Can A Bank Sue You For A Deficiency After The Foreclosure Lawsuit Is Over?
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.