Illinois Appellate Court invalidates mortgage where lender was not properly licensed under the Residential Mortgage License Act

In a case of first impression in Illinois, the Appellate Court for the Second District of Illinois has determined that a mortgage made by an entity lacking authorization to conduct business under the Residential Mortgage License Act (205 ILCS 635/1-1 et seq.) is void as against public policy.  First Mortgage Company, LLC v. Daniel Dina and Gratziela Dina, 2014 IL App (2d) 130567 (March 31, 2014).

The Plaintiff, First Mortgage Company, LLC, filed a foreclosure complaint relating to property in North Barrington, Lake County, Illinois, naming as defendants Daniel Dina, the property owner and borrower, and Gratziela Dina, who had also signed the mortgage.  According to the Complaint, the lender was an entity identified as FMCI.  Defendants, the Dinas, appeared through counsel and asserted that Plaintiff, First Mortgage Company, LLC was neither the mortgagee nor the successor in interest to the mortgagee and that Plaintiff lacked standing.  Plaintiff moved for summary judgment in which it provided evidence of a merger between FMCI and Plaintiff.

The Dinas missed their deadline to respond to the motion for summary judgment, sought additional time and filed a proposed response asserting that neither entities were licensed to do business in Illinois or licensed under the RMLA. The circuit court granted Plaintiff’s motion for summary judgment and entered judgment for foreclosure.

On appeal, the appellate court relied on Illinois law relating to other licenses and sister-state law concerning statutes analogous to the License Act to reach its determination that a License Act violation results in an unenforceable contract. The court further concluded that because the mortgage contract would be void as a matter of public policy, any technical flaw in the way the defendants raised the defense did not result in a forfeiture of the defense.

The court’s opinion made clear that where a mortgage has been assigned to another entity who then seeks to enforce its terms through foreclosure, it is the licensure status of the original mortgagee that is relevant. Under the License Act, “[n]o [nonexempt person or entity] shall engage in the business of brokering, funding, originating, servicing or purchasing of residential mortgage loans without first obtaining a license from the [Secretary]. Opinion ¶16; 205 ILCS 635/1-3(a).  Thus it is the original mortgagee’s status, not plaintiff’s that is relevant here. Id.

In reaching its decision, the court relied on the rationale stated in Chatham Foot Specialists, P.C. v. Health Care Service Corp., 216 Ill 2d 366 (2005):

It is well settled that ‘courts will not aid a plaintiff who bases his cause of action on an illegal act.’ More specifically, ‘courts will not enforce a contract involving a party who does not have a license called for by legislation that expressly prohibits the carrying on of the particular activity without a license where the legislation was enacted for the protection of the public, not as a revenue measure.’

The Second District concluded, therefore, that a mortgage made by an entity lacking authorization to conduct business under the RMLA is void and against public policy.  The court noted that although the Dinas did not properly raise the defense, under the circumstances they did not forfeit the defense as a matter of public policy, and stressed that it is within the court’s power and discretion to sua sponte consider whether an agreement is unenforceable as against public policy, even if no party raised the point. The court vacated the foreclosure judgment and remanded to the circuit court to permit the Plaintiff to respond to the Dinas’ defense.

Sarah Holdener secures judgment establishing priority of refinance deed of trust

Sarah Holdener has secured judgment on behalf of a bank client establishing the senior priority of its refinancing deed of trust, where another lender had initially agreed, but failed, to issue a subordination of its own deed of trust.

Trent Bond obtains judgment reforming deed of trust and establishing lien priority

On behalf of an insured lender, Trent Bond obtained a favorable judgment following a bench trial, reforming a deed of trust and establishing lien priority.  At issue was the borrower’s dispute of her intent to encumber the entirety of her property and her contest over the validity of her electronic signature on the underlying promissory note.  The Court found that the borrower intended to encumber the entirety of her property and that she did electronically sign the promissory note on a computer terminal provided at the closing of the loan transaction.

Bill Sauerwein recovers $1,403,265.33 for his client following appeal.

