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realty, transfer ownership, second
mortgage, sales contract, first
mortgage, genuine issue, own home, re-
financing, downpayment, originator
LexisNexis(R) Headnotes
Evidence > Judicial Admissions >
General Overview
Governments > Courts > Rule
Application & Interpretation
[HN1] A bare statement of lack of
information is an insufficient basis
upon which to deny a statement of fact
in a U.S. Dist. Ct., N..D. Ill. R.
12(m) statement. In the absence of an
explanation of the basis for denial or
lack of information, the statement isadmitted. U.S. Dist. Ct., N..D. Ill.
R. 12(n).
Civil Procedure > Summary Judgment >
Burdens of Production & Proof >
Movants
Civil Procedure > Summary Judgment >
Motions for Summary Judgment > General
Overview
Civil Procedure > Summary Judgment >
Standards > Appropriateness
[HN2] In a motion for summary
judgment, the movant must show that nogenuine dispute exists over any
material fact which constitutes an
element essential to that party's case
with respect to which she has the
burden of proof. Summary judgment is
appropriate if any allegedly disputed
factual issues can only be reasonably
or rationally resolved in favor of the
moving party. The court must examine
the underlying facts and draw all
inferences and resolve all ambiguities
in favor of the non-moving party.
Contracts Law > Types of Contracts >
Bona Fide Purchasers
Real Property Law > Financing >
Mortgages & Other Security Instruments
> Mortgagee's Interests
Real Property Law > Title Quality >
Adverse Claim Actions > Quiet Title
Actions
[HN3] A person who takes property for
valuable consideration without notice
of another's adverse claim is regarded
as a bona fide purchaser whose rights
are superior to competing claims. A
mortgagee of realty is afforded the
same protections as a bona fide
purchaser if the mortgagee secures the
mortgage without knowledge or notice
of adverse claims to its mortgage.
Notice of a competing interest in the
realty may be predicated upon actual
or constructive knowledge, and may
also be imputed if the circumstances
impose a duty of inquiry upon the
purchaser/mortgagee. A person is
charged with the duty of inquiry only
upon gaining knowledge of facts
inconsistent with the mortgagor's
claim or those facts which would make
a prudent person suspicious. Inquiry
notice imputes knowledge of all those
facts which a diligent inquiry would
have revealed.
Contracts Law > Types of Contracts >
Bona Fide Purchasers
Real Property Law > Nonmortgage Liens
> Lien Priorities
Real Property Law > Title Quality >
Adverse Claim Actions > General
Overview
[HN4] The most common example of
inquiry notice of adverse claims toits mortgage charged to a mortgagee is
when a person other than the vendor is
in possession of the property.
However, inquiry notice is imputed
whenever the cumulative facts or
circumstances create a reasonable
suspicion that the mortgagee's
interests are subject to an adverse
claim. Factors, besides possession,
which can serve as red flags to place
a party on inquiry notice include: the
extensive involvement of the putative
bona fide purchaser in the
transaction; the precarious financialstatus of the plaintiff; the low
purchase price of the property; and
the ease at which minimal
investigation would uncover the
fraudulent nature of the transaction.
JUDGES: [*1] BUCKLO
OPINION BY: ELAINE E. BUCKLO
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OPINION:
REPORT AND RECOMMENDATION
Plaintiffs, John N. Newman and
Sarah Newman ("the Newmans"),
initiated a class action lawsuit n1against defendants, 1st 1440
Investment, Inc. ("1st 1440"), Frank
Clay, Stanley Cain, and Mortgage
Correspondents of Illinois, Inc.
("MCI"). The Newmans allege that 1st
1440, through Mr. Clay and Mr. Cain,
victimized financially distressed
homeowners in a fraudulent mortgage
re-financing scheme. TheNewmans claim
that MCI, as a mortgage broker,
provided financing for the
transactions and knew, or should have
known, of the allegedly fraudulent
nature of the deals. MCI contends theNewmans have alleged insufficient
evidence of such knowledge and seek
summary judgment on its behalf.
n1 Plaintiffs have never
moved for class certification.
Count I of the Newmans' Complaint
alleged that 1st 1440, Mr. Clay, and
Mr. Cain violated the Racketeer
Influenced and Corrupt Organizations
Act ("RICO"), 18 U.S.C. 1961. On
July 10, 1990, [*2] the courtentered a judgment in favor of the
Newmans against all three defendants,
jointly and severally, in the amount
of $ 71,704.11 plus attorneys' fees
and costs. Minute Order, July 10,
1990. MCI is a named defendant in the
remaining three counts. In Count II
the Newmans aver that they were
consumers engaged in a credit
transaction and thereby seek to invoke
their right to cancel the mortgage
agreement under the Truth In Lending
Act ("TILA"), 15 U.S.C. 1635.
