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 giant still progressed to the final four of the Champions League 3-2 on aggregate.
Despite booking a 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 the 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 semifinals 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 semifinal."
Madrid will now appear in its fourth consecutive Champions semifinal, but the club has lost all three of its previous last-four ties.