FYI: Ill App Ct Upholds Dismissal of Action on Mis-Dated Guaranty

The Illinois Appellate Court, First District, recently upheld a lower court's order dismissing a loan assignee's complaint against the guarantor of a loan for failure to state a cause of action. 

In reaching its decision the Court noted that:  (1) absent an ambiguity in the terms of a guaranty, parole evidence cannot be used to alter the agreement;  (2) a party's allegations in its verified complaint constitute judicial admissions; and  (3) the drafting party cannot, as a matter of law, reasonably rely upon statements made by the non-drafting party during the negotiations of the agreement to the extent that they differ from the written instrument. 

A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1121702.pdf

A bank extended an $8.1 million loan to a business for the development of an athletic training facility.  The loan was generally guaranteed by the business, its parent company, and the parent company's owner.  The bank also obtained a limited guaranty from the owner of the parent company. 

The loan was finalized on August 24.  However, the limited guaranty erroneously made reference to a loan agreement reached on July 27.  The bank drafted the limited guaranty. 

The loan and related guaranties were sold and assigned.  Following the default on the loan, the owner of the loan ("Loan Owner") brought an action which sought, in part, to enforce the limited guaranty. 

 

The Loan Owner brought three verified complaints:  the original, the first amended and the second amended.  In its first amended complaint the Loan Owner admitted that there was no loan agreement dated July 27.  The guarantor successfully moved to dismiss this complaint, bringing about the Loan Owner's second amended complaint. 

The Loan Owner's second verified complaint contained four counts against the guarantor:  1) breach of guaranty; 2) reformation of the guaranty; 3) enforcement of the reformed guaranty; and 4) fraudulent misrepresentation.  This time the lower court dismissed the second amended complaint with prejudice. 

In its appeal, the Loan Owner argued that the trial court erred in its ambiguity consideration by not considering extrinsic loan documents from the August 24 loan which the Loan Owner argued were incorporated by the integration clause.  The Loan Owner further argued that the lower court erred because an intrinsic ambiguity was evident on the face of the limited guaranty. 

Addressing the Loan Owner's arguments, the Appellate Court first noted that public policy favors greater protection for guarantors of debts incurred after the execution of the guaranty.  The Court also noted that a guaranty's terms are strictly construed in favor of the guarantor, especially when the agreement is prepared by the creditor. 

 

Nevertheless, when the guaranty's language is unequivocal the agreement must be construed in accordance with the terms and language used.

Utilizing these general rules, the Appellate Court determined that the guaranty was not ambiguous.  In fact, the Court noted that the guaranty is exactingly clear as to the date of the loan agreement – July 27. 

 

Because the Appellate Court determined that no ambiguity existed, the Court rejected the Loan Owner's attempts to introduce extrinsic evidence due to the parole evidence rule.  As you recall, the parole evidence rule prohibits any evidence outside the terms of the written instrument from altering or adding to the agreement unless an ambiguity exists.  The exclusion of extrinsic evidence was further supported by the existence of an integration clause in the agreement, as noted by the Court. 

Moreover, the Appellate Court also held that the Loan Owner's amended verified complaints made multiple judicial admissions that worked against the Loan Owner, including that no loan agreement dated July 27 existed.  The Court explained that the Loan Owner's attempts to broaden its allegations through amended complaints were of no avail.

The Loan Owner additionally argued that the reformation of the guaranty was appropriate based upon mutual mistake of fact, or based upon its unilateral mistake as furthered by a fraud perpetrated by the guarantor.  However, the Court determined that both of these allegations failed, as the Loan Owner failed to sufficiently plead a variance between the original agreement and the written agreements. 

Once again, the Court found that the Loan Owner's verified complaint was the source of its own demise.  Therein, the Loan Owner had admitted that both parties at the time the guaranty was drafted intended for the guarantor to be liable for a loan executed on July 27 but not August 24.  Thus, no variance between the actual terms of the guaranty and the alleged mistaken terms existed which required the reformation.

Due to the lack of ambiguity of the guaranty and the Loan Owner's judicial admissions, the Court concluded dismissal regarding the counts alleging breach of guaranty, or seeking to reform the guaranty were appropriate. 

Finally, the Loan Owner argued that the lower court's dismissal of its fraudulent misrepresentation count against the guarantor was in error because a determination of reasonable reliance is a question of fact. 

