FYI: 1st Cir Adopts "Unsophisticated Consumer" Standard for FDCPA Actions

The U.S. Court of Appeals for the First Circuit recently affirmed a judgment against a debt collector for violation of the federal Fair Debt Collection Practices Act (“FDCPA”) where the debt collector’s debt validation or “1692g” notice included an implied threat of imminent litigation, which the Court held overshadowed the consumer’s right to dispute the debt. 

 

In so ruling, as a matter of first impression in this circuit, the First Circuit held that “for FDCPA purposes, a collection letter is to be viewed from the perspective of the hypothetical unsophisticated consumer.”

 

A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/13-2478P-01A.pdf.

 

On October 23, 2012, a debt collection law firm (Law Firm) sent a consumer (Consumer) a collection letter which explained that Law Firm planned to collect the debt “through whatever legal means are available and without [Consumer’s] cooperation.”  The letter went on to inform Consumer that Law Firm was “obligated to [its] client to pursue the next logical course of action without delay” and described how the [Consumer] could make payments.  The collection letter “contained the statutorily mandated notice of consumer rights.” 

 

Following her receipt of this collection letter, Consumer contacted Law Firm to dispute ownership of the debt and request validation.  Approximately one month after the collection letter arrived, Consumer sued for alleged violations of the FDCPA.

 

As you may recall, a debt collector must inform the consumer that s/he has thirty days from receipt of the debt validation notice within which to dispute the debt, and that if the consumer disputes the debt, the debt collector must provide the consumer with verification of the debt. See 15 U.S.C. § 1692g(a)(3)-(4).  If the consumer either disputes the debt or requests information concerning the identity of the original creditor within this thirty-day period, the debt collector must suspend collection efforts until it supplies such data.  See Id. § 1692g(b).

 

The Financial Services Regulatory Relief Act of 2006 amended the FDCPA to include that “[a]ny collection activities and communication during the 30-day period may not overshadow or be inconsistent with the disclosure of the consumer's right to dispute the debt or request the name and address of the original creditor.” See Pub. L. No. 109-351, § 802(c), 120 Stat. 1966, 2006-07 (codified at 15 U.S.C. § 1692g(b)).

 

The First Circuit first considered whether Consumer had standing.  Law Firm argued that Consumer lacked “a constitutionally cognizable injury because she was not flummoxed about her statutory rights after reading the collection letter, as evidenced by the fact that she exercised those rights.”  The First Circuit rejected Law Firm’s standing arguments, reasoning that “[i]n cases in which a plaintiff's injury stems solely from the violation of a statute, the nature of the right that the statute confers is of paramount concern,” citing Warth v. Seldin, 422 U.S. 490, 500 (1975).  Thus, the First Circuit held that “[t]he invasion of a statutorily conferred right may, in and of itself, be a sufficient injury to undergird a plaintiff's standing even in the absence of other harm … the FDCPA does not require that a plaintiff actually be confused.”

 

In analyzing whether the collection letter actually violated the FDCPA (specifically, 15 USC 1692g), the First Circuit held that “for FDCPA purposes, a collection letter is to be viewed from the perspective of the hypothetical unsophisticated consumer.” 

 

The Court noted that a majority of the circuits applies a "least sophisticated consumer" standard. See, e.g., Fed. Home Loan Mortg. Corp. v. Lamar, 503 F.3d 504, 509 (6th Cir. 2007); Terran v. Kaplan, 109

F.3d 1428, 1431-32 (9th Cir. 1997); Russell v. Equifax A.R.S., 74 F.3d 30, 34 (2d Cir. 1996); cf. Chiang v. Verizon New Eng. Inc., 595 F.3d 26, 42 (1st Cir. 2010) (referencing, though having no occasion to adopt or apply, the least sophisticated consumer standard).

