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In re Anderson

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

September 5, 2017

In re CAROL S. ANDERSON and MARK R. ANDERSON, Debtors.
v.
BMO HARRIS BANK, N.A., Appellee. CAROL S. ANDERSON and MARK R. ANDERSON, Debtors-Appellants,

          MEMORANDUM OPINION AND ORDER

          HON. JORGE ALONSO United States District Judge

         Debtors Carol S. Anderson and Mark R. Anderson appeal to this Court, pursuant to 28 U.S.C. § 158(a)(1), from a decision of the United States Bankruptcy Court. For the following reasons, the bankruptcy court's decision is reversed.

         BACKGROUND

         This appeal stems from the consolidated bankruptcy case of debtors Carol S. Anderson and Mark R. Anderson. Their initially separate Chapter 7 involuntary bankruptcy cases, both filed in October 2013, were converted to Chapter 11 and consolidated on March 4, 2014. Prior to consolidation, BMO Harris Bank, N.A. (“BMO”), as successor in interest to Amcore Bank, N.A, filed proofs of claim in each of the debtors' individual cases to assert a claim against Mark based on a promissory note in the amount of $697, 000, secured by property located at 151 West Wing Street, Unit 905, f/k/a 201 West Wing Street, Arlington Heights, Illinois (“the Wing St. Property”).

         The Wing St. Property was also the subject of a foreclosure action that BMO brought against Mark and others in 2009 in the Circuit Court of Cook County, case number 09-CH-34081 (“the Wing St. Foreclosure Action”). In May 2013, in the Wing St. Foreclosure Action, BMO filed a Second Amended Complaint consisting of two counts: Count I, in which BMO sought a judgment of foreclosure and a deficiency judgment against Mark and co-defendant Walter Kaiser; and Count II, in which BMO alleged breach of contract against Mark and Kaiser for failing to make payments required under the promissory note.

         About five months later, the filing of debtors' bankruptcy cases automatically stayed the Wing St. Foreclosure Action pursuant to 11 U.S.C. § 362. On December 20, 2014, BMO moved in the bankruptcy court for relief from the automatic stay, seeking leave to proceed with the Wing St. Foreclosure Action. (Appellant Designation of R. on Appeal (hereinafter, “R.”) at 145[1], ECF No. 12-2.) The bankruptcy court granted the motion, entering an order (“the Stay Relief Order”) granting “full and complete relief from the Automatic Stay of Section 362 to permit BMO HARRIS BANK to proceed with the pending State Court foreclosure litigation with respect to the property commonly known as 151 W. Wing St., Unit 905, Arlington Heights, Illinois 60005 as more particularly described in the Motion for Relief.” (R. at 855, ECF No. 16.)

         The Wing St. Foreclosure Action resumed, and on January 23, 2015, the Circuit Court of Cook County entered an Amended Order of Summary Judgment and Judgment of Foreclosure and Sale in the Wing St. Foreclosure Action. Specifically, according to the terms of the order, the court entered “Judgment of Foreclosure under Counts I and II of the Second Amended Complaint for Mortgage Foreclosure . . . pursuant to 735 ILCS 5/15-1506 in favor of plaintiff, BMO Harris, against Defendants Mark R. Anderson (in rem); Walter Kaiser (in personam);” and others, and ordered a judicial sale of the Wing St. Property. (R. at 637, ECF No. 12-7.) On April 8, 2015, the circuit court entered an order confirming the sale of the Wing St. Property and providing that “[a]n in rem deficiency judgment is ordered in favor of the Plaintiff, BMO Harris Bank, N.A., . . . and against Defendant[] Mark Anderson, ” and “an in personam deficiency judgment is ordered in favor of the Plaintiff, BMO Harris Bank, N.A., . . . and against defendant Walter Kaiser pursuant to his obligations under the Promissory Note, in the . . . total amount of $646, 396.33.” (R. at 352-53, ECF No. 12-5.)

