FYI: Ill App Ct Rejects Borrower's Attempt to Undo Foreclosure Based on Alleged Payments Made After Judgment Entered

The Illinois Appellate Court, First District, recently upheld the denial of a borrower's petition to vacate a final order in a foreclosure, where the borrower argued that the final order was allegedly void because the loan owner accepted additional payments from borrower after the foreclosure judgment was entered. 

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1111224.pdf.

 

Defendant borrower ("Borrower") defaulted on her home mortgage loan.  Plaintiff loan owner ("Loan Owner") then filed a foreclosure complaint against her pursuant to the Illinois Mortgage Foreclosure Law ("IMFL").  In her answer, Borrower asserted that she did not default on the loan until Loan Owner refused to accept her mortgage payments.  Loan Owner moved for summary judgment, supporting its motion with an affidavit of judgment detailing Borrower's loan default.    

 

The lower court ultimately granted Loan Owner's summary judgment motion and entered a judgment of foreclosure the same day.  Borrower did not appeal the court's findings.

 

Over a year later, Borrower's property was sold at a judicial foreclosure sale, with Loan Owner being the successful bidder.  The lower court confirmed the sale shortly thereafter, also entering an in rem deficiency judgment of over $100,000.   Again, Borrower did not appeal. 

 

Several months following the confirmation of sale, Borrower filed a motion to stay possession of the property, making various assertions including that she had not been given notice of the foreclosure proceedings.   In response, Loan Owner provided the court with various items, including proof of service of process, appearance of Borrower's defense counsel, and numerous notices to defense counsel and defense counsel's response thereto.      

 

About five months after the confirmation of sale and entry of judgment, Borrower, represented by new counsel, filed a petition to vacate the final order in the foreclosure.  Borrower claimed among other things that the order for summary judgment was invalid and void, because Loan Owner allegedly continued to accept payments from Borrower after the judgment was entered.  She also claimed to have a meritorious defense to Loan Owner's foreclosure action, and that she was diligent in presenting her petition to the court. 

 

Loan Owner argued that Borrower's challenge to the foreclosure judgment was barred under Section 15-1509 of the IMFL, and that the procedural rule allowing petitions to vacate final orders did not apply because the IMFL was the exclusive procedure for foreclosure in Illinois and thus trumped the Code of Civil Procedure.

 

The lower court denied Borrower's petition.  Borrower appealed.  The Appellate Court affirmed.

 

As you may recall, Section 15-1509(a) of the IMFL provides:  "[a]fter (i) confirmation of the sale, and (ii) payment of the purchase price . . . of the sale, the court (or . . .the person who conducted the sale . . . ), shall upon the request of the holder of the certificate of sale. . . promptly execute a deed to the holder or purchaser sufficient to convey title. . . .  If the deed issues to a grantee prior to the expiration of the period for appealing the confirmation of sale, and the grantee conveys title to another party within that period, that other party will not be deemed a bond fide purchaser unless and until such period expires without an appeal having been filed or, an appeal having been filed, such appeal is denied or withdraw."  735 ILCS 5/15-1509(a).

 

In addition, Section 15-1509 of the IMFL further provides, "(b) [d]elivery of the deed executed on the sale of the real estate, even if the purchaser or holder of the certificate of sale is a party to the foreclosure, shall be sufficient to pass the title thereto" and "(c) [a]ny vesting of title by . . . deed pursuant to subsection (b) of Section 15-1509, unless otherwise specified in the judgment of foreclosure, shall be an entire bar of (i) all claims of parties to the foreclosure. . . ."   735 ILCS 5/15-1509(b), (c).

 

Moreover, Illinois Supreme Court Rule 303(a)(1) provides that a notice of appeal must be filed within 30 days after the entry of a final judgment.  Ill. Sup. Ct. R. 303(a)(1).

 

Finally, Section 2-1401 of the Illinois Code of Civil Procedure specifies that a petitioner is entitled to relief from a judgment if he sets forth each of the following elements:  (1) the existence of a meritorious defense or claim; (2) due diligence in presenting the defense or claim to the circuit court in the original action; and (3) due diligence if filing the petition.  

 

Noting, first, that because the order confirming the sale of the property in this case rendered the foreclosure judgment final and appealable, and that Borrower had forfeited her argument as to the propriety of summary judgment in favor of Loan Owner, the Appellate Court pointed out that Borrower filed her Section 2-1401 petition more than 30 days after the entry of final judgment as required by Illinois Supreme Court Rule 303(a)(1).  See In re Marriage of Verdung, 126 Ill. 2d 542, 555-56 (1989); Fiala v. Schulenberg, 256 Ill. App. 922, 929 (1993). 

