FYI: Ill App Ct (1st Dist) Holds "Substitute Service" Effective on Adult With Cognitive Impairment

The Illinois Appellate Court, First District, recently held that substitute service can be effected under the Illinois Code of Civil Procedure when the summons is left with an adult with a cognitive impairment.

 

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

 

The plaintiff mortgagee filed a foreclosure action against the defendants. The plaintiff served the mortgagor defendants by substitute service – a copy of the summons was delivered to the defendants' home and left with their adult son.

 

The defendants' son has diagnosed autism, and the defendants claimed their son never told them about the summons and complaint, and that they had no knowledge of the foreclosure action before a default judgment was entered against them.

 

After the default was entered, a judicial foreclosure sale was scheduled. The property was sold at auction, and the plaintiff moved for confirmation of the judicial sale. At that time, defendants moved to quash service. The trial court struck the motion to quash service and confirmed the judicial sale. The defendants filed an amended motion to quash service, which the trial court also denied.  This appeal followed.

 

On appeal, the defendants argued that service of process was ineffective because it was effectuated by delivering the summons and complaint to an adult with a cognitive impairment, making it insufficient to satisfy due process.

 

As you may recall, the Illinois Code of Civil Procedure allows substitute service, through which process can be served by leaving a copy of the summons at a defendant's abode, with some family member or resident over the age of 13. 735 ILCS 5/2-203(a)(2). The process server must inform that person of the contents of the summons, and must also mail a copy of the summons to the defendant at his abode. Id.

 

The Appellate Court examined the language of the statute, and found that there was no requirement that the recipient of the substitute service be mentally competent.  The Court held that it lacked authority to add such a requirement.

 

The defendants argued that, because the statute includes a minimum age requirement, and a requirement that the process server explain the contents of the summons, it contemplates the mental capacity of the person receiving the summons.

 

The Court examined other jurisdictions and found that some other states explicitly require a level of competency on the part of the recipient of substitute service. See Wis. Stat. Ann. § 801.11(1)(b)(1) (West 2021); Cal. Civ. Proc. Code § 415.20(b)(West 2018), and that the federal rule requires that the recipient be of "suitable age and discretion." Fed. R. Civ. P. 4(e)(2)(B).

 

Although the Appellate Court noted that the defendants' arguments were reasonable, they could not prevail against the clear language of the statute. The Court also noted the plaintiff's argument that requiring a process server to assess mental capacity would add a new dimension to service beyond verifiable facts.

 

In Illinois, a process server's affidavit is prima facie evidence of proper service. Illinois Service Federal Savings & Loan Ass'n of Chicago v. Manley, 2015 IL App (1st) 143089 ¶ 37.

 

The defendants never contended that the process server failed to follow the statutory requirements. Instead, they argued only that their son could not understand the importance of the summons.

 

As a result, the Appellate Court held it did not have the authority to impose a requirement not found in the statute, and affirmed the trial court's ruling in favor of the mortgagee.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 1st Cir Holds Defect in Massachusetts Certificate of Acknowledgement Made Mortgage Voidable

The U.S. Court of Appeals for the First Circuit recently affirmed a bankruptcy court's grant of a debtor's motion for summary judgment allowing the debtor to void a mortgage under the "strong arm" provision of the Bankruptcy Code.

 

In so ruling, the First Circuit held that the omission of a debtor's name from a certificate of acknowledgement is a material defect under Massachusetts law, and that this omission fails to charge a bona fide purchaser with constructive knowledge of the instrument. As such, the Court held that the mortgage could be avoided in bankruptcy by the debtor.

 

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

 

The appeal was brought a mortgagee after a Massachusetts bankruptcy debtor commenced an adversary action in a Chapter 11 proceeding in Bankruptcy Court.

 

The mortgagee initiated pre-foreclosure proceedings against the debtor and the filed for Chapter 11 bankruptcy. In the debtor's petition, the mortgage was identified as unliquidated and disputed. Because the debtor's name was missing from the certificate of acknowledgement, she then commenced an adversary proceeding against the mortgagee, seeking to avoid the mortgage.

 

As you may recall, "[u]nder the Bankruptcy Code, a mortgage may be avoided if a hypothetical bona fide purchaser of the mortgaged properly would not be charged with constructive notice of the mortgage." In re Daylight Dairy Products, Inc., 125 B.R. 1, 3 (Bank. D. Mass. 1991) (citing 11 U.S.C. § 544(a)). Avoidance of the mortgage leaves the debt unsecured and the creditor "to stand at the end of the line with other unsecured creditors in sharing unencumbered assets of the debtor."

