The U.S. Court of Appeal for the Seventh Circuit recently held that a junior mortgagee is a necessary or "required party" to an Illinois foreclosure action, because the trial court could not "accord complete relief" under Fed. R. Civ. P. 19(a) to the plaintiff mortgagee without the junior mortgagee as the junior mortgagee would still have an interest in the property.
A copy of the opinion is available at: Link to Opinion
A mortgagee filed a foreclosure action in federal court in Illinois based on diversity jurisdiction. The mortgagee had its main office in Ohio, and the borrowers were located in Illinois. The borrowers answered the complaint and asserted claims against the loan servicer, a third party.
The plaintiff mortgagee later learned that the junior mortgagee was also a citizen of Ohio. Once the plaintiff realized that the junior mortgagee was also a citizen of Ohio, it moved to voluntarily dismiss the case without prejudice because of lack of complete diversity. The trial court granted the dismissal without prejudice, and also dismissed the borrowers' claims asserted against the third party servicer.
The borrowers challenged the trial court's dismissal on various grounds. First, the borrowers argued the case involved violations of HOEPA, 12 C.F.R. Section 1024, 1026, and the Dodd-Frank Act, which the borrowers argued provided the federal court with subject matter jurisdiction. However, the Seventh Circuit rejected this argument, as these federal theories were not asserted by the plaintiff mortgagee. The Court noted that the plaintiff mortgagee's claims were based solely on state law.
The Seventh Circuit also upheld the trial court's decision to dismiss the case for lack of diversity, due to the junior mortgagee being a citizen of the same state as the plaintiff mortgagee.
The borrowers argued that the junior mortgagee could simply have been dismissed from the case to preserve diversity. The Seventh Circuit noted that, in Illinois, a senior mortgagee can foreclose on a property without joining junior mortgagees. See 735 ILCS 5/15-1501(a); React Fin. v. Long, 852 N.E.2d 277, 281 – 82 (Ill. Ct. App. 2006). Accordingly, the borrowers requested the trial court to dismiss the junior mortgagee from the case claiming they are not a required party.
However, the Seventh Circuit also noted that, in Illinois, a junior mortgagee's interest in the property is not extinguished unless it is made a party to the foreclosure action. See 735 ILCS 5/15-1501(a); ABN AMRO Mortg. Grp., Inc. v. McGahan, 931 N.E.2d 1190, 1197, (Ill. 2010); React Fin., 852 N.E.2d at 281.
Rejecting the borrowers' argument, the Court reasoned that, without the presence of the junior mortgagee, the trial court could not "accord complete relief" to the plaintiff as the junior mortgagee would still have an interest in the property. Fed. R. Civ. P. 19 (a)(1)(A). By dismissing the case entirely, rather than simply dismissing the junior mortgagee, the Seventh Circuit held that the trial court properly eliminated the need for the plaintiff mortgagee to litigate over the same property in both state and federal court.
Lastly, the Seventh Circuit held that the district court did not wrongly dismiss the third party complaint against the nonparty servicer for failure to properly serve it in a timely fashion. Because the borrowers waited for over two years to pursue their claims against the nonparty servicer, the Court ruled out an extension of time for service.
Accordingly, the Seventh Circuit affirmed the trial court's ruling.
Ralph T. Wutscher
Maurice Wutscher LLP
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