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Illinois: An Invalid and Unenforceable Mortgage May Be Saved Through a Reformation Action

Posted By USFN, Thursday, February 4, 2016
Updated: Friday, February 19, 2016

February 4, 2016


by Douglas A. Oliver
Anselmo Lindberg Oliver – USFN Member (Illinois)

The Illinois Court of Appeals for the Second District recently held a mortgage to be invalid because of the manner in which the borrowers signed it. At the same time, the appellate court left open the possibility that the mortgage could be judicially reformed, thus all hope was not lost. Improperly executed mortgages are not common, but they are also not rare. This case, and how a seemingly intractable problem can be approached by foreclosure counsel, is worth knowing about.

On January 22, 2016 the Illinois Appellate Court for the Second District released its opinion in CitiMortgage, Inc. v. Parille, 2016 Ill. App. 2d 150286, holding that the mortgage in question was unenforceable. Two basic factors led to this conclusion; first, the husband-and-wife borrowers held title as “tenants by the entirety.” This special type of joint tenancy is allowed by Illinois law and is available only to spouses and only with respect to their principal residence. When an Illinois married couple holds title as tenants by the entirety, neither spouse can encumber or sell the property without the participation of the other. In other words, if one spouse wants to mortgage his or her share of the marital residence and not the whole thing, the other spouse would also have to sign the mortgage — otherwise the encumbrance would be ineffective.

That is precisely what happened in the Parille case: after a series of financing and refinancing transactions in the short space of three years, the wife took out a fourth note and mortgage on the marital residence. This time, only the wife signed the note and mortgage as a “borrower.” The husband signed the mortgage but, for the reasons that follow, without legal effect.

The second factor that caused the mortgage to be invalid was the manner in which the husband signed it. The wife executed the mortgage in the “normal” manner — without any restrictive language accompanying her signature. The husband, however, signed “only to waive homestead rights.” This means that the husband’s signature signified he was only waiving certain bankruptcy and judgment protections that apply to homesteads in Illinois; he did not indicate that he was agreeing to encumber his share of the marital residence, or that he consented to his wife encumbering part or all of her share.

This scenario is not unheard of. Mortgages are sometimes executed incorrectly, such that not all title holders sign in the correct capacity or manner so as to encumber their full interest. The principal method of dealing with this situation is to include in the foreclosure complaint a count to reform the mortgage. In such a count, it is alleged that the lender, borrower, and other title holders intended to fully encumber the title holders’ interests because they would not otherwise have been able to get the loan. The essence of the claim is that the parties agreed to a full encumbrance but the documents signed at closing did not properly reflect their agreement and did not fully carry out their intent. The court is then requested to enter an order amending the documents to correctly reflect a full encumbrance.

In the Parille case, the plaintiff-lender asserted a count to reform the mortgage. In addition, the lender asserted claims including equitable lien, unjust enrichment, and fraud. The trial court dismissed all of these claims, including that the mortgage should be reformed. The lender appealed.

Because the note and mortgage reflected on their face that the wife was the only borrower and the husband signed the mortgage merely to waive homestead rights, the appellate court found that the lender could not plead facts to support any equitable claim except one: that the documents did not truly reflect the parties’ intent. The appellate court, therefore, affirmed the dismissal of all claims, except the claim to reform the mortgage. (The dismissal of borrower fraud claims was sustained as time-barred.)

The end result was that the case was remanded to the trial court for determination of whether or not the borrower and her spouse actually intended to encumber the entire property in order to get the loan proceeds. While a positive outcome for the lender is not assured, the lender at least has a means to attempt to fully enforce the note and mortgage.

This case illustrates how improper mortgage execution — a very serious problem — can potentially be solved. To pursue a count to reform, foreclosure counsel would start by gathering all of the closing documents, including the loan application, closing statements, disclosures, and other documents submitted by the borrowers or signed prior to or at the closing. Discovery would then be conducted based on those documents. The aim of that discovery would be to establish that the borrowers knew that the lender expected that all title holders would subordinate their interests to the mortgage loan, otherwise the loan would not close. Outcome is generally positive in the vast majority of cases, whether by trial or by settlement.

It should also be noted that a lender does not need to wait for a foreclosure scenario to seek to reform a mortgage. “Reformation of instruments” is a valid cause of action on its own; a case can be filed solely for that purpose.

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