IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS
COUNTY DEPARTMENT, CHANCERY DIVISION
Kenneth and Patricia Leahy, )
)
Plaintiff, )
)
vs. ) 05 CH 16744
)
Harrison & Chase, Inc., J.T. Foxx, ) Judge Bronstein
George Hantzakos, Justin Core LLC, )
Walberg Investment Company II, LLC, ) Jury Trial Demanded
Walberg Investment Company I, LLC, )
BankFinancial, F.S.B., and )
Unknown Owners and Nonrecord Claimants, )
)
Defendants. )
Walberg Investment Company II, LLC, )
)
Plaintiff, )
)
vs. ) 05 M2 002336
)
Kenneth and Patricia Leahy, )
)
Defendants. )
RESPONSE TO MOTION FOR USE AND OCCUPANCY PENDING TRIAL
Now come Kenneth and Patricia Leahy ("the Leahys"), by and through their attorneys,
Daniel P. Lindsey, of the Legal Assistance Foundation of Metropolitan Chicago, and Philip A.
Creed, of McCarthy & Levin, and respond to the Motion for Use and Occupancy Pending Trial
("Motion") filed by Walberg Investment Company II , LLC ("Walberg"). For the reasons set
forth below, Walberg is not entitled to Use and Occupancy ("U & O") pending trial of this action.
INTRODUCTION
The Leahys filed this quiet title action on September 30, 2005. In their First Amended
Complaint to Quiet Title and for Other Relief ("Complaint"), Leahy v. Walberg, et al., 05 CH
16744, the Leahys name Walberg and other related individuals and entities as Defendants. A
true and accurate copy of the Leahys' Complaint is attached hereto as Exhibit 3. The Leahys'
Complaint includes 8 counts and alleges, at its core, that the purported sale of the Leahys' home
of 40 years must, by law, be construed as an equitable mortgage. Likewise, the monthly
payments which the Leahys have struggled to make for the past two years must, by law, be
construed not as lease payments, but as monthly mortgage payments. Accordingly, now that the
Leahys have stopped making monthly mortgage payments, Walberg's sole remedy, by law, is to
pursue foreclosure of its equitable mortgage.
However, instead of filing a foreclosure action or asserting counterclaims in this action,
Walberg sought to assert its rights as a purported landlord by filing an independent eviction case,
Walberg v. Leahy, 05 M1 002336, which it filed on October 20, 2005. The Leahys immediately
moved to consolidate Walberg's eviction case into this action. Their motion was granted on
November 8, 2005, and the eviction case was consolidated herein.
Nonetheless, Walberg has now filed a motion for U & O in this case. In so doing,
Walberg continues to seek to be treated as a landlord, and to have the Leahys treated as tenants.
Motions for U & O are routinely available to landlords filing eviction cases. They are not,
however, available where, as here, two parties are contesting title. Though it fails to
acknowledge it, Walberg's motion for U & O is a motion for preliminary injunction, and,
applying the facts at issue in this case, Walberg falls far short of meeting the requirements for a
grant of preliminary injunctive relief. As with all mortgagees, an equitable mortgagee must seek
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to foreclose its lien using the procedures set forth in the Illinois Mortgage Foreclosure Law
("IMFL"), 735 ILCS 5/15-1101 et seq. This includes actions to foreclose on "equitable
mortgages" and on "every deed conveying real estate, although an absolute conveyance in its
terms, which shall have been intended only as a security in the nature of a mortgage." 735 ILCS
5/15-1207(c) and (d). The presumption enshrined in the IMFL is that a mortgagee is adequately
protected by its security interest in the property; therefore, unlike in eviction cases, U & O is not
available. Such could not be truer here, where Walberg has gained (formal) title to a house worth
several hundreds of thousand dollars more than the debt which Walberg paid off on behalf of the
Leahys. There is a huge amount of equity in the Leahys' home.