 

However, the First Circuit stated that was adopting the “unsophisticated consumer” formulation “to avoid any appearance of wedding the standard to the ‘very last rung on the sophistication ladder.’"  The Court noted that two other circuits -- the Seventh and Eighth -- concluded that a collection letter is to be viewed from the perspective of the hypothetical unsophisticated consumer.  See Peters v. Gen. Serv. Bureau, Inc., 277 F.3d 1051, 1055 (8th Cir. 2002); Gammon v. GC Servs. Ltd. P'ship, 27 F.3d 1254, 1257 (7th Cir. 1994).

 

The First Circuit then held that “a collection letter is confusing if, after reading it, the unsophisticated consumer would be left unsure of her right to dispute the debt and request information concerning the original creditor.”

 

The Court found that Law Firm’s collection letter “conveys the message that [Law Firm] is not inclined to do anything other than file a lawsuit and that it plans to pursue such a course of action ‘without delay.’  At bottom, the letter seems to threaten immediate litigation.” 

 

The First Circuit further found that “implicit in this threat, is the idea that litigation can be avoided only if payment is made forthwith. That idea is reinforced by the fact that the letter appears on law firm letterhead and bears the signature of an attorney.”

 

The Appellate Court was particularly critical that of the collection letter’s second-to-last sentence:  “[W]e further inform you that despite the fact that you have a thirty (30) day period to dispute the debt may not preclude [sic] the filing of legal action against you prior to the expiration of the period.”  According to the First Circuit, “this sentence is easily read as suggesting that a lawsuit is going to proceed without delay whether the consumer disputes the debt or not.”

 

The First Circuit concluded that “the letter effectively overshadows the disclosed right to dispute by conveying an inaccurate message that exercise of the right does not have an effect that the statute itself says it has … [it] could dupe the unsophisticated consumer into believing that disputing a debt could not forestall a suit.”

 

The Court also rejected the Law Firm’s other arguments.  Law Firm had argued that “the thirty-day validation period is not a grace period.”  However, the First Circuit held that an unsophisticated consumer could be confused when “faced with two seemingly contradictory statements:  that they may dispute the debt and that they must pay immediately.”  Accordingly, the First Circuit held that “when undertaking collection, a debt collector bears the burden of apprising the consumer of her validation rights in an effective manner.”

 

Law Firm also argued that “its collection letter [was] not confusing because it [did] not contain an express demand for payment within thirty days.”  The First Circuit disagreed:  “Although the letter does not demand immediate payment in haec verba, it not so subtly threatens immediate litigation and tells the plaintiff how to make payments. The clear implication is that the plaintiff can stave off suit only by ignoring her validation rights and making payment.”

 

Finally, Law Firm argued that “the fact that this collection letter was sent by an attorney is irrelevant.”  However, the First Circuit stated that it shared the view of the Third Circuit that “[u]nder the [FDCPA], attorney debt collectors warrant closer scrutiny because their abusive collection practices are more egregious than those of lay collectors,” citing Campuzano-Burgos v. Midland Credit Mgmt., Inc., 550 F.3d 294, 301 (3d Cir. 2008).  Thus, “[a]n unsophisticated consumer, getting a letter from an attorney, knows the price of poker has just gone up,” citing Avila v. Rubin, 84 F.3d 222, 229 (7th Cir. 1996).

 

Accordingly, the First Circuit affirmed the lower court’s judgment against the debt collection law firm.

 

 

 

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
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FYI: 9th Cir Rules Bank Did Not Violate Automatic Stay by Placing Temporary Administrative Pledge on Debtors' Deposit Accounts

The U.S. Court of Appeals for the Ninth Circuit recently held that a bank did not willfully violate the automatic stay by placing a temporary administrative pledge on the debtors’ accounts in favor of the bankruptcy trustee.

 

A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2014/08/26/12-16087.pdf

 

The debtors filed a voluntary Chapter 7 bankruptcy in August 2009. The debtors were deposit account holders at a bank (Bank). They held four accounts with an aggregate balance of $17,075.06. They did not list two accounts in their original schedule of assets, and did not claim any exemption for account funds. The debtors listed Bank as an unsecured creditor for two debts totaling $52,000.00.

