The Journal of The DuPage County Bar Association

Back Issues > Vol. 25 (2012-13)

Under Illinois Law, What Constitutes A Lack of Standing in Mortgage Foreclosures?
By Steve Caravajal

Whether one has represented either party in a mortgage foreclosure case, or simply encountered any number of discussions in the media, most practitioners are undoubtedly familiar with the ongoing clash between lenders and borrowers regarding a plaintiff's right to foreclose.  Despite the fact that  lack of standing is one of the most often asserted defenses in foreclosure proceedings, there are only a handful of recent appellate opinions which have addressed this ubiquitous issue.  This article offers a look at one of the most recent opinions, Deutsche Bank Nat'l Trust Co. v. Gilbert,[1] and discusses the effect it is likely to have, or should have, in foreclosure proceedings to come.

The doctrine of standing is designed to preclude persons who have no interest in a controversy from bringing suit, and assures that issues are raised only by those parties with a real interest in the outcome of the controversy.[2]  Put another way, standing requires some injury in fact to a legally cognizable interest.[3]  In mortgage foreclosure proceedings, this debate typically centers on one question: whether the plaintiff had sufficient interests in the note and mortgage by which to initiate the foreclosure suit.

Lack of Standing as an Affirmative Defense

If a borrower believes the plaintiff in his or her foreclosure case does not actually have any interest in the note and mortgage, it is up to that borrower to demonstrate the plaintiff lacks standing.  The Illinois Supreme Court has stated on more than one occasion that a plaintiff need not allege facts establishing he has standing to proceed; rather, it is the defendant’s burden to plead and prove lack of standing as a defense to the claim.[4]  However, this may be much easier said than done, especially in the context of mortgage foreclosure proceedings.  Even though a plaintiff does not have any duty to plead sufficient facts to establish its standing, foreclosure plaintiffs have the benefit of a statutory form complaint[5] which already has the necessary allegations to demonstrate standing built into the complaint.  A complaint which contains the statements and requests called for by the statutory form complaint set forth in §1504(a) of the Illinois Mortgage Foreclosure Law ("IMFL") is not only legally and factually sufficient, but it also contains all allegations relative to standing.[6]

In addition to the seemingly higher hurdle foreclosure defendants may face in proving a lack of standing, the timeliness of an attempt to assert such a defense cannot be stressed enough.  If an affirmative defense is not raised in a timely fashion, it will be considered forfeited and will be deemed waived.[7]  In a foreclosure proceeding, the point at which such waiver occurs is the entry of a judgment order of foreclosure and sale.[8]  In at least three separate opinions, the courts have held that attempting to assert this defense at the end of the foreclosure proceedings, when the plaintiff had already moved for confirmation of the foreclosure sale, was far too late.[9]  In Gilbert, the Court apparently considered the defendant's efforts sufficient to clear these hurdles, ultimately holding the plaintiff lacked standing to foreclose, and dismissed the complaint.

Standing to Foreclose by a Plaintiff Holding the Note

It is worthwhile to first discuss the significance of how the plaintiff in Gilbert pleaded its capacity or standing as the plaintiff (alleging it was the current holder of the indebtedness, and attaching copies of the note and mortgage as exhibits to the complaint)[10].  Under Illinois law, the holder of a note is entitled to enforce that note.[11]  The fact that a note may not identify a foreclosing plaintiff as the payee or may not be specially indorsed to the plaintiff does not necessarily mean that the plaintiff is not entitled to enforce that note.  It is possible that the note is indorsed in blank, and when so indorsed a negotiable instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.[12]  It is well-established that possession of such bearer paper is prima facie evidence of title to it, and is sufficient to entitle plaintiff to sue on the instrument.[13]

Only when the note is unendorsed and is in the hands of someone other than the identified payee is it insufficient for a plaintiff to allege it is the holder of the note.[14]  “In an action by one other than the payee of a note the declaration must aver the assignment or the endorsement (sic) of the note or must allege some other fact to show plaintiff’s ownership.”[15]  Even in the event a plaintiff may be in possession of a note that is specially indorsed to someone else, or may not actually be in physical possession of the note at all, that plaintiff can still demonstrate its standing or capacity as a party entitled to enforce the note.[16]