Complaint, PP 42-49. The Newmans claimin Count III that MCI violated the
Illinois Consumer Fraud and Deceptive
Business Practices Act ("Consumer
Fraud Act"), ILL. REV. STAT., ch.
12101/2, PP 261 et seq. and in Count
IV, that MCI breached its common law
fiduciary obligations by causing loan
transactions which failed to reflect
or protect the Newmans' equitable
ownership interests in their home. Id.
at PP 59-63, 72-76.
I recommend that MCI's motion for
summary judgment be denied.
Facts
The Newmans' Complaint alleges that1st 1440 defrauded a class of
homeowners by securing second mortgage
loans which exceeded amounts owed
under the first mortgage, permitting
1st [*3] 1440 to retain the
homeowner's accumulated equity. n2
However, the Newman transaction is the
only example of the alleged scheme
cited in the class action complaint
against 1st 1440. The Rule 12(m) n3
and 12(n) statements filed by MCI and
the Newmans reveal the following
undisputed facts:
n2 According to the Newmans,
1st 1440's re-financing scheme
worked in the following manner.
1st 1440 would seek out
homeowners delinquent in their
mortgage payments, but with
substantial equity in their
homes. Complaint, P 12. 1st 1440
would then solicit a "nominee" to
whom the homeowner would transfer
ownership. The nominee would
obtain a new mortgage loan, which
exceeded the amount necessary topay off the homeowner's first
mortgage loan. Id. The nominee
would be paid a fee for its
services. 1st 1440 would retain
the difference between the amount
of the new loan and the amount
required to pay off the original
mortgage loan. The homeowner
would retain possession of the
home under a sale leaseback
agreement. However, the payments
were higher under the second
mortgage, and the homeowner
ultimately faced eviction while1st 1440 pocketed the homeowner's
equity. Id.
[*4]
n3 In its 12(m) statement,
MCI failed to make references to
affidavits or parts of the record
to support all of its factual
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allegation. Under Rule 12(m),
such failure "constitutes grounds
for denial of the motion." The
rule, however, does not compel
denial, and because MCI submitted
its Rule 12(m) statement with the
affidavit of Mr. Wade attached,
this technical requirement is
overlooked.
1. On July 18, 1987, the Newmans
executed a real estate contract to
transfer ownership of their home for $
48,000.00 to Marlene Griffin.
Defendants Uncontested and Stipulated
Facts ("12(m) Statement"), P 1;
Plaintiffs' 12(n) Statement ("12(n)
Statement"), P 1.
2. Mr. Cain and Ms. Griffin applied
for a mortgage with Michael Wade, a
loan originator employed by MCI. Ms.
Griffin filled out a loan application
for an FHA loan to finance the
transaction. In connection with that
application, Ms. Griffin executed an
affidavit stating that she would live
in the Newmans' home. Ms. Griffin
represented that she would lease out
her own home. Based upon these
representations, the loan was approved
for FHA insured [*5] owner-occupied
mortgage financing. 12(m) Statement,
PP 2-4; 12(n) Statement, PP 2-4. n4
n4 The Newmans stated that
they had no information as to
whether Ms. Griffin executed the
affidavit in question and
therefore denied it. [HN1] A bare
statement of lack of information
is an insufficient basis upon
which to deny a statement of fact
in a Rule 12(m) statement. In the
absence of an explanation of the
basis for denial or lack of
information, the statement is
admitted. See Local Rule 12(n).
3. On December 28, 1987, the
transaction was closed at Intercounty
Title Company. 12(m) Statement, P 5;
12(n) Statement, P 5.
4. The Newmans never had direct
contact with MCI. Pretrial Stipulation
and Order dated December 21, 1990.
The Newmans have introduced
evidence of additional facts that are
relevant to the question of MCI's
knowledge or notice that Ms. Griffin
was acting as a nominee purchaser.
1. In 1987, facing foreclosureproceedings on their home, the Newmans
contacted Mr. Clay and Mr. Cain of 1st
1440, who indicated that they would
help the [*6] Newmans refinance
their existing mortgage debt by
obtaining a loan from a new lender to
pay off the original lender.
Declaration of John Newman, PP 2-3.
2. Mr. Clay represented that the
Newmans would make payments to him for
two years, and thereafter payments
would be made to a new lender.
Declaration of John Newman, P 4.
3. Mr. Cain, Mr. Clay, the Newmans,
Ms. Griffin, an attorney named Timothy
Rowells, and Charlotte Berry (the
closer for Intercounty Title), were
all present at the closing. 12(n)
Additional Facts, PP 1, 4, Declaration
of Marlene Griffin, P 8.
