FYI: 5th Cir Affirms Dismissal of Texas Constitution and Defamation Claims Against Mortgage Lender

The U.S. Court of Appeals for the Fifth Circuit recently upheld the dismissal of a borrower's allegations that the lien securing their home equity loan was invalid under section 50(a)(6) of the Texas Constitution because the allegations were time-barred under the four-year statute of limitations, when borrowers' signed their loan documents more than five years before they filed suit.

 

The Court also ruled that:  (1)  the borrowers' defamation claim also failed, because the defendant bank's statements as to their delinquent payments were true and the bank's lien was valid as a result of the expiration of the limitations period; and (2) the lower court was within its discretion to strike the second and third amended complaints, as the complaints would have destroyed diversity jurisdiction.

 

A copy of the opinion is available at:  http://www.ca5.uscourts.gov/opinions/pub/12/12-40032-CV0.wpd.pdf.

 

Plaintiffs homeowners ("Borrowers") obtained a home equity loan secured by a lien on their home.  The loan closing supposedly took place in their home.  Borrowers eventually fell behind on their loan payments, and, over five years after signing their loan documents, sent a letter to the lender, alleging that the circumstances of the loan closing violated the Texas Constitution's requirement that loan closings must occur at the office of an attorney, the lender, or a title company.  They also contended that they did not receive notice of their rights twelve days before the closing as required by the Texas Constitution.  Accordingly, Borrowers' letter sought "cure" of the alleged deficiencies. 

 

Having received no response from the original lender because the loan had been acquired by defendant bank ("Bank"), Borrowers sent a letter to Bank, similarly requesting cure of the alleged constitutional deficiencies.  Bank also took no action to cure the alleged constitutional defects in the loan transaction.

 

Borrowers subsequently filed suit against various entities (collectively "Defendants") in state court seeking a declaratory judgment that both the loan and the lien against their home were void and that, because Defendants had failed to cure the alleged constitutional violations, Bank was required to forgive the loan entirely.   Borrowers also sought actual and punitive damages and attorney's fees for defamation based on Bank's supposedly libelous reporting of Borrowers' delinquent loan payments to credit reporting agencies.

 

Bank removed to federal court, where it moved to dismiss the law suit as barred under the four-year statute of limitations.   Although the lower court initially denied Bank's motion to dismiss and allowed Borrowers to file an amended complaint, it ultimately dismissed the lawsuit, but struck Borrowers' second and third amended complaints because they would have destroyed jurisdiction by joining non-diverse parties.  Borrowers appealed.

 

The Fifth Circuit affirmed, concluding in part that:  (1) Borrowers' claims failed because the four-year statute of limitations barred Borrowers' constitutional claims; (2) Bank's statements regarding Borrowers' delinquent payments were true; and (3) the lower court was within its discretion in striking Borrowers' second and third amended complaints to preserve federal diversity.

 

As you may recall, Section 50(a)(6) of the Texas Constitution provides that a "homestead . . . shall be, and is hereby protected from forced sale, for the payment of all debts except for . . . (6) an extension of credit that:  (M) is closed not before:  (i) the 12th day after the later of the date that the owner of the homestead submits a loan application to the lender for the extension of credit or the date that the lender provides the owner a copy of the notice prescribed by Subsection (g) of this section."  Tex. Const. Art. XVI § 50(a)(6)(M)(i).

 

In addition, the Texas Constitution further provides that a lien on a homestead is valid only if it "is closed [. . .] at the office of the lender, an attorney at law, or a title company"  and that "no lien on a homestead is valid unless it secures a debt described by [Section 50]."  Id. § 50(a)(6)(N), (c) ("Section 50(a)(6)"). 

 

Moreover, if a lien is made in violation of these requirements, a party notified of the violation has 60 days to "cure."   Section 50(a)(6)(Q)(x). 

 

Finally, Texas law also provides that "[e]very action for which there is no express limitations period, except an action for the recovery of real property, must be brought not later than four years after the day the cause of action accrues."  Tex. Civ. Prac. & Rem. Code § 16.051 ("Section 16.051").

