Freedom Mortg. Corp. v. Burnham Mortg., Inc.

• Decision Date: 23 June 2009
• Docket Number: No. 08-3007.,08-3007.
• Citation: 569 F.3d 667
• Parties: FREEDOM MORTGAGE CORPORATION, Plaintiff-Appellant, v. BURNHAM MORTGAGE, INCORPORATED, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

569 F.3d 667

FREEDOM MORTGAGE CORPORATION, Plaintiff-Appellant, v. BURNHAM MORTGAGE, INCORPORATED, et al., Defendants-Appellees.

No. 08-3007.

United States Court of Appeals, Seventh Circuit.

Argued June 1, 2009.

Decided June 23, 2009.

Dennis A. Dressler (argued), Christian J. Jorgensen, Dressler & Peters LLP, Chicago, IL, for Plaintiff-Appellant.

Thomas B. Underwood, Attorney, Purcell & Wardrope, Barbara Gimbel, Holland & Knight, Joel D. Bertocchi, Hinshaw & Culbertson, David A. Baugh, Attorney, Baugh, Dalton, Carlson & Ryan, Chicago, IL, Robert A. Chapman, Attorney, Christopher C. Kendall, Attorney, Daniel Rozenstrauch, Attorney, Chicago, IL, for Defendants-Appellees.

Before EASTERBROOK, Chief Judge, and BAUER and EVANS, Circuit Judges.

EASTERBROOK, Chief Judge.

The goal of a mortgage-flipping scam is to deceive a potential lender about the value of the collateral. Go-between G finds a building for sale and arranges its sale to Buyer B for more than its market value. B borrows the money for the purchase, assisted by Appraiser A, who certifies to the lender that the property is worth more than the actual purchase price. Someone else (if not G himself) certifies that B has put in a substantial down payment. (Most lenders limit their exposure to 90% or less of the property's value; the buyer's equity not only is extra security but also ensures that the buyer will keep the property in good shape.) Here is an example. Go-between finds a property that can be purchased for $50,000. Appraiser certifies that it is worth $100,000. Buyer agrees to buy the property for $50,000 but tells Lender that the price is $100,000 and that B will put up $20,000 of his own funds. Lender provides the rest. At closing, $50,000 of Lender's money is paid to the original owner; B and G split $30,000 (less the fee already paid to Appraiser). B vanishes and never makes a payment on the mortgage. When Lender forecloses, it suffers a $30,000 loss. See generally Decatur Ventures, LLC v. Daniel, 485 F.3d 387 (7th Cir.2007).

Freedom Mortgage Corporation contends in this suit that the defendants conducted such a scam. The principal Burnham Mortgage (a broker) and its manager John Jeffrey Hlava, played the role of G in our example. (So Freedom alleges; its assertions have yet to be tested but must be accepted for current purposes.) Other played the roles of Buyer B and Appraiser A. Two of the Buyer have pleaded guilty to criminal charges of fraud. Other Buyer cannot be located (Freedom Mortgage says that Burnham used phony names), and one insists that her identity had been stolen and that she had nothing to do with the transaction. The Appraiser say that their appraisals were honest. Two title insurers complete the cast of defendants. The insurers promised to indemnify Freedom Mortgage not only for any defects in title but also for damages caused by failure to close the real-estate transactions according to Freedom's specifications. Freedom says that Burnham and Exeter Title closed deals with phantom buyers, at phony prices, and without the promised down payments, entitling it to indemnity from the insurers. The insurers (Exeter and Ticor Title) have refused to pay, asserting that Burnham and Exeter followed Freedom's closing instructions.

Freedom contends that it is entitled to recoup its losses under contracts with Burnham and the insurers. It also contends that all defendants are liable in tort for participating in a fraudulent scheme; it seeks actual and punitive damages. Finally, Freedom maintains that the fraudulent scheme was conducted using the mails and interstate telecommunications system, exposing the defendants to treble damages under 18 U.S.C. § 1964(c), part of the Racketeer Influenced and Corrupt Organizations Act. (Mail and wire fraud are predicate offenses under RICO. 18 U.S.C. § 1961(1)(B).)

