2015 IL App (1st) 143114
FOURTH DIVISION December 24, 2015
No. 1-14-3114
LAKEVIEW LOAN SERVICING, LLC, ) Appeal from the ) Circuit Court of Plaintiff-Appellee, ) Cook County. ) v. ) ) Nos. 12 CH 32727 MARY PENDLETON, ) 11 CH 18520 ) Defendant and Third-Party Plaintiff-Appellant ) ) Honorable (Bank of America National Association, Third-Party ) Franklin U. Valderrama Defendant-Appellee). ) Judge Presiding.
JUSTICE ELLIS delivered the judgment of the court, with opinion. Presiding Justice McBride and Justice Cobbs concurred in the judgment and opinion.
OPINION
¶1 The question in this appeal is whether an individual who provides a mortgage on her home
as security for a loan, but who is not a party to the loan itself, is entitled to a notice of a right to
rescind the mortgage under the federal Truth in Lending Act (TILA) (15 U.S.C. § 1601 et seq.
(2006)). We hold that she is so entitled.
¶2 Defendant and third-party plaintiff Mary Pendleton provided a mortgage on her home as
security for a loan made to her daughter, Deborah Reid. Pendleton did not sign the promissory note
and did not receive any TILA disclosures. Her daughter later defaulted on the loan, and foreclosure
proceedings were initiated. In those proceedings, Pendleton attempted to rescind the mortgage,
arguing that her right to rescind under TILA had not expired, because she never received the
necessary TILA disclosures informing her of that right. The trial court rejected Pendleton's
argument, finding that TILA did not afford her a right to rescind because she was not an "obligor" No. 1-14-3114
under the statute, and dismissed her counterclaim and third-party complaint seeking rescission of
the mortgage. In ruling that Pendleton was not an "obligor" for the purposes of TILA because she
was not personally liable for the loan on which her house was mortgaged, the trial court
understandably relied on a recently-issued decision of the appellate court in Financial Freedom
Acquisition, LLC v. Standard Bank & Trust Co., 2014 IL App (1st) 120982.
¶3 But during the pendency of this appeal, our supreme court reversed the judgment of the
appellate court in that case and squarely rejected its reasoning. See Financial Freedom Acquistion,
LLC v. Standard Bank & Trust Co., 2015 IL 117950, ¶¶ 23, 30. Although Financial Freedom
involved a reverse mortgage, whereas this case involves a more traditional home-equity mortgage,
the supreme court's reasoning applies with equal force in this matter. We thus vacate the trial
court's order dismissing Pendleton's counterclaim and third-party complaint and striking her
affirmative defenses, and we remand for further proceedings.
¶4 I. BACKGROUND
¶5 Pendleton and Reid co-owned the home that is the subject of the foreclosure proceeding in
this case. On June 25, 2010, Reid executed a promissory note in favor GSF Mortgage Corporation
(GSF), showing that GSF had loaned Reid $142,127. Pendleton did not sign the note.
¶6 The note was secured by a mortgage on Pendleton and Reid's home, given to GSF's
nominee, Mortgage Electronic Registration Systems, Inc. (MERS). The mortgage included a
paragraph that stated, in relevant part:
"Any Borrower who co-signs this [mortgage] but does not execute the Note: (a) is
co-signing this [mortgage] only to mortgage, grant and convey that Borrower's interest in
the Property under the terms of this [mortgage]; (b) is not personally obligated to pay the
sums secured by this [mortgage]; and (c) agrees that Lender and any other Borrower may
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agree to extend, modify, forbear or make any accommodations with regard to the terms of
this [mortgage] or the Note without that Borrower's consent."
Both Pendleton and Reid were listed as "Borrowers" under the mortgage, and they both signed the
mortgage.
¶7 On May 20, 2011, Reid filed a complaint seeking to partition the property between her and
Pendleton (trial court case number 11 CH 18520). Pendleton and GSF were listed as defendants in
that action. (The partition action is not a subject of this appeal.)
¶8 On September 20, 2011, MERS assigned the mortgage to Bank of America, N.A. (Bank of
America). GSF endorsed the note to Bank of America.
