Thomas P. Davis and Cathy M. Davis v. G.N. Mortgage Corporation and Countrywide Home Loans, Inc.

On September 9, 1999, Thomas P. Davis and Cathy M. Davis obtained a $288,000 adjustable rate mortgage (“ARM”) from the G.N. Mortgage Corporation (“GN”) for the purpose of refinancing prior, non-business personal debts which was to be secured by their home in Manhattan, II. A few months later, GN sold the note to Countrywide Home Loans, Inc. (“Countrywide”). The Davises paid off the 30-year ARM from GN less than three years later, on February 20, 2002, and at that time were assessed over $12,000 in penalties pursuant to the terms of a five-year prepayment penalty rider included in the mortgage document. The Davises objected to the penalty and filed a diversity suit against GN and Countrywide, alleging that -the prepayment penalty agreement was fraudulently obtained, that enforcement of the penalty constituted a breach of contract and that the penalty violated the Illinois Interest Act, 815 ILCS 205/1 et seq., and the Illinois Consumer Fraud Act, 815 ILCS 505/1 et seq. The core of the Davises’ claim is that the parties had agreed to a twenty-four month prepayment rider, but that GN had nevertheless fraudulently induced them into signing one that provided for a penalty if the loan was paid before sixty months had elapsed. The district court granted the defendants- , appellees’ motions for summary judgment on each of the Davises’ legal claims, and the Davises appealed. We affirm.

I. BACKGROUND

On September 9, 1999, Thomas and Cathy Davis (the “Davises”), husband and wife and citizens of the State of Illinois, closed on a $288,000 adjustable rate mortgage loan (the “loan”) with an initial interest rate of 10.9% from the GN Mortgage Corporation in order to refinance personal debt. Aside from the Davises, the only other party present at the loan closing was Patricia Bogdanovich (“Bogdanovich”), the closing agent for TICOR Title Insurance Company, which was the title company authorized by GN to conclude the transaction.

At the closing, which took place at TI-COR’s offices in Joliet, Illinois, Bogdano-vich presented the Davises with two stacks of paper, each purportedly consisting of 24 documents and totaling 43 pages. Included in the stacks were duplicate copies of the proposed adjustable rate note, mortgage, adjustable rate rider to the mortgage, and accompanying documents entitled “Prepayment Penalty Note Ad *874 dendum,” “Alternative Mortgage Transaction Parity Act Disclosure,” and “Notice of Right to Cancel.” Although the Davises admit that they failed to read or compare the two sets of documents thoroughly at the time of the closing, 1 they allege that Bogdanovich told them that the ' stacks were identical in content and accurately represented the agreement between themselves and GN, including a provision setting forth a two-year prepayment penalty period. The Davises signed all of the documents in one of the stacks and Bogdano-vich delivered the signed stack to GN while the Davises retained the unsigned stack for their records. 2

Early in 2000, GN. sold the Davises’ mortgage, including all its rights and obligations emanating from the loan agreement, to Countrywide Home Loans, Inc. Thereafter, in the summer of 2001, the Davises requested that Countrywide apprise them of the amount required to satisfy the remaining balance on their loan as of its two-year anniversary; September 9, 2001. Countrywide responded by informing the Davises that a prepayment penalty of .approximately $12,000 (six months’ worth of interest on the loan) would apply if the loan was paid off prior to the expiration of the five-year prepayment penalty period, according to the signed prepayment penalty addendum in their loan file. This came as a surprise to the Davises, who had no knowledge that they had agreed to a five-year prepayment penalty rider and instead believed that they had signed, and were only subject to, a two-year prepayment penalty clause based on alleged representations by Bogdanovich as well as their own broker. 3

