July 2010 Vol. 3, No. 6

Underwriters' Bulletin


Mortgage Foreclosures and Res Judicata

Imagine that a lender files a complaint to foreclose its mortgage. The complaint names, amongst others, either an owner of the land who did not sign the mortgage, but who likely received a benefit from the loan proceeds (for example, husband and wife own the land and took out the loan but only one spouse signed the mortgage), or a different mortgage lender with a first priority mortgage. All parties are served a complaint that in part raises the issue of lien priority. If either of the two individuals above appeared in the case and defended the foreclosure, they could potentially have factual grounds to defeat the foreclosure as to their own interest; instead, they each default and enter no appearance. The judge issues a judgment of foreclosure, foreclosing the interest of the non-mortgagor owner or lender. Doesres judicataprevent either a non-mortgagor owner or a first lender from asserting their interest after the judgment of foreclosure?

Res Judicata, Generally

In fact, the doctrine ofres judicatavery likely bars further action in such a case.res judicataacts to "prevent a multiplicity of lawsuits between the same parties where the facts and the issues are the same."Dalan/Jupiter, Inc. v Draper & Kramer, Inc., 372 Ill App 3d 362, 369 (1st D, 2007). It is a principle of equity, in that courts must balance questions of fairness in its application.Borcherding v Anderson Remodeling Co., Inc., 253 Ill App 3d 655 (2nd D, 1993). In Illinois, "[t]o make a matter decidedres judicata, there must be a concurrence of the following four conditions: identity in the thing sued for, identity in the cause of action, and identity of persons and of parties."Hanna v Read, 102 Ill 596 (Ill, 1882). More recent cases identify the cause of action as the significant point of issue. E.g., seeHudson v City of Chicago, 228 Ill 2d 462, 889 NE2d 210 (Ill, 2008).res judicatathus acts as a preventative measure to deny people more than one "bite at the apple."Mountain States Mortg. Center, Inc. v Allen, 257 Ill App 3d 372 (1st D, 1993).

Barring the involvement of a third-party purchaser, the original foreclosure involves the same parties as further proceedings on the same issue. The question is therefore whether future litigation on lien priority would amount to concurrence of what is being sued for and of the cause of action.



"In the case at bar, there is no dispute that the foreclosure court was a court of competent jurisdiction, that it rendered a final judgment and that the identical parties in this action were also parties in the prior action. Thus, the only issue with respect to res judicata is whether the two actions involved the same cause of action."

Eighteen Investments, Inc. v NationsCredit Financial Services Corp., 376 Ill App 3d 527 (1st D, 2007). In that case the purchaser of a foreclosed property, Eighteen Investments, first brought suit against the property owner based on a mortgage release, and then tried to bring a later suit based on incorrect PIN and lot numbers for the property.Id.The court found thatres judicata"constitutes an absolute bar to a subsequent action involving the same claim, demand or cause of action."Id.at 533. The court specifically confronted what constituted the same &€˜cause of action&€™ and applied a transactional test. The Illinois Supreme Court held that "separate claims will be considered the same cause of action for purposes ofres judicataif they arise from a single group of operative facts, regardless of whether they assert different theories of relief." River Park, 184 Ill 2d 290, 311. The court found thatres judicataapplied because the same transaction created the causes of action: the judicial sale.


There is significant case law underlining the importance of notice inres judicatacases. E.g., seeWagemann Oil Co. v Marathon Oil Co., 306 Ill App 3d 562 (1st D, 1999). Like with any other individual or business entity, courts have no jurisdiction over a mortgagee who is not properly served notice.Id.InWagemann Oil Co, the court found that if the prior proceedings determined the priority of the mortgage lenders thenres judicatacould apply to a defaulted party; however, the court found that a party could not be bound by the judicial order if they were not named in the suit, for want of personal jurisdiction.Id.

