Lender’s Right to Personal Deficiency Judgment: Use It (Correctly) or Lose It

Lenders beware: if a complaint for mortgage foreclosure seeks a personal deficiency judgment against a borrower based on the borrower’s obligations under a note and mortgage, be certain to obtain the right to a personal deficiency judgment in the foreclosure judgment and a personal deficiency judgment in the order confirming sale. If your mortgage foreclosure complaint does seek a personal deficiency judgment against a borrower but you do not obtain a personal deficiency judgment in that case, you will not be able to bring a subsequent suit on the note against the borrower, as the Appellate Court of Illinois just ruled such a suit is barred under the doctrine of res judicata.

According to the Appellate Court of Illinois in LSREF2 Nova Investments III, LLC v. Michelle Coleman, 2015 IL App (1st) 140184, in an opinion handed down on June 5, 2015, where the circuit court had personal jurisdiction over a defendant to enter a personal deficiency judgment against her pursuant to section 15-1508(e) of the Foreclosure Law, plaintiff’s subsequent suit for the amount of the personal deficiency as determined in the foreclosure suit was barred by the doctrine of res judicata.

shutterstock_162913184What is res judicata? The doctrine of res judicata prevents the multiplicity of lawsuits between the same parties involving the same facts and issues. In order for res judicata to bar the same parties (or their privies) from litigating causes of action that were or could have been raised in an earlier lawsuit, the moving party must demonstrate: (1) a final judgment on the merits rendered by a court of competent jurisdiction; (2) an identity of causes of action; and (3) an identity of the parties or their privies. In this case, defendant executed a mortgage and promissory note related to a commercial property, and subsequently defaulted on payments. The plaintiff filed a single-count complaint to foreclose the mortgage seeking in its prayer for relief a judgment to foreclose the mortgage and a personal judgment for a deficiency. The complaint alleged that the defendant was “personally liable for any deficiency.” The court entered a judgment of foreclosure and sale in favor of plaintiff, finding a default by defendant, that “plaintiff [had] the right and power to declare immediately due and payable all indebtedness secured by the mortgage,” and providing that the plaintiff was entitled to a deficiency judgment against the defendant, and execution thereon as provided by law. The judgment also provided that the court retained jurisdiction to, inter alia, satisfy any deficiency which may be found due to plaintiff. A judicial sale was held, and the plaintiff purchased the subject property. The court subsequently entered an order approving the report of sale and distribution of the subject property, confirming the sale, and ordering possession. That order stated that “there shall be an IN REM deficiency judgment entered in the sum of $227,416.32 with interest thereon as by statute provided against the subject property.”

A few months later, plaintiff filed a complaint, seeking to enforce the promissory note against defendant. The defendant filed an answer, withdrew the answer, and then filed a motion to dismiss, arguing that plaintiff’s breach of promissory note action was barred by the doctrine of res judicata where the circuit court had already ruled on defendant’s liability pursuant to the promissory note. The circuit court denied defendant’s motion to dismiss without providing its reasoning, and defendant filed a motion to reconsider. The court granted defendant’s motion to reconsider, and dismissed plaintiff’s complaint with prejudice based upon res judicata.

On appeal, the Appellate Court of Illinois, First Judicial District, affirmed. The parties disputed the second element of res judicata: the existence of an identity of causes of action. Plaintiff argued there was no identity to the causes of action where it sought separate, consecutive proceedings for the adjudication of the mortgage and promissory note. The defendant argued there was an identity of causes of action where the pleadings demonstrated that the plaintiff chose to adjudicate its rights under the note in the mortgage foreclosure action.

The court agreed with the defendant. In the foreclosure action, the plaintiff specifically sought a personal deficiency judgment against the defendant based on defendant’s obligations under both the promissory note and the mortgage. Pursuant to section 15-1508(e) of the Foreclosure Law, with “any order confirming a sale pursuant to the judgment of foreclosure, the court shall also enter a personal judgment for deficiency against any party (i) if otherwise authorized and (ii) to the extent requested in the complaint and proven upon presentation of the report of sale in accordance with Section 15-1508.” Therefore, Section 15-1508 allowed a personal money judgment to be entered against the defendant in the foreclosure action and allowed plaintiff to enforce and collect it to the same extent and manner applicable to any money judgment.

In addition, the foreclosure judgment order entered stated that plaintiff would be entitled to a deficiency judgment after the sale of the property and be allowed to execute upon such judgment in the even there was a deficiency amount due. Following the judicial sale, there was a deficiency amount due. The circuit court’s order confirming the sale did not provide for an in personam deficiency judgment, only an in rem one, but the fact that plaintiff did not obtain an in personam deficiency judgment as requested in its complaint did not preclude the application of res judicata principles.

Thus, the court held that where the circuit court had personal jurisdiction over the defendant to enter a personal deficiency judgment against her pursuant to section 15-1508(e) of the Foreclosure Law based on plaintiff’s request for a personal deficiency judgment in its foreclosure complaint, plaintiff’s subsequent claim for the amount of the deficiency as determined in the foreclosure suit as a result of the sale of the property is barred by the doctrine of res judicata.

Does this affect an asset based lender’s right to pursue a foreclosure action and bring a lawsuit on the note at the same time? No. In fact, a lender may still pursue a foreclosure action and bring a lawsuit on the note consecutively and concurrently. However, if a lender pursues its remedy for personal deficiency judgment in the mortgage foreclosure case, it is precluded from subsequently seeking a personal deficiency judgment solely on the promissory note in a consecutive action.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.