 

In rejecting this argument, the Appellate Court noted that in assessing whether a party's reliance was justifiable, a court must consider all the facts known to the plaintiff and those facts that the plaintiff could have learned through the exercise of ordinary prudence. 

The Appellate Court held that as a matter of law the Loan Owner could not have reasonably relied upon the statements made by the guarantor which contradicted the terms of the instrument the Loan Owner in fact drafted. 

 

Accordingly, the Appellate Court upheld the lower court's dismissal of the complaint against the guarantor.

 

 

 

 

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: Ill App Ct Rejects Challenge to Foreclosure Sale Based on Alleged Faulty Lis Pendens and Alleged Non-Compliance w/ Illinois Collection Agency Act

The Illinois Appellate Court, First District, recently upheld the lower court's denial of a third-party intervenor's motion to vacate a foreclosure sale, ruling that the mandatory requirements of the Illinois Mortgage Foreclosure Law barred the effort. 

 

In so ruling, the Court concluded that the intervenor failed to show that "justice was otherwise not done" or that the foreclosing loan servicer's lis pendens was somehow defective in listing a second mortgage under the heading "Other parties of interest." 

 

The Court also ruled that the intervenor failed to prove that the loan servicer was subject to the registration requirements of the Illinois Collection Agency Act, 225 ILCS 425/1, et seq. ("ICAA").

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1120711.pdf.

 

Plaintiff loan servicer ("Servicer") brought a mortgage foreclosure action against a number of defendants, including the borrower and others.  The lower court entered a judgment of foreclosure and order of sale, and subsequently confirmed the judicial sale under Section 15-1508(b) of the Illinois Mortgage Foreclosure Law ("IMFL"). 

 

After the sale confirmation, a real estate firm ("Intervenor") intervened, seeking to vacate the confirmation of sale under section 2-1301(e) of the Illinois Code of Civil Procedure.   Specifically, Intervenor's section 2-1301(e) motion argued in part that Intervenor had acted diligently, had meritorious claims, and would be penalized if the confirmation of the sale was not vacated.  Intervenor also asserted that it was the successful bidder at an earlier foreclosure sale in a separate foreclosure action brought by a second mortgagee on the property, and that Servicer's sale of the property had violated a bankruptcy stay.

 

To support its section 2-1301(e) motion, Intervenor relied on the IMFL, claiming that "justice would not otherwise be done" if the sale were not vacated.  Moreover, Intervenor asserted that, based on information from the recorder of deeds website, it had bid on the property in the prior foreclosure sale, that a fraudulent release of the first mortgage had been recorded, and that Servicer had filed a defective lis pendens in that Servicer listed the second mortgage under the heading "Other parties of interest."   Intervenor further alleged that, because Servicer was not licensed as a collection agency under the ICAA, the foreclosure action was void. 

 

The lower court ultimately denied Intervenor's motion to vacate the confirmation of sale.  Intervenor appealed. 

 

The Appellate Court affirmed, reasoning that Intervenor failed to prove that "justice was not otherwise done," or that any of the alternative findings for vacating a foreclosure sale were present, as required under the IMFL. 

 

As you may recall, the IMFL provides:  "Upon motion and notice . . . which motion shall not be made prior to sale, the court shall conduct a hearing to confirm the sale.  Unless the court finds that (1) a notice required in accordance with subsection (c) of Section 5-1507 was not given, (ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently, or (iv) that justice was otherwise not done, the court shall then enter an order confirming the sale."  735 ILCS 5/15-1508(b). See also 735 ILCS 5/2-1301(e)(court may set aside a judgment on motion filed within 30 days after entry of the judgment).

 

In addition, the ICAA provides: "This Act does not apply to persons whose collection activities are confined to and are directly related to the operation of a business other than that of a collection agency, and specifically does not include the following:  1.  Banks, including trust departments, affiliates, and subsidiaries thereof, fiduciaries, and financing and lending institutions (except those who own or operate collection agencies). . . .  8.  Loan and finance companies[.]"  225 ILCS 425/2.03. 

