Financial Services Law Developments: 9/15/13

Saturday, September 21, 2013

FYI: Ill App Ct Confirms "Technical" Defect Not Resulting in Prejudice Insufficient to Undo Foreclosure

The Illinois Appellate Court, Third District, recently rejected a borrower's allegations of a defective grace period notice in connection with a foreclosure action, holding that because the borrower failed to allege any prejudice resulting from the alleged defect, any alleged defect would be "technical" only, and therefore without merit.

A copy of the opinion is available at http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/3rdDistrict/3120601.pdf

A bank ("bank") filed a foreclosure action against two defendants (the "borrowers"). The lower court granted foreclosure, approved the foreclosure sale, and entered an order of possession for the bank, but granted the borrowers 60 days' possession of the subject property. In so doing, the lower court allegedly instructed the borrowers that "maybe you can get a lawyer who will file the appropriate motions and see if we can give you any kind of assistance on this."

The borrowers then filed a petition to vacate the foreclosure orders, arguing that the Illinois grace-period notice provided by the bank was ineffective because it was addressed only to one of the two borrowers. Accordingly, the borrowers claimed that the foreclosure action was void, and could not lawfully commence until both borrowers received the appropriate notice.

The borrowers also argued that the due diligence requirement imposed under Illinois law for petitions to vacate was inapplicable, because the court had given them 60 days to "come back to Court with any issues they are able to find." The lower court disagreed, and denied the borrowers' petition and a subsequent motion to reconsider. The borrowers appealed.

As you may recall, Illinois law requires that a grace-period notice be mailed to the mortgagor at the common address of the subject property prior to filing a foreclosure complaint. 735 ILCS 5/15-1502.5(c). However, a technical defect in the grace period notice does not warrant the dismissal of a foreclosure action, where the mortgagor does not allege any resulting prejudice. Aurora Loan Services, LLC v. Pajor, 2012 IL App (2d) 110899, Par. 27.

On appeal, the Court began by determining the appropriate standard by which to evaluate the borrowers' petition, noting that "despite the fact that the [borrowers] styled their motion as a section 2-1401 petition, it was actually a motion brought pursuant to section 2-1203 of the code (735 ILCS 5/2-1203 (West 2012))."

The Court based its conclusion on its determination that the lower court extended the period during which a postjudgment motion might be filed to 60 days. Because Sec. 2-1401 applies only to motions brought after the period for postjudgment motions has expired, the Court held that section 2-1401 was inapplicable.

Accordingly, the Court evaluated the borrowers' motion based on section 2-1203, which required the Court to determine "not merely whether the [lower] court's order... represented an abuse of discretion but, rather...whether substantial justice is being done between the parties." In re Marriage of Sutherland, 251 Ill. App. 3d 411, 414 (1993).

With that standard in place, the Court had little difficulty in rejecting the borrowers' contentions, noting that the borrowers' sole contention was that the grace-period notice was defective because it was sent to only one of the two borrowers. However, the Court noted that the borrowers failed to allege any prejudice in connection with the alleged defect, as required.

In addition, the Court indicated that the borrowers' petition to vacate suggested that "both [borrowers] had received the grace-period notice, and even indicates that there had been some dialogue between [the parties] concerning a loan modification."

Accordingly, the Court determined that the borrowers' arguments were "meritless," and affirmed the ruling of the lower court.

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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Email: RWutscher@mwbllp.com

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Thursday, September 19, 2013

FYI: Md Court of Appeals Holds Equitable Subrogation Applied in Favor Lender, Despite Recorded Lis Pendens

In a priority dispute between a lender and a prior owner claiming fraud by the borrower, the Maryland Court of Appeals recently held that substitute trustees acting for the lender were not bona fide purchasers because they received due notice, through a recorded lis pendens, of the pending claim on the subject property. Despite such constructive knowledge, the Court determined that the substitute trustees had priority to the extent that the borrower's mortgage loan paid off a prior mortgage loan under the doctrine of equitable subrogation.

A copy of the opinion is available at: http://www.mdcourts.gov/opinions/coa/2013/93a12.pdf

After the borrower (the "Borrower") defaulted under a deed of trust dated February 18, 2008 (the "Deed of Trust"), Petitioner-substitute trustees ("Substitute Trustees") filed an action to foreclose on the subject property (the "Property"). In response, the personal representative for the estate of the Property's prior owner ("Respondent") moved to stay and dismiss the foreclosure.