Walberg's motion should be denied based on the allegations set forth in the Leahys' First
Amended Complaint, and verified by the Leahys in their Affidavits (attached hereto as Exhibits 1
and 2). The allegations set forth fully in the First Amended Complaint and in the Leahys'
Affidavits are summarized below.
FACTUAL BACKGROUND
The Leahys bought their single-family home ("Home" or "Property") located at 1490
Pleasant Lane, Glenview, Illinois, 60025, in 1964, for approximately $22,000. Over the years,
the Leahys took out several mortgage loans in order to build an addition to their Home, and to
put their two daughters through college. Affidavit of Kenneth Leahy (Exhibit 1), 1; Affidavit of
Patricia Leahy (Exhibit 2), 1; First Amended Complaint (Exhibit 3), 4, 13-14.
After working for 30 years in the area of customer service call management, Mr. Leahy
was laid off from his job at AT & T Cable, which was downsizing to make itself a more
attractive acquisition to its prospective buyer, Comcast. At the time, Mr. Leahy was about to turn
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63 years old. Because Mr. Leahy was subsequently unable to find full-time employment, the
Leahys fell behind on their mortgage payments. The Leahys' lender, Countrywide, offered to
take title to the home in lieu of foreclosing, but the Leahys refused: they knew they only owed
about $179,000 on their mortgage, whereas they knew their house was worth at least $400,000 to
$500,000. Exhibit 1, 2-4; Exhibit 2, 2-4; Exhibit 3, 16-20.
The lender filed a foreclosure suit, and the Leahys began to receive a wave of
solicitations. Of all of these, the solicitation from Harrison & Chase stood out: this company
claimed to be "Illinois' Top Foreclosure Mitigation Firm," and it claimed a 98.3% success rate in
saving people's homes from foreclosure. Nowhere did the solicitation indicate that Harrison &
Chase would sell the homeowner's property. Exhibit 1, 5-7; Exhibit 2, 5-7; Exhibit 3, 22-26.
Based on several meetings with representatives of Harrison & Chase, the Leahys agreed to put
their home into a "protected trust." They were told they would still own the property, together
with an investor (which turned out to be Walberg), and that by putting the home in a "protected
trust," they would be protecting the home from creditors. The Leahys were told that they would
then make monthly payments and could buy the home back out of the trust in two years. They
were told that if the home were sold, they sould have a right of first refusal. Exhibit 1, 9-11;
Exhibit 2, 9-11; Exhibit 3, 27-34.
Harrison & Chase lied. On October 3, 2003, the Leahys attended a closing, where,
contrary to the statements that had been made to them, title to the home was transferred outright
to Walberg, and, unbeknownst to the Leahys, Walberg (or one of its affiliate companies) turned
around a month later and mortgaged the home for an additional $160,000 (by taking out a loan of
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$368,000, whereas the payoffs on behalf of the Leahys had only been about $207,000). Exhibit
1, 12-16; Exhibit 2, 12-16; Exhibit 3, 35-46.
Never knowing about this new, higher mortgage loan, the Leahys struggled mightily for
24 months to make payments of $2,500, largely with the help of family and friends (since the
$2,500 payments approximated the Leahys' total monthly income). Despite Mr. Leahy's multiple
hospitalizations, and the death of both of Mrs. Leahy's parents, the Leahys managed somehow to
make these payments, hoping to preserve the possibility of buying their house back out of the
"protective trust." All told, over the past two years, the Leahys have made payments of $56,650.
Property taxes, which remain in the Leahys' name, have been paid using a portion of these
monthly payments. The Leahys have continued to pay for homeowners insurance separately.
Exhibit 1, 17-20; Exhibit 2, 17-20; Exhibit 3, 47-51.
The Leahys never intended to sell their home to Walberg, and the prospect of an outright
transfer of title to Walberg was contrary to all of the statements made to them by Harrison &
Chase. The Leahys were not willing to deed their home to the lender, when offered, and they
were not seeking to sell to Walberg. Exhibit 1, 13; Exhibit 2, 13; Exhibit 3, 57.
