FYI: SD Fla Holds Debtor Provided "Prior Express Consent" Under TCPA, Even as to Another Account With Same Creditor

The U.S. District Court for the Southern District of Florida recently held that a debt collector’s automated calls to a debtor’s cell phone number did not violate the federal Telephone Consumer Protection Act, 47 U.S.C. §§ 227 (“TCPA”), because the debtor provided the cell phone number to the original creditor when the debtor opened a prior and different account.

 

In so ruling, the Court held that the “prior express consent” exception to the TCPA applied because the debtor provided his cellphone number while registering his first account, even though the number was not provided in registering the second and different account, which was the defaulted account that the debt collector was trying to collect.

 

A copy of the opinion is attached.

 

The debtor opened an account with a cable provider in September 2012, and provided his cell phone number with the account registration form.  When the debtor moved in February 2013, he closed the first account, and opened a second account with the same provider, but did not provide his cell phone number when opening the second account.

 

The second account became delinquent after the debtor failed to timely pay his bill.  The defendant debt collector left automated messages and placed at least 46 calls to the cell phone number provided by the debtor when registering for the first account in an effort to collect the debt relating to the second account.

 

As you may recall, the TCPA prohibits any person from making “any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system or an artificial or prerecorded voice... to any telephone number assigned to a … cellular telephone service…” 47 U.S.C. § 227(b)(1)(A)(iii); 2008 FCC Declaratory Order at 560, 564.

 

The District Court analyzed whether the debtor provided prior express consent to debt-collection calls regarding the second account by furnishing his cell phone number to the same cable provider when opening the prior and different account, which never became delinquent.

 

The Court noted this was a case of first impression, as the rules interpreting the TCPA are seemingly written under the assumption that an individual only has one account with a given creditor that can become delinquent and give rise to debt-collection calls.  See e.g., Mais v. Gulf Coast Collection Bureau, Inc., 768 F. 3d 1110 (11th Cir. 2014); 2008 FCC Declaratory Order.

 

The debtor focused on the phrase in the 2008 FCC Declaratory Order that “during the transaction that resulted in the debt owed,” arguing that the debt collector’s calls violated the TCPA because the debt collector used the number that the debtor supplied when opening the first account to call him regarding the debt on the second account – a different “transaction.”

 

The Court declined to adopt the debtor’s argument, reasoning that “[i]t is clear that the 2008 FCC Declaratory Order fails to contemplate the facts of this case, where a plaintiff gave his number when opening one account with a creditor, but then received debt-collection calls regarding a second account with the same creditor,” but “its rationale offers sufficient guidance.”

 

The Court noted that, in its 2008 Declaratory Order, the FCC stated that the prior express consent applies “when the called party has provided the telephone number… for use in normal business communications.”  2008 FCC Declaratory Order at 564.  The Eleventh Circuit held that the FCC’s focus is on whether a consumer has consented to phone calls to a particular number from a particular creditor.  See Mais at 1124-25 (“reasoning that one creditor may not forward a phone number to another creditor so that the second may make debt-collection calls”).

 

The Court found that “normal business communications” logically included communications from the cable company regarding he first account as well as the second account, without instructions to the contrary. 

 

Thus, the Court held, because the debtor knowingly provided his cellphone number and did not provide instructions that limited communications to the first account, he gave the original creditor (and thereby, debt collector) permission to call him at that number for normal business communications, including the debt owed on the delinquent second account.

 

Accordingly, the Court granted summary judgment in favor of the defendant debt collector.

                                                                                                                                                                    

 

Ralph T. Wutscher
McGinnis Wutscher 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: 7th Cir Rules Certain Wisconsin College Savings Accounts and Annuities Exempt from Execution by Creditors

The U.S. Court of Appeals for the Seventh Circuit recently addressed two issues of first impression under a Wisconsin statute that permits resident debtors to shield certain assets from execution by creditors. 

