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Illinois Supreme Court: Mortgage Foreclosure Based Upon Payment Default is Same as Action on Note

by Neil Garfield | December 12, 2018

First Midwest Bank v Cobo

Hat Tip to Daniel Khwaja, Esq.
Attorney at Law

There are several points in this decision worthy of reading and digesting. The principal point interesting to me is that the court correctly decided that an action on a mortgage for nonpayment is the same thing as an action on the note for nonpayment. They are both alleging defaults on the same instrument — the promissory note.

The banks try to make a distinction particularly where they are filing a second or third or fourth lawsuit on the same deal based upon the same facts. In Illinois they have a very intelligent rule which says that if you sue and then take a voluntary dismissal, and they you sue again and take a voluntary dismissal they can’t sue a third time.

In Hawaii, the banks have brought nonsense to a whole new level. Instead of seeing the mortgage as an incident to the debt or the note there are decisions there that appear to treat the mortgage as a stand alone instrument, as though there was no need for a debt to be secured by the mortgage. The mortgage simply eiss independent of the debt or the note. Going even further, there are some decisions in which the completely irrelevant doctrine of adverse possession was used to justify ignoring the statute of limitations of 6 years and to effectively change the statute of limitations to 20 years. It is difficult to see how those decisions will stand up but who knows?

All of this shows that the courts are struggling unnecessarily. Judges are ruling like this because they don’t like the result imposed by public policy as expressed by long-standing laws enacted by legislative branches of the federal or state government. They are forgetting the essential constitutional doctrine of separation of powers. If as private citizens they don’t like legislation they can lobby for a change of the law, but like sentencing laws like minimum mandatory sentences, judges as judges have no choice but to follow the letter of the law.

Unfortunately the myth has grown to epic proportions that judges actually do have a choice no matter what the legislative branch has stated clearly and unambiguously. Rulings based upon that belief that judges discretionary authority extends to a choice as to whether to follow the law or not are literally without authority or as we say in the law ultra vires even if confirmed by appellate courts.

This in turn leads to the uncomfortable fact that trust in our institutions is dropping daily because litigants who are individuals and who seek to invoke the protections of the law as written are routinely steamrolled by banks who are violating the law. Each time a judge does that, they remove another brick of trust in our democratic institutions.

As in Illinois where the bank sought to avoid the 2 strikes and you’re out rule, the banks have in many cases succeeded in persuading judges at every level to twist the statute of limitations into something that is unrecognizable. In Florida, for example, the statute of limitations on contract actions (e.g. promissory notes) is 5 years. By virtue of the terms of the contract (note) the creditor has an option, upon default, to either sue based upon the missed payments or to declare the entire sum due and payable.

Obviously, if a creditor announced its acceleration of the the entire balance due, such action made the entire balance due which in turn comprised the claim against the borrower. If the creditor declined to sue for more than 5 years (which is an eternity in the banking world) they were barred from collection on the note and therefore the mortgage.

All that was obvious until the courts, including the Florida Supreme Court decided that they would insert a fictitious act by the creditor as a legal fiction such that the claim could be and actually was somehow automatically decelerated (despite the creditor’s action and declarations to the contrary — and therefore suddenly the payments were still becoming due even though no creditor on earth would accept those fictional payments. Hence they reasoned that since they had created the presumption of deceleration the payments subsequently due after acceleration were effectively renewed as to the statute of limitations wherein mortgage foreclosures were allowed even 10-12 years after acceleration. This is something straight out of Gulliver’s Travels or Dickens (see Bleak House).

All this was done because of the POLICY argument that disallowing the foreclosures would cause a financial and societal meltdown. The fact that the meltdown had already occurred anyway did not enter into calculations. The fact that courts are supposed to rule on law rather than policy seems not to have been discussed in case decisions although it was the subject of many discussions behind closed doors, some of which I know intimately well.

In times of all out war it seems logical for democratic institutions to bend far off of what is normally allowed. The mortgage meltdown and Great Recession worldwide were treated as though the government was justified in using what are considered inherent powers in the face of existential emergency. Unfortunately many economists and financial experts bought into the myth that allowing a “free house” to homeowners would be catastrophic, undermining the value of all assets etc. etc. As a result many trillions of dollars was artificially pumped into the artificial world of shadow banking. Tens of trillions of dollars worth of assets was sucked out of the world economies and landed in one place — under the direct or indirect control of bankers. The missing money still dogs us as we try to come out from under the effects of the recession.

Imagine if you will a world in which the courts had continued to apply the same rules as they had done for centuries with respect to collection of debt, foreclosure of mortgages etc.

Borrowers seeking to work out their loans would have been able to do so because the courts, in forcing the parties to mediation, would have also forced the appearance of the actual creditor instead of intermediaries whose sole interest was in pursuing foreclosure. Just like the commercial sector workouts, principal would have been reduced and terms would have been adjusted to reflect economic realities.

Claimants in foreclosure cases would have been required, just as before, to give the judge clear and convincing assurance that they were in fact the owner of the debt and were the holder of the receivable. This would have forced dismissal of most foreclosure cases. The pressure on housing prices would have substantially diminished and the landing much softer after the hyper inflation generated by fraudulent appraisals of homes (putting a price at a multiple of the fair value of the property).

Investors, realizing that their money had been spent ways not even remotely contemplated by them, would have continually sued with success, thus tearing apart the TBTF banks and raising the stature of smaller banks. Bankers would have gone to jail by the hundreds. Investors would have swept aside the convoluted fictional infrastructure of “servicing” loans and placed the loans into receiverships that were governed by people who administer the payments in large settlements to large numbers of people, protecting the rights of both sides. Losses would have been shared and apportioned between investors, banks and borrowers. Zombie foreclosures would have been virtually nonexistent.

Household income and net worth would have declined much less than we saw in the world of TBTF. Hence consumer spending would have rebounded much more quickly, driving the economy back up to full strength without allowing all the money that siphoned out (or bailed out) to stay under the control of bankers whose only thought was somehow to capture more wealth and more power.

The investors and the governments of many nations would have clawed back trillions of dollars parked overseas in a multitude of assets (what do you do with trillions of dollars?). The current threat of the shadow banking market would have been reduced or even eliminated.

And today we would have virtually no continuing fall out from the losses inflicted on everyone by the TBTF banks.

God knows how politics would have gone if Bush, Obama and the regulatory agencies had followed the law instead of letting their fear be stoked by information derived solely from the perpetrators. One thing is for certain, the intense anger of many voters would be muted by comparison and political discourse and faith in our institutions would be running at acceptable levels. The courts would not need to reinvent the Constitution and would not want to legislate from the bench.




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