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In re Sobczak-Slomczewski

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

December 5, 2017

ROBERT SOBCZAK- SLOMCZEWSKI, Defendant-Appellee. WDH LLC, Plaintiff-Appellant,

         On appeal from the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division Bankr. Case No. 13-A-972 Judge Donald Cassling


          Robert M. Dow, Jr. United States District Judge.

         This case is on appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case No. 13-A-972. Plaintiff-Appellant WDH LLC (“Appellant”) appeals from the Bankruptcy Court's April 28, 2017 order denying Appellant's motion for relief and correction of judgment (the “Order”). See App. 228.[1] For the reasons set forth below, the Bankruptcy Court's Order is AFFIRMED.

         I. Background

         Debtor/Defendant-Appellee Robert Sobczak-Slomczewski (“Debtor”) was a principal of Dells Hospitality, Inc. d/b/a Hilton Garden Inn Wisconsin Dells (“Dells”). Dells borrowed $12.6 million (the “Loan”) from Bear Stearns Commercial Mortgage, Inc. (“Bear Stearns”) to fund the acquisition of the Hilton Garden Inn Hotel in Lake Delton, Wisconsin (the “Hotel”). Debtor, in his individual capacity, agreed to indemnify Bear Stearns against certain losses that it might suffer in connection with the Loan. The Loan was subsequently acquired by Maiden Lane Commercial Mortgage-Backed Securities Trust 2008-1 (the “Trust”).

         Debtor defaulted on the Loan. The Trust therefore began foreclosure proceedings in Wisconsin state court. The Hotel eventually was sold at auction to Appellant, which is a limited liability company owned by the Trust. Appellant subsequently assigned to Maiden Lane, LLC (“Maiden Lane”) all of its right, title, and interest in all payments, guarantees, claims, demands, causes of action, remedies, and judgments to which it is entitled against Debtor.

         While he was in default under the Loan and the foreclosure proceedings were pending, Debtor transferred more than $677, 000 of Hotel revenues that had been pledged as cash collateral to secure repayment of the Loan. Upon discovering these transfers, Appellant sued debtor in Wisconsin state court for indemnification, conversion and embezzlement (the “Wisconsin Case”). Debtor removed the action to the United States District Court for the Western District of Wisconsin (“Wisconsin District Court”). On March 20, 2013, the Wisconsin District Court granted summary judgment for Appellant (the “Wisconsin Order”), concluding that Debtor committed conversion and embezzlement and awarding Appellant $667, 000 in actual damages. The Wisconsin District Court also ordered Appellant to submit proof of exemplary damages and any documentation needed for the court to consider an award of additional damages.

         On April 22, 2013, Debtor filed a petition for Chapter 7 bankruptcy (No. 13 B 16661) in the Bankruptcy Court for the Northern District of Illinois (the “Bankruptcy Court”). Without ruling on exemplary damages, the Wisconsin District Court dismissed the Wisconsin Case “without prejudice subject to its reopening upon the completion of bankruptcy proceedings where all issues have not been rendered fully dispositive.” App. 20.

         On July 18, 2013, Appellant filed an adversary proceeding (No. 13-A-972) in the Bankruptcy Court. See App. 40. The adversary complaint asked the Bankruptcy Court to determine the dischargeability of the Wisconsin Order under 11 U.S.C. § 523(a)(4) and (6). The complaint alleged that Appellant had “obtained summary judgment against the Debtor” in the Wisconsin District Court “on March 20, 2013 in the amount of at least $677, 000.00, plus interest, costs, disbursements, reasonable attorneys' fees, and treble damages.” App. 41.[2] In its prayer for relief, Appellant asked the Bankruptcy Court to “[d]etermine and adjudge that Debtor's indebtedness to [Appellant] is excepted from the Debtor's general discharge pursuant to 11 U.S.C. § 523(a)(4) and/or (a)(6).” App. 49.

         Appellant moved for summary judgment in the adversary proceeding. In its memorandum in support of summary judgment, Appellant explained that it was “a creditor of [Debtor] by virtue of . . . obtaining summary judgment against . . . Debtor” in the Wisconsin Case “on March 20, 2012 in the amount of at least $677, 000.00.” App. 131-132. Appellant requested that the Bankruptcy Court “enter an order determining that [Appellant]'s Wisconsin District Court Judgment is not subject to the Debtor's General Discharge.” App. 149. Appellant's brief did not discuss treble damages or attorneys' fees. The proposed order submitted with the motion for summary judgment requested a declaration that “[t]he debt owed by Robert Sobczak-Slomczewski to [Appellant] in the amount of $677, 000.00, together with all related fees and costs, is allowed [in] full and held to be non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(4) and 523(a)(6).” [10] at 8.

