FYI: 1st Cir Rules RI Fed Ct's "Stay" on Some 700 Foreclosures Improper

The U.S. Court of Appeals for the First Circuit recently ruled that various Rhode Island federal court orders imposing a "stay" on mortgage foreclosures and eviction proceedings were actually preliminary injunctions under Federal Rule 65, and as such required defaulted mortgagors to show the likelihood of prevailing on their claims that MERS and other mortgagees lacked authority to assign mortgages and foreclose under Rhode Island law.  

 

Due to the volume of affected cases and in "belated compliance" with Rule 65(a)(1), the Court of Appeals remanded to determine whether the injunctions should remain in effect, and to establish specific time and expense limits on the ongoing court-ordered mediation in the pending actions challenging the foreclosures. 

 

A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/12-1526P-01A.pdf.

 

Plaintiffs, defaulted residential mortgage borrowers ("Borrowers"), filed suit to prevent foreclosure of their property or to avoid eviction, arguing that Mortgage Electronic Registration Systems, Inc. ("MERS") and other mortgagees (collectively, "Defendants") allegedly lacked authority to foreclose under Rhode Island's non-judicial foreclosure scheme.  The cases, numbering almost 700, were either filed in or removed to federal court.  In two of the cases, a magistrate recommended dismissal, reasoning that Borrowers lacked standing to challenge Defendants' assignments of the original mortgagees' interests.  The lower court, not having acted on the magistrate's recommendation in the two cases, put all the pending cases on a Foreclosure Docket established to manage the large number of cases.

 

The lower court also appointed a Special Master to handle mandatory mediation intended to resolve Borrowers' cases challenging the foreclosure actions against them, and issued orders imposing a "stay" on the foreclosure and eviction proceedings, but failed to set time and cost limitations on the court-ordered mediations. 

 

Although the stay orders did not at first expressly prohibit Defendants from initiating non-judicial foreclosures, when one of the Defendants attempted to do so in one of the cases on the Foreclosure Docket, the lower court issued an order continuing the stay in all the cases on the Foreclosure Docket, thus preventing Defendants from foreclosing on any of the properties that were the subject of pending cases on the docket.

 

In their interlocutory appeal and petition for mandamus, Defendants argued that the lower court's stay orders were in fact in the nature of a preliminary injunction, and thus required notice and hearing and, in addition, that the lower court erred in failing to set time and cost limits when referring the cases to mandatory mediation.

 

Agreeing with Defendants, the First Circuit concluded in part that the "stay" was a preliminary injunction that failed to satisfy Rule 65, and accordingly remanded for a hearing on whether Borrowers had a substantial likelihood of prevailing in the pending actions to justify continuing the mediation order.

 

As you may recall, Federal Rule of Civil Procedure provides that a preliminary injunction may be imposed "only on notice to the adverse party," and requires a hearing and findings that the party seeking the injunction has a substantial likelihood of success in the pending action, and would suffer irreparable harm in the absence of the injunction.  Fed. R. Civ. Pro. 65. 

 

Having concluded in part that it had jurisdiction to hear the appeal in this case because, despite its label as a "stay," the order was actually an injunction, the First Circuit focused on Borrowers' likelihood of successfully challenging the foreclosures.  In so doing, the Court noted that the so-called "stay" actually prohibited Defendants from exercising their statutorily authorized non-judicial foreclosure powers, that the lower court had threatened to impose sanctions for violations of its order, and that the lower court never established a cut-off for completion of the mediation process. 

 

Moreover, citing the "close concordance of the injunction and the mediation order," the First Circuit also concluded that it had pendant jurisdiction over Defendants' appeal concerning the lack of time and expense limits on the mandatory mediation of the foreclosure cases, noting that the injunction effectively operated to keep the mediation alive and to allow Borrowers to remain in their mortgaged properties indefinitely.  

 

The First Circuit concluded that both the mediation order and the injunction suffered from error.  Specifically, the Court first pointed out that Defendants were not provided formal notice, and that Borrowers had not demonstrated in hearings their likelihood of success in challenging the foreclosures.  In so doing, the First Circuit rejected Borrowers' assertions that Defendants had the opportunity for hearings, observing that the lower court expressly instructed the Special Master to avoid the issue common to all parties of jurisdictional standing to challenge the foreclosures. 

 

Second, the Court also noted that the mandatory mediation failed to conform to the standard of reasonable trial court discretion, in that there were no prospective limits placed on the period during which mediation must be completed or on the costs to which parties may be subjected.  See In Re Atl. Pipe Corp., 304 F.3d 135 (1st Cir. 2002).

