Old Second Nat'l Bank v. Jafry
| Decision Date | 28 June 2016 |
| Docket Number | No. 2–15–0825.,2–15–0825. |
| Citation | 57 N.E.3d 1251,405 Ill.Dec. 153 |
| Parties | OLD SECOND NATIONAL BANK, Plaintiff–Appellee, v. Syed N. JAFRY and Asmat Z. Jafry, Defendants–Appellants. |
| Court | United States Appellate Court of Illinois |
Michael A. Grill, Christopher W. Carmichael, and Elaina L. Emerick, all of Holland & Knight LLP, of Chicago, for appellants.
Craig C. Westfall and Donna Becker, both of Nigro, Westfall & Gryska, P.C., of Glendale Heights, for appellee.
¶ 1 Defendants, Syed and Asmat Jafry, were guarantors on a real estate loan extended by plaintiff, Old Second National Bank (the Bank). After a loan default, the Bank obtained a judgment of foreclosure on the property. At the sheriff's sale, the Bank purchased the property for $900,000. The trial court approved the sale and entered a deficiency judgment of $577,876. Four months later, the Bank sold the property for $1,320,000. The Bank thereafter initiated enforcement proceedings against defendants, seeking the full deficiency judgment of $577,876, plus interest. Defendants responded with a petition for setoff, arguing that allowing the Bank to obtain a substantial profit from the resale of the property as well as the full deficiency judgment would constitute an improper double recovery. The trial court disagreed and dismissed defendants' petition. We hold that, when a mortgagee obtains a deficiency judgment against the mortgagor in a foreclosure action, purchases the property at a judicial sale, and then resells it to a third party for an amount that exceeds the price paid at the judicial sale, the mortgagor is not entitled to a setoff in the mortgagee's enforcement proceedings to recover the deficiency judgment, because the foreclosure terminates the mortgagor-mortgagee relationship. If the mortgagor fears that the mortgagee will obtain a windfall in purchasing the property at a judicial sale, the mortgagor may attempt to sell the property himself before foreclosure or challenge the confirmation of sale under the Mortgage Foreclosure Law (Foreclosure Law). See 735 ILCS 5/15–1508(b) (West 2014). Here, defendants neither attempted to sell the property nor appealed their unsuccessful challenge to the confirmation of sale. We affirm.
¶ 3 On June 19, 2013, the trial court entered a judgment of foreclosure and sale with respect to the property at 720 Crescent Street in Wheaton. The judgment reflected an outstanding loan balance of $1,362,329. Defendants were the guarantors on the loan. On June 19, 2014, the Du Page County sheriff's office conducted a public sale of the property. The Bank was the only bidder, purchasing the property for $900,000.
¶ 4 Defendants contested confirmation of the judicial sale, on the basis that the Bank's bid was unconscionably low. Defendants submitted an appraisal, dated July 11, 2014, which valued the property at $1,280,000. The Bank submitted two appraisals that valued the property between $1,000,000 and $1,060,000.
¶ 5 On August 26, 2014, the trial court entered an order approving the sale at $900,000 and entering a deficiency judgment of $577,876 against defendants. Defendants did not appeal from that order. Four months later, on December 15, 2014, the Bank sold the property to a third party for $1,320,000.
¶ 6 On February 17, 2015, the Bank initiated enforcement proceedings against defendants, seeking the full deficiency judgment of $577,876, plus interest. On April 15, 2015, defendants filed a petition for equitable setoff, requesting a $420,000 reduction in the deficiency judgment, to reflect the difference between the Bank's winning bid at the judicial sale in June 2014 and the resale price in December 2014.
¶ 7 On May 19, 2015, the Bank moved to dismiss defendants' petition pursuant to section 2–615 of the Code of Civil Procedure (the Code) (735 ILCS 5/2–615 (West 2014) ). On July 15, 2015, the trial court dismissed defendants' petition, explaining that, in the foreclosure context, a claim for setoff is unavailable, because (1) it could cause foreclosure proceedings to drag on indefinitely and (2) in some cases it would be impossible for the trial court to determine the setoff amount. Defendants thereafter filed a timely notice of appeal.
¶ 9 Defendants contend that the trial court erred in denying them a setoff following the foreclosure. They argue that Illinois has a longstanding policy against double recoveries and that this policy should apply equally to all enforcement actions, including those in the foreclosure context. They insist that a judgment debtor should be allowed to seek a setoff when the judgment creditor has recovered all or part of a loan deficiency before the creditor initiates proceedings to enforce a deficiency judgment.
