U.S. BANK v. LOPEZ – What happened and where do we go from here?
*Case Documents: PDF format below
| E-filed PLA.pdf |
| US Bank v Lopez Appellate - 2nd District Court |
| U.S Bank v Lopez - 2nd Opinion - 2nd District Appellate Court of Illinois |
It’s fair to say the case of U.S. Bank v. Lopez is unprecedented in Illinois history. The case featured a unanimous panel reversing and dismissing the action for U.S. Bank’s lack of standing, the withdrawal of the opinion on the court’s own motion on the twenty-first day, a petition for rehearing filed by the Plaintiff soon thereafter, an amicus brief filed by powerful interest groups Attorney Title Guaranty Fund, Inc., and the Illinois Land Title Association, and a second opinion issued on May 4, 2018, affirming in part, and reversing in part, the trial court decision.
The reader is strongly encouraged to read the attachments supporting this article including the November 14, 2017 opinion, the May 4, 2018 opinion, and finally, the Defendants’ Petition for Leave to the Illinois Supreme Court. The case was selected for oral argument before the Second District Appellate Court and the audio has also been made available. Only with a thorough review of the attachments, and evidence provided, can the reader begin to comprehend the procedural history of this case, and the facts that strongly supported the Defendants’ Lack of Standing Affirmative Defense.
On November 16, 2016, the Defendant-Mortgagors appealed to the Second District Appellate Court of Illinois raising four issues for review: violation of recently enacted Supreme Court Rule 113 (which now requires the note to be attached in its current form with all endorsements and allonges), the use of Plaintiff’s 735 ILCS 5/2-619 to strike Defendants’ Affirmative Defenses, (which allowed improper evidence via a mortgage assignment), a procedural tool designed only for a Defendant, Plaintiff’s Lack of Standing due to the Note containing a special “pay to the order” endorsement to Secretary of Housing and Urban Development, a non-party to the case, and the Note being assigned after the case was filed. Finally, the Defendants argued the Plaintiff failed to comply with 24 C.F.R. § 203.604 of the Code of Federal Regulations which requires that the mortgagor be sent a certified letter offering a face-to-face meeting within 90 days of default. A review of the extensive procedural history is necessary to shed light on the matter.
On March 11, 2014, Plaintiff, U.S. Bank Trust, National Association, filed its original Complaint to Foreclose Mortgage. The Mortgage and Note, as it currently existed, was attached to the Complaint. The Note was specially endorsed to the “Secretary of Housing and Urban Development.” There were no endorsements, or assignments of the Note, to the Plaintiff, when the Complaint was filed. On May 12, 2014, Defendants filed their Answer and three Affirmative Defenses: (1) Lack of Standing, (2) violation of Supreme Court Rule 113, and (3) Non-Compliance with 24 C.F.R. § 203.604. On the hearing date of Plaintiff’s Motion to Strike, Plaintiff made an oral motion to amend its Complaint which the trial court granted. Defendants objected to the filing of an amended complaint, and explained to the court that, a Supreme Court Rule 113 violation would occur.
On November 7, 2014, Plaintiff filed an Amended Complaint. Plaintiff changed its legal capacity. Plaintiff now alleged that “on March 11, 2014 Plaintiff was a non-holder with rights of a holder. Plaintiff is currently the legal holder of the note.” The Amended Complaint attached an undated allonge which was not filed with the original Complaint. The Allonge contained an endorsement that was executed after March 11, 2014, the filing of the foreclosure complaint. These facts were adduced by the judicial admissions of the Plaintiff in its pleadings and in an affidavit of one of Plaintiff’s attorneys, Robert Rappe Jr. The Allonge contained a special endorsement to the trust, which U.S. Bank was a trustee on behalf of, “Queens Park Oval Asset Holding Trust.” Defendants argued in the trial court that the allonge attached to the amended Complaint was a violation of recently enacted Supreme Court Rule 113.
On January 8, 2015, Defendants presented a combined Motion to Dismiss Plaintiff’s Amended Complaint pursuant to 735 ILCS 5/2-619.1 and Supreme Court Rule 113. Defendants argued that Plaintiff lacked standing to file the foreclosure action, and that it violated Supreme Court Rule 113, as the Note was endorsed to a non-party to the case, and not to the Plaintiff. On March 18, 2015, the trial court denied Defendants’ Combined Motion to Dismiss, with leave granted to file an Answer.
On April 16, 2015, Defendants filed an Answer with Affirmative Defenses to Plaintiff’s Amended Complaint to Foreclose Mortgage. Defendants again raised the Affirmative Defense of Lack of Standing and non-compliance with 24 C.F.R § 203.604. Defendants reiterated within their standing defense that Supreme Court Rule 113 was violated.