A real estate broker who is familiar with the area in which the Leahys live recently
estimated that the value of their Property is at least $659,000. Affidavit of Connie Browne
(attached hereto as Exhibit 4). As such, the Leahys would never have deeded their property to
Walberg (or anyone else) for a mere $207,000.
The Leahys do not want to be evicted from their Home of 40 years. They want to save
their Home and the equity built up therein. They want this court to declare that the October 2003
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transaction was, by law, an equitable mortgage. That is why they filed this quiet title action.
Exhibit 1, 22; Exhibit 2, 22; Exhibit 3, 58.
ARGUMENT
I. Walberg must be denied U & O because such relief is only appropriate in forcible
entry and detainer actions, not in quiet title actions where the party in possession
contests title and alleges an equitable mortgage.
Walberg's claim that it is entitled to U & O boils down to the claim that it is a landlord
with an enforceable lease agreement, and that, pending any legal action related to possession of
the subject premises, it should be able to collect its normal "rent." Walberg attaches the lease
agreement it entered into with the Leahys, arguing that this agreement makes it a landlord
entitled to collect U & O. Yet Walberg fails to acknowledge all of the above circumstances
surrounding the Leahys' real estate transaction, and the claims arising from those circumstances.
Walberg fails to mention that the lease agreement is part of a sale-leaseback with an option to
repurchase, and that the subject transaction was, according to the First Amended Complaint, part
of a scheme to defraud the Leahys of up to $500,000 of equity built up in their home of 40 years.
There is no dispute as to what documents were signed by the Leahys, or as to what those
documents say. The dispute is as to the their legal effect. Walberg does not even acknowledge
that the Leahys are the long-time homeowners of the Property. Were Walberg to acknowledge
such, it would no doubt argue that by transferring title to Walberg, the Leahys sold their home
(never mind that they "sold" it for less than a third of its value), and, that after 40 years of living
in the only home they'd ever owned, the Leahys became mere tenants owing rent to a landlord.
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Thus, according to Walberg's blinders-eye view, it should be able to collect "rent" pending this
action.
The facts speak loudly otherwise. According to the facts as set forth above, the
transaction at issue has all the hallmarks of an equitable mortgage, and not a true sale creating a
subsequent landlord-tenant relationship.
The doctrine of equitable mortgage has been recognized in Illinois for over 100 years,
under facts similar to the Leahys' transaction with Walberg. The relevant factors in determining
whether a deed that is absolute in form constitutes a mortgage as a matter of law include the
relationship of the parties, the circumstances surrounding the transaction, the adequacy of the
consideration, and the situation of the parties after the transaction. Nave v. Heinzmann, 344 Ill.
App. 3d 815, 821 (5th Dist. 2003). In Nave, the Illinois Appellate Court held that simultaneous
agreements to sell and then re-purchase property constitute an indication that the parties intend
the transaction to be a mortgage. Id., 344 Ill. App. 3d at 821-22. As the Nave court pointed out,
a "declaration that a deed which is otherwise absolute in form is a mortgage, does not require the
existence of fraud, accident, or mistake." Id. at 821. A host of Illinois appellate courts have
found that a transaction, like this one, that amounts to a sale-leaseback with an option to
repurchase, is in fact an equitable mortgage. See, e.g., McGill v. Biggs, 105 Ill. App. 3d 706 (3rd
Dist. 1982); Metcalf v. Altenritter, 53 Ill. App. 3d 904 (5th Dist. 1977); Warner v. Gosnell, 8 Ill.
2d 24 (1956); In re Scheribel's Estate, 340 Ill. App. 238 (1st Dist. 1950); Kiethly v. Wood, 151
Ill. 566 (1894).