In the case of junior lienors in a senior foreclosure, the Illinois courts have held that a default is binding.Illinois Nat. Bank of Springfield v Gwinn, 348 Ill App 9 (3rd D, 1952). "[The parties] were served with process of summons and defaulted&€¦ their rights were adjudicated and because they defaulted, nothing was found to be due them. If they had any rights, these rights should have been urged and adjudicated in the foreclosure."Id.at 17. This is in part because the rights and interests of junior lienholders are always at issue in a foreclosure.

The parties in the hypothetical mentioned in the opening paragraph appear be barred from raising their claim in a second suit due to this doctrine, specifically because the foreclosure proceeding precipitated the need to assert their rights, and because they were named in the original suit. Given thatres judicataapplies both to issues that were raised and those that could have been raised, this seems to strongly imply thatres judicatawould bar a future claim.

Issues Barred

Illinois courts have held that "[i]f the three elements necessary to invokeres judicataare present,res judicatawill bar not only every matter that was actually determined in the first suit, but also every matter that might have been raised and determined in that suit."Treadway v Nations Credit Financial Services Corp., 892 NE2d 534 (5th D, 2008). Even if the court does not litigate the third party interest, the claim may still be blocked; "res judicatabars not only those issues that were actually litigated in a prior suit; it bars those that could have been raised as well." 382 Ill App 3d 952 (1st D, 2008).

This is one of the key differences between a doctrine like collateral estoppel andres judicata.res judicatais vastly more expansive in blocking matters that might have been litigated in the original suit but were not.LaSalle Bank Nat. Ass'n v Village of Bull Valley, 826 NE2d 449 (2nd D, 2005).

735 ILCS Mortgage 5/15 (The Illinois Mortgage Foreclosure Law)

The Illinois Mortgage Foreclosure law, 735 ILCS 5/15-1501,et seq., has provisions that are very consistent with the principles ofres judicata. Even without the common law rule, the law provides for finality in mortgage foreclosure proceedings, as achieved through the statutory handling of parties, interests, and termination of rights. Section 15 1501 provides that the necessary parties to an action are the mortgagor and those who owe indebtedness. Thus, while the court may rule absent another mortgage holder, the respective interests established are subject to those of the absent parties.Id.

The foreclosure proceeding is a proper avenue to add a multiplicity of other parties, especially those with an interest in the disputed property and it further grants the right to become a party to "[a]ny person who has or claims an interest in real estate which is the subject of a foreclosure or an interest in any debt secured by the mortgage."Id.Under the statute, in a suit by a junior mortgage holder, the senior may either be named as a party, or of its own accord become a party to the proceedings.

Under the act "[t]he court may proceed to adjudicate ... respective interests, but any disposition of the mortgaged real estate shall be subject to (i) the interests of all other persons not made a party or (ii) interests in the mortgaged real estate not otherwise barred or terminated in the foreclosure." 15-1501. As noted earlier, these provisions allow a court to adjudicate the interests of the parties. In the case of most junior mortgage foreclosures, however, the senior lienor&€™s interest is not at issue. It is therefore critical that the statute explicitly allows for the court to adjudicate the interests of the joined parties. If an entity is made a party to the proceeding, and their interests are brought into question, the act explicitly grants the court authority to adjudicate those interests, including the priority of the liens attached to the property.

The statute directly addresses the presence of lien holders that are not the foreclosing party. For instance, 5/15-1505 allows that, from the start of foreclosure to the judicial sale, another lien holder may petition the court for approval to pay any amount due in order to preserve the status of the title. 5/15 1505. The lienholder&€™s presence is expressly allowed in the statute and their ability to be actively drawn into the action by a need to prove priority is also noted. The act directly states that lien holders may be called upon to prove their priority, and that mere silence is insufficient to preserve their rights in such a case. To the contrary, the statute provides the proper means of delaying the need to prove priority when it is at issue. 5/15-1506. "With the approval of the court prior to the entry of the judgment of foreclosure, a party claiming an interest in the proceeds of the sale of the mortgaged real estate may defer proving the priority of such interest until the hearing to confirm the sale." 5/15-1506(h). Thus, a senior lien holder whose interest is challenged must act to preserve it, either as preserving the lien or in a piece of the final sale.

