FYI: Ill App Ct Rules Foreclosure Against Corporation Voided Due to Potential Improper Service

The Illinois Appellate Court, First District, recently ruled that, although the lower court had personal jurisdiction over the individual defendants through personal and substitute service, a question remained as to the propriety of service on a defendant corporation that was the mortgagor of commercial property subject to a default judgment and order of foreclosure and sale. 

 

In so ruling, the Court noted in part that defendants' affidavits challenging corporate service specifically denied that service had been effectuated on an agent of the corporation and, moreover, that, because defendants based their challenge to the default judgment solely on lack of jurisdiction due to improper service, their petition for relief comprised a motion to quash service and thus did not need to satisfy the state procedural requirements for petitions for relief from judgment and was not barred by the related two-year limitations period.

 

The Court also concluded that the later sale of the property to a bona fide purchaser was secondary to the question whether the lower court had personal jurisdiction to effectuate its default judgment and order of foreclosure and sale.

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1122077.pdf

 

Plaintiff bank ("Bank") filed a mortgage foreclosure action against a corporate defendant ("Corporation") and two individual defendants (respectively, Lela and Berce) regarding commercial property located in Cook County, Illinois.  Corporation was the listed mortgagor on the property. 

 

Bank used a special process server ("SPS") to serve the summons and complaint through corporate service on an alleged agent of Corporation, substitute (abode) service on Berce, and through personal service on Lela.  Almost six months later, Bank moved for a default judgment of foreclosure against Defendants due to their failure to appear, answer, or otherwise respond to the complaint.  Bank attached affidavits of service signed by the SPS stating how service was accomplished and providing descriptions of the persons served. 

 

The lower court granted Bank's motion, entered a default judgment against the defendants and a judgment of foreclosure and sale, stating that it specifically found that all the defendants had been properly served with summons and complaint and that it had personal and subject matter jurisdiction.   Giving the defendants three months to redeem the property, the court also noted that the balance due on the loan was over $2 million and that the defendants could be personally liable for any deficiency. 

 

Over two years later, the defendants filed a petition for relief from the default and foreclosure judgments pursuant to Section 2-1401 of the Illinois Code of Civil Procedure, arguing that service in the foreclosure action had been improper.  The defendants attached to their petition the affidavits submitted by the SPS, as well as affidavits signed by the same SPS in another foreclosure action against the same defendants but on a different property.   The affidavits for the second foreclosure gave inconsistent physical descriptions of the persons served even though the SPS served the identical persons. 

 

The defendants also attached their own affidavits to their 2-1401 petition, asserting that the lower court's judgment of foreclosure was void due to lack of personal jurisdiction.   Citing significant inconsistencies and errors in the SPS's affidavits, the defendants asserted that they had not been served, that the person served as the Corporation's agent never acted in that capacity, and that the descriptions of the individuals allegedly served failed to match their physical characteristics, including gender.

 

In response, Bank submitted copies of the real estate contract for the sale of the property from Bank to a third party real estate developer and the recorded special warranty deed, arguing that the defendants were barred from seeking relief from the foreclosure judgment at such a late stage, because the property had been sold to a bona fide purchaser and their petition was untimely.  

 

The lower court denied the defendants' petition.  The defendants appealed.

 

The Appellate Court, although ruling that Bank properly served Berce and Lela, nevertheless reversed and remanded, finding that a question of fact remained as to the propriety of service on Corporation.   

 

As you may recall, Section 2-1401 of the Illinois Code of Civil Procedure allows a party to challenge a trial court's final judgment beyond 30 days of entry if there is a meritorious defense or claim, the party exercised due diligence in pursuing that claim before judgment, and exercised due diligence in pursuing the claim or defense after judgment.  735 ILCS 5/2-1401.  In addition, an action under Section 2-1401 must be filed no later than two years after the entry of the original order or judgment.  735 ILCS 5/2-1401(c).   See Malkin v. Malkin, 301 Ill. App.3d 303, 310 (1998). 

 

However, a petition challenging a void judgment in the nature of a motion to quash need not allege the elements of a meritorious defense or due diligence and may be brought at any time.  Sarkissian v. Chicago Board of Education, 201 Ill. 2d 95, 104-05 (2002) (noting that a section 2-1401 petition challenging a void judgment in the nature of a motion to quash does not need to allege the general elements of either a meritorious defense or due diligence, and may bring the petition at any time, even beyond the two-year limitations period under section 2-1401(c))("Sarkissian").

