Davis v. G.N. Mortg. Corp., 03-1617.

Citation396 F.3d 869
Decision Date31 January 2005
Docket NumberNo. 03-1617.,03-1617.
PartiesThomas P. DAVIS and Cathy M. Davis, Plaintiffs-Appellants, v. G.N. MORTGAGE CORPORATION and Countrywide Home Loans, Inc., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Daniel A. Edelman, James O. Latturner (argued), Edelman, Combs & Latturner, Chicago, IL, for Plaintiffs-Appellants.

Nancy A. Temple (argued), Chicago, IL, Howard L. Teplinsky, Ottenheimer, Teplinsky, Rosenbloom, Buffalo Grove, IL, for Defendants-Appellees.

Before COFFEY, KANNE, and EVANS, Circuit Judges.

COFFEY, Circuit Judge.

On September 9, 1999, Thomas P. Davis and Cathy M. Davis obtained a $288,000 adjustable rate mortgage ("ARM") from the G.N. Mortgage Corporation ("GN") for the purpose of refinancing prior, non-business personal debts which was to be secured by their home in Manhattan, Il. A few months later, GN sold the note to Countrywide Home Loans, Inc. ("Countrywide"). The Davises paid off the 30-year ARM from GN less than three years later, on February 20, 2002, and at that time were assessed over $12,000 in penalties pursuant to the terms of a five-year prepayment penalty rider included in the mortgage document. The Davises objected to the penalty and filed a diversity suit against GN and Countrywide, alleging that the prepayment penalty agreement was fraudulently obtained, that enforcement of the penalty constituted a breach of contract and that the penalty violated the Illinois Interest Act, 815 ILCS 205/1 et seq., and the Illinois Consumer Fraud Act, 815 ILCS 505/1 et seq. The core of the Davises' claim is that the parties had agreed to a twenty-four month prepayment rider, but that GN had nevertheless fraudulently induced them into signing one that provided for a penalty if the loan was paid before sixty months had elapsed. The district court granted the defendants-appellees' motions for summary judgment on each of the Davises' legal claims, and the Davises appealed. We affirm.

I. BACKGROUND

On September 9, 1999, Thomas and Cathy Davis (the "Davises"), husband and wife and citizens of the State of Illinois, closed on a $288,000 adjustable rate mortgage loan (the "loan") with an initial interest rate of 10.9% from the GN Mortgage Corporation in order to refinance personal debt. Aside from the Davises, the only other party present at the loan closing was Patricia Bogdanovich ("Bogdanovich"), the closing agent for TICOR Title Insurance Company, which was the title company authorized by GN to conclude the transaction.

At the closing, which took place at TICOR's offices in Joliet, Illinois, Bogdanovich presented the Davises with two stacks of paper, each purportedly consisting of 24 documents and totaling 43 pages. Included in the stacks were duplicate copies of the proposed adjustable rate note, mortgage, adjustable rate rider to the mortgage, and accompanying documents entitled "Prepayment Penalty Note Addendum," "Alternative Mortgage Transaction Parity Act Disclosure," and "Notice of Right to Cancel." Although the Davises admit that they failed to read or compare the two sets of documents thoroughly at the time of the closing,1 they allege that Bogdanovich told them that the stacks were identical in content and accurately represented the agreement between themselves and GN, including a provision setting forth a two-year prepayment penalty period. The Davises signed all of the documents in one of the stacks and Bogdanovich delivered the signed stack to GN while the Davises retained the unsigned stack for their records.2

Early in 2000, GN sold the Davises' mortgage, including all its rights and obligations emanating from the loan agreement, to Countrywide Home Loans, Inc. Thereafter, in the summer of 2001, the Davises requested that Countrywide apprise them of the amount required to satisfy the remaining balance on their loan as of its two-year anniversary; September 9, 2001. Countrywide responded by informing the Davises that a prepayment penalty of approximately $12,000 (six months' worth of interest on the loan) would apply if the loan was paid off prior to the expiration of the five-year prepayment penalty period, according to the signed prepayment penalty addendum in their loan file. This came as a surprise to the Davises, who had no knowledge that they had agreed to a five-year prepayment penalty rider and instead believed that they had signed, and were only subject to, a two-year prepayment penalty clause based on alleged representations by Bogdanovich as well as their own broker.3