 

When Bank discovered that the debtors filed for Chapter 7 bankruptcy, it placed a temporary administrative pledge on their account.  Bank  then sought instruction from the Chapter 7 trustee regarding the distribution of funds.  Bank sent a letter to the trustee stating that upon the filing of a bankruptcy petition, the account funds became the property of the bankruptcy estate, payable only to the trustee or upon the trustee’s order.

 

The debtors claimed a portion of the funds were exempt under Nevada law. They filed an adversary class action against Bank alleging violations of 11 U.S.C. § 362(a)(3)’s automatic stay provision.  Bank filed a motion to dismiss for failure to state a claim.

 

The Bankruptcy Court granted Bank’s motion to dismiss with prejudice finding (1) that the debtors lacked standing to pursue any violation of the automatic stay because the trustee alone has standing to protect estate property; and (2) that debtors could not allege any injury to their interest because they had no right to possess estate property.

 

On appeal, the District Court held that if there is no objection to a debtor’s claimed exemption, the property is exempt upon the expiration of the thirty-day objection period. The District Court noted there is an exception to this rule where the particular exemption statute does not allow the debtor to exempt the entire property interest. The District Court found that the statute here, § 362(a)(3) permits a debtor to exempt an entire property interest.

 

According to the District Court, before the objections period ran, the property remained with the estate and Bank did not violate § 362(a)(3) during this period. After this period, the District Court held, the property passed out of the bankruptcy estate and Bank could not violate § 362(a)(3) because that section only applied to estate property. Accordingly, the District Court affirmed the Bankruptcy Court’s ruling dismissing the account holders’ allegations.

 

The account holders then appealed to the Ninth Circuit.  The Appellate Court first determined when the account funds revested in the debtors. In reaching its decision, the Ninth Circuit examined United States Supreme Court’s ruling in Schwab v. Reilly, 560 U.S. 770 (2010). In Schwab v. Reilly, the U.S. Supreme Court held that where a debtor claims an exemption in an amount equal to the entire amount of the property, the asset remains in the estate, and only an “interest” in the property is removed from the estate.

 

The Ninth Circuit relied on the general rule that exempt property immediately revests in the debtor. The Ninth Circuit read Schwab v. Reilly as an exception to the general rule and found that the debtors in question did not fall within the Schwab exception.

 

The Nevada Statute in question exempted only seventy-five percent of the disposable earnings of a debtor.  Thus, the Ninth Circuit found that the general rule, and not Schwab v. Reilly, applied.

 

Finding that the general rule applied, the Ninth Circuit ruled that the account funds automatically became part of the bankruptcy estate when the debtors filed the petition. When the debtors filed the account exemption, the funds did not become exempt because of Section 341(a)’s 30-day objection period. The funds revested in the debtors after the expiration of this period, when no objections were made.

 

The Ninth Circuit rejected the debtors’ argument that they were injured during the thirty day period when the Bank placed the hold on the funds. The Ninth Circuit held that there was no injury because during this time, the funds remained estate property. After the funds revested, Bank could not violate the automatic stay provision because it applied only to estate property, and because the property revested, it was no longer estate property. 

 

Accordingly, the Ninth Circuit affirmed the District Court’s ruling in favor of the Bank.

 

 

 

 

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

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: 3rd Cir Rules Unqualified Use of Estimated Fees and Costs Violates FDCPA, Debt Collector's Notice Constituted "Debt Collection" Activity

The U.S. Court of Appeals for the Third Circuit recently held that estimates of attorney's fees and costs included in a statement to the borrower as components of the amount of the debt owed, without clarification that these amounts were estimates, constituted a misrepresentation in violation of the federal Fair Debt Collection Practices Act (FDCPA).  

 

The Third Circuit also rejected the debt collector’s argument that its notice did not constitute “debt collection” activity under the FDCPA.  In addition, the Court affirmed the district court's imposition of sanctions against the defendant law firm debt collector, where the defendant law firm did not comply with the district court's order to produce its invoices in discovery.  

