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Illinois App. Court (1st Dist) Holds Trial Court Improperly Denied Borrower’s Estate Opportunity to Show Lack of Capacity

illinois mortgage lawThe Appellate Court of Illinois, First District, recently reversed a trial court’s order striking an affirmative defense to a foreclosure, vacated the foreclosure rulings, and remanded the matter for further proceedings.

Specifically, the Appellate Court held that an estate administrator’s affirmative defense alleging that the deceased mortgagor’s dementia denied her the requisite mental capacity to execute the mortgage loan documents was sufficient to withstand the reverse mortgage lender’s motion to strike and that the administrator should have been granted the opportunity to amend his affirmative defense prior to the entry of summary judgment.

A copy of the opinion in Reverse Mortgage Funding, LLC v. Catchins is available at:  Link to Opinion.

In response to a foreclosure action brought by a reverse mortgage mortgagee, the administrator of the mortgagor’s estate raised an affirmative defense that the mortgagor was mentally incompetent to execute the mortgage documents due to her dementia.

The mortgagee moved to strike the affirmative defense arguing that, because the mortgagor had never been adjudicated incompetent by a court, nor had a court-appointed guardian administering her affairs, the defense was insufficient at law. The mortgagee also moved for summary judgment.

In his responses to both of the mortgagee’s motions, the administrator presented new factual materials as exhibits, including an affidavit from the mortgagor’s son stating that, when he lived at the subject property with his mother, she was approached by an individual who worked for the mortgagee’s predecessor in interest and was urged to sign a reverse mortgage to help pay her debts and obtain money to rehabilitate the property. Although the mortgagor’s son purportedly told the individual that his mother was not competent to sign any contracts because she was diagnosed with “severe dementia,” she signed the mortgage documents anyway at the individual’s behest.

After briefing on the motion to strike, the trial court expressed concern about whether a deceased contracting party could be retroactively proven to have been incompetent at the time of signing a contract. Therefore, the court entered a judgment of foreclosure and sale and struck the affirmative defense.

The mortgagee then purchased the foreclosed property at a judicial sale for a full credit bid. The administrator made similar arguments in opposition to the lender’s motion for confirmation of the sale as he had against summary judgment, but the trial court again rejected these arguments and entered a final judgment confirming the sale. The administrator timely appealed.

On appeal, the administrator contended that the trial court erred in striking the affirmative defense and that the materials he submitted in opposition to the mortgagee’s motions were sufficient to create a genuine issue of material fact.

An affirmative defense admits the legal sufficiency of the cause of action but “asserts new matter by which the plaintiff’s apparent right to recovery is defeated.” Vroegh v. J&M Forklift, 165 Ill. 2d 523, 530 (1995). A defendant must state the facts establishing an affirmative defense with the same degree of specificity that is required of a plaintiff stating a cause of action. International Insurance Co. v. Sargent & Lundy, 242 Ill. App. 3d 614, 630 (1993). Moreover, under 735 ILCS 5/2-612(b), “[n]o pleading is bad in substance which contains such information as reasonably informs the opposite party of the nature of the claim or defense which he or she is called upon to meet.”

The First District noted that section 11a-22 of the Probate Act of 1975 (755 ILCS 5/11a-22) provides that a contract entered into by a person who has been adjudicated as incompetent is void against that person and her estate. Additionally, the Appellate Court found that there was no dispute that, at the time she signed the mortgage, the mortgagor had not been adjudicated as incompetent, and nothing in the record on appeal suggested that she was later so adjudicated.

However, the Appellate Court also recognized that incapacity due to mental impairment is a valid defense to a contract claim under Illinois common law. Campbell v. Freeman, 296 Ill. 536, 539 (1921) (citing Bordner v. Kelso, 293 Ill. 175 (1920), Crosby v. Dorward, 248 Ill. 471 (1911), McLaughlin v. McLaughlin, 241 Ill. 366 (1909), Baker v. Baker, 239 Ill. 82 (1909), and Sears v. Vaughan, 230 Ill. 572 (1907)). Additionally, “mental weakness of one party to a transaction, even if it is of itself insufficient to destroy a contract will, if accompanied by undue influence, inadequacy of price, ignorance and want of advice, misrepresentation or concealment be a basis for setting aside the agreement.” Freiders v. Dayton, 61 Ill. App. 3d 873, 880 (1978) (citing Fewkes v. Borah, 376 Ill. 596, 601 (1941)).

Thus, the First District concluded that the allegations in the administrator’s affirmative defense were sufficient to withstand the mortgagee’s motion to strike because they contained the basic elements set forth in Illinois case law regarding incapacity of mentally impaired persons to contract. Furthermore, the Appellate Court determined that the affirmative defense contained such information as reasonably necessary to inform the mortgagee of the nature of the defense which it was called upon to meet. Therefore, the Appellate Court held that the trial court erred in striking the affirmative defense.

The First District next addressed the trial court’s entry of judgment of foreclosure and sale. Summary judgment is appropriate “if the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” 735 ILCS 5/2-1005(c).

The First District found that the mortgagor’s son’s affidavit, attached to the administrator’s responses to the motion to strike and motion for summary judgment, did not present a genuine issue of material fact sufficient to overcome the mortgagee’s summary judgment motion. However, the Appellate Court also held that the trial court erred by striking the administrator’s affirmative defense, which was properly pleaded, while simultaneously granting summary judgment to the mortgagee because this deprived the administrator of a fair opportunity to properly frame his defense of incapacity. As pointed out by the Appellate Court, 735 ILCS 5/2-1005(g) requires: “[b]efore or after the entry of a summary judgment, the court shall permit pleadings to be amended upon just and reasonable terms.” An affirmative defense is a “pleading” within the scope of the Code. Id. §§ 2-603(a), 2-613(a).

Accordingly, the First District: (1) reversed the trial court’s order striking the administrator’s affirmative defense; (2) vacated the order of foreclosure and sale; (3) vacated the order confirming sale; and (4) remanded for further proceedings consistent with its opinion.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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