 

Bearing in mind that, given the size of the Foreclosure Docket, simply vacating the injunction and mediation orders would create chaos for the lower court,  the First Circuit opted to "tolerate the status quo long enough to give the parties time to plan for contingencies." 

 

Accordingly, the First Circuit remanded to allow the lower court to correct errors in failing to comply with Rule 65's notice, hearings, and findings requirements, stressing that Borrowers' bore the burden of demonstrating probable success as a condition of continuing the injunction against the foreclosures.  The Court further instructed the lower court to set time and cost limits for any remaining cases that go through the court ordered mediation.

 

 

 

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

 

Admitted to practice law in Illinois

 

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FYI: Oregon Sup Ct Rules MERS "May" Have Authority to Assign Trust Deed and to Foreclose, Provides Other Rulings Under OTDA

In related rulings in two different cases, the Supreme Court of the State of Oregon recently held that, under the Oregon Trust Deed Act ("OTDA"),

 

(1) MERS cannot be a beneficiary under a trust deed, as it is not the lender to whom the obligation that the trust deed secures is owed;

 

(2) Nor can MERS be conveyed "legal title" in a trust deed, because it was not conveyed the beneficial right to repayment;

 

(3) The OTDA's recording requirement does not apply to assignments of trust deeds by operation of law; and

 

(4) Although the OTDA does not allow MERS to hold and transfer "legal title" to a trust deed, it may have authority to act on behalf of the beneficiary if it can demonstrate that it had a sufficiently expansive agency relationship.

 

A copy of the opinion in Brandrup, et al. v. Recontrust Company, N.A., et al., is available at: http://www.publications.ojd.state.or.us/docs/S060281.pdf.

 

A copy of the opinion in Niday v. GMAC Mortgage, LLC, et al., is available at: http://www.publications.ojd.state.or.us/docs/S060655.pdf.

 

In Brandrup, the Oregon Supreme Court considered four certified questions of law from a U.S. district court.  The questions all related to the practice of drafting mortgages and trust deeds that identify Mortgage Electronic Registration Systems, Inc. ("MERS"), as "mortgagee" or "beneficiary" rather than the lender, a practice which, has come "under scrutiny" in a number of foreclosures cases arising under the Oregon Trust Deed Act ("OTDA").  In each case considered in Brandrup, the borrowers had signed a promissory note pledging to repay the money borrowed, plus interest, and a deed of trust – also referred to as a trust deed – which secured payment of the note and other related promises.  In relevant part, each trust deed stated:

 

The beneficiary of this Security Instrument is MERS (solely as nominee for Lender and Lender's successors and assigns) and the successors and assigns of MERS.  This Security Instrument secures to Lender: (i) the repayment of the Loan, and all renewals, extensions and modifications of the Note, and (ii) the performance of Borrower's covenants and agreements under this Security Instrument and the Note… Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property, and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.

 

As recounted by the Oregon Supreme Court in Brandrup, following the borrowers' defaults, MERS executed a written assignment of the trust deed to the "reputed ultimate successor in interest of the original lender," and recorded that assignment in the land records.  Then, the assignees appointed a trustee, such assignment also being recorded, and initiated the nonjudicial foreclosure process under the trust deeds.  In each case, borrowers sought to enjoin foreclosure, claiming that (1) the requirement under the OTDA that any assignment of a trust deed by the "beneficiary" be recorded had not been satisfied; and that (2) MERS's "purported" assignment of the trust deed was ineffective, because "the principal for whom MERS purported to act as 'beneficiary' did not hold plaintiff's loan at that date."

 

The OTDA provides a nonjudicial alternative to the foreclosure process, meaning that lenders, or their successors in interest, could exercise their right to sell the property to satisfy the borrower's obligation without filing suit.  See ORS 88.010 (except as otherwise provided by law, lien upon real property shall be foreclosed by a suit).  Nonjudicial foreclosure under the OTDA is only available when a home loan is secured by a trust deed, which "conveys an interest in real property to a trustee in trust to secure the performance of an obligation the grantor or other person named in the deed owes to a beneficiary."  ORS 86.705(7).  So long as certain conditions are satisfied, the trustee appointed under a trust deed may advertise and sell the property to the highest bidder without judicial involvement.  See ORS 86.710; ORS 86.755.