4. A Lease and Repurchase Agreement
(i.e., sale leaseback), dated December
28, 1987, was executed at the closing
by the Newmans and Ms. Griffin, under
which the Newmans leased their home
back from Ms. Griffin for two yearswith an option to repurchase and
assume Ms. Griffin's mortgage. 12(n)
Additional Facts, P 2, Exhibit C.
5. For her services as nominee in
the transaction, Mr. Cain made what he
called a partial payment of $ 800.00
by personal check to Ms. Griffin at
the closing, in the presence of Ms.
Berry. Ms. Berry indicated that an
additional check would be cut by
Intercounty Title, which Ms. Griffin
picked up at Intercounty Title's
office on the following [*7] day in
the amount of $ 329.55. The secondcheck is accounted for in the
Settlement Statement, line 303 as
"Amount to Borrower." 12(n) Additional
Facts, P 4, Griffin Declaration, P 11.
Discussion
[HN2] In a motion for summary
judgment, the movant must show that no
genuine dispute exists over any
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material fact which constitutes an
"element essential to that party's
case . . . with respect to which she
has the burden of proof." Celotex
Corp. v. Catrett, 477 U.S. 317, 322-
23, 91 L. Ed. 2d 265, 106 S. Ct. 2548
(1986). Summary judgment is
appropriate if any allegedly disputed
factual issues can only be reasonably
or rationally resolved in favor of the
moving party. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 250, 91 L.
Ed. 2d 202, 106 S. Ct. 2505 (1986).
The court must examine the underlying
facts and darw all inferences and
resolve all ambiguities in favor of
the non-moving party. United States v.
Diebold, Inc., 369 U.S. 654, 655, 8 L.
Ed. 2d 176, 82 S. Ct. 993 (1962).
The critical issue in this motionfor summary judgment is not whether a
fraud was perpetrated against the
Newmans, but "whether MCI had notice
that Marlene Griffin was acting as
nominee for the Newmans in the
mortgage loan transaction."
Preliminary Pretrial scheduling [*8]
Order, p. 6. [HN3] A person who takes
property for valuable consideration
without notice of another's adverse
claim is regarded as a bona fide
purchaser whose rights are superior to
competing claims. Life Savings & Loan
Association v. Bryant, 125 Ill. App.3d 1012, 81 Ill. Dec. 577, 582, 467
N.E.2d 277 (1st Dist. 1984). A
mortgagee of realty is afforded the
same protections as a bona fide
purchaser if the mortgagee secures the
mortgage without knowledge or notice
of adverse claims to its mortgage. Id.
Notice of a competing interest in the
realty may be predicated upon actual
or constructive knowledge, and may
also be imputed if the circumstances
impose a duty of inquiry upon the
purchaser/mortgagee. Burnix oil Co. v.
Floyd, 106 Ill. App. 2d 16, 23, 245N.E.2d 539 (1st Dist. 1969). A person
is charged with the duty of inquiry
only upon gaining knowledge of facts
inconsistent with the mortgagor's
claim or those "facts which would make
a prudent person suspicious." In re
Ryan, 851 F.2d 502, 511 (1st Cir.
1988). Inquiry notice imputes
knowledge of all those facts which a
diligent [*9] inquiry would have
revealed. In re Cutty's-Gurnee, Inc.,
133 Bankr. 934, 950 (N.D. Ill. 1991).
[HN4] The most common example of
inquiry notice charged to a mortgagee
is when a person other than the vendor
is in possession of the property.Life Sav. & Loan Ass'n v. Bryant,
supra, 81 Ill. Dec. at 582, 467 N.E.2d
277. However, inquiry notice is
imputed whenever the cumulative facts
or circumstances create a reasonable
suspicion that the mortgagee's
interests are subject to an adverse
claim. See, e.g., In re Cutty's-
Gurnee, Inc., supra, 133 Bankr. at
952-53. Factors, besides possession,
which can serve as red flags to place
a party on inquiry notice include: the
extensive involvement of the putative
bona fide purchaser in thetransaction; the precarious financial
status of the plaintiff; the low
purchase price of the property; and
the ease at which minimal
investigation would uncover the
fraudulent nature of the transaction.
Shacket v. Roger Smith Aircraft Sales,
651 F. Supp. 675, 691-92 (N.D. Ill.
1986).
In this case, MCI claims there is
no genuine [*10] issue of fact as to
whether it knew of Ms. Griffin's
nominee status. It relies primarily on
the affidavit of its loan originator,
Mr. Wade, who disclaims any knowledge
of the underlying fraudulent purpose
of the transaction. Mr. Wade claims
that he only approved the loan upon
Ms. Griffin's representation that she
would occupy the Newman house and rent
out her own home. He further states
that he was never "aware or advised by
anyone that Marlene Griffin was not,
in fact, purchasing the subject
property from the Newmans."