 

First, the Seventh Circuit concluded that the owner of a state-qualified college savings account had a sufficient interest in the account to qualify it as exempt.  Second, the Seventh Circuit concluded that an annuity that provides a death benefit qualifies as exempt. 

 

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

 

The debtor was a retiree who incurred significant medical expenses caring for his wife before she passed away, and as a result of a stroke he suffered after she passed away.  The debtor sought the advice of an attorney about pre-bankruptcy exemption planning and converting his non-exempt assets into exempt assets.  As a result, the debtor borrowed $95,000 from the bank and mortgaged his unencumbered home. With that loan, he established college savings accounts for his 5 grandchildren. He also converted a $42,000 certificate of deposit into an annuity.  The annuity would begin paying in 35 years and it also contained a death benefit provision.

 

When the debtor filed bankruptcy, he listed the college savings accounts and annuity as exempt property.  The Trustee objected and argued that the debtor had transferred property in an attempt to defraud his creditors.  The Trustee also argued that the college savings accounts and annuity were not exempt under the statutory definitions of those assets. 

 

The bankruptcy court concluded that there was no evidence that the debtor transferred his property with the intent to hinder or defraud creditors.  The bankruptcy court also held that under the college savings account statute, only the beneficiary had an interest in the account, not the owner.  And, finally, the bankruptcy court held that the annuity was exempt under the statute because it contained a death benefit clause. 

 

Although the district court vacated the bankruptcy court’s findings, it agreed with most of the bankruptcy court’s reasoning.  The district court held that there was insufficient evidence to establish the debtor had improperly transferred his assets.  The district court also agreed with the bankruptcy court’s interpretation of the college savings account statute that the accounts were not exempt because only the beneficiary of the account had an interest in it.  As to the annuity, the district court narrowed the bankruptcy court’s interpretation of the applicable statute and remanded the case for additional fact-finding to determine whether the annuity qualified under the more narrow interpretation. 

 

On remand, the bankruptcy court again concluded that the annuity was exempt even under the narrower interpretation.  Both sides preserved their respective appeals of all orders issued to the district court.  After the district issued a final order affirming the bankruptcy court’s rulings, the debtor appealed the disallowance of the college savings accounts and the Trustee appealed the ruling on the annuity. 

 

On appeal, the Seventh Circuit analyzed both Wisconsin state statutes at issue.  As to the college savings accounts, the Court concluded that the statute was not ambiguous and the term “interest in a college savings account” was not limited to the beneficiary’s interest and interpreting it as such would produce an illogical result.  “If account owners may not invoke the general exemption in [the statute], as the trustee suggests and the lower courts held, then a college savings plan can be reached by an account owner’s creditors, impairing the beneficiary’s right to qualified withdrawals.” 

 

As to the annuity, the Appellate Court quickly identified that the exemption specifically includes “providing benefits by death.”  And because the debtor’s annuity contained a death benefit clause, the Court concluded that the debtor’s annuity qualified.

 

The Appellate Court pointed out, however, that the inquiry did not stop there.  Not only must the annuity qualify under the statutory definition, but it had to either be (a) employer sponsored or (b) compliant with the Internal Revenue Code.  It was undisputed that the debtor’s annuity was not employer sponsored and the issue of whether it complied with the Internal Revenue Code had not been previously addressed.  The Trustee, however, had not previously raised the argument in the bankruptcy court that the annuity did not comply with the Internal Revenue Code.  As a result, district court deemed the argument waived and the Seventh Circuit affirmed.

 

Holding that the debtor’s college savings accounts were exempt, and that the issue of whether his annuity complied with the Internal Revenue Code had been waived, the Seventh Circuit reversed the district court’s ruling disallowing the exemption for the college savings accounts and affirmed the district court’s ruling regarding the annuity being exempt.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher 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: 11th Cir Holds Lower Court Erred in Holding Bank Waived Arbitration as to Unnamed Putative Class Members

The U.S. Court of Appeals for the Eleventh Circuit recently held that a lower court erred in ruling that a bank waived its rights to compel arbitration of unnamed putative class members’ claims. 

