September 1, 2015
by Lee Perres, Jill Rein, and Kimberly Stapleton
Pierce & Associates, P.C. (USFN Member – Illinois)
On June 5, 2015, an important appellate decision was issued in the First Judicial District of Illinois about personal deficiencies. It is significant with respect to the mortgage foreclosure practice in Illinois because it directly impacts a lender’s options in pursuing a personal deficiency judgment, an option often sought after a judicial foreclosure sale on foreclosed properties. [LSREF2 Nova Investments III, LLC v. Coleman, 2015 Ill. App. (1st) 140184].
The underlying suit was brought on the note for the balance due after an in rem judgment in a foreclosure suit was obtained. The appellant, LSREF2, sought review of the trial court’s ruling that LSREF2’s complaint seeking relief under a promissory note post-foreclosure was barred under the doctrine of res judicata.
According to the appellate court, where the circuit court had personal jurisdiction over a defendant to enter a personal deficiency judgment against the defendant pursuant to 735 ILCS 5/15-1508(e) in the foreclosure suit, the plaintiff’s subsequent suit for the amount of the personal deficiency as determined in the foreclosure suit was barred by the doctrine of res judicata.
Note, however, that LSREF2’s Petition for Leave to Appeal has been accepted for filing by the Illinois Supreme Court. A decision on whether or not the Illinois Supreme Court will accept the case is expected no earlier than the last week of September 2015.
In August 2010, LSREF2 filed a single-count complaint to foreclose mortgage pursuant to the Illinois Mortgage Foreclosure Law (IMFL). In its prayer for relief, LSREF2 sought a judgment of foreclosure, in addition to a personal judgment for deficiency. The complaint alleged that the defendant Michelle Coleman was “personally liable for any deficiency.” On November 22, 2010 a judgment of foreclosure was entered, awarding LSREF2 judgment in the amount of $322,668.35 and ruling that the defendant would be personally liable for a deficiency judgment as provided by law.
A judicial sale was held and LSREF2 purchased the property. On February 28, 2011 the court entered an order approving sale, which stated that “[t]here shall be an IN REM deficiency judgment entered in the sum of $227,416.32 with interest thereon as by statute provided against the subject property.”
On May 15, 2012 LSREF2 filed a new complaint seeking to enforce the promissory note against the defendant. The defendant filed a motion to dismiss, asserting that LSREF2’s breach of promissory note action was barred by the doctrine of res judicata where the circuit court had already ruled on the defendant’s liability pursuant to the promissory note. The circuit court initially denied the defendant’s motion, but that court reconsidered its order. On December 19, 2013 LSREF2’s complaint was dismissed with prejudice based on res judicata.
In Illinois, the doctrine of res judicata bars recovery in matters that have been previously adjudicated. The Illinois Supreme Court has provided the test for application of res judicata:
“For the doctrine of res judicata to apply, three requirements must be met: (1) there was a final judgment on the merits rendered by a court of competent jurisdiction; (2) there was an identity of cause of action; and (3) there was an identity of parties or their privies.” Rein v. Noyes, 172 Ill. 2d 325; 665 N.E.2d 1199, 1206; 216 Ill. Dec. 642 (1996).
“A cause of action is defined by the facts that give a plaintiff a right to relief.” Rein, 172 Ill. 2d 325, 338.
“ ‘While one group of facts may give rise to a number of different theories of recovery, there remains only a single cause of action. “If the same facts are essential to the maintenance of both proceedings or the same evidence is needed to sustain both, then there is identity between the allegedly different causes of action asserted and res judicata bars the latter action.” ’ ” Rein, 172 Ill. 2d at 338, quoting Progressive Land, 151 Ill. 2d 285 at 295 (1992), quoting Morris v. Union Oil Co., 96 Ill. App. 3d 148, 157 (1981).
The doctrine of res judicata extends not only to what is actually decided in the original action but also to matters that could have been decided in that prior suit. Progressive Land at 294. Accordingly, a mortgage foreclosure based on a breach of the terms of the note (and mortgage), and a suit on the note, arise from an identity of a cause of action; and as a mortgage foreclosure allows for recovery under both the note and mortgage, a suit on the note meets the requirements of res judicata.
In the foreclosure action, LSREF2 explicitly sought a personal deficiency judgment against the defendant based on the defendant’s obligations under the promissory note and the mortgage. Pursuant to 735 ILCS 5/15-1508(e), with “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.” Therefore, Section 15-1508 allowed a personal money judgment to be entered against the defendant in the foreclosure action and allowed the plaintiff to enforce and collect it to the same extent and manner applicable to any money judgment.
In addition, the judgment of foreclosure order stated that the plaintiff would be entitled to a deficiency judgment after the sale of the property, and be allowed to execute upon such judgment in the event that a deficiency amount was due. Following the judicial sale, there was a deficiency amount due. The order approving sale did not provide for an in personam deficiency judgment, only an in rem deficiency judgment, but the fact that the plaintiff did not obtain an in personam deficiency judgment as requested in its complaint to foreclose mortgage did not preclude the application of res judicata principles.
The First District Appellate Court affirmed the circuit court’s decision. The appellate court held that where the circuit court had personal jurisdiction over the defendant to enter a personal deficiency against the defendant pursuant to section 15-1508(e) based on the plaintiff’s request for a personal deficiency judgment in its complaint to foreclose mortgage, the plaintiff’s subsequent claim for the amount of the deficiency, as determined in the foreclosure suit as a result of the sale of the property, is barred by the doctrine of res judicata.
The LSREF2 case is clear that a party is barred from seeking a remedy in a subsequent case if it was previously available in a prior one. As a matter of public policy, plaintiffs are generally not permitted to split their causes of action by suing for part of a claim in one action, and then suing for the remainder in another action. Rein at 1206. Illinois courts refer to this as “claim-splitting.” Accordingly, filing a two-count complaint for both a mortgage foreclosure and a suit on note only complicates matters, without solving the problem, as a personal deficiency could be sought in a mortgage foreclosure alone.
However, the court in Rein discusses exceptions to the rule against claim-splitting, citing to section 26(1) of the Restatement (Second) of Judgments. The exception relevant here is where “the court in the first action expressly reserved the plaintiff’s right to maintain the second action.” Thus, if a plaintiff is granted leave to adjudicate the issue of personal deficiency by the chancery court, a motion to dismiss on res judicata grounds may be defeated.
Looking ahead, in cases where there is a possible deficiency that one would not want to pursue at the order approving sale, it may be best to file, concurrently, a motion seeking to preserve the issue of deficiency for a subsequent action. Since this is a wholly novel approach, it is uncertain whether a court would grant such a motion, and whether a second court would find that it is sufficient to prevent a motion to dismiss on res judicata grounds. There is a lack of case law on court-sanctioned subsequent actions. However, in cases where an in personam deficiency is unavailable at the entry of the order approving sale, then seeking an order preserving the right to proceed in a separate suit regarding the personal deficiency may be the only means by which a judgment creditor may recover.
As drawn from the LSREF2 case, potential concern arises moving forward if foreclosing mortgagees file a complaint to foreclose mortgage, which includes language seeking a personal deficiency judgment provided for under 735 ILCS 5/15-1508(e), because of the res judicata application.
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