Despite Lack Of Actual Knowledge Or Record Notice, Sloppy Lender Should Have Known Of Victimized Homeowner's Unrecorded Equitable Mortgage Rights To Home Sold Out From Under Her, Says Illinois Appeals Court

A 2012 case decided by an Illinois appellate court (see U.S. Bank Nat. Ass'n v. Villasenor, 979 NE 2d 451 (Ill. App. 1st Dist., 6th Div. 2012)) involves another situation where a mortgage lender unwittingly found itself financing an equity stripping ripoff orchestrated by the typical band of bad actors, and perpetrated against an elderly homeowner who owned her home of over thirty years free and clear of any mortgage.

Not surprisingly, the scammers were nowhere to be found when this lawsuit was brought, leaving a victimized homeowner to fight it out in court (not only to undo the equity stripping scam by having it recharacterized it as an equitable mortgage, but to undo a subsequent foreclosure sale that she wasn't a party to in connection with a loan that was borrowed out from under her by using her home's equity) with an unwitting but careless lender which claimed that, not only did it lack actual notice of the ripoff, but that it also lacked constructive notice as well.

Despite the fact that the mortgage lender wasn't in on the scam, the court granted summary judgment on the victimized elderly homeowner's intervenor's complaint and quiet title lawsuit, finding that the lender had constructive notice of occupants in possession of the home securing its loan, but failed to inquire of said occupants as to the nature of their possession. The court found that, had it done so, the lender would have discovered that there was a problem with the title to the home (ie. that the victimized homeowner may hold an unrecorded equitable interest) and wouldn't have granted the mortgage loan to one of the bad actors who, through the mechanics of the equity stripping ripoff, ended up as the purported record owner of the home.

Following below is an over-simplified summary of the facts - much detail has been omitted (ie. references to land trusts, transfers between related entities, excerpts from depositions of the victimized homeowner and both of her two grandsons, among other things have been left out):

Ownership/Possession By The Victimized Elderly Homeowner:

1. Ruthie Lee Ellis ("Ellis"), the intervenor, age 73, alleges in her intervenor's complaint, affirmative defense, and complaint to quiet title that she had owned the home since 1972 and lived in the home with her son, Andre Ellis, until 1985.
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2. Ellis then moved out and Andre, or other relatives, continued to reside in the home until 2003.
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3. Later, Andre moved out and Michael Ellis, a grandson, moved in and resided in the home until 2009.
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4. From 2009 through the commencement of the instant action, Martez Knox, another of Ellis' grandsons, has lived in the home.

Events Leading Up To The Dispute:

1. In 2004, Ellis became aware that her 2000 Cook County real estate taxes had been sold in a tax sale. To avoid losing the property, Ellis sought a loan to pay off the overdue taxes. She began searching for loan providers and was contacted by Property Tax Counselors, Inc. (PTC).
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2. On September 23, 2004, Ellis signed a written agreement drafted by PTC (the PTC agreement) and, pursuant to the agreement, executed a warranty deed in trust on the same day, conveying title to the home to First Suburban as trustee of a land trust.
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3. The PTC agreement outlined the terms of a $10,210.63 loan in which Ellis alleges, in her affirmative defense and complaints, that her property served as security for the loan. It required periodic payments, and a right to repurchase the home.
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4. On June 7, 2005, record title to the home was sold to one, Villasenor, who was ostensibly connected to the outfit orchestrating the scheme. Villasenor obtains a mortgage loan secured by the theretofore free and clear home in the amount of $99,000 shortly thereafter.
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5. On April 1, 2007 (almost two years after title to the home was ostensibly sold out from under her and encumbered with a $99,000 mortgage), Ellis secured a second loan from PTC for $3,764.19, alleging in her deposition that she needed the money to pay off water bills and property taxes. An identical agreement was executed for that loan. Ellis alleges in her complaints, affirmative defense, and motions that she made all payments due under both PTC loans until October of 2007 when her mailed payments were returned by the United States post office showing that PTC was not located at the address and had left no forwarding address. All efforts to locate PTC were unsuccessful.
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6. On May 1, 2007 (one month after securing the second loan from PTC), Villasenor (the then-ostensible owner of record) defaulted on his mortgage and the mortgage lender filed a complaint to foreclose on August 21, 2007.
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7. In October, 2007 (two months after the mortgage lender filed its foreclosure action), Ellis' mailed payments to PTC on account of her two loans were returned to her by the post office showing that PTC was not at that address and had left no forwarding address (as referenced in #5, above),
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8. On November 7, 2007, the mortgage lender filed a motion for an order of default and for judgment for foreclosure and sale for Villasenor's failure to file an appearance and answer or otherwise plead.
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9. On December 10, 2007, an order of default and judgment for foreclosure and sale was entered.
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10. The notice of sale was mailed to two separate addresses, one of which was the subject property. At the time the notice was mailed to the subject property, Michael Ellis, one of Ellis' grandsons, was the occupant of the home.
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11. On April 24, 2008, after the judicial sale had taken place, the foreclosing mortgage lender filed a motion to approve the report of sale and for the entry of an order of possession, which was granted the same day.
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12. On April 28, 2008 (four days later), Ellis learned of a cloud on her title after receiving notice that her property had been foreclosed and that an eviction action had commenced (as alleged in her motion for leave to intervene).
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13. On May 21, 2008, Ellis responded by filing a motion for leave to intervene in the Villasenor foreclosure and a motion to vacate the judgment for foreclosure and the order confirming the sale.
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14. On August 7, 2008, the court permitted Ellis to intervene and granted her request to vacate the April 24 order approving the report of sale and possession order, and the December 10 judgment of foreclosure and order confirming the sale. The court granted Ellis leave to file an answer, affirmative defense, and complaint to quiet title.
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15. Among Ellis' allegations was that the warranty deed was represented to her and in the PTC agreement as only security for her loan. Ellis claimed that the agreement and warranty deed she executed created an equitable mortgage. Ellis also alleges that PTC would be required to foreclose on her mortgage in accordance with Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1101 et seq. (West 2004)) before title could pass to a third party.
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16. The mortgage lender claimed that, as a matter of law, Ellis's equitable mortgage claim could not defeat the bank's mortgage because the bank was first to record its interest in the property and had no notice of Ellis's equitable claim.
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17. Further, it claimed that because the tenancy relationship between Ellis and her grandson was not inconsistent with the public record, this relationship did not place the bank on notice of Ellis's interest as a matter of law. The bank denied Ellis's claim that it had a duty to inquire further to satisfy inquiry notice. U.S. Bank also alleges that, had it inquired further, there was nonetheless no certainty that it would be led to Ellis's purported interest.

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Following below is the Illinois appeals court's recitation of the relevant Illinois law, its application to the facts of the case, and the court's conclusion, in its entirety:

• ¶ 58 The primary issue we are to consider is whether U.S. Bank had notice of Ellis's interest prior to granting the Villasenor mortgage. The law measures bona fide purchasers and mortgagees under the same standards. US Bank must qualify as a bona fide mortgagee to retain an interest in the property. In order to successfully foreclose on the property, U.S. Bank must establish that it acquired an "interest in [the] property for valuable consideration without actual or constructive notice of another's adverse interest in the property." In re Ehrlich, 59 B.R. 646, 650 (Bankr.N.D.Ill.1986) (citing Life Savings & Loan Ass'n of America v. Bryant, 125 Ill.App.3d 1012, 1019, 81 Ill.Dec. 577, 467 N.E.2d 277 (1984)). If U.S. Bank meets these requirements it would obtain the role of a bona fide mortgagee. In the case at bar, U.S. Bank denies that it had actual or constructive notice of Ellis's interest.
  
  ¶ 59 Actual notice is that knowledge the purchaser had at the time of the conveyance. Bryant, 125 Ill.App.3d at 1019, 81 Ill.Dec. 577, 467 N.E.2d 277. The parties agree that U.S. Bank did not have actual notice.
  
  Thus, the next inquiry is whether the bank had constructive notice. Constructive notice is knowledge that the law imputes to a purchaser, whether or not he had actual knowledge at the time of the conveyance. See generally In re Application of Cook County Collector for Judgment & Sale Against Lands & Lots Returned Delinquent for Nonpayment of General Taxes for the Year 1985, 228 Ill. App.3d 719, 734-35, 170 Ill.Dec. 649, 593 N.E.2d 538 (1991); City of Chicago v. Cosmopolitan National Bank, 120 Ill.App.3d 364, 368, 75 Ill.Dec. 843, 458 N.E.2d 11 (1983); In re Application of County Treasurer, 30 Ill.App.3d 235, 240, 332 N.E.2d 557 (1975); Landis v. Miles Homes Inc., 1 Ill.App.3d 331, 273 N.E.2d 153 (1971).
  