A copy of the opinion is available at: http://www2.ca3.uscourts.gov/opinarch/132015p.pdf

 

Due to an error on the original mortgagee's part, a borrower (Borrower) fell behind on his mortgage payments, and in 2010, the mortgagee referred the account to a foreclosure law firm (Law Firm).  The Law Firm sent Borrower a debt validation or “1692g” notice to Borrower, which Borrower alleged contained an incorrect statement of the amounts owed.  

 

Borrower did not seek verification of the debt in response to the Law Firm’s notice.  Instead, Borrower filed a putative class action complaint alleging that the Law Firm violated the FDCPA by, among other things, falsely representing that it had performed legal services and incurred certain recoverable costs and expenses on or before the date of the letter.  Borrower alleged the letter violated the FDCPA because the Law Firm had not actually performed the related services or incurred the fees or costs as of the date it sent the letter.  

 

The district court dismissed Borrower’s complaint, holding that Borrower could not bring suit without first disputing the validity of the debt pursuant to the FDCPA’s validation procedures as set forth in 15 U.S.C. § 1692g.  The district court also held that the fees in the letter were estimates and held that “estimating the amount of attorneys’ fees in an itemized debt collection notice does not violate the FDCPA.”

 

The Third Circuit reversed, holding that the letter claimed to set forth “the amount of debt” and did not mention estimates.  The Court noted that if the Law Firm “wanted to convey that the amounts in the Letter were estimates, then it could have said so.”  Applying the FDCPA’s “least sophisticated debtor” standard, the Third Circuit held that the including of estimated fees letter constituted a misrepresentation in violation of the FDCPA.  

 

In addition, the Third Circuit rejected the Law Firm’s argument that a debt collector cannot incur liability as a matter of law where the debt collector complied with the debt validation procedure set forth in the FDCPA, and the consumer does not seek to validate the debt before filing suit.

 

The Third Circuit noted that the relevant statutory language indicates that disputing a debt is optional, and that failure to dispute a debt cannot be construed as an admission of liability.  Accordingly, the Court held that “a consumer is not required to seek validation of a debt he or she believes is inaccurately described in a debt communication as a prerequisite to filing suit under § 1692e.”

 

The Court also rejected the Law Firm’s argument that its debt validation or “1692g” notice was not debt collection activity under the FDCPA.  The Law Firm argued that its letter did not

constitute “debt collection activity” subject to the FDCPA because it “made no demand for payment, contained no suggestion that [Borrower] settle the underlying debt, nor enter into a payment plan.”

 

However, citing its prior ruling in Simon v. FIA Card Servs., N.A., 732 F.3d 259, 265 (3d Cir. 2013), the Third Circuit reiterated that a communication need not contain an explicit demand for payment to constitute debt collection activity.  The Court found that “[i]t is reasonable to infer that an entity that identifies itself as a debt collector, lays out the amount of the debt, and

explains how to obtain current payoff quotes has engaged in a communication related to collecting a debt,” and therefore that the Law Firm’s notice “constitutes debt collection activity under the FDCPA and misrepresentations contained therein may provide a basis for relief.”

 

Additionally, the Third Circuit affirmed the district court's imposition of sanctions against the Law Firm related to the Law Firm's refusal to produce its invoices pursuant to Borrower's proper discovery request.  The Law Firm objected to the request, arguing that the information sought was not likely to lead to the discovery of admissible evidence, but the district court granted the Borrower's motion to strike the objection, and ordered the Law Firm to produce the requested invoices.  Despite the court’s order, the Law Firm did not produce its invoices until attaching them to its summary judgment reply brief.  Based on that conduct, the Third Circuit held that the district court properly imposed sanctions on the Law Firm in the amount of $15,050.50.

 

Accordingly, the Third Circuit reversed the district court's dismissal of the Borrower's FDCPA claims, and affirmed the district court's imposition of sanctions against the Law Firm.

