FYI: 9th Cir Holds Unaccepted Offer of Judgment That Would Satisfy Pl's Claims Does Not Render Claims Moot

The U.S. Court of Appeals for the Ninth Circuit recently held that an unaccepted offer of judgment under Federal Rule of Civil Procedure 68 that would fully satisfy the plaintiff's claims did not render those claims moot. 

 

A copy of the opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2013/10/04/11-57239.pdf

 

A consumer ("consumer") sued the provider of her home warranty plan ("Warranty Provider"), arguing that Warranty Provider refused to make timely repairs, used substandard contractors and wrongfully denied claims. 

 

The lower court dismissed several of her claims.  Then, Warranty Provider made an offer of judgment to the borrower pursuant to Federal Rule of Civil Procedure 68 ("Rule 68") as to the remainder.  The consumer did not accept the offer, and Warranty Provider moved to dismiss the remaining claims for lack of subject matter jurisdiction. 

 

The lower court granted Warranty Provider's motion, and the consumer appealed. 

 

On appeal, the Ninth Circuit began by surveying the current case law regarding whether an unaccepted Rule 68 offer that would fully satisfy a plaintiff's claim renders that claim moot.  It explained that the Supreme Court has yet to squarely address the issue, and that the Circuit Courts to do so are divided on the question. 

 

However, the Ninth Circuit noted that "[a]lthough the majority of courts and commentators appear to agree...that an unaccepted offer will moot a plaintiff's claim, four justices of the Supreme Court...embraced a contrary position" in Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523, 1528-29 (2013) ("Genesis Healthcare"). 

 

As you may recall, the majority in Genesis Healthcare did not reach the issue of the effect of an unaccepted Rule 68 offer on a plaintiff's claims.  The dissenting justices, however, indicated that "[a]n unaccepted settlement offer - like any unaccepted contract offer- is a legal nullity, with no operative effect."  Id. at 1533-34 (Kagan, J., dissenting). 

 

The dissenting justices in Genesis Healthcare also scrutinized the language of Rule 68, finding that "[t]he text of the Rule contemplates that a court will enter judgment only when a plaintiff accepts an offer," but "provides no appropriate mechanism for a court to terminate a lawsuit without the plaintiff's consent."  Id. at 1536. 

 

The Ninth Circuit followed the reasoning of the dissenting justices in Genesis Healthcare to hold that "an unaccepted Rule 68 offer that would have fully satisfied a plaintiff's claim does not render that claim moot." 

 

Accordingly, the Ninth Circuit vacated the lower court's judgment, and remanded the matter 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

 

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

 

 

 

 

 

 

FYI: Cal App Ct Holds No Duty of Care Imposed in Handling Loan Modifications, Declines to Follow Jolley v. Chase Home Finance

The California Court of Appeal, Fourth Appellate District, recently distinguished Jolley v. Chase Home Finance, LLC (2013) 213 Cal. App. 4th 872 ("Jolley"), ruling the defendant bank owed no duty to the borrowers in considering their loan modification request on the basis that Jolley involved a construction loan with ongoing disbursements made throughout the construction period, whereas the present action involved a home mortgage loan, and also, unlike the California UDAP claim in Jolley, the borrowers failed to properly allege "dual tracking" where a bank pursues foreclosure while also engaging in loan modification discussions.

 

In so ruling, the Court of Appeal held: (1) the borrowers failed to plead fraud with sufficient particularity because the borrowers failed to identify the bank's representative that made the alleged false statement; (2) that the borrowers failed to state a claim under the California UDAP statute because they did not properly an unfair business practice; and (3) the borrowers failed to state a claim for negligent misrepresentation because the bank did not owe a duty.

 

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/D061449.PDF.

 

The Plaintiffs and appellants (the "borrowers") financed the purchase of their residence with a promissory note and deed of trust. The borrowers later refinanced the home, and later began loan modification negotiations.  In January 2009, the trustee recorded a notice of default and election to sell under the deed of trust.  The loan was transferred to the defendant and appellee bank (the "bank") in October 2009, and the borrowers resumed loan modification negotiations with it.