Upon reviewing the unsigned copy of the mortgage contract that they retained from the closing, the Davises discovered two documents which they had not previously read entitled "Prepayment Penalty Note Addendum," both of which had been drafted by GN. The riders were identical except that one provided for a "twenty-four month penalty period," while the other provided for a "sixty month penalty period." The addendum that the Davises signed at the closing was of the "sixty month" species, a fact which they do not dispute. However, the Davises claim that at the closing they signed both a two-year and a five-year addendum. They base this conclusion on the fact that they found a two-year rider in the papers they retained after the closing and that Bogdanovich told them that the two stacks of documents presented at the closing (one signed and returned to GN and the other left with the Davises) were identical. Therefore, the Davises allege that because they signed every document in one of the stacks and found both a five-year and a two-year rider in their stack, they must have signed both versions at the closing. Unfortunately for the Davises though, they are unable to produce a signed two-year agreement. On the other hand, the mortgage companies maintain that the parties never executed a two-year prepayment penalty addendum and that no such rider, signed or unsigned, exists; therefore, the Davises were rightfully charged a penalty when they refinanced before the sixty-month period in the duly signed document elapsed.

On August 23, 2001, the Davises filed a diversity action against GN and Countrywide in the United States District Court for the Northern District of Illinois. In their original complaint, the Davises sought a declaration that their loan was subject to either a two-year prepayment penalty period or no prepayment penalty period whatsoever. They also claimed that they were entitled to relief under the Illinois Interest Act, 815 ILCS 205/1 et seq., which, inter alia, makes it unlawful for a loan to provide for a prepayment penalty when that loan has an interest rate in excess of eight percent per annum (the Davis' ARM carried an initial interest rate of 10.9% per annum) and is secured by a mortgage on residential real estate. 815 ILCS 205/4(2)(a). Before the matter was adjudicated, however, the Davises chose to refinance their loan at a lower, fixed interest rate with another mortgage company paying Countrywide the contested $12,781.76 prepayment penalty in the process, thereby mooting this portion of their claim. As a result, on April 2, 2002, the Davises sought leave to file an amended complaint, which the court conditionally granted.4

The plaintiffs filed their amended complaint on May 23, 2002, whereupon the trial judge addressed their failure to properly plead diversity jurisdiction and granted them ten days' leave to file a second amended complaint to cure the deficiency, which they accomplished. The second amended complaint,5 filed on May 30, 2002 contained four counts, alleging: (1) that each of the defendants violated the Illinois Interest Act when they imposed a prepayment penalty without an agreement authorizing them to do so; (2) that Countrywide breached the parties' contract by imposing a five-year prepayment penalty period; (3) that GN through their agent Bogdanovich intentionally committed common law fraud when they misrepresented the terms of the Davises' mortgage loan; and (4) that GN fraudulently caused the Davises to sign inconsistent prepayment penalty riders, in violation of the Illinois Consumer Fraud Act, 815 ILCS 505/1 et seq.

At the time that the Davises filed their amended complaint, they also sought discovery from the defendants. However, due in part to settlement negotiations and two separate stays issued by the trial judge — one giving the Davises leave to file a second amended complaint and the other allowing GN to file a motion for summary judgment — GN failed to reply to any of the Davises' discovery requests.6 However, both of the mortgage company defendants had previously complied with initial discovery requirements in accordance with Federal Rule of Civil Procedure 26(a)(1), and each provided the Davises copies of their respective loan files for the September 9, 1999, transaction. Neither company's copy of the Davises' loan file contained a two-year addendum (either signed or unsigned), but both contained a signed, five-year addendum.

On July 24 and July 26, 2002, GN and Countrywide, respectively, filed motions for summary judgment. At this time, the plaintiffs filed an emergency motion to reconsider and vacate the district court's July 12 order staying discovery pending defendants' motions for summary judgment and to obtain discovery pursuant to Federal Rule of Civil Procedure 56(f). The trial court denied this motion on July 26, 2002. The district court granted the defendants summary judgment on all of the Davises' claims on February 13, 2003. We affirm.

II. ANALYSIS

At the outset, we note that in a case where subject matter jurisdiction in federal court is premised on diversity jurisdiction under 28 U.S.C. § 1332, we apply the substantive law of the forum state, here Illinois. See Merrill v. Trump Indiana, Inc., 320 F.3d 729, 731 (7th Cir.2003). Thus we are obligated to "determine the issues presented...

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