Settlers' Hous. Serv., Inc. v. Schaumburg Bank & Trust Co., N.A. (In re Settlers' Hous. Serv., Inc.)

• Decision Date: 19 May 2017
• Docket Number: Bankruptcy No. 13–28022,Adversary No. 13–1328
• Citation: 568 B.R. 40
• Parties: IN RE: SETTLERS' HOUSING SERVICE, INC., Debtor. Settlers' Housing Service, Inc., Plaintiff v. Schaumburg Bank & Trust Company, N.A., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

568 B.R. 40

IN RE: SETTLERS' HOUSING SERVICE, INC., Debtor.

Settlers' Housing Service, Inc., Plaintiff

v.Schaumburg Bank & Trust Company, N.A., Defendant.

Bankruptcy No. 13–28022

Adversary No. 13–1328

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

Signed May 19, 2017

William J. Factor, David Paul Holtkamp, Sara E. Lorber, Jeffrey K. Paulsen, The Law Office of William J. Factor, Ltd., Chicago, IL, for Plaintiff.

Francisco Connell, Miriam R. Stein, Terence G. Tiu, Chuhak & Tecson, P.C., Chicago, IL, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Jack B. Schmetterer, United States Bankruptcy Judge

This adversary proceeding, related to a voluntary Chapter 11 bankruptcy case, is before the court for decision after trial.The debtor in the bankruptcy case, Settlers' Housing Service, Inc.("Settlers"' or the "Debtor"), is an Illinois nonprofit corporation organized and operated to fulfill the housing needs of recently arrived legal immigrants.After incurring large amounts of debt to acquire properties in August of 2008, the properties failed to generate enough revenue to pay the loans and Settlers' failed to pay the debt.In the meantime, the original bank lender failed and the Federal Deposit Insurance Corporation("FDIC"), as receiver for the defunct lender, transferred its interests in Settlers' loans to Schaumburg Bank and Trust, N.A.("Schaumburg Bank" or the "Bank").When Schaumburg Bank sued Settlers' to foreclose on properties then asserted to be collateral for the loans, Settlers' responded by filing the bankruptcy case and this proceeding, which contests the right to foreclose and the claim filed in bankruptcy by the Bank.

The adversary proceeding was brought on behalf of the Chapter 11 estate.The complaint alleges that one of the mortgages on property claimed as collateral for all loans was obtained by the Bank's predecessor through fraud, without Settlers' actual knowledge or authorization.Among other things, the complaint seeks determination that the mortgage on the Washington-Taylor Property (as defined in the Findings of Fact below) is void and unenforceable against Settlers' and its estate for fraud in the execution or other illegality.Equitable subordination of the Bank's claim and other relief is also sought.

Trial was held over the course of twelve afternoons.At the conclusion of trial, all parties having rested, the court directed the parties to submit written proposed findings of fact and conclusions of law in lieu of final oral argument.This was done, and the resulting argument has been reviewed.Findings of Fact and Conclusions of Law will now be made and entered below.It is held therein that Settlers' met its burden of proof in disputing the validity and enforceability of a mortgage claimed by the Bank on the Washington-Taylor Property, and Settlers' objection to the Bank's claim will be sustained in that respect.Other factual allegations in the complaint were also established, but Settlers' is not entitled to all the relief sought.Judgment will be separately entered in favor of Settlers' as to some, but not all counts tried.An order and judgment disallowing part of the Bank's claim, in part, and protecting the Washington-Taylor Property from foreclosure will be entered.

CONCLUSIONS OF LAW AS TO JURISDICTION

Under 28 U.S.C. § 1334, federal district courts have original and exclusive jurisdiction of all cases under the Bankruptcy Code(title 11, U.S.C.), and original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.The district courts may refer these cases and proceedings to the bankruptcy judges for their districts pursuant to 28 U.S.C. § 157(a), and the District Court for the Northern District of Illinois has made such reference through Internal Operating Procedure15(a).

After a case is referred to a bankruptcy judge, 28 U.S.C. § 157(b)(1) authorizes the judge to issue final judgments in "core proceedings" arising under the Bankruptcy Code, or arising in a bankruptcy case, and § 157(b)(2) gives several examples of core proceedings.However, unless the parties consent, related proceedings may only be treated by a bankruptcy judge through the issuance of proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c)(1), with judgment entered by the district court after de novo review.Exec.Benefits Ins. Agency v. Arkison, ––– U.S. ––––, 134 S.Ct. 2165, 2173–74, 189 L.Ed.2d 83(2014).