 

Subsequently, the bank sent the borrowers a letter informing them that preliminary review indicated they may not be eligible for the Home Affordable Modification Program ("HAMP"), but it had been directed to place their mortgage in a "Trial Period Plan."  The borrowers and the bank continued to discuss a potential modification.  The bank later informed the borrowers by letter it would not adjust the terms of their mortgage.

 

One of the borrowers allegedly called the bank to reopen the modification process and allegedly spoke with a person in its customer service department. The employee supposedly told the borrower that her loan had been transferred to the foreclosure department, there was no scheduled trustee's sale date, and the modification would be reopened if the borrowers submitted documents showing additional income.  At a later date, the borrower was allegedly told she had been preapproved for a loan modification but would need to submit another package.

 

Several days later, a member of the bank's "home preservation" team allegedly contacted the borrowers. The borrowers supposedly explained that they had more income than what was represented in the bank's letter.  Allegedly at the bank's representative's direction, the borrowers submitted additional documents needed to process their request.  The bank's representative supposedly told the borrowers their loan modification was "under review."  The next day, the bank sold the borrowers' home at a trustee's sale.

The borrowers spoke again with the bank's representative, who informed them their home had been sold at the trustee's sale two days earlier. The borrowers told a bank representative that they never received prior notice that the bank would be selling the home, who responded that notice should have been sent.

 

Subsequently, the bank offered the borrowers a special forbearance agreement that they could accept by signing and returning the letter with the first of several payments. That agreement required the borrowers to make payments during a trial period, and the bank would review the outstanding amounts for a loan modification.  The borrowers were unable to comply with the terms of the forbearance agreement because their home had already been sold. The bank's representative continued to tell the borrowers that their loan modification was under review.

 

After the trustee's sale, the borrowers sued the bank for fraud, negligent misrepresentation, and "unlawful business practices" under the California Unfair Competition Law ("UCL").  The bank eventually moved for summary judgment, submitting portions of one of the borrower's deposition in which she acknowledged she and her husband stopped making mortgage payments in order to obtain a loan modification, and she understood the loan was in default. She admitted receiving a letter from the bank informing her that if the loan was not cured, the home was subject to a foreclosure sale. She also admitted receiving the notice of trustee's sale.

After the bank filed its summary judgment motion, the borrowers moved for leave to amend the complaint. Specifically, the borrowers sought to include the allegation that one of the borrowers called a bank agent and representative, who told her the loan had recently been transferred from the modification department to the foreclosure department and that there was no trustee sale pending.  The borrowers maintained the unidentified representative's statement was reflected in the borrower's deposition, which contained a typographical error on the page where she recounted the conversation.

 

The court granted the borrowers leave to amend. The amended pleading added an allegation that the borrower called the bank's Customer Service department to re-open the modification process based on additional income that had not been taken into consideration. During that telephone call, the employee supposedly told the borrower that: her loan had been transferred to the foreclosure department; there was no trustee's sale date scheduled for the property; if the borrower submitted additional documents showing additional income that the modification would be re-opened. Thereafter the borrower was told that she had been pre-approved for a loan modification; that she needed to submit another loan modification package and that a loan 'negotiator' would be contacting her shortly. 

 

The borrower alleged those representations were false, and the true facts were that the trustee's sale date for the property had been scheduled to take place and that regardless of whether or not the borrowers submitted additional financial documents, the modification process would not be re-opened and the trustee's sale would proceed as scheduled.  The borrowers further alleged that the bank "had no intention of providing [the borrowers] verbal or written notice regarding the date that the trustee's sale of [the borrowers'] house would take place"; they were ignorant of the falsity of the representations, and in reliance on them, they were induced not to take any other action to reinstate their loan or to forestall the foreclosure and protect the substantial amount of equity they had in the property. They alleged they were induced to provide the various loan modification packages, and as a result of their inaction the property was foreclosed upon and sold at the trustee's sale, causing them damage.

