M & T Bank v. Mallinckrodt

• Decision Date: 30 September 2015
• Docket Number: No. 2–14–1233.,2–14–1233.
• Citation: 43 N.E.3d 1039
• Parties: M & T BANK, Plaintiff–Appellant, v. Udo Von MALLINCKRODT, a/k/a Udo Mallinckrodt, a/k/a Udo V. Mallinckrodt; JP Morgan Chase Bank, N.A.; Mortgage Electronic Registration Systems, Inc., as Nominee for First Security Mortgage; Unknown Heirs and Legatees of Udo Von Mallinckrodt, if any; Unknown Owners; and Nonrecord Claimants, Defendants. U.S. Bank National Association, Plaintiff–Appellee, v. Udo Von Mallinckrodt, a/k/a Udo V. Mallinckrodt; JP Morgan Chase Bank, N.A.; Unknown Owners; and Nonrecord Claimants, Defendants.
• Court: United States Appellate Court of Illinois

43 N.E.3d 1039

M & T BANK, Plaintiff–Appellant

v.Udo Von MALLINCKRODT, a/k/a Udo Mallinckrodt, a/k/a Udo V. Mallinckrodt;

JP Morgan Chase Bank, N.A.;

Mortgage Electronic Registration Systems, Inc., as Nominee for First Security Mortgage;

Unknown Heirs and Legatees of Udo Von Mallinckrodt, if any;

Unknown Owners;

and Nonrecord Claimants, Defendants.

U.S. Bank National Association, Plaintiff–Appellee

v.Udo Von Mallinckrodt, a/k/a Udo V. Mallinckrodt;

JP Morgan Chase Bank, N.A.;

Unknown Owners;

and Nonrecord Claimants, Defendants.

No. 2–14–1233.

Appellate Court of Illinois, Second District.

Filed Sept. 30, 2015.

Rehearing Denied Nov. 2, 2015.

Peter M. King and William J. Holloway, both of King Holloway Lipinski LLC, Chicago, for appellant.

Russell R. Custer, Jr., and Edward R. Sherman, both of Lillig & Thorsness, Ltd., Oak Brook, for appellee.

OPINION

Justice SPENCE

delivered the judgment of the court, with opinion.

¶ 1 This appeal involves a lien priority dispute in mortgage foreclosure proceedings on a residential property. Plaintiff-appellant, M & T Bank, appeals from the trial court's grant of partial summary judgment in favor of plaintiff-appellee, U.S. Bank National Association (U.S. Bank). The trial court ruled that U.S. Bank's mortgage had priority over M & T Bank's mortgage. We reverse and remand.

¶ 2 I. BACKGROUND

¶ 3 We summarize the background of this case according to documents in the record, recognizing that the case is on-going and that some facts may later be disputed by the property owner or others.

¶ 4 Udo Von Mallinckrodt owns residential property commonly known as 23W066 Kings Court in Glen Ellyn. Mallinckrodt is also the president of First Security Mortgage, Inc. (First Security).

¶ 5 On August 12, 2005, Mallinckrodt executed a $348,000 mortgage against the property in favor of Mortgage Electronic Registration Systems, Inc. (MERS), as the mortgagee for the lender, First Security. This mortgage was recorded on August 19, 2005, with the Du Page County recorder of deeds. At some point that is not clear from the record, the mortgage was assigned from MERS to M & T Bank.

¶ 6 On July 26, 2007, Mallinckrodt executed a second mortgage against the property, this time for $350,000. The mortgage was purportedly to refinance the property. MERS again acted as the mortgagee for the same lender, First Security, and the mortgage was assigned to U.S. Bank. At the time of closing, the title commitment revealed the prior $348,000 mortgage and another, $147,000, mortgage to JP Morgan Chase. The latter mortgage was subject to a subordination agreement. Mallinckrodt provided a payoff statement for the $348,000 mortgage, stating that funds to pay off that mortgage should be wired to an account at MB Financial Bank.

¶ 7 First American Title Insurance Company (FATIC) acted as the agent for U.S. Bank at the closing. On July 31, 2007, it wired $345,566.06 from U.S. Bank to the MB Financial Bank account listed in the payoff statement, which was intended to satisfy the $348,000 mortgage. On August 21, 2007, FATIC recorded a certificate of release for the $348,000 mortgage. The U.S. Bank mortgage was recorded the same day.

¶ 8 Although U.S. Bank initially took the position in the trial court that M & T Bank received the funds to satisfy its mortgage, the parties now agree that the payoff statement turned out to be fraudulent. The money intended to fulfill the $348,000 mortgage was sent to an account for Belvis Mortgage Services at MB Financial Bank, of which Mallinckrodt was an authorized signatory. The money was then transferred to an account at Fifth Third Bank of which Mallinckrodt was also a signatory, and he disbursed the funds for his own purposes; Mallinckrodt did not use the money to pay off the $348,000 mortgage. Mallinckrodt maintained the monthly payments for both mortgages until about July 2010.

¶ 9 On October 28, 2010, U.S. Bank filed an action to foreclose the $350,000 mortgage. Shortly afterward, on November 5, 2010, M & T Bank filed a separate action to foreclose the $348,000 mortgage. Each party asserted having a first mortgage lien on the property.