The final fundamental issue of the law rests on termination. The mortgage foreclosure law has a multitude of provisions dealing with the termination of rights at the close of a proceeding. "Upon the entry of the judgment of foreclosure, the rights ... [of] all persons made a party in the foreclosure and (ii) all nonrecord claimants given notice ... shall be solely as provided for in the judgment of foreclosure and in this Article." 5/15 1506. Parties and interests named in a proceeding continue to exist only as provided for by the judgment (and any outstanding provisions of the act). While the act preserves senior rights that are not at issue, it makes no such provision of safe harbor for a lien holder that merely chooses not to defend the interests which the court must define in its decision.

Additionally, the statute provides that the court cannot escape a ruling on priority. At the sale 5/15-1508 requires that the court "determine the priority of the judgments of parties who deferred proving the priority ... but the court shall not defer confirming the sale pending the determination of such priority." 5/15 1508(b)(3). A party whose priority is at issue may delay its answer to such a claim, but must ultimately answer, even if that answer is mere assent through silence.

As on the principles of settlement of law, the act does not allow such parties to bring their claim again at a later date. Section 1509 provides that "[a]ny vesting of title by ... judgment of foreclosure, shall be an entire bar of &€¦ all claims of parties to the foreclosure." As the law provides no avenue for senior lien holders whose interests are in dispute and merely choose not to answer, their claim is barred by the language of the statute.

In summary, the statute provides that the foreclosure proceeding may bring issue with the parties, that those parties may have their relative interests and priorities decided by the court, and that absent special exceptions to the contrary, the court&€™s final decision must describe the surviving interests from those being litigated. In pursuit of finality the Mortgage Act gives broad discretion as to the issues to be heard. While a senior lien holder may generally avoid intervention in a foreclosure without losing its priority, this is no longer the case when their interests become disputed. The code illustrates the judicial principle that such parties must answer, and absent such answer, surrender their claims.

Additionally,res judicataitself is implicated in the clarity of the law. The law provides for the naming of other parties with interests in the property, 15-1504(a)(3)(L), and for the requested relief of declaring the foreclosed mortgage be given priority over other liens. 15-1504(c)(7). The statute also provides that certain mortgage lien claims may be barred. 15-1509(c). "Any vesting of title by a consent foreclosure pursuant to Section 15-1402 &€¦ shall be an entire bar of (i) all claims of parties to the foreclosure and (ii) all claims of any nonrecord claimant who is given notice of the foreclosure&€¦". This provision and the structure of the statute are in accord with the same policy whichres judicatais used to protect. While the Section 1509 provision is not actually an absolute bar (as it allows a claim to be made against the proceeds of the sale) it still functions under the same reasoning of preventing excess litigation and barring claims which could have been raised in prior proceedings.

InFirst Bank and Trust Co. of O'Fallon, Illinois v King, the court held that Section 1509 was an absolute bar to future claims of a mortgage holder except to the proceeds, of which there were none. 726 NE2d 621 (5th D, 2000). Of course Section 1509 is only applicable when the judicial sale is actually complete. The Second District noted that "[t]he Mortgage Foreclosure Law&€¦ expressly provides that all outstanding claims on property that has been the subject of a foreclosure and sale pursuant to the law are extinguished."BCGS, L.L.C. v Jaster, 700 NE2d 1075, 1079 (2nd D, 1998). This broad extinguishment is generally held to be effected by the foreclosure of a senior lien.Id.at 1080. It is, therefore, critical, when arguing that an issue has been closed by the Mortgage Foreclosure Law, that the original suit raised the issue of priority of the liens.

While Section 1509(c) has not been the subject of much litigation at the appellate court level in Illinois, its importance is primarily in establishing that the legislature did not intend to circumvent established principles concerning subsequent litigation, and in fact provided for a bar after confirmation of the judicial sale. In denying the application of Section 1509(c) in the suit of a junior lien holder, it seems obvious that Illinois law is settled (See Section IV,infra) that a foreclosure on a junior lien is able to proceed with the buyer taking the property subject to a senior lien. This does not implicate the concerns of equity orres judicata.

