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Smith v. SIPI, LLC

United States District Court, N.D. Illinois, Eastern Division

September 22, 2014

KEVIN SMITH and DAWN SMITH, Appellants,
v.
SIPI, LLC and MIDWEST CAPITAL INVESTMENTS, LLC, Appellees, and HAROLD MOSKOWITZ, Appellant,
v.
KEITH SMITH and DAWN SMITH, Appellees

For Keith Smith, Dawn Smith, Appellants (1:13-cv-06422): Arthur George Jaros, Jr., Arthur G Jaros Jr, Oak Brook, IL.

For Sipi, LLC, Appellee (1:13-cv-06422): Harold L. Moskowitz, Law Firm of Harold Moskowitz, Chicago, IL.

For Midwest Capital Investments, LLC, Appellee (1:13-cv-06422): Michael Benjamin Bregman, LEAD ATTORNEY, Ruff, Freud, Breems & Nelson Ltd., Chicago, IL; Timothy Scott Breems, Ruff, Weidenaar & Reidy, Ltd., Chicago, IL.

For Service List (1:13-cv-06422): U.S. Bankruptcy Court, Clerk, LEAD ATTORNEY, U.S. Bankruptcy Court, Chicago, IL; United States Trustee, Office of the United States Trustee, Chicago, IL; Judge Black, United States Bankruptcy Court, Chicago, IL.

For Harold L Moskowitz, Appellant (1:14-cv-01034): Harold L. Moskowitz, Law Firm of Harold Moskowitz, Chicago, IL.

For Keith Smith, Dawn Smith, Appellees (1:14-cv-01034): Arthur George Jaros, Jr., LEAD ATTORNEY, Arthur G Jaros Jr., Oak Brook, IL.

For Sipi, LLC, Appellee (1:14-cv-01034): Harold L. Moskowitz, Law Firm of Harold Moskowitz, Chicago, IL; Timothy A. Clark, LEAD ATTORNEY, Krockey, Cernugel, Cowgill, Clark and Pyles, Joliet, IL.

For Midwest Capital Investments, LLC, Appellee (1:14-cv-01034): Edward P. Freud, Timothy Scott Breems, LEAD ATTORNEYS, Ruff, Weidenaar & Reidy, Ltd., Chicago, IL; Michael Benjamin Bregman, Scott Nelson, LEAD ATTORNEYS, Ruff, Freud, Breems & Nelson Ltd., Chicago, IL.

For Service List (1:14-cv-01034): United States Trustee, LEAD ATTORNEY, Office of the United States Trustee, Chicago, IL; U.S. Bankruptcy Court, Clerk, U.S. Bankruptcy Court, Chicago, IL; Judge Black, United States Bankruptcy Court, Chicago, IL.

Page 738

MEMORANDUM OPINION AND ORDER

Hon. Harry D. Leinenweber, United States District Judge.

Before the Court are two appeals arising out of an adversary proceeding in bankruptcy. The first concerns the adversary case itself, in which Plaintiffs Keith Smith and Dawn Smith (" the Smiths" ) sought to use the fraudulent transfer provision of the Bankruptcy Code, 11 U.S.C. § 548, to avoid the sale of their house pursuant to Illinois tax law. The home had been purchased by Defendant SIPI, LLC (" SIPI" ) and transferred to Defendant Midwest Capital Investments, LLC (" Midwest" ). As explained below, Plaintiffs fail to state a claim under § 548 because they do not allege any defect in the tax sale conducted under state law. The adversary case should have been dismissed, and the Bankruptcy Court's contrary conclusion is therefore reversed.

In the second appeal, Harold Moskowitz (" Moskowitz" ), counsel for SIPI, challenges

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an order of sanctions entered against him by the Bankruptcy Court. Because the Smiths did not comply with the procedural requirements of Bankruptcy Rule 9011 when they moved for sanctions, the Court lacked the authority to grant the Motion and issue sanctions. Thus, the sanctions imposed on Moskowitz are vacated.

I. BACKGROUND

A. Factual and Legal Background

Starting in 1998, the Smiths (then-married) resided in a home in Joliet, Illinois (" the Property" ) that was owned by Dawn's great-grandfather. On March 25, 2004, Dawn inherited the Property free and clear of any mortgage; however, the Property was encumbered by a tax lien for unpaid real estate taxes for the 2000 tax year.