These principles are incorporated into the IMFL, as it defines a mortgagee as (i) the holder of an indebtedness… secured by a mortgage or any person designated or authorized to act on behalf of such holder and (ii) any person claiming through a mortgagee as successor.[17]  Likewise, the IMFL’s statutory form complaint requires a plaintiff to demonstrate its standing or capacity to foreclose by “indicat[ing] whether plaintiff is the legal holder of the indebtedness, a pledgee, an agent, the trustee under a trust deed or otherwise, as appropriate.”[18]  Based upon the holding from MERS v. Barnes,[19] a complaint which alleged the plaintiff was the holder of the indebtedness and attached copies of the note and mortgage would appear to have all of the necessary allegations relative to standing.

The Facts in Gilbert

On August 15, 2005, Gilbert executed a note and mortgage in favor of WMC Mortgage Corporation as the lender and Mortgage Electronic Registration Systems, Inc. ("MERS") as the mortgagee as nominee for the lender.[20]  Deutsche Bank National Trust Company ("Deutsche Bank"), in the capacity of a trustee, then filed a complaint for foreclosure on March 10, 2008, alleging that it was the current holder of the indebtedness, and attached copies of the note and mortgage as exhibits to its complaint.[21]  On September 12, 2008, Deutsche Bank filed an amended complaint which also attached an assignment of mortgage, executed on August 25, 2008, as an exhibit.[22]  The language in the assignment itself speaks only of an assignment of the mortgage having taken place, and does not make any reference to an assignment or transfer of the note.[23]  In response to this amended complaint, Gilbert filed an answer and affirmative defense asserting Deutsche Bank lacked standing.[24]  The basis of Gilbert's defense was that the assignment of mortgage allegedly showed Deutsche Bank did not own the indebtedness when it originally filed the foreclosure (Gilbert also file a counterclaim; however, those additional issues raised by Gilbert are not relevant to this discussion).[25]

In September 2009, both parties filed cross motions for summary judgment: Deutsche Bank argued it did have standing because the assignment of mortgage was simply a memorialization of an earlier transfer of interests; Gilbert countered that he was entitled to dismissal of the complaint due to Deutsche Bank's lack of standing.[26]  In support of Deutsche Bank's motion for summary judgment, it offered an affidavit by an employee from its loan servicer attesting to the fact that MERS assigned its interest to Deutsche Bank on November 1, 2005.[27]  The trial court initially ruled in favor of Gilbert and dismissed the foreclosure, finding that Deutsche Bank was not the holder of the indebtedness at the time the suit was commenced and noting there was no document showing when the assignment took place.[28]  Deutsche Bank then filed a motion to reconsider which was ultimately granted, reversing the earlier dismissal and granting summary judgment in favor of Deutsche Bank.[29]  The property was sold back to Deutsche Bank at a subsequent foreclosure sale and the sale was confirmed by the trial court.[30]

So What Constitutes Standing?

On appeal, Gilbert argued the trial court erred in granting the motion for reconsideration and entering summary judgment in favor of Deutsche Bank, based on Deutsche Bank's alleged lack of standing.[31]  The Gilbert Court framed this issue as one in which the validity of the foreclosure depended on whether Deutsche Bank owned the mortgage on the date it filed the foreclosure action.[32]  This characterization is curious, since ownership of either the note or mortgage did not necessarily appear to be placed at issue, and is not dispositive on the issue of whether a plaintiff has standing to foreclose a mortgage, particularly one asserting holder status.  As the Court noted, a foreclosure suit "may be filed by a mortgagee, i.e., the holder of an indebtedness secured by a mortgage, or by an agent or successor of a mortgagee."[33]  Ownership of the loan or note is not a term mentioned within the IMFL, nor is it mentioned in the Uniform Commercial Code, as dispositively addressing a party’s right to enforce a note or initiate foreclosure.