 

Prior to ruling on class certification, the lower court issued an order denying the bank’s conditional motions to compel arbitration of the unnamed putative class members’ claims in the event of class certification.  The Eleventh Circuit held that the lower court lacked jurisdiction to resolve issues involving unnamed putative class members prior to certification, and that the named plaintiffs lack standing to defend the lower court’s ruling.  Accordingly, the Eleventh Circuit reversed the district court’s order.

 

A copy of the Court’s opinion is available at:  http://media.ca11.uscourts.gov/opinions/pub/files/201312082.pdf

 

The plaintiffs in the five separate putative class actions allege that a bank unlawfully charged them overdraft fees for their checking accounts.

 

The checking accounts are governed by agreements that provide for arbitration of disputes on an individual basis.  The agreement stated that “either the customer or the bank may require the submission of a dispute to binding arbitration at any reasonable time notwithstanding that a lawsuit or other proceeding has been commenced,” but that neither a customer nor the bank may consolidate disputes or “include in any arbitration any dispute as a representative or member of a class.” 

 

The trial court gave the bank a deadline to file a motion to compel arbitration.  Instead, the bank filed a motion to dismiss.  After the lower court denied the motion to dismiss, it set another deadline for the bank file its motion to compel arbitration. 

 

The bank did not file such a motion, but instead filed a statement reserving its right to compel arbitration against any plaintiffs “who might later join, individually or as putative class members, in this litigation,” explaining that “its arbitration rights as to a nationwide class, for newly added plaintiffs, and/or for from plaintiffs from newly added states are not yet at issue.”  When it filed its answer, the bank again gave notice that it was reserving its right to arbitrate the claims of future plaintiffs.

 

While the parties engaged in discovery, the United States Supreme Court issued its ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which held that § 2 of the Federal Arbitration Act, 9 U.S.C. § 2, preempts state-law rules prohibiting consumer arbitration agreements that bar classwide arbitration agreements. 

 

Thereafter, the bank moved to compel arbitration of the named plaintiffs in the five putative cases.  The lower court denied the bank’s motion, ruling that the bank had waived its right to compel arbitration by failing to move to compel by the court-imposed deadlines.  The bank appealed, and the Eleventh Circuit affirmed the District Court’s ruling. 

 

On remand, the plaintiffs moved for class certification.  The bank filed its opposition, arguing that the court should not certify a class due to lack of numerosity.  The bank argued that all customers with enforceable arbitration agreements would be excluded from the class, and because all of its customers had signed the agreements containing the arbitration provisions, there would not be enough class members to make a class action viable.

 

The bank simultaneously filed conditional motions to dismiss the claims of the unnamed or absent class members in favor of arbitrations in the event the lower court certified a class.  In essence, the bank was informing the court in advance that, if the court certified a class, the bank intended to move to compel arbitration with all unnamed class members.

 

The lower court denied the bank’s conditional motion to dismiss in favor of arbitration, and the bank appealed.

On appeal, the Eleventh Circuit clarified that the bank had adequately preserved its rights to seek arbitrations of any claims the unnamed putative class members might have against it should the lower court certify them as members of the proposed class.

 

Next, the Eleventh Circuit concluded that, because a class including the unnamed putative class members had not been certified, Article III’s jurisdictional limitations precluded the lower court from entertaining the bank’s conditional motions to dismiss those members’ claims as subject to arbitration.  The Court also concluded that the named plaintiffs lacked standing to seek the affirmance of the lower court’s provisional holding that if a class is certified the bank will be estopped to assert its contractual rights to arbitration.

