2016 IL App (3d) 150632
Ill. App. Ct.2016Background
- Borrowers (the Bodzianowskis) obtained a mortgage from Novastar in 2006; the loan was pooled into the NovaStar Mortgage Funding Trust, Series 2006-5 governed by a PSA under New York law.
- Borrowers defaulted in 2010. In 2010 MERS assigned the mortgage to Deutsche Bank as trustee for the Trust.
- In 2011 Deutsche Bank filed a foreclosure in federal court; borrowers moved to dismiss arguing the Depositor did not properly endorse/transfer the mortgage into the Trust under the PSA and applicable New York law, so the transfer was void and Deutsche Bank lacked standing.
- The federal district court found the borrowers’ standing argument persuasive and dismissed Deutsche Bank’s federal foreclosure complaint with prejudice in 2011; Deutsche Bank did not appeal.
- In 2014 Deutsche Bank filed the same foreclosure in Illinois state court. Borrowers moved to dismiss under section 2-619(a)(4) as barred by res judicata based on the 2011 federal judgment.
- The state court granted the dismissal. On appeal Deutsche Bank argued intervening Illinois authority (Bank of America v. Bassman) changed the law and thus res judicata should not apply; the appellate court affirmed dismissal.
Issues
| Issue | Plaintiff's Argument (Deutsche Bank) | Defendant's Argument (Bodzianowski) | Held |
|---|---|---|---|
| Whether the state foreclosure is barred by res judicata because of the 2011 federal dismissal with prejudice | Res judicata shouldn’t apply because Bassman (2012 IL App) represents an intervening change in law undermining the prior judgment | The 2011 federal judgment on the same claim and parties is final and bars a second action; res judicata applies | Res judicata bars the state action; dismissal affirmed |
| Whether Bassman created an intervening change in law that removes a res judicata bar | Bassman clarified Illinois law to deny borrowers the right to challenge trust-transfer validity, undermining the federal judgment | Bassman merely interpreted New York law (and did not create an intervening change of controlling New York law); federal judgment stands | Bassman did not supply the necessary intervening change; res judicata remains effective |
| Whether borrowers had standing to challenge the transfer into the trust | (Implicit) Deutsche Bank previously argued borrowers lacked standing as nonparties to the PSA | Borrowers successfully argued in federal court that under New York law the transfer was void and Deutsche Bank thus lacked standing | Federal court already decided standing against Deutsche Bank; that decision is preclusive |
| Whether an unappealed federal judgment may be denied preclusive effect because of later changes in law | Deutsche Bank contends Illinois precedent (Bassman) should control application of res judicata | Borrowers point to finality of the unappealed federal judgment; federal common law favors preclusive effect over subsequent changes that would undermine finality | The court treats the federal judgment as preclusive; subsequent local interpretations do not defeat res judicata |
Key Cases Cited
- Semtek International Inc. v. Lockheed Martin Corp., 531 U.S. 497 (federal common law governs preclusive effect of federal judgments)
- Federated Department Stores, Inc. v. Moitie, 452 U.S. 394 (final federal judgments on the merits are preclusive despite intervening changes in law)
- In re Bridgestone/Firestone, Inc. Tires Products Liability Litigation, 333 F.3d 763 (federal common law usually incorporates state preclusion rules in diversity cases)
- Rein v. David A. Noyes & Co., 172 Ill. 2d 325 (elements of res judicata)
- Lehman v. Continental Health Care, Ltd., 240 Ill. App. 3d 795 (res judicata bars relitigation where identity of parties and causes of action exist)