Bankruptcy; Divorce; Lis Pendens

First Midwest, A Division of Jacksonville Savings Bank v. Pogge, 687 N.E. 2d 1195 (Ill. App. Ct. 1997)

Facts: Wife filed a petition for divorce in May 1988. The couple owned a home in joint tenancy, subject to a first mortgage. In addition, the couple had three other loans, and the husband had two loans individually. All the loans became overdue, resulting in the husband taking a second mortgage on his undivided one-half interest in the home in July 1989. The divorce became final in December 1989, and the court awarded the house to the wife but ordered the husband to assume the indebtedness on the property. Accordingly, the husband quitclaimed the property to the wife. Two months before the property award, a foreclosure action had been initiated on the house. The foreclosure sale paid off the first mortgage, leaving $12,000 that the bank put in escrow to cover the husband's second mortgage loan. In 1991, the husband filed for bankruptcy and received a discharge, which relieved him of the second mortgage. In 1992, the wife filed for bankruptcy, and her trustee filed to recover the $12,000 that was still held in escrow. Both sides filed motions for summary judgment. The trial court found for the wife's bankruptcy trustee, and the bank appealed.

Holding: Reversed and remanded. The basis of the bankruptcy trustee's argument was that the bank's right to the $12,000 divested when the husband's rights were divested under the divorce settlement by application of the lis pendens doctrine. A spouse has the right to alienate his or her property, including the mortgage of an undivided one-half interest in the property. A mortgagee may foreclose and collect its one-half interest in cases of default. However, if the property was involved in a pending action at the time of the mortgage, the mortgagee's rights to that property would be limited by the doctrine of lis pendens. The court said the lis pendens could apply to divorces whether or not there is actual notice of the pending action. In fact, the court states the wife did not have to contest the mortgage during the dissolution action. The court believed the doctrine of lis pendens applied and that the bank was bound by the dissolution action. However, the court did not believe the bank's rights were adversely affected by the judgment. In the eyes of the court, the judgment in the dissolution recognized the second mortgage and awarded the house to the wife subject to that mortgage. Under the doctrine of lis pendens, the bank took the mortgage subject to the dissolution decree and had no interference of rights.

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