 

The mortgagee argued that "[t[he recording of a mortgage with such a defect was effective to provide constructive notice of the mortgage; and, in any event, registration of the mortgage provided sufficient notice to subsequent bona fide purchasers."  The bankruptcy court disagreed, and granted summary judgment in favor of the debtor.  The district court concurred, and this appeal followed. 

 

On appeal, the First Circuit noted that Massachusetts law allows for two methods for giving constructive notice of a mortgage on real property:  properly record the mortgage in the registry of deeds (Mass. Gen. Laws ch. 183, § 4), or register the mortgage with the Land Court (Mass. Gen. Laws ch. 185, § 58.5).

 

Under Massachusetts law, "a properly recorded mortgage provides notice of a security interest, but a recording is not effective - - indeed is literally barred under Massachusetts law -- unless there is a certificate of acknowledgment or proof of its due execution attached."  Mass. Gen. Laws ch. 183, § 29.6."

 

In addition, Massachusetts law requires the grantor to "acknowledge that [he or she] has executed the instrument as [his or her] free act and deed," and the statute requires that "a certificate reciting that the grantor appeared before the officer making the certificate and made such acknowledgment . . . be attached to the instrument in order to entitle it to be recorded." Bank of Am., N.A. v. Casey, 52 N.E.3d 1030, 1035 (Mass. 2016) (quoting McOuatt, 69 N.E.2d at 809); see also Mass. Gen. Laws ch. 183, § 30 (specifying the requirements for a certificate of acknowledgment).

 

In the instant recording, there was no such certificate because the name was left blank. 

 

The First Circuit held that, based on the plain language of Massachusetts law, omitting the debtor's name would render the recording of the mortgage ineffective because there is not a proper certification of acknowledgment.

 

The First Circuit conceded there was no definitive law deeming this type of defect as material, but nevertheless held that the weight of the precedent leaned in favor of strictly construing the statutory requirements relating to certificates of acknowledgment. In fact, the Appellate Court noted, bankruptcy courts have deemed certificates of acknowledgement lacking the debtor's name to be materially defective under Massachusetts law.

 

The First Circuit reasoned that there was no reason to "resist the momentum of the precedent" especially because this type of defect is easily avoided. The Court saw no reason to "eliminate an express requirement that the Massachusetts legislature ha[d] specified as a condition for proper recording," and thus held that the recording of the mortgage was not effective to give constructive notice to third parties.

 

As to the mortgagee's second argument, that effective notice was given by registering the mortgage with the Land Court, the First Circuit found that this argument had no "toehold" in Massachusetts' statutes.

 

The mortgagee relied on Mass. Gen. Laws ch. 185, § 58, "in which the Massachusetts legislature provides that registration of a lien in the proper district 'be notice to all persons,' but that notice applies only to liens which, 'if recorded, filed or entered in the registry of deeds, affect the land to which it relates.'"

 

The First Circuit agreed with the bankruptcy's interpretation of Massachusetts law, stating that it "incorporates the filing standards for recorded land," including the acknowledgment requirement, "into the land registration system as the condition for the act of registration to be notice to third parties." In re Mbazira, 518 B.R. at 21.

 

Although the mortgagee argued that this reading of section 58 "is unsupported and would usurp the function of the Land Court's registration process," the First Circuit pointed out that they were not concerned with other kinds of notice or the other functions of the land registration system, but only with constructive notice. The Court stated actual notice to individuals who consult the land registry is unaffected. See In re Woodman, 497 B.R. 668, 670 n.2 & 673 (Bankr. D. Mass. 2013).

 

Finally, the mortgagee returned its focus back to section 58, arguing that "any document which a person could record that would affect the land would also provide notice once it is accepted for registration by the Land Court." However, the First Circuit reiterated, that because the mortgage here was lacking a proper certificate of acknowledgment, it was not a mortgage that could have been properly recorded. See Part II.A., supra; Mass. Gen. Laws ch. 183, § 29 ("No deed shall be recorded unless a certificate of acknowledgment or the proof of its execution . . . is endorsed or annexed to it.").

 

Despite the mortgagee's argument that the Land Court accepted the mortgage for registration and the mortgage appeared on the Certificate of Title, the First Circuit held that did not create constructive notice to third parties under Massachusetts law, because constructive notice is defined by state law and in Massachusetts, that requires a proper certificate of acknowledgment. See Mass. Gen. Lawsch. 185 § 58; id. ch. 183 § 4.