 

Noting that other courts have applied the so-called "residual" four-year limitations period in Section 16.051 to defects in homestead liens, the Fifth Circuit similarly concluded that the limitations period applied to constitutional defects under Section 50(a)(6).  See, e.g., Rivera v. Countrywide Home Loans, Inc., 262 S.W.3d 834, 839(Tex. App. 2008)(ruling that the four-year statute of limitations applies to constitutional and fraudulent lien causes of action arising under Texas Constitution); Schanzle v. JPMC Specialty Mortg. LLC, No. 03-09-00639-CV, 2011 WL 832170, at *4 (Tex. App.)(applying four-year statute of limitations to violations of constitutional requirements for home equity loans); Ho v. University of Texas at Arlington, 984 S.W.2d 672, 686 (Tex. App. 1998)(applying residual statutory limitations period to constitutional claims); Boutari v. JP Morgan Chase Bank N.A., 429 F. App'x 407 (5th Cir. 2011)(affirming judgment that four-year limitations period applies to Section 50(a)(6) claims).

 

Turning next to the issue of claim accrual, the Fifth Circuit applied the so-called "injury rule" in concluding that Borrowers' claims accrued when the alleged wrongful conduct caused a legal injury, which in this case was at the time of the loan closing. 

 

Rejecting Borrowers' assertion that the limitations period began to run when they discovered the constitutional violations and sent the demand for cure, and noting that nothing made their injury "undiscoverable," the Court concluded that Borrowers' claims accrued at the time they created the lien by signing the loan documents in their home and failed to receive the requisite 12-day notice.  

In so doing, the Fifth Circuit also rejected Borrowers' other arguments, including the assertion that  Bank was estopped from asserting a limitations defense because it "fraudulently concealed" its disclosure violation.   Noting that fraudulent concealment consists of four elements, none of which applied in this case, the Court explained in part:  "it would be impossible to conceal the fact that the closing occurred in [Borrowers'] living room. . . . [Bank] did not 'conceal' the fact that [it] did not provide the required constitutional notices. . . [and ] [i]t is difficult to imagine how a party could conceal a lack of disclosure." 

 

The Fifth Circuit also rejected Borrowers' assertion that Bank's failure to disclose was tantamount to fraudulent concealment because Bank owed them a "duty to disclose"  akin to a fiduciary duty.  See DiGrazia v. Old, 900 S.W.2d 499, 503 (Tex. App. 1995)(ruling there is no fraudulent concealment when defendant owes no duty to disclose); Federal Dep. Ins. Corp., v. Coleman, 795 S.W.2d 706, 709 (Tex. 1990)(noting that mortgagor-mortgagee relationship does not include fiduciary duties).

 

Turning to Borrowers' defamation claim, the Court ultimately concluded that the claim failed because Bank's reporting of their delinquent payments was truthful  under Texas libel law.   In reaching this conclusion, the Fifth Circuit reasoned that because the limitations period expired, the lien that was once voidable under Section 50(a)(6) became valid and that the now-valid lien, combined with Bank's truthful credit reporting, provided a complete defense to the defamation claim.  See Doody v. Ameriquest Mortgage Co., 49 S.W.3d 342 (Tex. 2001)(suggesting that liens created in violation of Section 50(a)(6) are voidable rather than void and thus can be "cured" and rendered valid).

 

Finally, as to the appeal of the lower court's striking of their second and third amended complaints, the Fifth Circuit rejected Borrowers' assertion that they were simply relying on the lower court's scheduling order which, they claimed, allowed them to amend essentially as many times as they wanted by the deadline.   In so doing, the Court noted that the lower court had not waived the presumptive requirement of leave to amend and that the lower court was within its discretion to strike the amended complaints because they sought to join non-diverse parties.  See, e.g., Hensgens v. Deere & Co., 833 F.2d 1179, 1182 (5th Cir. 1987)(pointing factors to consider in determining whether to permit joinder of non-diverse parties).

 

As did the lower court, the Fifth Circuit observed in part that Borrowers intentionally attempted to add additional defendants to destroy diversity jurisdiction, and that they would not be injured by denial of the second and third amended complaints. 

 

Accordingly, the Fifth Circuit affirmed the dismissal in all respects.

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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FYI: Maryland Ct of Appeals Rules Repo'd Auto Auctions "Private," Requiring Add'l Disclosures Under MCLEC, Due to Admission Fee

The Maryland Court of Appeals recently concluded that sales of repossessed automobiles requiring all bidders and other interested parties, including debtors whose cars had been repossessed,  to pay a refundable $1,000 admission fee to attend and observe the sales were "private sales" under Maryland's Creditor Grantor Closed End Credit Act ("CLEC"), and therefore subject to CLEC's requirements to make specific disclosures to the debtors about the purchaser, the number of bids received, and distribution of proceeds, among others.   