 

Rejecting Borrower's argument that her Section 2-1401 petition was not barred by IMFL Section 15-1509, the Appellate Court reasoned that Borrower misinterpreted Section 15-1509(a) by failing to take into account that this provision applies only to situations in which the grantee under the foreclosure, here, Loan Owner, attempts to convey title to another party before expiration of the period for appealing the confirmation of sale, which did not occur here. 

 

Thus, agreeing with Loan Owner that applying Section 2-1401 petitions to the appeal provision in Section 15-1509(a) would nullify Section 15-1509(c)'s bar on claims, the Appellate Court pointed out that not only did Borrower not appeal the confirmation of sale within the 30-day period required by the Illinois Supreme Court rules, but that a Section 2-1401 petition is not a timely appeal, but rather a completely new action.  See Ill. Sup. Ct. R. 303(a)(1); Sarkissian v. Chicago Board of Education, 201 Ill. 2d 95, 102 (2002)(filing a section 2-1401 petition is a new proceeding, not a continuation of the old one).

 

Relying on a case involving a petition to vacate after a default foreclosure judgment and confirmation of sale, the Appellate Court noted that using the Illinois Code of Civil procedure to circumvent the IMFL would eviscerate the IMFL provisions governing finality of sale.  See  Mortgage Electronic Registration Systems, Inc. v. Barnes, 406 Ill. App. 3d 1 (2010)(recognizing that IMFL Section 15-1508(b)'s provision governing confirmation of sale was more restrictive, inconsistent with, and thus trumped, Section 2-1301(e) of the Illinois Code of Civil Procedure's provision regarding vacatur of judgments).  Again noting that Borrower failed to challenge the confirmation of sale within the 30-day appeal period, the Appellate Court further reasoned that there was no authority to support her contention that she could circumvent IMFL Section 15-1509(a) or (c) after confirmation of sale by using a Section 2-1401 petition to vacate. 

 

Finding Section 15-1509(c)'s language dispositive, the Appellate Court concluded that Borrower's claim in her Section 2-1401 petition was barred once the circuit court confirmed the sale of the property.  As the court explained, "[i]f there is no relief available to the defendant under section 2-1301(e) [in Barnes], it follows logically that there can be no relief under section 2-1401."  

 

Accordingly, the Appellate Court affirmed the lower court's denial of Borrower's Section 2-1401 petition to vacate.

 

 

 

Ralph T. Wutscher
McGinnis 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: 8th Cir Upholds Dismissals of Two Quiet Title and Slander of Title Cases Against Mortgagees

The U.S. Court of Appeals for the Eighth Circuit recently upheld the dismissals of two borrowers' complaints for failure to state quiet title and slander of title claims against mortgagees.  

 

The Court further rejected the "show-me-the-note" theory, confirmed that mortgagors lacked standing to challenge foreclosures based on trust agreements governing mortgage-backed securities trusts, and ruled that borrowers failed to plead "sufficient factual matter" to raise plausible questions as to parties' mortgage-acceleration rights.  Copies of the opinions are attached. 

 

In two cases dealing with the rights of mortgagees under Minnesota law, a group of plaintiffs-borrowers ("Borrowers") filed lawsuits against various defendants (collectively, "Defendants"), including federal financial institution regulators, a number of financial institutions, and Mortgage Electronic Registration System, Inc. ("MERS").  The Borrowers essentially asserted that under Minnesota law the Defendants either lacked standing to foreclose on their properties or improperly foreclosed on them, thereby creating a cloud on the title to their property. 

 

As you may recall, the Minnesota quiet title statute provides that "[a]ny person in possession of real property . . . or any other person having or claiming title to vacant or unoccupied real property, may bring an action against another who claims . . .  a lien thereon, adverse to the person bringing the action, for the purpose of determining such adverse claim and the rights of the parties, respectively."  Minn. Stat. § 559.01 ('Section 559.01"). 

 

In one case, relying on recent precedent, the Eighth Circuit easily rejected Borrowers' assertion that they had stated a slander-of-title action.  See Butler v. Bank of America, 690 F.3d 959, 962 n.3 (8th Cir. 2012); Cox v. Mortgage Electronic Registration System, Inc., 685 F3d. 663, 668 (8th Cir. 2012).  Turning next to Borrowers quiet title claim under Section 559.01, the Court ruled that Borrowers failed to sufficiently plead a quiet title action in that they failed to plead that they were in possession of the properties or that they had or claimed to have title to vacant land. 

