FYI: Ill App Ct Rejects Alleged Modification of Commercial Loan for Non-Compliance with Illinois Credit Agreements Act

The Illinois Appellate Court, First District, recently reversed and remanded judgment in a commercial foreclosure, holding that a settlement agreement was unenforceable because it was a modification of the mortgage documents and subject to the requirements of the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq. (“Credit Act”).

 

A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/1stDistrict/1121661.pdf

 

In 2008, a company (“Company”) borrowed money from a bank (“Bank”) to purchase and develop a piece of commercial real estate.  Company granted Bank a mortgage on the property, secured by two promissory notes.  Ten individual organizers of Company signed commercial guaranties promising to pay Company’s debts.  Company failed to raise the necessary capital and the planned development never materialized.

 

A construction company commenced an action to foreclose on its mechanics liens on the property.  Bank filed a cross-complaint against Company to foreclose on its mortgage and for breach of the promissory notes, and a third party complaint against the guarantors for breach of the guaranties.  Throughout the proceedings, Company and eight of the guarantors were all represented by the same attorney.  Of the two remaining guarantors, only one is relevant to this action (hereinafter, “Guarantor P”).

 

During the course of litigation, the parties began settlement negotiations which occurred mostly in e-mails over the course of a year.  Throughout the negotiations, the parties attempted to resolve their differences regarding the guarantors’ ability to pay, the mechanism for determining whether they had experienced an increase in ability to pay, and the role of Guarantor P in the settlement.  Counsel for Bank repeated stated that any settlement offer required approval by Bank.

 

Although subsequent e-mails between counsel for Company and Bank indicated that settlement had not been finalized, Company argued that the e-mail exchange between the parties culminated in a settlement agreement.  The Bank eventually rejected the settlement offer from Company and guarantors.

 

Bank moved for summary judgment in the amount of over $1.8 million.  Company and the guarantors filed an emergency motion to enforce the settlement, alleging that the parties agreed to a deed in lieu of foreclosure and a $350,000 payment.  Bank argued that no agreement was ever reached, and even if one was reached, it was unenforceable because the purported agreement was not signed by the parties as required under the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq. (“Credit Act”).

 

The trial court determined that the agreement between the parties constituted a binding agreement when the piecemeal terms in e-mails were read together.  In addition, the trial court found that the settlement agreement was not a new credit agreement, but rather a modification of an existing mortgage agreement and did not invoke the Credit Act.

 

On appeal, the Illinois Appellate Court first considered whether the purported settlement agreement was encompassed by the Credit Act.

 

As you may recall, section 1(1) of the Credit Act defines “Credit agreement” as “an agreement or commitment by a creditor to lend money or extend credit or delay or forbear repayment of money not primarily for personal, family or household purposes, and not in connection with the issuance of credit cards.”  815 ILCS 160/1(1) (West 2010).  Section 2 of the Credit Act states that “[a] debtor may not maintain an action on or in any way related to a credit agreement unless the credit agreement is in writing, expresses an agreement or commitment to lend money or extend credit or delay or forbear repayment of money, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor.”  815 ILCS 160/2 (West 2010).

 

Section 3 of the Credit Act states in pertinent part:

 

The following actions do not give rise to a claim, counter-claim, or defense by a debtor that a new credit agreement is created, unless the agreement satisfies the requirements of Section 2:

 

***

(3) the agreement by a creditor to modify or amend an existing credit agreement or to otherwise take certain actions, such as entering into a new credit agreement, forbearing from exercising remedies in connection with an existing credit agreement, or rescheduling or extending installments due under an existing credit agreement.” 

 

815 ILCS 160/3 (West 2010).

 

In light of these provisions, the Appellate Court found the purported settlement agreement to be a modification of an existing agreement, i.e., the mortgage documents.  But unlike the trial court, the Appellate Court determined that the modification invoked the Credit Act by its plain terms.

 

The Court relied on Teachers Insurance and Annuity Ass’n of America v. La Salle National Bank, 295 Ill. App.3d 61, 70 (1998), holding that the parties’ original written agreement did not require the creditor to restructure the loan at issue, and their subsequent agreement to that effect fell within Section 3 of the Credit Act and could not be enforced absent a signed writing.  As applied to this case, the guarantors had not established any provision in the parties’ original agreement that required Bank to accept a lower sum than what was otherwise due.  The intent of the purported settlement agreement was to have Bank refrain from collecting the remaining sum due and from exercising its right to foreclose on the property.  Therefore, the Appellate Court held that the purported modification agreement triggered application of Section 3 of the Credit Act and could not be enforced absent a signed writing.

