Recently, the Illinois Supreme Court denied a Petition for Leave to Appeal seeking review of the First District Appellate Court decision in Turczak and Lew v. First American Bank. In that case, the First District Appellate Court held that under Illinois law a lender may bring separate enforcement actions on the note and mortgage. Further, the Appellate Court held that despite the senior lender obtaining a default judgment of foreclosure and sale, the junior mortgagee’s lien was not extinguished until the senior lender obtained an order approving sale.
In Turczak, the homeowners obtained a $391,250 loan from one lender secured by a first mortgage on the property, and a $73,335 loan from a another lender secured by a second mortgage on the property. When the homeowners stopped making payments on both loans, the senior lender filed to foreclose its mortgage and joined the junior lender as a defendant. The senior lender subsequently obtained a default judgment of foreclosure and sale against the homeowners and the junior lender. Almost concurrently with the suit filed by the senior lender, the junior lender brought an action against the homeowners on the note (but did not seek to foreclose the junior mortgage) and received a default judgment. Thereafter, the homeowners sought a short-sale of the property, which the senior lender agreed to approve if, among other things, the junior lender agreed to execute a release of its second mortgage lien. The junior lender required the homeowners to pay $6,000 in order to release the junior mortgage, and did so upon receiving the payment.
The homeowners then filed suit against the junior lender alleging that the junior lender violated either the Illinois Consumer Fraud and Deceptive Business Practices Act or a valid interlocutory order by demanding payment to release the junior mortgage.
Before the Appellate Court, the homeowners argued that once the junior lender obtained a final judgment in its action to enforce the promissory note, the junior lender was barred from further actions to enforce the junior mortgage. Therefore, the homeowners’ reasoned, the junior lender’s demand for payment to release the junior mortgage in conjunction with the short-sale was fraudulent. The Appellate Court rejected this argument, holding that under well-settled Illinois law, upon default, a lender can choose whether to proceed on the note or to foreclose upon the mortgage and that the remedies may be pursued consecutively or concurrently.
The homeowners further argued that when the senior lender obtained its default judgment of foreclosure and sale against the junior lender, the junior lender’s mortgage was extinguished. The Appellate Court rejected this argument as well, holding that “[a]fter a judgment of foreclosure, only a judicial sale of the property followed by judicial confirmation of the sale will terminate ‘with finality,’ the rights of third parties.” As no judicial sale ever took place, the junior lender was not prohibited from seeking payment in exchange for releasing its junior mortgage. Only when a judicial sale has been approved by the court does the junior lien holder lose its lien interest and related legal rights.