Monday, September 14, 2015

Mortgage Lender Trips Over Illinois "Single Refiling" Rule; Left Holding The Bag With Unenforceable Mortgage As Federal Appeals Court Rejects Bank's Attempt To Foreclose After It Had Already Twice Filed Actions To Recover On Promissory Notes & Voluntarily Dismissed Each Case

From an Opinion Summary from Justia US Law:
  • In 2005, Mutual Bank of Harvey, Illinois, made loans to the defendants, evidenced by promissory notes. As security the defendants executed mortgages. Mortgage I applies to four properties in Appleton, Menasha, and Milwaukee, Wisconsin. Mortgage II applies to a property in Grand Chute. Mortgage III applies to seven Milwaukee properties.

    The notes went into default in 2008. In 2009, regulators closed Mutual Bank. The Federal Insurance Deposit Corporation (FDIC) was appointed receiver. Ultimately UCB became the owner and holder of the notes and mortgages on the Wisconsin properties.

    In 2011, UCB commenced mortgage foreclosure. Defendants argued that under the Illinois “single refiling” rule, 735 ILCS 5/13-217, UCB was barred from enforcing the promissory notes underlying the mortgages since UCB had twice formerly filed an action against the defendants to recover on the notes and voluntarily dismissed each of these prior actions.(1)

    The Seventh Circuit affirmed that Mortgage I, was governed by Illinois law and that UCB was precluded from foreclosing on Mortgage I. The defendants did not appeal a holding that Wisconsin law applied to Mortgages II and III and that Wisconsin law permitted UCB to foreclose.
Source: Opinion Summary - United Central Bank v. KMWC 845, LLC.

For the court ruling, see United Central Bank v. KMWC 845, LLC, No. 14-1491 (7th Cir. August 28, 2015), aff'g United Cent. Bank v. Wells Street Apartments, LLC, 957 F. Supp. 2d 978 (E.D. Wis. 2013).

(1) From the court ruling:
  • The Illinois single refiling rule provides that a plaintiff who dismisses a lawsuit "may commence a new action within one year or within the remaining period of limitation, whichever is greater." See 735 ILCS 5/13-217.[1]

    Illinois courts interpret this language to mean that a plaintiff who voluntarily dismisses a lawsuit may commence only one new action within the statutorily imposed time limit. See Carr v. Tillery, 591 F.3d 909, 914 (7th Cir. 2010).

    Once the plaintiff commences this one new action, any further action is barred. See, e.g., Timberlake v. Illini Hosp., 676 N.E.2d 636, 635-36 (Ill. 1997).

    In the present case, the district court found that UCB had formerly filed and voluntarily dismissed two actions in Illinois against the appellees for breach of the promissory note that Mortgage I secured. The court thus determined that, pursuant to the Illinois single refiling rule, UCB was statutorily barred from enforcing the note underlying Mortgage I.

    UCB does not dispute that the Illinois single refiling rule precludes it from enforcing the note underlying Mortgage I. Rather, UCB argues that the Illinois single refiling rule does not bar it from foreclosing on Mortgage I because a mortgage foreclosure action is not the same cause of action as an action on the underlying note.

    This argument, although correct inasmuch as Illinois law considers a mortgage foreclosure action to be a separate cause of action from an action on the underlying note, misses the point. It does not matter that UCB's foreclosure action itself does not constitute an impermissible second refiling; what matters is, as the district court noted, that long-standing Illinois law precludes a plaintiff from foreclosing on a mortgage when an action on the underlying note is barred by the statute of limitations or another procedural rule. See, e.g., Hibernian Banking Ass'n v. Commercial Nat. Bank, 41 N.E. 919, 922 (Ill. 1895) ("[I]t has been repeatedly decided by this court that the mortgage is a mere incident of the debt, and is barred when the debt it barred[.]"); see also Dale Joseph Gilsinger, Annotation, Survival of Creditor's Rights Created by Mortgage or Deed of Trust as Affected by Running of Limitation Period for Action on Underlying Note, 36 A.L.R. 6th 387 (2008) (collecting cases showing that the states are split on the question of whether a creditor can foreclose a mortgage when an action on the underlying note is barred).

    On the basis of this long-standing Illinois precedent, the district court determined that UCB could not foreclose on Mortgage I because it was barred by Illinois statute (the single refiling rule) from filing an action to enforce the note underlying Mortgage I. We find no error in this decision.

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