Celtic Bank, Corporation v. Executive Title, Inc. et al
Filing
46
MEMORANDUM Opinion and Order Signed by the Honorable Young B. Kim on 10/13/2015. (ma,)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
CELTIC BANK CORPORATION, a
Utah chartered bank,
Plaintiff,
v.
EXECUTIVE TITLE, INC.,
f/k/a, Protect 1 Title, Inc., an Illinois
corporation, MARTHA E. TOVIAS,
and FERNANDO R. CARRANZA &
ASSOCIATES,
Defendants.
)
)
)
)
)
)
)
)
)
)
)
)
)
)
No. 15 CV 30
Magistrate Judge Young B. Kim
October 13, 2015
MEMORANDUM OPINION and ORDER
Plaintiff Celtic Bank Corporation (“Celtic”) brings this suit seeking a
judgment of foreclosure against Defendant Executive Title, Inc. (“Executive Title”)
because Executive Title allegedly defaulted on a loan Celtic had extended in
connection with a purchase of real property. (R. 1, Compl. ¶ 1.) Celtic also seeks a
judgment for breach of an unconditional guarantee against Defendant Martha
Tovias based on this alleged default.
Defendant Fernando R. Carranza &
Associates is a tenant of the subject property. (Id. ¶ 9.) After Celtic instituted this
action, Executive Title filed for bankruptcy protection, triggering an automatic stay
of the case with respect to it. The parties disagree as to whether the case should
proceed against Tovias despite the automatic stay.
Before this court is Celtic’s
motion to proceed against Tovias. For the following reasons, the motion is granted:
Background
According to Celtic’s complaint, on May 18, 2007, Celtic loaned $450,000 to
Executive Title in connection with the financing and purchase of real property
located in Cicero, Illinois (the “Property”). (Id. ¶ 1.) This loan was secured by,
among other things, a promissory note executed by Executive Title and an
Unconditional Guarantee (the “Guarantee”) signed by Tovias promising to “repay
any and all sums due and owing in connection with the Loan.” (Id.) Specifically,
the Guarantee states that Tovias “unconditionally guarantees payment to Lender of
all amounts owing under the Note,” and it further states that Tovias “must pay all
amounts due under the Note when Lender makes written demand upon Guarantor.”
(Id., Ex. C ¶ 1.)
Celtic claims that Executive Title defaulted on the loan on
November 14, 2014. (R. 1, Compl. ¶ 24.) In addition to seeking foreclosure on the
Property, Celtic also seeks a judgment for breach of the Guarantee against Tovias.
(Id. ¶¶ 41-44.)
After consenting to this court’s jurisdiction under 28 U.S.C. § 636(c), the
parties attended a status hearing on April 20, 2015. (R. 24, Apr. 20, 2015 Order.)
Executive Title reported at the status hearing that it was seeking to refinance the
loan to resolve the case. (Id.) The court took this into account and issued a written
discovery schedule to allow Executive Title additional time to refinance the subject
loan. (Id.) On July 20, 2015, the defendants advised the court that Executive Title
had filed for bankruptcy and argued for a stay of the entire case. (R. 25, July 20,
2015 Order.)
2
On August 11, 2015, Celtic filed the current motion to proceed against Tovias.
(R. 27.)
Tovias objects and argues that the motion should be denied because,
according to her: (1) Celtic’s motion is premature; (2) Executive Title’s Chapter 11
confirmation will create a new contract, possibly precluding any action against her;
(3) there was no loan default; and (4) Celtic is fully secured in the bankruptcy
proceeding.
(R. 39, Def.’s Resp. ¶ 4.)
In her response, Tovias also denies the
existence of the promissory note between Executive Title and Celtic and the
existence of the Guarantee underlying that note. (Id. ¶ 5.)
Analysis
Section 362 of the Bankruptcy Code precludes “the commencement or
continuation, including the issuance or employment of process, of a judicial,
administrative, or other action or proceeding against the debtor that was or could
have been commenced before the commencement of the case under this title.” 11
U.S.C. § 362(a)(1).
