ILLINOIS APPELLATE COURT DISMISSES FORECLOSURE ACTION AGAINST BONAFIDE PURCHASER & BONAFIDE MORTGAGEE
Illinois’ First District Appellate Court affirmed the dismissal of a foreclosure action filed by the purchase money mortgagee finding the subsequent purchaser, PP Fin Chicago (PP FIN), to be a bonafide purchaser and the subsequent mortgagee, Federal National Mortgage Association (FNMA), to be a bonafide mortgagee having no notice that a release of the purchase money mortgage was in fact fraudulently executed and recorded. 5201 Washington Invs. LLC v. EquityBuild, Inc., 2024 IL App (1st) 231403-U, ¶¶ 1, 8.
By way of history, in February 2015, several investors including 5201 Washington Investments, LLC (collectively, the LLC or Plaintiff), loaned money to EquityBuild, Inc., to purchase mortgage (2015 Mortgage) which matured in February 2017.[i] The LLC engaged EquityBuild Finance, LLC (EBF), to service the loan. The 2015 Mortgage defined “Lender” in a manner which included EBF (among other entities) and identified EBF as the lender’s agent.[ii] Plaintiff and EBF entered into a written servicing agreement (the Servicing Agreement) which prohibited EBF from taking “any action with respect to the collateral without written instructions from plaintiffs.”[iii] Notably, the parties did not record the Servicing Agreement.
EquityBuild failed to pay the note off when it matured in February 2017.[iv] Unbeknownst to the LLC and contrary to the Servicing Agreement, in January 2018 EBF executed and recorded a release of the 2015 Mortgage as a prerequisite for a sale of the Property to PRE Holdings 2, LLC.[v] After the release had been of record more than a year, PRE Holdings 2 conveyed the Property to PP FIN who financed the purchase with a FNMA[vi] loan in the amount of $1,755,000 (2019 Mortgage).[vii] Prior to the purchase, both PP FIN and FNMA’s predecessor hired title companies to conduct a search of the public records for any encumbrances on the title and found there to be none.[viii]
Based on the February 2017 default, in 2022 the LLC sued EquityBuild, PP FIN and FNMA seeking to foreclose the 2015 Mortgage and seeking a declaration from the court that EBF’s release of the 2015 mortgage was void.[ix] Ostensibly, during the proceedings Plaintiff discovered that EquityBuild and EBF were running a Ponzi scheme wherein EquityBuild would purchase a property with borrowed funds secured by a mortgage on the property, EBF would record a fraudulent release of the mortgage and EquityBuild would resell the property (with the existing mortgages) to pay earlier investors and pocket any remaining funds.
Both PP FIN and FNMA moved to dismiss the LLC’s action against them arguing they were bonafide purchasers/mortgagees for value.[x] The circuit court granted the dismissal finding that PP FIN and FNMA “acquired their interests in the [P]roperty at issue for value without actual or constructive knowledge that the prior mortgage was not properly released.”[xi] Plaintiff appealed the dismissal order to the First District. On appeal Plaintiff argued that PP FIN was not a bonafide purchaser and FNMA was not a bonafide mortgagee because (1) they had notice of the 2015 Mortgage which was timely recorded; (2) EBF lacked “apparent authority to execute a release” of the 2015 Mortgage; and (3) PP FIN and FNMA had a duty to inquire further as to EBF’s authority, or lack thereof, to execute the release.[xii]
The First District rejected each of these arguments focusing the bulk of its opinion on the effect of the fraudulent release and the reasonableness of PP FIN’s and FNMA’s reliance on the release. Firstly, the Court concluded that the 2015 Mortgage provided EBF with at least the apparent authority either as the Lender or as the Lender’s “legal representative” to execute the release on the LLC’s behalf.[xiii] Therefore, there was no actual notice of the fraud. The Court refused to consider the limiting language of the Servicing Agreement as “notice” of EBF’s fraudulent actions because the Agreement was not recorded so potential purchasers had no knowledge of its existence.[xiv]
The Court also rejected the LLC’s argument that PP FIN and FNMA had a duty to investigate EBF’s authority to execute the release because of its “suspicious nature.”[xv] The Court clarified that a purchaser’s duty of inquiry ends with the title search.[xvi] Elaborating, the Court explained that a further investigation beyond a title search would only be required if “the party knew of facts or circumstances that would cause a prudent person to make further inquiry.”[xvii] Based on more than a hundred years of precedent, the Court reiterated that the precise point of the title search is to avoid the burdensome process of “hunting for documents not in the public records to confirm the result of [a title] search.”[xviii]
Finally, the Court explained that PP FIN’s and FNMA’s reliance on the “chain of title, the recorded Release, a ‘clean’ title evidenced by the purchaser/mortgagee title policies, and the absence of clear proof of fraud or bad faith” meant that neither PP FIN nor FNMA had constructive notice of the LLC’s adverse interest.[xix] The First District affirmed the order of dismissal with prejudice.[xx] The LLC’s foreclosure action remained pending against EquityBuild, but FNMA’s 2019 Mortgage took priority over the LLC’s 2015 Mortgage.[xxi]
[i] EquityBuild, at ¶9. Subsequent references to this case are to this citation unless indicated otherwise.
[ii] EquityBuild, at ¶2.
[iii] EquityBuild, at ¶8.
[iv] EquityBuild, at ¶9.
[v] EquityBuild, at ¶15. PRE Holdings 2, LLC, and PP FIN were affiliated companies. EquityBuild, at ¶9. During the process of purchasing the Property from EquityBuild, PRE Holdings hired a title company which identified the 2015 Mortgage and noted that a release would be required or the 2015 Mortgage would be listed as an exception on the title policy. EquityBuild, at ¶12.
[vi] Greystone Servicing Corporation originated the loan and then immediately assigned the mortgage to FNMA. EquityBuild, at ¶15.
[vii] EquityBuild, at ¶13.
[viii] EquityBuild, at ¶¶11-13.
[ix] EquityBuild, at ¶2, ¶10, ¶15.
[x] EquityBuild, at ¶16.
[xi] EquityBuild, at ¶1.
[xii] EquityBuild, at ¶4.
[xiii] EquityBuild, at ¶¶29-32.
[xiv] EquityBuild, at ¶32, ¶44.
[xv] EquityBuild, at ¶40.
[xvi] EquityBuild, at ¶41.
[xvii] EquityBuild, at ¶42.
[xviii] EquityBuild, at ¶51.
[xix] EquityBuild, at ¶46.
[xx] EquityBuild, at ¶60.
[xxi] EquityBuild, at ¶55.
