Knezovic v. Urban Partnership Bank

Filing 25

MEMORANDUM Opinion and Order. Signed by the Honorable John Robert Blakey on 6/18/2018. Mailed notice(ep, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ZIVKO KNEZOVIC,
Plaintiff-Appellant,

Case No. 17-cv-8991

v.

Judge John Robert Blakey

URBAN PARTNERSHIP BANK,
Defendant-Appellee.

MEMORANDUM OPINION AND ORDER
Plaintiff Zivko Knezovic appeals from the bankruptcy court’s grant of
summary judgment to Defendant Urban Partnership Bank (UPB) on his adversary
complaint, and the court’s denial of his motion to alter or amend that judgment.
For the reasons explained below, this Court affirms the bankruptcy court’s orders.
I.

Background
A.

The Note

In August 2005, Plaintiff and two co-signers borrowed $1.5 million from
ShoreBank. [8-4] at 55. The bank and the borrowers memorialized the loan in a
promissory note (the Note) that the borrowers executed when they took out the
loan. Id. At the same time, the Chicago Title Land Trust Company executed a
mortgage in favor of ShoreBank on three properties in Chicago to secure the $1.5
million due under the Note. Id.
The Note had a variable interest rate and included the following provisions:

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PAYMENT. Subject to any payment changes resulting from changes
in the Index, Borrower will pay this loan in 360 payments of $9,481.02
....
VARIABLE INTEREST RATE. The interest rate on this Note is
subject to change from time to time based on changes in an index
which is the ShoreBank’s internal commercial lending rate for multifamily dwellings, and in effect 60 (sixty) days before the change date
(the “Index”). The Index is not necessarily the lowest rate charged by
Lender on its loans and is set by Lender in its sole discretion. If the
Index becomes unavailable during the term of this loan, Lender may
designate a substitute index after notifying Borrower . . . . The interest
rate change will not occur more often than each two year period. Your
rate will change every two years on either the first day of January or
the first day of July . . .
Id. at 76. The Note also contained an acknowledgement above the signature line
that the borrowers “read and understood all the provisions of this note, including
the variable interest rate provisions,” and agreed to the Note’s terms. Id. at 78.
Plaintiff signed the Note. Id.
The initial interest rate on the Note was 6.5%, and from September 2005
through December 2007, the borrowers made monthly payments at that rate. Id. at
57. Per the terms of the Note, ShoreBank set its variable interest rate according to
the “Index” referenced in the Note, defined as “ShoreBank’s internal commercial
lending rate for multi-family dwellings.” Id. at 58. In January 2008, the Index rose
to a 7% yearly rate and the borrowers’ interest payments on the Note increased to
match that rate. See id. In January 2010, the Index rose to 7.5% but the interest
rate on the Note remained 7%. Id.
In August 2010, the FDIC closed ShoreBank and was appointed as its
Receiver. Id. The FDIC as Receiver (FDIC-R) succeeded to all rights, titles, and

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powers of ShoreBank. Id.; see also 12 U.S.C. § 1821(c)(3)(a). That same month, the
FDIC-R endorsed the Note to UPB, assigning all of its interests in the Note and its
security (the mortgage taken out by Chicago Title Land Trust Company) to UPB.
[8-4] at 59, 79.

At that time, UPB received ShoreBank’s records, including a

historical list of ShoreBank’s interest rate indexes, including the Index applicable to
the Note. Id. at 59. According to an unrebutted declaration submitted by James T.
McCartney, UPB’s Director of Credit Policy and Risk Management, UPB preserved
and maintains the Index along with other records in its internal computer system.
See id.; [8-5] at 14; [8-15] at 40–42.
According to the Note, the Index is not tied to a national average mortgage
rate; instead, UPB sets the Index in its discretion. See [8-4] at 59. In October 2010,
UPB set the Index at 7%. Id. From that point through at least March 2016, UPB
did not change the Index. See id. at 59–60. During that period, the borrowers made
monthly installment payments on their loan at the 7% interest rate. Id. at 60. UPB
set that rate at least in part because it considers the loan “high risk” as a result of
certain features; for example, the loan does not require the borrowers to provide
UPB with financial information related to their ability to pay off the loan or to
maintain the collateral properties. See id. at 60–61.
B.