 

Noting the inconsistencies in Intervenor's motions and pleadings and the absence of a complete record, the Appellate Court first pointed out that relief under Section 2-1301(e) was not available where the IMFL governed and that the IMFL limited the court's discretion to deny confirmation of sale only to the four specified grounds listed in the IMFL.  See Mortgage Electronic Registration Systems, Inc. v. Barnes, 406 Ill. App. 3d 1, 4-5 (2010)("If section 15-1508(b) of the [IMFL] did not prevail over section 2-1301(e) of the Code, then the latter would eviscerate the former because parties could thwart section 15-1508(b) by filing petitions to vacate nonfinal judgments even after foreclosure sales have been held."); Household Bank, FSB v. Lewis, 229 Ill. 2d 173, 178-79 (2008)(ruling that motion requesting confirmation of a judicial sale invokes mandatory requirements of the IMFL).  Cf. Wells Fargo Bank, N.A. v. McCluskey, 2012 Il. App (2d) 110961, appeal allowed, No. 115469 (Ill. Mar. 27, 2013)(ruling section 2-1301(e) motion may apply after a foreclosure sale). 

 

Next, observing that Intervenor bore the burden of proving sufficient grounds to vacate the judicial sale, and that Intervenor's only argument for vacating the sale was that justice was not done due to the alleged defective lis pendens, and Servicer's alleged failure to register as a collection agency, the Appellate Court ruled in part that Intervenor failed to demonstrate that Servicer was a collection agency, and failed to present any evidence that indicated that loan servicing is related to the actions of a collection agency, and thus was required to register as such under the ICAA. 

 

The Appellate Court also rejected Intervenor's assertion that the lis pendens in this case was defective.  In so doing, the Appellate Court noted Intervenor's reliance on a printout from the recorder of deeds' website as a basis for its fraudulent release allegation, and that Intervenor failed to examine the actual lis pendens which it had attached as an exhibit to its motion.  The Court also pointed out that Servicer properly listed the second mortgage in the lis pendens, thus providing Intervenor with constructive notice of the foreclosure action related to the first mortgage.  As the Appellate Court stated, "We will not vacate the confirmation of a judicial sale at the insistence of an interested party whose complained of error was the result of its own negligence." 

 

Accordingly, concluding that Intervenor failed to meet its burden to show that "justice was otherwise not done" in the foreclosure sale, the Appellate Court affirmed the judgment of the lower court and refused to vacate the confirmation of sale.

 

 

 

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: Ill App Ct Rejects Appeal of Orders Relating to Foreclosure Plaintiff's Injunction as to Borrower's Collection of Payments Relating to Collateral

In a case involving a foreclosure on commercial property, the Illinois Appellate Court, Second District, recently dismissed an interlocutory appeal for lack of jurisdiction, reasoning that the lower court's orders were not "attendant" to the foreclosing plaintiff's temporary injunction enjoining the defendants from handling payments related to the property.

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/2ndDistrict/2130213.pdf

 

Plaintiff bank ("Bank") filed a foreclosure action against real estate holding firms (collectively "Defendants") that owned commercial property.  Bank subsequently filed motions for, among other things, appointment of a receiver for the property, and a temporary restraining order to prevent defendants from removing or impairing the collateral. 

 

Defendants moved to quash service of summons, objected that certificates of service for the motions were deficient in that the motions were not included with the notices as required by local rule, and filed a jury demand.  After "re-noticing" the motions and moving to strike the jury demand, Bank moved for substitution of judge as a matter of right under the Illinois Code of Civil Procedure.  The lower court granted Bank's motion for substitution and the case was reassigned. 

 

The lower court overruled Defendants' objection that Bank failed to provide copies of the motions as required by local rule.  The lower court also granted Bank's motion for appointment of a receiver and other motions, enjoining Defendants from accepting or making payments on the property pending the receiver taking possession of the property.  Due to the appointment of the receiver, Bank withdrew its motion for a temporary restraining order.

 

Shortly thereafter, having their motion to quash service of summons denied, Defendants filed an interlocutory appeal under Illinois Supreme Court Rule 307(a)(1) with respect to 11 separate orders entered by the lower court on Bank's various motions and the motion to quash service of summons.  In so doing, Defendants argued that the lower court erred in: (a) denying their objection that Bank violated local rules by serving notices of the motions without copies of the motions themselves;  (b) denying the motion to quash service of summons; and  (c) granting Bank's motion for substitution of judge as a matter of right.

 

The Appellate Court dismissed the appeal for lack of jurisdiction, reasoning that Rule 307(a)(1) provided no basis to review the orders that were not intertwined with the merits of the lower court's injunction.

