Page 11 - John Hundley 2018

Banking Law Roundup

Sharp Thinking

No. 151 Perspectives On Developments In The Law From Sharp-Hundley, P.C. April 2018

Court Distinguishes Perfection From

Enforcement In Assignment-Of-Rent Cases

By John T. Hundley, John@sharp-hundley.com, 618-242-0200

Applicants for the bar exam routinely are taught to distinguish between the creation of a security interest
and its perfection, and that the resolution of competing claims will depend upon when perfection occurs.

But developing case law with respect to one kind of property ‒ rents ‒ is
challenging the latter premise.

That case law ‒ most clearly exemplified by BMO Harris Bank, N.A. v. Joe
Contarino, Inc., 2017 IL App (2d) 160371 – says that with respect to rents, it is not so
much when the security interest is perfected that matters, it’s when that interest is first
enforced.

In BMO, the Appellate Court relied upon § 31.5 of the Conveyances Act, 765 ILCS
5/31.5, added in 1996. That statute contains the customary provisions that
recordation constitutes perfection and that from “the time of recordation, the assignee
has a superior claim to the rents that are subject to the assignment, as against all
parties whose claims or interests arise or are perfected thereafter” (§ 31.5(b)). But
the statute goes on to state: Hundley

(d) Unless otherwise agreed to by the parties, the mere recordation of an assignment does
not affect who is entitled, as between the assignor and the assignee, to collect or receive
rents until the assignee enforces the assignment under applicable law.

§ 31.5(d). At first blush, the reader would assume that that provision only applies “as between the assignor
and the assignee.” But in BMO, the appellate panel relied on that provision to hold that it is the date on
which enforcement of the security interest begins that is determinative in the case of rents, as between
competing claimants. (In apparent agreement on this point is U.S. Bank N.A. v. Randhurst Crossing LLC,
2018 IL App (1st) 170348, ¶ 66, a case discussed in another context on p. 2 of this newsletter.)

Thus, in BMO, the holder of a citation lien under 735 ILCS 5/2-1402 (who had not taken action to enforce
the lien by way of a turnover motion) lost out to holders of recorded assignments of rents who had enforced
their assignments by obtaining turnover provisions in forbearance agreements.

BMO thus adds to the list of advantages that a well-drafted forbearance agreement can offer when a
loan begins to go bad. Well-recognized previously were the ways that forbearance agreements stripped
debtors of potential defenses to foreclosure. But the idea that a forbearance agreement actually can bring
better results than seeking and obtaining possession from a court ‒ this seems new and powerful.

●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●
Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking shall
be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein constitute educational
material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal advice on your particular
situation, contact a Sharp-Hundley lawyer at 618-242-0200 or one of the addresses provided on page 2 of this newsletter.