Mortgage Law Roundup

Sharp Thinking

No. 127    Perspectives on Developments in the Law from Sharp-Hundley, P.C.    February 2015

“In Rem” Deficiency Judgments:  Risky Nonsense?

            By John T. Hundley, 618-242-0200, john@sharp-hundley.com

            It’s a curious practice:  Foreclosure plaintiffs file a complaint seeking a personal deficiency judgment against the mortgagor, but provide in the order confirming sale that the deficiency judgment is “in rem”.  In rem, of course, means that the judgment is against the thing – the property which, by the terms of the order of confirmation, is transferred to the purchaser at the foreclosure sale (or its assignee).  Since the deed issued pursuant to that confirmation vests good title in that purchaser (or assignee), what is the property encumbered by the “in rem” deficiency judgment?  There would appear to be none.  The in rem deficiency judgment clause appears to be legal nonsense.

            To be sure, switching the deficiency judgment from in personam to in rem prevents the foreclosure plaintiff from being in contempt if the mortgagor has filed for bankruptcy; in that circumstance the mortgagee will have received relief from the stay to pursue its remedies against the mortgaged property, but not against the debtor personally.  So the taking of an “in rem” judgment prevents liability in the bankruptcy context, but no more so than if no deficiency judgment were taken at all.  And if, as we think, the “in rem deficiency judgment” is a mere legal fiction, words that mean nothing legally, we are at a loss as to why the clause is included. 

            If the practice serves no good purpose, a case decided by the Appellate Court in Chicago late last year demonstrates its riskiness.  In LSREF2 Nova Inv. III, LLC v. Coleman, 2014 IL App (1st) 140184, plaintiff filed a foreclosure complaint which sought a personal deficiency judgment; it tendered to the trial court a foreclosure judgment which said that any deficiency would be personal; and only in a confirmation order did it ask for the deficiency judgment to be in rem.  Having received such a judgment, it then went off and filed a separate action against the debtor based on the promissory note.                                                      

            The debtor responded that the second suit was barred by res judicata, and the trial court agreed.  So did one-third of the appellate panel.  Two of the appellate judges voted to give the plaintiff a second bite at the personal-judgment apple, but their reasoning is unpersuasive.  To be sure, a mortgagee has the right to sue on the mortgage or the note or both and to do so in whatever order it wants (see Sharp Thinking No. 105 (December 2013)).  But where it does sue on both (as permitted by the current Illinois Mortgage Foreclosure Law), there appears to be no logic to holding that res judicata does not apply just because the plaintiff did not receive the requested personal relief.

            We think the better result would have been to leave the plaintiff hoisted upon its own petard, and that the case would be a good one for Supreme Court review.  What do you think?  Was LSREF2 correctly decided?  Is there some basis for the in rem deficiency judgment that we are missing?  Let us know your thoughts, which we’ll include in a future edition of Sharp Thinking.

Appeals Court Renders Key HAMP Decision

            A purported denial on the merits of a mortgagor’s Home Affordable Mortgage Program (HAMP) mortgage modification application is an admission that the mortgagee had all the required documentation needed to make its decision, a panel of the Appellate Court in Chicago has concluded. 

            Dealing with the HAMP rules applicable to Federal Housing Administration (FHA) mortgages, the court in CitiMortgage, Inc. v. Lewis, 2014 IL App (1st) 131272, relied upon a denial letter to conclude defendant’s application was complete, but upon a subsequent letter to conclude that it was still pending.  Because the later letter suggested the application was still pending, the court concluded that a foreclosure sale may have been in violation of FHA-HAMP rules and § 15-1508(d-5) of the Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1508(d-5)).

            The court vacated the trial court’s confirmation of the foreclosure sale and ordered an evidentiary hearing on whether the sale had violated those provisions.

            Lewis is significant for several reasons:

              ►       It demonstrates that mortgagees have to be diligent in their use of “pending” and “denial” letters, because there are important ramifications to their issuance.

              ►       It agrees with CitiMortgage, Inc. v. Bermudez, 2014 IL App (1st) 122824 (see Sharp Thinking No. 116 (June 2014)), that the initial burden of showing compliance with HAMP application requirements rests with the mortgagor.

              ►       Lawyers will argue about this, but it appears to create a right to an evidentiary hearing when a sale is held in apparent violation of the HAMP rules.

Void Foreclosure Judgment May Be Attacked At Any Time

            Neither Wells Fargo Bank, N.A. v. McCluskey, 2013 IL 115469, nor any other applicable case provides that an attempt to vacate a mortgage foreclosure judgment after confirmation of the sale is limited to the matters stated in § 15-1508(b) of the Illinois Mortgage Foreclosure Law, the Appellate Court’s Second District has held.

            The court ruled that even though a series of properties were sold pursuant to foreclosure judgment in 2009 and the mortgagor did not seek to vacate until 2013, 735 ILCS 5/2-1401 permitted such a motion to vacate because a void judgment may be attacked at any time.  West Suburban Bank v. Advantage Financial Partners, LLC, 2014 IL App (2d) 131146.

            In West Suburban, the judgments were ruled void because the private process server had let both its corporate status and its state registration lapse when it served the foreclosure summonses and complaints.  The fact that the mortgagor in fact obtained notice of the foreclosure through the defective services was inconsequential, the court said.

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