Breaking and Entering as a Legal November 4, 2011 Obligation: - PDF document

Breaking and Entering as a Legal November 4, 2011 Obligation: Amendments to Chicago Practice Group(s): Mortgage Banking & Ordinance Continue Trend of Forcing Consumer Financial Products Lenders to Maintain Vacant Property Even Before Assuming Title By Nanci L. Weissgold, Phoebe S. Winder, and Ryan M. Tosi 1 When is breaking and entering a home you do not own a legal obligation and not a crime? In Chicago, and in an increasing number of jurisdictions around the country, mortgagees and servicers of residential loans are required to monitor and maintain vacant properties before they obtain legal title. The Chicago City Council recently adopted a controversial amendment to the Chicago Municipal Code that significantly expanded the definition of an “owner” of vacant property. Specifically, the definition of “owner” includes, among other institutions, “mortgagees,” “assignees,” and “agents” that have yet to take actual possession of vacant property or legal title to such property. This first amendment drew so much criticism that the Council subsequently proposed and passed a second, alternate amendment which agreed to remove mortgagees from the definition of owner and instead created a separate code section setting forth specific maintenance requirements for mortgagees. The second amendment is expected go into effect on November 19, 2011. The Chicago Amendment This fall, Chicago passed a measure (the “First Chicago Amendment”) continuing the trend of potential for lender liability with respect to vacant property. The First Chicago Amendment broadened the definition of an “owner” of vacant property to include “any person who alone, jointly or severally with others is a mortgagee who holds a mortgage on the property, or is an assignee or agent of the mortgagee.” 2 The amended definition of “owner” required subject entities to maintain vacant property and the exterior and interior of buildings on such property and to meet certain minimum standards, including removal of debris, securing buildings by boarding up openings, and not allowing water to accumulate on the property. 3 Failure to comply with the minimum standards would have resulted in substantial penalties. Violations would have resulted in a fine of $500 to $1,000 per offense, and each day that a violation continued would have constituted a separate, fineable offense. 4 In addition to the liability, an “owner” has to pay a registration fee (that can range from $250 to $1,000 every six months) and pay the costs associated with maintaining the property. The First Chicago Amendment took effect on September 17, 2011. 5 Those in support of the First Chicago Amendment claimed it would “protect the community” from the hazards and negative effects of vacant properties. 6 Opponents, however, were troubled by the fact that the First Chicago Amendment made the mortgagee responsible as the “owner” of a vacant property, despite the mortgagor maintaining legal title and the possessory interest in the property. 7

Breaking and Entering as a Legal Obligation: Amendments to Chicago Ordinance Continue Trend of Forcing Lenders to Maintain Vacant Property Even Before Assuming Title In early November, however, the Chicago City Council unanimously passed a second, compromise amendment (the “Second Chicago Amendment”), which it struck with the mortgage industry and which continue to make mortgagees liable for some maintenance requirements on properties that are vacant and unregistered, but removed mortgagees from the definition of owner and created a separate code section setting forth specific maintenance requirements for mortgagees. 8 The Second Chicago Amendment still requires mortgagees to register, inspect, and maintain vacant property or face fines, but the requirements are more limited than under the First Chicago Amendment. Mortgagees do not need to register a vacant property if the property is already registered by the mortgagor or another mortgagee of the property. 9 When registration by a mortgagee is necessary, it would be required every six months, but the registration fee of $500 is required only once. 10 The Second Chicago Amendment also created “affirmative defenses” mortgagees could raise to those duties. 11 These defenses – which defeat the need to inspect or maintain vacant property – include, the property is occupied; the mortgagee is barred performing these duties by an automatic bankruptcy stay; the mortgage was not in default at time of violation; the mortgagee cured all violations within 30 days after receiving notice of them; and the owner has raised claims or defenses or requested mediation against the mortgagee in bankruptcy proceedings. 12 Additionally, the Second Chicago Amendment protects mortgagees from civil or criminal liability for complying with the ordinance unless the act or omission “constitutes gross negligence or willful, wanton, or intentional misconduct.” 13 The terms of this second ordinance represent one avenue by which mortgagees can attempt to protect themselves, if state or local governments insist on making mortgagees liable for maintaining vacant properties. Legality of the Chicago Amendments Making Lenders Liable to Maintain Properties without Legal Title Even though the terms of the Second Chicago Amendment are less onerous than those of the First Chicago Amendment, serious legal questions still exist as to whether Chicago’s City Council has the power to treat mortgagees as akin to owners for purposes of protecting vacant buildings. As an initial matter, the Second Chicago Amendment as passed appears to conflict with existing law. Illinois state statutes setting forth Mortgage Foreclosure Law expressly dictate that “[n]o mortgagee shall be required to take possession of the mortgages real estate, whether upon application made by any other party or otherwise.” 14 This provision directly contravenes the attempt of the Second Chicago Amendment to treat a mortgagee as akin to an owner or force the mortgagee take possession before foreclosure. 15 Moreover, under Illinois precedent, home rule units – like the City of Chicago – only have authority to enact an ordinance if (1) the subject pertains to local government affairs and is not of statewide or national concern; and (2) the General Assembly of Illinois can restrict the concurrent exercise of a home rule unit’s power by enacting a law specifically limiting such power. 16 Given the fact that the Second Chicago Amendment appears to “contravene[] a state statute, or otherwise intrude[] upon the bailiwick of a governmental branch,” the Illinois courts should “not hesitate[] to find it an invalid exercise of home rule authority.” 17 The Second Chicago Amendment potentially implicates other laws such as trespass and wrongful entry provisions, which act to prohibit lenders from entering or controlling property prior to such time as legal title passes to the lender. Indeed, to the extent a vacant property was owned by a borrower that had filed bankruptcy, federal bankruptcy protections, including the Bankruptcy Code’s automatic stay provision would also act to limit the acts a lender could take prior to such time as the automatic stay was lifted. Even if the Second Chicago Amendment is found not to contradict state or federal 2