2018 IL App (1st) 172976
Ill. App. Ct.2019Background
- In 2006 Royalty Properties (formed by Richard and Meryl Cannon) purchased a horse farm; Horizon Farms made a $1.5M junior loan to Royalty Properties secured by a second mortgage and a guaranty by the Cannons. The trust later assigned that note to plaintiff McGinley Partners.
- A senior lender (Amcore → BMO → Forest Preserve) foreclosed on the senior mortgage; multiple appeals followed in related proceedings. Plaintiff sued in 2014 to enforce the $1.5M junior note and guaranty; plaintiff obtained summary judgment and, after reconsideration, a judgment for $8,320,669.43 (Feb. 2, 2017).
- Defendants filed a section 2-1401 petition nine months after judgment, claiming an Intercreditor Agreement (signed at closing) precluded plaintiff’s suit or limited recovery (priority to senior lender; cap on junior recovery) and that defendants only became aware of its applicable provisions in Oct. 2017.
- The intercreditor agreement (between senior lender, junior lender Horizon, and the borrower Royalty) subordinated the junior loan until the senior loan was indefeasibly paid, required 90 days’ notice before the junior could initiate enforcement, and capped junior recovery for enforcement costs and interest.
- District court dismissed the 2-1401 petition without an evidentiary hearing, finding defendants had the agreement in their possession (produced it in October 2015 and obtained it from the seller’s counsel), failed to act with due diligence in the underlying litigation, and lacked a meritorious defense/standing to enforce the agreement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether defendants alleged a meritorious defense based on the intercreditor agreement | McGinley: Agreement does not give defendants standing/does not preempt enforcement; plaintiff entitled to judgment | Cannons: Intercreditor Agreement barred/limited plaintiff’s enforcement rights and recovery absent notice to senior lender | Court: No meritorious defense shown; defendants lacked standing and agreement did not preempt judgment |
| Whether defendants exercised due diligence in raising the intercreditor defense in original action | McGinley: Defendants had the agreement and produced it in discovery; failure to raise defense was negligence | Cannons: They signed in a pressured closing and only became aware of controlling provisions later when documents were produced in another foreclosure discovery | Court: Defendants were not diligent — they had the agreement by Oct 2015 (months before summary judgment) and failed to timely raise it |
| Whether equitable relaxation of due diligence is warranted (extraordinary circumstances) | McGinley: No fraud or concealment by plaintiff; no extraordinary reason to relax due diligence | Cannons: Alleged fraud/concealment by plaintiff and pressured signing justify relaxation | Court: No extraordinary circumstances proven; allegations insufficient to excuse lack of diligence |
| Standard of review for 2-1401 petition (de novo v. abuse of discretion) | McGinley: Petition raises factual challenge — abuse-of-discretion review | Cannons: (raised later) argued purely legal voidness warranting de novo review | Court: Petition raised factual claims; abuse-of-discretion standard applies; trial court did not abuse discretion |
Key Cases Cited
- Smith v. Airoom, Inc., 114 Ill. 2d 209 (Ill. 1986) (elements and diligence standard for section 2-1401 relief)
- Warren County Soil & Water Conservation Dist. v. Walters, 2015 IL 117783 (Ill. 2015) (distinguishes purely legal voidness claims subject to de novo review)
- Paul v. Gerald Adelman & Associates, Ltd., 223 Ill. 2d 85 (Ill. 2006) (abuse-of-discretion review of equitable determinations)
- Ameritech Pub. of Illinois, Inc. v. Hadyeh, 362 Ill. App. 3d 56 (Ill. App. Ct. 2005) (extraordinary-circumstances standard for relaxing diligence requirement)
- Sarkissian v. Chicago Bd. of Educ., 201 Ill. 2d 95 (Ill. 2002) (void-judgment allegations negate need to show meritorious defense or diligence)