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Espinosa v. Bank of New York Mellon

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

March 28, 2016

ESPINOSA, CANDELARIO AND ESPINOSA, YUDY, Debtors,
v.
BANK OF NEW YORK MELLON, Defendant-Appellee AP SIDING & ROOFING COMPANY, Plaintiff-Appellant

Page 474

          For AP Siding & Roofing Company, Appellant: Anthony Gerald Suizzo, LEAD ATTORNEY, Law Offices of Anthony G. Suizzo, Glenview, IL.

         For Candelario Espinosa, Yudy Espinosa, Appellees: Jeffrey S Harris, Maywood, IL.

         For Mortgage Electronic Registration Systems, Inc., Appellee: F. John McGinnis, LEAD ATTORNEY, Jeffrey Thomas Karek, Maurice Wutscher LLP, Chicago, IL; Louis J. Manetti, Jr., LEAD ATTORNEY, Codilis & Associates, P.C., Burr Ridge, IL.

Page 475

         MEMORANDUM OPINION AND ORDER

         John J. Tharp, Jr., United States District Judge.

         " He who seeks equity must do equity." Manufacturers' Fin. Co. v. McKey, 294 U.S. 442, 449, 55 S.Ct. 444, 79 L.Ed. 982

Page 476

(1935). This may be an ancient maxim but, as this case illustrates, it remains timeless. Before the Court is Appellant AP Siding & Roofing (" AP" ) Company's appeal of the bankruptcy court's order revoking nunc pro tunc relief from an automatic stay. In the bankruptcy proceedings below, AP initially successfully secured an annulment order that excused its foreclosure on a creditor's property that was done in violation of an automatic stay. Mortgage Electronic Registration System (" MERS" ) then moved to have the annulment order set aside. Through MERS' motion, the court learned that when moving for the annulment AP had failed to inform the court that in a parallel state court proceeding MERS was seeking to set aside a default foreclosure judgment that AP had obtained in violation of the automatic stay. Because AP failed to disclose these facts, the bankruptcy court revoked its previous ruling granting AP's request for an annulment. AP moved for reconsideration--not once, but twice--and both motions were denied.

         AP now appeals. Its principal argument is that because MERS had assigned its interest in the disputed property to the Bank of New York (" BONY," the appellee here) before it filed the motion to vacate the annulment, it no longer had standing. The bankruptcy court rejected the argument, reasoning that MERS' status with respect to the disputed property was irrelevant because the court's decision to revoke its annulment order was based on AP's own failure to disclose the ongoing state court proceedings. In addition to reiterating the bankruptcy court's proffered reasons for revoking the annulment order, BONY now adds that even if MERS' status was relevant that MERS had suffered an injury in fact (and thus had standing) because AP used the annulment order to secure a default judgement against it.

         BACKROUND

         On November 26, 2010 debtors Candelario and Yudy Espinosa filed a Chapter 7 bankruptcy petition in the Northern District of Illinois (the " 2010 bankruptcy" ). Brief of Appellee, ECF No. 17, 2. The bankruptcy estate included a small property located at 5941 W. Patterson Avenue, Chicago, Illinois. The building was subject to a mortgage owned, at the time, by MERS and a mechanic's lien that AP had secured as collateral for a construction job it had completed for the Espinosas. Even though an automatic stay had been placed on the property shortly after the Espinosas filed the 2010 bankruptcy, on February 9, 2011 AP brought an action in state court to foreclose on its mechanic's lien. Id. Several months later, on September 6, 2011, AP obtained a default judgment of foreclosure and sale against both the Espinosas and MERS from the Circuit Court of Cook County, Illinois. Id.

         On September 22, 2011 the Espinosas' 2010 bankruptcy petition was dismissed. Id. The Espinosas filed a new petition on October 6, 2011 (the " 2011 bankruptcy" ). AP sought relief from the automatic stay put into place after the 2011 bankruptcy, but although the 2010 bankruptcy was disclosed in the 2011 filings, it did not seek retroactive relief from the 2010 stay. Id. The Espinosas' 2011 bankruptcy proceeding was later dismissed on December 29, 2011. Id.

         On February 15, 2012 AP purchased the Espinosas' property at its own foreclosure sale. On November 1, 2012, MERS, which had not previously appeared in any proceedings due to allegedly inadequate service, filed a motion to vacate the default judgment in the state court foreclosure action. AP was served with notice of the motion on November 2, 2012. In its motion MERS argued that because AP moved to

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foreclose on its mechanics lien in violation of the 2010 automatic stay, the state foreclosure action and resulting default judgment were void.

         Shortly after MERS filed its motion to vacate, on November 19, 2012, AP filed a motion in the bankruptcy court for annulment, seeking retroactive relief from the automatic stay put in place during the pendency of the 2010 bankruptcy. AP's motion to annul the stay, however, contained no reference to MERS' pending motion to vacate in state court, and on December 18, 2012 the bankruptcy court issued an annulment order granting relief from the 2010 stay nunc pro tunc.

         MERS soon became aware of AP's annulment order. In response, on January 2, 2013 MERS filed a motion with the bankruptcy court to vacate that annulment order. MERS argued it had never received notice of AP's motion and that AP's motion seeking retroactive relief from the 2010 stay had been filed in response to MERS motion in state court to vacate AP's default judgment, which was premised on AP's failure to obtain relief from the 2010 automatic stay. The bankruptcy court agreed with MERS, and on March 4, 2013, Judge Barnes entered an order vacating his previous order granting AP retroactive relief from the 2010 stay. The bankruptcy court found that MERS had " failed to include state court developments [the motion to vacate] directly germane to the Court's consideration, and that had the Court had all of the facts before it, the Court may have decided differently." Order Vacating Order Granting Relief From Stay, ECF No. 17, Ex. 1, 44.

         On March 11, 2013 AP filed a renewed motion for annulment. In denying AP's motion from the bench, the bankruptcy court offered the following justifications for its ruling:

COURT: So here's the issue, and it's the same issue I had last time and it's going to be the basis of my ruling here, which was when I granted annulment the first time, I did it based on what was represented to me what was going on in state court. There was no representation in that motion that there was this pending motion for sanctions, or that a briefing schedule [for the motion to vacate the default judgment] has been set. None of that was said to me . . . annulment is an extraordinary remedy. I was willing to do it based on the uncontroverted facts that were before me on the first motion. I am not willing to do it now . . . I'm denying it actually for the lack of disclosure in the original motion . . . if you know of any reason why your request [for annulment] should not be granted, you have an obligation to inform the court of that as well.

May 13, 2013 Tr. Proceedings, ECF No. 17, Ex. 1, 67-68. Thus, the bankruptcy court reiterated that because AP had failed to notify the court of the ongoing state proceedings to vacate the default judgment, it was denying AP's request for an annulment. Id. at 69. The bankruptcy court then issued an order denying AP's renewed motion for annulment.

         About ten months later, on March 23, 2014, AP took one final swing at obtaining retroactive relief from the 2010 automatic stay. AP filed another motion seeking relief from the bankruptcy court's previous order vacating nunc pro tunc relief and requesting that the court reopen the bankruptcy action. AP argued that because MERS had assigned its mortgage interest in the subject property to BONY in February 2012--months before it first sought relief in the state court foreclosure action--it had no standing to seek ...


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