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Analysis As of: Feb 09, 2007 JOHN H. NEWMAN and SARAH NEWMAN, on behalf of themselves and all others similarly situated, Plaintiffs, v. 1ST 1440 INVESTMENT, INC., FRANK CLAY; STANLEY CAIN; MORTGAGE CORRESPONDENTS OF ILLINOIS, INC.; AND TRANSOHIO SAVINGS BANK, Defendants. Case No. 89 C 6708 UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION 1993 U.S. Dist. LEXIS 354 January 14, 1993, Decided January 15, 1993, Docketed CASE SUMMARY: the broker's summary judgment motion was whether it had notice that the third party buyer was acting as the homeowner's nominee in the refinancing scheme. The court held that the homeowners had raised a genuine issue of material fact regarding the broker's knowledge of the re-financing scheme. The employee of the title agency that handled the closing of the transaction knew that the third party was paid sums other than the customary amounts in such transactions. If the homeowners could show that this knowledge was imputable to the broker on an agency theory, it could then be shown that the broker was put on notice to inquire into the validity of the mortgage. OUTCOME: The magistrate judge recommended that the mortgage broker's motion for summary judgment be denied. CORE TERMS: mortgage, nominee, homeowner, notice, inquiry notice, mortgagee, summary judgment, closer, leaseback, purchaser, agency relationship, bona fide purchaser, acceleration clause, owner-occupied, declaration, fraudulent, lender, adverse claim, genuine, imputed,

PROCEDURAL POSTURE: Plaintiff homeowners filed a class action suit against defendants, an investment company, a mortgage broker, and two individuals, seeking to cancel a mortgage contract under the Truth In Lending Act, and alleging that the broker violated the Illinois Consumer Fraud and Deceptive Business Practices Act. The broker filed a motion for summary judgment. The matter was before the magistrate judge for a report and recommendation. OVERVIEW: The homeowners contended that defendants engaged in a scheme whereby they contacted homeowners in financial distress, who had substantial equity in their homes, and engaged in a fraudulent re-financing scheme whereby the property was conveyed to a third party who obtained a loan greater than the amount needed to pay off the existing mortgage. The investment company then paid off the mortgage, pocketed the excess, and leased the home back to the homeowners, thereby depriving them of their equity. The critical issue in

realty, transfer ownership, second mortgage, sales contract, first mortgage, genuine issue, own home, refinancing, 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 is admitted. U.S. Dist. Ct., N..D. Ill. R. 12(n).

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.

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 no genuine 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

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 to its 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 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. JUDGES: [*1] BUCKLO

OPINION BY: ELAINE E. BUCKLO

OPINION: REPORT AND RECOMMENDATION Plaintiffs, John N. Newman and Sarah Newman ("the Newmans"), initiated a class action lawsuit n1 against 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. The Newmans 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 the Newmans 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 court entered 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 claim in 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 that 1st 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 to pay 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 while 1st 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

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 foreclosure proceedings 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 years with 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 second check 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

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, 32223, 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 motion for 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, 245 N.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'sGurnee, 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 the transaction; 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 fact could 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

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 VicePresident 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 nonexistent. [*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. then? A: Um-hmn. Q: Do you have any kind of an agency agreement with the closer? A: Yes. The closer is your agent

12(n) Statement, Exhibit Deposition, p. 10.

A,

Altizer

An agency relationship between a mortgagee and a title company has been acknowledged in other jurisdictions if the 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 owneroccupied. 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

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 after receipt 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 FHAinsured 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.