All of the factors identified as relevant in these cases indicate that the Leahys' transaction
should be construed as an equitable mortgage. From the point of initial solicitation through
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closing, Harrison & Chase and its agents never indicated to the Leahys that they were selling
their house; instead, they were promising to help save the Leahys' home from foreclosure,
supposedly by helping the Leahys put the home in a "protected trust." Clearly, the Leahys did not
intend to sell their home; they made this clear from the beginning, even in refusing to transfer
title to Countrywide-because they knew their house was worth far more than the mortgage debt
they owed. Both Harrison & Chase and Walberg were far more sophisticated than this retired
couple who had never owned any other real estate, and who simply wanted to save their home.
As further indicia of an equitable mortgage, the Leahys remained in the property, hoping
somehow to come up with the "repurchase" price (in fact a balloon payment on the equitable
mortgage loan advanced by Walberg to pay off Countrywide). Throughout, the Leahys intended
to stay in their home. Just as they had refused to sell low to Countrywide, there is absolutely no
indication that they intended to sell their home to Walberg for less than a third of what it was
worth.
Under Illinois law, every mortgage, equitable or otherwise, must be foreclosed
exclusively under the procedures set forth in the Illinois Mortgage Foreclosure Law. U & O,
routinely available in eviction cases, is not available in foreclosure actions. Indeed, in the very
case cited by Walberg in support of its motion, Morales v. Zamora, 2003 WL 21467107, *1 (Ill.
App. 1st Dist., May 6, 2003), the eviction court judge whose grant of U & O was affirmed
suggested as much:
"The only concern I have is to apply the forcible entry and detainer statute to the
proceeding in front of me. The only basis, as I said before, for me granting the
motion of use and occupancy is because at some juncture it is the appropriate
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remedy, not in the [separately filed] Chancery proceeding, but just in the
proceeding in front of me…."
Here, in contrast, now that Walberg's eviction case has been consolidated into this quiet title
action, and given that title is being contested (which was not the case in Morales), U & O is not
available. Given the nature of the facts pled and the claims alleged herein, this is no traditional
landlord-tenant relationship in which the status quo would be maintained by granting U & O.
There is simply no precedent for granting U & O in a case like this, where title is being contested
by long-time homeowners who entered into an equitable mortgage.
II. Walberg is not entitled to U & O because it does not meet the standard for a grant
of preliminary injunctive relief.
As stated above, Walberg may only bring its equitable mortgage claim under the Illinois
Mortgage Foreclosure Law. The IMFL contains no authority for payment of U & O to a
mortgagee pending trial. The mortgagee is presumed to be adequately secured, and that is
certainly the case here. Because the applicable statute does not provide for U & O, Walberg is,
without acknowledging it, seeking preliminary injunctive relief, which may only be ordered
pursuant to the Injunction Act. See 735 ILCS 5/11 101. The Injunction Act creates an
extraordinary remedy. Stavros v. Karkomi, 28 Ill. App. 3d 996, 329 N.E.2d 563 (1st Dist. 1975).
Specifically, a preliminary injunction is "an extraordinary remedy which should be used
sparingly, with due restraint, and only when the circumstances clearly require it." Cullen Electric
co. v. Cullen, 218 Ill. App. 3d 726, 578 N.E.2d 1058, 1061 (1st Dist. 1991). Thus, a party must
plead facts which clearly establish his or her rights to the requested relief. Allstate Amusement
Co. v. Pasinato, 96 Ill. App. 3d 306, 308, 421 N.E.2d 374 (1st Dist.1981). Walberg has
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presented no argument as to why this court should grant the extraordinary remedy of preliminary
injunctive relief in this case.
The party seeking a preliminary injunction must establish each of the following elements
before the injunction may issue:
(a) that the party has a reasonable likelihood of prevailing on the merits of the
case; (b) that the party has no adequate remedy at law and will be irreparably
injured if the injunction is not granted; (c) that the threatened injury to the party
will be immediate, certain, and great if the injunction is denied while the loss or
inconvenience to the opposing party will be comparatively small and insignificant
if it is granted; and (d) that granting the preliminary injunction will not have an
injurious effect upon the general public.
