Thursday, October 7, 2010

FYI: 7th Cir Confirms Possession of Properly Indorsed Note Provides Standing to Foreclose, and Use of Lost-Note Affidavits, Under Illinois Law

In a dispute regarding damages following an incomplete sale of a mortgage loan, the U.S. Court of Appeals for the Seventh Circuit recently confirmed that the possession of a properly indorsed note provides standing to foreclose, and confirmed the use of lost-note affidavits, under Illinois law.

A copy of the opinion is available at:
http://www.ca7.uscourts.gov/tmp/1O0W3Z5B.pdf

The purchaser/assignee of a mortgage loan tried to foreclose on a mortgage, but its action was dismissed in state court because it could not produce the original note.  Because the assignee could not produce either an original or a copy of the underlying note in a subsequent foreclosure action, the property owners in that action contended that the assignee was not a mortgagee entitled to foreclose.  The trial court agreed and entered a directed verdict against the assignee.  The Illinois Appellate Court affirmed, concluding that the assignee "had not proved it was a noteholder because it never received the note from [the assignor] or otherwise possessed it and therefore was not entitled to foreclose upon the mortgage."  This breach of contract lawsuit against the assignor followed. The district court entered summary judgment in favor of the assignor, this appeal followed, and the Seventh Circuit reversed.

In reversing the district court, the Seventh Circuit addressed the following two questions:  (1) whether the parties' agreement required the assignor to deliver the original or a copy of the note secured by the mortgage when it sold the mortgage; and  (2) whether the assignor's failure to deliver an original or a copy of the note caused the assignee's foreclosure action to fail. 
 
As to the first question, the Court ruled that the district court mischaracterized the issue of whether the obligation to transfer physical possession of the note or at least a copy was part of the parties' agreement as a question of law, when really it is a question of fact.  Consequently, the Court held that the assignee had met its burden of producing "enough evidence to convince a reasonable fact finder that the parties agreed [the assignor] would transfer the original or a copy of the note."  Accordingly summary judgment was improper, because "evaluating the weight of the evidence is a task for a jury, not a judge."

As to the issue of causation, the Court held that "had [the assignor] delivered the original or a copy of the note, [the assignee] would in turn have been able to produce it in the foreclosure proceeding and thus fill the evidentiary void on which the Illinois trial and appellate courts rested their adverse decisions." 
 
The Court reached this conclusion because, pursuant to Illinois Mortgage Foreclosure Law, "[g]enerally speaking, only a mortgagee can foreclose on property, and a mortgagee must (at a minimum) be 'the holder of an indebtedness . . . secured by a mortgage'" and under the Uniform Commercial Code, adopted by Illinois, "a key requirement to being a holder is physical possession of the note secured by the mortgage." 
 
The Court rejected the assignor's arguments that the assignee did not use all reasonable means to mitigate its damages (e.g., requesting a lost-note affidavit) or that the assignee could have filed a personal-judgment action against the property owners.  In so doing, the Court noted that "[a]lthough a few courts have allowed foreclosure to proceed based on a lost-note affidavit, the affidavits in these cases also attached a copy of the underlying original note" and "[w]e are not aware of any case in Illinois in which a lost-note affidavit by itself was enough to prove ownership of the underlying debt." 
 
The Court pointed out here that the assignor's argument was a "red herring," especially given that there was a gap in the chain of title in the matter.
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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Tuesday, October 5, 2010

FYI: 2nd Cir Holds BK Proof of Claim Cannot Form Basis of FDCPA Action

The U.S. Court of Appeals for the Second Circuit recently held that a proof of claim filed in bankruptcy court cannot form the basis for a claim under the federal Fair Debt Collection Practices Act. 
 
A copy of the opinion is available at:
 
The consumers brought a putative class action, alleging that an allegedly inflated proof of claim filed by a creditor in their bankruptcy proceeding constituted a violation of the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692, et seq., because it allegedly misrepresented the amount of the debt allegedly owed by the consumers.
 
The defendants moved to dismiss on the ground that an inflated proof of claim in bankruptcy court cannot form the basis for an FDCPA action as a matter of law, and also sought costs and attorneys' fees pursuant to 15 U.S.C. § 1692k(a)(3).  Both their motions to dismiss and their requests for attorneys' fees and costs were granted by the district court.  This appeal followed.
 
The Second Circuit joined several other federal courts that have held that filing a proof of claim in bankruptcy court (even one that is somehow invalid) cannot constitute the sort of abusive debt collection practice proscribed by the FDCPA, and that such a filing therefore cannot serve as the basis for an FDCPA action. 
 
In so ruling, the Court noted that "[t]he FDCPA is designed to protect defenseless debtors and to give them remedies against abuse by creditors," and "[t]here is no need to protect debtors who are already under the protection of the bankruptcy court, and there is no need to supplement the remedies afforded by bankruptcy itself."

As you may recall, bankruptcy provides remedies for wrongfully filed proofs of claim, including revocation of fraudulent proofs of claim and the court's substantial contempt power.  The consumer here did not seek or invoke these remedies remedies. 

However, because the issue was a legal one that was not decided in the Second Circuit, the Court vacated the lower court's award of fees and costs under 15 U.S.C. § 1692k(a)(3).

Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com