  There are two kinds of constructive notice: record notice and inquiry notice. LaSalle Bank v. Ferone, 384 Ill.App.3d 239, 245, 322 Ill.Dec. 948, 892 N.E.2d 585 (2008) (citing In re Ehrlich, 59 B.R. 646, 650 (Bankr.N.D.Ill.1986)). Both parties agree that U.S. Bank did not have record notice because Ellis's interest in the property was not recorded because the PTC agreement prevented recordation. Thus the chain of title does not impute record notice on U.S. Bank. The bank relies on section 30 of the Conveyances Act (765 ILCS 5/30 (West 2004)) to explain in relevant part that all mortgages:
  
  
  "which are authorized to be recorded, shall take effect and be in force from and after the time of filing the same for record, and not before, as to all creditors and subsequent purchasers, without notice; and all such deeds and title papers shall be adjudged void as to all such creditors and subsequent purchasers, without notice, until the same shall be filed for record." 765 ILCS 5/30 (West 2004).
  
  US Bank argues that, "the first mortgage recorded has priority. Firstmark [Standard Life Insurance Co. v. Superior Bank FSB], 271 Ill.App.3d [435,] 439 [208 Ill. Dec. 409, 649 N.E.2d 465] [(1995)]. An unrecorded interest in land is not effective to a bona fide purchaser without notice. Schaumburg State Bank v. Bank of Wheaton, 197 Ill.App.3d 713, 720 [144 Ill.Dec. 151, 555 N.E.2d 48] (1990)." Federal National Mortgage Ass'n v. Kuipers, 314 Ill. App.3d 631, 635, 247 Ill.Dec. 668, 732 N.E.2d 723 (2000).
  
  U.S. Bank points to the chain of title to prove that it recorded an interest before Ellis. However, Ellis argues that U.S. Bank is on inquiry notice, yet failed to uphold its duty to inquire. In effect, she argues that, "where a party has constructive notice of a prior interest in real estate, the failure to record is not necessarily fatal to the rights of the prior interest holder. See Dana Point Condominium Ass'n, Inc. v. Keystone Service Co., 141 Ill.App.3d 916, 922 [96 Ill.Dec. 249, 491 N.E.2d 63] (1986)." Kuipers, 314 Ill. App.3d at 635, 247 Ill.Dec. 668, 732 N.E.2d 723.
  
  
  "The title of a purchaser whose deed has been recorded will not be postponed to a prior unrecorded conveyance except upon clear proof of actual notice of the earlier deed or of circumstances which should have induced an honest and prudent purchaser to make inquiry which would have disclosed the truth. Mere suspicion will not establish an inference of fraudulent intent. The proof must be so clear that the inference of bad faith is a necessary conclusion." Cessna v. Hulce, 322 Ill. 589, 597, 153 N.E. 679 (1926) cited in Reed v. Eastin, 379 Ill. 586, 592, 41 N.E.2d 765 (1942)).
  
  See also Blake v. Blake, 260 Ill. 70, 102 N.E. 1007 (1913); In re Cutty's-Gurnee, Inc., 133 B.R. 934, 949 (Bankr.N.D.Ill. 1991). Ellis argues that U.S. Bank acted in bad faith by ignoring clear proof of her equitable interests.
  
  She relies most heavily on Michael Ellis's presence as an occupant of the home, and the inadequate consideration recorded in her initial conveyance evidenced in the chain of title, as proof of her interests. She argues that had U.S. Bank inquired of Michael Ellis, inquiry would have led to Ellis's interests since Michael was her grandson. Regardless of the bank's actions, Ellis argues that the law imputes U.S. Bank with this duty to inquire. She relies on Cessna, once again stating that, "[i]t is true that one having notice of such facts as would put a prudent man on inquiry is chargeable with the knowledge of other facts which he might have discovered by diligent inquiry. Whatever is notice enough to excite attention, put the party on his guard and call for inquiry is notice of everything to which such inquiry might have led." Cessna, 322 Ill. at 595, 153 N.E. 679. See also Reed v. Eastin, 379 Ill. at 592, 41 N.E.2d 765.
  
  It is important to note that the law does not concern itself with whether an inquiry is actually carried out; rather, "notice is imputed to the subsequent purchaser, on account of his negligence in not prosecuting his inquiries in the direction indicated." Anthony v. Wheeler, 130 Ill. 128, 135, 22 N.E. 494 (1889). See also Smolek v. K.W. Landscaping, 266 Ill.App.3d 226, 229, 203 Ill. Dec. 415, 639 N.E.2d 974 (1994); Bryant v. Lakeside Galleries, Inc., 402 Ill. 466, 477, 84 N.E.2d 412 (1949); Reed v. Eastin, 379 Ill. 586, 592, 41 N.E.2d 765 (1942) (citing Cessna v. Hulce, 322 Ill. 589, 597, 153 N.E. 679 (1926)); Doll v. Walter, 305 Ill.App. 188, 192, 27 N.E.2d 231 (1940). See generally Aurora National Loan Ass'n v. Spencer, 81 Ill.App. 622, 622-25 (1898); Robertson v. Wheeler, 162 Ill. 566, 580, 44 N.E. 870 (1896); Grundies v. Reid, 107 Ill. 304 (1883); Slattery v. Rafferty, 93 Ill. 277 (1879).
  
  ¶ 60 Both parties rely on Ehrlich to explain the tenets of inquiry notice. In re Ehrlich, 59 B.R. 646, 649-50 (Bankr. N.D.Ill.1986). Ehrlich, in turn relies on Illinois Supreme Court and Appellate Court cases Miller v. Bullington, 381 Ill. 238, 44 N.E.2d 850 (1942), and Burnex Oil Co. v. Floyd, 106 Ill.App.2d 16, 245 N.E.2d 539 (1969), respectively.
  
  We will first consider the precedent set forth in Miller by reviewing the relevant case history that spans over 50 years.
  
  ¶ 61 We begin our review with Miller v. Bullington, but first must lay Miller's foundational precedent in Whitaker v. Miller, 83 Ill. 381 (1876), and Mallett v. Kaehler, 141 Ill. 70, 73-74, 30 N.E. 549 (1892). In Whitaker, our supreme court found that a complainant's right of possession was evidenced by her tenants. "Her possession was notice to all the world of her rights in the premises, and inquiry of her would have disclosed a knowledge of the truth. Without inquiry, no one can claim to be an innocent purchaser of lands in actual possession of another, as against such party." Whitaker v. Miller, 83 Ill. 381, 386 (1876). This tenet was reinforced when the Illinois Supreme Court found, yet again, that:
  
  
  "[W]hen one purchases land in the possession of a third party, he is bound to take notice of whatever facts an inquiry as to the right of such possession would lead to. We said in Whitaker v. Miller, 83 Ill. 381 [(1876)], (and in substance in many other cases,) that `the possession of land by a party, through his tenants, is notice to all the world of his rights in the premises, and without inquiry of him, no one can claim to be an innocent purchaser, as against him.'" Mallett v. Kaehler, 141 Ill. 70, 74 [30 N.E. 549] (1892).
  
  These two 19th-century cases lay the foundation upon which the 20th-century Miller v. Bullington decision stands. The court in Miller found:
  
  
  "Again, possession of premises by a landlord through his tenant is notice of the landlord's rights. (Mallett v. Kaehler, 141 Ill. 70 [30 N.E. 549 (1892)]). One having notice of facts which would put a prudent man on inquiry is chargeable with knowledge of other facts which he might have discovered by diligent inquiry. Whatever is notice enough to excite attention and put the party on his guard is notice of everything to which such inquiry might have led and every unusual circumstance is a ground of suspicion and demands investigation. Reed v. Eastin, [379 Ill. 586, 41 N.E.2d 765 (1942)]; Struve v. Tatge, 285 Ill. 103 [120 N.E. 549 (1918)]; Blake v. Blake, 260 [Ill.] 70 [102 N.E. 1007 (1913)]." Miller v. Bullington, 381 Ill. 238, 243, 44 N.E.2d 850 (1942).
  
