Opinion ID: 176568
Heading Depth: 2
Heading Rank: 2

Heading: Damages Caused by the Alleged Breach

Text: The district court's alternative basis for entering summary judgment for CitiFinancial was that CitiFinancial's failure to turn over the original or a copy of the note was not the cause of The Patrick Group's damages. The Patrick Group argues that causation is established as a matter of law because the state-court decisions would have been different if it could have produced an original or a copy of the note. CitiFinancial maintains that because there were alternative ways of proving ownership of the note, the dismissal of the foreclosure action was not caused by its failure to deliver the note. We begin with the observation that the particular causation question here is a legal, not a factual one. Although the general rule is that the determination of causation is for the fact finder, Illinois courts apply a special rule in breach-of-contract claims where the asserted damage is caused by an adverse outcome of a judicial proceeding. See, e.g., O'Neil v. Cont'l Bank, N.A., 278 Ill.App.3d 327, 214 Ill.Dec. 923, 662 N.E.2d 489, 496 (1996). In O'Neil the plaintiff submitted a bid to purchase real estate in a bankruptcy proceeding; the plaintiff claimed the defendant agreed to support confirmation of the bid in the bankruptcy court. When the time came for the defendant to so, however, the defendant remained silent and the bankruptcy judge accepted a competitor's bid. In the ensuing breach-of-contract action, the Illinois Appellate Court held that as a matter of law, the defendant's breach caused the plaintiff's bid to fail. Id. at 497. The causation inquiry, the O'Neil court said, was a legal question for the court if the bankruptcy judge acted in his role as `judge,' not as `fact finder.' Id. at 496. Under O'Neil, as we have noted, the causation inquiry in this context is a legal question; the state courts that rejected The Patrick Group's foreclosure action were acting in their capacity as judges and not as fact finders. The trial court in the foreclosure action took the issue out of the jury's hands by entering a directed verdict against The Patrick Groupa decision the appellate court affirmed. These courts concluded that The Patrick Group failed to make out a prima facie case because it had not shown it was a noteholder, and in Illinois the question of whether a plaintiff has presented a prima facie case is a question of law. E.g., People ex rel. Sherman v. Cryns, 203 Ill.2d 264, 271 Ill.Dec. 881, 786 N.E.2d 139, 148 (2003). Since the Illinois courts acted in their capacity as judges, not as fact finders, this particular causation question is a legal one. O'Neil is also instructive because it emphasizes that in a breach-of-contract action like this one, which turns on how the defendant's conduct affected the outcome of a judicial proceeding, the proper question to ask at the causation stage is what a reasonable court should have done had the defendants followed through on their agreement. 214 Ill.Dec. 923, 662 N.E.2d at 496. The inquiry therefore focuses on what a reasonable court should have done in the foreclosure action had CitiFinancial given The Patrick Group the original or a copy of the note secured by the mortgage. [3] This question turns on principles of Illinois mortgage-foreclosure law. Generally speaking, only a mortgagee can foreclose on property, and a mortgagee must (at a minimum) be the holder of an indebtedness. . . secured by a mortgage. 735 ILL. COMP. STAT. 5/15-1208. Under the Uniform Commercial Code, which Illinois has adopted, 810 ILL. COMP. STAT. 5/1-101 et seq., a key requirement to being a holder is physical possession of the note secured by the mortgage. See id. 5/1-201(b)(21)(A) (defining a holder as the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession). Had CitiFinancial delivered the original or a copy of the note, The Patrick Group would in turn have been able to produce it in the foreclosure proceeding and thus fill the evidentiary void on which the Illinois trial and appellate courts rested their adverse decisions. A reasonable court under these circumstances would have allowed The Patrick Group to proceed with the foreclosure. It follows, then, that CitiFinancial's failure to deliver the note or a copy to The Patrick Group caused the foreclosure action to fail. CitiFinancial raises two arguments in response, which do not address causation so much as they address whether The Patrick Group use[d] all reasonable means to mitigate [its] damages. Pokora v. Warehouse Direct, Inc., 322 Ill.App.3d 870, 256 Ill.Dec. 367, 751 N.E.2d 1204, 1213 (2001). First, CitiFinancial contends that The Patrick Group could have asked it to provide a lost-note affidavit, which could then have been used to establish ownership of the debt secured by the mortgage and thus foreclose on the property. Second, CitiFinancial claims that The Patrick Group could have filed a personal-judgment action against the property owners based on its ownership interest in the note. Neither of these arguments carries the day. A lost-note affidavit from CitiFinancial would not have conclusively established The Patrick Group's ability to foreclose on the mortgage. The Illinois rules of civil procedure provide that if a claim rests upon a written instrument, as foreclosure actions do, the plaintiff must attach a copy of the written instrument to the pleading. 