 

One such condition, which was considered at length by the Oregon Supreme Court, involved the recording of "[t]he trust deed, any assignments of the trust deed by the trustee or the beneficiary and any appointment of a successor trustee in the mortgage records of the counties in which the property described in the deed is situated."  ORS 86.735(1).  The Court recognized that, although mortgages may be "assigned by an instrument in writing," ORS 86.060, they have also been held to "follow" the promissory notes that they secure, such that "by operation of law," the sale or transfer of the note effects an equitable transfer of the mortgage.  See Bamberger v. Geiser, 24 Or. 203, 206-07 (1893).  Although recording a mortgage or trust deed assignment is not required to make the transfer legally effective between the parties, it is "necessary and desirable" for protecting an assignee's interest under the security instrument against a purchaser in good faith for valuable consideration.  See ORS 93.640; Williamette Col. & Credit Serv. V. Gray, 157 Or. 77, 83 (1937).  However, as stated by the Court, the recordation of a trust deed assignment "by the trustee or the beneficiary" is required before the nonjudicial foreclosure procedures of the OTDA may be invoked.  ORS 86.735(1).

 

In response to the four certified questions of law presented, the Oregon Supreme Court came to the following conclusions:

 

First, the Oregon Supreme Court held that, for the purposes of ORS 86.735(1), the "beneficiary" is the "lender to whom the obligation that the trust deed secures is owed," precluding an entity like MERS, which is not a lender, from being a trust deed's "beneficiary" unless it is the lender's successor in interest.  In so holding, the Court considered the statutory definition of "beneficiary" as a person "named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given."  ORS 86.705.  According to the Court, the OTDA contemplates a "unitary beneficiary status," such that the person with the right to repayment of the underlying obligation also controls the foreclosure process, which would be undermined by permitting another party to act as agent or nominee.

 

Although the lender defendants argued that, under the statute, parties to a trust deed could "name" or "designate" whomever they choose to serve as beneficiary, the Court disagreed that the designation of a beneficiary is "purely a matter of contract."  It stated that the resolution of this question did not hinge on the parties' intent but on legislative intent, which cannot be altered by agreement.  See e.g. Ocean A. & G. Corp., Ltd. v. Albina M.I. Wks., 260 P. 229 (1927).

 

Second, the Oregon Supreme Court held that, because MERS was not conveyed the beneficial right to repayment, the provision that MERS holds "legal title" in the trust deed and may exercise rights under it does not alter the trust deed's designation of the lender as beneficiary or make MERS eligible to serve in that capacity.  The lender defendants argued that, by defining MERS as the beneficiary "acting solely as a nominee for Lender and Lender's successors and assigns," the trust deed clearly convey an intention that MERS act as agent for the lender or its successors.  In response, the Court noted that, while the lender defendants support MER's authority to exercise all of lender's rights and interests, "the trust deed fails to speak to the one interest that an entity must have to qualify as a beneficiary under [the OTDA]."  The Court reiterated that the beneficiary is the person to whom the obligation that the trust deed secures is owed.  ORS 86.705(2).  As interpreted by the Oregon Supreme Court, the trust deed does not convey to MERS the beneficial right to repayment of the secured obligation, thereby making MERS ineligible to serve as beneficiary.

 

Third, the Oregon Supreme Court was asked whether assignments "by operation of law" – where the promissory note is transferred and the mortgage follows – are included in the statutory recording requirement of ORS 86.735(1).  Although the Court noted the text of the OTDA was "not conclusive" with respect to this issue, the Court found it significant that the recording requirement in ORS 86.735 assumes the existence of an assignment in recordable form, and that the transfer of a promissory note cannot serve that function.  Considering the state of Oregon law at the time that the OTDA was enacted, the Court found that "assignments of the trust deed" under ORS 86.735 mean "written assignments that are executed and acknowledge… not a post hoc memorialization of a transfer of the secured obligation created solely for the purpose of recording."  See Barringer v. Loder, 47 Or. 223, 230 (1905).  Therefore, the Oregon Supreme Court held that the OTDA's recording requirement does not require recordation of assignments of trust deeds by operation of law.

 

Fourth, when asked whether the OTDA allows MERS to retain and transfer legal title to a trust deed as nominee for the lender after the note has been transferred, the Oregon Supreme Court split its analysis into two parts.  As an initial matter, the Court held that the OTDA does not allow MERS to hold and transfer "legal title" to a trust deed.  The logical interpretation of the OTDA, according to the Court, is that the trustee holds legal title to the lien conveyed by the trust deed and the beneficiary holds equitable title to that lien.  As the Court had already established that MERS is neither trustee nor beneficiary, MERS holds "no interest at all in the lien conveyed by the trust deed."