Upon reviewing the unsigned copy of the mortgage contract that they retained from the closing, the Davises discovered two documents which they had not previously read entitled “Prepayment Penalty Note Addendum,” both of which had been *875 drafted by GN. The riders were identical except that one provided for a “twenty-four month penalty period,” while the other provided for a “sixty month penalty period.” The addendum that the Davises signed at the closing was of the “sixty month” species, a fact which they do not dispute. However, the Davises claim that at the closing they signed both a two-year and a five-year addendum. They base this conclusion on the fact that they found a two-year rider in the papers they retained after the closing and that Bogdanovich told them that the two stacks of documents presented at the closing (one signed and returned to GN and the other left with the Davises) were identical. Therefore, the Davises allege that because they signed every document in one of the stacks and found both a five-year and a two-year rider in their stack, they must have signed both versions at the closing; Unfortunately for the Davises though, they are unable to produce a signed two-year agreement. On the other hand, the mortgage companies maintain that the parties never executed a two-year prepayment penalty addendum and that no such rider, signed or unsigned, exists; therefore, the Davises were rightfully charged a penalty when they refinanced before the sixty-month period in the duly signed document elapsed.

On August 23, 2001, the Davises filed a diversity action against GN and Countrywide in the United States District Court for the Northern District of Illinois. In ' their original complaint, the Davises sought a declaration that their loan was ■ subject to either a two-year prepayment ■ penalty period or no prepayment penalty period whatsoever. They also claimed that they were entitled to relief under the Illinois Interest Act, 815 ILCS 205/1 et seq., which, inter alia, makes it unlawful for a loan to provide for a prepayment penalty when that loan has an interest rate in excess of eight percent per annum (the Davis’ ARM carried an initial interest rate of 10.9% per annum) and is secured by a mortgage on residential real estate. 815 ILCS 205/4(2)(a). Before the matter was adjudicated, however, the Davises chose to . refinance their loan at a lower, fixed interest rate with another mortgage company paying Countrywide the contested $12,781.76 prepayment penalty in the process, thereby mooting this portion of their claim. As a result, on April 2, 2002, the Davises sought leave to file an amended complaint, which the court conditionally granted. 4

The plaintiffs filed their amended complaint on May 23, 2002, whereupon the trial judge addressed their failure to properly plead diversity jurisdiction and granted them ten days’ leave to file a second amended complaint to cure the deficiency, which they accomplished. The second amended complaint, 5 filed on May 30, 2002, *876 contained four counts, alleging: (1) that each of the defendants violated the Illinois Interest Act when they imposed a prepayment penalty without an agreement authorizing them to do so; (2) that Countrywide breached the parties’ contract by imposing a five-year prepayment penalty period; (3) that GN through their agent Bogdanovich intentionally committed common law fraud when they misrepresented the terms of the Davises’ mortgage loan; and (4) that GN fraudulently caused the Davises to sign inconsistent prepayment penalty riders, in violation of the Illinois Consumer Fraud Act, 815 ILCS 505/1 et seq.

At the time that the Davises filed their amended complaint, they also sought discovery from the defendants. However, due in part to settlement negotiations and two separate stays issued by the trial judge — one giving the Davises leave to file a second amended complaint and the other allowing GN to file a motion for summary judgment — GN failed to reply to any of the Davises’ discovery requests. 6 However, both of the mortgage company defendants had previously complied with initial discovery requirements in accordance with Federal Rule of Civil Procedure 26(a)(1), and each provided the Davises copies of their respective loan files for the September 9, 1999, transaction. Neither company’s copy of the Davises’ loan file contained a two-year addendum (either signed or unsigned), but both contained a signed, five-year addendum.

On July 24 and July 26, 2002, GN and Countrywide, respectively, filed motions for summary judgment. At this time, the plaintiffs filed an emergency motion to reconsider and vacate the district court’s July 12 order staying discovery pending defendants’ motions for summary judgment and to obtain discovery pursuant to Federal Rule of Civil Procedure 56(f). The trial court denied this motion on July 26, 2002. The district court granted the defendants summary judgment on all of the Davises’ claims on February 13, 2003. We affirm.

II. ANALYSIS

At the outset, we note that in a case where subject matter jurisdiction in federal court is premised on diversity jurisdiction under 28 U.S.C. § 1332, we apply the substantive law of the forum state, here Illinois. See Merrill v. Trump Indiana, Inc., 320 F.3d 729, 731 (7th Cir.2003). Thus we are obligated to “determine the issues presented herein as we believe the [Illinois] courts would.” See Trytko v. Hubbell, Inc., 28 F.3d 715, 719 (7th Cir.1994) (quoting Kutsugeras v. *877 AVCO Corp., 973 F.2d 1341, 1346 (7th Cir.1992)).