  See also LaSalle Bank v. Ferone, 384 Ill. App.3d 239, 246, 322 Ill.Dec. 948, 892 N.E.2d 585 (2008).
  
  ¶ 62 U.S. Bank ignores the importance of these three holdings in protecting the rights of landlords through their tenants. Ellis repeatedly asserts that Michael, as occupant and tenant, represents her equitable interests in the property. "Such occupancy has been repeatedly held to charge a purchaser or incumbrancer with notice, and all that it would lead to, if pursued." Crawford v. The Chicago, Burlington & Quincy R.R. Co., 112 Ill. 314, 321 (1884). See Doll v. Walter, 305 Ill. App. 188, 192, 27 N.E.2d 231 (1940).
  
  ¶ 63 U.S. Bank supports its position by noting that Michael's tenancy is not inconsistent with the record owner. The bank persistently argues that when Villasenor applied for a loan and mortgage, First National remained the record owner in a land trust. US Bank argues that Michael's tenancy is not inconsistent with this relationship and thus it is not on notice of Ellis's interests. However, U.S. Bank reaches this conclusion only after misinterpreting Burnex Oil Co. v. Floyd and thus we do not find its argument persuasive. Burnex was decided after the trio of supreme court cases discussed above and clearly supports their conclusions:
  
  
  "Where real estate is in the possession of someone other than the record owner, such possession is generally regarded as notice to the world of the interest represented thereby and is legally equivalent to the recording of such interest. Carnes v. Whitfield, 352 Ill. 384 [185 N.E. 819 (1933), cited in Beals v. Cryer, 99 Ill.App.3d 842, 845, 55 Ill.Dec. 278, 426 N.E.2d 253 (1981); Bryant v. Lakeside Galleries, Inc., 402 Ill. 466, 477, 84 N.E.2d 412 (1949); Chicago Title & Trust Co. v. Darley, 363 Ill. 197, 204, 1 N.E.2d 846 (1936)]], and Slinger v. Sterrett, 283 Ill. 82 [118 N.E. 1008 (1918)].

  
  A purchaser is bound to inquire of the person in possession by what tenure he holds and what interest he claims in the premises." Burnex Oil Co. v. Floyd, 106 Ill.App.2d 16, 21-22 [245 N.E.2d 539] (1969). Even if First Suburban was the record owner at the time Villasenor's mortgage was recorded, the home was still in Ellis's possession via Michael. Thus, this situation matches the criteria described in Burnex. Following the logic of Burnex, Ellis's equitable mortgage has all the effects of recordation because the land was in possession by someone other than the record owner. Not only does the equitable mortgage have the effects of recordation, but this also requires that U.S. Bank foreclose on Michael's interests as occupant and tenant of the house. We note that while Burnex is instructive, it continues the long precedent our supreme court set forth in Miller v. Bullington, Carnes, Slinger, Mallett, and Whitaker.
  
  ¶ 64 Therefore, U.S. Bank was imputed with inquiry notice of Ellis's interest based on Michael Ellis's possession of the home. Had the bank, or their appraisers, dutifully inquired of Michael, he surely would have responded that he rented the property from his grandmother, Ruthie Lee Ellis, who was the owner of the home.
  
  Then U.S. Bank would have searched the chain of title further to find the recorded conveyance with inadequate consideration. These facts in tandem would have led U.S. Bank to learn of Ellis's interest and PTC's misrepresentation and fraud. These facts are imputed to U.S. Bank regardless of their decision to actually question Michael Ellis. The ruling in Burnex is certainly not an anomaly based on ancient case law; rather, the same precedent from Miller v. Bullington is evidenced in the 21st century as well:
  
  
  "[S]ee also Atwood v. Chicago, Milwaukee & St. Paul Ry. Co., 313 Ill. 59, 62 [144 N.E. 351] (1924) (as long as possession is not occasional or temporary, it amounts to constructive notice, viable against the world, of any rights person in that possession may have). This may include improvements on the property, signs posted thereon, or possession by a tenant of the person claiming possession. See Carnes, 352 Ill. at 390 [185 N.E. 819] (possession of tenant is constructive notice of rights of landlord in property, even if legal title to property indicates another) * * *"
  
  Banco Popular v. Beneficial Systems, Inc., 335 Ill.App.3d 196, 211, 269 Ill.Dec. 389, 780 N.E.2d 1113 (2002).
  
  ¶ 65 In Banco Popular, George and Helena Kaltezas owned property which contained a building that had fallen into disrepair. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. The City of Chicago instituted a building code violation case against the Kaltezases, which resulted in the filing of a lis pendens notice with the recorder's office in 1995. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. The Kaltezases hired Morris Reynolds to do work on the property, but he eventually filed a claim for breach of contract against the Kaltezases and sought a lien on the property. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. Reynolds was awarded judgment against the Kaltezases, and the judgment was recorded in the Cook County recorder of deeds office on May 3, 1996. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 66 Before the judgment was entered, the Kaltezases executed a quitclaim deed conveying all interest in the property to Marsha Azar, through her nominee Saul Azar. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. The deed was delivered on March 13, 1995, and stated that Marsha Azar had the right of equitable ownership in the property and the building, "`even if it [was] not recorded by way of deed conveying and vesting such legal ownership.'" Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. The Azars paid taxes on the property, paid the water bill and brokers' commissions, placed a sign in the building's window stating that their company was managing the property, changed the name of the tax addressee to their company, dealt with the local police department and alderman's office in rehabilitating the property, and leased the property to new tenants. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. Saul Azar told Reynolds' attorney that he and Marsha had purchased the property. Banco Popular, 335 Ill.App.3d at 199, 269 Ill.Dec. 389, 780 N.E.2d 1113. Saul Azar also appeared in open court to defend the building code case instituted by the City of Chicago, and the case was eventually dismissed when the Azars completed all necessary repairs on the property. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. However, the Azars did not record the quitclaim deed. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 67 After the judgment in favor of Reynolds was rendered, he assigned the judgment to Benefit Systems, Inc. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. Benefit Systems' president searched the records and found the lis pendens notice, but did not review the court file or inspect the property. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. On August 6, 1996, Marsha Azar recorded the deed she received from the Kaltezases and recorded a deed in trust on the property and a mortgage. Banco Popular, 335 Ill. App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 68 Benefit Systems delivered the judgment to the Cook County sheriff for levy and sale on August 16, 1996. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. Benefit Systems successfully purchased the property at the sheriff's sale, and Benefit Systems notified Marsha Azar of the sale. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. Marsha Azar, and Banco Popular as trustee, brought suit against Benefit Systems to set aside the sheriff's deed. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. Benefit Systems filed a counterclaim to quiet title and establish its priority in the mortgage. Banco Popular, 335 Ill.App.3d at 200, 269 Ill.Dec. 389, 780 N.E.2d 1113. The trial court granted summary judgment to Marsha Azar and Banco Popular. Banco Popular, 335 Ill.App.3d at 201, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 69 On appeal, we found that Beals and Miller found that possession of a property can "be equivalent to the recording of a deed as to a judgment creditor who claims an interest in the property of which another has possession when the creditor secured the judgment." Banco Popular, 335 Ill.App.3d at 210, 269 Ill.Dec. 389, 780 N.E.2d 1113 (citing Beals v. Cryer, 99 Ill.App.3d 842, 844, 55 Ill.Dec. 278, 426 N.E.2d 253 (1981); and Miller, 381 Ill. at 243, 44 N.E.2d 850). Possession must provide some measure of notice to the outside world of the possessor's interest. Banco Popular, 335 Ill.App.3d at 211, 269 Ill.Dec. 389, 780 N.E.2d 1113 (citing Beals, 99 Ill. App.3d at 844, 55 Ill.Dec. 278, 426 N.E.2d 253). Evidence of possession includes making improvements on the property, posting signs on the property, and possession of the property by a tenant of the person claiming possession. Banco Popular, 335 Ill.App.3d at 211, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 70 What constitutes possession in this respect will depend on the facts of the case and is thus a question of fact. Banco Popular, 335 Ill.App.3d at 211, 269 Ill.Dec. 389, 780 N.E.2d 1113. Therefore, the Azars' actions created questions of fact about whether or not they "possessed" the property and whether or not their actions put Reynolds and Benefit Systems on constructive notice of Marsha Azar's interest in the property. Banco Popular, 335 Ill. App.3d at 211-12, 269 Ill.Dec. 389, 780 N.E.2d 1113. Therefore, we reversed the grant of summary judgment and remanded for further proceedings. Banco Popular, 335 Ill.App.3d at 214, 269 Ill.Dec. 389, 780 N.E.2d 1113.
  