The large number of defendants, roles, and transactions has caused the litigation to become protracted. It has not helped that the case is on its third district judge. In 2006 Judge Filip, the second judge assigned to the case, concluded in a lengthy opinion that Freedom's potential recovery is limited by the fact that it (or its agents) purchased the properties at foreclosure sales. Freedom used the mechanism of a credit bid. In other words, Freedom bid some or all of the outstanding balance of the loan, rather than cash. The judge concluded that, as a matter of Illinois law, even though only Freedom and the buyers were parties to the foreclosures, Freedom cannot recover damages from any third party by contending that the property was worth less than the amount of the credit bid. Freedom Mortg. Corp. v. Burnham Mortg., Inc., 2006 WL 695467, 2006 U.S. Dist. LEXIS 10538 (N.D.Ill. Mar. 13, 2006).

Here's an illustration. Freedom loaned $244,211.37 on the security of the real property at 7953 South Escanaba Avenue in Chicago. When the buyer defaulted, Freedom made a credit bid of $143,500 at the auction. That was the winning bid. The state court awarded Freedom the property and a default judgment of $100,711.37. Freedom resold the property, realizing only $92,978.15. The district court held that Freedom can not argue in this suit that the property was worth less than $143,500. The court reserved for future decision whether Freedom can recover punitive damages under state law, or treble damages under RICO, on account of this property, and whether any of the non-buyer defendants may be liable for the $100,711.37 deficiency. (The state court's order forbade Freedom to collect this deficiency from the buyer but did not mention insurers and other third parties.)

Defendants then filed a welter of motions for summary judgment. Some of these motions argued the merits and some that damages had been wiped out. Before acting on these motions, Judge Filip accepted an appointment as Deputy Attorney General and resigned from the bench. The case was reassigned to Judge Gettleman, who granted the motions for summary judgment on the ground that Judge Filip's opinion shows that the federal suit is barred by claim preclusion, see 28 U.S.C. § 1738 (state law governs the effect of state judgments), plus the Rooker-Feldman doctrine. See Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923); District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983). As Judge Gettleman saw things, Freedom is trying to wage a collateral attack on the state judgments. Freedom Mortg. Corp. v. Burnham Mortg., Inc., 2008 WL 4866324, 2008 U.S. Dist. LEXIS 54465 (N.D.Ill. July 11, 2008).

In this court the parties engage in vigorous debate about whether Judge Gettleman correctly understood and applied Judge Filip's opinion. That topic is irrelevant. The question we must decide is not the relation between two opinions of the district court, but whether the judgment of the district court correctly applies the Illinois law of preclusion and the Rooker-Feldman doctrine. Those legal issues are open to plenary consideration here.

We start with the Rooker-Feldman doctrine, because it is a jurisdictional rule. Only the Supreme Court of the United States may review the judgment of a state court in civil litigation. But Freedom Mortgage isn't trying to overturn any judgment. The question at hand is the effect of the foreclosure judgments, under the state's law of issue and claim preclusion. The Rooker-Feldman doctrine does not displace § 1738 and turn all disputes about the preclusive effects of judgments into matters of federal subject-matter jurisdiction. See Lance v. Dennis, 546 U.S. 459, 126 S.Ct. 1198, 163 L.Ed.2d 1059 (2006). The Rooker-Feldman doctrine is concerned with "cases brought by state-court losers complaining of injuries caused by state-court judgments". Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005). Freedom Mortgage, the winner in the state cases, complains about injuries caused by fraud that predated the state litigation and is neither addressed nor redressed by the foreclosure judgments. The Rooker-Feldman doctrine does not prevent the pursuit of compensation for injury caused by fraudulent schemes, even though § 1738 and the principles of defensive non-mutual issue preclusion may limit the recoverable damages.

As for preclusion: Why would either issue or claim preclusion block all recovery against non-parties to the state proceedings? Take a simple situation. Freedom lends to Borrower B against two kinds of security: the real property, and a guaranty of B's note by a solvent obligor, such as B's rich uncle. If B defaults, Freedom will foreclose on the note and mortgage, then try to collect the deficiency judgment from B's uncle. Illinois law permits a separate action on the guaranty. See Farmer City State Bank v. Champaign National Bank, 138 Ill.App.3d 847, 852, 93 Ill.Dec. 200, 486 N.E.2d 301 (1985); LP XXVI, LLC v. Goldstein, 349 Ill.App.3d 237, 285 Ill.Dec. 45, 811...