¶9 In March 2012, Pendleton filed a third-party complaint against MERS and Bank of
America, alleging a violation of TILA for failing to provide certain disclosures, including notice of
her right to rescind the mortgage, and pleading for rescission. See 15 U.S.C. §§ 1635, 1638 (2006);
12 C.F.R. § 226.23(b)(1) (2010).
¶ 10 On August 28, 2012, Bank of America filed a complaint to foreclose on the mortgage (trial
court case number 12 CH 32727). Bank of America alleged that the note had been in default since
May 1, 2011. The circuit court granted Pendleton's motion to consolidate Bank of America's
foreclosure suit with Reid's partition suit.
¶ 11 After the cases were consolidated, Pendleton filed a combined answer and counterclaim.
Pendleton, who was 84 years old at the time, alleged that she and her husband had bought her home
in 1969. In 1979, they divorced, and Pendleton received the entire property. Pendleton claimed
that, in 1993, she agreed to let Reid live at the house "in exchange for [Reid] helping ***
Pendleton with the bills." At the time Reid moved in with Pendleton, "there was no mortgage on
the Property."
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¶ 12 After Reid moved in, Pendleton told Reid that she wanted to take out a "small loan" to
make some improvements to the property. According to Pendleton, she and Reid agreed that, in
lieu of Reid paying rent to stay at the house, she would make the payments on this loan. Reid
brought Pendleton to a mortgage broker where "Pendleton signed some papers." According to the
answer and counterclaim, Pendleton "was unfamiliar with mortgages and did not understand the
nature of the transaction." And according to Pendleton's answer in the partition action, these
documents led to Reid obtaining an ownership interest in the house, which Pendleton had never
intended to give her. Pendleton alleged that Reid refinanced the mortgage in 1995, 1999, 2002,
2004, and 2010. Pendleton claimed that these six transactions "stripp[ed] the Property of the
majority of its equity." Pendleton said that she "never received any benefit from any of these
loans."
¶ 13 Pendleton alleged that, in June 2010, Reid asked her "to co-sign a new loan to help [Reid]
lower her interest rate and/or loan payments." Reid left "some papers" on the dining room table
with a note directing Pendleton to sign them. Pendleton signed the documents "because her
understanding was that by signing the documents she could help [Reid] lower her loan payments."
The documents were not notarized when Pendleton signed them. According to Pendleton, she
never received any copies of the signed mortgage or "copies of any disclosures about the APR, the
amount financed, the finance charge, the total of payments, *** the schedule of payments[, or] the
notice of her three-day right to rescind the transaction," all of which she alleged were required
under TILA. See 15 U.S.C. §§ 1635, 1638 (2006); 12 C.F.R. § 226.23(b)(1) (2010).
¶ 14 Thus, in three different ways—in her third-party complaint against Bank of America
before it initiated foreclosure proceedings, and then as both a counterclaim and affirmative defense
to Bank of America's foreclosure complaint—Pendleton alleged in the trial court that she had
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never received the necessary disclosures under TILA. Specifically, Pendleton argued that, because
she never received notice of her right to rescind the mortgage within three days of executing it, she
could rescind it at any time within three years of its execution. Pendleton also alleged that she
exercised that right when she sent "notices of rescission to GSF and Bank of America on or about
November 22, 2011." 1
¶ 15 Before Pendleton filed her answer and counterclaim, Bank of America had assigned the
mortgage to Lakeview Loan Servicing, LLC (Lakeview). The trial court granted Lakeview's
motion to be substituted into the case in Bank of America's place.
¶ 16 Lakeview moved to dismiss Pendleton's affirmative defense and counterclaim pursuant to
section 2-619.1 of the Code of Civil Procedure (735 ILCS 5/2-619.1 (West 2012)). Lakeview
raised three arguments: (1) that Pendleton did not sign the note and was thus not an "obligor"
entitled to TILA disclosures; (2) that, even if she was entitled to TILA disclosures, her
counterclaim was not filed within TILA's three-year repose period; and (3) that Pendleton failed to
plead that she had "a plausible ability to tender" payment of the note, which, according to
Lakeview, was necessary for her to exercise her right to rescind the mortgage.
¶ 17 In response to Lakeview's motion to dismiss, Pendleton argued that she was entitled to
TILA disclosures because TILA's implementing regulation, Regulation Z (12 C.F.R. § 226.1 et
seq. (2010)), provides that any individual whose property is subject to a mortgage, regardless of
whether he or she signs the underlying note, has a right to rescind under TILA. Pendleton also
argued that she exercised her right to rescind in November 2011, well within the three-year time
1 Where a lender fails to give a consumer entitled to rescind notice of his or her rescission right, the consumer can exercise his or her right to rescind at any time within three years of the loan's consummation. 15 U.S.C. § 1635(f) (2006); see Johnson v. Thomas, 342 Ill. App. 3d 382, 396 (2003).