 

However, the Oregon Supreme Court was unable to determine whether MERS may nevertheless have authority as an agent for the original lender and its successors to act on their behalves with respect to a transfer of interest under a trust deed.  The lender defendants argued in the alternative that MERS had authority as an agent of the original beneficiary and any successor to take the steps required to carry out the nonjudicial foreclosure process.  However, the Court found that the accuracy of that assertion depends on whether MERS qualifies as an agent under Oregon law.  See Vaughn v. First Transit, Inc., 346 Or. 128, 136 (2009) (defining the agency relationship in Oregon).  Furthermore, the Court held that the trust deeds themselves do not establish the necessary relationship and that the agency relationship depends on "evidence with respect to who ultimately holds the relevant interests in the notes and trust deeds, and whether that person and each of its predecessors in interest conferred authority on MERS to act on their behalves in the necessary respects."  Finding such evidence not present in the record, the Oregon Supreme Court was unable to determine whether MERS acted with authority as an agent of the lender and its successors in interest.

 

In Niday, the Oregon Supreme Court applied its answers in Brandrup to a dispute that came before it on appeal.  Similar to Brandrup, Borrower sued MERS, their lender, and others, arguing that no defendant had a legal or beneficial interest in the trust deed that would allow it to proceed to foreclosure under the OTDA.  The trial court granted Defendants' motion for summary judgment and the Oregon Court of Appeals reversed.  Finding a genuine issue of material fact to exist, albeit a different on from the Court of Appeals, the Oregon Supreme Court affirmed.

 

The Oregon Supreme Court's holdings in Niday were substantially similar to its conclusions in Brandrup.  Ultimately, the Court found that an issue of fact remained as to whether MERS had authority to act for the lender's successors in interest.  According to the Court, even if MERS lacks authority to act as beneficiary, it may have authority to act on behalf of the beneficiary if it can demonstrate that it had an agency relationship with the beneficiary that is "sufficiently expansive." 

 

Although in Brandrup the Court addressed discussed that possibility that MERS would have authority to assign a trust deed, the Court held the same reasoning "would seem to apply equally" to the issue of MERS's authority to foreclose the trust deed. "In either case, MERS' authority to act as the beneficiary's agent depends on who succeeded to the lender's rights, whether those persons manifested consent that MERS act on their behalf and subject to their control, and whether MERS has agreed to so act."

 

Accordingly, in Niday, the Oregon Supreme Court affirmed the decision of the Court of Appeals, reversing the trial court's judgment and remanding the case for further proceedings.

 

 

 

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

 

Admitted to practice law in Illinois

 

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FYI: 2nd Cir Rejects Borrower's Arguments of Equitable Estoppel, "Good Faith and Fair Dealing," and General Principles of Equity

Reversing the lower court, the U.S. Court of Appeals for the Second Circuit recently ruled that a developer borrower was unable to rely on equitable estoppel, general principles of equity, or the covenant of good faith and fair dealing to prevent the bank from demanding payment of the interest and attorney fees, partly because the bank had not waived its right to payment through its course of conduct.  

 

In so ruling, the Court reasoned that:  (a) the developer could not demonstrate that it reasonably relied to its detriment on any alleged misrepresentations that the bank would not require payment of the accrued interest;  (b) the bank's course of conduct was consistent with the express terms of the loan agreement;  (c) the developer's failure to meet time-is-of-the-essence deadlines resulted in breach of a material term of the loan agreement; and  (d) the collection of the accrued interest was a "debt" under the terms of the loan agreement entitling the bank to attorney fees. 

 

A copy of the opinion is available at:  Link to Opinion.

 

Plaintiff real estate developer ("Developer") entered into a subordinated loan agreement with a lender for the construction of a residential building located in New York City.  Following defendant bank's ("Bank's") assumption of the loan, Developer defaulted on the loan, owing Bank $20.7 million in principal and over $10 million in interest.  As a result of multiple defaults, Bank and Developer modified the loan agreement a number of times, each time expressly waiving Developer's prior defaults, setting a new maturity date with the option to extend, and defining as "events of default" the failure to obtain an occupancy certificate for a penthouse unit and the failure to substantially complete the development project by specific future dates.