         On January 27, 2016, in the consolidated bankruptcy action, debtors filed an objection to BMO's claim against Mark arising out of the promissory note, arguing that, having already fully litigated the Wing St. Foreclosure Action against Mark to final judgment in state court, BMO was barred by res judicata from litigating Mark's liability under the promissory note again. BMO filed an amended proof of claim in which it reduced the amount of its claim, but it maintained its claim in the amount of $646, 396.33, the deficiency after the sale of the Wing St. Property, and it maintained its right to seek that amount from Mark personally, arguing that the foreclosure judgment against Mark had been in rem, not in personam. The bankruptcy court overruled the objection as “premature.” (Opening Br. of Appellant, App., April 14, 2016 Tr. at 11:15-16, ECF No. 22-1.) The court explained that it had “never understood the bifurcation of foreclosure cases, ” and it had sympathy for debtors because there “should be some effort to get them resolved” all at once, rather than piecemeal (id., Tr. at 11:16-19), but nevertheless, in the court's experience, Illinois courts commonly permit creditors to pursue in personam deficiency judgments separately from foreclosure (id., Tr. at 12:23-13:3). Debtors cited a recent case of the Illinois Appellate Court, LSREF2 Nova Investments III, LLC v. Coleman, which held that a creditor who had already received an in rem judgment against the borrower in a foreclosure action was barred from subsequently seeking an in personam deficiency judgment on the promissory note because “res judicata bars not only what was actually decided in the first action but, also, whatever could have been decided.” 33 N.E.3d 1030, 1034, 1037 (Ill.App.Ct. 2015) (citing In re Liquidation of Legion Indem. Corp., 870 N.E.2d 829, 834 (Ill.App.Ct. 2007)). The bankruptcy court was unmoved, explaining that it still had doubts based on the fact that “Illinois allows all this stuff to be pursued at different times in different ways, ” and, because Illinois law was so “unstructured” in that respect, the court overruled the objection. (Opening Br., App., Tr. at 12:25-25, 13:18.) Debtors appeal that ruling.

         DISCUSSION

         This Court has jurisdiction to review “judgments, orders and decrees” issued by the bankruptcy court. 28 U.S.C. § 158(a)(1). “A bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo.” In re Midway Airlines, Inc. 383 F.3d 663, 668 (7th Cir. 2004) (citing In re Smith, 286 F.3d 461, 464-65 (7th Cir. 2002)).

         In this appeal, as in the bankruptcy court, debtors argue that BMO is barred by res judicata from seeking to establish Mark's personal liability under the promissory note because BMO litigated that issue to final judgment in the Wing St. Foreclosure Action. BMO responds by arguing that the bankruptcy court correctly ruled that the Wing St. Foreclosure Action does not bar BMO from collecting from Mark on the promissory note because the judgment against him was in rem, not in personam, and Illinois law recognizes that foreclosure of a mortgage and damages for breach of a promissory note are distinct, independent remedies. Further, BMO argues that it could not have obtained an in personam judgment against Mark, even if it had sought one, because it had no authority to litigate its claims against him personally while his bankruptcy proceedings were pending; it had only sought (and only received) relief from the automatic stay in order to proceed with foreclosure to protect its interest in the Wing St. Property, not to proceed against Mark personally. The Court will address the latter argument first.

         A. SCOPE OF RELIEF FROM STAY

         “When a petition in bankruptcy is filed, the automatic stay provisions of 11 U.S.C. § 362 take effect and prevent creditors from taking any action to collect on their debts.” In re Jepson, 816 F.3d 942, 945 n.4 (7th Cir. 2016). However, if a creditor holds a mortgage secured by property worth less than the debtor owes, then “bankruptcy proceedings may only delay the inevitable result, ” and “[t]here may be no reason to make the creditor wait until the final distribution of the estate to get what it bargained for, ” so “Congress included a provision for relief from the automatic stay[, ] § 362(d)”. In re Vitreous Steel Prod. Co., 911 F.2d 1223, 1231-32 (7th Cir. 1990). “Under certain circumstances the bankruptcy court may lift the stay under that section, either for cause, including lack of adequate protection of a creditor's interest, or . . . the stay may be lifted if the debtor has no equity in the collateral and the collateral is not necessary to an effective reorganization of the debtor.” Id.

         Section 362(d) does not require relief from an automatic stay to take a particular form; the statute states that, where relief is warranted, the bankruptcy court “shall grant relief . . . such as by terminating, annulling, modifying, or conditioning such stay.” 11 U.S.C. § 362. “Therefore, the Court has considerable flexibility to fashion relief” that is appropriate to a particular case. In re Ascher, 146 B.R. 764, 772 (Bankr. N.D.Ill. 1992) (citing 2 Collier onBankruptcy ΒΆ 362.07). To ...


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