 

The Appellate Court next considered whether the record supported a finding of an enforceable settlement agreement.  In the Court’s own words, “little proof exists that a meeting of the minds occurred here.”  The e-mails did not evince the relevant terms of the agreement, did not recite the names of every party to be bound, and Guarantor P’s role in the settlement had not been finalized.  Moreover, the e-mails did not set forth the specific property to be transferred in the deed, the legal instruments to be rendered inoperable by the agreement, and provided no deadlines for the parties to fulfill their obligations under the agreement. 

 

The Appellate Court further noted that Company and the guarantors failed to develop any argument regarding the signatures of the parties at issue.  The Court considered cases involving an attorney’s ability to bind her clients and found that even if Bank’s attorney had authority to bind the Bank, her e-mails clearly stated that any settlement was conditioned upon Bank’s approval, which did not appear in the record.

 

Accordingly, judgment was reversed and remanded for further proceedings.

 

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

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FYI: 1st Cir Upholds Dismissal of RICO Claims Against Lender for Alleged Fraud in Loan to Purchase Securities

The U.S. Court of Appeals for the First Circuit recently affirmed the dismissal of a Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (“RICO”) claim against a bank, in which the bank was accused of engaging in a scheme to entice investors into borrowing money to buy securities in violation of federal securities regulations. 

 

In so ruling, the First Circuit confirmed that private plaintiffs may not bring RICO claims based on conduct that would have been actionable as fraud in the purchase or sale of securities.

 

A copy of the opinion is available at: http://media.ca1.uscourts.gov/pdf.opinions/12-2128P-01A.pdf

 

Two investors (“Borrowers”) sued their bank, several officers/employees of the bank and the bank’s parent/subsidiary/affiliated companies, and several insurance companies (collectively, “Bank”), alleging that Bank enticed them into borrowing money to buy and trade securities.  Borrowers claimed that Bank intentionally concealed the fact that the entire arrangement violated Regulation U, 12 C.F.R. Ch. II, Pt. 221, a regulation issued by the Board of Governors of the Federal Reserve Board pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. (“Regulation U”).  See 12 C.F.R. § 221.1(a).

 

Regulation U “imposes credit restrictions upon persons other than brokers or dealers (hereinafter lenders) that extend credit for the purpose of buying or carrying margin stock if the credit is secured directly or indirectly by margin stock.”  12 C.F.R. § 211.1(b)(1).  “Margin stock” includes “[a]ny equity security registered … on a national securities exchange.”  Id. § 221.2.  In pertinent part, Regulation U prohibits banks from lending more than a certain percentage of the value of the securities used to secure the loan,  see Id. § 221.3, thereby typically ensuring that the purchaser has some of his own fund invested, and reducing the extent to which holders of securities are over-leveraged.  See Capital Mgmt. Select Fund Ltd. V. Bennett, 680 F.3d 214, 221-22 & n.9 (2d Cir. 2012).

 

After roughly $9 million in trades, Borrowers suffered a loss of nearly $3 million, and claimed that had the Bank not loaned them the money they would not have bought so many securities and suffered such a loss.  Borrowers advanced two arguments: (1) a private cause of action under Regulation U, and (2) treble damages and attorneys’ fees under RICO.

 

The district court dismissed the case, ruling that (1) there is no private right of action for a violation of Regulation U, and (2) the alleged misconduct was not actionable under RICO, which, as amended, does not encompass private claims that would have been “actionable as fraud in the purchase or sale of securities.”  Private Securities Litigation Reform Act (“PSLRA”), Pub. L. No. 104-67, § 107, 109 Stat. 737 (1995), amending 18 U.S.C. § 1964(c).  Plaintiff appealed the dismissal of their RICO claim and not the claim under Regulation U.

 

As you may recall, “[f]raud in the sale of securities” is listed as a RICO predicate act.  18 U.S.C. § 1961(1).  For a time, this allowed private litigants to use RICO to threaten treble damage liability in securities fraud litigation.  See Bald Eagle Area Sch. Dist. V. Keystone Fin., Inc., 189 F.3d 321, 327 (3d. Cir. 1999).  In response, Congress adopted the PSLRA, which generally bars private plaintiffs from bringing RICO claims based on “any conduct that would have been actionable as fraud in the purchase or sale of securities.”  18 U.S.C. § 1964(c); see Bald Eagle Area Sch. Dist., 189 F.3d at 327.

 

On appeal, the issue before the First Circuit was whether the PSLRA, which amended RICO, barred the Borrowers’ RICO claim in this case.  In other words, whether the conduct in question is “actionable as fraud in the purchase or sale of the securities.” 

