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MorEquity, Inc. v. Naeem

October 25, 2000


The opinion of the court was delivered by: Gettleman, District Judge.


Plaintiff MorEquity, Inc. ("MorEquity"), brought a mortgage foreclosure action in the Circuit Court of Cook County, Illinois, against defendants Abdul and Sally Naeem (the "Naeems"), Prairie Village Townhome Association, Fremont Investment & Loan ("Fremont") and the United States, seeking a judgment of foreclosure and sale of the Naeems' home. The Naeems removed the case to this court and filed: 1) a counterclaim against MorEquity alleging violations of the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2605, and the Illinois Interest Act, 815 ILCS 205/4.1a; 2) a cross-claim against Fremont for fraud, violating the Illinois Consumer Fraud and Deceptive Business Practices Act ("consumer fraud") and the Illinois Interest Act; 3) a third party complaint against Land Title Group, Inc., and its employee Carol Buczkowski for fraud, consumer fraud and violating the Illinois Notary Act, 5 ILCS 312/7-101; and 4) a third party complaint against Theresa Miller, a mortgage broker.

On January 12, 2000, the court dismissed the Naeems' fraud and consumer fraud claims against Fremont because they were based entirely on a conclusory allegation that Miller was acting as Fremont's agent when she allegedly made material misrepresentations to induce the Naeems to enter into the mortgages in question. Because the Naeems had argued that the information needed to assert the claims properly was exclusively within Fremont and Miller's control, the court granted the Naeems leave to replead the fraud claims against Fremont.

Also on January 12, 2000, the court dismissed all claims against Land Title and Buczkowski because they were not proper third party defendants. Because the Naeems' claims against Land Title and Buczkowski were not dependent on nor secondary to MorEquity's foreclosure action against the Naeems, they were not properly brought under Fed.R.Civ.P. 14. The fraud claims against Land Title, however, were pled as part of the same claims brought in the cross-claim against Fremont.*fn1 Therefore, if the Naeems' elected to replead fraud against Fremont, the court noted that the Naeems could move to add Land Title as an additional defendant under Fed. R. Civ. 13(h) and 19. Once Land Title was properly named as a defendant in the cross-claim, the Naeems could then bring in any additional claims they had against Land Title and could join any defendant that was potentially liable under those claims.

The Naeems elected to replead, and on June 30, 2000, filed: 1) and amended counterclaim against MorEquity alleging a quiet title action, various violations of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1638, and violations of RESPA and the Illinois Interest Act; 2) an amended cross-claim against Fremont seeking to quiet title and alleging slander of title, fraud and consumer fraud, and violations of the Illinois Interest Act. The amended cross and counterclaims also attempt to assert class claims for violations of the Consumer Fraud Act, Illinois Interest Act, and TILA. Rather than take the court's suggestion and add Land Title to the cross-claim, however, the Naeems elected to once again file a separate amended third party complaint against Land Title, Buczkowski and Miller, alleging slander of title, fraud and consumer fraud and (against Buczkowski and Land Title only) breach of fiduciary duty, negligence and violations of the Illinois Notary Act.

Fremont, MorEquity, and Land Title and Buczkowski have all moved to dismiss all claims against them. For the reasons set forth below, the motions are granted in part and denied in part.


Plaintiffs Abdul and Sally Naeem purchased a single family townhome in Aurora, Illinois in fee simple as joint tenants in September 1995, by borrowing $113,400 at an interest rate of 8.25% from Prism Mortgage Company. The loan, secured by a mortgage on the property, was later assigned to Mellon Mortgage Company (the "Mellon Mortgage"). As of September 1997, the principle balance on the Mellon Mortgage was approximately $111,000. The Mellon Mortgage was a first lien on the property, which had an appraisal value of $140,000. According to the complaints, the Naeems are immigrants from non-English speaking countries and unsophisticated borrowers. Mr. Naeem asserts that he can speak conversational English but has difficulty reading and understanding documents related to complicated financial transactions.