  ¶ 71 In summation, U.S. Bank had before it a series of facts that should have led it to inquire further before issuing its loan and mortgage. This is a duty imputed by the law. US Bank relies on Connor v. Wahl in alleging that Illinois precedent requires that "[w]here one of two innocent persons must suffer by reason of fraud or wrong conduct of another the burden must fall upon him who put it in the power of the wrongdoer to commit the fraud or do the wrong." Connor v. Wahl, 330 Ill. 136, 146, 161 N.E. 306 (1928). US Bank urges us to find that Ellis should be held responsible for placing the power in PTC to commit fraud. However, we find that that U.S. Bank is not without fault for the reasons noted. Thus U.S. Bank is not a bona fide mortgagee without notice. We come to this conclusion without considering Villasenor's role in any fraud that may have been committed upon Ellis.
  
  ¶ 72 III. Conclusion
  
  ¶ 73 For the reasons noted above, U.S. Bank is not a bona fide mortgagee without notice. Therefore we affirm the trial court in denying the U.S. Bank's motion to reconsider and affirm the grant of summary judgment in favor of Ruthie Lee Ellis.
  
  ¶ 74 Affirmed.

For the ruling, see U.S. Bank Nat. Ass'n v. Villasenor, 979 NE 2d 451 (Ill. App. 1st Dist., 6th Div. 2012).

Go here for a collection of decisions from the Illinois Supreme Court, and here for a collection of decisions from the Illinois appellate courts. on the issue of possession, duty to inquiry, and notice.

Go here for a collection of decisions from courts of other states on the issue of possession, duty to inquiry, and notice.

Recharacterizing An Escrowed Contingent Deed, Required As Condition For Granting Forbearance Agreement, As An Equitable Mortgage: Applicable Illinois Law

Yesterday's post involved a court ruling (In re Primes, 9/26/14) that illustrated the application of Illinois law recharacterizing a deed as an equitable mortgage when a bank requires a defaulting homeowner to sign over a deed to be held in escrow as a condition for granting said homeowner a forbearance agreement. In such a case, the bank will be prevented from taking possession of the premises upon a subsequent default by the homeowner without first bringing a foreclosure action.

As noted in yesterday's post, while the principles that underlie the doctrine of equitable mortgage are the same, the line of cases reviewed by the court in this case (involving a forbearance agreement/payment work-out of an existing mortgage) was different from the line of cases often cited when the equitable mortgage doctrine is invoked in Illinois in the context of a sale leaseback foreclosure rescue scheme (compare the line of cases cited below with the line of cases cited in Hatchett v. W2X, Inc., 993 NE 2d 944 (Ill. App., 1st Dist., 1st Div. 2013), a sale leaseback foreclosure rescue case).

Following below is the court's articulation of the Illinois state law that it applied in this case to find that, where an escrowed contingent deed is required from a homeowner as a condition for granting a forbearance agreement, the arrangement will be treated as an equitable mortgage:

• A. Contingent Transfers of Property Interests and the Equitable Right of Redemption Under Illinois Law.
  
  1. Illinois Disfavors Attempts to Extinguish the Equitable Right of Redemption or Otherwise Evade Judicial Foreclosure.
  
  Illinois law generally requires judicial foreclosure to involuntarily terminate a mortgagor's interest in real property. 735 ILCS 5/15-1106. "The only method by which a mortgagee can enforce a mortgage to collect the mortgage debt, other than with the consent of the mortgagor, is by a filing a complaint to foreclose the mortgage and sell the mortgaged property." 10 Illinois Real Property Service §54:2 (John Francis Major & Steven J. Cone eds., 2014).
  
  Thus, for example, a lender must bring a mortgage foreclosure action and may not proceed with an action for forcible entry and detainer to enforce its rights under a purported deed given by the mortgagor if the court determines the deed to be an equitable mortgage. First Ill. Nat'l Bank v. Hans, 493 N.E.2d 1171, 1174 (Ill. App. Ct. 1986). While a mortgagor can voluntarily transfer or relinquish his or her interest in the real property, Illinois statutes and established case law generally require the purported transfer to be found void or recharacterized, particularly where the transfer is to a lender and contingent on a future default.
  
  First, Illinois law expressly prohibits and renders void agreements "contained in" or made "in connection with" a mortgage that are intended to circumvent judicial foreclosure. The Illinois Mortgage Foreclosure Law states that "[n]o real estate within this State may be sold by virtue of any power of sale contained in a mortgage or any other agreement, and all such mortgages may only be foreclosed in accordance with this Article." 735 ILCS 5/15-1405.
  
  As the Illinois Supreme Court has explained, the purpose of the statutory predecessor to the current section 1405 was "to prevent sales of the equity of redemption, and no scheme or device to evade the statute or circumvent it by providing for a sale depriving the debtor of his equity of redemption will be upheld." De Voigne v. Chicago Title & Trust Co., 136 N.E. 498, 501 (Ill. 1922). As discussed below, a review of the act as amended and the cases construing it reveals this to continue to be the rule.
  
  Illinois courts generally "take a dim view of any attempt to limit or extinguish the mortgagor's equitable right of redemption." Hans, 493 N.E.2d at 1174. In addition to the statutory restriction on powers of sale, Illinois law also invalidates an agreement made in advance to provide or convey a quit claim deed upon future default or to waive the equitable right of redemption where it is "part of" or "in connection with" an original mortgage. See, e.g., Hans, id. at 1174 (finding a purported assignment of rights under installment contract made in connection with and as security for a loan to be an equitable mortgage and an assignment provision purporting to require mortgagor to execute a quit claim deed in lieu of foreclosure to be "null and void"). From its review of Illinois decisions the Illinois Supreme Court has concluded that the cases have "consistently held that the law favors redemptions." Household Bank, FSB v. Lewis, 890 N.E.2d 934, 939 (Ill. 2008) (collecting cases).
  
  Further, Illinois law treats a purported transfer of deed as a mortgage if it is intended as security to secure a loan. Section 1207 of the Illinois Mortgage Foreclosure Law defines "mortgage" to include "without limitation ... every deed conveying real estate, although an absolute conveyance in its terms, which shall have been intended only as a security in the nature of a mortgage"). 735 ILCS 5/15-1207(c). See also 735 ILCS 5/15-1207(d), (e) (term "mortgage" also includes "equitable mortgages" and "instruments which would have been deemed instruments in the nature of a mortgage prior to the effective date of this amendatory Act of 1987"). As noted in Hans, "[e]xpress words are not necessary to create an equitable mortgage; the only requirement is that it clearly appear from the document that the parties intended that an identifiable parcel of property `be held, given or transferred as security' for the payment of a debt." 493 N.E.2d at 1174 (quoting Hibernian Banking Ass'n v. Davis, 129 N.E. 540 (Ill. 1920)).
  
  Where it is demonstrated that the consideration for the deed is a prior indebtedness and it is demonstrated that the indebtedness was not satisfied by the purported conveyance "it will be presumed that a mortgage was intended." Wiemer v. Havana Nat'l Bank, 335 N.E.2d 506, 511 (Ill. App. Ct. 1975) (citing Wallace v. Greenman, 152 N.E. 137 (1926)). The party asserting that a transfer occurred bears "the burden of proving otherwise." Id. This is because a purported transferee "cannot hold the land absolutely, and at the same time retain the right to enforce payment of the debt, on account of which it was made." Id. at 586 (quoting Sutphen v. Cushman, 35 Ill. 186 (Ill. 1864)).
  
  2. The Doctrine of Equitable Mortgage and Related Principles Apply to Forbearance Agreements.
  
  The doctrine of equitable mortgage applies not only to purported transfers executed at the time money is lent, but also to deeds executed after the time the debt is created such as in the context of an amendment, a refinancing, a forbearance agreement or other work-out situation. "If there is an indebtedness or a liability between the parties, either a debt existing prior to the conveyance or from any other cause, and this debt is still left subsisting ... then the whole transaction amounts to a mortgage." Warner v. Gosnell, 132 N.E.2d 526, 529 (Ill. 1956) (emphasis added). See also Wynkoop v. Cowing, 21 Ill. 570 (Ill. 1859) ("[T]he unrestricted right of redemption will be extended to transactions between the parties, in the nature of security for the debt, subsequent to the original mortgage.").
  