 

In answering a question certified by the U.S. Court of Appeals for the Fourth Circuit, the Maryland Appellate Court stressed that the admission fee "obscured transparency" in the sales process, and thereby precluded the sales from being "public auctions" not subject to CLEC's stringent post-sale disclosure requirements. 

 

A copy of the opinion is available at:  http://mdcourts.gov/opinions/coa/2013/10a12m.pdf.

 

Two car buyers ("Consumers") purchased cars from car dealers under retail installment contracts governed by Maryland's Creditor Grantor Closed End Credit Act ("CLEC").  In each case, the car dealer assigned the installment contract to a finance company ("Finance Company") which had a security interest in Consumers' vehicles. 

 

Consumers eventually defaulted on their car loans, and Finance Company repossessed their cars.  Finance Company subsequently sent Consumers notices informing them that their cars would be sold at a "public sale" on a particular date, place and time.  One of the notices also indicated that a Consumer "may attend the sale and bring bidders if you want."  The notices supposedly did not mention that members of the public were required to provide a refundable $1,000 cash deposit in order to attend the sales, even as spectators.   However, published classified advertisements announcing the sales indicated that a $1,000 cash deposit was required to attend, but supposedly failed to indicate the make, model years, or condition of the cars to be sold.   When one of the Consumers tried to attend the sale of her car, she allegedly was denied admission because she could not pay the $1,000 deposit. 

 

Following the sales of Consumers' repossessed cars, Finance Company sent correspondence to Consumers informing them that they each owed a substantial deficiency balance of well over $10,000.   Consumers then filed separate putative class-action lawsuits in federal district court, alleging in part that Finance Company violated CLEC in that the sales of their cars were actually "private sales," subject to CLEC's post-sale disclosure requirements and that Financing Company had failed to provide those disclosures. 

 

The district court combined the lawsuits, reasoning that they shared the same issue as to whether the sales of Consumers' cars were "public auctions" or "private sales," with private sales being subject to CLEC's more stringent notice and accounting requirements.

 

Finance Company moved for summary judgment.  The district court granted Finance Company's motion, ruling that the sales were "public auctions" as the sales "were widely advertised and open to the public for competitive bidding."  Consumers appealed to the Fourth Circuit, where they moved to certify the question as to whether the sales of their cars were "private sales" in light of the $1,000 fee required to attend and observe.

 

Initially denying Consumers' motion, the Fourth Circuit later certified the question to the Maryland Court of Appeals.  The Maryland Court of Appeals in turn concluded that the sales were "private sales" that triggered CLEC's post-sale disclosures requirements, including the requirement to disclose the purchaser's name and address, the condition and value of the cars, and the number of bids sought and received.

 

As you may recall, CLEC provides in part:

 
(j)  Sale or auction – Authorized; notice; commercially reasonable manner; accounting. – (1)(i) . . . the credit grantor shall sell the property that was repossessed at:  . . .  (2) . . a private sale; or 2. A public auction.  (ii)  At least 10 days before the sale, the credit grantor shall notify the consumer borrower in writing of the time and place of the sale, by certified mail . . . sent to the consumer borrower's last known address.  (iii)  Any sale of repossessed property must be accomplished in a commercially reasonable manner. (2)  In all cases of a private sale of repossessed goods . . . . a full accounting shall be made to the borrower in writing and the seller shall retain a copy of this accounting for at least 24 months.  This accounting shall contain the following information:  (i) The unpaid balance at the time the goods were repossessed; (ii) The refund credit of unearned finance charges and insurance premiums, if any; (iii) the remaining net balance; (iv) The proceeds of the sale of the goods; (v) The remaining deficiency balance, if any, or the amount due the buyer; (vi) All expenses incurred as a result of the sale; (vii) The purchaser's name, address, and business address; (viii) The number of bids sought and received; and (ix) Any statement as to the condition of the good at the time of repossession which would cause their value to be increased or decreased above or below the market value for good of like kind and quality. . . .

 

(k) . . . (1) [in case of] a public sale of property which secured a loan in excess of $2,000 at the time the loan was made . . . (2) The proceeds of a sale to which this subsection applies shall be applied, in the following order, to: (i) The actual and reasonable cost of the sale; (ii) The actual and reasonable cost of retaking and storing the property; and (iii) The unpaid balance owing under the agreement at the time the property was repossessed. (3) The credit grantor shall furnish to the consumer borrower a written statement which shows the distribution of the proceeds.  Md. Code Ann., Com. Law § 12-1021(j), (k) ("Section 12-1021").