Despite Mr. Wade's affidavit, there
is evidence from which a trier of factcould conclude that Ms. Berry, the
Intercounty Title Representative, had
knowledge that Ms. Griffin was only a
nominee purchaser. The evidence
adduced by the Newmans, if true, shows
that at the closing Ms. Griffin and
the Newmans executed a sale leaseback
agreement, thereby giving Ms. Berry
notice that Ms. Griffin was not going
to live in the house, and that
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irregular and unexplained payments
were made to Ms. Griffin in Ms.
Berry's presence, leaving her with
virtually no equity in her new home.
n5
n5 According to MCI Vice-
President and Senior Underwriter,
Cynthia Altizer, an FHA-insured
owner-occupied loan requires a
downpayment of 3 to 5 percent.
Deposition of Cynthia Altizer
("Altizer Dep."), pp. 47-48. The
Settlement Statement indicates
that Ms. Griffin paid $ 1,250.00
as her downpayment, but upon
return of her $ 1,129.55 fee, her
equity was essentially non-
existent.
[*11]
Even if Ms. Berry had notice of
suspicious circumstances, her
knowledge can only be attributed to
MCI if an agency relationship is shown
to have existed between Intercounty
Title and MCI. See First National Bank
of Cicero v. United States, 653 F.
Supp. 1312, 1316 (N.D. Ill. 1987). Ms.
Altizer described MCI's relationship
with Intercounty Title:
Q: When you sent documents over to the
closing, do you keep some kind of an
inventory of what you send over there?
A: We keep a copy of the note and the
mortgage. The rest of it, the
originals come back to us from the
closer, but they don't disburse. We
have to be completely satisfied with
the conditions of the documents at
closing.
They [MCI] have our instruction. They
represent us as our agent -- the
closer.
Q: Okay. The closer is your agent
then?
A: Um-hmn.
Q: Do you have any kind of an agency
agreement with the closer?
A: Yes.
12(n) Statement, Exhibit A, Altizer
Deposition, p. 10.
An agency relationship between a
mortgagee and a title company has been
acknowledged in other jurisdictions ifthe title company's duties extend
beyond ministerial duties (e.g.,
insuring the title [*12] and
recording the instrument) to
overseeing the closing transaction.
See, e.g., Brauner v. Lamper, 555 So.
2d 935 (Fla. Dist. Ct. App. 1990);
Colegrove v. Behrle, 63 N.J. Super.
356, 164 A.2d 620, 622 (N.J. Super.
Ct. App. Div. 1960); Tamburine v.Center Savings Association, 583 S.W.2d
942 (Tex. Civ. App. 1979). This court
has not found any Illinois authority
on this issue. In the present case Ms.Altizer has admitted the existence of
an agency relationship, and MCI has
not otherwise denied it. Accordingly,
at the very least, there is a question
of fact as to whether Ms. Berry was
MCI's agent in this transaction.
In summary, the Newmans have raised
a genuine issue as to whether Ms.
Berry was aware of the sale-leaseback
agreement. If true, then Ms. Berry had
notice of two key facts, both
imputable to MCI if Ms. Berry is found
to be MCI's agent: first, that Ms.
Griffin did not intend to live in the
Newman house; and second, that a new
sales contract was executed which was
inconsistent with the mortgage
acceleration clause. Both facts would
put MCI on inquiry notice about Ms.
[*13] Griffin's nominee status and
the validity of the mortgage. Ms.
Griffin received the FHA-insured
mortgage based upon her representation
that the property would be owner-
occupied. With respect to the mortgage
acceleration clause, Ms. Altizer
admitted that execution of a sale
leaseback agreement should have halted
the closing:
Q: So would that -- would that
acceleration clause even forbid a
lease of (sic) option?
A: If there is any type of transfer of
title or intent to sell. In other
words, she wasn't going to occupy the
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property.
Q: Yes.
A: She had already sold -- she was
actually signing and entering into a
sales contract . . . she triggered the
due on sale. . . .
Q: Had you been notified that such
agreement was being executed
concurrent with the closing, what
would you have done?
A: Not close the loan.
Altizer Dep., pp. 44, 47.
In addition, the payment of two
checks to Ms. Griffin and her lack of
equity in the Newman house afterreceipt of those checks creates a
further question as to whether MCI
should have been on inquiry notice
about this transaction. If these
factual allegations are true, a finder
of fact could conclude that MCI should
have asked why Ms. Griffin [*14] was
receiving such checks and that MCI
should have recognized that her lack
of equity violated the rules for FHA-
insured mortgages.
Conclusion
For the reasons set forth above, I
conclude that genuine issues of fact
exist as to whether MCI was placed on
inquiry notice that Ms. Griffin was a
nominee purchaser. Therefore, I
recommend that MCI's motion for
summary judgment be denied.
ELAINE E. BUCKLO
United States Magistrate Judge
Dated: January 14, 1993.