newman v. 1st 1440 invest., inc., 1993 u.s. dist. lexis 354 (usdc n.d. ill.)

8/6/2019 Newman v. 1st 1440 Invest., Inc., 1993 U.S. Dist. LEXIS 354 (USDC N.D. Ill.)

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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


Motions for Summary Judgment > General

Overview


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.

newman v. 1st 1440 invest., inc., 1993 u.s. dist. lexis 354 (usdc n.d. ill.)

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