Personal Property Conundrum: Protecting Mortgagee of Real Estate from Claims by Owners of Personal Property Located on the Real Estate

November 23, 2015
Amber Michlig
SmithAmundsen Financial Services Alert



In Illinois it is well settled that if a mortgagee does not take control of personal property found on a foreclosed real property, it does not assume a duty of complete care for that personal property.  However, a mortgagee may still need protection through a court order or knowledgeable counsel when dealing with personal property found on foreclosed real estate so that it cannot be found that a mortgagee is taking improper control of personal property. Sometimes mortgagees want to claim that they now own the personal property found within a foreclosed real property, or claim that they have a right to destroy the personal property found within despite demand from the borrower for its return. The recent 2nd District case of Bhutani v. Barrington Bank and Trust Company, N.A. addressed these issues holding first, a foreclosure on real estate does not extend to personal property and second, that a bank may commit conversion if it exercises improper control over personal property.

In the Bhutani case, the bank foreclosed on a building in which Bhutani had medical equipment that he had not removed. Bhutani filed a conversion and replevin suit against the bank to get his Personal Propertyequipment back since the bank did not return the equipment upon Bhutani’s request for return after the bank had taken possession of the real estate. The court found that a suit to recover personal property is not barred by a judgment for foreclosure as that judgment simply deals with the real estate.

The court found that while the bank had a limited possessory right to Bhutani’s equipment while it was securing its own real estate, this limited possessory right did not defeat Bhutani’s ownership interests to the personal property and a judgment for foreclosure of the real estate did not give the bank the exclusive right to the personal property. The limited possessory right did not extend beyond what was needed to secure the real estate if the owner of the equipment sought its return. Further, the court pointed to an Illinois case law holding that a person who is evicted had the right to recover their personal property. The court also noted that nothing in Illinois law imposed a duty on a mortgagee who took possession of real estate to immediately deliver personal property to its owner. Therefore, although the mortgagee had no duty to deliver all of the borrower’s personal property left behind at the foreclosed property to the borrower, it might have exercised an improper degree of control by refusing to allow the borrower to take it back or to get it back, and the court remanded the case for trial on the issue of conversion.

In Bhutani, the mortgagee bank did not have a court order regarding a protocol for disposition of the personal property found within the real estate and the mortgagee did not give Bhutani notice that it was removing the personal property. Consequently, the bank now finds itself defending a conversion case on remand. This outcome might have been averted through a court order accompanying the foreclosure decree delineating how the bank should handle personal property. Receivers and other trustees commonly obtain such orders which protect them against liability and litigation. They have substantial latitude to request specific relief tailored specifically to the case at hand.