The Naeems own and operate a limousine business in which Mr. Naeem uses his own limousine. Sometime in the late summer of 1997 the limousine was damaged and required several thousand dollars of repairs. As a result, the Naeems needed a home equity loan to enable them to repair the limousine. At that time they saw an advertisement by Consumer Security Mortgage ("CSM"), an Illinois mortgage brokerage firm. Abdul contacted CSM and Theresa Miller and requested a $5,000 loan. Miller told Abdul that he would be required to borrow $20,000 because the lender would require that as a condition of the loan the Naeems pay off their credit card balances in the approximate amount of $10,900. Mr. Naeem argued that he needed only $5,000, but because of his emergency and allegedly based on Miller's statements about the conditions for the loan, Abdul reluctantly agreed to a $20,000 loan.

Miller completed a handwritten application for loan in that amount. Miller submitted the application to Fremont, which had developed and advertised to brokerage professionals a consumer loan program called the "95% Combined Loan-To-Value Stated Income" program. This program provided and required that borrowers could obtain home equity loans only if they also made a mortgage with Fremont for 75% of the value of their home. If the borrower made such a mortgage, Fremont would also make a loan to that borrower of up to an additional 20% of the value of the borrower's home. Fremont had advertised this program to CSM through a flyer, and then in early September, Fremont's Fred Scola visited CSM and had a sales solicitation meeting in which he described and explained the program. The Naeems allege that Miller completed an application form in her own handwriting with the express intent to submit that application for a $20,000 loan to Fremont under the 95% Combined Loan-To-Value Stated Income program. She submitted that application to Fremont's Chicago office by facsimile transmission the same day that she spoke with Mr. Naeem.

Shortly thereafter, Miller was telephoned by an employee in Fremont's Chicago office who told her that to participate in Fremont's advertised 95% Combined Loan-To-Value Stated Income program the Naeems would be required to refinance their existing mortgage. The Fremont employee also told Miller that Fremont would not loan Mr. Naeem $20,000 on a second mortgage without also refinancing the Naeems' existing mortgage.

Miller then spoke again by telephone with Abdul Naeem, and told him what she had been told by the Fremont employee. He protested, claiming that he needed only a $5,000 loan. Miller repeated to him that Fremont would not loan him that amount, or even $20,000, unless he refinanced his existing mortgage pursuant to the 95% Combined Loan-To-Value Stated Income program. According to the Naeems, Miller told them that they were required to refinance their entire first mortgage, that they did not have verifiable income because they were self employed and, therefore, were considered a higher credit risk, and they would be unable to find financing from any other source.

The Naeems allege that because of Miller's pressure and the emergency need for funds to repair the limousine, Mr. Naeem reluctantly agreed to refinance his existing mortgage. Therefore, Miller made application to Fremont for two loans, one for $105,000 and the other for $28,000. Miller completed the new application papers for the two loans and submitted them to Fremont for approval. After the approval, Fremont prepared all loan documents including loan escrow instructions for Land Title. As part of the transaction, Fremont required that Mrs. Naeem quitclaim her one-half undivided joint tenancy ownership to her husband. This requirement was and is a part of Fremont's custom and practice of requiring one co-owner to quitclaim his or her interest to the other co-owner who would be the obligor on the notes.

At the end of September 1997, Miller informed the Naeems that their loan application had been approved and instructed them to meet her at the Land Title office to close the loan. On September 30, 1997, Miller went to Fremont's Chicago office, picked up the "closing package" of documents that had been allegedly prepared by Fremont's internal Chicago staff. She carried those mortgage papers and other documents to Land Title for the closing.

The Naeems met Miller at Land Title and began the closing. When Mr. Naeem discovered that he would be required to pay what he terms exorbitant and excessive loan fees, he refused to sign any papers, refused to close the loan, and left the Land Title office.

Over the succeeding days, Miller and CSM repeatedly contacted Mr. Naeem in an "effort to force him into these punitive and unfair loan transactions." Believing that the only way that he would be able to obtain the $5,000 to repair his limousine was to refinance their existing mortgage as required by Miller, CSM and Fremont, the Naeems agreed to take out the two loans pursuant to the Fremont 95% Combined Loan-To-Value Stated Income program.

On October 9, 1997, the Naeems again met Miller at Land Title to close the two loans. During the closing Abdul was presented with a stack of papers and was instructed to sign without any knowledge or understanding of what those papers purported to be. Sally Naeem was also instructed to sign some of the papers presented to her. Her signature was obtained without any explanation of the papers or their legal force and effect.