Although this automatic stay provision prevents on-going
litigation against a debtor, the general rule in this circuit is that “‘plaintiffs are free
to pursue the debtor’s codefendants’” regardless of the automatic stay. Lee v. RCN
Corp., No. 03 CV 5866, 2004 WL 2108577, at *1 (N.D. Ill. Sept. 20, 2004) (emphasis
omitted) (quoting In re Koop, No. 00–B–24471, 2002 WL 1046700, at *3 (Bankr.
N.D. Ill. May 23, 2002)). That is because the stay provision was designed “to protect
the assets of the debtor for the benefit of creditors,” not to “afford collateral benefits
to non-debtor parties involved in litigation with the debtor as party defendants or as
co-defendants.” Id. (internal quotation omitted).
3
The Seventh Circuit recognizes two exceptions to this general rule to be
applied only in unusual circumstances. Id. First, a suit may not proceed against
non-debtor codefendants where “there is such identity between the debtor and the
third-party defendant that the debtor may be said to be the real party defendant
and that a judgment against the third-party defendant will in effect be a judgment
or finding against the debtor.” In re Fernstrom Storage & Van Co., 938 F.2d 731,
736 (7th Cir. 1991) (quotation omitted).
Second, the litigation stay may apply
concurrently to a debtor’s guarantor “where the pending litigation, though not
brought against the debtor, would cause the debtor, the bankruptcy estate or the
reorganization plan ‘irreparable harm.’” Id.
In response to Celtic’s present motion, Tovias does not argue that either of
these recognized exceptions applies, and even if she had, Celtic persuasively argues
that neither would justify extending the automatic stay to her. The first exception
only kicks in where litigation against the non-debtor, here Tovias, threatens the
property of the bankruptcy estate, such as where the debtor party has an absolute
duty to indemnify the non-debtor. In re Kmart Corp., 285 B.R. 679, 688 (Bankr.
N.D. Ill. 2002). But here, the debtor (Executive Title) has not agreed to indemnify
the non-debtor codefendant (Tovias), so any ruling against Tovias would in no way
affect Executive Title’s assets. In other words, because Tovias signed an absolute
Guarantee of the loan, Celtic can satisfy its claims without going after Executive
Title’s assets. The second exception contemplates situations where the pending
litigation against a third party would cause the debtor irreparable harm. Id. at 688.
4
But Tovias has put forth no evidence to show that an adverse ruling against her in
this case would in any way harm Executive Title, let alone cause “irreparable
harm.”1 Thus, even if Tovias had not forfeited these arguments by failing to raise
them in her response, neither of the recognized exceptions justifies delaying this
litigation with respect to her.
Instead of asserting the exceptions to the general rule, Tovias relies entirely
on an out-of-circuit case, Moore, Owen, Thomas & Co. v. Coffey, 992 F.2d 1439 (6th
Cir. 1993), to argue that a separate exception exists here. She argues that under
Coffey, a stay should concurrently apply to a guarantor where liability and the
amount of the underlying debt are not yet determined, and particularly where a
guarantor has filed a counterclaim. (R. 39, Def.’s Resp. ¶ 8.) But Tovias misapplies
the Coffey holding. In Coffey, creditors brought an action against a guarantor in
connection with the purchase and sale of a marina and houseboat rental business.
Coffey, 992 F.2d at 1441-42. Although the principal debtor had filed for Chapter 11
Bankruptcy relief, the district court entered summary judgment against the
guarantor after finding that the debtor had failed to perform its obligations. Id. at
1442-43.
On appeal, the guarantor argued that the district court could not
determine his liability until there was an appropriate determination of the debtor’s
obligation, which the guarantor argued was precluded by the debtor’s bankruptcy
Moreover, “[t]he weight of authority . . . holds that a request to extend a § 362
stay must be filed in the court where the bankruptcy action pends, and further, that
the request is to be filed by the debtor.” Hamilton v. American Corrective
Counseling Servs., Inc., No. 3:05-CV-434-RM, 2009 WL 973447, at *3 (N.D. Ind.
Apr. 8, 2009). Nothing in the parties’ current submissions indicates that Executive
Title has taken that step.