 

Limiting its analysis to the question whether the $1,000 admission fee affected the characterization of the sales of the repossessed cars as "public" as opposed to "private," the Court of Appeals noted that under Maryland law both public auctions and private sales must be conducted in a "commercially reasonable manner."   In so doing, however, the Court of Appeals pointed out that if a sale is a "private sale," the debtor must receive detailed information in the form of statutorily required post-sale disclosures than would otherwise be required in the context of a "public auction" and, further, that a debtor's ability to challenge a potential deficiency judgment may hinge on whether the sale, and any related disclosures, complied with CLEC.

 

Rejecting Finance Company's assertions that: (1) the car sales were "public auctions," and thus did not require Section 12-1021(j)'s post-sale disclosures, because a "private sale" expressly excludes "classes of individuals"; and (2) "public auctions" are simply methods of selling property "in a public forum through open and competitive bidding," the court observed that the sole focus in this case was the effect of the admission fee on the nature of the sales. 

 

Noting that neither the Maryland Uniform Commercial Code nor CLEC defines the terms "public auctions" or "private sales," the Appellate Court turned to CLEC's legislative history, among other things, to distinguish between private and public sales of repossessed goods. The Court also observed that, although all sales of re-possessed goods must be commercially reasonable, the term "commercially reasonable" remains similarly undefined. 

 

Accordingly, the Court of Appeals turned to case law interpreting Maryland's Uniform Commercial Code, and, applying a "multi-factor analysis" to CLEC issues, concluded that commercial reasonableness consists, not in the proceeds ultimately "received from the sale, but rather from the procedures employed for the sale."  See National Housing Partnership v. Municipal Capital Appreciation Partners I, L.P., 935 A.2d 300, 315 (D.C. 2007); Harris v. Bower, 266 Md. 579, 590-91, 295 A.2d 870, 875-76 (1972)(ruling that sale of repossessed boat was not commercially reasonable where creditor failed to advertise sale in "customary yachting publications," boat depreciated between time of repossession and resale, and the limited  number of bids were of "dubious nature"); Kline v. Central Motors Dodge, Inc., 328 Md. 448, 614 A.2d 1313 (1992)(requiring a "bona fide public or private sale" to be conducted in a commercially reasonable manner).  

 

According to the Court, factors in determining the commercial reasonableness of a sale of repossessed goods include:  how soon after repossession the sale occurred; location of sale; adequacy of advertising; opportunity for prospective bidders to inspect the property prior to the sale; maintenance performed by the creditor to increase selling price of goods; and whether the sale occurred as advertised. 

 

Moving from the issue of commercial reasonableness, the Appellate Court next noted that the hallmark of a "public auction" is that it is "a method of selling [property] in a public forum through open and competitive bidding."   The Court thus reasoned that the signature characteristics of a public auction are openness and competitive bidding, which, in turn, require full transparency to allow bidders and other interested parties to verify that procedures are followed and that the sale does not allow collusive or unfair practices.  See WSG Holdings, LLC v. Bowie, 429 Md. 598, 57 A.3d 463 (2012)(acknowledging in part that openness requires transparency by allowing observation of proceedings).

 

Reasoning that Section 12-1021(j)'s post-sale disclosure requirements for "private sales" are triggered in sales lacking openness and transparency, the Appellate Court concluded that in this case the admission fee "obscured transparency" because bidders and other interested parties had to pay the fee simply to observe the sale process.    Accordingly, because the admission fees "shielded the process used to sell . . . the cars from observation," the Court held that the sales were "in actuality, 'private sales' subject to" Section 12-1021(j)'s detailed post-sale disclosures rather than the "public auctions" Finance Company purported them to be.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

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FYI: Ill App Ct Refuses to Undo Foreclosure Eviction Order Based on Typographical Error in Plaintiff's Name

The Illinois Appellate Court, First District, recently ruled that a typographical error causing the first two letters of a plaintiff bank's name to be omitted in pleadings was simply a case of misnomer that did not require dismissing a post-foreclosure forcible and detainer action or vacating the ensuing order for possession. 

 

The Court further ruled that the Illinois Mortgage Foreclosure Law's requirement that occupants of foreclosed property be "properly served" with a 90-day notice of intent to file an eviction action did not specify the use of any particular language identifying the owner of the property, and that sanctions were not appropriate in a misnomer case that did not prejudice the defendants.