According to the complaints, the completed Fremont documents relating to the $28,000 loan financed approximately $27,315 at an annual percentage rate of 13.99%, in 179 monthly payments of $331.55 and one balloon payment of $25,234.78, for total payment of $84,582.23. The documents obligated the Naeems to pay a total finance charge of approximately $57,267 over the life of the loan.

The completed documents relating to the $105,000 loan financed the amount of approximately $99,736 at an annual percentage rate of 10.99% at 360 monthly payments of $999.15 for total payments of $359,264. The documents obligated the Naeems to pay a total finance charge of approximately $259,958. At closing Mr. Naeem was required to and did sign two new loan applications. Both loans are secured by mortgages obtained by Fremont on the Naeems' residential real estate.

During the closing, Sally Naeem was informed that a quitclaim deed was required, transferring her interest in the property to her husband. Someone, either at Fremont or CSM, prepared a quitclaim deed purporting to transfer Sally's interest in the property to Abdul. The deed indicates that it was prepared by Abdul. Sally refused to sign the quitclaim deed, and alleges that the signature on the deed purporting to be hers is a forgery.

After the October 1997, closing, the quitclaim deed was then altered, allegedly by an unknown employee or agent of Land Title, by the addition of the following language: "subject to the mortgage of September 30, 1997, recorded October 27, 1997, as Document No. R97-162957." The deed was recorded without an acknowledgment of a notary public, although third party defendant Buczkowski allegedly partially filled in the blanks in the notary certification. The deed was recorded with the DuPage County Recorder of Deeds on November 3, 1997, as Document No. R97-167161. Sometime thereafter, Buczkowski obtained a copy of the deed and affixed a fraudulent notary certificate, falsely attesting that Sally Naeem's signature was genuine.

The mortgage on the $28,000 loan was recorded with the DuPage County Recorder of Deeds on October 27, 1997, as Document No. R97-162957. Because the Mellon Mortgage remained of record, the $28,000 mortgage constituted a second lien on the property. The mortgage on the $105,000 loan was recorded on November 3, 1997, as Document No. R97-167162. According to the Naeems, as the later recorded instrument subordinate to the Mellon Mortgage and the $28,000 mortgage, the $105,000 mortgage constituted a third lien on the Naeems' residential property.

Fremont ultimately sold or transferred the $28,000 mortgage to The Associates, Ltd. On December 22, 1997, Fremont sold or transferred the $105,000 mortgage to MorEquity. On or about October 29, 1997, the Mellon Mortgage was paid in full, and on July 22, 1998, a release of that mortgage was recorded as Document No. R98-146617, resulting in an advancement of the priority of the two Fremont mortgages, with the $28,000 mortgage becoming the first lien and the $105,000 mortgage becoming the second lien.


Although each of the counter, cross, and third party defendants (except Miller) have filed separate motions to dismiss, many of the asserted defenses and legal arguments overlap. Because most of the Naeems' claims stem from their attack on how the initial loans were issued, the court begins with the motion by Fremont (the original lender) to dismiss cross-claim.

I. Fremont

A. Count I-Quiet Title

In Count I, styled "Quiet Title to Remove Cloud on Title," the Naeems seek an order declaring the allegedly fraudulent deed to be a nullity, canceling the record of the forged deed and declaring that title remains and has always been held by Abdul and Sally in fee simple as joint tenants. They also seek an order declaring the $105,000 MorEquity mortgage and $28,000 mortgage invalid as to any interest in the property. Fremont does not argue that the allegations that a forged deed was recorded are insufficient to state a claim for quiet title, but does argue that the remedy for any such violation would be simply a declaration that the quitclaim deed is invalid. An invalid quitclaim deed, according to Fremont, does not void the otherwise legally enforceable first and second notes and mortgages that the Naeems signed. Therefore, Fremont has moved to strike the prayer for relief to the extent it seeks a declaration of invalidity of the mortgages.

Neither party has submitted any legal authority on the appropriate remedy under the circumstances alleged. Because the Naeems' claim asserts that the forged quitclaim deed was created and recorded as part of a single underlying transaction, and because it is undisputed that Count I states a claim for quiet ...

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