 

The Circuit Court also held that, because a class had not been certified at the time the bank moved conditionally to compel arbitration of the claims of all unnamed class members, those unnamed individuals necessarily remained putative participants in the case.  The Court noted that:  (1) not until the class is certified are the putative members subject to the court’s power;  (2) absent class certification, there is no justiciable controversy between the bank and the unnamed putative class members; and  (3) because the unnamed putative class members are not yet before the court, any claims that they might have against the bank exist only by hypothesis, which would result in the court issuing an impermissible advisory opinion. 

 

The Eleventh Circuit also concluded that the named plaintiffs did not have standing to attempt to defend the lower court’s ruling that the bank had waived its right to compel the unnamed putative class members to arbitrate their claims.  According to the Eleventh Circuit, the named plaintiffs’ own legal rights and interests were not at issue, which is the general principle in addressing a party’s standing. 

 

The Court acknowledged that there are exceptions to that general principle, but that the named plaintiffs did not have such a close relationship with the unnamed plaintiffs to invoke the exceptions.  “The named plaintiffs have already received a favorable ruling as to whether the bank waived its rights to compel arbitration against them.  Whether or not the bank is precluded from asserting arbitration rights against other individuals has no legal relevance to the named plaintiffs.” 

 

Holding that the lower court lacked jurisdiction to rule on the arbitration obligations of unnamed putative class members, and that the named plaintiffs lacked standing to raise any arguments on the unnamed putative class members’ behalf, the Eleventh Circuit vacated the lower court’s order. 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher 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: 9th Cir Holds Any "Private Attorney General" Interest of Putative Class Rep After Voluntary Settlement of Individual Claims Not Enough for Article III Standing

The U.S. Court of Appeals for the Ninth Circuit recently dismissed an appeal of a putative class action as moot, holding that when a putative class representative voluntarily settles his individual claims, any continuing “private attorney general” interest that the putative class representative may have retained does suffice to meet Article III standing requirements.

 

A copy of the ruling is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2014/12/31/12-56784.pdf

 

A consumer (“Consumer”) brought a class action against a vendor (“Vendor”) alleging several causes of action, including breach of contract, breach of the implied covenant of good faith and fair dealing, violations of the California Consumers Legal Remedies Act (“CLRA”) and violations of the California Unfair Competition Law (“UCL”). 

 

Generally, Consumer alleged that Vendor arbitrarily denied claims made by him and a putative class of similarly situated policy holders of Vendor warranty plans, or otherwise cheated him and the putative class out of benefits owed under their policies with Vendor.

 

Following several years of motion practice, the district court denied Consumer’s motion for class certification and later granted Vendor’s motion for partial summary judgment on Consumer’s claims under the CLRA and UCL. 

 

After the district court granted partial summary judgment in Vendor’s favor, the parties reached a settlement agreement and filed a joint motion and stipulation for dismissal with the district court.  In that motion and stipulation for dismissal, the parties agreed to dismiss with prejudice Consumer’s individual claims in exchange for the full amount of those claims.  The parties also agreed to dismiss without prejudice “any class action claims and representative claims” under the UCL, one of several sets of claims alleged in Consumer’s complaint. 

 

However, the joint motion and stipulation for dismissal expressly reserved Consumer’s right to appeal the Court’s order denying class certification, the order precluding the Plaintiff from pursuing injunctive relief under the UCL, and any other order in the case.

 

The Ninth Circuit noted that after the rulings in Vendor’s favor and before Consumer’s appeal, the parties settled all of Consumer’s individual claims.  As such, the Court noted, Consumer expressly released all of his claims against Vendor, and even though Consumer expressly retained his right to appeal the putative class claims, that fact made no difference.

 

The Ninth Circuit held that the test for whether an appeal is moot after the putative class representative voluntarily settles his individual claims is whether the class representative retains a personal stake in the case.  See Narouz v. Charter Commc’ns, LLC, 591 F.3d 1261, 1264 (9th Cir. 2010). 