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1113678.pdf.

 

Plaintiff bank, the trustee of a pool of mortgage-backed securities ("Trustee"), filed a forcible entry and detainer action against defendants tenants ("Occupants") following a mortgage foreclosure action against the owner of the property.  In its complaint and pre-eviction notice, Trustee, through counsel, identified itself as "Bank National Association," thereby inadvertently misidentifying Trustee by leaving off the first two initials of Trustee's name.   Attached to the complaint was, among other things, a copy of the order confirming the foreclosure sale, which correctly identified Trustee by its full name.

 

Occupants were served with process requiring them to appear in court.  However, after continuing the case due to Occupants' failure to appear for trial or to answer the complaint, the lower court entered an order for possession against them, similarly using the incorrect name "Bank National Association" to identify Trustee.  The lower court stayed enforcement of the order for about a week.  

 

A few days before the stay expired on the order for possession, Occupants filed their first pleadings in the eviction, asserting among other things that "Bank National Association" was not a proper plaintiff and accordingly had no right to possession of the property.   Rather than filing a motion to vacate or for a new trial, Occupants' attorney filed a notice of motion indicating that he would present "Motions to Quash Service of Process, Dismiss for Lack of Jurisdiction, and Stay Order for Possession."   Despite its title, however, nothing in the supposed motion sought to quash service of process or cited any of the statutory provisions or other authorities to support a request to vacate.   Further, Occupants also referenced a pending appeal in the borrower's foreclosure action as a reason to stay the order for possession.

 

The lower court denied Occupants' motions, ordering Trustee to file a written motion to amend its complaint reflecting its full and correct name.  In its subsequent written motion, Trustee asserted that the error in its name was simply a misnomer created by a scrivener's error.  The lower court, intending to retroactively apply the amendment to all of Trustee's previously-filed pleadings, granted Trustee's motion and ordered that the complaint and order of possession be amended "nunc pro tunc" to reflect Trustee as the proper party plaintiff.

 

Occupants appealed, arguing that the lower court improperly denied their post-judgment motion to dismiss for lack of standing, that the lower court improperly amended the complaint and order for possession "nunc pro tunc," and that Trustee should be sanctioned for forcing Occupants to litigate an action brought by a supposedly "nonexistent entity."

 

The Appellate Court affirmed the judgment, but modified the court's order to remove the "nunc pro tunc" language so that the amendments "related back" to the original documents filed in the eviction action. 

 

As you may recall, the Illinois Code of Civil Procedure ("Code") provides:  "[m]isnomer of a party is not a ground for dismissal but the name of any party may be corrected at any time, before or after judgment, on motion, upon any terms and proof that the court requires."  735 ILCS 5/2-401(b).  

 

In addition, the Code further provides that "pleading[s] may be amended at any time, before or after judgment, to conform the pleadings to the proofs." 735 ILCS 5/2-616(c).  See also 735 ILCS 5/2-616(b)("relation-back" provision).

 

Finally, the Illinois Mortgage Foreclosure Law ("IMFL") in part requires that a notice of intent to file a forcible entry and detainer action be "properly served upon the occupant" of foreclosed property at least 90 days before such action is filed.  735 ILCS 5/15-1701(h)(4).

 

Examining, first, whether it had jurisdiction over the lower court's various orders at issue, the Appellate Court ultimately concluded that it had jurisdiction over the orders as they were all steps in the same "procedural progression."  See Burtell v. First Charter Service Corp., 76 Ill. 2d 434-35 (1979).

 

Next, noting the inarticulate and muddled nature of Occupants' pleadings, the Appellate Court turned to Occupants' assertions that the complaint, as amended "nunc pro tunc," was null and void, that the order for possession was likewise null and void, and that the lower court erred in denying the motion to dismiss for lack of standing.  In so doing, the Appellate Court noted in part that Occupants had waived standing as an affirmative defense and had additionally admitted all of Trustee's allegations by failing to answer the complaint, and had thus forfeited their right to challenge the result or form of the proceedings in the lower court. 

 

The Appellate Court also pointed out among other things that:  (1) although Occupants' motion used the word "vacate" in the prayer for relief, the actual intent of the motion was to dismiss the case entirely, thus ignoring that the case had proceeded to final judgment; (2) the actual name of the entity claiming possession was of little relevance given that Occupants, as mere tenants of the borrower, had no dealings with it; (3) that the actual party in interest was not Trustee, but the owner of the loan whose full legal name clearly and precisely appeared on both the pre-eviction notice and the complaint; and, (4) attached to the eviction complaint served on Occupants were copies of the foreclosure order listing the full name of Trustee and a list of contact persons.