 

In the second case, the Borrowers filed suit in Minnesota state court, alleging that, due to faulty assignments of their mortgages, the ensuing foreclosures of their property were improper.  Defendants removed to federal court.  The Borrowers then attempted to have the case remanded back to state court by joining a non-diverse defendant, filed claims to quiet title under Section 559.01 and for slander of title, and sought declaratory judgments as to whether (1) Defendants had a "true interest in or right to foreclose" and (2) their notes were properly accelerated by the correct party.  Defendants moved to dismiss for failure to state a claim. 

 

Concluding that joinder of the non-diverse defendant was fraudulent, the lower court granted Defendants' motion to dismiss.   Arguing for remand, Borrowers appealed, contending that the lower court erroneously relied on a court decision that rejected the so-called "show-me-the-note" theory under which a foreclosing entity must present the original promissory note.  See Jackson v. Mortgage Electronic Registration System, Inc., 770 N.W.2d 487, 500-01 (Minn. 2009)("Jackson"). 

 

Ruling that there was "no reasonable basis in fact and law supporting a claim against the resident defendant[]" under Minnesota law, the Eighth Circuit concluded that joinder of the resident defendant was indeed fraudulent, and accordingly affirmed the lower court's denial of remand and dismissal of claims against that particular defendant.

 

Turning to Borrowers' slander-of-title claim, and noting that the claim was simply an attempt to invalidate the foreclosures based on the discredited "show-me-the-note" theory, the Eighth Circuit relied on precedent in which it upheld the dismissal of a virtually identical claim, and dismissed this claim.  See, e.g., Butler v. Bank of America, N.A., 690 F.3d 959, 961, 962-63, 962 n.3 (8th Cir. 2012); Murphy v. Aurora Loan Servs., LLC, 699 F.3d 1027, 1031-32 (8th Cir. 2012) ("Murphy"). 

 

As to Borrowers' request for a declaratory judgment to determine whether Defendants had standing to foreclose, the Eighth Circuit noted that Borrowers' request was based on allegations that their promissory notes and mortgages were transferred into trusts underlying mortgage-backed securities, and that their foreclosures violated the terms of the trust agreements.  The Court adopted the reasoning employed by other courts in holding that mortgagors lacked standing to challenge foreclosures based on those trust agreements, because the mortgagors were neither parties to nor beneficiaries of such agreements.  

 

With regard to Borrowers' request for a declaratory judgment determining whether their promissory notes were accelerated by the correct party, the Eighth Circuit noted that Borrowers' pleadings were merely conclusory and thus failed to plead sufficient fact to "raise plausible questions as to the rights of parties to accelerate the mortgages."  See Fed. R. Civ. P. 8(a); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009; Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).

 

Finally, in addressing the Borrowers' quiet title claim in the second case, the Court rejected Borrowers' assertions that the "[m]ortgages [were] not properly perfected," and that Defendants were not "Note Holders as defined in the Original Notes" as merely the "show-me-the-note" theory in a different guise.   The Eighth Circuit thus concluded that the quiet title claims was similarly barred by Jackson.

 

While noting, however, that certain quiet title theories relating to potentially invalid mortgage assignments and to Defendants' entitlement to receive payments on Borrowers' notes were not precluded under Jackson or Murphy, the Eighth Circuit nevertheless affirmed the dismissal of the quiet title action, because Borrowers failed to sufficiently plead them. 

 

Citing federal pleading standards, the Court pointed out that although Borrowers may have satisfied the state pleading rules by referring to their actual possession of their land and an adverse claim by Defendants, they were "not state substantive standards that govern the success of a quiet title claim."   Accordingly, due to Borrowers' failure to provide factual support for their claim that Defendants' adverse claims were invalid based on speculation as to the propriety of assignments of their loans, the Eighth Circuit affirmed the dismissal of Borrowers' quiet title claim, even though such dismissal was based on theories not precluded by Jackson.

 

 

 

 

Ralph T. Wutscher
McGinnis 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: 1st Cir Reverses Dismissal of Wrongful Foreclosure Claims Involving "Confirmatory Assignment," Standing, and UDAP Allegations

The U.S. Court of Appeals for the First Circuit recently ruled that a borrower stated a plausible claim for wrongful foreclosure under Section 14 of the Massachusetts foreclosure law, where the complaint set forth allegations challenging whether the assignment of the loan to the foreclosing trustee took place prior to the foreclosure action to confer power of sale under the foreclosure statute, and that without further discovery, questions existed as to whether a purported "confirmatory assignment" in fact documented a bona fide assignment that had taken place before the foreclosure.    