 

Applying Sarkissian to this case, and noting that the petition here was based solely on a lack of jurisdiction based on service of process, the Appellate Court treated the defendants' petition for relief as a motion to quash service, as they claimed that they were never served and that the lower court thus lacked personal jurisdiction over them.  Accordingly, the Appellate Court deemed as irrelevant to this case the general elements of a Section 2-1401 petition as well as the two-year bar.  See OneWest Bank, FSB v. Topor, 2013 IL App (1st) 120010, ¶¶12-15 (discussing motion to quash service vis-à-vis a section 2-1401 petition); Sarkissian, 201 Ill. 2d at 104-05. 

 

Next, in relying on its recent decision in Deutsche Bank National Trust Co. v. Brewer, 2012 IL App. (1st) 111213, the Appellate Court noted that a bona fide purchaser was not protected where the underlying foreclosure and sale orders were void due to lack of proper service on the mortgagor.   In so doing, the Appellate Court noted that this case presented a virtually identical fact pattern and legal argument, and thus focused on whether Bank adequately served each of the defendants in order to effectuate personal jurisdiction over them.

 

With regard to personal service, the Appellate Court noted that in the context of personal service, return of summons is prima facie proof of proper service, pointing out that the defendants here presented an "uncorroborated, incredibly brief affidavit stating conclusorily" that service was not complete and contradicting the physical description presented in the SPS's affidavit.  The Appellate Court thus concluded that the bare affidavit was insufficient to set aside the trial court's determination that Bank properly served Lela. 

 

As to substitute service, the Appellate Court ultimately concluded that the affidavits presented by the defendants in this case were insufficient to effectively attack substitute service, noting that the same presumption of validity in the context of personal service did not exist as to substitute service and that where there is no counteraffidavit responding to an affidavit challenging service, the challenging affidavit must be taken as true and the service of summons must be quashed.  State Bank of Lake Zurich v. Thill, 113 Ill.2d 294, 310 (1986)(noting that where service of the summons and complaint is accomplished via abode, i.e, substitute, service, the return or affidavit must affirmatively state that a copy of the summons was left at the usual abode with a family member over the age of 13, that the family member was informed of the content of the summons, and that the process server mailed a copy of the summons to the defendant at his usual place of abode).

 

In so ruling, the Appellate Court observed among other things that the affidavits were "unbelievably short," that the defendants simply asserted that they did "not believe" they received a summons in the mail, and that they never affirmatively rebutted any of the three elements of substitute service verified in the return.   Accordingly, the Appellate Court ruled that Bank properly served Berce via abode service and that the lower court properly entered the default judgment of foreclosure as to Berce.   

 

However, with respect to service on Corporation, the Appellate Court noted that when a corporation is sued, a return is not conclusive as to the fact of agency and that the purported agent must have had actual authority to accept service on behalf of the corporation. See Dei v. Tumara Food Mart, Inc.  406 Ill. App.3d 856, 862 (2010) (private corporation may be served by leaving a copy of the summons or complaint with its registered agent or any officer or agent of the corporation found anywhere in the state).  The Appellate Court thus pointed out that the defendants' affidavit challenging corporate service specifically due to a lack of agency called into question the issue whether the trial court had personal jurisdiction over Corporation.   Thus, in observing that the question of agency status for purposes of corporate service was an unresolved question of fact in this case, the Appellate Court also pointed out that a question arose as to whether the lower court had personal jurisdiction to effectuate its default judgment and order of foreclosure and sale, especially in light of the fact that Corporation was listed as the mortgagor of the property.

 

Accordingly, ruling that the lower court erred in denying the defendants' petition, the Appellate Court reversed and remanded so that the lower court could conduct an evidentiary hearing on the question of agency as to service on Corporation.

 

 

 

 

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: E.D. Va. Rejects Borrower's Attempt to Assert Private Right of Action Using National Mortgage Servicing Settlement

The U.S. District Court, Eastern District of Virginia, recently ruled that:

 

(1) a borrower had no enforcement rights under the national mortgage servicing settlement agreement and consent judgment between loan servicers and state attorneys general (National Mortgage Servicing Settlement), as she failed to overcome the presumption that individual borrowers are mere incidental beneficiaries of the settlement rather than the intended beneficiaries;

 

(2) the borrower failed to allege state-law breach of contract claims, arising from an implied covenant of good faith and fair dealing or violations of the National Mortgage Servicing Settlement, as the loan servicer had the express contractual right to foreclose and had no duty to facilitate a loan modification or to review her loan modification application in accordance with the servicing standards under the National Mortgage Servicing Settlement, because the settlement was not the "applicable law" at the time borrower obtained her home mortgage loan.

 

A copy of the opinion is attached.