  In such cases, the most important factor used in determining whether a purported deed was intended as a mortgage is whether there remains a debt for which the deed serves as security. The Illinois Supreme Court identifies the essential criterion to be
  
  
  the continued existence of a debt or liability between the parties, so that the conveyance is in reality intended as a security for the debt, or indemnity against the liability. If that liability is left as subsisting, and if the grantor is regarded as still owing, and bound to pay it at some future time, ... then the whole transaction amounts to a mortgage, whatever language the parties may have used, and whatever stipulations they may have inserted in the instruments.
  
  Schwartzentruber v. Stephens, 133 N.E.2d 33, 36 (Ill. 1956) (quotation marks omitted). (quoting Warner, 132 N.E.2d at 529). See also Illinois Trust Co. of Paris v. Bibo, 159 N.E. 254, 257 (Ill. 1927)).
  
  The continuing debt factor "furnishes a sufficient test in the great majority of cases" and it is only "when application of this test leaves a doubt [that it is] necessary to consider other circumstances surrounding the transaction." Wiemer, 335 N.E.2d at 511 (reversing trial court for its reliance on testimony about statements made at the time of the transaction, and finding that plaintiff had failed to overcome presumption that purported deed was a mortgage). These include "every fact or circumstance tending to illustrate the purpose and intent of the parties," such as: (i) the fact of an existing indebtedness in respect to which the deed was executed; (ii) the retention of the evidence of such indebtedness by the grantee in the deed; (iii) that the deed was procured by fraud or oppression or undue advantage; (iv) that there was a loan of money; and (v) the subsequent conduct of the parties in respect to the land. Schwartzentruber, 133 N.E.2d. at 36. The question of whether a document is a deed or a mortgage "depends upon the intentions of the parties in that regard at the time of its execution" and "its character at the time of such delivery becomes fixed as of that time." Id. at 35 (quoting Warner, 132 N.E.2d at 529) (emphasis added).
  
  More than a century ago, the Illinois Supreme Court determined that a conditional quit claim deed executed in connection with a forbearance agreement is a mortgage. Bearss v. Ford, 108 Ill. 16 (Ill. 1883). In Bearss, a landowner borrowed money, giving the lender two promissory notes secured by two deeds of trust in a certain parcel of land. Several years later, the landowner defaulted on required tax and interest payments due under the notes and his lender threatened to foreclose. The lender eventually agreed to accept instead the borrower's quit claim deed conveying the property to the lender subject to the proviso that if the landowner paid the taxes and repaid the amounts owing on the notes and trust deeds within one year with interest, the conveyance would be void and the lender would reconvey the property back to the landowner. In connection with this arrangement the parties also executed a one-year lease whereunder the debtor, to maintain possession of the land, paid to the lender monthly rent which rent was "to be deemed and applied as interest, under the conditions of" the quit claim deed. Bearss, 108 Ill. 16.[4]
  
  The court began its analysis with the acknowledgment of the well-established rule in the law of mortgages "which permits the showing of a deed plain and unambiguous in its terms, and absolute on its face, to be a mortgage or mere security for the loan of money." Id. The court then held that:
  
  
  in construing instruments of this kind, when the consideration is an existing mortgage indebtedness, [courts] are more inclined to treat them as mortgages than when given upon an original advance, and when so treated they will not be regarded as a substitute for the former security, unless the intention to that effect is manifest, and in such cases the original mortgage may be foreclosed notwithstanding the giving of the new one, hence the principle "once a mortgage always a mortgage," has become a leading fundamental doctrine of the law of mortgages. The most satisfactory, and as a general rule the controlling, test in cases of this kind is, does the giving of the new instrument operate as a satisfaction or extinguishment of the mortgage indebtedness? If it does not, such new instrument will be treated as an additional security for the debt, or, in other words, as an additional mortgage. . . .
  
  Id. (emphasis added).
  
  Thus under Illinois law a deed in escrow given in connection with a forbearance agreement is not presumed out of hand to be a true transfer. The primary question for determining whether to treat the purported conveyance as a true transfer or simply additional security is whether the original indebtedness was satisfied or extinguished.
  
  In Bearss, the court noted that the agreements did not expressly provide for satisfaction or extinguishment of the existing debt, that the original note and trust deeds were not surrendered and that the lease expressly recognized the continuing debt. It concluded that the "so-called quitclaim deed was a mere additional security, and not an absolute conveyance of the property." Id. the court noted that whether the parties intended for title to transfer automatically upon a future default without the need for judicial foreclosure was not dispositive, noting that the "parties may have intended, and doubtless did intend, that if the premises were not redeemed before the 1st of July, 1879, [the instrument should become an absolute deed] in order to avoid the expenses of a foreclosure. But it is evident that parties can not, by mere agreement, change the law of the land." Id. Rather, as the court emphasized:
  
  
  nothing is more firmly established in the law of mortgages than that it is not competent for the parties, even by express stipulation, to cut off the right of redemption, and to permit them to make such an instrument an absolute deed upon some future contingency, would simply be cutting off the right of redemption, which, as we have just seen, can not be done." Id.

  
  Illinois courts continue to "adhere[] to the principle ... that a mortgage remains a mortgage until the right of redemption is barred by one of the modes recognized by law and have repeatedly stated that the parties cannot by an express stipulation in the mortgage transform the instrument into an outright conveyance upon default, which would operate to deprive the mortgagor of his redemptive rights." Hans, 493 N.E.2d at 1174 (collecting cases).
  
  For example, in Wiemer v. Havana Nat'l Bank, the court found that a purported deed in connection with a workout agreement was in fact a mortgage. 335 N.E.2d 506 (Ill. App. Ct. 1975). There, a couple executed a trust deed in connection with a refinancing indebtedness secured by real property. The trust deed purported to transfer the real estate into a trust that named one of the debtors' pre-existing lenders as the trustee. The trust deed purported to grant the trustee the power to sell the property and also required the debtors to execute and deliver a quit claim deed. The trust deed further provided that "[a]fter all debts to the banks are paid in full, the trustee shall convey any unsold property to the [debtors]." Id. at 508. When the debtor refused to execute the quit claim deed and challenged the lender/trustee's right to attempt to sell the land, the lender brought an action to compel the debtors to perform and to remove the cloud on the title. On appeal, the reviewing court reversed the trial court's determination that upheld the trust deed was a conveyance, holding that, because the debt to the lender continued after the purported transfer and was not satisfied, the deed must be presumed to be a mortgage. Id. at 511. Further, the appellate court found the power of sale contained in the trust agreement to be void. Id.[5]
  
  Alpine Bank identifies several decisions of lower courts that have upheld the use of a contingent deed in lieu of foreclosure. However, none of these cases directly address the issue now before this court, let alone question the clear authority of the state's highest court. For example, in Joyce v. Fidelity Real Estate Growth Fund II, L.P., 993 N.E.2d 532, 540 (Ill. App. 2013), the appellate court was not asked to examine the nature or effect of the purported deed under Illinois law, but only whether as a matter of Massachusetts contract law there was a breach of the agreement and if so, whether that breach was sufficiently `material' to trigger the lender's right to record the deed.
  
  An earlier appellate decision cited by the bank, Klein v. Devries, concerned a bankruptcy plan provision providing for the debtor to deliver a quit claim deed to be held in escrow. 722 N.E.2d 784 (Ill. App. Ct. 1999). The court held that once the debtor entered into the reorganization plan, "he had no right to cure a default on the mortgage, [the debtor's] title to the property was altered from fee simple to fee simple defeasible." Id. at 787. That case is inapplicable here as it involves the Bankruptcy Code's general pre-emption of state law restrictions on the power to retain, transfer or sell property of the debtor through a plan. See 11 U.S.C. §1123(a)(5). See, e.g., In re Federal-Mogul Global Inc., 684 F.3d 355 (3rd Cir. 2012) (Section 1123(a)(5)(B) preempts anti-assignment clauses in insurance policies).
  
