Page 5 - John Hundley 2015

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. Hundley
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.

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Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking
shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein constitute
educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal advice on
your particular situation, contact a Sharp-Hundley lawyer at 618-242-0200 or one of the addresses provided on page 2 of this newsletter.