A. The District Court’s Grant of Summary Judgment in Favor of the Mortgage Companies

Summary judgment is proper if the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R.Civ.P. 56(c). We review a district court’s grant of summary judgment de novo, considering “all of the available affidavits, depositions, transcripts, and exhibits in the light most favorable to the non-moving party.” Driebel v. City of Milwaukee, 298 F.3d 622, 636 (7th Cir.2002). A genuine factual issue is one “ ‘that properly can be resolved only by a finder of fact because [it] may reasonably be resolved in favor of either party.’ ” Zemco Mfg. Inc. v. Navistar Int’l Transp. Corp., 270 F.3d 1117, 1123 (7th Cir.2001) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). Such an issue “is material only if it might affect the outcome of the case under the governing law.” Doe v. Roe No. 1, 52 F.3d 151, 153 (7th Cir.1995) (internal quotation marks omitted); see also Korf v. Ball State Univ., 726 F.2d 1222, 1226 (7th Cir.1984). “[W]e are not required to draw every conceivable inference from the record,” Gleason v. Mesirow Fin., Inc., 118 F.3d 1134, 1139 (7th Cir.1997), and mere speculation or conjecture will not defeat a summary judgment motion, Estate of Phillips v. City of Mihuaukee, 123 F.3d 586, 591 (7th Cir.1997).

The Davises assert that the district court erred in granting summary judgment to the defendants because a genuine issue of material fact exists concerning whether or not they signed a two-year prepayment penalty addendum to their loan at the closing. Premised primarily on Thomas Davis’s two-page personal declaration, the Davises allege that: (1) their loan application originally reflected a proposed, three-year prepayment penalty period; (2) their own loan broker, Boatman, had informed them prior to closing that GN had agreed to a two-year prepayment penalty period; (3) at the closing, the Davises were presented with two stacks of documents by Bogdanovich and instructed to sign one copy which would be returned to GN, while the other should be retained for their (the Davises’) records; (4) while they failed to read and compare these two stacks line-by-line, Bogdanovich, the closing agent, told them that the stacks were identical and represented their agreement with GN in all material aspects, including the agreed-upon two-year prepayment penalty rider; and (5) upon later review, the Davises found that their stack of loan documents contained both an unsigned two-year prepayment penalty addendum as well as an unsigned five-year addendum.

Based on these alleged facts, 7 the Davises argue that a reasonable trier of fact could infer that at the closing they signed a two-year addendum in addition to *878 the five-year addendum discovered in the defendants’ files. Furthermore, the plaintiffs claim that the existente of an unsigned two-year addendum in their records is material to all of their claims renewed on appeal; i.e., it is material to their breach of contract claim because it establishes that the agreed-upon and intended prepayment penalty period under the contract is unclear, and it is material to the statutory and common law fraud claims because it explains the allegedly deceptive circumstances surrounding the obtainment of the prepayment penalty agreement.

1. Breach of Contract Claim

The Davises claim Countrywide breached the September 9, 1999, loan contract by enforcing a five-year prepayment penalty rather than honoring an allegedly agreed-upon two-year prepayment penalty. However; the only evidence of any agreement to a two-year prepayment penalty period, beyond the statements the Davises claim Bogdanovich made at the closing, is an unsigned copy of a two-year prepayment penalty addendum that they (the Davises) received and retained from the closing for their records.

