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Bank Entitled to Keep Profit from Sale of Foreclosed Property and Recover from Guarantors

In a case decided in Illinois last year, a bank received a judgment of foreclosure for approximately $1,360,000.00. The real estate was sold at sheriff's sale and the bank was the sole bidder for $900,000.00. The court approved the sale and entered a deficiency judgment against the guarantors for approximately $577,000.00.

Several months later, the bank sold the real estate to a third party for $1,320,000.00 -- almost the full amount of the original judgment. Then, the bank pursued the guarantors on the $577,000.00 deficiency judgment. The guarantors argued that they should be entitled to an offset of $420,000.00 -- the difference between the bank's bid at the sale and the amount the bank actually received from the third party buyer. The guarantors' position was that, at the end of the day, the bank was only out $157,000.00 and that was the all guarantors should be required to pay.

The court disagreed with the guarantors and sided with the bank. Once the bank took title at the foreclosure sale, the entire relationship between the mortgagor and the mortgagee was terminated. If the buyer at the sheriff's sale had been a party other than the bank, then the guarantors would not even have an equitable basis for argument. 

The key is that the foreclosure terminates all rights of the mortgagor. Of course, a bank still must follow the rules, conduct a proper sheriff's sale and not frustrate the guarantors' exercise of their rights. However, banks can be reassured that they can retain the value from a sale to a third party in the event the bank is able to maximize the value of the real estate that a bank is selling following a foreclosure sale.