 

Plaintiff borrower ("Borrower") obtained a home mortgage loan from defendant lender and servicer ("Servicer") that was secured by a deed of trust on her property.   Due to a reduction in income, Borrower applied to Servicer for a loan modification and was granted a temporary modification.   However, while Borrower's loan was still under review for a permanent modification, Servicer initiated foreclosure proceedings and scheduled a foreclosure sale.

 

Shortly before the scheduled foreclosure sale, Borrower filed a complaint in state court against Servicer and a law firm ("Law Firm") that Borrower incorrectly believed was the substitute trustee, seeking damages and a preliminary injunction enjoining Servicer from foreclosing prior to a "proper" loan modification review.  In her complaint, Borrower alleged in part that Servicer violated the March 2012 National Mortgage Servicing Settlement between the U.S. Department of Justice and state attorneys general ("Consent Judgment"), which sets forth mortgage servicing standards aimed at protecting homeowners from certain practices, such as "dual tracking."  Borrower also brought breach of contract claims under Virginia law based on a supposed implied covenant of good faith and fair dealing under the loan agreement and alleged violations of the servicing standards set forth under the Consent Judgment.

 

Removing the case to federal court, Servicer and Law Firm each moved to dismiss.  Borrower sought to remand the case back to state court, alleging that the federal court lacked subject matter jurisdiction.   The district court denied Borrower's motion to remand and dismissed her complaint.

 

Concluding that Law Firm was improperly named as a party in this case, and that the court thus had diversity jurisdiction, the District Court denied Borrower's motion to remand and granted Law Firm's motion to dismiss.  See, e.g., Monton v. America's Servicing Co., No. 2:11cv678, 2012 U.S. Dist. LEXIS 117259, at *13 (E.D. Va. Aug. 20, 2012); Correll v. Bank of America, N.A., No. 2:11cv477, 2012 U.S. Dist. LEXIS 12960, at *16-17 (E.D. Va. Feb. 2, 2012); Mayes v. Rapoport, 198 F.3d 457, 461 (4th Cir. 1999).

 

Next, the court addressed Borrower's assertion that Servicer was obligated to follow the mortgage servicing standards set forth in the Consent Judgment.  In so doing, the court explained that the Consent Judgment was essentially a contract between the parties and that, as a non-party to the contract, Borrower would become legally entitled to a benefit promised under the Consent Judgment only if the contracting parties so intended.  See Astra USA, Inc. v. Santa Clara County, 131 S. Ct. 1342, 1347 (2011); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 750 (1975); Bell v. Countrywide Bank, No.  2:11cv271, 2012 U.S. Dist. LEXIS 104728, at 7-8 (D. Utah July 26, 2012). 

 

Specifically, pointing out that the government acts in the interest of the general public rather than to benefit individual members of the public, the court explained that third parties to consent decrees are presumed to be mere incidental beneficiaries and must therefore "demonstrate that the contracting parties 'intended the third party to be able to sue to protect [the] benefit' the consent judgment conferred on the third party; it is not sufficient to show simply that the parties had some intent to benefit the third party."  Securities and Exchange Commission v. Prudential Securities, Inc., 136 F.3d 153, 158-59 (D.C. Cir. 1998).

 

Thus, in concluding that Borrower alleged no facts to show that individual borrowers were the intended beneficiaries under the Consent Judgment, and further noting that the Consent Judgment itself indicated that the parties thereto did not intend individual borrowers to be able to sue to protect the benefits it conferred, the court pointed out that the language in the Consent Judgment specified that "[a]ny enforcement action under this Consent Judgment may be brought by any Party to this Consent Judgment . . . ."  Ruling that Borrower was therefore not eligible to bring an enforcement action under the Consent Judgment, the court accordingly dismissed Borrower's claim as to Servicer's alleged "dual tracking."

 

Turning to Borrower's state-law breach of contract claims, the court rejected Borrower's assertions that Servicer breached the covenant of good faith and fair dealing under the loan agreement by failing to "properly review" her loan modification application and "properly service" her loan.  In so doing, the court noted that, although contracts governed by Virginia law contain an implied covenant of good faith and fair dealing, "when parties to a contract create valid and binding rights, an implied covenant of good faith and fair dealing is inapplicable to those rights" and will thus not prevent a party from exercising its explicit contractual rights.  See Ward's Equipment, Inc. v. New Holland North America, Inc., 493 S.E.2d 516 (Va. 1997); Virginia Vermiculite, Ltd. v. W.R. Grace & Co., 156 F.3d 535, 541-42 (4th Cir. 1998). 

