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.
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."
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
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