One of the recurring topics in mortgage foreclosure appeals is whether the trial court properly entered a personal deficiency judgment against the borrowers or guarantors of a loan. Although dependent on the fluctuation of property values, it is not uncommon for a deficiency to result from the judicial sale of a foreclosed property. Section 15-1508(e) of the Illinois Mortgage Foreclosure Law requires the trial court to enter a personal deficiency judgment if: (1) the personal deficiency judgment is “otherwise authorized”; (2) it was requested in the complaint and adequately proven with the presentation of the order approving sale; and (3) the party against whom the deficiency judgment is sought was served by personal service. Recent appellate court opinions on the topic have addressed whether substitute service satisfies the “personal service” requirement and whether a mortgagee can pursue a borrower or guarantor for a personal deficiency judgment in a lawsuit separate from the foreclosure action.

In a new case, Old Second National Bank v. Jafry, 2016 IL App (2d) 150825, the Illinois Appellate Court addressed a new facet of the personal deficiency judgment debate: what happens when the bank purchases a foreclosed property at the judicial sale and later sells the property to a third party for more money than it credit bid at the foreclosure sale? Are the borrowers or guarantors entitled to a setoff for the “profit” made by the bank from the deficiency judgment amount? In Jafry, the bank purchased the subject property back at the judicial sale for a $900,000 credit bid. The trial court entered a personal deficiency judgment against the guarantors for $577,876. Several months later, the bank sold the property to a third party for $1,320,000. In the post-judgment collection proceedings, the guarantors filed a petition for setoff, in which they asked the court to reduce the deficiency judgment by $420,000, the amount of profit that the bank made from the resale of the property. The bank filed a motion to dismiss the guarantors' petition for setoff, and the trial court granted the motion. The appeal followed.

Noting that the issue presented was one of first impression, the Appellate Court held that the guarantors were not entitled to a setoff in the collection proceedings because the mortgage foreclosure action terminated the mortgagor-mortgagee relationship. The guarantors had suggested that the bank would reap a windfall by bidding lower at the judicial sale, getting a personal deficiency judgment against them, making a profit from the resale of the property, and then not giving the guarantors a setoff for the profit. However, the Appellate Court disagreed, finding that the bank should not be treated differently because it purchased the property back at the foreclosure sale instead of a third party purchaser. Had a third party purchased the property, the guarantors would not be entitled to a setoff for the profit made by the third party for the resale of the property. The court held that the bank should not be treated any differently. The court also suggested that if the guarantors wanted to challenge the bank's conduct, then they should have appealed the trial court's ruling confirming the sale. The guarantors challenged the sale price at the hearing on confirmation of sale, but they did not appeal that ruling. Rather, they only appealed the order dismissing their petition for setoff in the post-judgment proceedings.

Two lessons can be learned from the Illinois Appellate Court's decision in Jafry. First, if borrowers or guarantors are concerned about their personal liability for a deficiency judgment, an appropriate avenue to challenge the judgment is by contesting the sale price. However, they also will need to show some type of fraud or irregularity with the sale before the trial court will refuse to confirm the sale. Second, in the somewhat unlikely event that a bank is able to resell a foreclosed property to a third party for more than its credit bid, it will not be required to give the borrowers a setoff for the profit made. What Jafry does make certain is that it will not be the first or last word by Illinois appellate courts on the topic of personal deficiency judgments.