 

The bank again demurred (i.e., moved to dismiss), which the trial court sustained.  The trial court concluded that the borrowers failed to plead what misrepresentation was made, other than a misrepresentation by an unidentified employee that was not a part of the foreclosure department and failed to plead that the bank ratified or authorized the statement by the unnamed employee.  The court further ruled the borrowers did not plead facts to establish the elements of intent to induce reliance, justifiable reliance, causation or damages. Finally, the court ruled the borrowers did not plead facts to support liability under the UCL.

 

The borrowers did not timely amend, and the trial court dismissed the second amended complaint with prejudice. Thereafter, the court entered a judgment of dismissal in the bank's favor. The borrowers appealed.

 

As you may recall, to state a fraud claim, a party must allege (1) a misrepresentation as to a material fact; (2) knowledge of its falsity or scienter; (3) intent to defraud; (4) justifiable reliance; and (5) resulting damage. (Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979, 990.) The heightened pleading standard for fraud requires " 'pleading facts which "show how, when, where, to whom, and by what means the representations were tendered." ' " (Ibid.) A plaintiff's burden in asserting fraud against a corporate employer requires the plaintiff to allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written. (Hamilton v. Greenwich Investors XXVI, LLC (2011) 195 Cal.App.4th 1602, 1614.)

 

The Court of Appeal classified the borrowers' misrepresentation claims as based on the single telephone conversation occurring in March of 2010. Because these allegations failed to identify the bank employee, they were deficient; they simply lacked the required specifics as to the name of the person at the bank who spoke and his or her authority to speak.

In reaching this conclusion, the Court of Appeal distinguished cases in which courts have found plaintiffs met their fraud pleading burden because the identity of a person or persons making the misrepresentations was a matter uniquely within the defendant's knowledge. (E.g., West v. JPMorgan Chase Bank, N.A., supra, 214 Cal.App.4th at p. 793; Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 248.)  According to the Court of Appeal, the borrowers provided no information allowing it to conclude that the bank will necessarily have superior knowledge of that person's identity or authority to speak, and therefore, no way for the bank to dispute the claim. Accordingly, the Court of Appeal affirmed the trial court's ruling.

 

Next the Court of Appeal analyzed the borrowers' UCL claim.  As you may recall, a UCL plaintiff must allege that the defendant committed a business act or practice that is fraudulent, unlawful, or unfair. (See Buller v. Sutter Health (2008) 160 Cal.App.4th 981, 986.) The borrowers first addressed their UCL claim in supplemental briefing, contending they have sufficiently alleged that the bank committed a business practice—"dual tracking"—that is unfair. They pointed to Jolley, supra, 213 Cal.App.4th 872, as authority that this business practice supports a cause of action for unfair business practices under the UCL.

 

The Court of Appeal examined Jolley, noting it was decided in the context of a motion for summary judgment brought by a bank, which had assumed the assets of its predecessor. (Jolley, supra, 213 Cal.App.4th at pp. 877-878.)

 

The plaintiff in Jolley alleged that before the modification, the predecessor made false representations about certain matters, and that there were irregularities in the construction loan disbursements, causing delays. (Id. at p. 878.) The plaintiff in Jolley sought another loan modification. The plaintiff in Jolley also spoke with a bank employee who told him there was a high probability of a loan modification so as to avoid the foreclosure, the likelihood was good.  The plaintiff in Jolley alleged he was induced by these representations to borrow heavily to finish the project, and he claimed construction delays during the loan modification negotiations prevented him from selling the property before the housing market collapsed.  Rather than agree to a loan modification, the bank in Jolley demanded payment in full and its trustee recorded a notice of default and then a notice of sale. (Jolley, supra, 213 Cal.App.4th at p. 881.)

 

In reversing summary judgment on the plaintiff's UCL cause of action, the appellate court in Jolley focused in part on allegations indicating the bank had subjected the plaintiff to dual tracking, the "common bank tactic" whereby the lender pursues foreclosure at the same time it engages in loan modification negotiations. The court in Jolley observed that the California Legislature made dual tracking illegal effective January 1, 2018. (Id. at pp. 904-905.) Though it acknowledged the law did not apply and dual tracking was not forbidden by statute at the time, the appellate court in Jolley nevertheless held "the new legislation and its legislative history may still contribute to its being considered 'unfair' for purposes of the UCL . . . ." (Id. at pp. 907-908.)