Borrower had acquired the Property from his mother (the "Prior Owner") by means of a deed dated May 30, 2007 (the "Deed"). On January 3, 2008, Respondent filed suit seeking to have the Deed declared null and void as it was procured through fraud. After Respondent's suit had commenced, Borrower executed the Deed of Trust for a loan, part of which was applied to pay-off a mortgage which the Prior Owner had placed on the Property years earlier, on December 6, 2004.

Following the execution of the Deed of Trust, the trial court in Respondent's lawsuit created a constructive trust as a means to carry-out its ruling that the Property be conveyed to the Prior Owner's estate. The court did so, however, without expressly declaring that the Deed was void ab initio.

Thereafter, Substitute Trustees initiated a foreclosure action. After a hearing, the trial court denied Respondent's motion to stay and dismiss.

On appeal, Maryland's intermediate appellate court reversed, reasoning that Substitute Trustees were not bona fide purchasers because they had constructive notice, through a recorded lis pendens relating to Respondent's action, of Respondent's claim to the Property. Significantly, the intermediate appellate court held that equitable subrogation was unavailable to Substitute Trustees because they had invoked it before, rather than after, a foreclosure sale. The intermediate court noted that in G.E. Capital Mortgage Services, Inc. v. Levenson, 338 Md. 227, 657 A.2d 1170 (1995), equitable subrogation applied "to refinance lenders who, after a foreclosure sale, obtain a position of priority." See id. (emphasis added). Substitute Trustees appealed to the Maryland Court of Appeals.

As you may recall, under the doctrine of lis pendens, where there is pending litigation affecting the property, a subsequent purchaser of the property who is not party to the litigation, including a mortgagee, has notice of such litigation and is bound to the judgment rendered therein. See Greenpoint Mortg. Funding, Inc. v. Schlossberg, 390 Md. 211, 225, 888 A.2d 297, 305 (2005).

In addition, in Maryland, equitable subrogation is available where a person pays another's debt due to mistake or fraud, and may apply in the absence of an express or implied agreement. Hill v. Cross Country Settlements, LLC, 402 Md. 281, 313, 936 A.2d 343, 362 (2007). Under the doctrine of equitable subrogation, "[w]here a lender has advanced money for the purpose of discharging a prior encumbrance in reliance upon obtaining security equivalent to the discharged lien, and his money is so used, the majority and preferable rule is that if he did so in ignorance of junior liens or other interests he will be subrogated to the prior lien. Although stressed in some cases as an objection to relief, neither negligence nor constructive notice should be material." Levenson, 338 Md. at 231-32, 657 A.2d at 1172.

On appeal, the Maryland Court of Appeals first considered whether Substitute Trustees' principal was a bona fide purchaser when it had constructive notice through lis pendens of another's claim to the land. Recognizing that the trial judge did not state whether the Deed was void or merely voidable in establishing the constructive trust, the Court of Appeals agreed with the intermediate appellate court that the mere creation of a constructive trust did not implicitly void the Deed.

Nevertheless, the Court held that Substitute Trustees were not entitled to the protections of a bona fide purchaser because they received due notice through application of the doctrine of lis pendens. See Schlossberg, 390 Md. at 225. Specifically, the Court noted that the Respondent filed suit on January 3, 2008, and the Note and Deed of Trust were executed on February 18, 2008.

The Maryland Court of Appeals then considered whether the doctrine of equitable subrogation nevertheless provided an alternative and partial remedy to Substitute Trustees. According to the Court, the principal, believing (albeit mistakenly) that Borrower had a valid deed to the Property, paid off the existing loan of the Prior Owner in order to protect its interests. Although the Court acknowledged that Substitute Trustees had constructive notice of another's claim on the Property, it stated that "constructive notice alone does not defeat the application of equitable subrogation." See Levenson, 338 Md. at 243, 657 A.2d at 1178.

Citing the Levenson opinion, the Court held that, in the "absence of actual knowledge on the part of the subrogation claimant concerning the intervening lien," equitable subrogation applies. See id.

Accordingly, the Maryland Court of Appeals reversed the judgment of the intermediate appellate court, and held that Substitute Trustees were subrogated to the extent that Borrower's mortgage loan paid off the prior mortgage loan.

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The Editor's Bio

Ralph T. Wutscher
Maurice Wutscher LLP
20 N. Clark Street, 33rd Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
RWutscher@MauriceWutscher.com
https://www.MauriceWutscher.com/

Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.