Sunday, October 13, 2013

FYI: Ill App Ct Confirms Lenders May Sue on Note and Mortgage Consecutively or Concurrently, Rejects Borrower's Claims Against Second Mortgagee

The Illinois Appellate Court, First District, recently rejected a borrower's argument that a second mortgagee was barred from demanding payment in exchange for release of its lien after it had previously obtained a default judgment on the promissory note secured by the mortgage. 


In so ruling, the Court noted that Illinois law allows a creditor to consecutively or concurrently pursue remedies under a mortgage and note, and that the second mortgage had not been extinguished in the foreclosure because a judicial sale of the property never occurred as required for a foreclosure to become final.  


A copy of the opinion is available at:


Two banks extended loans to plaintiffs borrowers ("Borrowers") to finance the purchase of a residence.  The first bank ("First Bank") secured its loan with a first mortgage on the property.  Defendant bank ("Second Mortgagee") similarly secured its portion of the financing with a second mortgage on the same property.  When Borrowers stopped making their loan payments, First Bank filed a foreclosure action against both Borrowers and Second Mortgagee, and subsequently obtained a default judgment against them.  The court in the foreclosure action entered a judgment for foreclosure and sale, but the sale never took place.  Rather, Borrowers set up a short sale of the property, with the sale being subject to the approval of both banks. 


During the pendency of the foreclosure action, Second Mortgagee, through the co-defendant law firm ("Law Firm"), filed suit against Borrowers on the promissory note secured by the second mortgage.  Several months following entry of the foreclosure judgment in First Bank's favor, Second Mortgagee obtained a default judgment against Borrowers on its note allowing it to garnish Borrowers' wages.  Second Mortgagee recorded the judgment on the note.


Borrowers obtained an offer for the property for less than the amount of the foreclosure judgment, and First Bank agreed to approve the short sale if Second Mortgagee executed a release of its second mortgage.  Second Mortgagee ultimately agreed to the release after requiring Borrowers to pay a small portion of the amount they owed.  


Without challenging the enforceability of Second Mortgagee's judgment against them on the note, Borrowers filed suit against Second Mortgagee and Law Firm, asserting that during the period when they were trying to sell their property, Law Firm improperly maintained that Second Mortgagee had an enforceable second mortgage following the judgment on its note. 


Specifically, Borrowers argued that res judicata barred any action on the second mortgage, such as requiring payment in exchange for the release, once Second Mortgagee had obtained a default judgment on its promissory note.  Borrowers also claimed that Second Mortgagee's demand for payment to execute the release violated the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq., and, further, that Law Firm engaged in false or misleading conduct in violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. 


Second Mortgagee and Law Firm moved to dismiss, arguing that Second Mortgagee's default judgment on the note did not bar it from enforcing the second mortgage, and that First Bank's foreclosure judgment did not extinguish the second mortgage since no judicial sale and confirmation of sale ever took place.


The lower court dismissed Borrowers' complaint with prejudice.  Borrowers appealed.  The Appellate Court affirmed.


As you may recall, the Illinois Mortgage Foreclosure Law ("IMFL") provides that a foreclosure "complaint . . . may be joined with other counts or may include in the same count additional matters or a request for any additional relief."  735 ILCS 5/15-1504(b). 


The IMFL further provides that following a judgment of foreclosure, only a judicial sale of the subject property and judicial confirmation of the sale will terminate "with finality" the rights of third parties.   735 ILCS 5/15-1404. 


Applying the so-called transactional test to determine whether res judicata barred Second Mortgagee's enforcement of its lien, the Appellate Court relied on court precedent and the IMFL in concluding that a mortgagee may choose whether to proceed on a note or to foreclose on a mortgage.  See LP XXVI, LLC v. Goldstein, 349 Ill. App. 3d 237, 241 (2004)("mere proximity in time and the overlap of some of the parties [do not] render them a single transaction . . . ."); Citicorp Savings of Illinois v. Ascher, 196 Ill. App. 3d 570, 574 (1990)(ruling that a foreclosure judgment does not bar a later suit on a guaranty agreement).  In so doing, the Appellate Court rejected Borrowers' assertion that enforcement of personal liability on the underlying note and a mortgage foreclosure action must be pursued in a single action.


Distinguishing between in rem, quasi in rem, and in personam actions, the Appellate Court also explained that the IMFL expressly applies only to mortgage foreclosures and does not require that other types of lawsuits, such as actions on a promissory note, be joined to the foreclosure in a single action. 


The Court also ruled that under the IMFL, First Bank's foreclosure judgment against Second Mortgagee did not preclude it from pursuing payment in exchange for the release of its mortgage because First Bank never held a judicial sale of the property. 


Finally, the Court also concluded that Borrowers' claims under the Illinois Consumer Fraud and Deceptive Business Practices Act and the federal Fair Debt Collection Practices Act could not survive in light of the Court's ruling on the viability of the second mortgage.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois


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