 

The Court of Appeal here decline to follow Jolley.  It was not persuaded that the allegations reflected that the bank engaged in dual tracking. The operative pleading alleged that the bank had notified the borrowers that it would not modify their loan.  Moreover, the Court of Appeal stated that the pleading was entirely uncertain as to the identity of the person with whom the borrower spoke, and his or her authority to make purported representations concerning the status of the borrowers' loan and alleged preapproval. At the time of the alleged foreclosure, the borrowers were told their loan modification was "under review." These allegations and facts did not show that the bank's process resulted in a " 'foreclosure[] even when a borrower has been approved for a loan modification.' " (Jolley, supra, 213 Cal.App.4th at p. 904, fn. 20).

 

Next, the Court of Appeal noted that on numerous occasions it held that to establish a practice is "unfair," a plaintiff must prove the defendant's "conduct is tethered to an[] underlying constitutional, statutory or regulatory provision, or that it threatens an incipient violation of an antitrust law, or violates the policy or spirit of an antitrust law." (Id., at p. 1366; Levine v. Blue Shield of California(2010) 189 Cal.App.4th 1117, 1137; Scripps Clinic v. Superior Court (2003) 108 Cal.App.4th 917, 940; Byars v. SCME Mortgage Bankers, Inc. (2003) 109 Cal.App.4th 1134, 1147.)

 

Here, the Court of Appeals held that the borrowers' operative complaint failed to state a claim under the unfairness prong of the UCL because they could not allege the bank's alleged dual tracking, when it occurred in 2010, offended a public policy tethered to any underlying constitutional, statutory or regulatory provision. (Durell v. Sharp Healthcare, supra, 183 Cal.App.4th at p. 1366.)  Accordingly, the Court of Appeal held that the trial court properly sustained the bank's demurrer to that cause of action without leave to amend.

 

Lastly, the Court of Appeal analyzed the borrower's negligent misrepresentation claim.  Once again relying on Jolley, the borrowers contended that the bank owed them a duty of care not to make misrepresentations to them regarding the status of their loan modification and foreclosure.  In California, "[t]he existence of a duty of care owed by a defendant to a plaintiff is a prerequisite to establishing a claim for negligence." (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal. App. 3d 1089, 1095 ("Nymark").)

 

However, the Court of Appeal reminded that, "as a general rule, a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as mere lender of money." (Nymark, supra, 231 Cal.App.3d at p. 1096; see also Wagner v. Benson (1980) 101 Cal.App.3d 27, 34-35; Ragland v. U.S. Bank Nat. Assn. (2012) 209 Cal.App.4th 182, 206).

 

The Court of Appeal agreed with federal district courts that have held that "offering loan modifications is sufficiently entwined with money lending so as to be considered within the scope of typical money lending activities." The Court of Appeal noted that if lenders were held to a higher standard of care, they simply would assert their rights to reclaim the property upon default, rather than offering services that may benefit a borrower.  (Alvarado v. Aurora Loan Services, LLC (C.D.Cal. 2012) 2012 WL 4475330, *6; see also Juarez v. Suntrust Mortgage, Inc. (E.D.Cal. 2013) 2013 WL 1983111, *12.)

Although the Court of Appeal acknowledged Jolley found that a duty of care existed, that case involved a construction loan, a critical distinction that the Court of Appeal held rendered Jolley inapposite.  Jolley decided that the question of whether a bank owed a duty of care was not properly resolved by the general rule stated in Nymark, supra, 231 Cal.App.3d 1089. (Jolley, supra, 213 Cal.App.4th at pp. 898-899.)  Instead, the court in Jolley applied the six-factor test of Biakanja v. Irving (1958) 49 Cal.2d 647, 650, in which imposition of a duty of care by a lender to a borrower depends on a balancing of several factors.  These factors, according to Jolley, favored a finding of a duty of care owed by a bank under the specific facts of that case, where the relationship between the lender and borrower on a construction loan is "ongoing" with contractual disbursements made throughout the construction period. (Jolley, at pp. 900-901 & fn. 16.)