From Gilbert's perspective, he argued Deutsche Bank had no standing to sue because neither the note nor mortgage identified Deutsche Bank as the mortgagee.[34]  He further argued the assignment of mortgage, which was attached to the amended complaint, did not provide Deutsche Bank any additional support since the assignment allegedly showed that MERS did not assign its interest in the mortgage until after the foreclosure suit had been commenced.[35]  From Deutsche Bank's perspective, its standing was purportedly established, since the assignment of mortgage was merely a memorialization of a previous transfer, and the affidavit from its loan servicer attested to the actual date of that previous transfer, which pre-dated the commencement of the suit.[36]

There does not appear to be any dispute that Gilbert had the burden of demonstrating that Deutsche Bank lacked standing.[37]  However, once again, the issue of standing was framed in terms of whether Deutsche Bank owned the loan on the date its filed suit as opposed to its status as the holder of the indebtedness.[38]  Ultimately, the Court determined that Gilbert satisfied his burden of proof.[39]  The Court found "Gilbert's documentary evidence that Deutsche Bank did not own the loan (the mortgage and the note, and an assignment executed after the date of filing) constituted prima facie evidence of lack of standing" and that this prima facie defense was sufficient since Deutsche Bank failed to rebut it with evidence of its own.[40]  Deutsche Bank's lack of ownership of the loan was again placed at issue since the Court found the note and mortgage did not show it owned the loan and they therefore contradicted the allegations in the complaint that it did own the loan.[41]  Although Deutsche Bank offered testimony of an affiant from its loan servicer, this was disregarded as inadmissible evidence, since the Court determined this affidavit failed to comply with Supreme Court Rule 191.[42]

When considering this "prima facie" defense one of the key factors is the assignment of mortgage, which in this case was executed after the foreclosure suit was initiated.  The Court was persuaded by several opinions from other jurisdictions which propose that an assignee cannot have standing to foreclose, and the suit should be dismissed, unless an assignment of mortgage is executed prior to the date on which the foreclosure suit is filed.[43]  On its face, this proposition seems logical if the mortgagee is relying upon its status as an assignee or successor of the original mortgagee in order to initiate foreclosure.  If an instrument, such as an assignment of mortgage, is intended to establish or define a mortgagee’s interests in the note and mortgage, it stands to reason the mortgagee’s interests would be created and the assignment executed by the time a foreclosure suit was commenced.

But what weight does an assignment of mortgage have as far as demonstrating a mortgagee’s interests, or the lack thereof, particularly when the mortgagee alleges it is actually the holder of the note, as opposed to an assignee or successor of the original mortgagee?  This difference is not just hair-splitting, since Illinois does not even require the execution of an assignment of mortgage in order to effectuate the transfer of a mortgage; a mortgage is merely an incident of the debt itself, and an assignment or transfer of the note itself also carries with it an equitable assignment of the mortgage by which it is secured.[44]  The underlying debt is actually the object of the transfer or assignment, and such a transfer carries with it the mortgage security.[45]  These distinctions are important, since those non-binding opinions the Court cites as persuasive are not discussed in terms of their states’ procedural differences, including the fact that one opinion was rendered by a Michigan court, which is not even a judicial foreclosure state, and in which state the type of assignment being referred to is extremely significant.[46]

And what if the assignment of mortgage is determined to lack any indicia of when an assignment or transfer actually took place?  This question would seemingly preclude dismissal of a foreclosure if there is no evidence offered at the summary judgment stage as to when the assignment or transfer of interests in the note and mortgage actually took place.  The Gilbert Court found that the assignment of mortgage did not explicitly state when the mortgage was assigned to Deutsche Bank, and stated that the only thing that could be known about when the assignment took place is that it was no later than the date on which the assignment was created.[47]  Therefore, the evidence upon which Gilbert relied to demonstrate Deutsche Bank’s alleged lack of standing is not dispositive.  It clearly leaves open the possibility that the assignment could have taken place prior to commencement of the foreclosure suit.