 

To provide some background, actions for fraud in the purchase or sale of securities often arise under section 10(b) of the Securities Exchange Act of 1934 and U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5.  See 15 U.S.C. § 78j; 17 C.F.R. § 240.10b-6.  Borrowers argued that this “bank fraud” was not actionable under Rule 10b-5 and not barred by the PSLRA because the fraud was not in “connection with the purchase or sale of securities.”  Borrower attempted to draw a distinction between obtaining loans and using loan funds to purchase securities, arguing that the alleged fraud arose “in connection with” the issuance of loans, not “in connection with” the purchase of securities.

 

The First Circuit rejected the argument because of the close nexus between the alleged fraud and the purchase of securities.  The scheme essentially alleged that the Bank loans were “extended exclusively for the purchase of securities” and the damages sought directly related to the purchase and sale of securities. 

 

Case law interpreting the “in connection with” requirement of Rule 10b-5 and related statues supported the First Circuit’s conclusion.  The Third Circuit found sufficient nexus between a failure to disclose the interest terms of margin trading  accounts and the subsequent purchase of securities to state a cause of action under Rule 10b-5.  See Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939, 943-45 (3d Cir. 1985).  The Ninth Circuit has held that misleading statements about stock reports and the risks of buying on margin in a declining market using borrowed funds stated a claim under Rule 10b-5.  See Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 618-19 (9th Cir. 1981).

 

In the context of a more traditional 10b-5 case dealing with a false or misleading stock tip, the Fourth Circuit identified four (non-exhaustive) factors relevant to whether a particular case satisfies the transactional nexus:

 

(1) whether a securities sale was necessary to the completion of the fraudulent scheme; (2) whether the parties’ relationship was such that it would necessarily involve trading in securities; (3) whether the defendant intended to induce a securities transaction; and (4) whether material misrepresentations were disseminated to the public in a medium upon which a reasonable investor would rely. 

 

See SEC v. Pirate Investor LLC, 580 F.3d 233, 233 (4th Cir. 2009) (citations omitted) (quotation marks omitted).

 

Applying the first three pertinent factors, the First Circuit found that all these facts were satisfied because the purpose of the alleged scheme was both to make loans and sell securities; the selling of securities was a necessary component of the scheme and of the relationship between the parties; and the complaint specifically alleged that the scheme was designed to make money for Bank through interest and commissions from the trading of securities. 

 

In sum, the First Circuit found the alleged scheme to be directly connected to purchase or sale of securities.  This was not a case where proceeds of an independent fraud that happened to be invested in securities, or where funds obtained were later invested in securities.  Here, the Borrowers obtained loans specifically to buy and sell securities and thus, the PSLRA is a bar in this action.

 

Accordingly, the First Circuit affirmed the district court’s ruling dismissing the action.

 

 

 

 

 

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

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: Ill App Ct Holds Mortgagee's Alleged Lack of Standing Would Not Void Judgment of Foreclosure

The Illinois Appeals Court, Second District, recently affirmed a trial court’s denial of a borrower’s motion to vacate the confirmation of a foreclosure sale because the borrower forfeited his right to contest the foreclosure action by failing to appear and file an answer.  

 

In so ruling, the Appellate Court held that standing does not affect a court’s subject matter jurisdiction as standing is merely an element of justiciability. Therefore, a party’s failure to have standing does not void a court’s judgment.  The Appellate Court further held if a party wishes to vacate a sale and judgment of foreclosure, the party must have a meritorious defense to the foreclosure judgment and meet the requirements of 735 ILCS 5/15-1508(b)(iv).

 

A copy of the opinion can be found at:

http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/2ndDistrict/2130676.pdf

 

On September 8, 2011, Plaintiff Mortgagee (“Mortgagee”) filed a foreclosure action against Defendant Borrower (“Borrower”). Plaintiff also named record and all non-record claimants as defendants.  One of the subordinate lienholders appeared and answered the foreclosure complaint while Borrower did neither.  Mortgagee moved for summary judgment against the subordinate lienholders and defaulted Borrower.

 

On June 5, 2012, the trial court entered a judgment of foreclosure in favor of Mortgagee.  On October 11, 2012, the subject property was sold and Mortgagee was the winning bidder. 

 

Mortgagee proceeded to move to confirm the sale.  At this point, Borrower appeared in the action for the first time and objected to the foreclosure.  Specifically, Borrower argued he was present at the sale and that no public offering occurred. On April 4, 2013, the trial court confirmed the sale.

 

On May 3, 2013, Borrower moved to vacate the confirmation of the sale arguing that a delay in his arrival to the courtroom prevented him from arguing his motion.  Borrower also asserted the original mortgagee did not properly assign the note and mortgage to Mortgagee and that Mortgagee was asserting rights “without showing whether any proper assignment occurred between [the known earlier owners of the note and mortgage] over time.” The trial court denied Borrower’s motion holding that Borrower forfeited the ability to raise his standing argument because he failed to appear and file an answer. This appeal followed. 