 

The Court of Appeal concluded that the handling of loan modification negotiations or servicing is a typical lending activity that precluded imposition of a duty of due care.

 

Accordingly, the Court of Appeal affirmed 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

 

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

 

 

 

 

 

 

 

 

FYI: 1st Cir Holds Borrower's Claims of Negligence in Loan Mod/Loss Mit Process Barred by Economic Loss Doctrine

The U.S. Court of Appeals for the First Circuit recently ruled that the economic loss doctrine barred a borrower's claims against a loan servicer and others for negligence and negligent misrepresentation, reasoning that the borrower failed to show how an exception to the economic loss doctrine applied to his claims that the defendants voluntarily assumed duties beyond the mortgage agreement to consider his loan modification application and to provide him with a reinstatement amount. 

 

In so ruling, the Court noted that recognizing such duties would contradict the terms of the mortgage agreement allowing the lender to accelerate payments and to foreclose.

 

A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/12-2388P-01A.pdf.

 

Plaintiff borrower ("Borrower") obtained a home refinance loan that was later assigned to defendant savings bank and serviced by defendant loan servicer ("Servicer").  The mortgage agreement provided among other things that in the event of default, the loan could be accelerated and foreclosed, and that Borrower could reinstate the mortgage upon payment of any past due amounts, penalties, interest and fees. 

 

Borrower defaulted on the loan, was able to obtain a loan modification, but subsequently fell behind on his payments a second time.  Servicer then sent Borrower a letter informing him of the amount due and that additional fees would be assessed after a certain date.   The letter did not specifically refer to a "reinstatement amount."  

 

Shortly thereafter, Borrower allegedly received a letter from a foreclosure law firm ("Foreclosure Counsel"), informing him that the loan was being accelerated according to the terms of the loan agreement.  Directing Borrower to Foreclosure Counsel's website, the letter indicated that Borrower could reinstate the loan, but did not provide a reinstatement amount.   Borrower allegedly requested a reinstatement amount from Foreclosure Counsel, but never received one. 

 

Next, having received a notice from Servicer of a scheduled foreclosure sale of the property, Borrower faxed Servicer a loan modification application.  Borrower then allegedly exchanged communications with a number of Servicer representatives and was supposedly instructed in two separate letters to submit additional financial information.  Each letter provided a different fax number for submitting the information.  Per the instructions in the second letter, Borrower submitted the additional information to the number specified in that letter, but not to the number listed in the previous letter.   

 

Servicer later allegedly contacted Borrower by phone to inquire about the status of the submission of the additional information.  Borrower explained that he had submitted the information to the number listed in the second letter.  Servicer allegedly instructed him to disregard that second letter and to resend the information to the number listed in the first letter, which Borrower did.  Borrower allegedly heard nothing further and the foreclosure sale took place as scheduled.

 

Seeking damages as well as injunctive relief nullifying the foreclosure, barring the pending eviction, and allowing him to modify or reinstate the mortgage, Borrower filed suit claiming that Servicer and others were negligent in failing to provide him with a reinstatement amount and in mishandling his loan modification application.  Borrower further claimed that Servicer engaged in negligent misrepresentation in connection with the second letter.  Borrower also asserted a contract claim -- but later abandoned it -- based on Servicer's alleged failure to delay the foreclosure while reviewing his application for a loan modification. 

 

Removing to federal court, the defendants moved to dismiss, arguing that Borrower's tort claims were barred by the economic loss doctrine and that they had breached no duties to Borrower.  The lower court granted the motions to dismiss.  Borrower appealed. 

 

The First Circuit affirmed, concluding that no exceptions to the economic loss doctrine applied to salvage Borrower's tort claims.

 

Explaining that the economic loss doctrine prohibits tort recovery for purely economic or commercial losses deriving from a contractual agreement, the Court of Appeals went on to observe that in the absence of a specific duty assumed by a contracting party, no general duty exists to avoid negligently causing economic loss. 

