Illinois Law Does Not Require A Lender To Join A Potentially Viable Third Party In The Underlying Foreclosure Action
FREEDOM MORTGAGE CORPORATION v. BURNHAM MORTGAGE, INC. (June 23, 2009)
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Freedom Mortgage Corp. loaned money to property purchasers arranged by broker Burnham Mortgage, Inc. After the purchasers defaulted, Freedom purchased the properties with credit bids at auction, was awarded default judgments for the difference between the purchase prices and the outstanding debts, and later resold the properties for less than their purchase price. Freedom claims (in its complaint, taken as true) that Burnham conducted a scam whereby it arranged to over-appraise properties, sponsor sham sales, and have Freedom lend money on its inflated understanding of the properties’ purchase prices. Title insurers indemnified Freedom for damages caused by a failure to close according to Freedom's specifications. Freedom sued Burnham and the insurers for fraud and under RICO. The court first ruled that, under Illinois law, Freedom was not able to recover from a third party any damages on the theory that the property was worth less than it had been purchased for at the foreclosure sale. The court later ruled that Freedom's claim was barred by claim preclusion and by the Rooker-Feldman doctrine. Freedom appeals.
In their opinion, Chief Judge Easterbrook and Judges Bauer and Evans reversed and remanded. The Court quickly disposed of the Rooker-Feldman argument. Rooker-Feldman comes into play when a party complains about a state court judgment in federal court. Here, Freedom is the prevailing state court party in the foreclosure action, and is complaining about injuries from conduct that predated the state court proceedings. Rooker-Feldman does not apply. With respect to claim preclusion, the Court noted that Illinois does not require all claims to be made in a single action - only if they relate to the same transaction. Since Illinois treats claims on a guarantee, for example, as a separate transaction, the Court concluded that it would allow a separate claim against a third party for fraud. As for issue preclusion, the Court agreed that Freedom is stuck with its credit bid purchase prices as the value of the properties. That does not eliminate damages, however -- it only limits them.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select