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period under TILA, and that she was not required to plead her ability to pay the note in order to
rescind the mortgage.
¶ 18 The trial court granted Lakeview's motion to dismiss without prejudice, because Pendleton
failed to plead her ability to tender the amount of the loan. Pendleton filed an amended answer and
counterclaim restating her TILA affirmative defense and counterclaim, and also alleging that she
was "ready, willing and able to tender an amount reflecting the benefit she received, *** less all
payments made on the account." Lakeview filed an amended motion to dismiss pursuant to section
2-619.1, reasserting the three claims it had made in its initial motion to dismiss.
¶ 19 The trial court granted Lakeview's amended motion to dismiss. The trial court's written
order stated, "The Court has considered the parties' briefs and the relevant case law, particularly
Financial Freedom Acquisition, LLC v. Standard Bank & Trust Co., 2014 IL App (1st) 120982
and Westbank v. Maurer, 276 Ill. App. 3d 553 (2d Dist. 1995), and determined that Financial
Freedom is controlling as it is a First District Appellate Court decision ***." The court stated that,
pursuant to the appellate decision in Financial Freedom, Pendleton was not an "obligor"
possessing a right to rescind the mortgage under TILA. The trial court also found that there was no
just reason for delaying an appeal of its order pursuant to Illinois Supreme Court Rule 304(a) (eff.
Feb. 26, 2010). Pendleton appealed.
¶ 20 While this appeal was pending, the Illinois Supreme Court decided Financial Freedom,
2015 IL 117950, ¶ 1, which reversed the appellate court's decision in Financial Freedom, 2014 IL
App (1st) 120982, on which the trial court had relied.
¶ 21 II. ANALYSIS
¶ 22 Section 2-619.1 permits a party to file, in one combined motion, both a motion to dismiss
pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 2012)) and a
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motion to dismiss pursuant to section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619
(West 2012)). 735 ILCS 5/2-619.1 (West 2012). A section 2-615 motion to dismiss attacks the
legal sufficiency of a pleading by alleging that the facts stated in the pleading are insufficient to
state a cause of action on which relief may be granted. Gatreaux v. DKW Enterprises, LLC, 2011
IL App (1st) 103482, ¶ 10. A section 2-619 motion, by contrast, admits the legal sufficiency of the
pleading but raises an affirmative defense or other matter that defeats the claim. Id. In reviewing
either motion, we examine the allegations of the pleading in the light most favorable to the
nonmoving party and take all well-pleaded facts as true. Id.; Thurman v. Champaign Park District,
2011 IL App (4th) 101024, ¶ 18. We apply de novo review. Gatreaux, 2011 IL App (1st) 103482,
¶ 10.
¶ 23 Pendleton claims that the trial court erred in granting Lakeview's motion to dismiss
because she was an "obligor" entitled to TILA disclosures. Bank of America and Lakeview claim
that Pendleton was not an "obligor" under TILA, relying primarily on the appellate decision in
Financial Freedom, 2014 IL App (1st) 120982. They also argue that we should disregard
Regulation Z's expansion of the right to rescind because it conflicts with the plain language of
TILA.
¶ 24 The TILA right to rescission at issue in this case provides, in relevant part:
"[I]n the case of any consumer credit transaction *** in which a security interest *** is or
will be retained or acquired in any property which is used as the principal dwelling of the
person to whom credit is extended, the obligor shall have the right to rescind the
transaction until midnight of the third business day following the consummation of the
transaction or the delivery of the information and rescission forms required under this
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section together with a statement containing the material disclosures required under this
subchapter, whichever is later ***." (Emphasis added.) 15 U.S.C. § 1635(a) (2006).