 

Accordingly, in noting the lack of clarity in New Hampshire law, the First Circuit observed that Borrower's claims essentially relied on an exception to the economic loss doctrine for assumed duties outside the contractual agreement.  Specifically, Borrower's claims hinged on the alleged assumed duties to provide a reinstatement amount and to consider his application for a loan modification.  In so doing, the Court concluded that New Hampshire's economic loss doctrine bars tort recovery for a breach of either of these alleged duties. 

 

As the Court discussed, under the economic loss doctrine, even if the mortgage agreement to allow reinstatement necessarily included a promise to provide Borrower with a reinstatement amount upon request, a tort claim based on that contractual duty must fail because a party to a contract may not pursue tort recovery for purely economic or commercial losses stemming from the contractual relationship.  Thus, pointing out that Borrower had abandoned his breach of contract claim on appeal, the Court stressed that Borrower could not recover in tort for breach of alleged duties that contradict the express terms of the contract, such as the right to accelerate the payments and foreclose in the event of default.   

 

As the First Circuit explained, the alleged duty to process a loan modification application before foreclosure was not merely an additional duty, but one that actually contradicted the mortgage agreement by restricting Servicer's right to foreclose.  Therefore, observing that New Hampshire does not recognize a statutory or common-law right to reinstate a mortgage, the Court refused to alter the terms of the contract by recognizing such alleged duties.

 

With regard to the negligent misrepresentation claim concerning the second letter, the Court acknowledged an exception to the economic loss doctrine for certain misrepresentation claims, but concluded that Borrower's claim fell outside that exception since Servicer's representations were made during the course of contract performance and related to the mortgage agreement itself in that the representations concerned the process by which the Servicer would decide whether to exercise the contractual right to foreclose.  See Wyle v. Lees, 33 A.3d 1187, 1190-93 (N.H. 2011)(applying the negligent misrepresentation exception to situations in which the representations preceded the formation of the contract or related to a transaction other than the one that constitutes the subject of the contract).

 

Having thus concluded that no exception to the economic loss doctrine applied to Borrower's tort claims, the First Circuit affirmed the lower court's dismissal of the negligence and negligent misrepresentation claims.

 

 

 

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

 

 

 

 

 

FYI: Ill App Ct Confirms Lenders May Sue on Note and Mortgage Consecutively or Concurrently, Rejects Borrower's Claims Against Second Mortgagee

The Illinois Appellate Court, First District, recently rejected a borrower's argument that a second mortgagee was barred from demanding payment in exchange for release of its lien after it had previously obtained a default judgment on the promissory note secured by the mortgage. 

 

In so ruling, the Court noted that Illinois law allows a creditor to consecutively or concurrently pursue remedies under a mortgage and note, and that the second mortgage had not been extinguished in the foreclosure because a judicial sale of the property never occurred as required for a foreclosure to become final.  

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1121964.pdf.

 

Two banks extended loans to plaintiffs borrowers ("Borrowers") to finance the purchase of a residence.  The first bank ("First Bank") secured its loan with a first mortgage on the property.  Defendant bank ("Second Mortgagee") similarly secured its portion of the financing with a second mortgage on the same property.  When Borrowers stopped making their loan payments, First Bank filed a foreclosure action against both Borrowers and Second Mortgagee, and subsequently obtained a default judgment against them.  The court in the foreclosure action entered a judgment for foreclosure and sale, but the sale never took place.  Rather, Borrowers set up a short sale of the property, with the sale being subject to the approval of both banks. 

 

During the pendency of the foreclosure action, Second Mortgagee, through the co-defendant law firm ("Law Firm"), filed suit against Borrowers on the promissory note secured by the second mortgage.  Several months following entry of the foreclosure judgment in First Bank's favor, Second Mortgagee obtained a default judgment against Borrowers on its note allowing it to garnish Borrowers' wages.  Second Mortgagee recorded the judgment on the note.

 

Borrowers obtained an offer for the property for less than the amount of the foreclosure judgment, and First Bank agreed to approve the short sale if Second Mortgagee executed a release of its second mortgage.  Second Mortgagee ultimately agreed to the release after requiring Borrowers to pay a small portion of the amount they owed.  