 

As you may recall Rule 307 provides that "[a]n appeal may be taken to the Appellate Court from an interlocutory order of court . . . granting, modifying, refusing, dissolving, or refusing to dissolve or modify an injunction."  Ill. Sup. Ct. Rule 307(a).

 

In noting that Defendants did not challenge the substance of the injunctive order enjoining them from accepting payments on the property, but nevertheless appealed under Rule 307, the Appellate Court rejected their assertion that the Appellate Court had jurisdiction over the other orders, and that those orders, including the order granting substitution of judge, tainted all further orders entered by the trial court. 

 

To support its conclusion that it lacked jurisdiction over the various other orders, the Court relied the rule that "[a]n appeal under Rule 307 does not open the door to a general review of all orders entered by the trial court up to that date. . . However, certain other orders may be reviewable.  . . . [W]hether an order preceding an interlocutory order from which an appeal is taken may be considered during the interlocutory appeal depends on its relationship to the order appealed from."  Olympic Federal v. Witney Development Co., 113 Ill. App3d 981 (1983).  

 

The court also noted that it lacked jurisdiction to review an order denying a motion to change venue in an appeal of a dismissal of a complaint and counterclaim because the order denying the change in venue was not "attendant" to, or intertwined with, the merits of the interlocutory order.  See Executive Commercial Services, Ltd. v. Daskalakis, 74 Ill. App.3d 760 (1979).  See also In re Marriage of Nettleton, 348 Ill. App. 3d 961 (2004)(ruling there was no jurisdiction to review an order denying substitution of judge, reasoning that there was no substantive linkage between the order and the appealed stipulated finding of contempt).

 

Accordingly, determining that the challenged orders were not "attendant" to the injunctive order that formed the basis for appellate jurisdiction under Rule 307, the Appellate Court ruled that it lacked jurisdiction over the various other orders. 

 

In so ruling, the Court noted that the Defendants failed to establish a link between any of the challenged orders and the injunctive order.  The Court also observed that Defendants failed to establish appellate jurisdiction over the order granting Bank's motion for substitution of judge, noting that an erroneous grant of a motion for substitution of judge as a matter of right may not have the same effect of voiding all subsequent orders as would an erroneous denial of a motion for substitution.

 

Accordingly, the Appellate Court dismissed the appeal.

 

 

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 Clarifies Pleading Requirements for Collection Agency and Debt Buyer Plaintiffs

The Illinois Court of Appeals for the First District recently held that the Illinois Collection Agency Act requires that third party "collection agency" plaintiffs identify the accounts transferred, the consideration paid, and effective date of the transfer as to assignments for collection, but not as to transfers to debt buyers.  

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1113658.pdf. 

 

A borrower defaulted on his credit card debt.  The lender sold the debt to a debt buyer; the debt buyer sold the account to a second debt buyer; the second debt buyer assigned its interest to a collection agency; and that collection agency assigned its interest to a second collection agency.  The second collection agency is the plaintiff in this matter.   

 

As you may recall, in the predecessor case to the instant litigation (see our update below), the Appellate Court held that Illinois law permits an assignee for collection to file suit for collection in its own name to collect a debt.  The Court also construed the Illinois Collection Agency Act to require that, in order to establish an assignment of a collection account, a collection agency must attach exhibits identifying the accounts transferred, the consideration paid, and the effective date of the transfer.  See 225 ILCS 425/8b ("Sec. 8b"). 

 

These documents "must be in the form of contracts of assignment or documents that are incorporated by reference into those contracts, rather than in the form of an affidavit."  Unifund CCR Partners v. Shah, 407 Ill. App. 3d 737 (2011) ("Shah I" -- see our prior update below). 

 

Following the decision in Shah I, the plaintiff collection agency filed a new complaint, which included as exhibits the contracts of assignment and related documents for the last two transfers.  However, the plaintiff collection agency did not demonstrate the consideration paid for the first two transfers.

 

The lower court held that the plaintiff collection agency's pleading was insufficient under the Illinois Collection Agency Act, and dismissed the complaint.  The plaintiff collection agency appealed. 

 

The Appellate Court began its analysis by surveying the ways in which creditors may collect a debt.  The Court explained that a creditor may bring an action in its own name; hire a collection agency, whereby the creditor retains equitable title for itself but assigns legal title to the collection agency; or sell its entire interest in a debt to a third party, known as a "debt buyer." 