  Here, unlike Klein, the deed in escrow is not a provision of the Debtor's plan. Although the Chapter 13 plan in Ms. Primes' first bankruptcy contained a vague statement that Alpine "has agreed to rewrite the Debtor's mortgage loan," it did not expressly provide for the quit claim deed and her deed and Forbearance Agreement were signed well after the plan was confirmed and automatic stay lifted. (2010 Case, Chapter 13 Plan at §G, ECF No. 38.) In re Prairie Crossing, L.L.C., like Klein, considered issues arising under the Bankruptcy Code and not the effectiveness of a deed under Illinois law. No. 99 Civ. 3558 (N.D. Ill. 2000), 2000 WL 1468755 ("[d]ebtor cites no facts, whatsoever, to support the contention that it retains any interest in the property now that the period for fulfilling the contingency has expired." Id. at *5). Neither Klein nor Prairie Crossing contains any reference to the doctrine of equitable mortgage or to whether a contingent deed in lieu must be recharacterized under Illinois law as a mortgage and, therefore, do not furnish precedent for the issue now before this court. See, e.g., Legal Services Corp. v. Velazquez, 531 U.S. 533, 557 (2001) (Scalia, J., dissent) ("Judicial decisions do not stand as binding `precedent' for points that were not raised, not argued, and hence not analyzed.") (citing United States v. Verdugo-Urquidez, 494 U.S. 259, 272 (1990).
  
  The Flores decision mentioned by Alpine Bank also fails to suggest that Illinois law has changed regarding the Debtor's equitable right of redemption. Eastern Savings Bank, FSB v. Flores, 977 N.E.2d 242 (Ill. App. Ct. 2012), overruled on other grounds by BAC Home Loans Servicing, LP v. Mitchell, 6 N.E.3d 162 (Ill. Mar. 20, 2014). Whether a party can contractually waive service, the question considered by the appellate court in Flores, involves quite different statutes, different doctrines and different policies from those at issue here and cannot support disregarding the principles set down by Bearss and its prodigy as Alpine would now have this court do.[6]
  
  3. Illinois' Statutory Recognition of Deeds in Lieu of Foreclosure Does Not Supplant the Equitable Mortgage Doctrine.
  
  Alpine argues that 735 ILCS 5/15-1401 modifies doctrine of equitable mortgage for post-default transactions because the Illinois Mortgage Foreclosure Law now recognizes quit claim deeds. Section 15-1401, entitled "Deed in Lieu of Foreclosure," provides that a "mortgagor and mortgagee may agree on a termination of the mortgagor's interest in the mortgaged real estate after a default by a mortgagor." 735 ILCS 5/15-1401. Alpine argues that a forbearance agreement, providing as is the case here, for the automatic termination of the mortgagor's interest upon the occurrence of a future contingency is the type of "agreement" contemplated by the phrase "agree on a termination" found in the statute.
  
  This argument does not stand up to close inspection. The term "deed in lieu of foreclosure" as commonly used involves the immediate transfer of the mortgaged property, often in full satisfaction of the debt, by the mortgage in distress. The term involves the procedure whereby a mortgagor/debtor reconveys his equity of redemption in the defaulted property to the mortgagee/creditor in consideration of the creditor's promise to forbear from suing on the debt or foreclosing the security is known as a deed absolute in lieu of foreclosure. R.R. Powell & P.J. Rohan, Powell on Real Property § 37.44 (2014).
  
  Alpine does not identify authority to suggest that Section 15-1401 was intended to permit and make enforceable `contingent' deeds in lieu of foreclosure or that the statute was otherwise intended to modify the doctrine of equitable mortgage. To the contrary, Illinois courts have repeatedly concluded that the Illinois Mortgage Foreclosure Law enacted in 1987 "was intended by its drafters to integrate into one statute as much of the law of mortgage foreclosure as possible" and to "codif[y] the prior statutory law and case law on the subject." Olney Trust Bank v. Pitts, 558 N.E.2d 398, 402 (Ill. App.1990) (internal citation omitted). While the 1987 amendment to the statute for the first time explicitly references deeds in lieu of foreclosure, id., the use of such instruments have long been treated by Illinois common law. See, e.g., Richardson v. Hockenhull, 85 Ill. 124 (Ill. 1877).
  
  Generally, the "premise behind deeds in lieu of foreclosure [was] to allow a borrower to transfer title to the lender in exchange for a release of his or her obligations under the note and mortgage" and the "IMFL does not alter that which had been implicit in prior practice." Olney, 558 N.E.2d at 402. Neither the terms of the 1987 amendments nor their subsequent construction by the courts suggest that the practice or applicable doctrine has been altered. If Section 15-1401 makes any change from prior practice, it is to make "it absolutely clear that a deed in lieu of foreclosure releases all mortgagors from personal liability" except as otherwise provided in the statute. Id. Alpine offers no authority to suggest that the 1987 amendments to the statute were intended to vitiate the doctrine of equitable mortgages as long articulated by Illinois courts or the common law equitable doctrines prohibiting contractual limitations on a mortgagor's equitable right of redemption.

For the ruling, see In re Primes, Bankr. No. 13-B-83310 (Bankr. N.D. Ill., Western Div. September 26, 2014).

Illinois Court Applies Equitable Mortgage Doctrine To Reject Bank's Attempt To Improperly Circumvent Judicial Foreclosure By Requiring Escrowed Contingent Deed To Be Recorded Upon Future Default As Condition To Grant Homeowner Forbearance Agreement

A recent court ruling by a U.S. Bankruptcy Court in Rockford, Illinois (In re Primes, 9/26/14) illustrates how the doctrine of equitable mortgage applies in the context of a transaction involving a financially distressed homeowner facing the loss of her home, and the lender currently holding the mortgage and threatening foreclosure.

More specifically, and given the particular facts of this case, it illustrates how a bank requiring the defaulting homeowner to sign over a deed to be held in escrow in connection with obtaining a forbearance agreement will be prevented from taking possession of the premises upon a subsequent default by the homeowner without first bringing a foreclosure action. In such a case, the bank is prohibited from obtaining possession of the premises by simply recording the escrowed deed and booting the homeowner through a forcible detainer (eviction) action. Such a scheme was looked at by the court as nothing more than the bank's attempt to improperly extinguish the homeowner's equitable right of redemption to evade judicial foreclosure.

An oversimplified summary of the fact follows (the reader is referred to the court's opinion for a full recitation of all the minutiae):

1. After the homeowner defaulted on her payments on her home mortgage, the bank commenced a foreclosure proceeding.
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2. The homeowner filed for Chapter 13 bankruptcy to halt the foreclosure action, and subsequent thereto, reached a forbearance agreement with the bank that called for regular monthly payments and a balloon payment.
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3. In addition, the bank required the homeowner to sign over a quit claim deed (which purported on its face to be in lieu of foreclosure) to the bank as security for homeowner's performance of her obligations pursuant to the forbearance agreement.
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4. The bank agreed to hold the deed in escrow, but that in the event of homeowner's default, the bank was authorized to record the deed and take possession of the home.
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5. As part of the agreement, the bank dismissed the ongoing foreclosure action.
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6. After approximately two years of monthly payments on the forbearance agreement (and shortly after the bankruptcy case was closed and the Chapter 13 trustee was discharged), the homeowner defaulted again.
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7. The bank sent notice to the homeowner that if the payment default was not timely cured, it would record the deed held in escrow.The homeowner failed to cure; the bank then recorded the deed.
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8. The homeowner then filed a second Chapter 13 case, (a) proposing to make up the back payments to reinstate the forbearance agreement, and (b) claiming that she was still the owner of the home, despite the deed she signed over to the bank a couple of years earlier.

The court described the legal issue to be addressed as follows ("Alpine" is Alpine Bank & Trust Co., the mortgage lender, Mrs. Primes is the Debtor/homeowner):

• Alpine argues that the pre-petition recording of the quit claim deed transferred ownership in the Mila Ave. property to the bank. Alpine thus contends that as of the petition date the Debtor had no interest in her residence and no right to redeem the property, and, therefore, the property is not necessary for her reorganization. See, e.g., Colon v. Option One Mortgage Corp., 319 F.3d 912 (7th Cir. 2003) (automatic stay may be lifted because at the time debtor filed her plan under Chapter 13 she "had no right to redeem").
  
  Ms. Primes argues in response that under Illinois law the quit claim deed given in connection with the Forbearance Agreement must be treated as an equitable mortgage, that the bank's recording of the deed without judicial foreclosure is ineffective to transfer her ownership interest, and that she is entitled to cure her default and satisfy the bank's secured claim through her Chapter 13 plan.
  
  Under the facts presented, the court finds the Debtor's argument to be correct under Illinois law.