 

The Court also ruled that the borrower could amend her complaint to sufficiently plead her claims for fraud and unfair and deceptive trade practices in relation to the foreclosure, as the lower court erroneously based its analysis of the sufficiency of those claims on its finding that a valid pre-foreclosure assignment had in fact occurred.   

 

A copy of the opinion is available at:  http://www.ca1.uscourts.gov/pdf.opinions/11-2431P-01A.pdf.

 

Plaintiff borrower ("Borrower") obtained a residential mortgage loan that was sold on the secondary mortgage market shortly after it was executed as part of a pool of securitized mortgages held by defendant bank ("Loan Owner"), as trustee.   A so-called "Pooling and Servicing Agreement ("PSA") partly governed the operations of the trust, including the timing as to when mortgage loans could be transferred into the trust.  The various transfers of the loan were not recorded in the county registry of deeds as they occurred.

 

Borrower defaulted on the mortgage loan, and Loan Owner foreclosed on her property.  Initially acting pro se, Borrower filed a complaint in Massachusetts state court against Loan Owner, the loan servicer, and others (collectively, "Defendants"), alleging that the assignment of her loan to the Loan Owner occurred after the deadline set forth for such transfers in the PSA.  This, Borrower, asserted, rendered both the assignment of the loan into the trust as well as the foreclosure null and void under Massachusetts law, because the defendants lacked power of sale under Section 14 as they did not hold the note and the mortgage at the time they began the foreclosure proceedings against her. 

 

As support for her assertion, Borrower attached to the complaint a document entitled "Corporate Assignment of Mortgage" ("Corporate Assignment"), which purported to assign Borrower's loan to Loan Owner and which was recorded in the registry of deeds after the date of the foreclosure.   The Corporate Assignment specified the date of assignment as being over a year after the PSA's supposed cut-off date for transfers into the trust.  Borrower also argued that Defendants lacked standing to foreclose because they did not have possession of the note at the time of the publication of the scheduled foreclosure sale of the property. 

 

In addition to seeking declaratory relief as to the validity of the foreclosure, the complaint included various other allegations, including failure to comply with the Massachusetts requirement for "foreclosure by entry," lack of standing to foreclose, fraud, and unfair and deceptive trade practices in violation of Massachusetts law. 

 

Defendants removed the case to federal court and moved to dismiss for failure to state a claim, arguing that Borrower was barred from litigating the foreclosure as she failed to enjoin the foreclosure proceedings, and that she could not challenge the assignment of the mortgage because she was neither a party to the PSA nor a third-party beneficiary thereof. 

 

Defendants also asserted in part that the Corporate Assignment clearly indicated that the mortgage had been assigned to Loan Owner at the time of the filing of the foreclosure action, even if the Corporate Assignment itself was executed after the foreclosure, because the Corporate Assignment was a proper "confirmatory assignment" under the Supreme Judicial Court's decision in U.S. Bank, N.A. v. Ibanez, 941 N.E.2d 40 (Mass. 2011)("Ibanez"). 

 

In addition, Defendants argued among other things that Borrower failed to plead the fraud claim with sufficient particularity and that Borrower failed to allege any unfair or deceptive practices or indicated how she was injured by Defendants' conduct. 
 
After a hearing, the lower court dismissed the case in its entirety without leave to amend, concluding in part that the Corporate Assignment evidenced a valid assignment consistent with Ibanez.  The court also concluded that Borrower failed to plead fraud with sufficient particularity, that her argument that Loan Owner had to hold both the mortgage and the note in order to foreclose was meritless, and that she lacked standing to challenge the assignment as she was neither a party to nor a third-party beneficiary of the PSA.  Borrower appealed.

 

The First Circuit reversed in part, finding that the complaint stated a plausible claim for violations of Section 14 of the Massachusetts foreclosure law, and remanded to allow Borrower to amend her complaint as to the claims for fraud and unfair and deceptive trade practices.

 

As you may recall, Section 14 permits only "the mortgagee or his executors, administrators, successors or assigns" to exercise the power of sale under a mortgage, which may be exercised only if the foreclosing entity is the "assignee[] of the mortgage[] at the time of the notice of sale and the subsequent foreclosure sale."  See Ibanez, 941 N.E.2d at 49-51; Mass. Gen. Laws ch. 244, § 14 ("Section 14").

