Deutsche Bank National Trust Company v. Bodzianowski , 2016 IL App (3d) 150632 ( 2016 )

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Appellate Court Date: 2016.12.02
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Deutsche Bank National Trust Co. v. Bodzianowski, 2016 IL App (3d) 150632Appellate Court DEUTSCHE BANK NATIONAL TRUST COMPANY, as Trustee of
Caption Novastar Mortgage Funding Trust, Series 2006-5 Novastar Home
Equity Loan Asset-Backed Certificates, Series 2006-5, Plaintiff-
Appellant, v. HOWARD J. BODZIANOWSKI; KRISTEN M.
BODZIANOWSKI; HERITAGE LAKES ESTATES
HOMEOWNERS ASSOCIATION; UNKNOWN OWNERS and
NONRECORD CLAIMANTS, Defendants-Appellees.
District & No. Third District
Docket No. 3-15-0632
Filed September 9, 2016
Decision Under Appeal from the Circuit Court of Will County, No. 14-CH-2296; the
Review Hon. Daniel Rippy, Judge, presiding.
Judgment Affirmed.
Counsel on Al Schwartz and Justin F. Carter (argued), both of Morris, Laing,
Appeal Evans, Brock & Kennedy, Chtrd., of Chicago, for appellant.
Theodore A. Woerthwein, John L. Miller, Ashley Hanlon, and
Matthew H. Hector (argued), all of Woerthwein & Miller, of Chicago,
for appellees.
Panel JUSTICE WRIGHT delivered the judgment of the court, with opinion.
Justice Schmidt concurred in the judgment and opinion.
Justice Holdridge specially concurred, with opinion.
OPINION
¶1 In 2011, Deutsche Bank National Trust Company (Deutsche Bank), acting as trustee for
the NovaStar Mortgage Funding Trust, Series 2006-5 (Trust), filed a foreclosure action in the
United States District Court for the Northern District of Illinois against the Bodzianowskis
(borrowers). In federal court, the borrowers filed a motion to dismiss the federal foreclosure
action on the grounds that the mortgage was not properly assigned to the Trust by the
“Depositor” as required by the governing Pooling and Servicing Agreement (PSA). As a
consequence of a void transfer to the Trust, the borrowers argued Deutsche Bank could not
pursue foreclosure on behalf of the Trust. In federal court, Deutsche Bank resisted the
borrowers’ motion to dismiss the federal foreclosure action by claiming the borrowers lacked
standing to contest a voidable transfer into the Trust because the borrowers were nonparties to
the PSA.
¶2 After considering the dueling standing arguments raised by each party, the federal court
found the arguments presented in the borrowers’ reply brief, asserting Deutsche Bank lacked
standing to foreclose on a debt arising out of a transfer to the Trust deemed as void by a New
York state statute, were compelling. As a result, the federal district court dismissed the federal
foreclosure action initiated by Deutsche Bank as trustee with prejudice. Deutsche Bank did not
appeal the dismissal.
¶3 Years later, in 2014, Deutsche Bank initiated a second foreclosure action against the same
borrowers, alleging the same date of default, in Illinois state court. The circuit court applied res
judicata and granted borrowers’ motion to dismiss pursuant to section 2-619 of the Code of
Civil Procedure (735 ILCS 5/2-619(a)(4) (West 2014)). We affirm.
¶4 BACKGROUND
¶5 On September 25, 2006, the borrowers acquired a $165,000 mortgage loan from Novastar
Mortgage, Inc. (original lender) for the purchase price of a home located at 3314 Concord
Court, Lockport, Illinois. The original lender in this case entered into a PSA, dated September
1, 2006, with three other entities to create a common-law trust known as “NovaStar Mortgage
Funding Trust, Series 2006-5” (Trust). The PSA designated the original lender to be the
“Sponsor” and “Servicer” and Novastar Mortgage Funding Corporation as the “Depositor” for
purposes of the resulting Trust. The PSA also designated U.S. Bank National Association to
serve as “Custodian” and Deutsche Bank to act as “Trustee.” The PSA mandated that the Trust
would accept mortgage documents endorsed by the “Depositor.” According to the PSA, the
Trust would be governed by the laws of the State of New York.
¶6 The borrowers defaulted on their mortgage loan in February 2010. On May 6, 2010,
Mortgage Electronic Registration Systems, Inc. (MERS), acting as nominee for the original
lender, assigned the mortgage to the Trust in a document titled “ASSIGNMENT OF
MORTGAGE ILLINOIS.” The 2010 assignment by MERS transferred the original lender’s
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interest in the mortgage to “DEUTSCHE BANK NATIONAL TRUST COMPANY AS
TRUSTEE NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2006-5 NOVASTAR
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 2006-5.”
