The Illinois-Federal Foreclosure Split

View Original Publication in Illinois Bar Journal, Vol. 111 #10, October 2023

In personam deficiency judgments, mandatory versus discretionary, and other practical considerations.

Federal and Illinois State Courts disagree as to whether in personam deficiency judgments are mandatory or discretionary under the Illinois Mortgage Foreclosure Law (IMFL).1 Given that disagreement, there are practical considerations for creditors and borrowers to keep in mind. For creditors, those considerations include which venue to file their complaint and what language to include in loan documents that contemplate in personam deficiency judgments. For borrowers, considerations include what defenses to evaluate raising when facing motions to confirm sales in federal court.

While the default rates on mortgages remain relatively low,2 the inevitable question with recent interest rate increases is when there will be an uptick in defaults and foreclosures, and with that the legal questions facing the courts. One area that will likely face heightened scrutiny from courts is in personam deficiency judgments. While Illinois state courts have interpreted the IMFL to mandate the entry of an in personam deficiency judgment absent a sufficient basis to set aside the judicial sale, federal courts interpreting the IMFL under diversity jurisdiction suggest that the entry of such in personam deficiency judgments is not mandatory and is in fact discretionary, leaving open the question in federal courts as to what standards to apply to that discretion.

What does the statute say?

Section 5/15-1508(e) of the IMFL provides: (e) Deficiency Judgment. In 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 other- wise 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. Except as otherwise provided in this Article, a judgment may be entered for any balance of money that may be found due to the plaintiff, over and above the proceeds of the sale or sales, and enforcement may be had for the collection of such balance, the same as when the judgment is solely for the payment of money. Such judgment may be entered, or enforcement had, only in cases where personal service has been had upon the persons personally liable for the mortgage indebtedness, unless they have entered their appearance in the foreclosure action.3

Illinois & mandated in personam judgments.

Illinois courts hold that “shall” means that the entry of an in personam deficiency judgment is mandatory and is not permissive.4 Accordingly, a trial court “must grant an in personam deficiency judgment in favor of a plaintiff under section 15-1508(e) of the [IMFL] when the requirements set forth in that section are met.”5

“The [IMFL’s] mandate that a trial court grant an in personam deficiency judgment requires no more than:

  • seeking an in personam deficiency judgment in the complaint against a specific borrower, including the applicable note and mortgage;
  • personally serving the specific borrower vesting in personam jurisdiction over the borrower; and
  • proving the deficiency upon the presentation of the sheriff ’s report of sale.”6

In Illinois state courts, a motion to confirm a sale (and enter an in personam deficiency judgment) will generally only be denied where there is evidence of fraud or an irregularity in the foreclosure proceeding; however, absent that, the court must enter an in personam deficiency judgment against the borrower.7

Federal courts & discretionary in personam judgments

In HSBC Bank USA, N.A. v. Townsend, the U.S. Seventh Circuit Court of Appeals interpreted the IMFL as allowing U.S. district courts discretion in entering in personam deficiency judgments.8 There, the bank filed suit in federal court based on diversity jurisdiction to foreclose a mortgage securing a promissory note. The district court entered summary judgment and an order providing for a judicial sale, which the pro se borrower then appealed.

Initially, the Townsend Court held that the foreclosure judgment ordering a sale is not final and appealable in federal courts in Illinois, based, in part, because under its reading of the IMFL, the courts have discretion to reduce in personam deficiency judgments and an in personam deficiency judgment cannot be determined until the judicial sale is held.9 Specifically, the Townsend Court relied upon what it considered to be permissive language in certain sections of the IMFL to reach the conclusion that the entry of an in personam deficiency judgment leaves a district court discretion over deficiency judgments.10 While Justice Hamilton’s dissent notes that Illinois law does not give trial courts the power to exercise discretion on the amount of an in personam deficiency judgment, and, instead, only gives authority to set aside a sale based upon “mistake, fraud, or violation of duty by the officer conducting the sale,”11 the Seventh Circuit’s Townsend decision mandates that federal district courts sitting in diversity jurisdiction exercise discretion in determining whether to enter in personam deficiency judgments in foreclosure actions based upon Illinois foreclosure law.

What the Townsend Court did not do is explain how to exercise that discretion. The Townsend Court simply gave some examples of circumstances in which a court could use its discretion to reduce or deny entirely an in personam deficiency judgment in noting:

  • a court may look to determine “whether the auction was conducted in a commercially reasonable way to maximize the price” and “[i]f it was not, the court might confirm the sale but decline to enter a deficiency judgment”;12
  • a court may decide “that better advertising or other measures would have produced a bid closer to the full amount owed” and “either cut or deny any deficiency judgment”;13 and
  • a court may look at “how much time elapse[d] between the district court’s sale order (which quantifies the debt at that moment) and the purchaser’s payment of the price at the auction” because “[t]he longer the delay, the more prejudgment interest must be added under the terms of the note.”14

As such, at least in federal courts considering foreclosure under the IMFL, the trial courts are going to be left to grapple with deciding under what circumstances to enter in personam deficiency judgments. Such significant discretion is certain to make its way back to the Seventh Circuit to evaluate whether that discretion was properly implemented by the trial court, especially where in personam deficiency judgments are entirely denied or significantly reduced.