Illinois adheres to a “four corners rule” of contract interpretation, which provides that “ ‘[a]n agreement, when reduced to writing, must be presumed to speak the intention of the parties who signed it. It speaks for itself, and the intention with which it was executed must be determined from the language used. It is not to be changed by extrinsic evidence.’ ” Air Safety, Inc. v. Teachers Realty Corp., 185 Ill.2d 457, 236 Ill.Dec. 8, 706 N.E.2d 882, 884 (1999) (quoting Western III. Oil Co. v. Thompson, 26 Ill.2d 287, 186 N.E.2d 285, 287 (1962)). This ap proach is consonant with the general rule under Illinois contract law that “if the contract imports on its face to be a complete expression of the whole agreement, it is presumed that the parties introduced into it every material item, and parol evidence cannot be admitted to add another item to the agreement.” Sunstream Jet Express, Inc. v. Int’l Air Service Co., Ltd., 734 F.2d 1258, 1265 (7th Cir.1984) (quoting Pecora v. Szabo, 94 Ill.App.3d 57, 49 Ill.Dec. 577, 418 N.E.2d 431 (1981)); see J & B Steel Contractors, Inc. v. C. Iber & Sons, Inc., 162 Ill.2d 265, 205 Ill.Dec. 98, 642 N.E.2d 1215, 1217 (1994). In other words, “[u]nder the parol-evidence rule, extrinsic or parol evidence concerning a prior or contemporaneous agreement is not admissible to vary or contradict a fully integrated writing.” Id. (emphasis in original) (internal quotations omitted). However, “even when a contract is integrated on its face, if the contract is ambiguous, as a matter of law, then extrinsic and parol evidence is admissible to explain the terms of the ambiguous contract.” Sunstream, 734 F.2d at 1266 (quoting Storybook Homes, Inc. v. Carlson, 19 Ill.App.3d 579, 312 N.E.2d 27, 29 (1974)) (internal quotations omitted); see Pappas v. Waldron, 323 Ill.App.3d 330, 256 Ill.Dec. 439, 751 N.E.2d 1276, 1282 (2001) (citing Air Safety, 236 Ill.Dec. 8, 706 N.E.2d at 884).

Accordingly, our task is to determine whether the loan agreement is fully integrated, clear and unambiguous, Krautsack v. Anderson, 329 Ill.App.3d 666, 263 Ill.Dec. 373, 768 N.E.2d 133, 146 (2002). The threshold question for us to examine is whether the contract in question, here the mortgage loan note, is a fully integrated document, despite the lack of a specific integration clause. See J & B Steel Contractors, Inc., 205 Ill.Dec. 98, 642 N.E.2d at 1217. The determination of whether a contract is integrated is a question of law for the trial judge to decide. See id. An integrated writing is one “intended by the parties to be a final and *879 complete expression of the entire agreement,” Krautsack, 263 Ill.Dec. 373, 768 N.E.2d at 146 (internal quotation marks omitted), which means it “ ‘contains such language as imports a complete legal obligation,’ ” Eichengreen v. Rollins, Inc., 325 Ill.App.3d 517, 259 Ill.Dec. 89, 757 N.E.2d 952, 958 (2001) (quoting Armstrong Paint & Varnish Works v. Continental Can Co., 301 Ill. 102, 133 N.E. 711, 713 (1921)). Importantly, “only the subject writing may be considered to determine the integration question.” Id. at 957; see also J & B Steel, 205 Ill.Dec. 98, 642. N.E.2d at. 1218-20, (affirming the vitality of this rule, which was first established in Illinois in Armstrong, 301 Ill. 102, 133 N.E. 711 (1921)).

The loan agreement entered into between GN and the Davises is fully integrated, final in nature, and creates a completed legal obligation between the parties. When viewing the loan agreement in its entirety, we find an uncomplicated set of documents that, when read together, clearly and specifically state that the loan is subject to a prepayment penalty period of five years duration, as provided for in a separately executed addendum. The Davises, in their attempt to establish non-integration, cite to the underlying promissory note, which provides that the borrower has the right to repay the loan at any time without penalty. However, other documents in the agreement, i.e., the one-page prepayment penalty note addendum itself, plainly states that “notwithstanding and provision to the contrary [to language] contained in said Promissory Note or Deed of Trust ... [t]he first sixty months of the loan term is called the ‘penalty period.’ ” GN Mortgage Corporation’s Memorandum in Support of Its Motion for- Summary Judgment, Exh. D. The inherent purpose of the addendum to the contract is to alter the terms of the underlying agreement (here the promissory note) and the existence of such a document can not reasonably be construed as establishing non-integration. Also, the documents comprising the loan agreement were all executed on the same day, contemporaneous with each other and, after reviewing each, we hold them to be internally coherent and fully integrated. In addition, the Davises have failed to present us with any case law to even suggest that the lack of a specific integration clause in the loan agreement, in and of itself, would render the agreement incomplete or unintegrated. See Eichengreen, 259 Ill.Dec. 89, 757 N.E.2d at 957-58 (discussing J & B Steel, 162 Ill.2d 265, 205 Ill.Dec. 98, 642 N.E.2d 1215 (1994)).