¶ 10 A motion to dismiss filed under section 2–615 attacks the legal sufficiency of a pleading. Vernon v. Schuster, 179 Ill.2d 338, 344, 228 Ill.Dec. 195, 688 N.E.2d 1172 (1997). The section 2–615 motion cannot raise affirmative factual defenses, but must allege only defects on the face of the pleading. Id. When considering a section 2–615 motion, the trial court accepts as true all well-pleaded facts and all reasonable inferences that reasonably flow therefrom. Napleton v. Village of Hinsdale, 229 Ill.2d 296, 320, 322 Ill.Dec. 548, 891 N.E.2d 839 (2008). A cause of action may not be dismissed on the pleadings unless it is clear that no set of facts can be proved that will entitle the claimant to relief. Vernon, 179 Ill.2d at 344, 228 Ill.Dec. 195, 688 N.E.2d 1172. The standard of review on appeal from an order granting a motion to dismiss for failure to state a cause of action is de novo. Marshall v. Burger King Corp., 222 Ill.2d 422, 429–30, 305 Ill.Dec. 897, 856 N.E.2d 1048 (2006).
¶ 11 Although the issue presented is one of first impression in this state, our analysis is guided by long-recognized principles here and elsewhere. Those principles include that a purchaser at a foreclosure sale takes under the decree and not under the mortgage or trust deed, and therefore the purchaser's rights are not dependent on any privity of contract between the purchaser and the mortgagor. Powell v. Voight, 348 Ill. 605, 609, 181 N.E. 403 (1932). As such, where a mortgagee by purchase at a foreclosure sale acquires a certificate of purchase, a new relationship is thereby created, which is in no way dependent on, or influenced by, the prior contract between the mortgagee and the mortgagor. Johnson v. Zahn, 380 Ill. 320, 325–26, 44 N.E.2d 15 (1942). In other words, the foreclosure ends the mortgagor-mortgagee relationship and “vests in the purchaser at the foreclosure sale all the rights, title, and interest of [both the mortgagor and] the mortgagee.” 59A C.J.S. Mortgages § 1208 (2016).
¶ 12 Defendants reject the long-held principle that the foreclosure exhausted all of their rights in the property. They claim that, after the foreclosure, they retained a right of setoff or equitable setoff. Neither concept applies.
¶ 13 Setoff refers to “a defendant's request for a reduction of the damage award because a third party has already compensated the plaintiff for the same injury.” (Emphasis omitted.) Thornton v. Garcini, 237 Ill.2d 100, 113, 340 Ill.Dec. 557, 928 N.E.2d 804 (2010). The right to setoff is derived from either a contractual right or equity. Brannen v. Seifert, 2013 IL App (1st) 122067, ¶ 95, 377 Ill.Dec. 209, 1 N.E.3d 1096. Without a contractual right, there is no inherent right to setoff in equity; rather, equitable setoff was conceived as a limited remedy. Id. A right to setoff in equity arises only if the indebtedness is certain and already reduced to a precise figure without a need for the intervention of a court or jury to estimate it. Id.
¶ 14 Courts have approved an award of setoff where the defendant's insurance company made payments on his behalf (Klier v. Siegel, 200 Ill.App.3d 121, 128, 146 Ill.Dec. 620, 558 N.E.2d 583 (1990) ) or where a co-defendant made payments for the same underlying injury (Thornton, 237 Ill.2d at 113–14, 340 Ill.Dec. 557, 928 N.E.2d 804 ; Star Charters v. Figueroa, 192 Ill.2d 47, 48, 248 Ill.Dec. 284, 733 N.E.2d 1282 (2000) ). However, we are aware of no case, and defendants cite none, where a defendant has been entitled to a setoff or equitable setoff because a third party, who had no relationship with the defendant, made a payment to the plaintiff.
¶ 15 At oral argument, defendants acknowledged that this case does not fall precisely under the traditional definitions of setoff or equitable setoff, but they asked us to create a new type of setoff based on a court's inherent equitable powers. What defendants propose is a broad and flawed expansion of the setoff doctrine that is not equitable at all. For example, if a third party had purchased the property at the sheriff's sale, defendants would have no recourse against that third party to reduce the deficiency judgment held by the Bank. See Johnson, 380 Ill. at 325–26, 44 N.E.2d 15. Yet, defendants insist that, because it was the Bank holding their mortgage that also bought the property, the Bank should be held to a different standard. The same argument was considered and rejected as contrary to “logic, justice, and common sense” in Kentucky Joint Stock Land Bank of Lexington v. Farmers Exchange Bank of Millersburg, 274 Ky. 525, 119 S.W.2d 873, 877 (Ky.Ct.App.1938).
¶ 16 In Kentucky Joint Stock, the debtor borrowed $20,000 from a bank to purchase land. The debtor failed to timely repay the loan, and the bank foreclosed on the property. At a court-ordered sale, the bank purchased the property for $13,071, which was approximately 50% above the appraised value. The bank sought a deficiency judgment, which was denied. Id. at 875–77.
¶ 17 The bank appealed, but the debtor sought to dismiss the appeal on the grounds that the bank had since sold the property for an amount that exceeded its purchase price at the court-ordered sale and...
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