Practical considerations

While the vast majority of foreclosures based upon the IMFL are filed in Illinois state courts, to the extent that creditors are able to file in federal court based upon diversity jurisdiction, the Seventh Circuit’s decision in Townsend should give at least some pause before deciding where there is even a remote chance of seeking an in personam deficiency judgment in the order approving the sale.

To the extent that the promissory note and mortgage allow for an in personam deficiency judgment, and the borrower is personally served, federal trial courts may still enter the judgment, as their Illinois state court counterparts would. However, the Townsend Court’s analysis mandates that the trial courts evaluate whether to reduce the in personam deficiency judgments or not allow them at all. The result of such discretion is to likely extend the date by which an order approving a sale is entered based upon additional briefing and potential evidentiary hearings, thus further delaying the finality of the foreclosure judgment. While foreclosure cases tend to move with greater expediency in federal court, the potential for greater litigation of the order approving the sale suggests that advantage to creditors may no longer be a reality.

For creditors, there are other key differences between state and federal court to keep in mind when deciding where to file. One is that federal courts sitting in diversity apply federal procedural law and the Illinois Supreme Court Rules do not apply.15 This means that a federal court sitting in diversity in a foreclosure case based upon the IMFL will apply federal procedural law to discovery, discovery related disputes, and other procedural matters. Additionally, a creditor filing a foreclosure action in federal court under diversity jurisdiction runs the risk of dismissal for lack of subject matter jurisdiction by naming “unknown owners” and “nonrecord claimants” as defendants given “the existence of diversity jurisdiction cannot be determined without knowledge of every defendant’s place of citizenship.”16

While many loans contain contractual provisions contemplating deficiency judgments, that will not isolate creditors entirely from potential challenges to in personam deficiency judgments in federal court sitting in diversity where the foreclosure is based upon the IMFL. And, to those creditors who continue to file in federal court, it may be worth a reevaluation of their contractual provisions regarding deficiency judgments.

For borrowers, the Townsend decision provides a blueprint to mount defenses to a motion to approve sale in an evidentiary hearing or the briefing of the motion, and while federal judges may still enter the in personam deficiency judgment sought, conversely, they may reduce or deny entirely the deficiency judgment.

  1. 735 ILCS 5/15-1101 et seq.; compare U.S. Bank Trust, N.A. v. Atchley, 2015 IL App (3d) 150144, with HSBC Bank USA, N.A. v. Townsend, 793 F.3d 771 (7th Cir. 2015).
  2. Consumer Financial Protection Bureau, Mortgage 30-89 Days Delinquent,
  3. 735 ILCS 5/15-1508(e).
  4. S. Bank Trust, N.A. v. Atchley, 2015 IL App (3d) 150144 (citing 735 ILCS 5/15-1105(b)).
  5. Id.
  6. Id. ¶ 14.
  7. See 735 ILCS 5/15-1508(b) (“Unless the court finds that (i) a notice required in accordance with subsection (c) of Section 15-1507 was not given, (ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently, or (iv) justice was otherwise not done, the court shall then enter an order confirming the sale.”).
  8. HSBC Bank USA, N.A. v. Townsend, 793 F.3d 771 (7th Cir. 2015).
  9. Id. at 775-78.
  10. See id. at 777 (citing 735 ILCS 5/15-1508(b)(2) an order confirming a foreclosure sale “may also … provide for a personal judgment against any party for a deficiency.”); 735 ILCS 5/15-1508(f) (“If the order confirming the sale includes a deficiency judgment ….”); 735 ILCS 5/15-1508(e) (the “judgment may be entered for any balance of money that may be found due to the plaintiff, over and above the proceeds of the sale or sales.”) (emphasis in original).
  11. Id. at 794 (quoting Illini Federal Savings & Loan Ass’n v. Doering, 162 Ill. App. 3d 768, 771 (5th Dist. 1987)).
  12. Id. at 776.
  13. Id.
  14. Id. 
  15. See Bank of N.Y. Mellon v. Ontiveros, 2014 U.S. Dist. LEXIS 3639, *8 (N.D. Ill. Jan. 13, 2014) (quoting Bachenski v. Malnati, 11 F.3d 1371, 1380 (7th Cir. 1993)) (“The Illinois Supreme Court Rules are ‘the procedural rules of the Illinois courts, and thus do not set out substantive law which the federal courts must follow when sitting in diversity.’”).
  16. Think Mutual Bank v. Wagner, 2014 U.S. Dist. LEXIS 35592, *3 (N.D. Ill. Mar. 19, 2014) (“The presence of ‘unknown owners’ and ‘nonrecord claimants’ in mortgage foreclosure cases like this, premised on diversity, has previously led to dismissal for lack of subject matter jurisdiction in a number of cases.”).

Reprinted with permission of the Illinois Bar Journal, Vol. 111 #10, October 2023.

Copyright by the Illinois State Bar Association.

Morgan I. Marcus | Commercial Litigation, Bankruptcy, Creditors’ Rights, Appellate Practice

Morgan brings 10 years of experience in representing financial institutions, loan servicers, and creditors on the trial and appellate levels in federal, state, and bankruptcy courts and in arbitration.  His focus is on commercial litigation, creditors’ rights, and bankruptcy litigation. If you need assistance with a related matter, contact Morgan.