On August 26, 2015, Plaintiff presented its 735 ILCS 5/2-619.1 Motion to Strike Defendants’ Affirmative Defenses. The Motion to Strike contained exhibits including an assignment of the mortgage, without the note, various affidavits, and a Federal Express tracking label. Plaintiff maintained that the mortgage assignment established its legal capacity as a “non-holder with rights of a holder” when the Complaint was filed. The mortgage assignment did not attempt to assign the Note.
On September 24, 2015, Defendants filed their Response to Plaintiff’s 735 ILCS 5/2-619.1 Motion to Strike. Defendants maintained that Plaintiff’s Motion was procedurally improper, in that, it utilized a 735 ILCS 5/2-619 which is available only to a Defendant, that Plaintiff lacked standing, and violated Supreme Court Rule 113. Defendants further maintained that Plaintiff failed to follow mandated servicing guidelines under 24 C.F.R § 203.604.
On November 4, 2015, the trial court granted Plaintiff’s Motion to Strike and struck the Defendants’ Affirmative Defenses with prejudice. The trial court held that the Plaintiff was a “non-holder with rights of a holder.” Subsequently, with Defendants’ Affirmative Defenses stricken, Summary Judgment, and a Judgment of Foreclosure and Sale was granted in favor of the Plaintiff. A personal deficiency was awarded against the Defendants in the amount of $144,857.75. On November 16, 2016, the Defendants filed a timely notice of appeal pursuant to Supreme Court Rule 301 and 303. The case was selected for oral argument. On October 3, 2017, attorney Daniel Khwaja argued the case before the Second District Appellate Court of Illinois.
On November 14, 2017, the Second District Appellate Court, unanimously, reversed and dismissed the case based on Plaintiff’s lack of standing and stated:
“Similarly, here, the note attached to the original complaint showed on its face that it was not indorsed to plaintiff. At the hearing on defendants’ motion to dismiss plaintiff amended complaint, plaintiff conceded that the note was not indorsed to plaintiff on the date the original complaint was filed. Plaintiff alleged that the copy of the note attached to its original complaint was a “copy of the note as it currently exists.” Thus, the allonge, which has no date of execution, must have been executed after the filing of the original complaint. As defendants observe, plaintiff’s admission that the note attached to its complaint was in its current form leaves no other possible interpretation. As in Gilbert, defendants have made a prima facie showing of a lack of standing, and plaintiff has failed to rebut it.” United States Bank Trust Nat'l Ass'n v. Lopez, 2017 IL App (2d) 160967 ⁋22. (first opinion).
The Appellate Court reaffirmed the holding in Deutsche Bank v. Gilbert 2012 IL App (2d) 120164 and dismissed the foreclosure action for U.S. Bank’s lack of standing, duplicating that result, for only the second time in Illinois history. The Appellate Court held that because the Note was assigned after the filing of the foreclosure to the Plaintiff, it was a prima-facie showing of lack of standing. Twenty-one days later, the Appellate Court, on its own motion withdrew its opinion. On that same day, and apparently within a matter of hours, the Plaintiff filed a Petition for Rehearing to reconsider the original opinion. On June 26, 2018, an amicus brief was filed by the Attorney Title Guaranty Fund, Inc. and the Illinois Land Title Association. This was undoubtedly, a coordinated effort by the Plaintiff, its attorneys, and powerful interest groups, to erase this historic decision from the landscape of Illinois on behalf of homeowners. On February 5, 2018, The Motion for Leave to file an Amicus Brief was denied by the Appellate Court. However, the pressure that this effort placed upon the Appellate Court can never truly be measured.
On May 4, 2018, without dissent, the Appellate Court reversed their own decision, and found the Plaintiff had standing. The instant matter is the first of its kind, where an Appellate Court openly recognizes that: 1) When the Complaint was filed the Note was endorsed to someone other than the Plaintiff; 2) That no version of the Note existed at the time the Complaint was filed that was made payable to the Plaintiff; and 3) The Allonge that was attached to the Amended Complaint was endorsed after the case was filed. U.S. Bank Trust N.A. v. Lopez, 2018 IL App (2d) 160967 ⁋⁋4-6, 29. (second opinion).
It is attorney Daniel Khwaja’s position that the Appellate Court recognized and correctly ruled in its first opinion that standing must exist when the Complaint was filed. See Village of Kildeer v. Village of Lake Zurich, 167 Ill. App 3d 783, 786 (2nd Dist.1988). When a plaintiff lacks standing in a foreclosure action, the trial court's entry of summary judgment and orders of foreclosure and sale are improper as a matter of law. Bayview Loan Servicing, L.L.C. v. Nelson, 382 Ill. App. 3d 1184 (5th Dist. 2008).
