Thursday, March 16, 2023

FYI: Ill App Ct (1st Dist) Reverses Dismissal of Claims That Choice of Law Provisions in Mortgage Loan Docs Violated IMFL

The Illinois Court of Appeals, First Judicial District, recently reversed a trial court's order dismissing a quiet title lawsuit that alleged a lender's commercial loan agreement violated the Illinois Mortgage Foreclosure Law (IMFL) and was invalid and unenforceable.


In so ruling, the First District held that disputed issues of fact regarding the legal significance and enforceability of various choice of law and forum selection provisions in the loan documents, among other factual issues raised by the allegations in the complaint, were sufficient to survive a motion to dismiss.


A copy of the opinion is available at:  Link to Opinion


An individual ("Plaintiff") entered into a loan agreement to finance a real estate rehabilitation project of a property located in Illinois ("Property"). The lender required that Plaintiff establish a limited liability company("LLC") in Utah, and that the LLC hold title to the Property. 


Plaintiff and the lender were joint owners of the LLC.  Plaintiff, as the president of the LLC, signed a promissory note as that promised to pay Lender the principle of $84,000.00. The lender also required Plaintiff to sign various documents such as a security agreement, loan agreement ("loan documents"), individually and as an officer of the LLC. 


Under the loan documents, plaintiff pledged his membership interest in the Utah LLC as collateral for the loan and personally guaranteed it.  In addition, the loan documents provided that the loan "shall be construed and governed under the laws of the State of Utah, and jurisdiction for any disputes relating to this Agreement or the Note shall be in Utah State Courts sitting in Salt Lake County, Utah."


After the closing of the loan, title to the Property was transferred to the LLC.  Under the terms of the promissory note, if Plaintiff did not complete the rehabilitation project within sixty (60) days, Plaintiff defaulted. Plaintiff did not complete the rehab project in 60 days. In order to prevent a foreclosure proceeding on Plaintiff's interests in the LLC, the lender required Plaintiff to make payments of $1,888.00 per month toward a total amount due of $135,000.00.


Plaintiff did not accept these terms and the lender proceeded to use the Utah legal system to take control of the LLC. Plaintiff subsequently filed a complaint against the lender and LLC ("Defendants") seeking to quiet title and alleging that the Defendants violated the Illinois Mortgage Foreclosure Law ("IMFL") by taking possession of the Property via the LLC without complying with the IMFL.


The Defendants filed a motion to dismiss, arguing that the LLC acquired title to the property, the purchase of the property was funded by the lender, and as part of the lending agreement Plaintiff permissibly pledged his membership interest in the LLC as collateral for the loan and personally guaranteed the loan. Defendants further argued that after maturation of the loan, the LLC defaulted and plaintiff did not comply with the terms of the personal guaranty. As a result, the Defendants argued that the lender acted lawfully when it auctioned and subsequently acquired the LLC's membership interest in Utah.


In response, Plaintiff argued the loan terms violated public policy and the IMFL , and that he did not enter into the loan documents with knowledge that its terms bypassed Illinois foreclosure law, and that the Defendants took advantage of Plaintiff.  The Defendants countered that the LLC did not make any payments after maturation of the loan and that under the UCC a debtor could pledge his membership interest in an LLC as collateral. Essentially, Defendants argued they were only enforcing their rights under the UCC and that Plaintiff's membership interest in the LLC did not implicate the IMFL.


The trial court granted the Defendants' motion to dismiss.  This appeal followed.


On appeal, Plaintiff argued that the loan documents, specifically the security agreement, violated public policy and the mortgage was invalid and violated the IMFL because the lender required Plaintiff to form the LLC to obtain the financing. Plaintiff also argued that the Utah was not a court of competent jurisdiction to determine issues concerning Illinois Property and mortgage, and that the Utah litigation was only related to a money judgment against the plaintiff. Defendants argued that the trial court's dismissal was proper because of the Utah forum selection clauses contained in the loan documents and the ruling of the Utah court in favor of the lender meant Plaintiff's claims were barred by res judicata.


During the appeal, the Appellate Court ordered the Office of the Illinois Attorney General's Consumer Protection Division ("Attorney General") to file an amicus brief regarding their position on the case. The Illinois Attorney General's Office generally supported Plaintiff's position and argued that the Defendants failed to show that dismissal is warranted based on both the Utah forum selection clauses contained in the loan and security agreements and res judicata.


Plaintiff argued that Illinois law applied and Defendants argued that Utah law applied.  The Appellate Court examined both and determined that, regardless of which state's law applied, Plaintiff's complaint should not have been dismissed based on the forum selection clauses contained in the loan documents.


In Utah, a Plaintiff's claim that a contract was entered into fraudulently is "sufficient to render the forum selection clause unenforceable." Energy Claims Ltd. v. Catalyst Investment Group. Ltd., 2014 UT 13, ¶¶ 51-53. Because Plaintiff's complaint included allegations that the entire loan transaction was improper and lender's practices were deceptive and unlawful, the Appellate Court concurred with the Plaintiff and Attorney General's office and held that Plaintiff's complaint should not be dismissed under Utah law.


Under Illinois law, "a forum-selection clause in a contract is prima facie valid and should be enforced unless the opposing party shows that enforcement would be unreasonable under the circumstances." Dancor Construction, Inc. v. FXR Construction, Inc., 2016 IL App (2d) 150839, ¶ 75.  In order to invalidate a forum selection clause the alleged fraud must be specific to the forum selection clause. IFC Credit Corp. v. Rieker Shoe Corp., 378 Ill. App. 3d 77, 93 (2007).


Because the Plaintiff and Defendants both relied on portions of the loan documents to support their respective arguments, and the loan documents contained inconsistent provisions regarding which state law governs, the Appellate Court held there were issues of fact as to the factors the court must consider to determine if it would be unreasonable under the circumstances to enforce the forum selection clauses.


Accordingly, the Appellate Court held that the trial court erred in dismissing plaintiff's complaint based on the forum selection clauses contained in the loan documents.


Plaintiff also argued that the trial court improperly determined that that res judicata applied to the complaint based on the Utah judgment. Plaintiff argued that the lender's lawsuit was related to a money judgment against Plaintiff, not to determine ownership rights of the property. Lender argued that Plaintiff's entire complaint was barred by res judicata because the issue of the ownership of the LLC has already been adjudicated by a court in Utah, which determined that Lender owns the LLC.


Illinois and Utah law both require the party who claims the doctrine applies must prove three elements, including: (1) a final judgment on the merits, (2) an identity of the parties or their privies, and (3) an identity of causes of action. The Appellate Court held that lender did not meet its burden to prove that res judicata barred Plaintiff's claim because the Utah order did not specifically state the issues or causes of action in the case sufficiently to determine whether the causes of action are the same as they are in this case.


Although the Utah judgment mentioned the security agreement, Plaintiff's claims were based on other agreements in the loan documents not referenced by the Utah order. Additionally, the Appellate Court, relying partially on the Attorney General's position that the court need not apply res judicata if it would be fundamentally unfair to do so, held there are questions of fact regarding whether it would be unreasonable or unfair to apply res judicata to Plaintiff's complaint. 


Lastly, the Appellate Court held that the trial court's dismissal of Plaintiff's IMFL claim was improper because the trial court's order relied on Defendants' assertion that it did not violate IMFL, a conclusion of law which required the determination of various underlying facts that were disputed. Because the trial court's dismissal was based on factual disputes, dismissal was not proper.


Accordingly, the Appellate Court reversed and remanded for further proceedings.



Ralph T. Wutscher
Maurice Wutscher LLP
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Chicago, Illinois 60602
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