Bill Sauerwein recovers $1,403,265.33 for his client in a case filed in Western District of the Federal District of Missouri concerning the sales proceeds from several tracts of Boone County commercial real estate.  The action by filed by an estate sought to declare void the loan and deed of trust given to Sauerwein’s clients, successor to a failed bank and purchaser of the bank’s assets, and have the sales proceeds distributed to the estate.  The case ended following a favorable Eighth Circuit appeal.  The Eighth Circuit’s opinion extended the powers of the FDIC under 12 U.S.C. §1821 (j) of the Financial Institutions Reform, Recovery and Enforcement Act, affirmed the validity of title to the assets, and interpreted Missouri partnership law in ruling in favor of Sauerwein’s client. 

Bill Sauerwein successful before Eighth Circuit

Bill Sauerwein succeeded on appeal before the Eighth Circuit on behalf of the FDIC and a purchaser of a bank’s assets in an action which involved the FDIC’s powers under FIRREA and the validity of title to financial assets transferred to the FDIC’s purchasers. After a successful result before the Federal district court for the Western District of Missouri, the Eighth Circuit Court of Appeals upheld the decision of the trial court in a written opinion found at Dittmer Props., L.P. v. FDIC, 2013 U.S. App. LEXIS 4018 (February 27, 2013). The Eighth Circuit’s opinion extended the powers of the FDIC under 12 U.S.C. §1821 (j), affirmed the validity of title to the assets transferred, and interpreted Missouri partnership law in ruling in favor of Sauerwein’s client. 

Illinois legislature passes SB16 to address effect of In re Crane decision

In response to the now infamous In re Crane decision, the Illinois legislature yesterday passed SB 16. The relevant language appears at the end of the enrolled bill at the following link: SB0016

The bill will become law effective June 1, 2013,  if signed by Governor Quinn.

 In In re Crane, an Illinois Bankruptcy Court held a mortgage avoidable in bankruptcy if it fails to include the maturity date and the interest rate of the underlying debt within the mortgage document as recordedIn re Crane, Case No. 11-90592, U.S. Dist. Ct. C.D. Ill., February 29, 2012; Supplemental Opinion and Order, April 5, 2012.  The Debtors, Gary and Marsa Crane, filed for relief under Chapter 7 of the Bankruptcy Code, and a trustee was appointed. The Gifford State Bank claimed a mortgage lien on various parcels of real estate owned by the Debtors. In an adversary proceeding, the trustee claimed that the mortgages were defective and subject to avoidance pursuant to 11 U.S.C. § 544, because both mortgages failed to state the interest rate and the maturity date thereof, in violation of the Illinois conveyancing statutes, specifically 765 ILCS Sec. 5/11. This failure to comply with Illinois statutes, argued the trustee, meant that the mortgages did not give constructive notice to subsequent bona fide purchasers, and that the trustee had the power to avoid the mortgages per 11 U.S.C. § 544(a)(3). The bankruptcy court agreed with the trustee and found that the failure to include the maturity date and the interest rate in the mortgage violated the express requirements of Illinois conveyancing statutes, and thus did not provide the constructive notice to the trustee necessary to prevent the avoidance.  The Crane decision is currently on appeal with several amicus filing, including by the Illinois Land Title Association. 

 SB16 proposes to modify the Conveyances Act, found in Section 765 ILCS 5/11, by adding the following language:

 Sec. 11. (a) Mortgages of lands may be substantially in the following form:

       * * *

 The provisions of subsection (a) regarding the form of a mortgage are, and have always been, permissive and not mandatory.  Accordingly, the failure of an otherwise lawfully executed and recorded mortgage to be in the form described in subsection (a) in one or more respects, in cluding the failure to state the interest rate or the mature date, or both, shall not affect the validity or priority of the mortgage, nor shall its recordation be innefective for notice purposes regardless of when the mortgage was recorded.