On May 4, 2018, in reversing their own ruling, the Appellate Court affirmed the trial court’s decision to strike the Defendants’ Lack of Standing Affirmative Defense. The Appellate Court then ruled that Plaintiff was a “non-holder with rights of a holder,” and subsequently became a “holder” at the time the Allonge was executed, even though the Appellate Court recognized that this endorsement occurred after the filing of the Complaint.
“Pursuant to Section 3-301 of the UCC, a person can enforce a negotiable instrument as a holder or nonholder in possession of the instrument who has rights of a holder 810 ILCS 5/3-301. The fact that here the note was indorsed to HUD, and not to Plaintiff, when the original complaint was filed proves only that Plaintiff was not the holder of the note at that time…Further the assignment of the mortgage from HUD to plaintiff, which predated the filing of the original complaint, showed that plaintiff had the right to enforce the note at that time.” United States Bank Trust Nat'l Ass'n v. Lopez, 2018 IL App (2d) 160967 ⁋23. (second opinion).
The ILCS states the following as to this section:
810 ILCS 5/3-301:
"Person entitled to enforce" an instrument means:
- the holder of the instrument,
- a nonholder in possession of the instrument who has the rights of a holder, or
- a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3-309 or 3-418(d). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument. 810 ILCS 5/3301 (West 2018)
A “non-holder with rights of a holder” certainly exists in the Uniform Commercial Code, but the Appellate Court in this instance, could never have reached such a conclusion. First, U.S. Bank attached a note to its Complaint that made no reference to it, demonstrating Secretary of Housing and Urban Development was the “holder” with the rights provided therein. Second, the mortgage assignment in this case was a red herring. It did not establish Plaintiff was a “non-holder with rights of a holder” at the original filing. To the contrary, it bestowed no enforcement rights upon the Plaintiff, even by a cursory review, had merely assigned the mortgage, without the Note. Therefore, under Illinois law and well-established principles throughout the country it was a nullity.
The Appellate Court fully recognized this in the first opinion and stated:
“Plaintiff's argument rests on the January 16, 2014, assignment of the mortgage, from HUD to plaintiff. However, "'[a]n assignment of the mortgage without an assignment of the debt creates no right in the assignee.'" Bristol v. Wells Fargo Bank, National Ass'n, 137So.3d1130,1133(Fla.Dist.Ct.App.2014)… Without the assignment of the debt to plaintiff, which must have occurred after the foreclosure complaint was filed, when the allonge was executed, the assignment of the mortgage did not give plaintiff the rights of a holder. United States Bank Trust Nat'l Ass'n v. Lopez, 2017 IL App (2d) 160967, ⁋23. (first opinion).
The Appellate Court well understood the value of the mortgage assignment, and that it contained no reference to the Note, and that the Note had been assigned after the foreclosure filing. The Plaintiff in this case, had not introduced a single piece of evidence in the record that the rights of the Note were assigned to the Plaintiff before the filing of the Complaint. The Appellate Court changed its analysis in the first opinion that the mortgage assignment did not reference the Note and the Note was assigned after the foreclosure complaint to the Plaintiff, to the mortgage assignment gave the Plaintiff the right to enforce the Note. The change in analysis is fairly striking between the two opinions and raises more questions than answers how the Appellate Court made such a fundamental change in its analysis of the documentary evidence in the record. The Appellate Court could not have arrived at such a conclusion based on a plain reading of the mortgage assignment. It is attorney Daniel Khwaja’s advice that if such a situation arises for any homeowner in a foreclosure action where the Plaintiff claims that it is a “non-holder with rights of a holder” the Supreme Court of Maryland can provide instruction on this issue.
The Supreme Court of Maryland has stated on this issue:
A nonholder in possession, however, cannot rely on possession of the instrument alone as a basis to enforce it. Thetransferee's right to enforce the instrument derives from the transferor (because by the terms of the instrument, it is not payable to the transferee) and therefore those rights must be proved. Com. Law § 3-203cmt.2; accord Leavings v.Mills175S.W.3d301(Tex.Ct.App.2004 )("A person not identified in a note who is seeking to enforce it as the owner or holder must prove the transfer by which he acquired the note.") citing Com. Law § 3-203cmt.2. If there are multiple prior transfers, the transferee must prove each prior transfer…. Once the transferee establishes a successful transfer from a holder, he or she acquires the enforcement rights of that holder. See Com. Law § 3-203cmt.2. Thus, the Substitute Trustees here, who possess an unindorsed note and wish to enforce it, had the burden of proving their status as nonholder in possession. Anderson v. Burson, 35 A.3d 452, 462-463, 424 Md. 232, 248-249, 2011 Md. LEXIS 777, *29-31, 76 U.C.C. Rep. Serv. 2d (Callaghan) 255.
