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United States v. First American Title Insurance Co.

United States District Court, N.D. Illinois

December 20, 2016

UNITED STATES OF AMERICA, Plaintiff,
v.
FIRST AMERICAN TITLE INSURANCE COMPANY, ET AL. Defendants.

          MEMORANDUM OPINION AND ORDER

          Marvin E. Aspen United States District Judge.

         Presently before us is Defendant Nitin Patel's motion to dismiss the United States' amended complaint or, in the alternative, to stay the proceedings in this action. (Dkt. No. 12.) For the reasons set forth below, we deny Patel's motion.

         BACKGROUND

         At the motion to dismiss stage, we accept all well-pleaded factual allegations as true, and draw all inferences in the plaintiff's favor. Cole v. Milwaukee Area Tech. Coll. Dist., 634 F.3d 901, 903 (7th Cir. 2011). On October 27, 2005, Defendant D&R Real Estate Holdings, LLC (“D&R”) borrowed $198, 000 from the Small Business Administration (“SBA”).[1](Am. Compl. ¶ 4.) On that same day, D&R “made, executed, and delivered to SBA its promissory note . . . in the original amount of $198, 000.” (Id.) As security, D&R granted the SBA a mortgage to real estate at 1621 Algonquin Road, Mount Prospect, Illinois (“the property”). (Id. ¶ 5.) That mortgage was recorded on October 28, 2005. (Id.)

         The SBA alleges that, in June 2014, D&R defaulted on its loan and, “by virtue of these defaults, the maturity of the Note has been accelerated and the entire balance of principal and interest is declared due and payable.” (Id. ¶ 7.) Thus, as of June 1, 2016, the SBA alleges D&R owed $162, 885, with interest still accruing daily. (Id. ¶ 8.)

         In September 2005, D&R granted a mortgage on the same property to American Chartered Bank. (Dkt. No. 12-1 at Pg. ID#: 68-80.) D&R defaulted on its loan payments to American Chartered Bank, which instituted a foreclosure action in Illinois state court in June 2014. (Def.'s Mtn. (Dkt. No. 12) ¶ 2; see Dkt. No. 12-1 at Pg. ID#: 49-64 (American Chartered Bank's complaint).) American Chartered Bank joined the SBA, as a junior mortgage holder, in that action. (Dkt. No. 12-1 at Pg. ID#: 49-50;) Pl.'s Resp. (Dkt. No. 15) at 1.) The SBA brought a counterclaim seeking to foreclose its junior mortgage. (Dkt. No. 12-2.) On June 23, 2015, the Illinois state court entered a judgment of foreclosure and sale. (Dkt. No. 12-3.) However, no judicial sale occurred; instead, the property was sold privately to Defendant Patel on March 15, 2016. (Dkt. No. 12-5 at Pg. ID#: 352; Am. Compl. ¶ 11.) American Chartered Bank placed the proceeds from the sale in an escrow fund. (Dkt. No. 12-5 at Pg. ID#: 148-49; Def.'s Mtn. ¶ 5.) The SBA alleges Patel “took title to the property subject to the SBA's mortgage lien.” (Am. Compl. ¶ 11.)

         On April 21, 2016, American Chartered Bank filed a motion to determine disbursement of the funds from that private sale, because the SBA and American Chartered Bank dispute the amount of proceeds the government should receive from that sale. (Dkt. No. 12-5 at Pg. ID#: 148-55.) That motion is still pending before the Illinois state court. (Def.'s Mtn. ¶ 6.) On July 6, 2016, the SBA instituted this foreclosure action, claiming its “lien position on the subject property is superior to all other defendants.” (Am. Compl. ¶ 10.) Patel filed the instant motion to dismiss or, in the alternative, stay this action on October 6, 2016. (Dkt. No. 12.)

         LEGAL STANDARD

         Patel moves to dismiss the SBA's claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. “The purpose of the motion to dismiss is to test the sufficiency of the complaint, not decide the merits.” Gibson v. City of Chi., 910 F.2d 1510, 1520 (7th Cir. 1990) (internal quotation marks omitted) (quoting Triad Assocs., Inc. v. Chicago Hous. Auth., 892 F.2d 583, 586 (7th Cir. 1989)). To survive a Rule 12(b)(6) motion to dismiss, a complaint need only contain enough facts to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 556 U.S. 544, 570, 127 S.Ct. 1955, 1974 (2007)) (internal quotation marks omitted). A complaint “has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

         In the alternative, Patel argues that, pursuant to Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 86 S.Ct. 1236 (1976) and Federal Rule of Procedure 12(b)(1), we must dismiss or stay the SBA's foreclosure action pending resolution of the motion to determine disbursement of the funds from the private sale of the property that is currently pending in Illinois state court. Abstention pursuant to Colorado River is “an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it.” Id. at 813, 96 S.Ct. at 1236. In deciding whether to stay proceedings pursuant to Colorado River, we first “determine whether ‘the concurrent state and federal actions are actually parallel.'” Tyrer v. City of South Beloit, Ill., 456 F.3d 744, 751 (7th Cir. 2006) (quoting Clark v. Lacy, 376 F.3d 682, 685 (7th Cir. 2004)). “If there is any doubt that cases are parallel, a district court should not abstain.” Huon v. Johnson & Bell, Ltd., 657 F.3d 641, 646 (7th Cir. 2011). If we determine the cases are actually parallel, we must then “consider a number of non-exclusive factors that might demonstrate the existence of exceptional circumstances.” Tyrer, 456 F.3d at 751 (internal quotation marks omitted) (quoting Clark, 376 F.3d at 685). Abstention is warranted only if we determine both of these requirements have been met.

         ANALYSIS

         I. Collateral Estoppel

         Patel moves to dismiss SBA's action based on both collateral and judicial estoppel. Patel argues that collateral estoppel bars the SBA's action because it “elected to allow the private sale [of the property] to proceed and did not object in the Cook County case to that procedure.” (Def.'s Mtn. ¶ 20.) Patel thus argues that the “Cook County Court's order approving the private sale precluded a foreclosure on the property acquired by Mr. Patel.” (Id.) The SBA argues in response that collateral estoppel cannot apply here, because there was no final judgment in the Illinois state court foreclosure case. (Pl.'s Resp. at 3-4.) While there was a foreclosure judgment in the Illinois state court case, the SBA argues that the “final order in a mortgage foreclosure case is a sale confirmation order, ” which will not be entered because of the intervening private sale to Patel. (Id. at 4.)

         Collateral estoppel “generally bars relitigation of issues that were litigated fully and decided with finality in a previous proceeding.” Sornberger v. City of Knoxville, Ill., 434 F.3d 1006, 1020 (7th Cir. 2006) (citing Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 2428 (1981); Lee v. City of Peoria, 685 F.2d 196, 199-202 (7th Cir. 1982)). “Federal courts give preclusive effect to state court judgments to the extent provided by state law.” Burke v. Johnson, 452 F.3d 665, 669 (7th Cir. 2006) (citing 28 U.S.C. § 1738; Allen v. McCurry, 449 U.S. 90, 95-96, 101 S.Ct. 411, 415-16 (1980)). In Illinois, the application of collateral estoppel requires at least that “(1) the issue decided in the prior adjudication is identical with the one presented in the suit in question, (2) there was a final judgment on the merits in ...


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