 

 

 

 

 

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

 

Admitted to practice law in Illinois

 

 

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FYI: 2nd Cir Holds Collection of Taxes, Water and Sewer Charges Not Subject to FDCPA

The U.S. Court of Appeals for the Second Circuit recently held that liens imposed by a city in connection with property taxes, water and sewer charges are not subject to the federal Fair Debt Collection Practices Act, because they do not involve a "debt" as that term is defined in the statute. 

 

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

 

When two property owners failed to pay property taxes, water and sewer charges, and other municipal charges, the City of New York ("City") imposed liens on the properties, securing the unpaid charges.  The City sold lien certificates to various trusts (the "Trust Defendants") for purposes of collecting on the liens. The Trust Defendants then foreclosed on the liens. 

 

The property owners sued the Trust Defendants, alleging that the attorneys' fees and costs assessed in connection with the foreclosure actions violated the federal Fair Debt Collection Practices Act, 15 U.S.C. Sec. 1692, et seq. ("FDCPA"). 

 

The lower court ruled in favor to the Trust Defendants, finding that the liens in question did not constitute "debt" as defined by the FDPCA.  The property owners appealed. 

 

As you may recall, the FDCPA defines "debt" as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family or household purposes...."  15 U.S.C. Sec. 1692a5. 

 

On appeal, the Second Circuit began its analysis by noting that the issue of whether mandatory water and sewer charges constitute a "debt" for FDCPA purposes is an issue of first impression.  However, the Second Circuit considered the issue to be analogous to that posed in a previous case, wherein the Court determined that "municipal taxes levied automatically in connection with ownership of personal property do not involve a 'transaction'...and, accordingly, are not 'debt' for purposes of the FDCPA.  Beggs v. Rossi, 145 F.3d 511, 512 (2d Cir. 1998). 

 

The Second Circuit found the reasoning of the Beggs case to apply here, due to the similarities it observed between the collection of property taxes and water and sewer charges: both are levied as an incident to property ownership, and the city ordinance concerning foreclosure of water and sewer liens indicates that the process should be conducted in the same manner as a lien for taxes.  N.Y. Pub. Auth. L. Sec. 1045-j(5).

 

Therefore, the Second Circuit held that "the charges at issue are best treated as akin to the municipal taxes discussed in Beggs and, accordingly, outside the scope of the FDCPA."  

 

 

 

 

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

 

 

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FYI: Ill App Ct Reverses Order Appointing Receiver as to Mixed Use Collateral

The Appellate Court of Illinois, Second District, recently reversed a trial court’s order appointing a receiver as to a portion of real estate collateral being foreclosed by a mortgagee.

 

In so holding, the Appellate Court found that the entire property, and not only the dwelling portion, constituted “residential property” under the Illinois Mortgage Foreclosure Law, and the property’s multipurpose use did not affect the categorization as residential real estate.

 

Because the Court found that the property constituted residential real estate, the borrowers had a presumptive right to possession, while also giving the mortgagee an opportunity to rebut the presumption.

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/2ndDistrict/2140399.pdf.

 

The property at issue was primarily used as farmland. The produce grown on the farmland was either consumed by the borrowers or donated. There was only one building on the property.

 

The borrowers used the building for various purposes. They operated a bakery out of the first floor and used the property to maintain tractors and other vehicles. Finally, the building contains a 750-square-foot apartment, which the borrowers used as their primary residence at all times relevant to this case.

 

In 2010, the borrowers defaulted on their mortgage, and the mortgagee initiated foreclosure proceedings. The mortgagee also moved for the appointment of a receiver, which the trial court granted.

 

The trial court granted the motion as to all portions of the property except for the living quarters, or “dwelling unit,” in which the borrowers maintained their primary residence. The trial  court’s decision was based on its finding that the majority of the property (excepting the dwelling unit) was nonresidential real estate.

 

The borrowers appealed the trial court’s ruling.

