Seventh Circuit Makes Stays Pending Appeal Automatic in Mortgage Foreclosures

Over a dissent, the Seventh Circuit ruled “provisionally” in a nonprecedential opinion that “stays pending appeal should be the norm in mortgage foreclosure appeals” in states where the foreclosure judgment is not final and appealable until the homeowner faces imminent eviction.

The Seventh Circuit’s Townsend Rule

The Seventh Circuit’s opinion on February 6 was an outgrowth from HSBC Bank U.S.A. N.A. v. Townsend, 793 F.3d 771 (7th Cir. 2015), where the appeals court held that a foreclosure judgment under Illinois law is not final and appealable until the district court not only has foreclosed the mortgage but has also ordered a sale of the property, confirmed the sale and ordered eviction of the homeowner. Later, the Seventh Circuit extended the foreclosure-finality rule to Wisconsin.

The majority in the February 6 opinion — composed of Circuit Judges Ilana D. Rovner and David F. Hamilton — interpreted Townsend to mean that a homeowner’s first opportunity to appeal and seek a stay of foreclosure in Illinois and Wisconsin comes 30 days before eviction.

Consequently, the majority said, Townsend would require the appeals court to undertake “a quick evaluation of the likely merits of the appeal, where the parties, lawyers, and the judges must act under time pressure of a 30-day eviction deadline.” In the application for a stay before the court, the majority framed the question as “whether we should allow normal appellate procedures to work as they would in most other cases.”

The majority admitted that most mortgage foreclosures “are likely to be affirmed.” But still, the majority said, “there is plenty of room for human and legal error in mortgage foreclosures.”

The Facts in the Case on Appeal

The homeowner’s appeal was hardly frivolous. The lender began foreclosure in 2007, but the case was dismissed on the parties’ agreement. After a few months passed, the lender initiated another foreclosure action, which the state court dismissed two years later for want of prosecution.

After the mortgage was transferred, the new holder of the mortgage began foreclosure in 2013. Invoking res judicata, the district court dismissed the foreclosure action because the lender had not refiled the suit within one year. On motion for reconsideration, the district court reinstated the case and later entered a foreclosure order on summary judgment. The homeowner appealed, but the appeal was dismissed under Townsend because the summary judgment order was not final.

After the district court entered a foreclosure judgment, the appeals court again dismissed the appeal under Townsend. Finally, the district court order a sale and approved the sale to the lender. Facing imminent eviction, the homeowner appealed and sought a stay, which the district court denied.

The homeowner applied to the Seventh Circuit for a stay. The appeals court granted the stay in July 2018, saying that an explanation would follow.

The February 6 order “is the explanation,” the appeals court said. In the meantime, Rule 62 of the Federal Rules of Civil Procedure was amended as of December 1, 2018.

The Majority’s Rationale

The majority said that the 2018 amendments to Rule 62 “have clarified the law for purposes of this case and made its application simpler and more flexible.”

Under the prior version of the rule, the majority said that the lender’s mortgage on the property “should ordinarily suffice to protect the lender’s rights pending appeal for the purposes of Rule 62,” thus entitling the homeowner to a stay pending appeal. A stay may not be proper, the majority said, if taxes or insurance were not being paid or the property was not being “cared for.”

The majority interpreted Townsend to “clearly” imply “that stays in pending appeals in foreclosure sales should be routine to prevent the irreparable harm of losing one’s home.”

The amendments to Rule 62, the majority said, “reinforce making a stay pending appeal the norm in mortgage foreclosure cases.” For a blackline showing the amendments to Rule 62, click here.

The majority quoted the Committee Notes to the amendments, which say, “The new rule’s text makes explicit the opportunity to post security in a form other than a bond.”

“Given that flexibility,” the majority said, “continuing the security interest . . . should provide adequate security in most cases, at least so long as the property is cared for and protected by insurance and payment of property taxes.”

The majority made the opinion nonprecedential for a reason: The “issues have not yet been the subject of a full adversarial presentation,” the majority said. The two judges expressed a “willingness to reconsider our thinking, particularly if and when we have the benefit of briefing by counsel on both sides.”

The Dissent

Circuit Judge Amy J. St. Eve dissented. She said, “Whatever interest a lender has in a foreclosed piece of property, it seems a stretch to liken it to a bond.” She went on to say the amendments to Rule 62 do not “clearly dictate the majority’s result.”

Judge St. Eve said she also disagreed with the majority’s interpretation of the “old” Rule 62. She saw no reason to opine on the new rule when the stay had been granted in July under the old rule.