 

The modified loan agreements also contained certain new provisions including an "Accrued Interest Waiver," an "Affiliate Purchase Right," and a "Lockbox Agreement."  The Accrued Interest Waiver had the effect of, among other things, freezing interest at the $10 million amount, provided there were no future defaults on the loan.  The Affiliate Purchase Right provision permitted Developer or its affiliates to purchase certain units in the building in order to avoid a default and foreclosure.  Finally, the Lockbox Agreement allowed proceeds from the sale of units to be distributed in a specified priority such that Bank's loan would be paid in full, then Developer would recover its equity investment, and any remaining proceeds would be distributed on a 50-50 basis between Developer and Bank. 

 

Developer subsequently defaulted on the modified loan agreement in part by failing to obtain an occupancy certificate for the penthouse and to substantially complete the project on time.   Bank then notified Developer that Bank was reserving all its rights and remedies, and informed Developer that its willingness to extend the maturity date was not a waiver or modification of Bank's entitlement to the accrued interest. 

 

Developer eventually exercised its right to purchase the remaining units with a loan obtained from a different lender.  However, the proceeds from the sale of the units did not cover Developer's equity.  Bank, therefore, was unable to receive any profits under the profit sharing provision of the Lockbox Agreement.  In response to Developer's purchase of the units, Bank again indicated in part that Bank was not required to waive payment pursuant to the Accrued Interest provision. 

 

Having obtained a loan from a different lender to cover the payment due to Bank, Developer, under protest, paid Bank $370,000 in attorney fees as well as the remaining $4.1 million in principal plus roughly $4.5 million in accrued interest, claiming that Bank had waived the accrued interest partly by failing to immediately provide notice of the events of default and waiting too long to inform Developer that the accrued interest payment was required. 

 

Developer filed suit in federal court, alleging that it was entitled to the return of the accrued interest and attorney fees, and that it was also entitled to damages consisting of the funds it borrowed to cover the payment to Bank.  Seeking a declaratory judgment, bank counterclaimed, arguing that it was entitled to the accrued interest and attorney fees under the express terms of the loan agreement, and that it was not liable for damages. 

 

The lower court determined that equity required Bank to return the accrued interest and attorney fees and that Bank was liable for damages.  Bank appealed.

 

The Second Circuit reversed, concluding in part that under the express terms of the loan agreement, Bank was entitled to accrued interest and fees, and that Bank never waived its rights to those funds.

Addressing whether equitable estoppel, principles of good faith and fair dealing, or general principles of equity prevented Bank from keeping the accrued interest, the Appellate Court concluded that the district court's analysis was faulty in several respects. 

 

First, the Court ruled that Developer could not rely on equitable estoppel to recover the accrued interest because Developer was unable to demonstrate that it had reasonably relied to its substantial detriment on a concealment or misrepresentation of Bank.  In so ruling, the Second Circuit rejected Developer's contention that Bank had committed an act of concealment by not notifying Developer immediately that events of default had occurred and that payment of the accrued interest was required.    See General Electric Capital Corp. v. Armadora, S.A., 37 F.3d 41, 45 (2d Cir. 1994)(setting out four elements of equitable estoppel:  an act of concealment or misrepresentation; intention or expectation that such act will be relied upon; knowledge of true facts by wrongdoers; and reliance on misrepresentation causing innocent party to detrimentally change position). 

 

Noting that silence does not give rise to a claim of equitable estoppel when there is no duty to speak, the Second Circuit pointed out that under the terms of the loan agreement, an event of default automatically existed upon the occurrence of a described default, and that Bank had no duty under the loan agreement to accept any cures or to provide notice of its intention to collect interest.

 

Further, partly acknowledging that any written agreement can be modified by a course of actual performance, and that the loan agreement here expressly provided that Bank could waive any conditions or obligations, the Appellate Court also concluded among other things that:   (1) Bank's course of performance was consistent with the written loan agreement because, whenever Bank waived provisions of the loan agreement, it reserved all other rights and expressly stated that the waiver of events of default had no effect on Bank's right to collect the accrued interest;  (2) Developer's reliance on monthly statements and communications from Bank's loan servicer was unreasonable, given its expertise in real estate development and that the plain language of the loan agreement specified when an event of default had occurred; and  (3) Developer was not induced to detrimentally change its position in justifiable reliance on any alleged concealment on Bank's part, because Developer had an existing legal duty to perform under the agreement, and the modifications to the loan agreement occurred prior to the alleged concealment period.