 

The borrowers challenged the trial court’s interpretation of the statutory term “residential real estate.” They argued that the Illinois foreclosure statute instructs that the entire property, not just the dwelling unit, should be classified as residential real estate. Therefore, the borrowers asserted, they enjoy a presumptive right of possession.

 

The borrowers requested that the Appellate Court remand the cause to the trial court in order that mortgagee may seek to rebut the borrowers’ presumptive right to possession or, otherwise, concede possession to the borrowers.

 

The Appellate Court agreed that the Illinois foreclosure statute defines the entire property as residential real estate, because the statutory condition that would limit the residential status of the property to the dwelling unit had not been met.

 

As you may recall, under Illinois law, whether a presumptive right to possession belongs to the mortgagor or the mortgagee depends upon the property’s classification. 735 ILCS 5/15-1701. If the property is classified as residential real estate, the presumptive right to possession belongs to the mortgagor. Id.

 

If the mortgagee seeks possession, it must establish: (1) good cause to possess the property despite the presumption; (2) authorization by the terms of the mortgage agreement that it may do so; and (3) a reasonable probability of prevailing on a final hearing of the cause. Id. If the property is classified as nonresidential real estate, the presumptive right to possession belongs to the mortgagee. 735 ILCS 5/15-1701(b)(2). If the mortgagee is entitled to possession and requests a receiver, the court shall appoint one. 735 ILCS 5/15-1702(a).

 

Section 15-1219 of the Illinois Code of Civil Procedure defines “residential real estate” as meaning:

 

“[A]ny real estate, except a single tract of agricultural real estate consisting of more than 40 acres, which is improved with a single family residence or residential condominium units or a multiple dwelling structure containing single family dwelling units for six or fewer families living independently of each other, which residence, or at least one of which condominium or dwelling units, is occupied as a principal residence either[:] (i) if a mortgagor is an individual, by that mortgagor, that mortgagor’s spouse[,] or mortgagor’s descendants, or (ii) if a mortgagor is a trustee of a trust or an executor or administrator of an estate, by a beneficiary of that trust or estate or by such beneficiary’s spouse or descendants[,] or (iii) if a mortgagor is a corporation, by persons owning collectively at least 50 percent of the shares of voting stock of such corporation or by a spouse or descendants of such persons. The use of a portion of residential real estate for non-residential purposes shall not affect the characterization of such real estate as residential real estate.”

 

735 ILCS 5/15-1219.

 

Section 15-1701(b)(1) limits the above definition of “residential real estate” for the purposes of establishing the presumptive right to possession, and the accompanying right to have a receiver appointed. It states that “[i]f the residential real estate consists of more than one dwelling unit, then for the purposes of this Part residential real estate shall mean only that dwelling unit or units occupied by persons described in clauses (i), (ii)[,] and (iii) of Section 15-1219.”  735 ILCS 5/15-1701(b)(1).

 

The Appellate Court next looked to section 15-1202.5 of the Code, which defines a “dwelling unit” as: “For the purposes of [inter alia, section 15-1701], ‘dwelling unit’ means a room or suite of rooms providing complete, independent living facilities for at least one person, including permanent provisions for sanitation, cooking, eating, sleeping, and other activities routinely associated with daily life.” 735 ILCS 5/15-1202.5 (West 2012).

 

The parties disagreed as to how the above-quoted provisions should be harmonized to classify the instant property. Again, section 15-1219 essentially states that, so long as the property includes a qualifying residence, the entire property is classified as residential; “[t]he use of a portion of residential real estate for non-residential purposes shall not affect the characterization of such real estate as residential real estate.” 735 ILCS 5/15-1219.

 

Section 15-1701(b)(1), however, places a limitation on section 15-1219’s broad definition of “residential real estate” for the purposes of creating the presumptive right to possession in foreclosure actions. That limitation states that, where the property contains more than one dwelling unit, only the dwelling unit in which the mortgagor maintains his or her primary residence will qualify as residential real estate so as to provide the mortgagor with the presumptive right to possession.