 

Without challenging the enforceability of Second Mortgagee's judgment against them on the note, Borrowers filed suit against Second Mortgagee and Law Firm, asserting that during the period when they were trying to sell their property, Law Firm improperly maintained that Second Mortgagee had an enforceable second mortgage following the judgment on its note. 

 

Specifically, Borrowers argued that res judicata barred any action on the second mortgage, such as requiring payment in exchange for the release, once Second Mortgagee had obtained a default judgment on its promissory note.  Borrowers also claimed that Second Mortgagee's demand for payment to execute the release violated the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq., and, further, that Law Firm engaged in false or misleading conduct in violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. 

 

Second Mortgagee and Law Firm moved to dismiss, arguing that Second Mortgagee's default judgment on the note did not bar it from enforcing the second mortgage, and that First Bank's foreclosure judgment did not extinguish the second mortgage since no judicial sale and confirmation of sale ever took place.

 

The lower court dismissed Borrowers' complaint with prejudice.  Borrowers appealed.  The Appellate Court affirmed.

 

As you may recall, the Illinois Mortgage Foreclosure Law ("IMFL") provides that a foreclosure "complaint . . . may be joined with other counts or may include in the same count additional matters or a request for any additional relief."  735 ILCS 5/15-1504(b). 

 

The IMFL further provides that following a judgment of foreclosure, only a judicial sale of the subject property and judicial confirmation of the sale will terminate "with finality" the rights of third parties.   735 ILCS 5/15-1404. 

 

Applying the so-called transactional test to determine whether res judicata barred Second Mortgagee's enforcement of its lien, the Appellate Court relied on court precedent and the IMFL in concluding that a mortgagee may choose whether to proceed on a note or to foreclose on a mortgage.  See LP XXVI, LLC v. Goldstein, 349 Ill. App. 3d 237, 241 (2004)("mere proximity in time and the overlap of some of the parties [do not] render them a single transaction . . . ."); Citicorp Savings of Illinois v. Ascher, 196 Ill. App. 3d 570, 574 (1990)(ruling that a foreclosure judgment does not bar a later suit on a guaranty agreement).  In so doing, the Appellate Court rejected Borrowers' assertion that enforcement of personal liability on the underlying note and a mortgage foreclosure action must be pursued in a single action.

 

Distinguishing between in rem, quasi in rem, and in personam actions, the Appellate Court also explained that the IMFL expressly applies only to mortgage foreclosures and does not require that other types of lawsuits, such as actions on a promissory note, be joined to the foreclosure in a single action. 

 

The Court also ruled that under the IMFL, First Bank's foreclosure judgment against Second Mortgagee did not preclude it from pursuing payment in exchange for the release of its mortgage because First Bank never held a judicial sale of the property. 

 

Finally, the Court also concluded that Borrowers' claims under the Illinois Consumer Fraud and Deceptive Business Practices Act and the federal Fair Debt Collection Practices Act could not survive in light of the Court's ruling on the viability of the second mortgage.

 

 

 

 

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

 

 

 

 

 

 

 

 

FYI: PA Sup Ct Holds Defective Pre-Foreclosure Notice Not Sufficient to Undo Foreclosure

The Supreme Court of Pennsylvania recently held that a mortgagee's failure to comply with a state statute requiring pre-foreclosure notice to a mortgagor of her option to meet face-to-face with the mortgagee or a consumer credit counseling agency did not divest the trial court of jurisdiction over the mortgagee's foreclosure.

 

A copy of the reported opinion is available at: http://www.pacourts.us/assets/opinions/Supreme/out/j-24-2013mo.pdf#search=%22beneficial%22.
 