 

Second, with respect to the covenant of good faith and fair dealing, the Appellate Court, disagreeing with the lower court, concluded that the doctrine was not implicated here, as Developer failed to demonstrate that Bank had violated an expected obligation.  See Thyroff v. Nationwide Mutual Ins. Co., 460 F.3d 400, 407-08 (2d Cir. 2006)(breach of implied covenant requires a direct violation of "an obligation that may be presumed to have been intended by the parties.").  Taking into account such factors as the express language of the loan agreement, Bank's previous written waivers, and the contractual terms limiting the effect of such waivers, the Second Circuit ruled that Developer had no reasonable basis to expect that Bank would forgo its right to collect the accrued interest.

 

Third, turning to general principles of equity, the Second Circuit also rejected the lower court's conclusion that the events of default were only technical in nature and that Developer's obligation to pay accrued interest was thus an improper "forfeiture."  See Fifty States Mgmt. Corp. v. Pioneer Auto Parks, 46 N.Y.2d 573, 576-77 (1979)(ruling that equity operates to "prevent a substantial forfeiture occasioned by a trivial or technical breach.").  In so doing, the Court pointed out in part that the agreement contained a time-is-of-the essence clause which rendered the deadlines material, and that Developer's failure to meet those deadlines resulted in the contracted-for financial consequence of having to pay the accrued interest.  The Court stressed that neither Developer nor the lower court could "re-write the contract to impose its own definition of materiality."

 

Finally, as to the attorneys' fees, the Second Circuit observed that the lower court was incorrect in finding that the fees provision did not apply to the Bank's counterclaim for the accrued interest, reasoning that interest was included in the agreement's definition of "debt," and that Bank's counterclaim was thus in connection with its collection of a debt, and moreover that the attorney fees were properly incurred in connection with Bank's protection of its rights and remedies under the loan agreement.

 

Accordingly, the Second Circuit reversed as to the accrued interest, liability for damages, and attorneys' fees, and remanded for a determination as to  the amount of attorneys' fees Developer owed Bank.

 

 

 

 

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

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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FYI: Ill App Ct Rejects Borrower's Challenge to Foreclosure Based on Failure to Register under Illinois Collection Agency Act

The Illinois Appellate Court, First District, recently upheld a lower court's order denying a borrower's motion to challenge service and vacate the trial court's entry of default judgment and judgment of foreclosure against the borrower.

 

In so ruling, the Court held that:  (1) a party submits to the court's personal jurisdiction by filing an untimely answer; and  (2) that Illinois Collection Agency Act does not apply to banks and their affiliates and subsidiaries. 

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1121700.pdf

 

The mortgagee filed its foreclosure complaint against the borrower following the borrower's failure to make timely payments.  The mortgagee served the complaint on the borrower, but the borrower failed to appear or to file an answer.  Accordingly, the mortgagee filed a motion for default judgment. 

 

Over eight months after filing its complaint, the borrower appeared, for the first time, in person at the hearing on the mortgagee's motion for default judgment.  The borrower requested an extension of time to answer the complaint, and the court allowed the borrower nearly another month in which to file his answer.  The borrower failed to file an answer within the extended period allowed by the court.  Nevertheless, the trial court again provided an extension for the borrower to file an answer. 

 

The borrower failed to file an answer within this second extension time period, and the trial court entered a default judgment against the borrower, over ten months after the filing of the complaint by the mortgagee.  Subsequent to but on the same day as the default judgment was entered, the borrower filed a pro se general appearance and verified answer to the mortgagee's complaint, but did not challenge the propriety of service of process. 

 

Approximately nine months after the entry of default, the property was sold at judicial sale with the mortgagee being the highest bidder.  The sale was approved by the court. 

 

A year and a half after the filing of the mortgagee's complaint, and approximately one year after the mortgagee's motion for default judgment was filed, the borrower filed a motion to quash service and to vacate the default judgment. 

 

The borrower presented two arguments: 1) that the court lacked personal jurisdiction over the borrower due to an alleged defect in the service of the complaint; and 2) that the foreclosure judgment and final order approving the foreclosure sale were void as the mortgagee was not a registered debt collector as required by the Illinois Collection Agency Act ("ICAA"), 225 ILCS 425/1 et seq. 

 

The mortgagee argued that no defect in the service existed, and that the borrower waived any objections to the court's jurisdiction by the filing of its answer without also challenging the service of process or the court's exercise of personal jurisdiction over him.