As the basis for its conclusion, the court goes through an extensive analysis of the Illinois law (refer to the court's opinion for its full analysis of the law), and its application of the law to the facts of the case. Interesting to note that, while the underlying principles are the same, the case law reviewed by the court was a different line of cases than the line of cases often cited when the equitable mortgage doctrine is invoked in Illinois in the context of a sale leaseback foreclosure rescue scheme (compare the line of cases cited in In re Primes with the line of cases cited in Hatchett v. W2X, Inc., 993 NE 2d 944 (Ill. App., 1st Dist., 1st Div. 2013), a sale leaseback foreclosure rescue case).

After its analysis of the applicable Illinois law, the court reached its conclusion, making these findings and observations:

• The doctrine of equitable mortgage applies not only to purported transfers executed at the time money is lent, but also to deeds executed after the time the debt is created such as in the context of an amendment, a refinancing, a forbearance agreement or other work-out situation.
  
  
  ***
  
  Applying the principles discussed above to the facts in this case, it is clear that the execution, delivery and recording of the Debtor's quit claim deed was ineffective to transfer title in her Rockford, Illinois property from Ms. Primes to Alpine Bank. Instead, the Debtor still owned the Mila Ave. property as of the petition date. Alpine Bank holds only a secured claim which could be modified through a plan pursuant to and in accordance with Chapter 13 of the Bankruptcy Code.
  
  The evidence establishes that the parties did not intend for the quit claim deed to immediately transfer title to the Mila Ave. property from the Debtor to Alpine Bank on July 13, 2011. The Forbearance Agreement provided that the deed would be held in escrow and not recorded until after a future default in the Debtor's payment obligations. Additionally, at least for some period after July 13, 2011, the Debtor continued to make and Alpine Bank continued to accept payments. Alpine instead simply held the deed for the contingency of a later default. The bank's officer admitted at trial that it was not his bank's understanding that it was receiving the property at the time the Debtor deliver the deed; rather the instrument was security to secure the loan. Therefore, the deed here is not a deed in lieu of foreclosure as contemplated by 735 ILCS 5/15-1401.
  
  Further, it is clear from the language of the Forbearance Agreement and the bank's actions that Alpine Bank did not intend that the recording of the quit claim deed would extinguish or satisfy the debt owed by the Debtor to the bank. The Agreement expressly states that the "recording of the Deed will not extinguish the debt of Borrower to Bank." The Agreement also provides that the debt would not be reduced until the further step of a sale of the property to a third party. The Agreement states that "[u]pon the sale of the Property, Bank shall provide a credit to Borrower against the indebtedness which is due at that time" and that any "deficiency which remains after the sale of the Property shall be due and payable in full to Bank from Borrower." Again, as the bank's officer admitted, the quit claim deed was security for its loan that it only recorded after the Debtor missed several payment installments.
  
  Alpine cannot have it both ways. As stated in Sutphen v. Cushman, the bank cannot argue that it holds the property absolutely and at the same time retain the right to enforce payment of the full debt. 35 Ill. 186 (Ill. 1864). At most, the parties intended to agree upon a mechanism that they believed would allow Alpine Bank to obtain title to the property upon a future default without the need for judicial foreclosure and without requiring future cooperation of the Debtor. But as stated by the Illinois Supreme Court in Bearss, parties cannot "by mere agreement . . . even by express stipulation" agree in advance to "cut off the right of redemption" in such a manner. 108 Ill.16.
  
  Even were this court able — which it is not — to set aside Bearss and the well-established law of Illinois and, as Alpine now proposes, adopt the approach taken by the courts in Ringling Joint Venture II and Guam Hakubotan, Inc., it does not appear that result here would change. In marked contrast with those decisions, the instant case involves an individual debtor's residential property in a consumer transaction with an unsophisticated borrower. There is no evidence that the Forbearance Agreement was drafted at the insistence of the Debtor or that she signed it in bad faith. Indeed the Debtor testified without dispute that she intended to make payments under the agreement at the time she signed it, that she did initially make payments and only fell behind after she broke her wrist and was out of work for several months.
  
  Accordingly, the Debtor held title to the property as of the date of the petition.

For the court ruling, see In re Primes, Bankr. No. 13-B-83310 (Bankr. N.D. Ill., Western Div. September 26, 2014).

See also, “Deed in Lieu”: Deed That Is Not Really In Lieu Of Foreclosure Will Likely Not Be Treated As a Deed.

Recent State Appeals Court Ruling Reviews Application Of Equitable Mortgage Doctrine In Illinois To Foreclosure Rescue Sale Leaseback Scheme

A sale leaseback equity stripping, foreclosure rescue scheme was at the center of a 2013 case addressed by an Illinois appeals court in Hatchett v. W2X, Inc., 993 NE 2d 944 (Ill. App., 1st Dist., 1st Div. 2013).While the appeals court addressed a number of issues, this post will focus solely on the scammed homeowner's assertion, made in a quiet title claim against a straw buyer purchaser and the mortgage lender that financed the transaction, that the deal was an equitable mortgage. (Note that the rest of the court's ruling on other issues arising in connection with the subject transaction may make for interesting reading for those in the business of undoing these ripoffs.)

In this case, after a bench trial, the trial court granted a directed finding in favor of the lender and against the screwed over homeowner on the quiet title claim, finding that the homeowner did not establish a prima facie case for equitable mortgage.

In reversing this aspect of the trial court's ruling, the appeals court reviewed the Illinois case law on the doctrine of equitable mortgage, and applied the principles embodied therein to the facts of the case, ultimately finding that the homeowner had, in fact, made a prima facie case for equitable mortgage.

From the appeals court's opinion ("Kendra" is the straw buyer who took title to the home in question; "Chase Bank" is the original lender that financed the scheme; "BONY" is Bank of New York, Chase Bank's successor-in-interest via a mortgage assignment; "Helen" is the screwed-over homeowner; "Jackson" is the foreclosure rescue operator who orchestrated the scheme; "Gaston" is the attorney who purportedly provided legal representation to homeowner/Helen, and to whom Helen was referred by Jackson, the scheme's orchestrator):

• ¶ 38 Count II of the second amended complaint sought to quiet title to the property on the basis that Kendra had only acquired an "equitable mortgage" on the property, rather than an outright purchase of the property; that Kendra's subsequent attempt to encumber the property with the mortgage interests was void; and that Chase Bank, as predecessor-in-interest to BONY, had notice that its mortgage interest was subject to Helen's claims in the instant case.
  
  ¶ 39 The Illinois Mortgage Act defines a "constructive mortgage" as "[e]very deed conveying real estate, which shall appear to have been intended only as a security in the nature of a mortgage, though it be an absolute conveyance in terms, shall be considered as a mortgage." 765 ILCS 905/5 (West 2010). "To convert an absolute deed into a mortgage, the proof must be clear, satisfactory and convincing and may come from `almost every conceivable fact that could legitimately aid that determination.'" Robinson v. Builders Supply & Lumber Co., 223 Ill.App.3d 1007, 1014, 166 Ill.Dec. 358, 586 N.E.2d 316, 320 (1991) (quoting McGill v. Biggs, 105 Ill.App.3d 706, 708, 61 Ill.Dec. 417, 434 N.E.2d 772, 773 (1982)); 765 ILCS 940/55(b) (West 2010) ("[t]he remedies and rights provided for in [the Mortgage Rescue Fraud Act] are not exclusive, but cumulative, and all other applicable claims, including, but not limited to, those brought under the doctrine of equitable mortgage, are specifically preserved").
  
  In determining whether an equitable mortgage exists, courts consider several factors, including a debt relationship; close relationship of the parties; prior unsuccessful attempts for loan; the lack of legal assistance; the inadequacy of consideration; an agreement to repurchase; and the continued exercise of ownership privileges and responsibilities by the seller. Gandy v. Kimbrough, 406 Ill.App.3d 867, 876-77, 346 Ill.Dec. 771, 941 N.E.2d 329, 336-37 (2010). "The parties' intentions are the key consideration and the proof of these factors must be clear, satisfactory and convincing if they are to overcome a written instrument." (Internal quotation marks omitted.) Id. at 877, 346 Ill.Dec. 771, 941 N.E.2d at 337.
  
