Sunday, February 22, 2015

FYI: Ill App Ct Holds Mortgagee Must Plead and Prove Capacity to Foreclose, Rejects Borrower's Challenge to Change in Foreclosing Plaintiff Mid-Foreclosure

The Illinois Appellate Court, Third District (“Appellate Court”) recently held that a mortgagee must plead and prove its capacity to foreclose, and that the mortgagee here sufficiently demonstrated its capacity to foreclose.  The Appellate Court also rejected the borrower’s challenge to the change in mortgagee and assignment of mortgage during the course of the foreclosure.


A copy of the opinion is available at:


The plaintiff bank (“Bank”) filed a mortgage foreclosure action against the defendant borrowers (“Borrowers”) in its capacity as mortgagee, and as the entity “designated and authorized to act on behalf of the owner of the note to enforce the note and mortgage at issue.”  Copies of the mortgage, assignment of mortgage, and note indorsed in blank were attached to the complaint.


The Borrowers filed an answer to the complaint denying various allegations, including the Bank’s capacity to foreclose.  The Borrowers also asserted an affirmative defense of fraud. 


The Bank then filed a motion for summary judgment and for judgment of foreclosure and order of sale.  The Borrowers filed a response to the motion for summary judgment asserting the Bank did not have standing.  After the Borrowers’ counsel withdrew, new counsel appeared and requested time to file a supplemental response to the motion for summary judgment. 


The trial court denied the motion to supplement and found that the Borrowers had waived their right to argue whether the Bank lacked capacity because it was an affirmative defense which should have been asserted in their answer. 


The motion for summary judgment was granted, and a foreclosure sale was held.  The Bank then filed a motion for order approving sale, and to substitute a new party (“Assignee”) as plaintiff.  The motion for substitution attached an assignment of mortgage indicating that the assignment occurred before the motion for summary judgment was granted. 


The Borrowers objected to the motion to approve the sale, arguing that they did not receive notice of the sale, but the trial court granted the motion to approve the sale and permitted the substitution of the plaintiff. 


On appeal, the Borrowers first argued that despite their failure to raise lack of standing as an affirmative defense, it was the Bank’s burden to prove it had the capacity to foreclose under the Illinois Mortgage Foreclosure Law (the “IMFL”) because the Borrowers denied the allegation. 


The Bank argued that the IMFL did not create a requirement of alleging and then proving capacity, and that the Borrower’s failure to assert an affirmative defense of lack of standing or cross-motion for summary judgment foreclosed their right to assert such a defense. 


The Appellate Court noted that although the parties and trial court treated the issue as one of standing, the case did “not present an issue of standing as we find the trial court was correct to determine that the [Borrowers] waived their right to assert that affirmative defense.”  Instead, “the argument . . . is whether [the Bank] proved its alleged ‘legal capacity to sue.’” 


The Appellate Court stated that while standing “requires that a party . . . have a real interest in the action brought and its outcome,” capacity “generally refers to the status of the party, e.g., incompetent, infant, or unincorporated association.”  The Appellate Court therefore found that “standing is not the same as legal capacity to sue or be sued.” 


The Appellate Court held that “[b]ecause they did not assert the defense in their answer to the complaint and did not file a cross-motion for summary judgment raising the defense, the affirmative defense of lack of standing was waived by [the Borrowers].” 


Still, the Appellate Court stated that the Borrowers “denial of [the Bank’s] capacity to bring the suit was erroneously deemed synonymous with their waived affirmative defense of lack of standing,” and that under the IMFL “[a]n allegation of capacity as the mortgagee in a foreclosure proceeding is a material fact and must be proved whether admitted or denied by the defendant.”   


Therefore, because the Bank alleged its capacity to sue in the complaint, “it [was] incumbent upon [the Bank] to prove capacity notwithstanding the [Borrowers’] waiver of their right to argue standing or even their denial of [the Bank’s] capacity to bring suit.” 


Nevertheless, the Appellate Court affirmed the trial court’s granting of the motion for summary judgment because it held that the Bank did prove its claim of capacity. 


In so ruling, the Appellate Court noted that, although not a requirement, the Bank complied with the IMFL form complaint in alleging its capacity to bring the lawsuit as a mortgagee.  The Appellate Court further held that the Bank “proved capacity as the holder of the indebtedness by being the bearer of the note and through its supporting affidavit.  [The Bank] as the assignee of the mortgage, pursuant to the IMFL, attached copies of the mortgage and the assignment to its complaint and motion for summary judgment.  It also attached a copy of the note to both filings.  The note . . . ended with a final blank endorsement.”  Thus, the Bank “presented a prima facie case that it owns the note.” 


The Bank also “provided an affidavit in which the affiant stated [the Bank] is the holder of the note.” On appeal, the Borrowers argued that the affidavit was insufficient because it did not allege the computer systems relied on were industry standard, and that it did not demonstrate the personal knowledge of the affiant.  However, the Appellate Court held that the Borrowers waived these arguments by failing to raise them in the trial court.  In any event, the Appellate Court noted that the affidavit “was sufficient to prove capacity and support the motion for summary judgment.” 


The Borrowers final argument was that the Bank did not have capacity throughout the lawsuit because of the assignment of mortgage to the Assignee.  However, the Appellate Court cited section 2-1008(a) of the Illinois Code of Civil Procedure in holding that “[t]he statute clearly shows that a change in interest will not cause the action to abate.”  Further, “[t]he timing of the motion to substitute parties or the opposing party’s awareness thereof also do not abate the action when the original party held the interest at the action’s commencement and a motion to substitute parties is filed to negate the opposing party’s possible argument of surprise.” 




Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois






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