¶ 25 The statute, alone, may not clearly answer the question presented here. The language
quoted above suggests that Congress made a distinction between the "person to whom credit is
extended" (which in this case would only be Pendleton’s daughter, not Pendleton herself, as she
did not sign the note) and the “obligor” entitled to rescission rights. If the only person entitled to
rescission rights was “the person to whom credit was extended,” why did Congress use a different
term—“obligor”—in the same sentence to describe those with rescission rights? The appellate
court majority in Financial Freedom made no distinction between the two terms, holding that,
under the language quoted above, “ '[t]he right to rescind may be exercised only by the obligor, i.e.
the person to whom credit is extended.' ” (Emphasis omitted.) Financial Freedom, 2014 IL App
(1st) 120982, ¶ 24 (quoting Ferreira v. Mortgage Electronic Systems, Inc., 794 F. Supp. 2d 297,
302-03 (D. Mass. 2011)). The dissent, on the other hand, noted that “[t]he statute uses the word
‘obligor’ to describe the entity that has the right to rescind, and the words ‘the person to whom
credit is extended’ to denote the consumer who lives in the dwelling as his or her principal
dwelling place. [Citation.] The use of two very different terms indicates—contrary to the
majority's assumption—that these terms are not interchangeable.” Id. ¶ 40 (Gordon, J., dissenting).
¶ 26 The federal regulations implementing TILA are less vague on this question. Regulation Z
requires the lender to deliver "two copies of the notice of the right to rescind to each consumer
entitled to rescind." 12 C.F.R. § 226.23(b)(1) (2006). It then provides that, "[i]n a credit transaction
in which a security interest is or will be retained or acquired in a consumer's principal dwelling,
each consumer whose ownership interest is or will be subject to the security interest shall have the
right to rescind the transaction." (Emphasis added.) 12 C.F.R. § 226.23(a)(1) (2010). Regulation Z
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defines "consumer" as both "a natural person to whom consumer credit is offered or extended,"
and "for purposes of rescission ***, the term also includes a natural person in whose principal
dwelling a security interest is or will be *** acquired, if that person's ownership interest in the
dwelling is or will be subject to the security interest." (Emphasis added.) 12 C.F.R. § 226.2(a)(11)
(2010).
¶ 27 The Staff Commentary on this regulation further explains, "[I]f a security interest is taken
in A's ownership interest in a house and that house is A's principal dwelling, A is a consumer for
purposes of rescission, even if A is not liable, either primarily or secondarily, on the underlying
consumer credit transaction." (Emphasis added.) 12 C.F.R. pt. 226, Supp. I, § 226.2(a)(11), Note 2
¶ 28 Clearly, Regulation Z and the Staff Commentary support Pendleton's position that she was
entitled to TILA disclosures, because she was a consumer whose ownership interest in her home
was subject to the mortgage. It makes no difference whether she was liable on the note, as long as
her principal dwelling was used as security for the loan, which it unquestionably was. But Bank of
America and Lakeview argue that the plain language of TILA, as interpreted by the appellate court
in Financial Freedom, 2014 IL App (1st) 120982, should control over regulations and
administrative interpretation of that statute.
¶ 29 As we have noted, after briefing in this appeal, our supreme court resolved this dispute in
Financial Freedom, 2015 IL 117950. In that case, the homeowner entered into a reverse mortgage
transaction with Standard Bank and Trust. Id. ¶ 3. A note was executed showing that Financial
Freedom had loaned money to the homeowner. Id. The mortgage identified Standard Bank as the
mortgagor and borrower and contained an exculpatory clause providing that Standard Bank was
not personally liable for any amounts under the note. Id. ¶ 4. The note also said that Standard Bank
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had no personal liability, and that the only means of enforcing the mortgage was "through the
property itself." Id. ¶ 5. Standard Bank never received any TILA disclosures. Id. ¶ 6. Financial
Freedom sought to foreclose on the mortgage. Id. ¶ 7. Standard Bank counterclaimed that it had
not received its TILA disclosures, and that it had rescinded the mortgage. Id. The trial court
dismissed Standard Bank's counterclaim. Id. ¶ 8.
¶ 30 The supreme court reversed the dismissal, holding that Standard Bank had the right to
rescind, even though it was not liable on the underlying consumer credit transaction. Id. ¶ 46. The
court noted that Congress had granted the Federal Reserve Board (Board) the authority to make
regulations interpreting TILA (id. ¶ 20), and that "the Board's interpretations of TILA are entitled
to a great degree of deference." Id. ¶ 21. The court also wrote that, according to the United States
Supreme Court, " '[u]nless demonstrably irrational, *** Board staff opinions construing the Act or
Regulation [Z] should be dispositive.' " Id. (quoting Ford Motor Credit Co. v. Milhollin, 444 U.S.
555, 565 (1980)). Our supreme court noted that, while TILA did not define the term "obligor,"
Regulation Z said that "each consumer whose ownership interest is or will be subject to the
security interest [citation] or is subject to the risk of loss [citation] is entitled to rescind."