 

The Appellate Court then explained the pleading requirements for various types of transfers.  Where a creditor hires a collection agency to collect its debt -- assigning legal title to the collection agency -- the agency must file a verified complaint that alleges that the agency is the actual bona fide owner at least of legal title to the debt, and sets forth how title was acquired.  735 ILCS 5/2-403(a) ("Sec. 403(a)").  The agency must also make the three factual allegations required under Shah I (i.e., identify the accounts transferred, the consideration paid, and effective date of the transfer as to assignments for collection). 

 

Similarly, where a creditor assigns legal title to a collection agency, who in turn assigns its interest to an additional collection agency, the plaintiff must set forth how title was acquired in its complaint -- and trace how it acquired title back to the original creditor.  Otherwise, the Court explained, "[t]he debtor (and more importantly, the court) would have no way of knowing whether the plaintiff actually had legal standing." 

 

However, the Court noted that it is unclear from the plain language of the Illinois Collection Agency Act whether a plaintiff is required to satisfy the requirements of Sec. 8b for each assignment of title, as the language of the statute refers to "assignment" in the singular.  The Court concluded that it does apply to each assignment, reasoning that "if that legislature thought that the stringent protections of section 8b were necessary...where legal title has been assigned only once, then we cannot believe that the legislature did not intend for those same requirements to apply in situations where legal title has been assigned multiple times..." 

 

Next, the Court considered the pleading requirements that apply where a creditor sells its entire interest to a debt collector.  Although the Court noted that it was clear that the requirements of Sec. 403(a) applied, it was less clear as to whether Sec. 8b applied.

 

Accordingly, the Court scrutinized Sec. 8b.  It determined that "[b]y referring specifically to assignments for collection, the plain language of section 8b indicates that the legislature intended to exclude sales of an account to a debt buyer from the section's reach."  Therefore, the Court held that debt buyers need comply only with the requirements of Sec. 403(a), and not also the requirements of Sec. 8b. 

 

Having determined the applicable legal standards, the Court turned to the facts of the case.  It noted that here, the original creditor sold the relevant account to a debt buyer; the debt buyer sold the account to a second debt buyer; the second debt buyer assigned its interest to a collection agency; and that collection agency assigned its interest to a second collection agency. 

 

Accordingly, the Court determined that the second collection agency -- the plaintiff -- was required to file a verified complaint or affidavit explaining "how and when each entity in the chain acquired title."  The plaintiff here was further required to satisfy the requirements of Sec. 8b as to the two assignments for collection, but not for the sales to debt buyers. 

 

Applying its ruling, the Court held that the plaintiff collection agency did not meet its burden, because the plaintiff collection agency failed "to include a complete and unredacted version of the complaint's supporting documents," which rendered the Court unable to determine whether Sec. 8b's requirements were satisfied. 

 

In light of the foregoing, the Court determined that it "must assume that the circuit court ruled correctly when it dismissed the complaint."  Accordingly, the Court affirmed the lower court's decision. 

 

 

**********************

 

 

The Illinois Appellate Court, First District, recently held that a collection agency has standing to sue, where the agency pleads and proves that it has legal title to accounts receivable assigned "for collection purposes only."  The Court also held that an agency may establish such an assignment through multiple incorporated documents attached as exhibits to the complaint.  However, the documents provided must include contracts of assignment or incorporate such contracts by reference; the agency may not rely merely on affidavits to establish an assignment.  Further, the documents provided must also identify the accounts transferred, the consideration paid, and the effective date of the transfer of the accounts.

 

A copy of the opinion is available online at: http://www.state.il.us/court/Opinions/AppellateCourt/2011/1stDistrict/February/1100855.pdf

 

Defendant borrower defaulted on a Citibank credit card account.  Citibank then sold the account to Unifund Portfolio A, L.L.C.  On the same day, Portfolio A sold the account to Cliffs Portfolio Acquisition I.  Cliffs Portfolio then assigned its legal interest in the account to Palisades Collection, L.L.C., to enable Palisades to collect on the account, but purported to retain an equitable interest in the debt itself.  Finally, Palisades then assigned its interest in the account to the collection agency plaintiff.