Stewart Schneider and Trent Bond obtained Summary Judgment

Stewart Schneider and Trent Bond were awarded Summary Judgment on behalf of a Bank client, in a Judgment declaring the Bank’s deed of trust to be in a first lien position.  Central to the case was whether or not a Quit Claim Deed at issue, which was signed during the grantor’s life but not recorded until after the grantor’s death, was validly delivered to the grantee.  Subsequent to the recording, the grantee sold the property and an heir to the deceased grantor sought to invalidate the Deed and all subsequent conveyances.  The Court found that delivery had been made and the Bank and its borrower qualified as a bona fide purchasers under Missouri law.   The real property at issue was adjudged to be free and clear of the heir’s claims.

New Missouri Court of Appeals Decision Regarding the Enforceability of Spousal Guarantees under Regulation B of the Equal Credit Opportunity Act

Commercial lenders in Missouri should be aware of a recent Missouri Court of Appeals opinion regarding the enforceability of spousal guarantees under Regulation B of the Equal Credit Opportunity Act (the “ECOA”).  The case, titled Frontenac Bank v. T.R. Hughes, Inc. et al., specifically holds that where a commercial borrower is independently creditworthy under the lender’s standards for determining creditworthiness, requiring the borrower’s spouse to execute an unlimited personal guarantee constitutes discrimination based on marital status under the ECOA.  The case is also significant because it sets forth a relatively thorough analysis and discussion regarding when, and under what circumstances, a commercial lender may require a borrower’s spouse to execute personal guarantees and sheds light on the importance of having and following written guidelines and procedures when determining the creditworthiness of the borrower. 

 Factual Background

In the underlying case, Frontenac Bank brought suit against St. Louis homebuilder, T.R. Hughes, Inc., a related entity known as Summit Point, L.C., as well as their principal, Thomas R. Hughes and his wife,Carolyn, seeking to recover under several promissory notes, deeds of trust and accompanying guaranty agreements. 

The defendants filed several counterclaims and asserted a variety of affirmative defenses—including the defense  guaranty, which was an unlimited personal guaranty, was null and void because it violated the ECOA.  The basis of this defense was that the borrowers, T.R. Hughes, Inc. and Summit Point, L.C., were both sufficiently creditworthy under Frontenac Bank’s own standards and as such, Frontenac Bank’s requirement that Carolyn guaranty the loans as a condition to their being made was unlawful as discriminating based on marital status under the ECOA.  The trial court agreed and held the guarantees invalid and unenforceable.

 The Appellate Court’s Opinion and Analysis

The Court of Appeals affirmed, specifically finding that:

             a) T.R. Hughes, Inc. and Summit Point, L.C., were both independently creditworthy under Frontenac’s own written standards for creditworthiness;

             b)Carolyn was not an officer, director or owner of the businesses whose loans were secured by her guarantees—thereby removing her from the ECOA’s exemption for the personal guarantees of officers, directors or owners of corporate borrowers; and

             c) that her guarantees were not voluntarily given, but were in fact required by Frontenac as a precondition to making the loans.

In its analysis, the Court examined Frontenac’s loan procedure, its written policies and the language of Regulation B which expressly provides that a lender:

[s]hall not require the signature of an applicant’s spouse…on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of credit requested. 

In so doing, the Court determined that while Frontenac Bank’s loan officers may have had the ability and authority to consider a wide variety of factors in determining a borrower’s creditworthiness, its only written standard was the loan-to-value ratios contained in its loan policy—which ratios were met by T.R. Hughes, Inc. and Summit Point, L.C.  The Court specifically noted that Frontenac’s “written policy speaks only of the ‘loan-to-value’ ratios…and does not include the additional qualifications that Frontenac alleges loan officers were permitted to consider in analyzing a borrower’s creditworthiness.”  The Court further noted that Frontenac’s witnesses were “unaware of any credit analysis of [Summit Point, L.C or T.R. Hughes, Inc.] with respect to each loan…” and that “[r]ather than conducting an analysis of Summit and [T.R. Hughes, Inc.’s] creditworthiness, Frontenac deemed the joint financial statements [submitted by Tom and Carolyn] to be an offer by Carolyn to provide her guaranty as well.”  This, the Court said, “seemed to be common practice by Frontenac in its treatment of requiring the guarantees by wives on all large loans.

