Bona Fide Purchaser Status Not Available To Lender For Failure To Inquire Into Continued Possession By Ex-Homeowner In Equity Stripping Scam

A 2009 case ruled upon by a Federal court in Chicago, Illinois dealt with the following facts:

• Homeowner Davis was facing foreclosure and entered into a transaction with a foreclosure rescue operator in which the homeowner unwittingly conveyed full, unconditional title to the operator, and received $18,000 upon consummation of the transaction, a transaction that Davis believed to be a mortgage refinancing.

• Davis retained possession of his home, and pursuant to a contemporaneously executed contract for deed, agreed to pay the operator $ 1,223.51 per month, with the option to repurchase his home in one year.

• At the end of the year, Davis, unable to purchase the home back, received an extension of the contract for another year.

• Before the end of the second year, Davis began having trouble making the monthly payments. At this point (and probably on the advice of legal counsel, who undoubtedly informed him that he unwittingly conveyed full title to the operator two years earlier, although the ruling is silent on this fact), Davis (or someone on his behalf) takes a stroll over to the Cook County Recorder of Deeds and records a "Notice of Equitable Mortgage and Affidavit of Interest" setting forth his claim to the sole legal title to the property.

• Approximately three months later, the operator sells the home to a third party for $345,000, who financed the purchase with a mortgage loan from an institutional lender.

• Davis subsequently files a lawsuit to recharacterize his unwitting transfer to the operator as an equitable mortage, and to void both the operator's sale to the third party, and the mortgage obtained from the institutional lender to finance the third party's $345,000 purchase.

• The lender claimed that its mortgage has priority over any interest or equity Davis could establish in the home because it (the lender) acquired its mortgage interest as a bona fide purchaser, without having any actual knowledge of either (a) Davis' earlier dealings with the foreclosure rescue operator, or (b) Davis' continued possession in the home.

In this ruling, the court was asked to decide on the narrow issue of whether the institutional lender acquired its mortgage interest in the home as a bona fide purchaser, or whether its interest is subject to (and inferior to) any right or equity that Davis can establish in the premises.

The court decided that the institutional lender was not a bona fide purchaser and, accordingly, is subject to any right or equity in the home that Davis can estabilsh.

While alluding to the fact that Davis had recorded a "Notice of Equitable Mortgage" with the county Recorder of Deeds, the court relied primarily on the fact that the lender had constructive notice of Davis' possible rights or equities in the home by reason of his continued possession in the home. (It found this to be the case despite the fact that the lender may have lacked actual knowledge of the facts that led up to the home's sale to the third party.)

More specifically, the court ruled that Davis' visible, open, exclusive and unambiguous possession of the property, under Illinois law, imposes on the lender a duty to inquire into the nature of any rights or equities Davis may claim in the premises, and charges the lender with that knowledge when it fails to make said inquiry.

For the longer version of ths post, which includes the judge's recitation of the relevant Illinois law, and links to the court ruling and some of the relevant court filings, see Lender's Failure To Inquire Into Possession Disqualifies It For Bona Fide Purchaser Protection In Suit To Undo Foreclosure Rescue Sale Leaseback Scam.

Representing the homeowner is John S. Elson, Lead Attorney, Northwestern University School Of Law, Legal Clinic, Chicago , IL. foreclosure rescue sale leaseback