This adversary proceeding deals with the objection of Settlers' estate to the claim filed by Schaumburg Bank in the bankruptcy case, as well as a request to equitably subordinate the Bank's claim and other affirmative relief.By prior Opinion, it was held that despite certain protections given to banks taking from the FDIC as receiver, subject matter jurisdiction lies here to consider defenses to the validity and enforceability of the Bank's claim, equitable subordination, and counterclaims relating to some asserted actions or omissions by Schaumburg Bank.SeeSettlers' Hous. Serv., Inc. v. Schaumburg Bank & Trust Co., N.A.(In re Settlers' Hous. Serv., Inc.),540 B.R. 624, 634–35 and 636–37(Bankr. N.D. Ill.2015).The Bank's motion to dismiss the Third Amended Complaint for lack of subject matter jurisdiction was therefore denied with respect to Counts 1, 3, 6, 8, 9 and 11.Id. at 637.The reasoning and ruling in that Opinion, as well as two prior Opinions on motions to dismiss filed by the Bank in this adversary case, see520 B.R. 253(Bankr. N.D. Ill.2014);514 B.R. 258(Bankr. N.D. Ill.2014), are incorporated into the Conclusions of Law by this reference.

Counts 3, 6, 9: Objections to Claim Relating to Fraud in the Execution

Schaumburg Bank still maintains that subject matter jurisdiction is lacking as to Counts 1 (Equitable Subordination), 3 (Fraudulent Misrepresentation related to Fraud in the Execution), 6 (Fraud, Illegality and Unenforceability of the Washington-Taylor Mortgage), 8 (Setoff) and 9 (Unjust Enrichment related to Fraud in the Execution) because those claims relate to purported acts or omissions of its predecessor in interest prior to appointment of the FDIC as receiver.(SeeDef.'s Proposed Findings of Fact and Conclusions of Law, Dkt. No. 327 ["Def.'s FFCL "], at 2.)

With respect to Counts 3 (Fraudulent Misrepresentation related to Fraud in the Execution), 6 (Fraud, Illegality and Unenforceability of Washington-Taylor Mortgage) and 9 (Unjust Enrichment related to retention of Washington-Taylor Mortgage), it was earlier held that available relief is "limited to that which is needed to dispute the validity of Schaumburg Bank's claim against the estate or otherwise disallow the bank's claim."Settlers ', 540 B.R. at 637.Defendant maintains that consideration of defensive theories identified in these counts is barred by the FDIC administrative exhaustion requirement, see12 U.S.C. § 1821(d)(13)(D).The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101–73,103 Stat. 183, limits judicial review of claims against the FDIC and its successors.The statutory provision limiting court jurisdiction to review those claims provides as follows:

Except as otherwise provided in this subsection, no court shall have jurisdiction over-

(i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the Corporation has been appointed receiver, including assets which the Corporation may acquire from itself as such receiver; or

(ii) any claim relating to any act or omission of such institution or the Corporation as receiver.

12 U.S.C. § 1821(d)(13)(D).See alsoSettlers ', 540 B.R. at 630–31.

The Bank cites Farnik v. F.D.I.C.,707 F.3d 717(7th Cir.2013), which held that claims brought against the successor bank that related to pre-FDIC receivership acts of the predecessor bank were subject to FIRREA's administrative claims process exhaustion requirement, seeid . at 722–23(citing12 U.S.C. § 1821(d)(13)(D)(ii) );See alsoSettlers',540 B.R. at 631–32.However, for reasons discussed in the prior Opinion, defenses to enforcement of rights raised after a FDIC receivership are not subject to FIRREA's administrative exhaustion requirement.Settlers',540 B.R. at 633–34;see alsoNat'l Union Fire Ins. Co. of Pittsburgh, PA v. City Sav. F.S.B.,28 F.3d 376, 393(3d Cir.1994);Am. First Fed., Inc. v. Lake Forest Park, Inc.,198 F.3d 1259, 1264(11th Cir.1999).Nothing in Farnik compels a different result.

In Farnik,the plaintiffs had instituted a class action suit alleging that the predecessor bank had breached loan agreements and violated various state laws regulating interest rates.Such claims were asserted before the FDIC stepped in as receiver, and the plaintiffs later substituted the successor bank as defendant.The complaint there set forth claims "for violations of the Illinois Interest Act, 815 ILCS 205/1 et seq., and the Illinois Consumer Fraud and Deceptive Practices Act, 815 ILCS 505/1 et seq., as well as for contract reformation and fraud."Farnik,707 F.3d at 720.The Farnik opinion held that such claims were subject to FIRREA's administrative exhaustion requirement, id. at 722–23, a requirement that was not met.

In contrast, consideration of Counts 3, 6, and 9 in this case is limited to defensive theories challenging the validity and enforceability of the Bank's claim in the bankruptcy case.See reasoning at Settlers',540 B.R. at 635(holding that while requests for damages are jurisdictionally barred, defensive theories challenging the enforceability of the Bank's claim are not barred).Those counts seek a holding that the mortgage on the Washington-Taylor Property is void for fraud in the execution or other theories and is therefore unenforceable against Settlers' and the estate.

Unlike the claims at issue in Farnik, unenforceability based on...