FYI: Ill App Ct Holds Service by Publication Affidavit Inadequate, Voids Foreclosure and Sale

The Illinois Appellate Court, First District, recently held that the trial court lacked jurisdiction in a mortgage foreclosure action, thereby voiding the subsequent sale of the property, where the affidavits filed in support of service of process by publication failed to indicate that the affiants first took the steps required in attempting to personally serve process on the defendant. 

 

A copy of the opinion is available at: 

http://www.state.il.us/court/Opinions/AppellateCourt/2012/1stDistrict/1111213.pdf.

 

Defendant borrower defaulted on a residential mortgage loan on a condominium located in Cook County, Illinois.  In the ensuing foreclosure action against the borrower, plaintiff loan owner ("Loan Owner") sought to serve process on the borrower at her residence, the mortgaged condominium.  After making many repeated and unsuccessful attempts to serve process on the borrower through a special process server, the Loan Owner sought leave from the court to serve process on the borrower by publication. 

 

To support its motion, the Loan Owner submitted affidavits of employees of the special process server, stating among other things that "attempts were made" to serve the borrower at the condominium and that "it was discovered that no contact could be made" with the borrower even after "we attempted to locate the defendant by searching" various public and confidential databases for a current address.   The Loan Owner's attorney also supposedly signed an affidavit swearing that the borrower "on due inquiry cannot be found."

 

Relying on the affidavits, the trial court allowed publication service, and eventually entered a default judgment against the borrower.  Subsequently, the Loan Owner purchased the property at the foreclosure sale.  Following the court's approval of the sale, the borrower moved to quash the service of process by publication and void the judgment and sale of the condominium for lack of jurisdiction.  The trial court denied the motion. 

 

The borrower appealed, and the Appellate Court reversed, ruling in part that publication service was improper in this case, because the Loan Owner failed to show due inquiry in "strict compliance" with the circuit court's rule regarding affidavits in support of publication service in foreclosure cases. 

 

As you may recall, Illinois Code of Civil Procedure Section 2-206 provides in part:  "Whenever, in any action affecting property . . . within the jurisdiction of the court . . . plaintiff . . . shall file . . . an affidavit showing that the defendant . . on due inquiry cannot be found . . .  so that a process cannot be served upon him or her, and stating the place of residence of the defendant, if known, or that upon diligent inquiry his or her place of residence cannot be ascertained, the clerk shall cause publication to be made . . . ."  735 ILCS 5/2-206(a).
  
Expanding on Section 2-206, the Circuit Court of Cook County additionally requires that, in mortgage foreclosure actions, affidavits in support of publication service "must be accompanied by a sworn affidavit by the
individual(s) making such 'due inquiry' setting forth with particularity the action taken to demonstrate an honest and well directed effort to ascertain the whereabouts of the defendant(s) by inquiry . . ."   Cook Co. Cir. Ct. R. 7.3.

 

Moreover, Section 15-1509(c) of the Code of Civil Procedure provides in part that relief from an erroneous foreclosure judgment and sale is limited to a claim for the proceeds from the sale.  735 ILCS 5/15-1509(c).

 

Noting that Section 2-206 requires "strict compliance" with its requirements for publication service, and that the local Cook County Rule 7.3 adds on to those requirements by requiring affiants to set forth "with particularity" the actions they took to find and serve process on the defendant, the Court pointed out that the affidavits in this case failed to identify who attempted to serve process on the borrower or who took steps to locate her at other addresses.  In so doing, the Court remarked that the affidavits used the passive voice (e.g., "attempts were made"; the borrower "could not be served") and thus failed to indicate that the affiants personally undertook the requisite measures to serve process on or to locate the borrower.
 
Ruling that the submitted affidavits did not meet the local Cook County Rule 7.3's requirement that affiants swear that they personally undertook the actions listed in the affidavit, the Appellate Court concluded that the trial lacked jurisdiction to enter a default judgment.  
 
In so ruling, the Court rejected the Loan Owner's assertion that Illinois Civil Code Section 15-1509(c) barred any challenge to a foreclosure and sale, even where the court lacked jurisdiction over the defendant.  The Court explained that judgments entered without jurisdiction over the parties are void and of no legal effect, and ruled that Section 15-1509(c) applies only to valid judgments entered with jurisdiction, not to instances of improper publication service.    In so ruling, the Court stated, "nothing in section 15-1509 indicates that the legislature sought to make foreclosure judgments take effect and deprive owners of their properties when the trial court lacked personal jurisdiction over the owners."

 

The Appellate Court thus ruled that the default judgment, and the judgment approving the sale of the condominium, were void.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: 6th Cir Holds Treating Loan as In Default At Time of Acquisition Triggers FDCPA Liability

The U.S. Court of Appeals for the Sixth Circuit recently held that the federal Fair Debt Collection Practices Act's ("FDCPA") definition of "debt collector" includes loan owners and servicers that either acquired a debt in default or treated a debt as if it were in default at the time of the acquisition. 

 

A copy of the opinion is available at:

http://www.ca6.uscourts.gov/opinions.pdf/12a0112p-06.pdf

 

A borrower claimed to have made a double payment on her mortgage loan for a single month, and therefore did not make the following month's payment.  The prior owner of the loan claimed that the borrower's account was delinquent.  Around the same time, the prior owner sold the loan and related servicing rights to the current owner and servicer, which became defendants in this case.

 

The borrower alleged that despite her purported payments, the servicer (1) began dunning the borrower and her husband, the latter of whom purportedly was not a borrower on the loan; (2) made numerous collection calls to both the borrower and her husband, despite "do not call" requests; (3) threatened foreclosure; (4) assessed monthly late fees; and (5) reported derogatory credit information to the credit reporting agencies. 

