Hayes v. M & T Mortg. Corp.

• Court: Appellate Court of Illinois
• Writing for the Court: Coleman
• Citation: Hayes v. M & T Mortg. Corp., 906 N.E.2d 638, 389 Ill. App. 3d 388, 9 Ill.Dec. 440 (Ill. App. 2009)
• Decision Date: 25 March 2009
• Docket Number: No. 1-07-1063.,1-07-1063.
• Parties: Zakryscha HAYES, Plaintiff-Appellant and Counterdefendant-Appellant, v. M & T MORTGAGE CORPORATION, and Old Second Mortgage Company., Defendants-Appellees (M & T Mortgage Corporation, Counterplaintiff-Appellee; Custom Home Built Improvement Company, Sourmar Masonry Restoration, Inc., Patria Construction LLC, City of Chicago, and Unknown Owners and Non-Record Claimants, Defendants).

906 N.E.2d 638

389 Ill. App. 3d 388

Zakryscha HAYES, Plaintiff-Appellant and Counterdefendant-Appellant, v. M & T MORTGAGE CORPORATION, and Old Second Mortgage Company., Defendants-Appellees (M & T Mortgage Corporation, Counterplaintiff-Appellee Custom Home Built Improvement Company, Sourmar Masonry Restoration, Inc., Patria Construction LLC, City of Chicago, and Unknown Owners and Non-Record Claimants, Defendants).

No. 1-07-1063.

Appellate Court of Illinois, First District, Third Division.

March 25, 2009.

The Brooks Law Firm, of Dalton (Lloyd J. Brooks, of counsel), for Appellant.

Noonan & Lieberman, Ltd., of Chicago (Mitchell A. Lieberman, of counsel), for Defendant/Counter-Plaintiff-Appellee Manufacturers & Traders Trust Company.

Law Offices of Cooper, Storm & Piscopo, of Geneva (Stephen M. Cooper, Peter M. Storm and Philip J. Piscopo, of counsel), for Appellee Old Second Mortgage Company.

Justice COLEMAN delivered the opinion of the court:

Zakryscha Hayes faced default on a federally insured mortgage, filed an action seeking damages for the lender's failure to abide by applicable federal regulations, and also asserted the regulation breach as a basis for dismissal of the lender's foreclosure complaint. Her action was dismissed, her motion for judgment on the foreclosure was denied, and the lender foreclosed on her property. Hayes appeals, contending that her complaint was improperly dismissed, that the lender's foreclosure action should have been dismissed, and that the foreclosure proceeding improperly assessed costs and fees. We affirm.

In July 2001, Hayes received a $288,000 loan from Old Second Mortgage Company for rehabilitation of a Chicago residential property. In accordance with the National Housing Act (12 U.S.C. § 1709 (2000)), the mortgage was insured by the Federal Housing Administration (FHA). The Federal Housing Administration's insurance for rehabilitation loans is governed by regulations of the Department of Housing and Urban Development (HUD). In a section captioned "Regulations of HUD Secretary," Hayes' mortgage provided: "In many circumstances regulations issued by the Secretary will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclosure if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary." The parties' agreement also provided that the majority of the loan funds would be held in escrow and used to pay third-party contractors who performed rehabilitation work on the property. Old Second subsequently transferred Hayes' mortgage note to M & T Mortgage Corporation, but Old Second continued to service the loan.

In October 2002, Hayes filed a complaint seeking resolution of an alleged dispute regarding release of funds from the escrow for payment of a contractor, Custom Home Built Improvement, whose work, according to Hayes, was unsatisfactory. She withdrew that complaint, filed an amended complaint that was stricken for failure to include necessary exhibits, and then filed a second amended complaint. That complaint alleged that Old Second had breached their agreement by failing to follow applicable federal regulations in servicing the loan. The complaint also claimed that Old Second and Custom Home Built Improvement had committed fraud in colluding to ensure that the contractor receive payment for substandard work.

M & T filed a counterclaim for foreclosure on Hayes' mortgage. In response, Hayes filed a combined motion for dismissal of the counterclaim under sections 2-615 and 2-619 of the Code of Civil Procedure (735 ILCS 5/2-615, 619 (West 2002)). Her motion asserted that a mortgagee under the FHA-insured program could not begin foreclosure proceedings without compliance with HUD regulations, and that Old Second and M & T had failed to comply with several applicable provisions.

Old Second and M & T moved to dismiss Hayes' second amended complaint. She conceded to dismissal of her allegations of fraud and conflict of interest regarding the payment to Custom Home, but stood on her breach of contract claim, and the circuit court dismissed her complaint with prejudice.

M & T responded to Hayes' motion to dismiss its complaint for foreclosure with the argument that the complaint stated a claim for relief, and that Hayes' contentions of breaches of HUD regulations could not be resolved by a section 2-615 motion because they were not apparent from the face of the pleadings. M & T also argued that Hayes' section 2-619 motion could not be granted because it was based upon factual allegations unsupported by affidavit. The court denied Hayes' motion to dismiss the foreclosure action and ordered her to answer M & T's complaint. Hayes failed to answer, an order of default was entered, and the court denied Hayes' motion to vacate the default and stay the foreclosure. After the circuit court approved M & T's report of sale, Hayes appealed that order along with the dismissal of her complaint.

Hayes argues that HUD regulations impose upon FHA-insured lenders an obligation to appoint an inspector to supervise the work of contractors, that this obligation was incorporated into her mortgage agreement, and that the lenders' breach of this obligation caused her damages which are legally recoverable. She contends that her allegations of these facts in her second amended complaint properly stated a cause of action and that the complaint was improperly dismissed. We review such contentions on a de novo basis. Doe v. McKay, 183 Ill.2d 272, 274, 233 Ill.Dec. 310, 700 N.E.2d 1018 (1998).

Hayes contends that her mortgage agreement's references to HUD regulations made those regulations a part of her agreement with Old Second. As previously noted, the mortgage document provided that "[i]n many circumstances regulations issued by the Secretary will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclosure if not paid," and that "[t]his Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary."

These references to HUD regulations fall short of the showing necessary to demonstrate that the parties intended to incorporate the regulations, in their entirety, into their mortgage agreement. To be construed as incorporating an entire second document, a contract must display an intention to completely adopt that document, not merely require compliance with specified portions. McWhorter v. Realty World-Star, Inc., 171 Ill.App.3d 588, 592-93, 121 Ill.Dec. 898, 525 N.E.2d 1205 (1988). The provisions cited by Hayes reflect only an acknowledgment that the lender's foreclosure rights under the mortgage are subordinate to applicable HUD regulation; they do not demonstrate an intent to make each loan regulation enforceable under the parties' agreement.

Despite the absence of contractual language showing specific intent to incorporate the HUD regulations into the parties' agreement, Hayes contends that they govern the parties' relationship. Although neither the parties' citations nor our own research in the instant case reveals an Illinois court's review of the issue, other jurisdictions have held that...