 

In support of its complaint, the collection agency plaintiff provided an affidavit of an employee who had reviewed plaintiff's internal records, as well as various contracts of sale and assignment for defendant's account, along with other incorporated agreements.  The defendant debtor moved to dismiss, arguing that the purported assignments of his account were inadequate under section 8b of the Collection Agency Act because required information, such as the account information, the consideration paid, and the effective date of assignment were scattered among plaintiff's exhibits, rather than contained in a single document.

 

The Appellate Court first considered whether an assignee of a debt has standing to sue where legal title was assigned "for collection purposes only."  The Court examined Section 2-403 of the Illinois Code of Civil Procedure, which states "[t]he assignee and owner of a non-negotiable chose in action may sue thereon in his or her own name."  Because a chose in action is a "proprietary right in personam, such as a debt owed by another person," the Court ruled, "[c]hoses in action like plaintiff's debt in this case are assignable."

 

The Court further noted that "[a]lthough Illinois cases have not explicitly addressed this issue, long-standing modern practice in other jurisdictions allows the owner of a debt to transfer the entire chose in action outright to a third party, retaining no ownership interest in it, or to transfer only the owner's legal interest in the action, retaining an equitable or beneficial interest."

 

The Court also examined Section 8b of the Illinois Collection Agency Act, which states that "[a]n account may be assigned to a collection agency…to enable collection of the account in the agency's name as assignee for the creditor."  Thus, the Court ruled, "[w]hen the two statutes are read together, it is apparent that an assignee for collection has standing to bring suit in its own name in order to collect a debt" and that "section 2-403 encompasses not only assignees who take complete ownership of an account but also those who merely take legal title for the purpose of collecting the debt while the creditor retains the beneficial interest and equitable title."

 

The Court then considered the requirements for pleading assignment of a debt under Section 8b of the Collection Agency Act.  Observing that a collection agency can bring suit to collect on a debtor's account only when "[t]he assignment is manifested by a written agreement, separate from and in addition to any document intended for the purpose of listing a debt with a collection agency," the Court considered whether an assignment must be manifested by only a single document or must consist of multiple incorporated documents.

 

In analyzing this question, the Court noted that "the key phrases in Section 8b are 'assignment manifested by a written agreement' and 'document manifesting the assignment'" and thus that "assignment of the account must be manifested by a legal document in the formal sense, that is, by a written contract of assignment… that is completely separate from any contract to list the account with the collection agency."

 

Further because "[i]t is a fundamental principal of contract law that 'an instrument may incorporate all or part of another instrument by reference'," then "it follows that the terms of the assignment may be found in either the contract of assignment itself or in any other document incorporated by reference."  Thus, the Court ruled, "assignment under Section 8b can be established through multiple documents that are incorporated by reference into the contract of assignment."

 

Having concluded that an assignment can be manifested by multiple incorporated documents, the Court then considered the content required for those documents to satisfy Section 8b, which "requires that the contract of assignment 'specifically state and include' both the effective date of the assignment and the consideration given for the assignment."  Further, the Court ruled, "[i]mplicit in the statute is a third requirement that the contract of assignment specifically state the relevant identifying information for the account that is being assigned."

 

Although the plaintiff collection agency provided "three broad categories" of documents in support of their complaint, including "affidavits, contracts of assignment, and incorporated documents," the Court ruled that "[p]laintiff's use of the affidavit in support of its claim…is problematic," because the "plain language of [Section 8b] provides only a single method of proving the existence of an assignment, and this method does not include affidavits."  The Court further noted that "[l]imiting the methods of proof of an assignment to only written contracts furthers…legislative policy because it requires collection agencies to clearly demonstrate that they and they alone are the proper parties for a debtor to be dealing with regarding their debt."

 

Therefore, the Court ruled, bare "affidavits…cannot be used by a collection agency to prove the assignment and state a claim to a debtor's account."

 

The Court then examined the contracts of assignment and incorporated documents provided in support of the plaintiff's collection agency's complaint.  Although it declined to rule on their sufficiency, noting that "it is for the circuit court to determine whether all of the documents that plaintiff has attached to its complaint in this case satisfy the requirements of section 8b," the Court specifically noted that "Section 8b requires each contract of assignment in the chain of title for the account, beginning with the original creditor and ending with the plaintiff, to specifically state and include the effective date of assignment, the consideration paid, and the identifying information for the account transferred."