McCormick v. Empire Accounts Service, Inc., 49 Ill. App. 3d 415, 417, 364 N.E.2d 420 (1st
Dist. 1977). Failure to establish any of these necessary elements must result in the denial of
injunctive relief. Mingere v. DeVito, 67 Ill. App. 3d 371, 373, 385 N.E.2d 20 (1st Dist. 1988).
In this case, Walberg has failed even to allege the required elements.
First, Walberg has not provided any evidence showing that it has a likelihood of
prevailing on the merits. In contrast, the Leahys' Complaint and Affidavits demonstrate a strong
likelihood of success on the merits, at the very least on their equitable mortgage claim, given
both the circumstances surrounding the subject transaction and the gross disparity between the
amounts paid on their behalf ($207,513.50) and the value of the home they stand to lose (at least
$659,000.00), not to mention the additional $56,650 the Leahys have paid to Walberg over the
past two years.
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Second, Walberg has a perfectly adequately remedy at law. If it prevails (which it should
not), then Walberg will retain title to a home worth at least $659,000.00 And if, incredibly, this
court finds that Walberg is entitled to any further relief, this court can enter an award for money
damages. As for the issue of possession, § 1701(b)(1) of the IMFL, 735 ILCS 5/15-1701(b)(1),
presumes that a residential mortgagor will remain in possession during the pendency of a
foreclosure suit absent an extraordinary showing of good cause supported by sworn affidavit.
Travelers Insurance Company v. LaSalle National Bank, 200 Ill. App. 3d 139, 143 (2nd Dist.
1990).
Third, Walberg needs to plead harm which is "immediate, certain, and great" compared to
the relatively insignificant harm that would befall the Leahys were injunctive relief granted. It is
hard to imagine how Walberg could even make such a claim. Not only has Walberg obtained
title to a house worth three times what it paid, but Walberg has already cashed out about
$160,000 of the available equity by virtue of the $368,000 mortgage loan which (unbeknownst to
the Leahys) Walberg took out with BankFinancial. Indeed, were Walberg to make the self-
serving argument that it needs U & O to cover payments due on this illegal $386,000 mortgage,
the court can do the math: the $160,000 that Walberg (or its affiliate) cashed out can fund 64
monthly payemnts of $2,500. Add on top of this the fact that the Leahys have struggled mightily,
despite underemployment and multiple instances of family illness, hospitalization, and death, to
pay Walberg an additional $56,650 over the past two years. In short, Walberg has already seen a
huge windfall. It will suffer nothing by being denied additional monthly profits, whereas the
Leahys have already suffered mightily, and will suffer further financial stress if they are forced to
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pay so-called U & O payments to Walberg (payments that approximate the Leahys' total monthly
income).
Fourth, Walberg has to show that granting U & O in this context will not have an
injurious effect upon the general public. To the contrary, granting U & O will further encourage
the growing phenomenon of equity stripping known as "rescue fraud," the practice to which the
Leahys fell victim herein, and a species of fraud that is arising across the country wherever there
is a high number of foreclosures combined with rising property values. See "Dreams Foreclosed:
The Rampant Theft of Americans' Homes Through Equity-stripping Foreclosure 'Rescue'
Scams," National Consumer Law Center, June 2005 (available at:
http://www.consumerlaw.org/news/ForeclosureReportFinal.pdf).
Walberg cannot possibly meet the stiff burden of proof required for the injunctive relief it seeks
in asking for U & O.
WHEREFORE, the Leahys respectfully request that the Court deny Walberg's Motion for
Use and Occupancy Pending Trial.
Attorney for the Leahys
Daniel P. Lindsey
Attorney Code No. 91017
Legal Assistance Foundation of Metropolitan Chicago
111 W. Jackson Blvd., 3rd Floor
Chicago, IL 60604
(312) 347-8365
Philip A. Creed
Attorney Code No. 90531
McCarthy & Levin
100 W. Monroe, Ste. 1612
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Chicago, IL 60603
(312) 263-1155
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