  Further, the existence of a debt relationship is essential to establish an equitable mortgage. Nave v. Heinzmann, 344 Ill.App.3d 815, 823, 279 Ill.Dec. 829, 801 N.E.2d 121, 127 (2003) (citing McGill, 105 Ill.App.3d at 708, 61 Ill.Dec. 417, 434 N.E.2d at 774); Flack v. McClure, 206 Ill.App.3d 976, 985, 151 Ill.Dec. 860, 565 N.E.2d 131, 136 (1990).
  
  ¶ 40 Helen argues that the evidence established that the conveyance of her property was an equitable mortgage, whereby the warranty deed was executed as security in exchange for a loan to save her home from foreclosure, rather than an outright sale. In response, BONY mainly argues that the evidence failed to establish the essential element of a debt relationship between Helen and Kendra.

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After a review of the trial record, the appeals court reached the following conclusion that Helen made a prima facie case for equitable mortgage, articulating its legal and factual basis in support thereof:

• ¶ 45 Based on our review of the record, we find that Helen has made a prima facie showing of the essential elements of an equitable mortgage.
  
  First, although Helen had never made any payments to Kendra or Jackson with regard to the property, we find a number of factors in the evidence to suggest the existence of a debt relationship. While a debt relationship is essential to establish an equitable mortgage, direct evidence is not necessary to prove the relationship and no particular type of evidence is required. Robinson, 223 Ill.App.3d at 1017, 166 Ill. Dec. 358, 586 N.E.2d at 322; McGill, 105 Ill.App.3d at 708, 61 Ill.Dec. 417, 434 N.E.2d at 774. Further, "the fact that the mortgage was made for a future debt or that there was no fixed time for repayment does not affect the status of an instrument as a mortgage." Flack, 206 Ill.App.3d at 985, 151 Ill.Dec. 860, 565 N.E.2d at 136.
  
  ¶ 46 It is undisputed that Helen's home was in the process of being foreclosed at the time she met Jackson. Helen presented evidence that the solicitation flyer sent to her by Jackson offered to save her home from foreclosure. Helen testified that she, in hopes of avoiding foreclosure, signed documents which Jackson presented to her under the belief that he would add his name to the title of her property, that she would make no payments on her loan for a year, and that she would regain sole ownership of her home after a year.
  
  Helen testified that she never intended to relinquish complete ownership of her home. Helen also presented evidence that Kendra was an employee of Jackson, that he provided a "lump sum of money" to Kendra for the purpose of paying the first six months of mortgage debt acquired by Kendra on the property, and that Kendra received a salary from Jackson for her help in each real estate "deal." Kendra's testimony revealed that she did not plan to keep, rehabilitate, or resell the property she acquired, testifying that the property would be reconveyed to the original owner after a period of six months. Kendra also testified that Helen was to live rent free in the home for six months after the conveyance at issue, and that she had a discussion with Helen regarding the amount of monthly rent to be paid by Helen at the end of the six-month period. See Robinson, 223 Ill.App.3d at 1017, 166 Ill.Dec. 358, 586 N.E.2d at 322 (factors suggesting a debt relationship even though the documents did not appear to create indebtedness between the parties included plaintiff's need of a loan and desire to save her property; her lack of intent to sell her property; her belief that the transaction constituted a loan); McGill, 105 Ill.App.3d at 708-09, 61 Ill.Dec. 417, 434 N.E.2d at 774 (defendant's attempt at collection and own characterization of an agreement to reconvey the property suggested the existence of a debt relationship). Thus, we find that, in the first step of the directed finding analysis, Helen presented sufficient evidence of a debt relationship which constitutes an essential element of an equitable mortgage.
  
  ¶ 47 Second, the adequacy of consideration is another factor used to determine the existence of an equitable mortgage. Robinson, 223 Ill.App.3d at 1014, 166 Ill.Dec. 358, 586 N.E.2d at 320. "Where consideration is grossly inadequate, a mortgage is strongly indicated." Flack, 206 Ill.App.3d at 986, 151 Ill.Dec. 860, 565 N.E.2d at 137.
  
  ¶ 48 At trial, Helen presented an HUD-1 settlement statement (exhibit K) which listed the purchase price of the property as $145,000, and listed approximately $17,965 as the payoff amount and taxes owed on Helen's home. Helen also presented copies of two checks (exhibits I and J), which were made payable to her in the amounts of $117,959.50 and $3,199.19. Helen's testimony revealed that, following the real estate transaction, she only received $3,000 from Jackson. It is undisputed by the parties that both of these checks were deposited into the bank account of W2X, the company operated by Jackson. Kendra's testimony shows that Helen was expected to pay at least $700 in monthly rent, after the six-month period, toward Kendra's newly acquired mortgage on the property. Helen presented evidence, through bank representative Colon's testimony, that Kendra's mortgage loans on the property amounted to 95% of the value of the property. In granting BONY's motion for a directed finding, the trial court remarked that "this case really comes down to two exhibits, [exhibits I and J]," and the "purported real estate contract." The trial court noted that neither the purchase price of $145,000 nor the debts that were satisfied as a result of the closing could be deemed as unconscionable.
  
  ¶ 49 However, we find that Helen presented sufficient evidence of the inadequacy of consideration. Although Helen's initial debt in the amount of approximately $17,965 was satisfied at closing, Helen only received $3,000 of the remainder of the $145,000 purchase price and was expected to contribute approximately $700 monthly rent toward Kendra's mortgage loans. In essence, Helen only received approximately $20,965 in benefits, while the payback amount required of Helen far exceeded that amount.
  
  Thus, we find that, in the first step of the directed finding analysis, Helen presented sufficient evidence of the inadequacy of consideration which is an essential element of an equitable mortgage. See Gandy, 406 Ill.App.3d at 878, 346 Ill.Dec. 771, 941 N.E.2d at 329, 337-38 (finding a vast disparity of consideration where surrogate buyer paid a purchase price of $90,000, with a net payout to homeowner of the property of $71,000; homeowner sent $22,900 back to surrogate buyer; and surrogate buyer resold property to a third party for a contract price of $170,000).
  
  ¶ 50 Other relevant factors that courts may consider in determining the existence of an equitable mortgage include any prior attempts to obtain a loan; the lack of legal assistance; an agreement to repurchase; and the continued exercise of ownership privileges and responsibilities by the seller. Id. at 876-77, 346 Ill.Dec. 771, 941 N.E.2d at 336-37. At trial, Helen testified that she had not made any prior attempts to obtain a refinance loan to stop foreclosure on her home, and that, after meeting Jackson, she only spoke with Attorney Gaston on one occasion.
  
  Evidence was presented that Helen was an elderly homeowner with an eighth grade education at the time she signed the documents, and that Kendra was a 21-year-old college student who did not intend to keep, rehabilitate or resell Helen's property. Both Helen and Kendra testified that they believed the property would be deeded back to Helen after a certain period of time. Evidence was presented that the relationship between Helen and Kendra was limited to the real estate transaction, which was orchestrated by Jackson. Helen also presented evidence that she continued to live in the home after the transaction took place, but that Kendra, as the new title owner of the property, visited Helen to inquire whether the house needed repairs. Evidence was presented at trial that Kendra never engaged in negotiations over the purchase price of the property, did not meet Helen prior to signing the real estate contract, and did not discuss with Helen the terms for regaining ownership of her home. See id. at 877-78, 346 Ill.Dec. 771, 941 N.E.2d at 337-38 (finding the existence of an equitable mortgage where the parties' relationship was limited to the real estate transaction which was brought together by a third party; an attorney nominally represented the seller; a debt relationship existed; the sophistication of the parties was limited; and consideration was inadequate); see also Robinson, 223 Ill. App.3d at 1016-17, 166 Ill.Dec. 358, 586 N.E.2d at 322-23 (relevant factors include the plaintiff's desperate circumstances, lack of sophistication, and lack of legal representation, and the existence of a debt relationship).
  
  Therefore, we find that, in the first step of the directed finding analysis, Helen presented a prima facie case to suggest that the parties intended the real estate transaction to be an equitable mortgage, rather than an outright sale. Accordingly, we hold that the trial court erred in granting BONY's motion for a directed finding as a matter of law on count II.
  
  In light of this holding, we reject Helen's argument that BONY failed to establish its affirmative defense of bona fide purchaser, where BONY, as a result of the trial court's granting of its motion for a directed finding, had not yet had the opportunity to present its evidence.

For the ruling, see Hatchett v. W2X, Inc., 993 NE 2d 944 (Ill. App., 1st Dist., 1st Div. 2013).