 

Consumer argued that he had a personal stake in getting the class certified because he maintained an interest in the matter as a private attorney general.  However, the Ninth Circuit noted that its case law required the putative class representative to maintain a financial interest in class certification.  See, e.g., Narouz (holding that a financial interest existed where putative class representative could receive a $20,000 enhancement fee if the court were the court to approve the settlement); Evon v. Law Offices of Sidney Mickell, 688 F.3d 1015 (9th Cir. 2012) (holding that financial interest remained where putative class representative could recover attorney’s fees).

 

The Ninth Circuit held that, under the terms of his settlement agreement, Consumer settled attorney’s fees and costs as well as his damages, and Consumer could not get a penny more.  Thus, the Court held, Consumer had no financial interest in the class action. 

 

Next, the Ninth Circuit rejected Consumer’s arguments relying on Pitts v. Terrible Herbst, Inc., 653 F.3d 1081 (9th Cir. 2011) and U.S. Parole Comm’n v. Geraghty, 445 U.S. 388 (1980).  The Court concluded that both cases were inconsistent with its analysis because the putative class representative’s claims expired involuntarily. The Court noted that, when the putative class representative’s claims expired involuntarily, the theoretical interest akin to a private attorney general could potentially suffice to meet Article III requirements. 

 

However, when a putative class representative voluntarily settled his individual claims, the Ninth Circuit held that the “private attorney general” interest does not suffice.

 

Accordingly, the Ninth Circuit dismissed Consumer’s appeal as moot.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher 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: Fla App Ct (3rd DCA) Reverses Foreclosure Judgment, Where Foreclosing Debt Buyer May Have Been Formed by Borrower With Sole Purpose of Eliminating Subordinate Liens

The District Court of Appeal of Florida, Third District, recently reversed a final summary judgment of foreclosure which terminated a contractor’s constructions liens on a developer’s luxury home project.

 

In sum, the Appellate Court held that there was sufficient evidence to establish material issues of fact as to whether the foreclosing debt buyer was formed by the same underlying investors as the developer of the construction project solely for the improper purpose of acquiring the developer’s first mortgage, foreclosing on said mortgage, and thereby eliminating the retained contractor’s construction liens.

 

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

 

In this case, the developer, controlled by a wealthy Ohio attorney and his family’s investment firm, intended to construct twenty-five luxury homes in Florida.  In order to fund this project, the developer obtained construction loans from a Florida lender.  The loan was personally guaranteed by the Ohio attorney and his family’s firm.

 

The developer then retained a contractor to construct the homes, and consistent with the terms of the construction loans, began work on eight of the twenty-five homes.  Eventually, due to a worsening of overall economic conditions, the developer terminated its contract with the contractor, but required that the contractor complete the initial eight homes already under construction.

 

While the contractor continued its work, it made a claim for lost profits from the cancelled seventeen homes.  The developer then began withholding payments for the contractor’s work, asserting that they were being improperly billed.

 

Eventually, the contractor completed work on all eight homes and certificates of occupancy were issued.  The contractor then recorded liens for its unpaid work, and brought suit against the developer seeking reimbursement for all unpaid work, lost profits from the cancelled seventeen homes, and foreclosure of its liens.

 

At around the same time as the contractor filed suit, the construction loans matured, and the developer was not able to pay off the balance.  The developer’s investors made a number of curtailment payments, but required that the lender not use these payments to reduce the principal on the liens, and instead requested that the payments be treated as junior liens executed to the benefit of the lender.

 

Thereafter, the developer’s investors created the foreclosing debt buyer, which operated out of the same location as the Ohio attorney’s other businesses.  The foreclosing debt buyer then secured a loan through a Canadian bank to purchase the developer’s construction loans at face value. 

 

The foreclosing debt buyer then foreclosed on the newly purchased construction loans, extinguishing the contractor’s constructions liens.  The trial court granted summary judgment in the debt buyer’s favor and entered a final judgment of foreclosure.  The contractor appealed.