After a mortgagor defaulted on her mortgage loan, the mortgagee commenced foreclosure.  Prior to filing its foreclosure complaint, and in an effort to comply with the Pennsylvania's Homeowner's Emergency Mortgage Act, 35 P.S. §§ 1680.401c et seq. ("Act 91"), the mortgagee provided the mortgagor with notice of her option to arrange a face-to-face meeting with a consumer credit counseling agency to attempt to resolve the delinquency.  The mortgagor and mortgagee eventually agreed to a settlement providing the mortgagee with a judgment for the accelerated amount due on the mortgage, which the mortgagee agreed not to execute so long as the mortgagor made regular payments.

 

Following the mortgagor's default on her obligations under the settlement agreement, the mortgagee executed its judgment and purchased the mortgagor's property at a foreclosure sale.  The mortgagor moved to set aside the judgment and sale on the basis that the mortgagee's notice prior to its initial foreclosure action was deficient. 

 

Specifically, the mortgagor relied on the language of Act 91 as enacted at the time of the initial foreclosure action, which "required a mortgagee who desired to foreclose to send notice to the mortgagor 'advis[ing] the mortgagor of his delinquency . . . and that such mortgagor has thirty (30) days to have a face-to-face meeting with the mortgagee who sent the notice or a consumer credit counseling agency to attempt to resolve the delinquency . . . by restructuring the loan payment schedule or otherwise.'"  Slip Op. at 5 (citation omitted) (alterations and emphasis in original).  Because the mortgagee's notice only provided her with the option of meeting with a consumer credit counseling agency, and not the alternative choice of meeting with the mortgagee, the mortgagor argued that the notice was deficient, thereby preventing the mortgagee from now foreclosing.

 

The trial court agreed with the mortgagor that the mortgagee's notice was deficient, and further held that the defective notice stripped the court of jurisdiction.  The trial court thus set aside the judgment and sale, and dismissed the mortgagee's original foreclosure complaint.  The intermediate appellate court affirmed.

 

The Supreme Court of Pennsylvania reversed the dismissal of the mortgagee's original foreclosure complaint, and remanded the matter for further proceedings.

 

On appeal before the Supreme Court of Pennsylvania, the mortgagee argued that Act 91's notice provisions did not implicate the trial court's jurisdiction, but instead were procedural requirements that went to the power of the court to act and were thus waivable.  Conversely, the mortgagee argued that the statutory notice requirements were mandatory, and that the legislature intended them to be met before a foreclosure action could be commenced.

 

In Pennsylvania, "'[c]laims relating to a tribunal's power are, unlike claims of subject matter jurisdiction, waivable.'"  Slip Op. at 7 (citation omitted).  Moreover, "[i]n the absence of a clear legislative mandate, laws are not to be construed to decrease the jurisdiction of the courts."  Slip Op. at 8.

 

On appeal, the Pennsylvania Supreme Court observed that whether Act 91 notice implicates subject matter jurisdiction was an issue of first impression.  However, the Court found persuasive a recent opinion by the New Jersey Supreme Court "reject[ing] a mortgagor's argument that a defect in a pre-foreclosure notice violates a 'jurisdictional precondition' and renders any resulting judgment void" on the basis that the statute at issue lacked any explicit statement by the legislature indicating that the notice requirements implicated jurisdiction.   Slip Op. at 7 (citing U.S. Bank Nat'l Assoc. v. Guillaume, 38 A.3d 570, 587 & n.4 (N.J. 2012)). 

 

The Pennsylvania Supreme Court then distinguished subject matter jurisdiction, which concerns a party's ability to commence a cause of action that sets forth "'a factual situation [entitling] one person to obtain a remedy in court from another person,'" from procedural law, which are "'the rules that prescribe the steps for having a right or duty judicially enforced . . . .'"  Slip Op. at 9 (citations omitted). 

 

Applying this distinction, the Court concluded that "the Act 91 notice requirements appear to fit comfortably in the procedural realm, as they set forth the steps a mortgagee with a cause of action must take prior to filing for foreclosure," and "do not sound in jurisdiction, as they do not affect the classification of the case as a mortgage foreclosure action."  Slip Op. at 9. 

 

Finally, the Court emphasized that "the lack of explicit language in Act 91 prescribing that such requirements are jurisdictional cautions against this Court treating them as such."  Slip Op. at 9.

 

 

 

 

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