Suits on Notes Prior to Foreclosure OK'd by Court

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October 16, 2013
Michael Cortina
SmithAmundsen Financial Services Alert

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The Illinois Appellate Court has just ruled that lenders can sue a borrower on a note and, in a separate action, sue to foreclose on a mortgage. This is an important decision because it gives lenders more choices when it comes to enforcement actions.

In the case, Turczak v. First American Bank, et al., the bank elected to file suit against the borrower for breach of the promissory note that it held rather than to foreclose on the second mortgage that it had on real estate because of the lack of equity in the property. The bank obtained a default judgment against the borrower on the suit on the promissory note and, shortly thereafter, the first mortgagee filed suit to foreclose its mortgage. In order to avoid the foreclosure, the borrower found a buyer for the land and requested that the first mortgagee authorize a short sale for the property in exchange for a release. The first mortgagee agreed, but First American Bank, which still held a second mortgage, refused to provide a release unless it received $6,000 from the proceeds of the sale. Eventually, the borrower and the first mortgagee agreed to each give $3,000 to First American Bank in order to obtain a release of its second mortgage so that the short sale could occur.

The borrower then sued First American Bank and its attorneys and claimed that First American Bank had no legal basis to refuse to release its mortgage because it had already obtained a separate judgment on the promissory note. The appellate court reviewed the law regarding mortgage foreclosures and whether suits on notes precluded subsequent foreclosures and held that Illinois law is “well settled” that lenders can bring separate enforcement actions on the mortgage and the note. The appellate court affirmed the decision of the trial court to dismiss the case against First American Bank and its attorneys.

This decision opens possibilities for lenders when they are seeking to enforce a borrower’s obligation. With real estate values still low, lenders are often hesitant to foreclose because they usually cannot become whole by foreclosing on the property at issue. Having the ability to sue on a note separate and apart from foreclosing on a mortgage is an option when the borrower has other assets that could be attached to satisfy some or all of the borrower’s obligations.