1
5
proceedings. Id. at 1449. The Sixth Circuit rejected this argument, noting that the
guaranty was “not in any way contingent upon the final outcome of [the debtor’s]
bankruptcy” and that discharge of the debtor in bankruptcy would not impact the
guarantor’s liability. Id. Although the court recognized that the guarantor’s exact
obligation could not be determined until the debtor’s obligation on the underlying
contract was resolved, the court specifically held that the merits of the debtor’s setoff claims could be adjudicated by the district court despite the debtor’s bankruptcy
filing. Id. at 1449-50; see also Fifth Third Bank v. Zayat Stables, LLC, No. 5:09-cv401-KKC, 2010 WL 2464986, at *2 (E.D. Ky. June 14, 2010) (holding that Coffey
supports the notion that “set-off claims could be resolved by the district court, so
that the obligation of the guarantors on the underlying contract would be known”).
Accordingly, contrary to Tovias’s argument, Coffey actually supports Celtic’s
position that the case should proceed against Tovias without delay.
Tovias also argues that Celtic’s motion to proceed should be denied because,
she says, Executive Title’s Chapter 11 confirmation will necessarily form a new
contract between the parties, precluding any action against her. (R. 39, Def.’s Resp.
¶ 14.) First, this argument is speculative because the Chapter 11 plan that Tovias
relies on has not yet even been filed. (Id. ¶ 17.) Second, Tovias assumes that the
Chapter 11 plan will somehow discharge her liability rather than simply reduce the
amount for which she is liable. Although Tovias is correct that a confirmed Chapter
11 plan constitutes a binding contract, see In re Schreiber, 163 B.R. 327, 333 (Bankr.
N.D. Ill. 1994), she would not be a party to this new contract. In other words, any
6
new contract that arises out of the bankruptcy proceedings will have no effect on
Tovias’s liability, if any, under the Guarantee. See In re White, 415 B.R. 696, 699
(N.D. Ill. Bankr. 2009) (“The liability of a guarantor to the creditor is separate from
the liability of the primary debtor.”); see also In re Stroller’s, Inc., 93 B.R. 628, 63536 (Bankr. N.D. Ind. 1988) (noting that “bankruptcy proceedings do not affect the
liabilities of co-debtors and guarantors”).
And as Celtic points out, Tovias’s
argument ignores the purpose of guaranty agreements, which is to protect the
creditor from non-payment should the principal debtor become unable to pay. If the
automatic bankruptcy stay provisions were routinely extended to the debtor’s
guarantors, lenders would have no incentive to enter into such agreements because
they could never be sure of efficient recourse in the event of the debtor’s
bankruptcy. (R. 43, Pl.’s Reply at 6-7.) Accordingly, Tovias has not demonstrated
that any new contract arising out of Executive Title’s bankruptcy would justify an
exception to the general rule that litigation against third-party guarantors is
permitted despite the automatic bankruptcy stay with respect to the debtor. See In
re White, 415 B.R. at 699.
Finally, Tovias argues that there is no need to proceed against her now
because she asserts that there was no default and that Celtic is fully secured in the
bankruptcy proceeding. (R. 39, Def.’s Resp. ¶¶ 28-31.) According to her, Celtic has
over $77,000 in equity cushion for the underlying debt under the note and thus is
adequately protected. (Id. ¶ 31.) But Celtic asserts that the amount due under the
Guarantee exceeds the value of the Property when accrued interest, late charges,
7
and fees are taken into account. (R. 43, Pl.’s Reply at 7.) Even if Tovias is correct
on the level of Celtic’s security, a factual issue the court is unable to address in the
context of the present motion, she has not explained how that fact counsels in favor
of extending the stay to her under 11 U.S.C. § 362(a)(1). The same is true with
respect to Tovias’s dispute that Executive Title defaulted on its loan. She has not
explained how these disputes play into either of the exceptions to the general rule
that litigation may move forward against a third-party guarantor. Accordingly, the
case must proceed against Tovias without further delay.
Conclusion
For the foregoing reasons, the motion to proceed against Tovias is granted.
ENTER:
____________________________________
Young B. Kim
United States Magistrate Judge
8
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?