Likewise, the Gilbert Court did not specifically address whether it considered Deutsche Bank’s complaint to comply with §1504(a) of the IMFL, nor did the Court expressly address how or whether the note attached to Deutsche Bank’s complaint was indorsed.  Each of these questions speaks directly to the issue of whether Deutsche Bank could be considered a holder of the note at the time it filed its complaint.  But since none of the evidence offered by Gilbert appears to address these issues, and none of the evidence offered by Deutsche Bank was considered to be admissible, this author believes the dismissal of Deutsche Bank’s complaint may have been premature, since no evidence was actually offered which demonstrated Deutsche Bank was not in possession of the note at the time it initiated foreclosure.

If Deutsche Bank alleged it was the holder of the note, then the question that must be answered is whether the note Deutsche Bank had in its possession at the time it initiated foreclosure was made payable or indorsed to its order.[48]  Despite the fact they are sometimes used interchangeably, the concept of an “owner” of the loan or of a note is not synonymous with the status as the “holder” of a note.  This distinction was addressed in a fairly recent report issued by the Permanent Editorial Board (“PEB”) for the Uniform Commercial Code, entitled “Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes.”[49]  The PEB's report is particularly instructive with respect to the transfer and enforcement of notes secured by a mortgage on real property, and is a must read for those practitioners in this area of law.[50]  The report was published, in part, in order to correct apparent misunderstandings of several key provisions of the UCC which address issues related to enforcement and collection of mortgage debt.[51]

As noted in the report and discussed in the Official Comment 1 to UCC §3-203, a person need not be the owner of a note in order to qualify as a person entitled to enforce it.[52]  “The right to enforce an instrument and ownership of the instrument are two different concepts.”[53]  It is conceivable that the owner of a note could also be the holder and entitled to enforce the note, but this is not always the case; therefore, the terms “owner” and “holder” cannot necessarily be used interchangeably.  Thus, the Gilbert Court’s framing of the issue as to whether Deutsche Bank owned the mortgage on the date it filed the foreclosure action may have been incorrect if Deutsche Bank did not actually hold itself out to be the owner of the note.  Either way, the evidence and findings of the Court do not appear to dispositively determine whether Deutsche Bank lacked standing to foreclose since.

It is conceivable that the application of the Gilbert opinion will reach those few instances where a plaintiff does assert it is an assignee or successor of the original mortgagee and does rely in some manner upon an assignment of mortgage as support for its standing.  In those circumstances, it may be necessary to have an executed assignment of mortgage prior to initiating foreclosure proceedings.  However, since the recent release of the Gilbert opinion, this author has already discovered one instance in which the opinion was relied upon for the argument that a plaintiff lacked standing because an assignment of mortgage was not executed until after the foreclosure proceedings, even though the plaintiff alleging holder status had already demonstrated possession of the original note and mortgage.  As discussed above, the holding in Gilbert is not broad enough to encompass those situations where a mortgagee has alleged and proven it was the holder of the note at the time it initiated its foreclosure and it should not have any bearing in those circumstances.

[1] See, Deutsche Bank Nat'l Trust Co. v. Gilbert, 2012 IL App (2d) 120164

[2] Mrtg. Elec. Regis. Sys., Inc. v. Barnes, 406 Ill. App. 3d 1, 6, 940 N.E. 2d 118, 123 (1st Dist. 2010).

[3] Barnes, 406 Ill. App. 3d at 6, 940 N.E. 2d at 123.

[4] Int’l Union of Operating Eng’rs, Local 148, AFL-CIO v. IL Dept. of Employment Sec., 215 Ill. 2d 37, 45, 828 N.E. 2d 1104, 1110 (2005); Wexler v. Wertz Corp., 211 Ill. 2d 18, 22, 809 N.E. 2d 1240, 1243 (2004); Greer v. Ill. Hous. Dev. Auth., 122 Ill. 2d 462, 494, 524 N.E. 2d 561, 575 (1988).

[5] 735 ILCS 5/15-1504(a) (West 2012).

[6] Barnes, 406 Ill. App. 3d at 6, 940 N.E. 2d at 123 (citing, 735 ILCS 5/15-1504(a) and (b) (West 2012)).

[7] Greer, 122 Ill. 2d 462, 508, 524 N.E. 2d 561, 582 (1988).