 

The Appellate Court agreed with the borrowers that the section 15-1701(b)(1) limitation was not invoked, because the Appellate Court held that the statutory requirement that there be more than one dwelling unit on the property was not met (“[i]f the residential real estate consists of more than one dwelling unit, then for the purposes of this Part residential real estate shall mean only that dwelling unit or units occupied by [the mortgagor]” (735 ILCS 5/15-1701(b)(1)).

 

The Court acknowledged that there is only one dwelling unit on the property. The property is improved with a large building that, in addition to the one dwelling unit in which the borrowers live, contains a show room, meeting rooms, and a maintenance area and is used for various ventures such as a bakery and a vehicle service area. According to the Appellate Court, none of these improvements showed the existence of more than one dwelling unit, equipped for independent living purposes, as statutorily required.

 

The Court also recognized that the mortgagee appeared to concede that the property has been improved with a qualifying structure—the residence in which the borrowers live—to make (in its view, at least a portion of) the property residential for the purposes of section 15-1219 cooking, eating, sleeping, and other activities routinely associated with daily life.” 735 ILCS 5/15-1202.5. The Court noted that no person aside from the borrowers lives on the property, and they live in the property’s only dwelling unit.

 

The improvements within the building to which mortgagee referred—the show room, the meeting rooms, the maintenance area—demonstrate that the property was used for purposes other than residential. However, the Court returned to the plain language of section 15-1701(b)(1) conditions the limitation (on what can qualify as residential real estate so as to provide the mortgagor with the presumptive right to possession) on the presence of more than one dwelling unit, not more than one use.

 

The Court noted that the Illinois legislature expressly defined “dwelling unit.” Moreover, the Court noted that the legislature expressly directed that its definition of “dwelling unit” be applied when considering whether section 15-1701 operates to limit the portion of residential real estate over which the mortgagor is given the presumptive right to possession.

 

There was only evidence of one dwelling unit. Therefore, per section 15-1701(b)(1), the condition limiting the definition of “residential real estate” to the unit occupied by the mortgagor did not apply. Rather, the general definition of residential real estate controls and, again, that definition states that “[t]he use of a portion of residential real estate for non-residential purposes shall not affect the characterization of such real estate as residential real estate.” 735 ILCS 5/15-1219.

 

Per the general definition of residential real estate, the property’s multipurpose use does “not affect” the categorization as residential real estate, and, accordingly, the entire property is residential real estate.

 

Where the entire property is residential real estate, the mortgagor has the presumptive right to possession. Because the Appellate Court held that the property here is residential real estate, the borrowers have the presumptive right to possession, and the mortgagee has the burden of establishing that: (1) it has good cause to possess the property despite the presumption; (2) there is authorization by the terms of the mortgage agreement that it may do so; and (3) it has a reasonable probability of prevailing on a final hearing of the cause. See 735 ILCS 5/15-1701(b)(1).

 

The mortgagee’s main argument, with which the trial court appears to have agreed, is that section 15-1701(b)(1)’s controlling phrase is “for the purposes of this Part residential real estate shall mean only that dwelling unit or units occupied by [the mortgagor].” 735 ILCS 5/15-1701(b)(1) (West 2012). In the mortgagee’s view, this narrow phrase should control over the general definition of residential real estate set forth in section 15-1219. However, as discussed by the Court, the mortgagee’s desired reading does not account for the conditional “if” (i.e., “[i]f the residential real estate contains more than one dwelling unit, then for the purposes of this Part residential real estate shall mean only that dwelling unit or units occupied by [the mortgagor]”).

 

Therefore, the Appellate Court rejected the mortgagee’s assertion that the latter portion of section 15-1701(b)(1) may be read in isolation so as to control the outcome of this case.

 

The mortgagee next argued, for the first time on appeal, that, in any case, there is more than one dwelling unit on the property. The court summarily rejected that argument.

 

Accordingly, the Court reversed the trial court’s ruling and remanded.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Email: RWutscher@mwbllp.com

 

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