Use It or Lose It When Pursuing Personal Deficiency Judgments

On June 5, 2015, the First District of the Illinois Appellate Court issued its decision in LSREF2 Nova Investments III, LLC v. Michelle Coleman¹, relating to breach-of-note actions following a mortgage foreclosure. The decision impacts how all mortgage lenders in Illinois should pursue personal deficiency judgments.

In Coleman, the predecessor of LSREF2 Nova Investments III filed a complaint seeking a judgment to foreclose Michelle Coleman's mortgage. The Court entered a judgment of foreclosure and sale, stating that “[i]n the case there is any deficiency in the amount [due], the plaintiff . . . shall be entitled to a deficiency judgment against the defendant . . .” However, the order approving the report of sale and distribution of property stated there would be an in rem deficiency judgment (against the property only).

Following the foreclosure, LSREF2 Nova Investments III filed another complaint against Coleman, this time seeking to enforce the promissory note. In response, Coleman filed a motion to dismiss². In her motion, Coleman argued that the breach-of-note action was barred by res judicata, the principle that prohibits multiple lawsuits between the same parties involving the same facts and issues³.

In order for res judicata to be invoked, three factors must be present:

(1) Final judgment on the merits;
(2) Identity of causes of action; and
(3) Identities of the parties or their privies⁴

The Court easily identified the first and third factors, but not the second: identity of causes of action. To determine causes of action, the Court used the transactional test established in River Park Inc. v. City of Highland Park⁵. In this test, “separate claims are considered as part of the same cause of action . . . as long as the claims arise from a single group of operative facts, regardless of whether they assert different theories of relief.”⁶  

The Court stated that the issue raised in the breach-of-note action could have been resolved in the foreclosure action. According to the Court, the operative facts were identical -- namely, the pursuit of the deficiency caused by the plaintiff’s default. As a result, due to res judicata, the trial Court properly dismissed the breach-of-note action with prejudice.

For mortgage lenders in Illinois, this decision essentially means “use it or lose it” when pursuing personal deficiency judgments.

Mortgagees may pursue foreclosure and bring a lawsuit on the note in one of two ways:

Consecutively. The mortgagee initiates a breach-of-note action and obtains a judgment. Then, in a separate proceeding, the mortgagee files a complaint to foreclose the mortgage. When the foreclosure is complete and the mortgagee obtains a personal deficiency against the mortgagor, the two judgments are merged into one.

Concurrently. This method is more popular and arguably more cost-effective. The mortgagee brings an action to foreclose the mortgage and, at the same time, requests a personal deficiency judgment following the sale of the property. The mortgagee also should enter the deficiency in the judgment of foreclosure and sale order, if the Court has jurisdiction to do so.

The Coleman decision chips away at mortgage lenders' ability to recover against a mortgagor in default. If Illinois lenders wish to collect on a promissory note and/or any deficiency following a mortgage foreclosure, they should pursue the remedies concurrently to avoid the res judicata situation in Coleman.

WWR will continue to monitor the case law in this area as it develops further.

For more information, please contact Charles Andrew ("Drew") Walgreen, Esq. Mr. Walgreen is an attorney based in the firm's Chicago office, and is a member of the Commercial and Consumer Collections practice groups, as well as the Real Estate Default Group. Mr. Walgreen is experienced in the prosecution of all aspects of Illinois and Wisconsin mortgage foreclosures, breach of note litigation and eviction actions on behalf of national loan servicers, note holders and secured lending institutions.