 

Addressing the lower court's order to amend the complaint and order for possession "nunc pro tunc," the Appellate Court noted that the term "nunc pro tunc" was misapplied, but nevertheless concluded that amending the pleadings to relate the amendments back to the original filing was a valid exercise of the lower court's authority.   In so doing, the Court rejected Occupants' assertion that the error in this case was not merely a misnomer but a case of mistaken identity.

 

Moreover, pointing out the "very slight difference" between the correct name of Trustee and the incorrect name that appeared on the pleadings, and that no one suggested that the difference was due "to anything but a scrivener's error," the Appellate Court relied on case law in applying the so-called "misnomer rule," thus concluding that technical errors should not provide a basis for promoting form over substance in litigation.  See, e.g., Santiago v. E.W. Bliss co., 2012 IL 111792, ¶ 25; Todd w. Musburger, Ltd. v. Meier, 394 Ill. App. 3d 781, 806-08 (2009)(upholding denial of defendant's motion for relief from judgment on grounds that plaintiff lacked capacity to sue due to misnomer); Bristow v. Westmore Builders, Inc., 266 Ill. App. 3d 257, 260 (1994)(opposing party may require a misnomer to be corrected, but may not force a dismissal for a misnomer); Thompson v. Ware, 210 Ill. App. 3d 16, 18 (1991)(noting that a pleading may be amended at any time to conform to proofs).

 

Deeming "superfluous" the "nunc pro tunc" language in the lower court's order, the Appellate Court explained that the lower court should have instead applied the "relation- back" doctrine in order that the amended complaint and order would be considered as filed on the date the original pleadings were filed.  See Maggi v. RAS Development, Inc. 2011 IL App (1st) 091955 ¶ 23; Ill. S. Ct. R. 366.  Accordingly, while affirming the lower court's judgment, the Appellate Court modified the lower court's order granting Trustee's motion to amend, clarifying that the judgment related back so as to modify the original pleadings.

 

Finally, the Court also rejected Occupants' assertion that they should prevail because the pre-eviction notice was flawed and that the lower court had no authority to amend it.  In so doing, the Court noted among other things that, as a pre-litigation notice, regular pleading rules did not apply, and, further, that the IMFL does not require any particular language for the notice or that the notice even contain the name of the owner of the property.  The Appellate Court pointed out that in this case the notice contained sufficient contact information in the event Occupants needed to make further inquiry.  

 

The Court also rejected Occupants' request for sanctions, noting that Occupants were not prejudiced by the misnomer, and that the lower court's judgment in favor of Trustee was substantively correct.

 

 

 

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: Ill App Ct Dismisses Borrower's Challenge of Service Process for Lack of Final Order

The Illinois Appellate Court, First District, recently dismissed an appeal of a "denial" of a motion to quash service in a foreclosure action after entry of the final order in the case, ruling that it lacked jurisdiction where the lower court had actually "struck" the motion to quash and merely ordered a different proceeding to challenge service, thereby rendering no final, appealable order. 

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1120010.pdf.

 

After plaintiff bank ("Bank") obtained a default foreclosure judgment against defendants borrowers ("Borrowers") and the foreclosure court confirmed the sale of Borrowers' property, Borrowers appeared to challenge service of process in the foreclosure action.    

 

Although affidavits from a special process server indicated that Borrowers were each personally served in the foreclosure action, Borrowers never appeared to defend against the foreclosure despite Bank's sending Borrowers notices advising them of Bank's upcoming motions.  Accordingly, the lower court entered a default order of judgment and sale against Borrowers.  Almost a year after initiation of the foreclosure action, the lower court entered an order confirming the sale of the property and directing the Sheriff to evict Borrowers.   

 

Around three months after entry of the order confirming the sale, Borrowers' attorney filed an appearance and a motion to quash based on improper service of process, attaching affidavits attesting to Borrowers' whereabouts at the time they were supposedly served in the foreclosure action.  In response, Bank argued that because more than 30 days had passed since the final judgment order, Borrowers had to serve the motion to quash on Bank itself rather than simply mail it to Bank's counsel.   Bank also argued, moreover, that the affidavits accompanying the motion to quash were insufficient for purposes of quashing service.

