Since the implosion of the real estate market, we have seen a massive number
of foreclosures in Illinois. In many of these cases, homes were sold at
auction for much less than the amount due on the mortgage. The difference
between the auction price and the amount due is called the deficiency.
In many cases, the bank did not seek a judgment against the homeowner
for this deficiency.
This created a unique problem for consumer defense attorneys -- if the
bank did not seek a personal deficiency judgment against the homeowner,
then could the bank later sue the homeowner to recover the deficiency
amount? This question has been the subject of debate at our firm, and
I am sure that other practitioners have argued this point.
Generally, there are two schools of thought on the issue where Illinois
mortgage foreclosure lawsuits are concerned.
1. Yes, The Bank Can Sue You Later
Those who advance the "Yes, the bank can sue you later," theory
tend to point out that the mortgage and the promissory note are two separate
documents that create two separate obligations. The promissory note is
a promise to repay the money lent by the bank. The mortgage is ties that
loan to the property and allows the lender to take the property if the
homeowner stops making payments.
There is case law in Illinois that discusses this idea. In general, it
states that lenders have two options when a homeowner defaults on a mortgage
loan: file a lawsuit based solely on the note or file a foreclosure action.
In the first scenario, the bank can only obtain a judgment against the
homeowner for the balance due on the note. In the second scenario, the
bank can sell the house in order to satisfy some or all of the balance due.
The argument that flows from this is that a foreclosure lawsuit is based
primarily on the mortgage obligation and not on the promissory note, therefore,
the bank can pursue the deficiency even after the foreclosure lawsuit
is over. Basically, the note is not extinguished in the foreclosure lawsuit,
so there is a separate action for pursuing the deficiency.
2. No, The Bank Can't Sue You Later
Those who advance the "no, the bank can't sue you later,"
argument tend to look at the doctrine of claim preclusion (also known as
res judicata). In Illinois, a mortgage foreclosure lawsuit is called a "quasi
in rem" proceeding. This is because the lawsuit seeks relief against
both the homeowner and the home.
The Illinois Supreme Court stated that foreclosure actions are based on
the note. It has also stated that the object of the foreclosure action
is to enforce the obligation created by [the note], throught the property,
but against the homeowner. (
ABN AMRO Mortgage Group v. McGahan, 237 Ill.2d 526, 536 (Ill. 2010).) As a result, when the foreclosure action
is completed, both the mortgage and the note have been extinguished by
the entry of a final judgment.
This argument is further supported by the Illinois Mortgage Foreclosure
Law (IMFL), which states that courts shall enter a personal deficiency
against the homeowner if sought by the foreclosing lender. (
See 735 ILCS 5/15-1508(b)(2).) Although the statute uses mandatory language
("shall"), the mandatory action is based on the lender requesting
the relief. As such, if the lender does not seek a personal deficiency
judgment, then it cannot seek one later -- the lender had its chance in
the foreclosure lawsuit.
This argument cuts to the heart of the claim preclusion/
res judicata theory -- the mortgage foreclosure lawsuit operates as a final adjudication
of the interests of the parties. Filing another lawsuit to obtain relief
that could have been obtained in the foreclosure lawsuit is unfair to
the homeowner and wastes the resources of the legal system. Quite simply,
you cannot take two bites at the same apple.
So what's the answer?
I just argued this issue on a motion to dismiss today. The plaintiff, a
third-party debt-buyer, was suing a former homeowner to recover the deficiency
amount ascertained in the foreclosure lawsuit.
In the foreclosure case, the foreclosing lender did not seek a deficiency
judgment against the homeowner. The lender's attorneys drafted the
judgment order that was signed by the judge. That order specifically stated
that the bank was seeking an "in rem" deficiency -- this means
that the deficiency was only against the house, not against the homeowner.
We filed a motion to dismiss the case based on the doctrine of
res judicata. Our basic argument was that proper time to obtain a personal judgment
against the homeowner was in the foreclosure case; the bank's failure
to do so prevented coming back later and seeking such a judgment.
After oral argument on many of the points discussed in this post, the judge
agreed with our arguments and dismissed the case. Barring an appeal from
the plaintiff, this means that our client cannot be pursued for the deficiency
ascertained in his foreclosure case.
My only regret is that this will not be a published opinion -- it would
be nice to cite to for other cases. However, if you or someone you know
is involved in a similar lawsuit, then please contact us.