 

Moreover, the court pointed out that the servicing standards set forth under the Consent Judgment did not apply at the time Borrower obtained her mortgage loan and thus did not govern the manner in which Servicer handled her loan modification application or the foreclosure proceedings.  Explaining that the deed of trust provided that all rights and obligations were subject to "applicable law," the court concluded that this provision referred only to then-existing law that applied directly to the contract.  See Condel v. Bank of America, N.A., 2012 U.S. Dist. LEXIS 93206, at *23-24 (E.D. Va. July 5, 2012).  Accordingly, the court concluded that Borrower could not assert a claim for breach of contract based on Servicer's alleged breach of the Consent Judgment.

 

Finally, the court also rejected Borrower's claim for breach of duty to mitigate damages, reasoning that failure to mitigate damages is an affirmative defense, not an independent cause of action and that Servicer had an express contractual right to foreclose.  The court also rejected Borrower's request for a preliminary injunction enjoining the foreclosure, because she failed to demonstrate that she was likely to succeed on the merits.

 

Accordingly, the court denied Borrower's motion to remand, granted the motions to dismiss, and dismissed Borrower's complaint in its entirety. 

 

 

 

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: 6th Cir Reverses Summary Judgment Against Borrower, Holding "Fraudulently Inflated Appraisal" May Have Proximately Caused Injury to Borrower

The U.S. Court of Appeals for the Sixth Circuit recently reversed the lower court's grant of summary judgment in favor of a mortgage broker, lender, appraiser, and others, ruling that a borrower alleged sufficient facts regarding loan origination fraud to raise genuine issues as to the proximate cause of his financial injuries in an action under the federal RICO and Kentucky law.  

 

In so ruling, the Court rejected the lower court's causation analysis that identified the high interest rate and terms of a negative amortization loan as the proximate cause of the borrower's injuries, rather than an allegedly false appraisal report that gave the illusion of substantial equity in the borrower's home.

 

A copy of the opinion is available at:  http://www.ca6.uscourts.gov/opinions.pdf/13a0117p-06.pdf.

 

Plaintiff borrower ("Borrower") obtained two mortgage loans on his home in order to use the proceeds of the cash-out to build an addition to his house.  One loan was a so-called option adjustable rate mortgage ("Option ARM") that gave Borrower the option of skipping principal payments and some of the interest for a certain number of years at the early stage of the loan repayment period.  Generally, under the terms of this type of loan, the unpaid balance is added to the body of the loan, potentially resulting in negative amortization, and a principal balance that potentially exceeds the value of the real estate used to secure the loan.  

 

To obtain the loan, Borrower met with defendant mortgage broker ("Broker") who arranged for an appraisal on Borrower's home.  The appraiser that Broker used allegedly valued Borrower's home at twice the amount Borrower had paid to purchase the home, even though the house was allegedly worth much less.  Based on the purported value of the home, Borrower qualified for a $500,000 loan, but Borrower declined, given his desire to borrow just enough to build the addition to his home and to refinance the two mortgages.   Nevertheless, Broker and Borrower eventually agreed on a loan for a lower amount, and Broker submitted the loan application to defendant mortgage lender ("Lender"), which Lender approved primarily on the basis of the allegedly inflated appraisal. 

 

Eventually, Borrower was unable to keep up with the payments on the refinance loan which had increased due in part to the adjusting interest-rate feature of the loan.  With the house being worth much less than the appraisal had indicated and there being no equity in the home, Borrower declared bankruptcy and lost his home, allegedly because he was unable to sell his home at a price at which he could repay the loan. 

 

Borrower filed a lawsuit in federal court, alleging claims under the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), Truth in Lending Act ("TILA"), and Real Estate Settlement Procedures Act ("RESPA"), as well as under Kentucky law for breach of contract, fraud, breach of fiduciary duty, and conspiracy.   Seeking relief from the adjustable-rate mortgage, Borrower alleged that the defendants had engaged in a conspiracy, with the allegedly misleading appraisal at its center, to commit fraud in order to generate higher fees. Borrower alleged that the unfavorable terms of the Option ARM were never fully disclosed to him and that he suffered financial harm as a result of the alleged conspiracy to defraud him. 

 

Broker and Lender both moved for summary judgment, which the lower court granted as to Borrower's RICO claims, the TILA claim, and the state law conspiracy claim.   The lower court denied the motions as to the rest of the claims and ordered the parties to mediation, which produced a settlement agreement under which Borrower prevailed on the RESPA claim and the other claims were dismissed with prejudice, but not released. 

