Mortgage Foreclosure and Standing to Sue

Recent cases have wrestled with a critical question in the "foreclosure crisis:" when do and don't lenders have standing to foreclose on homeowners? Cases are all over the map. Here's a review, and a thought about why it's important.

We have just completed five years of the so-called "mortgage foreclosure crisis." A recurring legal issue over that time - who has standing to file and prosecute a suit to foreclose a mortgage - has spawned a significant body of appellate decisions. Some cases favor lender plaintiffs, others borrower defendants. Here's a look a key rulings.

Lack of standing and "affirmative defense"

The case that began the standing debate was Bayview Loan Servicing, L.L.C. v. Nelson, 382 Ill. App.3d 1184; 890 N.E.2d 940 (5th Dist. 2008). The court held that the plaintiff's mere allegation of standing under the Illinois Mortgage Foreclosure Law (where there the original lender made no assignment(s) to the plaintiff and the note attached to complaint is not endorsed to the named plaintiff) did not give it standing to foreclose in the context of summary judgment.

When defendants began using this ruling in trial courts to challenge standing in foreclosure complaints, lender plaintiffs argued that Bayview does not apply at the pleading stage of a foreclosure. They said the mere allegation of standing is sufficient under IMFL if the lender pleads the statutory form complaint, citing the second district opinion in U.S. National Bank v. Sauer, 392 Ill.App.3d 942, 913 N.E.2d 70, 332 Ill.Dec. 475 (2nd Dist. 2009).

The Sauer court held that "[u]nder Illinois Law, a plaintiff need not allege facts establishing standing.…Rather, it is the defendant's burden to plead and prove lack of standing….Where standing is challenged by way of a motion to dismiss, a court must accept as true all well-pleaded facts in the plaintiff's complaint…[under Section 2-615]."

Reaching back a few decades, lender's counsel also cited Greer v. Illinois Housing Development Authority, 122 Ill.2d 462 (1988). Greer holds that a lack of standing in a civil case is an affirmative defense and not a basis for a motion to dismiss under 2-615. That means the defendant must plead and has the burden of proving the plaintiff lender's lack of standing.

Lenders were buoyed by MERS v. Barnes, 406 Ill.App.3d 1, 940 N.E.2d 118 (1st Dist. 2010) and Deutsche Bank National Trust Company v. Snick, 2011 IL App (3d) 100436, 957 N.E.2d 1273, both of which held that "standing" is (a) an affirmative defense that is waived if not asserted and (b) must be raised prior to the confirmation of sale, when the court's review is limited to the four elements set forth in IMFL section 1508.

But this latter holding in Barnes was specifically rejected in November by the second district in Wells Fargo Bank v. McCluskey, 2012 IL App (2nd) 110961, when it held that a motion to vacate can be brought at the time of the confirmation of sale regardless of the limitations of section 15-1508.

Standing and the Illinois Banking Act

The case of Standard Bank and Trust Co. v. Madonia, 2011 IL App (1st) 103516, deals with standing in a different context. There, lender plaintiff Standard Bank acquired the foreclosed-upon mortgage loan through a series of mergers rather than by assignment or endorsement and transfer. It argued that it had standing based on section 205 ILCS 5/28 of the Illinois Banking Act, which provides for transfer of all liabilities and interest to the bank that results from a bank merger.

Citing Barnes and holding that a foreclosure complaint is sufficient if it contains the averments required by IMFL under section 5/15-1504(a), the court held that since Standard Bank employed the statutory form complaint, pled that it was the mortgagee, and attached a copy of the mortgage and note, its complaint withstood a standing challenge.

Standing and timing

Deutsche Bank v. Gilbert, 2012 IL App (2d) 120164, however, is a standing case in which the defendant prevailed. Gilbert raised standing as an affirmative defense, noting that when the complaint was filed (March 10, 2008), the mortgage assignment to Deutsche Bank had not yet been executed. The assignment was signed on August 25, 2008, and the bank contended that the August execution was "simply memorializing an earlier transfer of interest" on November 1, 2005.

The court wrote that "[l]ack of standing to bring an action is an affirmative defense, and the burden of proving the defense is on the party asserting it." But where the documents in evidence show on their face that the assignment did not occur until months after the foreclosure was filed, the defendant met its burden.

Though not strictly speaking a standing case between mortgagor and mortgagee, Patrick L. Cogswell v. Citifinancial Mortgage Company, 624 F.3d 395 (7th Cir. 2010), holds that under Illinois law only the holder of a note may foreclose on property. Transferring a mortgage is not enough by itself to confer the right to foreclose upon property. The Patrick Group could not prove it was a note holder, and therefore it was not entitled to foreclose.

In Bank of America v. Basman EBT, LLC, 2012 IL App (2d) 110729, the court held that in challenging a plaintiff's standing, a defendant cannot attack the "sufficiency" of an assignment but is limited to asserting that an assignment is void.

Another very recent standing case, handed down in October, is Cavalry Portfolio Services v. Rocha, 2012 IL App (1st) 111690. In Rocha, standing arose in the context of a section 2-1401 motion to vacate a judgment on a line of credit with Washington Mutual Bank. The plaintiff was the assignee in a line of a very confusing and less than perfect transfers of Rocha's account by assignment.

Almost two years after the judgment was entered, Rocha filed his motion alleging a meritorious defense based on Cavalry's lack of standing. The account assignments attached to the complaint failed to meet the requirements of Section 8b of the Collection Agency Act, and this "standing" flaw, together with the mandate that substantial justice be considered in vacating a default judgment, supported the reversal of the trial court's denial of the 1401 petition to vacate the judgment.

The missing piece

"Standing" is a highly technical legal doctrine, and all of these cases point to something missing in the mortgagor/mortgagee relationship that is important in court and in the context of foreclosure. Outside of litigation, borrowers and attorneys general in various states are increasingly demanding responsiveness from mortgage lenders, investors, and servicers, even in the midst of a default, to requests for forbearance, loan modification, and loss mitigation.

Borrowers are frustrated by servicers who refer them to faceless investor trusts that refuse to address requests for foreclosure alternatives. They are frustrated that they can be sued in foreclosure by a party with whom they have no relationship yet somehow has "standing" to sue to take away their home. They are frustrated by mortgage servicers/lenders/investors who refuse to listen and respond in a meaningful way that can lead to recovery.

In other words, lender accountability and responsibility are what's missing in the foreclosure crisis. That is the human context in which sophisticated and technical "standing" battles are fought.

Lisle attorney Steven B. Bashaw is a past chair of the ISBA Real Estate Section Council, current director of the Illinois Real Estate Lawyers Association, and a member of the Association of Foreclosure Defense Attorneys.