[8] Nationwide Advantage Mrtg. Co. v. Ortiz, 2012 IL App (1st) 112755, ¶23 (citing, Barnes, 406 Ill. App. 3d at 7, 940 N.E. 2d 118).

[9] Mrtg. Elec. Regis. Sys., Inc. v. Barnes, 406 Ill. App. 3d 1, 6, 940 N.E. 2d 118, 123 (1st Dist. 2010); Nationwide Advantage Mrtg. Co. v. Ortiz, 2012 IL App (1st) 112755, ¶26; Deutsche Bank Nat'l Trust Co. v. Snick, 2011 IL App (3d) 100436, ¶9.

[10] 2012 IL App (2d) 120164, ¶5.

[11] 810 ILCS 5/3-301 (West 2011).

[12] 810 ILCS 5/3-205(b) (West 2011).

[13] Joslyn v. Joslyn, 386 Ill. 387, 395, 54 N.E. 2d 475, 478 (1944); First Sec. Co. of Chicago v. Schroeder, 351 Ill. App. 173, 176, 114 N.E. 2d 426, 427 (1st Dist. 1953).

[14] Ray v. Moll, 336 Ill. App. 360, 364, 84 N.E. 2d 163, 165-66 (4th Dist. 1949). 

[15] Oulvey v. Converse, 326 Ill. 226, 228, 157 N.E. 2d 245, 247 (1927).

[16] 810 ILCS 5/3-301 (West 2011).

[17] 735 ILCS 5/15-1208 (West 2012).

[18] 735 ILCS 5/15-1504(a)(3)(N) (West 2012).

[19] Barnes, 406 Ill. App. 3d 1, 6, 940 N.E. 2d 118, 123 (1st Dist. 2010).

[20] Gilbert, 2012 IL App (2d) 120164, ¶3

[21] Id, at ¶5.

[22] Id, at ¶6.

[23] Id.

[24] Id.

[25] Id.

[26] Id, at ¶7.

[27] Id.

[28] Id, at ¶8

[29] Id, at ¶9.

[30] Id, at ¶10.

[31] Id, at ¶12.

[32] Id, at ¶14.

[33] Id, at ¶15 (citing, Barnes, 406 Ill. App. 3d at 7, 940 N.E. 2d 118; and 735 ILCS §§5/15-1208 and -1504(a)(3)(N) (West 2008).

[34] Id, at ¶16.

[35] Id.

[36] Id, at ¶¶7 and 17.

[37] Id, at ¶20 (citing, U.S. Bank, N.A. v. Sauer, 392 Ill. App. 3d 942, 946, 913 N.E. 2d 70 (2nd Dist. 2009)).

[38] Id.

[39] Id, at ¶20-22.

[40] Id, at ¶20.

[41] Id.

[42] Id, at ¶17 and 18.

[43] Id, at ¶22.

[44] Moore v. Lewis, 51 Ill. App. 3d 388, 391-92, 366 N.E. 2d 594, 599 (1977); Fed. Nat’l Mrtg. Assoc. . Kuipers, 314 Ill. App. 3d 631, 635, 732 N.E. 2d 723, 727 (2d Dist. 2000).

[45] Moore, 51 Ill. App. 3d at 392, 366 N.E. 2d at 599.

[46] Gilbert, 2012 IL App (2d) 120164, ¶22.

[47] Id, ¶17.

[48] 810 ILCS §§5/1-201(20) and 3-301 (West 2011).

[49] See gen., Application of the UCC to Selected Issues Relating to Mortgage Notes, (as corrected, Nov. 16, 2011).

[50] Id, at pg. 1

[51] Id.

[52] Id, at pg. 4, note 15.

[53] See, Official Comment 1 to U.C.C. §3-203 (West 2008).

G. Stephen Caravajal, Jr. is a Senior Associate with the law firm of Freedman Anselmo Lindberg, LLC in Naperville, Illinois. Steve received his B.S. in Psychology with a Minor in Criminology from The Ohio State University in 2001 and received his J.D. from DePaul University College of Law in 2004.

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