The U.S. Court of Appeals for the Seventh Circuit recently ruled that
mortgage borrowers were unable to support a quiet title action based on a
mortgagee's alleged inability to produce the original mortgage note,
rejecting the borrowers' argument of lack of standing due to a supposed
split between the mortgage and the underlying note, and reasoning that
neither theory indicated that borrowers owned the property at the
commencement of the quiet title action, as required by Indiana law.
The Court also ruled that: (1) borrowers had no negligence claim against
the lender in evaluating their ability to repay the loan, as the lender
owed them no duty; and (2) the loan was not unconscionable given that it
was a "manifestly conventional" loan, the borrowers used a mortgage broker
to procure an appropriate refinancing loan, and they were able to make
their payments for seven years before defaulting. A copy of the opinion
Plaintiffs borrowers ("Borrowers") used a mortgage broker to obtain a
refinancing loan from a mortgage lender ("Lender") that was secured
against their property. For roughly seven years, Borrowers were able to
make the payments on the loan, but eventually went into default. No
foreclosure action was ever filed, however. Nevertheless, Borrowers
filed a quiet title action on the property and claimed that Lender and the
other defendants (collectively, "Defendants") negligently evaluated
Borrowers' ability to repay the loan, and that the loan was both
procedurally and substantively unconscionable.
Defendants removed the case to federal court, and filed a motion to
dismiss all the claims. The lower court granted the motion. Borrowers
appealed. The Seventh Circuit affirmed.
First addressing Borrowers' argument that Defendants negligently evaluated
their ability to repay the loan by relying on Borrowers' gross income
rather than on their net income, the Court easily dispensed with this
issue, pointing out that Defendants owed Borrowers no duty. Rejecting
Borrowers' assertion that Defendants specifically owed them a fiduciary
duty, as there was no relationship "of trust and confidence" between them,
the Court agreed with the lower court that Borrowers failed to state a
claim for negligence.
Turning to Borrowers' claim of unconscionability, the Seventh Circuit
stressed that Indiana courts are "unfriendly" to claims of
unconscionability generally, and pointed out that Borrowers failed to
allege facts to support either substantive or procedural
unconscionability. In so doing, the Court noted Borrowers' ability to
make payments on their loan for seven years before circumstances changed,
the fact that their loan was "manifestly conventional," that they used a
mortgage broker to assist them in securing the refinancing, and that
nothing indicated that Borrowers did not understand the terms of the loan
or that the mortgage process was somehow irregular. According to the
Court, these factors refuted Borrowers' assertion that their loan contract
was unconscionable, which the Court explained had been defined as a
contract that "no sensible man not under delusion, duress or in distress
would make. . . ." See Weaver v. American Oil Co., 276 N.E.2d 144, 146
Finally, with respect to Borrowers' quiet title action, the Seventh
Circuit concluded that Borrowers could not satisfy Indiana's requirement
that plaintiffs prove they owned the property at the commencement of the
quiet title action. See Kozanjieff v. Petroff, 19 N.E.2d 563, 565 (Ind.
1939). In so ruling, the Court noted Borrowers' reliance on two theories
that have been used in other jurisdictions as a means to forestall
imminent foreclosure actions, namely, lack of standing based on the
so-called split-note theory and inability to produce the original note.
The Seventh Circuit reasoned that neither theory was sufficient to support
a quiet title action, because they did not prove that Borrowers owned the
land in controversy at the time the action was filed. The Court also
found Borrowers' factual allegations that they possessed the property and
owned it in fee simple to be mere conclusory assertions which similarly
failed to support a quiet title action.
Accordingly, the Seventh Circuit affirmed the lower court's judgment as to
all three claims.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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