 

The borrower therefore sued the current loan owner and servicer in federal court, alleging various violations of FDCPA.  The loan owner and servicer both moved for summary judgment, arguing that they were not "debt collectors" under the FDCPA, because of the borrower's allegation that the loan was not actually in default.  The servicer further argued that as a servicer, it did not fall under the definition of debt collector.  The loan owner further argued that as the purchaser of the loan, it was a creditor and not a debt collector. The lower court found that neither the loan owner nor the servicer were debt collectors, and so dismissed the complaint.  The borrower appealed. 

 

As you may recall, the FDCPA defines a "debt collector" as any person who uses any instrumentality of interstate commerce to collect debts owed (or allegedly owed) to another.  15 U.S.C. Sec. 1692a(6).  The definition also includes those who collect their own debts using the name of another, "which would indicate that a third person is collecting or attempting to collect such debts..."  Id.  However, the definition of "debt collector" does not include a debt which was not in default at the time it was obtained by the collecting entity.  Id. 

 

The Sixth Circuit began its analysis by considering whether an entity might acquire and attempt to collect on a debt, without qualifying as either a creditor or debt collector under the FDCPA.  The Court answered in the negative, holding that an entity that did not originate, but acquired and attempted to collect on, a debt "is either a creditor or a debt collector depending on the default status of the debt at the time it was acquired."  Similarly, the Court held that a loan servicer can either "stand in the shoes of a creditor or become a debt collector," again depending on whether the debt was in default when the servicer began servicing the loan. 

 

The Court rejected the argument that neither the loan owner nor the servicer was a debt collector, due to the borrower's allegation that the loan was never in default.  To reach that conclusion, it cited the statutory definition of debt collector, which refers to both actual obligations and "alleged" obligations, as well as to debts that are "asserted" to be owed.  15 U.S.C. Sec. 1692a(5)-(6).  Accordingly, the Sixth Circuit held that "a debt holder or servicer is a debt collector when it engages in collection activities on a debt that is not...actually owed."  

 

Based on the foregoing, the Sixth Circuit held that "the definition of debt collector pursuant to Sec. 1692a(6)(f)(iii) includes any non-originating debt holder that either acquired a debt in default or has treated the debt as if it were in default at the time of acquisition." 

 

Having made that determination, the Sixth Circuit examined the borrower's FDCPA allegations, and found that they were sufficient to state a claim.  Accordingly, the Court reversed the decision of the lower court, and remanded the matter for further proceedings. 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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FYI: 11th Cir Holds Borrower Stated FDCPA Claim Against Foreclosure Firm For Identifying Servicer as "Creditor"

The U.S. Court of Appeals for the Eleventh Circuit recently held that a debtor's complaint stated a "false representation" claim under the federal Fair Debt Collection Practices Act, where the debt validation/1692g notice identified the loan servicer who started servicing the loan after it was in default as the "creditor." 

 

A copy of the opinion is available at: 

http://www.ca11.uscourts.gov/opinions/ops/201014618.pdf.

 

Plaintiff-Appellant ("Debtor") obtained a mortgage loan on his property and eventually defaulted on the loan.  Following the default, the original lender transferred the servicing rights for the loan.  The loan servicer in turn hired a foreclosure law firm ("Law Firm") to assist in the collection efforts.  To that end, the Law Firm sent a notice to the Debtor stating that the notice was being sent pursuant to the federal Fair Debt Collection Practices Act ("FDCPA") to collect on the debt.  The notice also identified the loan servicer as the creditor on the loan.

 

The Debtor filed suit against the Law Firm in federal district court, claiming that the notice sent to him by the Law Firm violated Section 1692e of the FDCPA by falsely representing that the loan servicer was the "creditor" on the loan.  The Debtor claimed that the loan servicer, having been assigned a debt already in default solely for purposes of collecting on the debt, was not a "creditor" under the FDCPA.

 

The Law Firm moved to dismiss for failure to state a claim.  The district court granted the motion, ruling that the loan servicer was a "creditor" according to the "ordinary meaning" of the term and, further, that even if the loan servicer were not a "creditor" under the FDCPA, it was harmless error to use the term with respect to the servicer, because the loan servicer had the authority to foreclose and otherwise act as the creditor on the loan.

 

The Debtor appealed.  The Eleventh Circuit vacated and remanded.

 

As you may recall, the FDCPA defines a "creditor" as "any person who offers or extends credit creating a debt or to whom a debt is owed," but expressly excludes from the definition "any person to the extent that he receives an assignment or transfer of a debt in default solely for purposes of facilitating collection of such debt for another."  15 U.S.C. § §1692a(4). In addition, the FDCPA requires a debt collector to send the debtor a written notice containing "the name of the creditor to whom the debt is owed" and subjects debt collectors to liability for "any false, deceptive, or misleading representation or means in connection with the collection of any debt." 15 U.S.C. §§ 1692e, 1692g(a)(2), 1692k(a).

 

After ruling that a false representation in connection with the collection of a debt need not be misleading or deceptive to constitute a violation under the FDCPA, the Eleventh Circuit noted that the Debtor's complaint contained allegations as to the date of default, that the debt was assigned to the loan servicer after the default, and that the Law Firm violated the FDCPA by falsely identifying the loan servicer as the "creditor" in its debt collection notice.   Construing the allegations in the Debtor's favor, the Court concluded that the Law Firm's statement in the collection notice falsely identified the loan servicer as the "creditor" and that the Law Firm could be liable to the Debtor for potential damages and attorneys fees.

 

Accordingly, the Eleventh Circuit held that the Debtor's complaint stated a claim under the FDCPA.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

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