 

Citing to the Third Restatement of Property, the Appellate Court made clear that under longstanding Florida law, “a person [is not permitted] to borrow money from a bank, give the bank a mortgage, incur additional liens and junior mortgages on the property, purchase the mortgage back from the bank and then foreclose on the mortgage for the primary purpose of eliminating the additional liens and junior mortgages.”  See Clermont-Minneola Country Club v. Loblaw, 143 So. 129 (Fla. 1932).

 

The Appellate Court went on to hold that there were issues of fact (that the trial court ignored) as to whether the foreclosing debt-buyer and the developer had the same identity and interests, and whether the debt-buyer was created for the sole purpose of improperly foreclosing on the contractor’s liens.

 

In reaching this conclusion, the Appellate Court distinguished the cases cited by the developer, which it asserted permitted it to acquire its mortgage loan indirectly through the foreclosing debt-buyer and foreclose on them.  See M.B. Financial Bank, N.A. v. Paragon Mortgage Holdings, LLC 89 So. 3d 917 (Fla. 2d DCA 2012); C.T.W. Co., Inc. v. Rivergrove Apartments, Inc. 582 So. 2d 18 (Fla. 2d DCA 1991). 

 

Rather than supporting the foreclosing debt-buyer’s arguments, the Appellate Court held that in these cases the subject developer’s original investors were not identical and had materially different interests as that of the newly formed foreclosing entity. 

 

Here, however, the Appellate Court opined that a jury could rationally find that the developer and foreclosing debt-buyer were identical and had the same interests.

 

In conclusion, the Appellate Court held that “investors cannot grant mortgages, contract for the improvement of the property mortgaged, and then use a network of companies to purchase and foreclose the mortgage for the primary purpose of extinguishing the construction liens that increased the value of the property.  To hold otherwise would undermine the long-standing principal recognized by [Florida’s] Supreme Court in Clermont-Minneola – persons cannot do indirectly what they are not permitted to do directly.”

 

Accordingly, the Appellate Court reversed the judgment of foreclosure, and remanded for further proceedings.

 

 

 

 

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

 

Admitted to practice law in Illinois

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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FYI: Ill App Ct Holds Mortgagee Must Plead and Prove Capacity to Foreclose, Rejects Borrower's Challenge to Change in Foreclosing Plaintiff Mid-Foreclosure

The Illinois Appellate Court, Third District (“Appellate Court”) recently held that a mortgagee must plead and prove its capacity to foreclose, and that the mortgagee here sufficiently demonstrated its capacity to foreclose.  The Appellate Court also rejected the borrower’s challenge to the change in mortgagee and assignment of mortgage during the course of the foreclosure.

 

A copy of the opinion is available at:  http://www.state.il.us/court/R23_Orders/AppellateCourt/2015/3rdDistrict/3130673_R23.pdf

 

The plaintiff bank (“Bank”) filed a mortgage foreclosure action against the defendant borrowers (“Borrowers”) in its capacity as mortgagee, and as the entity “designated and authorized to act on behalf of the owner of the note to enforce the note and mortgage at issue.”  Copies of the mortgage, assignment of mortgage, and note indorsed in blank were attached to the complaint.

 

The Borrowers filed an answer to the complaint denying various allegations, including the Bank’s capacity to foreclose.  The Borrowers also asserted an affirmative defense of fraud. 

 

The Bank then filed a motion for summary judgment and for judgment of foreclosure and order of sale.  The Borrowers filed a response to the motion for summary judgment asserting the Bank did not have standing.  After the Borrowers’ counsel withdrew, new counsel appeared and requested time to file a supplemental response to the motion for summary judgment. 

 

The trial court denied the motion to supplement and found that the Borrowers had waived their right to argue whether the Bank lacked capacity because it was an affirmative defense which should have been asserted in their answer. 

 

The motion for summary judgment was granted, and a foreclosure sale was held.  The Bank then filed a motion for order approving sale, and to substitute a new party (“Assignee”) as plaintiff.  The motion for substitution attached an assignment of mortgage indicating that the assignment occurred before the motion for summary judgment was granted. 