¶7 I. 2011 Federal Court Proceeding
¶8 On March 21, 2011, Deutsche Bank, acting as trustee for the Trust, filed a federal
complaint for foreclosure in the United States District Court for the Northern District of
Illinois. Deutsche Bank sought to enforce the borrowers’ loan agreement and foreclose on the
mortgage. The borrowers filed a motion to dismiss the federal foreclosure complaint on the
grounds that Novastar Mortgage Funding Corporation, the “Depositor,” was not the entity that
endorsed the mortgage documents deposited into the Trust as required by section 2.01 of the
Trust’s PSA. Therefore, the borrowers argued Deutsche Bank, acting as trustee for the Trust,
improperly accepted the mortgage documents on behalf of the Trust and lacked standing to
initiate the federal foreclosure action. Citing to the applicable statutes governing the Trust
according to New York law, the borrowers asserted that since “the transfer did not take place
according to the Trust’s own terms, the transfer is void.”1
¶9 After the parties briefed the standing issue raised in the borrowers’ motion to dismiss the
federal action, both counsel for Deutsche Bank and the federal district judge found the
borrowers’ arguments set forth in the borrowers’ reply were “compelling.” Specifically, the
federal district court stated “the [borrowers’] reply brief argues that the instruments at issue in
this case are not sufficient under New York law. And I am not sure that that argument was
squarely addressed by [Deutsche Bank].” On October 11, 2011, the court granted the
borrowers’ motion to dismiss Deutsche Bank’s federal foreclosure complaint with prejudice.
Deutsche Bank did not appeal or move to vacate the federal district court’s 2011 dismissal.
¶ 10 II. 2014 Illinois State Court Proceedings
¶ 11 On October 23, 2014, Deutsche Bank filed another foreclosure complaint against the same
parties in the circuit court of Will County, Illinois. Again, Deutsche Bank, acting as trustee,
sought to foreclose on the same mortgage assigned to the Trust in 2010 for the property located
at 3314 Concord Court, Lockport, Illinois.
¶ 12 On March 6, 2015, the borrowers filed a motion to dismiss the state court action pursuant to
section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619(a)(4) (West 2014)) on the
grounds that res judicata applied based on the resolutions of the same issues between the same
parties in federal court.
¶ 13 In state court, Deutsche Bank resisted the borrowers’ motion to dismiss by claiming new
Illinois precedent now provided that the borrowers would not have standing to contest a
violation of the PSA governing a particular trust. Specifically, Deutsche Bank asserted that the
Second District’s decision in Bank of America National Ass’n v. Bassman FBT, L.L.C., 2012
IL App (2d) 110729, changed the applicable law concerning the borrowers’ ability to
challenge Deutsche Bank’s standing to bring a foreclosure action. Deutsche Bank argued that
Bassman was a case of first impression holding that borrowers could not “challenge the
1
See N.Y. Est. Powers & Trusts Law § 7-2.4 (McKinney 2014).
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validity of the transfers of their Note and Mortgage based on non-compliance with the trust
agreements.”
¶ 14 After the parties’ briefings, on August 10, 2015, the circuit court of Will County granted
the borrowers’ section 2-619 motion to dismiss after finding res judicata applied in the case at
bar. On September 8, 2015, Deutsche Bank filed a timely notice of appeal.
¶ 15 ANALYSIS
¶ 16 The case law provides that a trial court’s decision granting a section 2-619 motion to
dismiss is reviewed de novo on appeal to this court. Landheer v. Landheer, 383 Ill. App. 3d
317, 320 (2008) (citing Van Meter v. Darien Park District, 207 Ill. 2d 359, 368 (2003)). In our
review, we “must construe all of the pleadings and supporting documents in the light most
favorable to the nonmoving party.” Id. (citing Van Meter, 207 Ill. 2d at 367-68). The basis of
the motion, section 2-619(a)(4) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(4) (West
2014)), provides that an action may be dismissed if the cause of action is barred by a prior
judgment. Similarly, an action may be dismissed under the doctrine of res judicata when the
claim is barred by a prior judgment. Papers Unlimited v. Park, 253 Ill. App. 3d 150, 153
(1993).