¶ 10 On January 28, 2011, an assignment of the $348,000 mortgage from MERS to M & T Bank was recorded.¹

¶ 11 On May 20, 2011, U.S. Bank filed a motion to dismiss M & T Bank's suit under section 2619 of the Code of Civil Procedure (735 ILCS 5/2–619 (West 2010)

). It argued that it was a defendant in the suit because M & T Bank named MERS, U.S. Bank's predecessor in interest, as a defendant by virtue of the $350,000 mortgage. U.S. Bank argued that it had paid off M & T Bank's loan. M & T Bank's response asserted that its lien was never paid. The trial court denied the motion to dismiss on January 31, 2012.

¶ 12 On March 2, 2012, U.S. Bank filed an answer to M & T Bank's complaint, and it also asserted the affirmative defenses of: (1) payoff of the $348,000 mortgage; (2) FATIC's certificate of release; and (3) bona fide purchaser status.

¶ 13 On February 10, 2014, U.S. Bank filed a motion for summary judgment on the issue of lien priority. It argued that under Bank of New York v. Langman, 2013 IL App (2d) 120609, 369 Ill.Dec. 436, 986 N.E.2d 749

, the bona fide purchaser doctrine applied to instances of forged and fraudulent mortgage releases. It argued that it should be deemed a bona fide purchaser because it took its mortgage interest in the property for valuable consideration, and neither it nor FATIC had any reason to know or suspect that Mallinckrodt had provided a forged payoff statement to divert the money intended to pay off the $348,000 mortgage.

¶ 14 U.S. Bank attached to the motion an affidavit of Elsa Fuchs, the “Senior Claims Counsel” at FATIC. She averred, in relevant part, that FATIC was not notified that there was a problem with the wire transfer to pay off the M & T Bank mortgage or that M & T Bank did not receive the funds. She further averred that neither U.S. Bank nor FATIC had any reason to know or suspect that Mallinckrodt provided an altered payoff statement to divert the payoff proceeds for his own personal use “or to fraudulently procure a false and wrongful Certificate to be recorded on the Property through FATIC for the M & T Mortgage.”

¶ 15 The trial court granted the motion on May 6, 2014. However, on May 8, 2014, M & T Bank filed an emergency motion seeking to vacate the ruling. M & T Bank alleged that it had inadvertently failed to file a response to the motion for summary judgment, due to its counsel's docketing error. Over U.S. Bank's objection, the trial court granted the motion on May 13, 2014, and vacated the grant of summary judgment.

¶ 16 M & T Bank filed a response to the motion for partial summary judgment on May 19, 2014. It argued that U.S. Bank was on notice of irregularities in the forged payoff statement because the document stated that the funds were payable to MB Financial Bank rather than M & T Bank.

¶ 17 On June 6, 2014, U.S. Bank filed a reply in support of its motion for partial summary judgment. It argued that the title insurance commitment revealed the $348,000 mortgage but did not show M & T Bank as either a mortgagee or a lender. Rather, it showed MERS as the mortgagee and nominee for the lender, First Security. U.S. Bank argued that, because M & T Bank neglected to timely record any assignment of the $348,000 mortgage to itself or any other document amending the lender designation of the mortgage, it left itself vulnerable to the possible fraudulent actions of the lender, First Security, and its president, Mallinckrodt. U.S. Bank argued that the loss from the fraud should be borne by M & T Bank because it agreed to have First Security act as its lender; it failed to record anything that would show third parties that M & T Bank had a payoff interest in the $348,000 mortgage; and M & T Bank's response did not point out how or when U.S. Bank and/or FATIC would have been put on notice of M & T Bank's interest.

¶ 18 On June 9, 2014, the trial court consolidated the two lawsuits into the U.S. Bank case.

¶ 19 A hearing on the motion for partial summary judgment took place on June 17, 2014. At the hearing, M & T Bank's counsel stated that the bank was not required to record the assignment of its interest in the property, though he stated that the “better practice” would have been to “put the world on notice” by doing so. The trial court granted the motion, finding that U.S. Bank took the $350,000 mortgage as a bona fide purchaser without notice of the $348,000 mortgage to M & T Bank. It ruled that, therefore, the U.S. Bank mortgage lien had priority over the M & T Bank mortgage lien. In its order, the trial court included language under Illinois Supreme Court Rule 304(a)

(eff. Feb. 26, 2010) that there was no reason to delay the enforcement or appeal of the order.

¶ 20 M & T Bank filed a motion to reconsider on July 16, 2014. It argued that it had a first priority mortgage on the property because its mortgage was recorded before U.S. Bank's mortgage, and M & T Bank never authorized or signed a mortgage release. It argued that the certificate of release was not from the lender and failed to follow known industry protocols.

¶ 21 U.S. Bank filed a response to the motion to reconsider on September 10, 2014. It argued that M & T Bank was raising a new legal theory, which was not permissible for a motion to reconsider, by bringing up the payoff protocols. It further argued that, without record notice or other notice to U.S. Bank or the title company of M & T Bank's interest, the bona fide purchaser rule allowed U.S. Bank to rely on the title report, payoff statement, and certificate of release to take priority of title over M & T Bank's non-record interest in the property.

¶ 22 On September 30, 2014, M & T Bank filed an emergency motion to file an additional appearance and amend the motion to reconsider. On October 2, 2014, the trial court granted the request to file an additional appearance and denied the request to amend the motion to...