 

Borrower appealed, challenging the lower court's grant of summary judgment as to his RICO claims and his state-law conspiracy claim.  The Sixth Circuit reversed in part and affirmed in part. 

 

As you may recall, RICO provides a private cause of action for "[a]ny person injured in his business or property by reason of a violation of" one of RICO's four criminal provisions and makes it illegal for an enterprise to engage in "racketeering activity," as defined by predicate acts including mail and wire fraud.  See 18 U.S.C. § 1964(c), § 1962(c).  In addition, RICO makes it illegal "for any person to conspire to violate any" of RICO's other criminal provisions.  18 U.S.C. § 1962(d). 

 

Similarly, under Kentucky law, a plaintiff must prove "an unlawful/corrupt combination or agreement between the alleged conspirators to do by some concerted action an unlawful act."  James v. Wilson, 95 S.W.3d 875, 897 (Ky. Ct. App. 2002).

 

Focusing on whether the allegedly fraudulent appraisal was the proximate cause of the harm Borrower suffered, the Sixth Circuit addressed Borrower's contention that the lower court erred in finding that his financial injuries were unrelated to the allegedly inflated appraisal, but resulted instead from the high interest rate and unfavorable terms of the refinance loan.   See Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 265-68 (1992)(ruling that a plaintiff must plead and prove that the predicate acts alleged "not only [were] a 'but for' cause of his injury, but [were] the proximate cause as well."). 

 

In so doing, the Sixth Circuit addressed the elements of "directness," "foreseeability," and whether the causal connection between the injury and conduct was logical and not merely speculative, and stressed that the appropriate inquiry in this case was not whether Borrower actually relied on the allegedly inflated appraisal, but whether the fraudulent scheme furthered by the appraisal proximately caused his financial injuries.  Holmes, 502 U.S. at 268; Hemi Group, LLC v. City of New York, 130 S. Ct. 983, 989 (2010); Perry v. American Tobacco Co., Inc., 324 F.3d 845, 850-51 (6th Cir. 2003); Trollinger v. Tyson Foods, Inc., 370 F.3d 602, 614-15 (6th Cir. 2004). 

 

Applying the "directness" standard and noting Borrower's allegations that:  (1) Broker and the appraiser produced and sent through the mail a false appraisal of his home that inflated its value by over $100,000 to secure the high-interest loan; (2) the appraisal created the illusion that there was substantial equity in the home against which Borrower could borrower; (3) based on that illusion, Broker was able to convince Borrower to enter into the loan agreement; (4) the terms of which were not fully disclosed; and (5) the accruing interest and increasing balance on the loan caused Borrower to suffer financial injuries, the Court concluded that Borrower established a question of fact regarding causation, as it was "able to trace a straight line between the alleged fraud and the asserted injury."  

 

Similarly, under the "proximate-cause" standard, which considers the foreseeability of the harm suffered and whether Borrower's theory of causation was "illogical or speculative," the Sixth Circuit concluded that Borrower raised a genuine issue of material fact in showing a connection between the alleged scheme to create an illusion of equity and the decision to obtain the Option ARM.  

 

Taking the lower court to task for reaching the opposite conclusion as to causation, the Sixth Circuit noted among other things that the high interest rate and unfavorable terms that the lower court cited as the cause of Borrower's injuries were "more properly viewed as components of the alleged injuries rather than the proximate cause of such" and, further, that the appraisal was "a substantial factor in the sequence of responsible causation."  See Cox v. Administrator U.S. Steel & Carnegie, 17 F.3d 1386, 1399 (11th Cir. 1994).

 

With regard to Borrower's state-law civil conspiracy claim, the Court noted that the claim consisted of two parts: (1) the alleged agreement between Broker and its principals to manufacture the false appraisals and (2) the alleged agreement between Broker and Lender to provide unlawful "kickbacks" in the form of yield spread premiums.  

 

As to the first part, the Sixth Circuit disagreed with the lower court's conclusion that Borrower failed to show that the appraisal caused his injuries, thus ruling that Borrower had raised a sufficient question of fact as to causation to survive a motion for summary judgment.   With respect to the second part, noting that the lower court did not rely "on its faulty proximate cause analysis," the Court agreed with the lower court that Borrower presented no evidence to establish that Lender and Broker agreed to commit an unlawful act, explaining that there was no indication of an illicit agreement between them, or any relationship other than within the context of the formal loan application process and payment of yield spread premiums. 

 

Accordingly, the Sixth Circuit reversed as to the causation issue, but affirmed the lower court's grant of summary judgment in favor of Lender on the state-law conspiracy claim.

 

 

 

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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Our updates are available on the internet, in searchable format, at:
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