Improper Lis Pendens Filing in Illinois Injunction Case

 The case of Five Mile Capital Westin North Shore SPE, LLC v. Berkadia Commercial Mortgage, LLC and other defendants, rendered by the Illinois Appellate Court, First District, on December 24, 2012, presents several interesting injunction issues.

The Westin North Shore, a hotel in Wheeling, Illinois, obtained a loan from JPMorgan Chase Bank, N.S., but JPMorgan offloaded much of the risk of the loan to three other participants.  The "A" participant had the lowest risk and return; the "B" participant had more risk and a higher return; and the "C" participant had the highest risk and the best return.  Alas, the loan went into default.

The contract provided for that eventuality by appointing a "special servicer," which would, in the event of a default, handle the foreclosure and foreclosure sale, subject to contractual obligations to promptly sell the property and to take the best interests of the participants into account.  Depending on the appraised value of the property, one of the three participants would be the controlling participant with the power to veto any of the servicer's decisions that might adversely affect its investment. 

In this case, after the foreclosure and sale, at which the servicer obtained title with a credit bid, it decided to sell the property.  The appraisal it obtained showed that participant A would fully recoup its investment, participant B would recoup all but about $4 million, and participant C would get nothing, so participant C sued, alleging that the appraisal of the servicer was wrong and it the property were held for a few years it would appreciate in value.  But the servicer believed that participant B was the controlling participant, and it sided with the servicer in believing that an immediate sale should occur.  

When the lawsuit was filed, participant C filed a lis pendens against the property.  The lower court quashed the lis pendens, and the plaintiff filed an interlocutory appeal from that order, and the first of the interesting issues presented by this opinion is whether the order quashing the lis pendens was appealable.  The court held that it could not be appealed before the final judgment was issued.  Although Illinois Supreme Court Rule 307, which authorizes interlocutory appeals from orders granting, modifying, refusing, dissolving or refusing to dissolve or modify an injunction, a lis pendens is not an injunction, and the argument that quashing a lis pendens functions similarly to an injunction because the plaintiff is prevented from informing potential real estate purchasers about the existence of a lawsuit by way of the lis pendens would "stretch the meaning of an injunction beyond all recognition . . . ."  

The court believed the better analogy was to motions that refuse to quash subpoenas, which are not appealable, and further noted that quashing a lis pendens might not necessarily be an equitable order:  a lis pendens (a "creature of statute") improperly filed in conjunction with an automobile negligence action, for example, might be quashed by a court not sitting in equity.  We consider other interesting issues presented by this opinion in future posts.

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