¶ 17 The parties agree that the party invoking a defense to an action based on res judicata bears
the burden of demonstrating the doctrine applies. Oshana v. FCL Builders, Inc., 2013 IL App
(1st) 120851, ¶ 15 (citing Cload v. West, 328 Ill. App. 3d 946, 950 (2002)). It is well
established that the doctrine of res judicata involves three requirements. Currie v. Wisconsin
Central, Ltd., 2011 IL App (1st) 103095, ¶ 28 (citing Rein v. David A. Noyes & Co., 172 Ill. 2d
325, 335 (1996)). First, there must be a prior and final judgment on the merits entered by a
court of competent jurisdiction. Id. Second, there must be an identity of the causes of action in
both cases. Id. Third, there must be an identity of parties or their privies in both cases. Id.Functionally, “[r]es judicata bars a second adjudication of the parties’ disputes where there has
been or could have been a former adjudication on the merits, and there is an identity of cause of
action and parties or their privies in the two lawsuits.” (Emphasis added.) Lehman v.
Continental Health Care, Ltd., 240 Ill. App. 3d 795, 801 (1992) (citing Simcox v. Simcox, 131
Ill. 2d 491, 497 (1989)). In other words, res judicata will bar a second action when the second
action is “nothing more than a do-over of the first action.” See Turczak v. First American Bank,
2013 IL App (1st) 121964, ¶ 28 (referencing Skolnik v. Petella, 376 Ill. 500, 507 (1941)). On
appeal, Deutsche Bank does not challenge the borrowers’ assertion that res judicata attaches in
this case. Rather, Deutsche Bank argues that the intervening change of law represented by the
decision in Bassman, 2012 IL App (2d) 110729, obviates the application of res judicata in this
case.
¶ 18 Our review of this record reveals that in 2011, Deutsche Bank pointed out to the federal
district court that the borrowers were nonparties to the PSA and did not have standing to assert
a violation of the PSA in defense of a foreclosure action initiated by Deutsche Bank, as trustee
for the Trust. After reviewing the borrowers’ reply to Deutsche Bank’s argument challenging
the borrowers’ standing, the federal district court and Deutsche Bank both agreed the authority
presented by the borrowers in support of their reply was “compelling.” After this observation,
the court ruled in favor of the borrowers and dismissed the federal foreclosure action with
prejudice.
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¶ 19 The case law provides that once a party, such as the borrowers in this case, establishes a
prima facie case of res judicata, the burden shifts to the opposing party to properly plead the
existence of an exception to res judicata. See Mistretta v. Village of River Forest, 2 Ill. App. 3d
102, 105 (1971). Generally, the “ ‘rule in Illinois is that res judicata extends only to the facts
and conditions as they were at the time a judgment was rendered’ ”; however, when “ ‘new
facts or conditions intervene before a second action, establishing a new basis for the claims and
defenses of the parties,’ ” the issues are not the same, and “ ‘the former judgment cannot be
pleaded as a bar in a subsequent action.’ ” Hayashi v. Illinois Department of Financial &
Professional Regulation, 2014 IL 116023, ¶ 46 (quoting Northern Illinois Medical Center v.
Home State Bank of Crystal Lake, 136 Ill. App. 3d 129, 144 (1985)). Thus, “a change in the law
resulting from [a] judicial decision or statute subsequent to a case’s adjudication eradicate[s]
the controlling effect of that case’s judgment on subsequent related litigation.” Statler v.
Catalano, 293 Ill. App. 3d 483, 486 (1997). Consequently, Deutsche Bank now argues that the
2012 Bassman decision presents an intervening condition that creates an exception to the
application of res judicata. We disagree.
¶ 20 For purposes of this particular appeal, both parties agree this PSA must be evaluated and is
governed by the laws of the State of New York. Importantly, in Bassman, the appellate counsel
did not provide the reviewing court with the authority, based on existing New York precedent,
to reverse the trial court’s finding that the invalid transfer of the debt to the trust in that case
resulted in a voidable transaction. Here, it is critical to our analysis to recognize that the
Bassman court interpreted the same substantive body of New York law that was available to be
presented and available to be considered by the federal district court in the 2011 foreclosure
action in the case at bar.
¶ 21 Our careful review of the record in this case reveals that the federal district court was
assigned the task of deciding whether Deutsche Bank had standing to pursue foreclosure of the
same mortgage debt involving the same parties now before us. The federal district court
decided against Deutsche Bank and their challenge to the same borrowers’ standing, as a
nonparty to the same PSA, by ruling in favor of the borrowers. It appears to this court that the
borrowers successfully persuaded the federal district court that the transaction involved in this
case was void according to existing New York law. Deutsche Bank accepted this final decision
at that time.
¶ 22 Now, it appears Deutsche Bank, invigorated by the lengthy discussion of the confusing
status of New York law by the court in Bassman, regrets failing to appeal the 2011 federal
district court’s ruling. Simply stated, res judicata does not permit “a do-over of the first
action.” See Turczak, 2013 IL App (1st) 121964, ¶ 28 (referencing Skolnik v. Petella, 376 Ill.