Similarly, here, the Plaintiff had not proved that it had a right to enforce the Note and the Appellate Court ignored well settled principles regarding mortgage assignments and their lack of evidentiary value. A transfer of a mortgage without an assignment of the underlying debt is treated as a nullity as the transferee must receive an interest in the mortgaged debt. Commercial Products Corp. v. Briegel, 101 Ill. App. 2d 156 (3rd Dist. 1968); See also Delano v. Bennet, 90 Ill. 533, 536 (1878). Here, the Note was clearly assigned after the foreclosure filing, and it would have been impossible for the mortgage assignment to establish Plaintiff’s standing. It lacked evidentiary value.
The Appellate Court also made a profoundly sweeping statement of first impression in the State of Illinois in the second opinion, which is likely to effect mortgage foreclosures throughout the State.
“Defendants attempt to distinguish Hardman and Tucker by arguing that the notes in those were unendorsed, whereas the note in the present case was indorsed to HUD. We fail to see any distinction between a note payable under its terms to an entity that is not the plaintiff and a note payable through indorsement to an entity that is not the plaintiff.” United States Bank Trust Nat'l Ass'n v. Lopez, 2018 IL App (2d) 160967, ⁋24.(second opinion).
The Second District Appellate Court has seemingly adopted a position that a Plaintiff can be a “non-holder with rights of a holder” where the Note is assigned to a totally unrelated party, if a mortgage assignment is present in the record. This analysis falls far short where a Plaintiff lacks the documentary evidence to demonstrate it has the right to enforce the Note, as in Lopez, to arrive at such a conclusion. This is a troubling result and in conflict with cases throughout the country.
The Appellate Court also did not address Defendants’ argument that Plaintiff’s 735 ILCS 5/2-619.1 Motion to Strike Defendants’ Affirmative Defense used a procedural tool, namely, a Section 2-619, which is only available to a defendant and not a plaintiff. The Defendants raised this issue repeatedly in the trial court (oral and in written submissions), as well as in their appellate brief, in oral arguments before the Appellate Court, and in their response to Plaintiff’s Petition for Rehearing. The authority interpreting this rule originates from the very same court. Federated Equipment & Supply Co. v. Miro Mold & Duplicating Corp. 166 Ill. App. 3d 670 (2nd Dist. 1988).
The Appellate Court in its modified second opinion chose to reaffirm the holding in U.S. Bank v. Hernandez 2017 IL App (2d) 160850 allowing the Defendants to win the appeal, but for very different reasons. It reversed its own finding that the Plaintiff lacked standing and vacated the trial court orders that found Plaintiff complied with 24 C.F.R § 203.604. In reaffirming Hernandez, the Appellate Court held that a Plaintiff must prove as a matter of law that it certified as having been dispatched the face-to-face letter and that a Federal Express tracking label and a bank affidavit falls far short of doing so.
The facts of this case demonstrate that homeowners in the State of Illinois may have an insurmountable mountain to climb to defeat a Plaintiff’s standing in a mortgage foreclosure action. The facts and the law were extremely favorable to the Defendants, so much so, that the Appellate Court initially ruled in the Defendants favor before changing their mind. For the first time, an Appellate Court openly recognized that the Note was endorsed after the filing of the foreclosure case to the correct party, and still ruled for the Plaintiff. It is the position of attorney Daniel Khwaja that great attention should be given to the capacity claimed in the Complaint to Foreclose Mortgage and whether a Plaintiff has claimed to be “holder”, “non-holder” or otherwise, as designated under the Illinois Mortgage Foreclosure Law. 735 ILCS 5/15-1504 3(N). Each capacity requires an entirely different approach and a homeowner in foreclosure would be well advised to properly address it.
CONCLUSION
The result in U.S. Bank v. Lopez has helped significantly strengthen defenses asserted under 24 C.F.R § 203.604, providing homeowners a useful sword to challenge non-compliance with federal law. However, the Appellate Court’s reversal of its own ruling, finding the Plaintiff to have standing based on the lack of evidence, is a far-reaching result. A well-planned strategy and favorable evidence may still not save the day and such issues must be addressed early and often. On September 26, 2018, the Supreme Court of Illinois denied the Defendants’ Petition for Leave to Appeal, despite a plethora of issues for the highest court in the land to consider and finally resolve. This leaves one to wonder if the Supreme Court will ever take a standing case in mortgage foreclosure action. To date, they never have.
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