FINALITY AND FORECLOSURE: DETERMINING A HOMEOWNER'S ABILITY TO APPEAL IN MORTGAGE FORECLOSURE CASES.

• Author: Ben Dor, Lavi M.

INTRODUCTION 1746 I. FIRST PRINCIPLES: FORECLOSURE AND FINALITY 1749 A. The Mortgage Foreclosure Process 1750 B. Appealability and the Final Judgment Rule 1752 II. TWO COMPETING PERSPECTIVES ON APPELLATE JURISDICTION OVER MORTGAGE FORECLOSURE APPEALS 1756 A. The Seventh Circuit's Novel View of Appealability 1756 B. The View of Other Courts of Appeals 1759 C. Appealability in State Courts 1763 III. DIMENSIONS OF DISAGREEMENT: EVALUATING THE APPROACHES TO FINALITY FOR PURPOSES OF APPEAL IN FORECLOSURE CASES 1765 A. Foreclosure as a Complicated Route to Damages 1766 B. Bright-Line Rules and the Nuances of State Law 1771 C. Townsend in Light of Prior Precedent 1775 IV. TOWARD A UNIFORM VIEW OF FINALITY: RESOLVING THE DISCORD AMONG THE COURTS OF APPEALS 1776 A. Judicial Branch 1777 1. Judicial Decisionmaking 1777 2. Resolution via Rulemaking 1778 B. Congressional Intervention 1785 CONCLUSION 1788 INTRODUCTION

The 2008 Great Recession arose from a massive, wide-scale disruption to the United States housing market. (1) In the years leading up to it, a "bubble" of artificially inflated home prices had grown, leading some homeowners to refinance their debt or take out second mortgages. (2) In addition, financial institutions relied more heavily on subprime mortgages, with which they lent to high-risk consumers who carried greater likelihoods of defaulting on their debt. (3) When the bubble burst, many individuals saw the value of their houses plummet and their mortgages become "underwater," meaning that the amount they owed exceeded the value of their homes. (4) This collapse in the real estate market subjected many people to eviction as a result of foreclosure actions, which in turn further depressed housing values. (5) Lending institutions ultimately foreclosed on the homes of millions of Americans over the course of the Great Recession and in the years that followed. (6) Over the next decade, the crisis abated, and the real estate market largely--but not entirely--rebounded from the chaos of the Great Recession. (7)

The COVID-19 pandemic, ongoing as of the writing of this Comment, threatens to upset the recovery and bring new upheaval to the housing market. To help the millions of Americans spending weeks or months out of work due to lockdowns, illness, or unemployment, government authorities across the country have tried to soften the recession's economic blow by temporarily banning foreclosures and evictions. (8) Those efforts may delay but may well be unable to prevent a significant uptick in foreclosures resulting from the pandemic-induced economic downturn, especially as the moratoria begin to expire. (9) And even prior to the crisis, foreclosure posed a significant threat to millions of homeowners struggling to keep up with their mortgage payments. (10)

It is this context that makes the Seventh Circuit's recent jurisprudential shift in the treatment of mortgage foreclosure litigation particularly significant. In 2014, the court in HSBC Bank USA, N.A. v. Townsend marked a novel approach to the appeals process in the foreclosure arena. (11) It dismissed an appeal for lack of jurisdiction because the district court's order of foreclosure was not "final." (12) The court did so despite the fact that the judgment determined the amount the homeowner owed the bank and the priority of claims against him, ordered a sale of the property, and indicated how the proceeds would be paid out. (13) To seek appellate review of a district court's foreclosure order, the Seventh Circuit held, a homeowner who remains unable to cure his debt must wait for his house to go through a foreclosure sale and have the court conclude that the sale was satisfactory. (14) Only the district court's last order confirming the sale would be sufficiently final to allow for appeal. (15)

The practical implications of this approach mean that a homeowner can only file an appeal to challenge the underlying merits of his foreclosure very late in the process. The Townsend rule bars a defendant from doing so at any point until the court enters judgment confirming the sale--at which point the homeowner, under Illinois law, only has thirty days before he must turn over his property. (16) It is only at this stage that a homeowner can seek appellate review of the underlying merits of his foreclosure, much less any legal issues arising from the sale and confirmation process. (17) While the defendant can request a stay of the order of sale while he appeals his case, the Seventh Circuit has not yet articulated a clear standard for what he must show in order to obtain one. (18) Absent a stay, nothing prevents the new buyer of the house from taking possession of the defendant's home in the meanwhile. (19)