500, 507 (1941)).
¶ 23 In conclusion, we hold that the decision issued by the Illinois Appellate Court in Bassman
merely interprets New York precedent concerning a borrower’s standing to challenge the
transfer of mortgage debt into a trust under New York law. The Second District’s decision does
not provide any intervening Illinois authority as needed to create an exception to the doctrine
of res judicata in this case. Thus, the circuit court properly granted the borrowers’ section
2-619 motion to dismiss this state court action based on res judicata arising from the final
judgment against the same parties in the federal district court.
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¶ 24 CONCLUSION
¶ 25 The judgment of the circuit court of Will County is affirmed.
¶ 26 Affirmed.
¶ 27 JUSTICE HOLDRIDGE, specially concurring.
¶ 28 I join in the majority’s judgment and analysis. I write separately to share my interpretation
of Bank of America National Ass’n v. Bassman FBT, L.L.C., 2012 IL App (2d) 110729, and to
provide some additional support for the majority’s holding. In my view, Bassman did not
provide its own interpretation of New York law regarding a borrower’s standing to challenge
the transfer of mortgage debt into a trust due to an alleged violation of the governing trust
documents. Rather, Bassman merely acknowledged that (1) the borrower’s standing to raise
such a challenge in that case depended upon whether the plaintiff’s noncompliance with the
trust documents rendered the assignment of the mortgages at issue “void” or merely “voidable”
under New York law and (2) New York law was inconsistent on this issue. Id. ¶¶ 17-19, 21.
Our appellate court noted that the tension between New York statutory law and some New
York cases addressing this issue was “for New York courts to reconcile—not this [court]” (id.
¶ 21) and that, “[a]s an Illinois court,” it “[could not] change New York law.” Id. ¶ 23. The
Bassman court stressed that the defendants had made “no attempt to reconcile” the relevant
“contradictions” in New York law and had failed to carry their burden of proving that the
transactions at issue were void under New York law, rather than merely voidable. Id. The court
held that, “[a]bsent clear answers about the nature of New York law,” the defendants’ failure to
carry their burden of persuasion on this issue was “dispositive.” Id.
¶ 29 In sum, Bassman merely held that the defendant had failed to carry its burden; it did not
change (or even construe) New York law in the manner suggested by Deutsche Bank in this
case. New York law controls here, as it did in Bassman. Accordingly, as the majority correctly
holds, there has been no intervening change in the governing law that could preclude the
operation of res judicata in this case.
¶ 30 In my view, Deutsche Bank’s Illinois foreclosure action is barred by res judicata for one
additional reason. The preclusive effect of a judgment rendered by a federal court is governed
by federal common law. Semtek International Inc. v. Lockheed Martin Corp., 531 U.S. 497,
508 (2001); In re Bridgestone/Firestone, Inc., Tires Products Liability Litigation, 333 F.3d
763, 767 (7th Cir. 2003), abrogated on other grounds, Smith v. Bayer Corp., 564 U.S. 299(2011). Federal common law “usually incorporates state law when the federal judgment stems
from litigation under the [federal court’s] diversity jurisdiction.” Bridgestone/Firestone, Inc.,
333 F.3d at 767. However, “state rules that undermine the finality of federal judgments are not
incorporated.” Id.; see also Semtek International, Inc., 531 U.S. at 508. Under federal common
law, an intervening change in the law does not bar the application of res judicata to a final,
unappealed federal court judgment on the merits. See, e.g., Federated Department Stores, Inc.
v. Moitie, 452 U.S. 394, 398 (1981); Precision Air Parts, Inc. v. Avco Corp., 736 F.2d 1499,
1503 (11th Cir. 1984); Barzin v. Selective Service Board No. 14, 446 F.2d 1382, 1383 (3d Cir.
1971). Applying Illinois’s contrary rule to deny the res judicata effect of the federal court
judgment in this case would undermine the finality of a federal court’s judgment, thereby
violating federal common law. Thus, under Semtek Intern and Bridgestone/Firestone, the
Illinois rule should not apply in this case. Deutsche Bank cites no case wherein an Illinois court
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declined to give preclusive effect to a federal judgment because of an intervening change in the
law. Nor have I found any such case.
¶ 31 In sum, Bassman did not change the applicable law, and, even if it did, such a change
would not justify denying preclusive effect to the federal court judgment. All of the
requirements for res judicata were met in this case (a final judgment on the merits rendered by
a court of competent jurisdiction, identity of causes of action, and identity of parties). Thus, the
trial court properly dismissed the plaintiff’s foreclosure complaint on the ground of
res judicata.
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