735 ILL. COMP. STAT. 5/2-606. It is true that if the instrument is not available, a party may proceed with the action by relying on an affidavit explaining why the instrument is not available and describing its terms, id.; this is commonly called a lost note affidavit. The Uniform Commercial Code contains a similar concept, allowing a party to enforce a lost, stolen, or destroyed instrument if it can prove the terms of the instrument and its right to enforce the instrument. See 810 ILL. COMP. STAT. 5/3-309(b). CitiFinancial's argument assumes that a party may succeed in a foreclosure action under 735 ILL. COMP. STAT. 5/15-1208 so long as it can produce a lost-note affidavit. Even if we assume that Illinois law permits a party to use a lost-note affidavit as part of its proof, [4] a lost-note affidavit would not have helped The Patrick Group under the circumstances of this case. Lost-note affidavits are most commonly used to prove the terms of the underlying debt; they are rarely enough by themselves to prove ownership of a debt. Although a few courts have allowed foreclosure to proceed based on a lost-note affidavit, the affidavits in these cases also attached a copy of the underlying original note. E.g., First Fed. Sav. & Loan Ass'n of Chi. v. Chi. Title & Trust Co., 155 Ill.App.3d 664, 108 Ill.Dec. 126, 508 N.E.2d 287 (1987) (finding that an affidavit and copies of note and mortgage were sufficient to support foreclosure action). We are not aware of any case in Illinois in which a lost-note affidavit by itself was enough to prove ownership of the underlying debt, and CitiFinancial has not identified other documentary or testimonial evidence that, in combination with a lost-note affidavit, would have filled the evidentiary vacuum identified by the Illinois trial and appellate courts in The Patrick Group's foreclosure action. Thus, CitiFinancial's ability to provide a lost-note affidavit if The Patrick Group had asked is simply a red herring. This is especially so considering the gap in the chain of title in this case. The decisions of the state trial and appellate courts reflect an understandable concern that CitiFinancial might not have been the true owner of the debt. Because neither The Patrick Group nor CitiFinancial could produce an original or even a copy of the note, there remained the possibility that the note was actually held by another who would be entitled to enforce it against the property owners. This concern was reasonable in light of the questions raised by the ambiguous state of the title record. Illinois law is clear that a mortgage may not be transferred unless the underlying debt is also transferred. In re BNT Terminals, Inc., 125 B.R. 963, 969 (Bankr.N.D.Ill.1990) (applying Illinois law); Moore, 9 Ill.Dec. 337, 366 N.E.2d at 599. It might have been theoretically possible to establish ownership of the underlying debt by tracing it through a title search back to the original mortgagee. See Fin. Freedom v. Kirgis, 377 Ill.App.3d 107, 315 Ill.Dec. 537, 877 N.E.2d 24, 45 (2007) (allowing a foreclosure action to proceed when the plaintiff produced testimonial evidence, a copy of the mortgage, and evidence that the mortgage was recorded). But that possibility would not have helped The Patrick Group here given the unexplained gap in the title record. Accordingly, the fact that The Patrick Group might have obtained a lost-note affidavit from CitiFinancial does not alter the conclusion that CitiFinancial's failure to deliver an original or a copy of the note caused the Illinois state courts to reject The Patrick Group's foreclosure action. Finally, CitiFinancial argues that The Patrick Group could have filed a personal-judgment action against the property owners based on its interest in the note. A personal-judgment action amounts to an effort to enforce the note, and the normal rule under the Uniform Commercial Code is that a party may not enforce a negotiable instrument unless it has physical possession of the note. 810 ILL. COMP. STAT. 5/3-301 (class of parties entitled to enforce negotiable instruments under Illinois law is limited to the holder of the instrument or a nonholder in possession of the instrument); Locks v. N. Towne Nat'l Bank of Rockford, 115 Ill.App.3d 729, 71 Ill.Dec. 531, 451 N.E.2d 19, 20-21 (1983). Obviously, The Patrick Group could not meet this requirement because it never had possession of the note. As we have discussed, Illinois allows a party to enforce a lost, stolen, or destroyed instrument under certain circumstances, 810 ILL. COMP. STAT. 5/3-301, 5/3-309, and here, The Patrick Group was entitled to acquire whatever rights CitiFinancial had in the note, see FREDERICK M. HART & WILLIAM F. WILLIER, NEGOTIABLE INSTRUMENTS UNDER THE UNIFORM COMMERCIAL CODE § 12.03(1) (2009) ([T]he owner of an instrument may not be in possession of it. Such non-holder transferees are protected by the property principle that a transferee of property, be it real property, tangible personal property or intangible property, obtains all of the rights of his or her transferor as a result of the transfer.). Put another way, The Patrick Group might have been able to proceed with a personal-judgment action if it could establish that CitiFinancial was in possession of the instrument and entitled to enforce it when loss of possession occurred, that the loss of possession was not the result of a transfer . . . or a lawful seizure, and that CitiFinancial cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. 810 ILL. COMP. STAT. 5/3-309(a). But this is just a different way of requiring The Patrick Group to prove that CitiFinancial owned and transferred the debt, and we have already explained why a reasonable court would conclude that The Patrick Group could not make this showing. Accordingly, a personal-judgment action to recover the amount of the past-due debt would have failed. In short, as a matter of law, The Patrick Group's damages were caused by CitiFinancial's failure to deliver an original or a copy of the note secured by the mortgage. [5] The open factual question is whether the parties' agreement required CitiFinancial to do so, and on this the evidence is disputed. We therefore REVERSE the judgment of the district court and REMAND for further proceedings consistent with this opinion.