 

Additionally, the mortgagee argued that it was exempt from the requirements of the ICAA, as it was a subsidiary of a bank. 

 

After a hearing and oral arguments on the borrower's motion, the trial court agreed with the mortgagee and denied the borrower's motions. 

 

The borrower appealed the court's decision, arguing that the trial court erred by: 1) not vacating the default judgment for improper service, based on waiver when only a pro se answer had been filed, and  2) not vacating the default judgment, because the mortgagee failed to register as required by the ICAA.

 

In addressing whether the borrower waived any impropriety as to service of process, the Appellate Court relied upon the section 5/2-301(a) of the Illinois Code of Civil Procedure, which provides that a party objecting to jurisdiction based upon insufficient process "waives all objections to the court's jurisdiction" by filing the a responsive pleading or motion prior to challenging service.  735 ILCS 5/2-301(a-5).  Following a plain reading of this statute, the Appellate Court held that the borrower's filing of an answer without raising any objection therein to the court's jurisdiction constituted a waiver of any objection to service. 

 

The Appellate Court rejected the borrower's argument that no waiver occurred due to the fact that the pro se answer was ineffective in preventing the default judgment, and noted that the argument had no basis in the case law or in the statute. 

 

As to the borrower's argument under the ICAA, the Appellate Court concluded that the plain language of the statute provided a clear answer.  The ICAA provides that it does not apply to "banks, including trust departments, affiliates, and subsidiaries thereof, fiduciaries, and financing and lending institutions (except those who own or operate collection agencies)."  225 ILCS 425/2.03. 

 

Prior to arriving at its decision, the Appellate Court engaged in a lengthy analysis of whether or not mortgage foreclosures were considered "debt collection" under the ICAA.  Finding no applicable Illinois decisions on point, the Appellate Court surveyed the case law interpreting the federal Fair Debt Collection Practices Act ("FDCPA"). 

 

The Appellate Court cited favorably to the majority of federal courts which had decided that the FDCPA does not apply to foreclosure actions.  However, the Appellate Court concluded that the FDCPA did not provide a perfect analogy based upon different definitions of "debt collector"   in the two different statutes.

 

Instead, the Appellate Court noted an "almost identical" corollary for the ICAA in California's "Rosenthal Act," Cal Civ. Code § 1788.2.  The Appellate Court made note of the fact that California courts interpreting and applying the Rosenthal Act have held that the foreclosure of property pursuant to a deed of trust is not debt collection. 

 

Notwithstanding its thorough analysis, the Appellate Court ultimately determined that it need not decide the issue of whether foreclosure activity constitutes "debt collection" under the ICAA, as it was clear that the ICAA did not apply to the mortgagee.

 

Accordingly, the Appellate Court upheld the trial court's ruling. 

 

 

 

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

 

Admitted to practice law in Illinois

 

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FYI: Florida Enacts Extensive Changes to Its Foreclosure Laws

As widely reported, Florida recently enacted extensive changes to its foreclosure laws. 

 

The text of the new legislation (CS/CS/HB 87, now Chapter No. 2013-137) is available at:

 

http://laws.flrules.org/2013/137

 

Among other things, the changes include:

Actions to Enforce Deficiency (Sections 95.11, 702.06, F.S.).  The statute of limitations for actions for a deficiency judgment on a residential foreclosure action is now 1 year from the day after the foreclosure certificate is issued by the court, or the day after the mortgagee accepts a deed in lieu of foreclosure.  In addition, for owner-occupied residential property, the amount of the deficiency may not exceed the difference between the judgment amount, or in the case of a short sale, the outstanding debt, and the fair market value of the property on the date of sale.

 

Pleading Standing (Section 702.015, F.S.).  For residential foreclosures, the complaint must plead the plaintiff's standing to foreclose.  For all foreclosures, "the complaint shall describe the authority of the plaintiff and identify, with specificity, the document that grants the plaintiff the authority to act on behalf of the person entitled to enforce the note."  In addition, for all foreclosures, "[i]f the plaintiff is in possession of the original promissory note, the plaintiff must file under penalty of perjury a certification with the court, contemporaneously with the filing of the complaint for foreclosure, that the plaintiff is in possession of the original promissory note."  These provisions do not apply to foreclosures as to timeshare interests.

 

Lost, Stolen or Destroyed Notes (Section 702.015, F.S.).  For all foreclosures, if the plaintiff seeks to enforce a lost, destroyed, or stolen instrument, a detailed affidavit executed under penalty of perjury and contained specific defined content must be attached to the complaint.

