The Illinois Appellate Court, First District, recently held that a mortgage lender had inquiry notice of a prior homeowner's purported equitable mortgage, because the prior homeowner's relative was occupying the property as a tenant. On that basis, the Court determined that the assignee mortgagee was not a bona fide mortgagee, and quieted title in the borrower's favor.
A copy of the opinion is available at: http://www.state.il.us/court/Opinions/AppellateCourt/2012/1stDistrict/1120061.pdf.
A homeowner signed a contract with a now-defunct company called Property Tax Counselors, Inc. ("PTC"), by which she conveyed her property to a land trust in exchange for a loan to pay her property taxes. The contract provided that the property could be conveyed to a third party, but that PTC would be obligated to re-purchase the property and convey it to the homeowner, if the homeowner made the required payments on her loan. The homeowner also executed a warranty deed effecting the conveyance, which was recorded.
The defendant in the instant action, an employee of PTC ("employee"), purchased the property and took title. The employee mortgaged the property with a lender. That lender, in turn, sold and assigned the mortgage loan to another bank, as trustee. When PTC's employee stopped making payments on the mortgage, the assignee/mortgagee instituted foreclosure proceedings, purchased the property at the foreclosure sale, and obtained an order of possession.
At the time of the foreclosure, the property was occupied by the original homeowner's grandson. When the original homeowner learned of the foreclosure, she filed motions to intervene and to vacate the judgment for foreclosure. The original homeowner alleged in her pleadings that she had made all required payments to PTC, until her payments were returned because PTC was no longer at their former address, and had not left a forwarding address. The lower court granted the original homeowner's motions, and granted her leave to file an answer, affirmative defense, and a complaint to quiet title.
Both the assignee/mortgagee and the original homeowner then filed motions for summary judgment. The original homeowner argued that the contract she executed with PTC, as well as the warranty deed she recorded, constituted an equitable mortgage such that the assignee/mortgagee was not a bona fide mortgagee. She further argued that the fact that her grandson was living in the home, as well as the fact that she received inadequate consideration for her initial transfer of the property, constituted constructive notice to the assignee/mortgagee.
The assignee/mortgagee countered that the borrower's equitable mortgage claim could not defeat the assignee/mortgagee's recorded interest, because the assignee/mortgagee's interest was recorded first, and because the assignee/mortgagee had no actual or constructive notice of the original homeowner's claim.
The lower court found that the original homeowner's loan operated as an equitable mortgage only as to PTC, but not as to the assignee/mortgagee. Further, the lower court held that issues as fact as to the assignee/mortgagee's status as a bona fide mortgagee remained, and therefore denied both motions for summary judgment.
The assignee/mortgagee filed a motion to reconsider, wherein it argued that because the tenancy of the borrower's grandson was not inconsistent with the public record, it did not provide the assignee/mortgagee with notice of the borrower's interest. The original homeowner responded, again asserting her argument that her motion for summary judgment was proper and that title should be quieted in her favor.
This time, the lower court agreed with the original homeowner, and granted her motions for summary judgment and to quiet title. The assignee/mortgagee appealed.
As you may recall, the Illinois Mortgage Act provides that "[e]very deed conveying real estate, which shall appear to have been intended only as a security in the nature of a mortgage, though it be an absolute conveyance in its terms, shall be considered as a mortgage." 765 ILCS 905/5. Further, the Conveyances Act provides that "all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchases, without notice, until the same shall be filed for record." 765 ILCS 5/30.
On appeal, the Court began by stating that the primary issue before it was whether the assignee/mortgagee had notice of the original homeowner's interest prior to its extension of the mortgage loan to PTC's employee. It recited that constructive notice may consist of record notice or inquiry notice, and explained that inquiry notice is at issue here.
The Court then surveyed the arguments of the parties, noting that the original homeowner contended that the assignee/mortgagee's knowledge of her grandson's tenancy in the property, as well as the fact that she received inadequate consideration from PTC in exchange for her conveyance of the property, put the assignee/mortgagee on inquiry notice. Further, the original homeowner cited case law providing that "one having notice of such facts as would put a prudent man on inquiry is chargeable with the knowledge of other facts which he might have discovered by diligent inquiry." Cessna v. Hulce, 322 Ill. 589, 595 (1923). The assignee/mortgagee maintained its position that its mortgage was recorded first, and that the facts at issue here were not sufficient to put it on inquiry notice.
The Court then engaged in an extensive examination of relevant Illinois case law, finding binding precedent as far back as 1876 establishing that an owner's right of possession was evidenced by tenants. See, e.g., Whitaker v. Miller, 83 Ill. 381, 386 (1876).
Accordingly, the Court held that the original mortgagee's "equitable mortgage has all the effects of recordation because the land was in possession by someone other than the record owner." The Court further held that the assignee/mortgagee "was imputed with record notice of [the borrower's] interest based on [her grandson's] possession of the home." Had the assignee/mortgagee "dutifully inquired" of the grandson, the Court found, it would have led the assignee/mortgagee to discover that the original homeowner was still the owner of the home. According to the Court, the assignee/mortgagee would then have reason to search the chain of title further, and discover that the original homeowner received inadequate consideration for the transfer, and further discover "PTC's misrepresentation and fraud."
Because the assignee/mortgagee "had before it a series of facts that should have led it to inquire further before issuing its loan and mortgage," the Court held that the assignee/mortgagee was not a bona fide mortgagee. Therefore, it affirmed the holding of the lower court.
Ralph T. Wutscher
McGinnis Wutscher LLP
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