 

In addition, in order to state a claim for fraud, a complaint must plead:  (1) that the statement was knowingly false; (2) that [defendants] made the false statement with the intent to deceive; (3) that the statement was material to the plaintiffs' decision . . .; (4) that the plaintiffs reasonably relied on the statement; and (5) that the plaintiffs were injured as a result of their reliance."  Doyle v. Hasbro, Inc., 103 F.3d 186, 193 (1st Cir. 1996).  See also United States ex rel. Rost v. Pfizer, Inc., 507 F.3d 720, 731 (1st Cir. 2007); Fed. R. Civ. P. 9(b).

 

Finally, Massachusetts law provides that in the event of a foreclosure by entry "a memorandum of the entry shall be made on the mortgage deed and signed by the mortgagor or person claiming under him, or a certificate, under oath, of two competent witnesses to prove the entry shall be made."  Mass. Gen. Laws ch. 244, § 2 ("Section 2"). 

 

Noting that Borrower's complaint lacked clarity, and focusing for the most part on whether Defendants held power of sale under Section 14, and whether a valid assignment had occurred prior to the initiation of the foreclosure, the First Circuit concluded that Borrower alleged sufficient facts to set forth a plausible claim under Section 14, without addressing the validity of the assignment into the trust under the PSA. 

 

In so doing, the First Circuit pointed out that at the time this case began, a mortgagee seeking to execute under the mortgage had to possess only the mortgage to initiate foreclosure proceedings, not both the note and mortgage.  Cf. Eaton v. Fed. Nat'l Mort Ass'n., 469 N.E.2d 1118 (Mass. 2012)(ruling prospectively only that a "mortgagee" refers to the person or entity holding the mortgage at the time of filing of foreclosure action and also either the note or acting on behalf of the note holder).  Moreover, the Court emphasized that by pointing out in her complaint the discrepancy in the dates listed for the purported date of assignment and the date of the recording of the assignment -- which was after the foreclosure began and just a few days before the foreclosure sale of Borrower's property -- Borrower had stated a plausible claim that the assignment may have actually taken place after the foreclosure had been finalized and was thus not merely a "confirmatory assignment." 

 

Rejecting Defendants' argument that the document was clearly a confirmatory assignment recognized by the Supreme Judicial Court in Ibanez as a valid means of documenting that a bona fide assignment had taken place prior to foreclosure, the Court stressed the holding in that case that a foreclosure carried out by an entity lacking power of sale is void.  Ibanez, 941 N.E.2d at 50, 53.

 

Thus, noting that the Corporate Assignment attached to Borrower's complaint plainly indicated that it was recorded after the foreclosure, and purported to reference a pre-foreclosure assignment in its heading but did not also indicate in its body that it was a confirmation of a written pre-foreclosure assignment, the Court concluded that the lower court erred in ruling that Borrower could make no plausible claim under Section 14.

 

With respect to Borrower's claims for fraud and unfair and deceptive trade practices, in reviewing Borrower's complaint to determine whether it met the fraud pleading requirements under both Massachusetts law and the Federal Rules of Civil Procedure, including the specific requirement that a complaint plead injury as a result of plaintiff's reliance on the defendant's false representations, the Court agreed with the lower court that Borrower's complaint did not meet the threshold particularity requirements that must be pled in order to state a claim for fraud.  The First Circuit further noted in part that the complaint failed to provide notice to Defendants regarding the discrete acts that allegedly were unfair or deceptive "within the penumbra of some . . . concept of unfairness [or deceptiveness]." See Kenda Corp. v. Pot O'Gold Money Leagues, 329 F.3d 216, 234 (1st Cir. 2003)(noting that the applicable statute does not define "unfair" and "deceptive"); Mass. Gen. Laws ch. 93A, § 2.  

 

In short, the Court stressed that to state a claim for unfair and deceptive practices it was not enough for Borrower to broadly allege that Defendants foreclosed on her property in violation of Massachusetts foreclosure law, but that Borrower must allege some "extortionate quality that gives . . . the rancid flavor[s] of unfairness [and deceptiveness]."  See Arthur D. Little, Inc. v. Dooyang Corp., 147 F.3d 47, 55 (1st Cir. 1998).

 

Nevertheless, the First Circuit ruled that Borrower could amend her complaint, reasoning that the lower court erred insofar as it applied its erroneous findings regarding Borrower's Section 14 claim that a valid pre-foreclosure assignment had taken place to its analysis of her claims for fraud and unfair and deceptive practices. 

 

The Court expressly did not address Borrower's argument that the assignment of the loan into the trust occurred after the cut-off date for transfers of loans into the trust in violation of the PSA, relying instead on its ruling that the Borrower alleged enough facts to set forth a plausible claim for violations of Section 14. 

 

Accordingly, the First Circuit remanded the case back to the lower court.

 

 

 

Ralph T. Wutscher
McGinnis 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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