(Emphasis in original and internal quotation marks omitted.) Financial Freedom, 2015 IL 117950,
¶ 23. The court found that Congress agreed with TILA's expanded definition, because it had been
in existence since 1968, and Congress had never amended it, even when it recently "moved
authority from the *** Board to the Consumer Finance Protection Bureau to oversee TILA." Id. ¶¶
24-25. Thus, "[b]ased on Regulation Z and the commentary," the supreme court held that "the right
to rescind extends to each consumer whose ownership interest is or will be subject to the security
interest or is subject to the risk of loss." (Internal quotation marks omitted.) Id. ¶ 30.
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¶ 31 Applying our supreme court's holding in Financial Freedom to this case, Pendleton was
clearly entitled to TILA disclosures. Her home was subject to a mortgage that served as security
for a consumer credit transaction. As shown by Financial Freedom, the fact that she did not have
any personal obligations on the underlying promissory note is immaterial.
¶ 32 We recognize that, in this case, Pendleton executed a more traditional home-equity
mortgage, unlike Financial Freedom, which involved a reverse mortgage. And we acknowledge
that the nature of a reverse mortgage was part of the court's analysis in Financial Freedom. But the
supreme court only discussed the nature of reverse mortgages in order to provide additional
reasoning why the appellate court's interpretation of the term "obligor" would be particularly
inappropriate in that context. The supreme court explained that, in a reverse mortgage, the lender
makes payments to the consumer, not the other way around, thus the "reverse" nature of the
mortgage—and thus, under the appellate court's reasoning, no consumer would be considered an
obligor, and no consumer would be entitled to TILA disclosures. See id. ¶¶ 26-28. That point
certainly bolstered the supreme court's reasoning, but by no means was it the primary basis for the
supreme court's holding. The primary basis was the plain language of TILA and Regulation Z, as
well as the staff commentary interpreting TILA (see id. ¶¶ 21-25), none of which make a
distinction between a reverse mortgage and the more traditional mortgage at issue in this case. We
believe that the supreme court's holding in Freedom Financial squarely applies to this case.
¶ 33 Bank of America and Lakeview also cite several federal district court decisions that have
declined to use the Regulation Z definition in similar circumstances. See, e.g., In re Smith-Pena,
484 B.R. 512, 528 (Bankr. D. Mass. 2013) ("To the extent [Regulation Z] grants a right of
rescission to a person who incurred no obligations on the transaction, it is an irrational construction
of [TILA] that does not bind this Court."). But in interpreting federal law, we are bound by the
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decisions of our supreme court and the United States Supreme Court, not lower federal courts. See
Bowman v. American River Transportation Co., 217 Ill. 2d 75, 91-92 (2005) (decisions of lower
federal courts are persuasive, but not binding, when Illinois court is interpreting federal law);
People v. Fountain, 2012 IL App (3d) 090558, ¶ 23 (this court is bound by our supreme court's
interpretation of federal law "unless and until that conclusion is revisited by our supreme court or
overruled by the United States Supreme Court"). And even lower federal courts have not been
uniform in deciding this issue. See, e.g., Dent v. Regions Bank, No. 1:14-CV-141 (WLS), 2015
WL 329215, at *3-5 (M.D. Ga. Jan. 23, 2015) (relying on Regulation Z definition to find that
individual who had executed mortgage, but who had not signed promissory note, was entitled to
rescission). The cases cited by Bank of America and Lakeview do not compel us to reach a
different result.
¶ 34 We emphasize again that the trial court, in its ruling that is under review, relied on what
was then a new decision from the appellate court in Financial Freedom, 2014 IL App (1st)
120982. But in light of the supreme court's decision in that matter, the trial court's order of
September 20, 2014 can no longer stand. We vacate that order, which dismissed Pendleton's
counterclaim and third-party complaint and which struck Pendleton's affirmative defenses.
Although we lack transcripts of the proceedings in the trial court, it appears that the trial court did
not rule on the remaining contentions in Lakeview's amended motion to dismiss. Thus, we remand
for consideration of those remaining issues and for any other proceedings consistent with this
opinion.
¶ 35 III. CONCLUSION
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¶ 36 For the reasons stated above, we vacate the trial court's dismissal of Pendleton's
counterclaim and third-party complaint and its striking of Pendleton's affirmative defenses. We
remand for further proceedings.
¶ 37 Vacated and remanded.
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