         On August 5, 2014, the Bankruptcy Court granted Appellant's motion for summary judgment, concluding that “the $667, 000 debt owed by the Debtor to [Appellant] is non-dischargeable under § 253(a)(4) and (a)(6).” App. 203. Debtor appealed the Bankruptcy Court's judgment to the District Court, which dismissed the appeal as untimely. The Seventh Circuit affirmed, and the Supreme Court denied Debtor's petition for writ of certiorari.

         On September 4, 2016, Appellant filed a motion in the Wisconsin District Court to reopen its lawsuit against Debtor to seek additional damages under the Wisconsin Order. The Wisconsin District Court reopened the case. It awarded Appellant treble damages and post-judgment interest, but denied Appellant's request for attorneys' fees, for a total award of $2, 033, 370.43 (the “Additional Damages Order”). See App. 26. The Wisconsin District Court declined to address whether the additional damages were non-dischargeable in bankruptcy, instead noting that “[t]he bankruptcy court found only that this court's award [of] $667, 000 in actual damages was dischargeable, . . . without addressing (and apparently without being asked to address) the potential of an award of treble damages or attorneys' fees.” App. 29.

         On November 29, 2016, Appellant filed a motion to reopen the Bankruptcy Court adversary proceeding for the purpose of modifying the court's previous order (the “Motion to Reopen”) and a motion for relief and correction of judgment pursuant to Federal Rules of Civil Procedure 60(a) and 60(b)(6) (the “Rule 60 Motion”). Appellant argued that the judgment should be corrected to reflect that the additional damages awarded by the Wisconsin District Court were non-dischargeable.

         On February 15, 2017, the Bankruptcy Court granted the Motion to Reopen (which was unopposed), but denied the Rule 60 Motion. The Bankruptcy Court determined that Appellant was not entitled to relief under Rule 60(a)-which authorizes a court to “correct a clerical mistake or a mistake arising from oversight or omission, ” Fed.R.Civ.P. 60(a)-because “the Final Order, finding only $667, 000.00 non-dischargeable, was an accurate reflection of the Court's intention at the time.” App. 233. The Court rejected Appellant's argument that, by requesting a “non-dischargeability award of ‘at least' $667, 000.00, it thereby reserved its right to seek an amount greater than $677, 000.00 at some unspecified date, ” explaining that Appellant's summary judgment motion “never specifically requested or provided evidence for any specific sum over that amount that should be awarded.” App. 232-233.

         The Bankruptcy Court also rejected Appellant's argument that it was entitled to relief under Rule 60(b)(6)-Rule 60's “catchall” provision for “any other reason that justified relief” but that is not specifically provided for in the rule. Fed.R.Civ.P. 60(b)(6). The Bankruptcy Court determined that Appellant did not file his motion within a reasonable time, because Appellant “was aware of its right to pursue potential additional damages, at the very least, on March 20, 2013, ” when the Wisconsin District Court issued an order in which it “acknowledged that causes of action of the type found in that case generally make treble damages mandatory.” App. 234-236. According to the Bankruptcy Court, “[o]nce aware of its entitlement to seek that relief, [Appellant] could have explicitly requested that this Court include in its Final Order a provision declaring non-dischargeable any additional damages made by the Wisconsin District Court in the Wisconsin Order.” App. 236. “Having failed to do that in the adversary proceeding, ” the Bankruptcy Court further explained, Appellant “could have preserved its rights by filing a motion for rehearing or clarification within fourteen days of this Court's entry of the Final Order, ” or “could have filed a motion under Rule 60(b)(1) for ‘mistake, inadvertence, surprise, or excusable neglect' after the issuance of the Final Order within one year of its entry.'” App. 236-237 (quoting Fed.R.Civ.P. 60(b)(1)).

         The Bankruptcy Court concluded that, even if Appellant's motion under Rule 60(b)(6) had been timely, the facts that it alleged did not “rise to the level of extraordinary circumstances.'” App. 237. The Bankruptcy Court acknowledged that its denial of the motion “may result in what one could describe as a dischargeability ‘windfall' for the Debtor, ” while noting in a footnote that “[w]indfall is perhaps too strong a word to use in these circumstances” given that Appellant “still has the right to pursue the Debtor for up to $677, 000.00.” App. 237. Nonetheless, the Bankruptcy Court explained, “that ‘windfall' is the result of [Appellant's] own litigation decisions, and an ...

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