Notwithstanding the clear, comprehensive and integrated nature and language of the loan contract, the Davises also argue that the agreement is facially ambiguous because of the existence of an unsigned two-year penalty addendum document in their stack of the closing papers. This reasoning is unpersuasive; for the Davises cannot cite their unsigned copy of a two-year prepayment penalty rider, the very extrinsic evidence they seek to introduce, to establish that the contract is facially ambiguous thereby requiring the consideration of extrinsic evidence. The introduction of parol evidence .to establish ambiguity in a facially unambiguous, signed, -dated and fully integrated contract is a practice which the Illinois Supreme Court has, to this date, neither condoned nor sanctioned, and accordingly we refuse to do so today. Air Safety, Inc., 236 Ill. Dec. 8, 706 N.E.2d at 884-85; Commonwealth Ins. Co. v. Titan Tire Corp., 2004 WL 2439727, *4 n. 4, 398 F.3d 879, 885 n. 4 (7th Cir.2004); see also See PPM Finance, Inc. v. Nbrandal USA, Inc., 392 F.3d 889 (7th Cir.2004) (stating that Illinois courts will “look to extrinsic evidence to deter *880 mine the parties intentions only if an agreement is ambiguous.”).

The Davises argue that we should employ the “provisional admission approach” and consider extrinsic evidence concerning even facially unambiguous agreements. However, in Air Safety, the Illinois Supreme Court reiterated the state of contract law and the four-corners rule in Illinois when it stated: “If the language of the contract is facially unambiguous, then the. contract is interpreted by the trial court as a matter of law without the use of parol evidence.” Air Safety, Inc., 236 Ill.Dec. 8, 706 N.E.2d at 884. In that same case, the Supreme Court made clear that Illinois has “never officially adopted the provisional admission approach.” Air Safety, Inc., 236 Ill.Dec. 8, 706 N.E.2d at 885 n. 1. In addition, the Court “expressly decline[d] to rule on whether the provisional admission approach may be applied to interpret a contract which does not contain an integration clause until such a case is squarely before [it].” Id.; but cf. AM Int’l, Inc. v. Graphic Mgmt. Assocs., 44 F.3d 572, 574 (7th Cir.1995). It is true that, although never definitively adopted either by the legislature of Illinois or the highest court of that State, this court as well as a number of the Illinois appellate courts have entertained the theory that under Illinois law “objective evidence supplied by disinterested third parties may establish ah extrinsic ambiguity” in an otherwise unambiguous contract under certain limited circumstances. 8 Commonwealth Ins. Co., 2004 WL 2439727, *4, 398 F.3d at 885 (quoting Ocean Atl. Dev. Corp. v. Aurora Christian Schs., Inc., 322 F.3d 983, 1003-04 (7th Cir.2003)); see also Air Safety, Inc., 236 Ill.Dec. 8, 706 N.E.2d at 885 (listing Illinois appellate court decisions). However, because the Davises do not proffer objective third-party evidence, 9 this suggested rule is inapplicable and, therefore, it is unnecessary for us to predict whether the Illinois Supreme Court would adopt this new rule of law. See Commonwealth Ins. Co., 2004 WL 2439727, *4 n. 4, 398 F.3d at 885 n. 4. 10

*881 In all, the entire loan contract, including its five-year prepayment penalty agreement, is clear, unambiguous and fully integrated; rendering extrinsic evidence inadmissible to vary the contract’s terms. The Davises essentially ask us to rewrite the signed and dated contract to include a shorter prepayment penalty period, “but courts are not in the business of rewriting contracts to appease a disgruntled party unhappy with the bargain it struck.” PPM Finance, Inc., 392 F.3d 889, 890 (7th Cir.2004). Thus, after review and consideration of the totality of the evidence, as is required, we hold that the signed and dated five-year addendum is the only legally binding agreement between the parties as to a prepayment penalty, and absent fraud, Countrywide cannot be found to have breached their agreement with the Davises by merely enforcing their rights to collect a penalty under the contract.

