Taking deficiency judgments in foreclosure

The Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-101, et.seq., (“IMFL”) allows for entry of a personal deficiency judgment against a borrower when the lender does not receive all amounts due it from the foreclosure sale of the property. Although obtaining a personal judgment may often be a pyrrhic victory, it is an option for collection that should often be pursued by foreclosure counsel.

In today’s economic climate, however, courts are becoming increasingly reluctant to entering such personal judgments, most often on the grounds of fairness and equity. On one occasion, the only reason given to this author was that “we don’t do that in this county.” Assuming that the statutory requirements are met by the lender, however, the IMFL does not give the court the discretion to refuse to enter deficiency judgments.

The first part of this article will discuss the legal standard for entry of a deficiency judgment. The second part will address several of the common roadblocks thrown up by courts in denying such judgments, and will suggest the legal arguments that should be made to overcome these roadblocks.

Legal standard for deficiency judgment

It is undisputed that trial courts have broad discretion in approving or disapproving a mortgage foreclosure sale. See, e.g. JP Morgan Chase Bank v. Fankhauser, 383 Ill. App. 3d 254 (2nd Dist. 2008). However, once the court approves the sale it does not, then, have the discretion to deny a deficiency judgment.

735 ILCS 5/15-1508 (“Report of Sale and Confirmation of Sale”) states, in part:

(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 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.

(Emphasis added).

Further, 735 ILCS 5/15-1511 (“Deficiency”) states:

Except as expressly prohibited by this Article, foreclosure of a mortgage does not affect a mortgagee’s rights, if any, to obtain a personal judgment against any person for a deficiency.

As to 5/15-1508(e)(i), although the language utilized is different from mortgage to mortgage, one common clause is “[i]f permitted by applicable law, Lender may obtain a judgment for any deficiency remaining in the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this section” In the absence of specific deficiency language, the “Rights and Remedies on Default” clause may simply give to the Bank “…any other rights or remedies provided by law” upon default.

It is important to note that a request for a deficiency judgment should be specifically included in the Complaint. Cases have held that a prayer for general relief is sufficient to authorize any judgment warranted by the facts alleged in the pleadings. Heritage Standard Bank and Trust Co. v. Heritage Standard Bank and Trust Co., 149 Ill. App. 3d 563 (2nd Dist. 1986). However, with courts scrutinizing every pleading and attached document to ensure that the plaintiff has met the requirements of the statute, the better practice is to include a prayer in the complaint for a deficiency judgment.

As to 5/15-1508(e)(ii), the amount of the judgment sought must be “proven upon presentation of the report of sale.” It is standard that at the time the motion for judgment of foreclosure and sale is filed, plaintiff’s counsel will obtain the affidavit of a duly authorized representative of the financial institution to set forth the amounts due and owing under the loan. Those amounts then are reflected in the Sheriff’s Report of Sale and Distribution, which gets filed at the time of the confirmation of sale. If the plaintiff has followed this procedure, then a deficiency judgment should be entered by the court.

Thus, at the hearing to confirm the sheriff’s sale, counsel should not only come fully prepared with the loan documents and copies of the supporting affidavits, but should also repeatedly stress to the judge the mandatory “shall” language of the statute. The court, then, has no legal basis for denying the entry of the deficiency judgment.

Judicial roadblocks and how to overcome them

1. “It isn’t fair!”

There is case law from both before and after the enactment of the Illinois Mortgage Foreclosure Law that holds that fairness and equity are not factors to be considered when a deficiency judgment is sought. For instance, the Court in Eiger v. Hunt held that “the right to a personal judgment in foreclosure proceedings does not rest on general equity principles, but upon the legal obligation of the maker of the note.” 282 Ill. App. 399 at 402-403 (1st Dist. 1935), citing Metz v. Dionne, 250 Ill. App. 369 (1st Dist. 1928). (Emphasis added).

The Eiger case was cited favorably by the court in Farmer City State Bank v. The Champaign National Bank, which held that a court has express statutory authority to render a personal judgment for a deficiency against any defendant over whom it has personal jurisdiction, or any defendant who has appeared in the foreclosure action. 138 Ill. App. 3d 847 at 850 (4th Dist. 1985). Accordingly, the fairness and equity of granting a deficiency judgment are not factors to be considered by a court, regardless of how sympathetic it may be to the defendant’s plight.

Further, case law is rich with language stating that a deficiency judgment is a right when authorized and properly proven. See, e.g., Bank of Benton v. Cogdill, wherein the court held that “[t]he right to secure such a deficiency judgment in any foreclosure proceeding is clear, provided the mortgagee receives only one full satisfaction.” 118 Ill. App. 3d 280 (5th Dist. 1983), citing Emerson v. LaSalle National Bank, 40 Ill. App. 3d 794 (2nd Dist. 1976) and In re Estate of Folksdorf, 304 Ill. App. 463 (1st Dist. 1940). (Emphasis added).

2. The loan documents were signed under a Power of Attorney

One circuit court recently took issue, sua sponte, with the fact that one of the borrowers had signed for the other borrower as her power of attorney. The borrowers never filed an answer to the Complaint, and the court had not raised any issues regarding the execution of the note and mortgage at the time that it entered the Judgment for Foreclosure and Sale.

In this instance, the argument must be made that it is undisputed that a person signing for another as power of attorney legally binds that person as though he or she had signed the document himself or herself. Further, there are no standards in either the IMFL or the Power of Attorney Act that delineate the exact manner in which a person must sign as Power of Attorney.

In addition, 755 ILCS 45/2-8 (“Reliance on document purporting to establish an agency”) states, in part:

Any person who acts in good faith reliance on a copy of a document purporting to establish an agency will be fully protected and released to the same extent as though the reliant had dealt directly with the named principal as a fully competent person.

Accordingly, whether the borrower physically put pen to paper herself of whether someone signed for her under a power of attorney, that borrower is legally bound by the loan documents.

3. Service was obtained via abode service

Another circuit court denied this author a deficiency judgment on the grounds that the borrower had been served via abode service and not personally. However, it is clear that abode service still gives the court personal jurisdiction over the defendant. 735 ILCS 5/2-203(a) sets forth the mechanism by which abode service must be obtained, upon which personal jurisdiction over the defendant is obtained. This mechanism, however, must be strictly complied with in order to obtain personal jurisdiction. See, e.g., Nibco, Inc. v. Johnson, 98 Ill. 2d 166 (1983).

4. “Things would be different if this were a commercial property”

One court, in denying the deficiency on a residential foreclosure, noted that “it would be different if this were a commercial property” before stating his unwillingness to remove the borrowers from their home and also subject them to wage deduction or account garnishment. However, the IMFL distinguishes between commercial and residential properties only in reference to reinstatement and redemption. 735 ILCS 5/15-1602 through 5/15-1604. Nowhere is a distinction made in either 735 ILCS 5/15-1508 or 5/15-1511, quoted supra, between residential and commercial property relative to the entry of a deficiency judgment. Counsel should proactively point out the unambiguous language of these statues at the confirmation hearing.

Conclusion

Although foreclosure attorneys face an uphill battle when it comes to obtaining deficiency judgments, the law is clearly on their side. Even though some courts are unwilling to enter such judgments, plaintiff’s counsel can prevail by being persistent and prepared. It is sometimes necessary to force courts to reconsider their denials in the presence of a court reporter in order to obtain the best results for the plaintiff, but such persistence often works well. Armed with the law and dogged persistence, attorneys can obtain positive results for their bank clients. ■