 

The Borrowers objected to the motion to approve the sale, arguing that they did not receive notice of the sale, but the trial court granted the motion to approve the sale and permitted the substitution of the plaintiff. 

 

On appeal, the Borrowers first argued that despite their failure to raise lack of standing as an affirmative defense, it was the Bank’s burden to prove it had the capacity to foreclose under the Illinois Mortgage Foreclosure Law (the “IMFL”) because the Borrowers denied the allegation. 

 

The Bank argued that the IMFL did not create a requirement of alleging and then proving capacity, and that the Borrower’s failure to assert an affirmative defense of lack of standing or cross-motion for summary judgment foreclosed their right to assert such a defense. 

 

The Appellate Court noted that although the parties and trial court treated the issue as one of standing, the case did “not present an issue of standing as we find the trial court was correct to determine that the [Borrowers] waived their right to assert that affirmative defense.”  Instead, “the argument . . . is whether [the Bank] proved its alleged ‘legal capacity to sue.’” 

 

The Appellate Court stated that while standing “requires that a party . . . have a real interest in the action brought and its outcome,” capacity “generally refers to the status of the party, e.g., incompetent, infant, or unincorporated association.”  The Appellate Court therefore found that “standing is not the same as legal capacity to sue or be sued.” 

 

The Appellate Court held that “[b]ecause they did not assert the defense in their answer to the complaint and did not file a cross-motion for summary judgment raising the defense, the affirmative defense of lack of standing was waived by [the Borrowers].” 

 

Still, the Appellate Court stated that the Borrowers “denial of [the Bank’s] capacity to bring the suit was erroneously deemed synonymous with their waived affirmative defense of lack of standing,” and that under the IMFL “[a]n allegation of capacity as the mortgagee in a foreclosure proceeding is a material fact and must be proved whether admitted or denied by the defendant.”   

 

Therefore, because the Bank alleged its capacity to sue in the complaint, “it [was] incumbent upon [the Bank] to prove capacity notwithstanding the [Borrowers’] waiver of their right to argue standing or even their denial of [the Bank’s] capacity to bring suit.” 

 

Nevertheless, the Appellate Court affirmed the trial court’s granting of the motion for summary judgment because it held that the Bank did prove its claim of capacity. 

 

In so ruling, the Appellate Court noted that, although not a requirement, the Bank complied with the IMFL form complaint in alleging its capacity to bring the lawsuit as a mortgagee.  The Appellate Court further held that the Bank “proved capacity as the holder of the indebtedness by being the bearer of the note and through its supporting affidavit.  [The Bank] as the assignee of the mortgage, pursuant to the IMFL, attached copies of the mortgage and the assignment to its complaint and motion for summary judgment.  It also attached a copy of the note to both filings.  The note . . . ended with a final blank endorsement.”  Thus, the Bank “presented a prima facie case that it owns the note.” 

 

The Bank also “provided an affidavit in which the affiant stated [the Bank] is the holder of the note.” On appeal, the Borrowers argued that the affidavit was insufficient because it did not allege the computer systems relied on were industry standard, and that it did not demonstrate the personal knowledge of the affiant.  However, the Appellate Court held that the Borrowers waived these arguments by failing to raise them in the trial court.  In any event, the Appellate Court noted that the affidavit “was sufficient to prove capacity and support the motion for summary judgment.” 

 

The Borrowers final argument was that the Bank did not have capacity throughout the lawsuit because of the assignment of mortgage to the Assignee.  However, the Appellate Court cited section 2-1008(a) of the Illinois Code of Civil Procedure in holding that “[t]he statute clearly shows that a change in interest will not cause the action to abate.”  Further, “[t]he timing of the motion to substitute parties or the opposing party’s awareness thereof also do not abate the action when the original party held the interest at the action’s commencement and a motion to substitute parties is filed to negate the opposing party’s possible argument of surprise.” 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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