However, Section 1509(c) is more applicable where the priority of the liens is at issue in the complaint. Indeed, Illinois courts have penalized mortgage holders for not acting on such information. InMountain States, one of the reasons the mortgage holder lost underres judicatawas because "plaintiff should have pleaded the purported priority of its 1984 mortgage as an affirmative defense in its answer".Mountain Statesat 1059. This reasoning supports the policy behind Section 1509(c). The court found that the pleadings define the issues, and that where priority is an issue, if one party believes its mortgage has priority it should have pleaded the issue.Id.Where it does not, a court has every reasonable right to rule and bar future claims. Indeed, the court chastised the party failing to raising the priority as an affirmative defense when the issue had been raised.

The principle of barring future claims is thus statutorily supported, but generally restricted to barring junior liens through a senior foreclosure for reasons of equity and because a junior holder can, and often does, proceed without challenging the priority of the liens.

Heritage Federal Credit Union v Giampa

The decision of the 2nd District of Illinois inHeritage Federal Credit Union v Giampa, 622 NE2d 48 (1993) provides another angle to theres judicatadiscussion. In Giampa, the homeowner had primary and secondary mortgage lenders.Id.The secondary lender instituted foreclosure proceeding without naming the primary lender as a party.Id.The primary lender made a formal appearance but did not make any arguments or file any motions.Id.After the foreclosure proceedings, JosephGiampaacquired the property at a sheriff&€™s sale.Id.Several months later, the primary lender attempted to foreclose its mortgage on the property andGiampacountered that the lender had lost the right to do so because it had not reasserted its rights in the previous hearings.Id.There is no unity of parties inGiampabecause Giampa himself was never a party to the original foreclosure — he was solely a third-party purchaser at the judicial sale — and the case is therefore not ares judicatacase, but the operative facts and issues are similar.

TheGiampacourt concluded that a senior mortgagee is not required to defend its interests in the face of a junior foreclosure because its interests would remain unaffected.Id.Even if the senior mortgagee was served, the judgment is not binding on the mortgagee unless its interests were at issue in the proceedings.Id.TheGiampacourt concluded that for an order in a junior foreclosure to affect the interests of the senior mortgagee, the senior mortgagee must have been served, and its interests must have been vulnerable.Id.An example of such a suit would be a junior foreclosure where the senior mortgagee is given notice and where the issue of priority is specifically addressed. In such a case, the senior mortgagee would be barred from later foreclosing its mortgage because it failed to protect its actively challenged interests in a lawsuit to which it was a party.

A subsequent case,JP Morgan Chase Bank v Fankhauser, however, had the courts declare that while the interests of senior lienholders are not affected by junior foreclosures similar to those in Giampa, this does not exempt them from the requirements of 735 ILCS 5/2-1401. 890 NE2d 592 (2nd D, 2008). Section 2-1401 of Civil Procedure is the statute that allows parties to petititon for relief from orders more than 30 days old. The statute requires that the petitioner show, amongst other things, that the petitioner showed due diligence in presenting its claim.Id.Fankhauserstated that a senior mortgagor&€™s ability to default in a junior foreclosure without effect on its interests does not mean that the senior mortgagor exercised due diligence for the purposes of being released from final and appealable orders 30 days or older under Section 2-1401. 890 NE2d at 601.


Ultimately, there are two critical issues that arise when dealing with a foreclosure where at least one lender defaulted: did the lender have proper notice, and were the lender&€™s interests at issue? If both answers are yes, only then canres judicatahope to apply. If the lender was not served notice, the court had no jurisdiction over the lender&€™s interests. If the lender&€™s interests were not at issue, one of the requirements ofres judicata- identity of interest — is missing and likewise deniesres judicata&€™s application.

If you have any questions, contact the ATG Underwriting Department,legal@atgf.com, 217.403.0020, or 312.752.1990.

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