Based on the above, the Court concluded that because both T.R. Hughes, Inc. and Summit Point, L.C. were independently creditworthy under Frontenac’s own written standards and Frontenac could identify no other business reason or written policy for requesting the guarantees, requiring Carolyn to execute unlimited personal guarantees for each of the loans to T.R. Hughes, Inc. and Summit Point, L.C. constituted a violation of the ECOA.  The Court buttressed its point by citingCarolyn’s trial testimony in which she stated that she never offered her guarantees, but only signed what her husband asked her to sign as a condition for his obtaining the loans. 

Thus the Court concluded there was sufficient evidence to support the trial court’s finding that “Frontenac did not demand guarantees from Carolyn on the basis of any purported relationship with [Summit Point, L.C or T.R. Hughes, Inc.], but on the basis that Carolyn was Thomas’s wife…”.

Limited Personal Guarantees and Perfecting Security Interests in Jointly Held Collateral

Despite holdingCarolyn’s unlimited personal guarantees null and void, the Court specifically noted that under Regulation B:

 [i]f an applicant requests secured credit, a creditor may require the signature of the applicant’s spouse…on any instrument necessary…under applicable state law to make the property being offered as security available to satisfy the debt in the event of default, for example, an instrument to create a valid lien, pass clear title, waive inchoate rights, or assign earnings.

The Court went on to direct that in a “tenants by the entireties” state such as Missouri, a limited guaranty from a debtor’s wife that did not extend beyond her interest in the property securing the loan, “fell within the exception of Regulation B, 12 C.F.R. § 202.7(d)(4).”  The Court likewise noted that the ECOA does not prohibit spousal guarantees where the applicant is not “independently creditworthy”.  However, because T.R. Hughes, Inc. and Summit Point, L.C. were deemed to be independently creditworthy, and because Frontenac’s unlimited personal guaranty was “more than a financial instrument necessary to make the property being offered as security available to satisfy a debt upon default…”, the Court concluded that Carolyn’s guarantees did not fall within the scope of the exceptions.

Conclusion

In the end, there is no doubt that the Court’s holding in Hughes will cause many commercial lenders to reexamine their policies and procedures regarding how, when and to what extent spousal guarantees are sought in commercial lending transactions.  If Sauerwein Simon P.C. can be of any assistance to you in this regard, or you wish to discuss the Court’s decision in more detail, please do not hesitate to contact the attorneys of Sauerwein Simon P.C. at any time.  A full copy of the Appellate Court’s Opinion can be found here.

 

 

This is not to be interpreted as legal advice. The choice of a lawyer is an important decision and should not be based solely upon advertisements. The attorneys at Sauerwein Simon P.C. are licensed to practice law in Missouri and in other states as noted on individual biographies. The firm and its attorneys practice only in jurisdictions in which they are licensed.

Bill Sauerwein obtains reversal of trial court’s judgment in the 4th District of Illinois.

Representing a property owner and a lender, Bill Sauerwein successfully argued for reversal of a trial court’s judgment awarding damages and a lien to a judgment holder which attributed fault to the negligence of the title insurer.  The 4th District Appellate court reversed in a lenghty opinion – United Community Bank, et al. v. Prairie State Bank & Trust et al (2012 WL 2834221) that explored the doctrines of Equitable Conversion, Equitable Subrogation, and the duties owed to a Junior Lienholder by a title insurer.

Bill Sauerwein and Trent Bond reach favorable resolution of substantial mechanics lien claims.

Bill Sauerwein and Trent Bond successfully resolved claims on behalf of a lender at a mediation conducted at Missouri University School of Law.   At and following the mediation, a favorable settlement was reached with a contractor who filed a substantial mechanic’s lien against lender’s property.