 

Finality of Mortgage Foreclosure Judgments (Section 702.036, F.S.).  Challenges to a completed foreclosure will be treated as solely as a claim for monetary damages, if:  (a) the party seeking relief was properly served;  (b) a final judgment of foreclosure was entered; (c) the time to appeal has run; and  (d) the collateral was sold to an unaffiliated third-party without a lis pendens or other such notice having been recorded.  In addition, in actions involving lost, stolen or destroyed notes, the Act cuts off claims to the collateral by persons entitled to enforce the instrument following conveyance of the collateral to an unaffiliated third party.

 

Adequate Protections for Lost, Destroyed, or Stolen Notes in a Mortgage Foreclosure (Section 702.11, F.S.).  The Act specifies what constitutes "reasonable means of providing adequate protection" under Section 673.3091, which is the statutory provision relating to the enforcement of a lost, destroyed or stolen instrument, in a foreclosure action involving such an absent instrument. 

 

Any security given must be on terms and in amounts set by the court, must run through the applicable statute of limitations for enforcement of the note, and must indemnify the maker of the note against any loss or damage that might occur by reason of a claim by another person to enforce the note. Recovery of damages and costs and attorney fees may be sought against the person who wrongly claims to be the holder of a lost, stolen, or destroyed note or against the adequate protections described above.  The Act also clarifies that the actual holder of the note need not also pursue recovery against the maker of the note or any guarantor.

 

Alternative Foreclosure Procedure (Section 702.10, F.S.).  The amendments to Section 702.10 create an alternative procedure that is designed to speed up the foreclosure process in uncontested cases or cases where there is no legitimate defense.

 

The following is a brief outline of this alternative foreclosure process:

•         After a complaint has been filed, the plaintiff may request an order to show cause for the entry of final judgment and the court must immediately review the complaint.

•         If the court finds that the complaint is verified, and alleges a proper cause of action, the court must issue an order directing the defending the show cause why a final judgment should not be entered.

•         The order must set a date and time for the hearing, not sooner than 20 days after the service of the order to show cause, or 30 days if service is obtained by publication, and no later than 45 days after the date of service.

•         The defendant can file defenses by a motion or by sworn or verified answer or appear at the hearing.  If the defendant raises a genuine issue of material fact which would preclude the entry of summary judgment or otherwise constitute a legal defense to foreclosure,  the expedited judgment will not be available.

•         The court need not hold a hearing for determination of reasonable attorney fees if the requested fees do not exceed 3% of the principal owed on the note at the time of filing.

•         The court may enter a final judgment if the defendant has waived the right to be heard or has not shown cause why a final judgment should not be entered.

 

Additionally, if the property is not owner-occupied residential real estate, the plaintiff may request a court order directing the defendant to show cause why an order to make payments during the pendency of the proceedings or an order to vacate the premises should not be entered.

 

•         The order must set a date and time for the hearing, not sooner than 20 days after the service of the order, or 30 days if service is obtained by publication.

•         The defendant can file defenses by a motion or by sworn or verified answer or appear at the hearing, which prevents entry of a final judgment.

•         The court may enter an order requiring payment or an order to vacate if the defendant has waived the right to be heard.

•         If the court finds that the defendant has not waived the right to be heard, after reviewing affidavits and evidence, the court can determine if the plaintiff is likely to prevail in the foreclosure action, and enter an order requiring the defendant to make the payments or provide another remedy.

•         The court order must be stayed pending final adjudication of the claims if the defendant posts bond with the court in the amount equal to the unpaid balance of the mortgage.

 

The Act also requests that the Supreme Court amend the Rules of Civil Procedure to provide for expedited foreclosure proceedings and related forms in conformity with Section 702.10, F.S.

 

Effective Dates:

 

The act was approved by the Florida Governor on June 7, 2013.  Many of the provisions were given retroactive effect. 

However, new Section 702.015 (elements of a foreclosure complaint; lost, destroyed or stolen note affidavit) applies to cases filed on or after July 1, 2013.  In addition, the amendments to Section 702.10 (order to show cause; entry of final judgment of foreclosure; payment during foreclosure), and new Section 702.11 (adequate protections for lost, destroyed, or stolen notes in mortgage foreclosure) "apply to causes of action pending on the effective date of this act." 

 

 

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

 

Admitted to practice law in Illinois

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.mwbllp.com