The Illinois Appellate Court, Second District, recently held that an asset securitization trustee lacked standing to foreclose on a borrower's property, where the assignment of the mortgage contradicted the trustee's assertion that it owned the debt at the time it filed the foreclosure action and the affidavit it submitted to show standing lacked a proper foundation.
The Court also ruled that the trustee was not liable as an assignee for the original lender's alleged violation of the federal Truth in Lending Act, involving an allegedly improper origination disclosure that the loan "may" have a discount feature, where such violation was not apparent on the face of the loan documents and required outside examination of historical LIBOR rates.
A copy of the opinion is available at: http://www.state.il.us/court/Opinions/AppellateCourt/2012/2ndDistrict/2120164.pdf.
Defendant borrower ("Borrower") obtained a home mortgage loan from a lender ("Lender") that was secured by a mortgage to Mortgage Electronic Registration Systems, Inc. ("MERS"), as nominee for Lender. Although the loan was a variable rate loan based on the London Inter-Bank Offered Rate ("LIBOR"), the promissory note specifically provided for a fixed initial interest rate for the first two years of the loan. At the time of closing, Lender provided Borrower with copies of the note, mortgage, and a disclosure document informing Borrower that "This [Adjustable Rate Mortgage] loan may have a discount feature, and your initial interest rate may not be based on the index used to make later adjustments."
Borrower eventually defaulted on the mortgage loan and Plaintiff, the trustee of a pool of mortgage-backed securities ("Trustee"), filed a foreclosure action against Borrower. In its complaint, Trustee alleged that it was the current holder of the debt. Trustee attached copies of the note and mortgage to its complaint.
Several months after the filing of the foreclosure complaint, MERS executed an "Assignment of Mortgage" ("Assignment"), transferring its interest in Borrower's mortgage to Trustee. Trustee then filed an amended complaint, attaching the Assignment as an exhibit.
In his answer, Borrower raised the affirmative defense that Trustee lacked standing to foreclose because the Assignment showed that Trustee did not own the debt when it originally filed the foreclosure action. Borrower also counterclaimed, alleging that Lender's disclosures at the time of the loan closing violated the federal Truth in Lending Act, 15 U.S.C. § 1601 et. seq. ("TILA") by stating only that the initial interest rate "may" be discounted, even though Lender knew for certain that the rate was discounted. Borrower claimed that Trustee was liable as an assignee for Lender's alleged TILA violations.
Both parties moved for summary judgment.
In response to Borrower's standing argument and counterclaim, Trustee contended that it had standing at the time it filed suit, as the Assignment simply memorialized an earlier transfer of the mortgage from MERS. To support its assertion, Trustee submitted an affidavit from an employee of Trustee's loan servicer stating that according to his review of Borrower's loan file, MERS had assigned its interest to Trustee almost three years earlier. Trustee did not include any documentation showing that MERS had in fact assigned the mortgage to Trustee on that prior date. Trustee also argued the requirements for assignee liability had not been met.
The lower court dismissed the foreclosure action, finding that Trustee was not the holder of the loan at the time it filed the law suit. That court also denied both parties' motions for summary judgment on the counterclaim, because there were issues of fact as to the alleged TILA violations and assignee liability.
Trustee moved for reconsideration -- which the court granted -- and argued that the Assignment "clearly stated" that MERS had assigned its interest to it three years before Trustee filed the foreclosure action, that the counterclaim was time-barred, and that Trustee was not subject to assignee liability because the alleged TILA violations were not apparent on the face of the loan documents.
Upon reconsideration, the trial court reversed its prior ruling and granted summary judgment for Trustee on all claims. The lower court ruled that the counterclaim was time-barred and that there was no assignee liability for the alleged TILA violations because the violations were not clear on the face of the loan documents. The court entered a foreclosure judgment, and Borrower's property was sold to Trustee at the ensuing foreclosure sale. Borrower appealed.
The Appellate Court reversed the foreclosure judgment, dismissed the foreclosure action for lack of standing, but affirmed the dismissal of the counterclaim.
Observing in part that the note and mortgage attached to the complaint identified MERS as the holder of the mortgage, that Trustee's name did not appear on these documents, and that the Assignment attached to the amended complaint was dated after the initial filing of the foreclosure action, the Appellate Court ruled that Borrower had made a prima facie showing that Trustee lacked standing when it filed the lawsuit.
Significantly, the Appellate Court also ruled that the Assignment and affidavit that Trustee submitted to rebut Borrower's assertions lacked evidentiary value. In so ruling, the court noted, first, that Trustee had abandoned its argument that the Assignment itself clearly showed that the transfer of the mortgage occurred three years previously and, second, that the Assignment failed to state explicitly when the mortgage was assigned to Trustee.
As to the affidavit, the Court ruled it was not admissible into evidence, because it was unsupported by a statement as to how the affiant knew when the assignment to Trustee occurred and there were no documents supporting his assertion attached to the affidavit. See Ill. Sup. Ct. R. 191(a)(affidavits in support of motions for summary judgment must set out the facts on which the affiant's claims are based, and all documents relied on by the affiant must be attached).
Rejecting Trustee's assertions that Borrower failed to meet his burden and that its complaint established its standing, the court ruled in part that the copies of the note and mortgage attached to the complaint actually contradicted Trustee's allegations that it owned the loan when it filed the foreclosure action. See Triple R Development, LLC v. Golfview Apartments I, L.P., 2012 IL App (4th) 100956, ¶ 12 (party may not rely on allegations in its pleadings to contradict evidence produced by the movant that would entitle it to judgment); Burton v. Airborne Express, Inc., 367 Ill. App. 3d 1026, 1034 (2006)(facts in an exhibit serve to negate inconsistent allegations contained in the body of the complaint). Cf. Mortgage Electronic Registration Systems, Inc. v. Barnes, 406 Ill. App. 3d 1, 6 (2010)(plaintiff sufficiently pleads a cause of action for foreclosure if it alleges that it holds the mortgage and attaches a copy of the note and mortgage).
The Appellate Court thus ruled that Trustee lacked standing at the time of filing and accordingly reversed the foreclosure judgment, vacated the order approving the sale of Borrower's property, and dismissed the foreclosure.
Turning to the counterclaim, the appellate court ruled that Trustee was not liable as an assignee of the loan for Lender's allegedly improper disclosure that the loan "may" have a discount feature. In reaching this conclusion, the Court noted that an assignee may be liable for defects in disclosures required by TILA only if the TILA violation "is apparent on the face of the disclosure statement." 15 U.S.C. § 1641(e)(1)(A). As the Court pointed out, a TILA violation was not apparent on the face of the note and the various disclosures given to Borrower, because a determination that the loan was subject to a discounted interest rate required outside knowledge of LIBOR rates that the loan documents did not provide.
Accordingly, the Appellate Court affirmed the grant of summary judgment in favor of Trustee on the counterclaim.
Ralph T. Wutscher
McGinnis Wutscher LLP
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