 

The lower court "denied" Borrowers' motion to quash, and ordered them to file a petition under 735 ILCS 5/2-1401 and to serve it on Bank.   Borrowers asked for reconsideration of that ruling, which the court denied, reasoning that a "Section 2-1401 petition is the proper procedural vehicle to bring a motion to quash 30 days after final judgment."  Borrowers appealed.  The Appellate Court dismissed the appeal, concluding in part that it lacked jurisdiction. 

 

As you may recall, Section 2-301(a-5) of the Illinois Code of Civil Procedure provides that a party waives jurisdictional arguments if it first files a responsive pleading or motion other than an appearance or motion for extension of time and then later files a motion to quash.  See 735 ILCS 5/2-301(a-5)("Section 2-301(a-5)").

 

In addition, Section 2-1401 of the Illinois Code of Civil Procedure provides a method for challenging final orders and judgments over 30 days old by way of a new cause of action.  Specifically, Section 2-1401 provides that a petition to vacate a judgment or order must be supported by affidavit and that "[n]othing contained in this Section affects any existing right to relief from a void order or judgment. . . ."  See 735 ILCS 5/2-1401(b), (f)("Section 2-1401").

 

First addressing Bank's strategy of attacking both the service of Borrowers' motion and the merits of their affidavits, the Appellate Court noted that making substantive arguments while simultaneously attacking service or process previously risked waiver of any objections based on personal jurisdiction, but that Section 2-301(a-5) now provides for waiver of such objections only if a party files a responsive pleading before filing a motion asserting a jurisdictional objection.  Accordingly, the Appellate Court ruled that because Bank challenged Borrowers' Section 2-1401 petition and the affidavits simultaneously, Bank had not waived its jurisdictional objection to service of process. 

 

Next, noting the confusion reflected in the record below as to the relationship between a motion to quash service and a Section 2-1401 petition, the Appellate Court observed that a challenge to a void judgment based on invalid service, supposedly as in Bank's foreclosure action against Borrowers, must be in the form of a Section 2-1401 petition.  See Sarkissian v. Chicago Board of Education, 201 Ill.2d 95, 104-05 (2002)(noting that regardless of the label given to the motion to quash, the motion was in substance a Section 2-1401 petition).    The Court thus treated Borrowers' motion to quash as a Section 2-1401 petition.

 

Further, noting that the lower court ordered Borrowers to file a Section 2-1401 petition and to "serve" it on Bank, the Appellate Court stressed that, although there was no transcript of the hearings, the lower court's use of the word "serve" suggested that it found Bank's jurisdictional arguments to be persuasive. 

 

Accordingly, concluding that the lower court had not ruled on the merits of the Section 2-1401 petition or "denied" the motion to quash, but instead had in fact struck it and ordered the filing of a Section 2-1401 petition, the Appellate Court ruled that there was no final, appealable order on a Section 2-1401 petition.  See Picardi v. Edwards, 228 Ill. App. 3d 905 (1992)(retaining jurisdiction where court invited a refiling); Romo v. Allin Express Service, Inc., 219 Ill. App. 3d 418 (1991)(ruling there was a right to file second Section 2-1401 petition where court invited refiling); Belluomimi v. Lancome, 207 Ill.  App.  3d 583 (1990)(holding that where motion was stricken, there was no adjudication of the merits). 

 

Finally, the Appellate Court also concluded that the lower court lacked jurisdiction over Borrowers' motion, given that Borrowers had served the motion to quash by mail upon Bank's attorneys rather than on Bank itself.  See 735 ILCS 5/2-1401(b)(party seeking relief under Section 2-1401 must follow Illinois Supreme Court rules as to providing notice to opposing parties); Ill. Sup. Ct. R. 105(b)(providing that notice by moving party be directed to opposing party and must be served either by summons, prepaid registered mail, or publication).  See also, e.g., Armis Construction Co. v. Cosmopolitan Nat'l Bank, 134 Ill. App. 3d 177, 180 (1985)(invalid notice deprives trial court of jurisdiction rendering its subsequent orders invalid). 

 

Accordingly, determining that it lacked jurisdiction to hear the appeal in this matter, the Appellate Court dismissed it, urging the parties to work out an agreement as to service of process so as to allow a hearing on the merits of Borrowers' motion.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct: (312) 551-9320
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Email: RWutscher@mtwllp.com

 

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