 

On appeal, Borrower argued that Mortgagee failed to plead its standing, and therefore the trial court lacked subject matter jurisdiction.  Borrower asserted that pursuant to the Illinois Mortgage Foreclosure Law, Mortgagee must allege the “capacity in which the plaintiff brings this foreclosure, i.e. the legal holder of the indebtedness, a pledgee, an agent, the trustee under a trust deed or otherwise.”  Borrower argued that Mortgagee’s allegation that it was the mortgagee and holder of the note was not supported by the documents attached to the complaint.  As a result, the trial court lacked subject matter jurisdiction and its judgment was void.

 

The Appellate Court rejected Borrower’s argument ruling that “even if Plaintiff had the burden to plead its standing, and even if it failed to do so, its failure to do so did not deprive the trial court of subject matter jurisdiction.”

 

The Appellate Court cited City National Bank of Hoopeston v. Langley, 161 Ill. App. 3d 266 (1987).  In Langley, the Court observed the plaintiff was statutorily required to attach a copy of the mortgage and note to the complaint which it failed to do.  As a result of the plaintiff failing to meet the statutory requirements of a foreclosure action, the Langley court determined the trial court lacked subject matter jurisdiction and voided the judgment.

 

Although the Court noted that Langley supported Borrower’s argument, the Court held Langley inapplicable, because it was decided under the old rule in Illinois that a court lacked subject matter jurisdiction unless all statutory requirements of a purely statutory cause of action were satisfied.  However, the current law is that subject matter jurisdiction is conferred entirely by the Illinois Constitution. 

 

Thus, the Court held, the only consideration in determining subject matter jurisdiction is whether the complaint falls within the general class of cases a court has the inherent power to hear.  If a matter falls within this class, the Court held subject matter jurisdiction is present.

 

The Appellate Court stated the reason for its broad view of subject matter jurisdiction is that it protects the finality of judgments over alleged defects in validity. The Appellate Court explained that labeling the requirements of a statutory cause of action as jurisdictional “would permit an unwarranted and dangerous expansion of the situations where a final judgment may bet set aside on a collateral attack.” In order to prevent judgments from being collaterally attacked, “final orders should be characterized as void only when no other alternative is possible.” See Belleville Toyota v. Toyota Motor Sales, U.S.A., Inc., 19 Ill.2d 325, 341 (2002).

 

The Court then examined whether a court has subject matter jurisdiction in a matter where a party appears to not have standing.  The Appellate Court determined a lack of standing does not affect subject matter jurisdiction as a plaintiff who lacks standing can still assert a justiciable matter.  Standing may be element of justiciability, but is not a requirement for a justiciable matter.  Therefore, a lack of standing does not void a judgment.

 

The Appellate Court rejected Borrower’s subject matter jurisdiction argument because Mortgagee presented a justiciable matter regardless of its standing.  Moreover, a foreclosure case “falls within the general class of cases that the court has the inherent power to hear and determine.”

 

The Court did note the documents attached to the complaint contradicted Mortgagee’s allegation that it had standing to foreclose on the subject property.  However, Borrower conceded the merits of the matter could only be reached if the trial court lacked subject matter jurisdiction. Because the Appellate Court determined subject matter jurisdiction existed, it did not examine whether Mortgagee had standing.

 

Borrower attempted to argue the Appellate Court should reach the merits of Mortgagee’s standing regardless because “the considerations of substantial justice, plain error, and/or public importance” require it to do so.   The Appellate Court acknowledged it has the power to vacate a default judgment after a judicial sale if justice otherwise was not done. 735 ILCS 5/15-1508(b)(iv). However, it will not exercise this power to merely “protect an interested party against the result of his own negligence.” Wells Fargo Bank N.A. v. McCluskey, 2013 IL 115469, ¶19 quoting Shultz v. Milburn, 366 Ill. 400, 403 (1937)).

 

The Appellate Court held that if Borrower wished to vacate the sale and underlying judgment of foreclosure, he must have a meritorious defense to the underlying judgment and also meet the requirements of 735 ILCS 5/15-1508(b)(iv).  Under 735 ILCS 5/15-1508(b)(iv), Borrower must show that justice “was not otherwise done because either the plaintiff, through fraud or misrepresentation, prevented the [Borrower] from raising his meritorious defenses to the complaint at an earlier time in the proceedings, or the defendant has equitable defenses that reveal he was otherwise prevented from protecting his property interests.”   

 

Borrower did not attempt to satisfy the requirements of 735 ILCS 5/15-1508(b)(iv), and therefore the Appellate Court did not examine whether Mortgagee had standing to bring the foreclosure action.

 

The Appellate Court affirmed the trial court’s denial of Borrower’s motion to vacate the confirmation of the sale of the subject property. 

 

 

 

 

 

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

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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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