The Blancos, who left Cristiano Ronaldo on the bench due to fitness fears, were beaten 2-0 by an injury-depleted Schwarzgelben side at Signal Iduna Park - but the Spanish giants still progressed to the final four of the Champions League 3-2 on aggregate.
Despite booking their spot in the next round, Modric was at a loss to explain the team's poor performance and says qualification is bittersweet because of the nature of of their defeat in Dortmund.
"I don't know what happened," the Croatian midfielder told reporters. "It may be that we were complacent because we won 3-0 and we started thinking it would be easy. I don't know.
"We need to learn from this match. We always say we need to learn but we never do.
"Of course we're happy we've reached the semi-finals but we aren't happy with how we've played, especially in the first-half," he said. We can't allow what happened in the first-half. But we improved and we are in the semi-final."
Madrid will now appear in their fourth consecutive Champions semi-final, but they have lost all three of their previous last-four ties.