 

Therefore, because there was no constructive notice giving rise to a duty to conduct an investigation, the hypothetical bona fide purchaser would not be charged with inquiry notice.

 

For the above stated reasons, the First Circuit held that summary judgment was properly granted in favor of the debtor as the omission of the debtor's name from the certificate of acknowledgement created a material defect under Massachusetts law and a bona fide purchaser would not be charged with constructive knowledge of the instrument, and that the mortgage could therefore be avoided.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 9th Cir (En Banc) Rejects All of City's FHA Claims Against Lender

The U.S. Court of Appeals for the Ninth Circuit, en banc, recently affirmed in part and reversed in part a trial court's partial grant and partial denial of a bank's motion to dismiss the City of Oakland's claims under the federal Fair Housing Act ("FHA").

 

In so ruling, the Ninth Circuit en banc held that all of the City's claims – including the claims for damages, as well as for injunctive and declaratory relief -- should be dismissed because, under Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017), foreseeability alone is not sufficient to establish proximate cause under the FHA, and there must be "some direct relation between the injury asserted and the injurious conduct alleged."

 

The Court concluded that the downstream "ripples of harm" from the bank's alleged lending practices were too attenuated and traveled too far beyond the bank's alleged misconduct to establish proximate cause.

 

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

 

The City of Oakland sued a bank under the Fair Housing Act ("FHA"), 42 U.S.C. § 3601 et seq., claiming that the bank's supposed discriminatory lending practices caused higher default rates, which triggered higher foreclosure rates that drove down the assessed value of properties, ultimately resulting in lost property tax revenue and increased municipal expenditures.

 

While the case was pending in the trial court, the Supreme Court of the United States decided Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017) and clarified the requirements for proximate cause under the FHA. Id. at 1305–06. Emphasizing that "foreseeability alone" is not sufficient to establish proximate cause, the SCOTUS required "some direct relation between the injury asserted and the injurious conduct alleged." Id. (quoting Holmes v. Sec. Inv. Prot. Corp., 503 U.S. 258, 268 (1992)).

 

The trial court dismissed Oakland's claims as to increased municipal expenditures, but allowed the claims as to decreased property tax revenue to proceed. The trial court also dismissed on standing grounds Oakland's claim that discriminatory lending practices undermined its racial-integration goals. Finally, the trial court allowed all claims for declaratory and injunctive relief to proceed, reasoning that Miami's directness requirement "does not appear to extend" to these claims.

 

The trial court certified two issues for interlocutory appeal under 28 U.S.C. § 1292(b): (1) whether Oakland's claims for damages satisfied the FHA's proximate-cause requirement; and (2) whether that proximate-cause requirement applies to claims for injunctive and declaratory relief.

 

A panel of the Ninth Circuit affirmed the trial court's determination that Oakland sufficiently pleaded proximate cause for the decreased property tax revenue claim, affirmed the trial court's determination that Oakland failed to plead proximate cause for the increased municipal expenditures claim, and reversed the trial court's determination that Miami's proximate-cause requirement did not apply to injunctive and declaratory relief. The Ninth Circuit then voted to rehear the case en banc.

 

To begin, the Ninth Circuit en banc determined that Oakland's theory of harm stretched proximate causation "beyond the first step," Miami, 137 S. Ct. at 1306, because Oakland's theory ran to depressed housing values, and ultimately to reduced tax revenue and increased municipal expenditures. Thus, the Court held that Oakland failed "a strict application of the 'general tendency' not to stretch proximate causation 'beyond the first step.'" Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118, 139 (2014) (quoting Holmes v. Sec. Inv. Prot. Corp., 503 U.S. 258, 271 (1992)).

 

The Court next considered whether there was some basis not to "conform[] . . . to the general tendency" not to go "beyond the first step" in this matter. Holmes, 503 U.S. at 272. The SCOTUS in Miami articulated that this analysis rests on two considerations: "the 'nature of the statutory cause of action' and an assessment 'of what is administratively possible and convenient.'" 137 S. Ct. at 1306 (first quoting Lexmark, 572 U.S. at 133; and then Holmes, 503 U.S. at 268).

 

The Ninth Circuit reasoned that the nature of a particular statutory cause of action implicates whether proximate cause can extend "beyond the first step" because some statutes support proximate cause for injuries further downstream. The Court concluded that the FHA is not such a statute because the harm that the statute guards against — issuing discriminatory loans that result in a default because of a failure to refinance or modify the loans on fair terms — is situated at the "first step": the issuance of the discriminatory loan. The harm to the borrower has a clear direct relation to conduct prohibited by the FHA.