Under Illinois law, if a judgment is rendered against any property for unpaid taxes, " the county collector shall . . . offer the property for sale." 35 Ill. Comp. Stat. 200/21-190. An Illinois tax sale is a special form of auction that begins the process of transferring the property from the original owner to a person or entity known as a " taxbuyer." At the auction, potential taxbuyers bid on the lowest monetary penalty that they will accept from the property owner to redeem the property. Id. § 21-215. The winning bidder pays the outstanding taxes on the property and receives a certificate of purchase. Id. § 21-250. After the sale, the owner may redeem the property within the statutory period by paying the taxes plus the penalty established at the tax sale. Id. § 21-355. The owner must also pay any subsequent taxes paid by the taxbuyer (plus interest) and various fees and costs provided by statute. Id. This auction process works to the advantage of the owner because competitive bidding drives down the penalty to be paid should the owner seek to redeem the property. Phoenix Bond & Indem. Co. v. Pappas, 194 Ill.2d 99, 741 N.E.2d 248, 252, 251 Ill.Dec. 654 (Ill. 2000) (explaining that the Illinois tax sale provisions were designed " to enable owners to exercise their right of redemption . . . at the lowest possible cost" ).

If the property owner fails to redeem within the statutory period, the taxbuyer may petition the Illinois circuit court for a tax deed. " The taxbuyer must comply with an array of procedural safeguards, including providing notice of the tax deed proceedings to all occupants, owners and persons interested in the property." In re Smith, 614 F.3d 654, 656 (7th Cir. 2010) (internal quotations and citations omitted). After the court issues the tax deed, the purchaser has one year to record the deed in the county recorder's office, otherwise the taxbuyer's rights are " absolutely void." 35 Ill. Comp. Stat. 200/22-85. Grounds for setting aside the tax deed are very narrow -- the property owner can challenge the issuance of the deed by appeal from the court issuing the deed or by collateral attack upon proof that (1) the taxes were paid prior to the tax sale, (2) the property was exempt from taxation, (3) the tax deed was procured by fraud or deception, or (4) that a party holding recorded ownership did not receive proper notice. Id. § 22-45. If those grounds for challenging the deed are unavailable, the tax deed is " incontestable," at least under state law. Id. At the end of the day, if the original owner does not redeem the property, and if the taxbuyer endures the redemption period and fulfills all procedural requirements, the taxbuyer takes title to the property and the transfer is complete.

The delinquent taxes on the Smith residence were offered for sale and purchased by SIPI's predecessor (hereinafter " SIPI" ) on November 2, 2001. The Smiths failed to redeem the delinquent taxes or pay the

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subsequent real estate taxes. SIPI applied for a tax deed to the property, which it obtained on April 15, 2005 after it certified that it had satisfied all of the tax sale procedural requirements. SIPI recorded the deed in May of that year and later sold the property to Midwest.

B. Prior Proceedings

On April 13, 2007, the Smiths initiated this action by filing an Adversary Complaint against SIPI and Midwest. The Bankruptcy Court dismissed the Complaint as untimely, and the District Court affirmed. The Seventh Circuit reversed, explaining that the taxbuyer's interest is perfected against bona fide purchasers once the tax deed is recorded, and the date of the recording fell within the two-year look back period in § 548. In re Smith, 614 F.3d 654, 659 (7th Cir. 2010).

With the Complaint now deemed timely, proceedings resumed in the Bankruptcy Court. But due to a clerical error, nothing happened in that court for five months after the Seventh Circuit issued the mandate. Eventually, SIPI filed a Motion for Status so that it could prosecute its defense of the matter and remove the cloud over its title to the Property. Proceedings resumed in earnest in April 2011. The next month, unbeknownst to SIPI and Midwest, Keith Smith filed a divorce action in the Circuit Court of Will County.

On September 21, 2011, the Bankruptcy Court granted another Motion to Dismiss and allowed the Smiths to replead. Three weeks later, the Smiths filed a Second Amended Adversary Complaint that asserted that both Keith and Dawn were entitled to compensation for the transfer of the house, including for Keith's loss of his homestead exemption. The Complaint's two counts sought (1) to avoid the transfer of the house under § 548 and (2) to obtain relief from Midwest as a transferee of the Property under § 550. Again, SIPI and Midwest moved to dismiss; they argued (1) that the court lacked jurisdiction under Rooker-Feldman to review the state court's judgment, (2) that § 548 does not apply to real estate tax sales, (3) that the Smiths had failed to state a claim under § 550 against Midwest, and (4) that Keith lacked standing because the property was owned by Dawn and a homestead interest alone was insufficient to confer standing.

On December 16, 2011, while the Motions to Dismiss were pending, a divorce decree was entered by the state court in the matter that Keith had filed seven months earlier. Per the decree, any and all rights to proceeds from the Property or this litigation were given to Keith. The Smiths did not inform the Bankruptcy ...


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