Illinois District Court holds that FDIC’s claims for fraudulent real estate transactions are limited to the amount of the deficiency judgments in the underlying foreclosures

The FDIC, acting as receiver for a failed bank, sued a title company and an appraiser in connection with four fraudulent real estate flip transactions. The title company moved for summary judgment seeking to limit the FDIC’s damages to the amount of the deficiency judgments that the bank obtained at the foreclosure sales of the properties, and not the losses that the FDIC claims. The title companies argued that because the bank placed credit bids on the properties, the FDIC’s damages are limited to the sum of the deficiency judgments obtained at the foreclosure sales. The District Court agreed relying heavily on Seventh Circuit authority that under the credit bidding rule a lender cannot obtain damages for fraud in the inducement against the borrowers and third parties in excess of the deficiency judgment set forth in the final order. _Freedom Mortg. Corp. v. Burnham Mortg., Inc_., 569 F.3d 667 (7th Cir.2009). The District Court concluded that a credit bid generally stands as a conclusive measure of the property’s value, even with respect to third parties. The court was not persuaded by the FDIC’s other arguments either. It found the cases the FDIC cited which refused to extend the protection of the full credit bid rule to parties beyond borrowers all relied on apposite state statutes regarding credit bids. There is no similar wording in the relevant Illinois law. The court also agreed that applying the credit bid rule to limit recovery against third parties makes sound policy sense. After effectively cutting off or discouraging lower bidders, to allow a lender to take the property – and then establish that it was worth less than the bid – encourages fraud, creates uncertainty as to the borrower’s rights, and most unfairly deprives the sale of whatever leaven comes from other bidders. The FDIC’s final argument, that its recovery should not be limited to the sum of the deficiency judgments because the bank was misled in its credit bids by a second set of faulty appraisals done after the borrower had defaulted, was unpersuasive because there is no allegation or evidence that the title company concealed wrongdoing by the appraisers, which in turn led to damages. Nor were the title companies in any way responsible for the losses that the FDIC claims were caused by the second set of flawed appraisals. The title companies had no role in the appraisal process. Federal Deposit Ins. Corp. v. Chicago Title Ins. Co., No. 12-CV-05198 (N.D. Ill. Sept. 9, 2015).

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