2. Common Law Fraud

The Davises, in a separate count of their complaint, go on to allege that GN perpetrated a common law fraud during the execution of the contract, which occurs “where there is a surreptitious substitution of one paper for another, or. where by some other trick or device a party is made to sign an instrument which he did not intend to execute.” Belleville Nat’l Bank v. Rose, 119 Ill.App.3d 56, 74 Ill.Dec. 779, 456 N.E.2d 281, 283 (1983) (citing Turzyn-ski v. Libert, 122 Ill.App.2d 352, 259 N.E.2d 295, 298 (1970)). The Davises claim that GN, along with its purported agent (Bogdanovich), mislead them by misrepresenting the terms of the mortgage loan at the closing. The Davises allege GN did so by presenting them with different versions of the prepayment penalty addendum, one of which (the five-year version) was different from what they bargained for and expected.

Under applicable Illinois law, an allegation of fraud must be established by clear and convincing evidence. Cwikla v. Sheir, 345 Ill.App.3d 23, 280 Ill.Dec. 158, 801 N.E.2d 1103, 1110 (2003). However, unlike the plaintiffs’ breach of contract claim, Illinois substantive law instructs that we are free to consider parol evidence to assist us in determining the true intent of the parties when a common law fraud has been alleged. 11 See O’Brien v. Cacciatore, 227 Ill.App.3d 836, 169 Ill.Dec. 506, 591 N.E.2d 1384, 1390 (1992); McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 1307, 1314 (7th Cir.1996). Under Illinois law, the elements the plaintiffs need to satisfy in order to establish common law fraud are: “(1) a false statement of a material fact; (2) defendant’s knowledge that the statement was false; (3) defendant’s intent that the statement induce plaintiff to act; (4) plaintiffs reliance upon *882 the truth of the statement; and (5) plaintiffs damages resulting from reliance on the statement.” Capiccioni v. Brennan Naperville, Inc., 339 Ill.App.3d 927, 274 Ill.Dec. 461, 791 N.E.2d 553, 558 (2003).

In order to satisfy the reliance element of their claim, the Davises must demonstrate not only that they relied on the GN’s representations regarding a two-year prepayment rider, but that they were justified in doing so. See Soules v. Gen. Motors Corp., 79 Ill.2d 282, 37 Ill.Dec. 597, 402 N.E.2d 599, 601 (1980). When ad dressing the issue of justified rebanee, Illinois courts have long recognized that “a party is not justified in relying on representations made when he has ample opportunity to ascertain the truth of the representations before he acts. When he is afforded the opportunity of knowing the truth ... he cannot be heard to say he was deceived by misrepresentations.” Elipas Enterprises, Inc. v. Silverstein, 243 Ill.App.3d 230, 183 Ill.Dec. 752, 612 N.E.2d 9, 13 (1993) (quoting Schmidt v. Landfield, 20 Ill.2d 89, 169 N.E.2d 229, 232 (I960)); see also Leon v. Max E. Miller & Son, Inc., 23 Ill.App.3d 694, 320 N.E.2d 256, 260 (1974); Miller v. William Chevrolet/GEO, Inc., 326 Ill.App.3d 642, 260 Ill.Dec. 735, 762 N.E.2d 1, 9 (2001). This rule applies with equal force, in instances where fraud is alleged with respect to the execution of a written contract. See Belleville, 74 Ill.Dec. 779, 456 N.E.2d at 284; see also N. Trust Co. v. VIII S. Mich. Assoc., 276 Ill.App.3d 355, 212 Ill.Dec. 750, 657 N.E.2d 1095, 1103 (1995) (“A party cannot close his eyes to the contents of a document and then claim that the other party committed fraud merely because it followed this contract.”). This is the so-called “due diligence rule,” Kolson v. Vembu, 869 F.Supp. 1315,1322 (N.D.Ill.1994), which defeats the Davises’ co