 

By contrast, the Ninth Circuit noted that the situations in which the SCOTUS has countenanced a finding of proximate cause "beyond the first step" arose from statutes that themselves encompass harm "beyond the first step." See Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (2008); see also Lexmark, 572 U.S. 118.

 

Having determined that the nature of the FHA does not warrant the extension of proximate cause "beyond the first step," the Ninth Circuit turned to Miami's second consideration: "what is administratively possible and convenient." 137 S. Ct. at 1306. In articulating this inquiry, Miami cited to Holmes, where the Court laid out three factors relevant to administrability: (1) the ability to distinguish the "damages attributable to the violation, as distinct from other, independent, factors"; (2) "the risk of multiple recoveries"; and (3) whether more direct plaintiffs could "be counted on to vindicate the law as private attorneys general." Holmes, 503 U.S. at 269–70 (citation omitted).

 

By citing to Holmes in its description of the administrability component of the direct-relation standard, the Ninth Circuit here reasoned that Miami appeared to endorse the use of the Holmes factors within the application of the direct-relation standard. Miami, 137 S. Ct. at 1306.

 

The Ninth Circuit concluded that the Holmes factors reinforced its view that Oakland had not met the directness requirement of the proximate cause standard. The first factor is the ability to distinguish the "damages attributable to the violation, as distinct from other, independent, factors." Holmes, 503 U.S. at 269 (citation omitted). In the Court's view, Oakland's theory of harm failed this test because Oakland did not allege that an increase in foreclosures was "surely attributable" to the discriminatory lending. Lexmark, 572 U.S. at 140.

 

The Ninth Circuit determined that the chain becomes attenuated when variables of property value (which could turn not only on foreclosure but neglect, criminal activity, changing demographics, and macroeconomic trends) and reduced tax revenues were piled on top of a cascading number of independent variables. Thus, the Court held that Oakland's "theory of liability rests not just on separate actions, but separate actions carried out by separate parties," in some cases third, fourth, or fifth parties. Hemi Grp., LLC v. City of New York, 559 U.S. 1, 11 (2010)).

 

The second Holmes factor is whether allowing proximate cause to extend "beyond the first step" would require the court to "adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries." Holmes, 503 U.S. at 269 (citations omitted). The Ninth Circuit concluded that this risk was not present here because only Oakland (or a related administrative authority) could recover lost property tax revenue. However, while the presence of this risk can indicate the need to rigorously adhere to the "first step" analysis, the Court noted that nothing suggests that the absence of a risk of duplicative recoveries warrants extending "beyond the first step." Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 459 (2006).

 

The third Holmes factor is whether directly injured victims "can generally be counted on to vindicate the law as private attorneys general." Holmes, 503 U.S. at 269–70. Here, the Ninth Circuit decided that the answer is clearly yes because directly harmed borrowers can sue individually and are incentivized to do so through the availability of punitive damages, attorneys' fees, and equitable relief. See 42 U.S.C. § 3613(c)(1)–(2). The Court also pointed out that harmed borrowers can sue as a class. See, e.g., Havens Realty Corp. v. Coleman, 455 U.S. 363, 366–67 & n.3 (1982).

 

Having followed Miami to consider the nature of the FHA and what is administratively possible and convenient, the Ninth Circuit concluded that Oakland's claimed harm of reduced tax revenue was too remote from the cause of action and that nothing advised in favor of going "beyond the first step" of proximate causation.

 

Furthermore, the Ninth Circuit held that Oakland's claim stemming from increased municipal expenditures also failed the proximate cause test because this claim was even further afield from the alleged wrongdoing than the reduced tax revenue claim.

 

Finally, the Ninth Circuit noted that the Court in Miami held that proximate cause is required under the FHA, and in doing so, did not distinguish between claims for damages and those for declaratory and injunctive relief. 137 S. Ct. at 1305–06. Therefore, the Court here read Miami to require a showing of proximate cause for all claims arising under the FHA, including claims for declaratory and injunctive relief.

 

Accordingly, the Ninth Circuit affirmed the trial court's dismissal of the damages claim related to increased municipal expenditures and reversed the trial court's denial of the bank's motion to dismiss the damages claim related to lost property tax revenue and the claims for injunctive and declaratory relief.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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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