Meanwhile, several other courts of appeals have disagreed. The Fifth, Sixth, Eighth, and Ninth Circuits have all read the Supreme Court's precedents differently, holding that the district court's order of foreclosure constitutes a final judgment if it finds the defendant liable, specifies the amount of damages owed, designates the property to be sold, and orders a foreclosure sale. (20)

This Comment explores these two competing views on when a homeowner can seek review by an appellate court during the foreclosure process. I begin in Part I by outlining the two bodies of law central to this Comment: state foreclosure statutory law and federal appellate jurisdiction doctrine. Next, Part II presents the Seventh Circuit's and the other courts of appeals' perspectives on when a judgment in the foreclosure process becomes final. I then argue in Part III that the Seventh Circuit incorrectly applies the Supreme Court's finality precedents and advocate in favor of the adoption of the other circuits' approach. Finally, in Part IV, I present potential judicial and legislative solutions for resolving the circuit split.

1. FIRST PRINCIPLES: FORECLOSURE AND FINALITY

   The issue this Comment explores is at the heart of the intersection between two distinct bodies of law: foreclosure law and the doctrine of appellate jurisdiction. Foreclosure provides the vehicle through which a lender collects on a debt secured by property when the borrower ceases to pay his debt. As governed by the loan agreement between the parties and applicable law, the lender is generally entitled to sell off the property and apply the proceeds to the borrower's outstanding debt. When the lender brings an action in federal court to obtain a foreclosure order, the case must satisfy various jurisdictional requirements. One of these, which concerns the appellate jurisdiction of the courts of appeals, is the final judgment rule. Under that principle, a party can usually only appeal an order from the district court that is sufficiently "final." This Part sketches the relevant aspects of each of these legal doctrines.

   1. The Mortgage Foreclosure Process

      The issue of foreclosure arises when a borrower fails to meet his financial obligations on a secured debt he owes. (21) Most frequently, a homeowner incurs this debt by taking out a mortgage to finance the purchase of his house. As part of a mortgage transaction, in exchange for receiving a loan from his lender, the debtor promises to pay back the debt pursuant to a set schedule--and grants the lender a security interest in their house. (22) The security interest means that if the borrower defaults on the loan and is unable to continue paying his debt, the lending party has the right to initiate foreclosure, selling the property (referred to as collateral) at a public auction and retaining the proceeds to the extent necessary to fulfill the unpaid debt. (23) A creditor may also obtain a security interest (also known as a lien (24)) in a person's home through other means. For example, if a person fails to pay his federal taxes, the IRS can take out a tax lien on his house and foreclose on it to collect the outstanding debt if he still fails to fulfill his obligations. (25) Another common category of security interest, a "mechanic's lien," arises in certain circumstances when a laborer provides construction services on credit; that laborer obtains an interest in the property on which he worked to secure the payment he is owed. (26)

      The means through which a lender can effectuate a foreclosure depend on what the relevant body of (typically state) law governing the lien permits, as well as on the terms of the documents that created the security interest. (27) States vary in their approaches to foreclosure. All states have authorized a judicial foreclosure process, in which the lender must bring an action in court to seek foreclosure. (28) Some additionally provide for nonjudicial foreclosure. (29) There, a mortgagee (30) can simply send a notice of default to the borrower and conduct the sale without involving the court system. (31) In addition, a few states allow for "strict" foreclosure, in which the court "determines that the borrower's interest has been terminated but no public sale of the property is required." (32) This Comment, however, focuses solely on judicial foreclosures, because they by their nature necessitate adversarial litigation proceedings before a court.

      An individual's ongoing failure to make payments on their mortgage will not always result in foreclosure and eviction. State statutes may provide for a right of redemption. Under such provisions, an individual can pay the full amount he owes under his mortgage, covering the principal, interest, fees, and costs to completely fulfill his total obligations across the entire life of the mortgage and eliminate his debt to the lender. (33) Mortgagors may also have the right to reinstate their mortgages. Reinstatement entails paying back any outstanding principal and interest that is currently owed to the mortgagee; doing so revives the mortgage and allows the homeowner to continue making payments on it as before. (34)

      Meanwhile, if a foreclosure sale goes forward, the proceeds may sometimes...