 

 

 

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:
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FYI: Cal App Ct Holds Title Insurer Owed No Duty to Defend Action Challenging Title Due to Alleged Tortious Acts of Insured

The California Court of Appeal, Second Appellate District, recently held that title insurers have no duty to defend and indemnify under an ALTA title insurance policy against a third party claim that alleges tortuous conduct in the manner in which the insured party acquired title, as opposed one which alleges an independent defect in title.

 

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/B234341.PDF

 

In this title insurance coverage dispute, the insured entity ("Insured") challenged the title insurance company's ("Title Insurer") refusal to defend and indemnify the Insured against a certain third party lawsuit (the "Underlying Action") relating to commercial real estate (the "Property").  The Insured obtained the title insurance policy (the "Policy") when it purchased the Property from the FDIC as receiver for a failed bank, which had foreclosed on its first trust deed encumbering the Property. 

 

The Policy consisted of the standard American Land Title Association (ALTA) owner's policy form.  In pertinent part, it provided that Title Insurer insures the Insured against loss or damage resulting from "[a]ny defect in or lien or encumbrance on the title."  Further, the Policy provided that Title Insurer will provide for the defense against certain third party claims adverse to the Insured's interest in the Property.

 

Among the Insured's owners were two individuals who were involved, through several entities under their control, in a series of transactions concerning the Property.  At one point prior to the Insured's purchase, an entity controlled by the individuals conveyed to the plaintiffs in the Underlying Action a 9.5 percent interest in a promissory note and second trust deed encumbering the Property.

 

After the purchase, the plaintiffs in the Underlying Action sued the Insured's owners, the Insured, and several other entities, alleging that the Insured had used the entity defendants, including the Insured, to avoid their obligations and duties to the plaintiffs.  After the parties settled the Underlying Action, the Insured filed this lawsuit against Title Insurer, alleging breach of its duties to defend the Underlying Action and to indemnify the Insured.

 

As you may recall, title insurance is a contract to indemnify against loss through defects in or encumbrances on title that may affect the title at the time that the policy was issued.  Elysian Investment Group v. Stewart Title Guaranty Co., 105 Cal.App.4th 315, 320 (2002).  It does not insure against future events nor does it guarantee the state of the title.  Quelimane Co. v. Stewart Title Guaranty Co., 19 Cal.4th 26, 41 (1998).

 

However, "[i]t has long been a fundamental rule of law" that an insurer has a duty to defend an insured against a third party lawsuit pleading facts that raise the potential for coverage.  Waller v. Truck Ins. Exchange Inc., 11 Cal.4th 1, 19 (1995).  To determine whether an insurer owes a duty to defend, a court compares the allegations of the complaint with the terms of the policy.  Id.  Although the insurer's duty to defend is broad, "it is not absolute but is measured by the nature and kinds of risks covered by the policy."  Rosen v. Nations Title Ins. Co., 56 Cal.App.4th 1489, 1500 (1997).

 

The primary issue before the California Appellate Court was whether the trial court erred in finding that Title Insurer had a duty to defend the Underlying Action.  Relying heavily on the opinion in Safeco Title Ins. Co. v. Moskopoulos, 116 Cal.App.3d 658 (1981), the Court concluded that the Underlying Action did not give rise to a duty to defend.

 

In Moskopoulos, a case involved an insuring clause identical to the one here, there was also no duty to defend the insured.  Id. at 663.  Significantly, the Moskopoulos Court found that the third party claim related "not to [the insured's] title in the property, but to the manner in which he acquired title."  Id. at 665.  Elaborating on this, the Court explained that "intentionally tortious conduct by [the insured]" was "not a defect in [] title."  Id. at 666.

 

Here, Title Insurer argued that the Underlying Action did not allege defects in title, but instead alleged tortious conduct in the manner in which the Insured acquired title. 

 

Although the Insured pointed to a quiet title claim in the Underlying Action as distinguishing this case from Moskopoulos, the California Appellate Court disagreed.  In addition, the Court held that a quiet title claim does not always "inherently presuppose" that plaintiff has legal title to the property; for example, an exception exists "when legal title has been acquired through fraud."  Warren v. Merill, 143 Cal.App.4th 96, 113 (2006).  Here, according to the Court, the allegations of fraud in the Underlying Action regarding the Insured's acquisition of title "fall squarely" within the exception.

 

Accordingly, judgment against Title Insurer was reversed, and Appellate Court  directed the lower court to enter judgment for Title Insurer.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

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