclosure Law changed the rules regarding possession during foreclosure. The relevant statutory provisions begin with §15-1701(b), which provides: Prior to the entry of a judgment of foreclosure: In the case of residential real estate, the mortgagor shall be entitled to possession of the real estate except if (i) the mortgagee shalll object and show good cause, (ii) the mortgagee is so authorized by the terms of the mortgage or other written instrument, and (iii) the court is satisfied that there is a reasonable probability that the mortgagee will prevail on a final hearing of the cause, the court shall upon request place the mortgagee in possession. If the residential real estate consists of more than one dwelling unit, then for the purpose of this part residential real estate shall mean only that dwelling unit or units occupied by persons described in clauses (i), (ii) and (iii) of Section 15-1219. In all other cases, if (·i) the mortgagee is so authorized by the terms of the mortgage or other written instrument, and (ii) the court is satisfied that there is a reasonable probability that the mortgagee will prevail on a final hearing of the cause, the mortgagee shall upon request be placed in possession of the real estate, except that if the mortgagor shall object and show good cause, the court shall allow the mortgagor to remain in possession. Therefore, prior to judgment, the residential mortgagor is entitled to possession, but if the mortgagee shows good cause and is authorized by the mortgage, then the mortgagee can obtain possession. In all other cases, if the mortgagee is authorized by the mortgage and the court believes it likely to prevail, the mortgagee upon request is to be placed in possession; however, if the mortgagor objects and shows good cause, the mortgagor may remain in possession…

VIII. Chapter 11

…11 U.S.C. §543(d) provides that a bankruptcy court may excuse compliance with 11 U.S.C. §543(b) if the interests of the creditors would be better served by permitting the custodian to continue in possession, custody or control of such property. When analyzing whether the interest of creditors would be better served by permitting a receiver to continue in possession, courts weigh a number of factors including: (1) the likelihood ofreorganization, (2) the probability that funds required for reorganization will be available, (3) whether turnover would be injurious to creditors, ( 4) whether the debtor will use the turned over property for the benefit of creditors, and (5) whether there are instances of mismanagement by the debtor. See In re Falconridge, LLC, 2007 WL 3332769, *7 (No. 07-19200, J. Cox) (Bkrtcy. N.D. Ill. )(“[E]vidence of mismanagement or questionable business practices by the Debtor may negate the statutory obligation of a custodian to tum over assets to a debtor in bankruptcy.”). In re Lizeric Realty Corp., 188 B.R. 499 (Bkrtcy. S.D.N.Y. 1995); see also Matter of Plantation Inn Partners, 142 B.R. 561, 563 (S.D.Ga. 1992) (Receiver excused from turnover where court found that debtor had defaulted on mortgage payments, failed to pay taxes, failed to report revenues, failed to place casualty and liability insurance on the Property, allowed flood insurance to lapse, hired an unqualified manager for the hotel, failed to maintain current accounting records, failed to account).

Download Complete Article