Bankruptcy Proceedings

In September 2016, Plaintiff filed for Chapter 11 bankruptcy. [8-3] at 6. In
December 2016, Plaintiff filed an adversary complaint seeking a determination of
the extent of UPB’s lien against the collateral properties securing the Note. Id. at 2,
6, 8. Plaintiff contended that UPB failed to properly adjust the interest rate on the
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Note, thus collecting more interest than it should have, which Plaintiff sought to
have deducted from the remaining amount he owed under the Note. See id. at 13.
Specifically, Plaintiff contended that ShoreBank’s Index became unavailable when
the FDIC closed the bank in 2010—requiring the court to determine a reasonable
substitute rate—and that ShoreBank and UPB failed to match the Note’s interest
rate to prevailing national rates. See id. at 10, 11–12.
In August 2017, UPB moved for summary judgment on Plaintiff’s adversary
complaint on the grounds that UPB charged an appropriate interest rate under the
Note. [8-3] at 3; [8-4] at 41. In his response to UPB’s motion, Plaintiff argued that:
(1) the Index was unavailable from the moment the FDIC closed ShoreBank; (2)
that UPB’s failure to adjust the interest rates on the Note amounted to a breach of
contract and violated the duty of good faith and fair dealing; and (3) that Plaintiff
had not waived his right to contest the interest rate by continuing to make
payments on the Note. See [8-15] at 26, 28, 30. Plaintiff failed to support his first
argument with any citations to legal authorities, and cited only to portions of UPB
employee depositions demonstrating certain gaps in their knowledge. Id. at 26–28.
Plaintiff also offered numerous insufficient and improper denials to UPB’s
statement of facts. See, e.g., [8-15] at 42; Malec v. Sanford, 191 F.R.D. 581, 584
(N.D. Ill. 2000) (denials must be justified by specific, clear citation to the record).
The bankruptcy court issued a ruling from the bench on October 19, 2017.
See [8-3] at 3–4; [9]. The court first discussed the terms of the Note and then issued
further “uncontested findings,” including that ShoreBank left the Note’s interest at

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7% in February 2010 despite raising the Index to 7.5%. [9] at 5–6. The court noted
that no evidence suggested that Plaintiff complained that this divergence in the
rates represented a breach of contract.

Id. at 6.

Finally, the court noted

McCartney’s testimony that UPB received the Index along with the rest of
ShoreBank’s records, and that the Index remained available to UPB throughout the
term of the loan. Id. at 7.
Based upon the uncontested—“or at least not properly contested”—facts, the
bankruptcy court found that the Index remained available to UPB. Id. at 7–8. All
that Plaintiff offered to rebut McCartney’s testimony was the bald assertion that
ShoreBank’s closing “caused the Index to disappear,” an unsupported proposition
that the court found “absurd.” Id. Next, the court rejected Plaintiff’s argument that
failing to adjust the interest rate on the Note could constitute a breach of contract,
since the Note clearly stated that the interest rate was “subject to change,” not that
it must change.

Id. at 8.

Plaintiff’s “unilateral mistake” in believing that the

interest rate depended upon national market rates did not void the clear terms of
the Note. Id. at 10. Having determined that the Index remained available to UPB
and that UPB had not violated the terms of the Note, the court did not need to
reach the issue of waiver. Id. at 12. The court granted summary judgment to UPB.
See id. at 13; [8-3] at 4. In a final comment, the court acknowledged that Plaintiff
failed to “effectively” dispute “most of the facts,” but noted that even without that
technical default, no evidence disproved the “key fact” that the Index existed and
remained available to UPB. [9] at 13.

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In November 2017, Plaintiff filed a motion to alter and amend the
bankruptcy court’s order granting UPB summary judgment and closing the
adversary proceeding. See [8-2] at 6;

[8-15] at 99.

In that motion, Plaintiff

repeated his argument that ShoreBank’s closure made its Index categorically
unavailable, this time citing Fifth Circuit precedent in support of his contention. [815] at 103. On November 30, the bankruptcy court denied the motion at a hearing.
See [8-2] at 6; [12] at 26.

The court found that Plaintiff offered no controlling

precedent and failed to identify a manifest error of law. [12] at 24–25. The court
also noted that the posture and facts of the Fifth Circuit cases that Plaintiff cited
differed from those in this case. Id. at 25.
Following that denial, Plaintiff appealed both the bankruptcy court’s grant of
summary judgment and denial of his motion to alter or amend that judgment. [1].
Those two orders present the only issues before this Court. See [1, 8].
II.

Legal Standard
This Court has jurisdiction to hear appeals from the rulings of the

bankruptcy court under 28 U.S.C. § 158(a).

On appeal, this Court reviews the

bankruptcy court’s legal findings de novo and its factual findings for clear error. In
re Miss.Valley Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014). The “weight of
authority” in the Seventh Circuit also subjects mixed questions of law and fact to
clear error review. Grede v. FCStone, LLC, 867 F.3d 767, 788 (7th Cir. 2017); but
see Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir. 2004) (stating that reviewing
courts assess mixed questions of law and fact de novo).

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This Court reviews the bankruptcy court’s grant of summary judgment de
novo. Dick v. Conseco, Inc., 458 F.3d 573, 577 (7th Cir. 2006). Federal Rule of Civil
Procedure 56 governing summary judgment motions applies to adversary
proceedings before the bankruptcy court, see Fed. R. Bankr. P. 7056, and the local
bankruptcy procedural requirements mirror those of this district’s local rules,
compare L. Bankr. R. 7056-1, 7056-2, with L.R. 56.1. Accordingly, the parties must
support their statements of facts and responses by citing to specific record
materials, see Malec, 191 F.R.D. at 584, and summary judgment is proper where
there is “no dispute as to any material fact and the movant is entitled to judgment
as a matter of law,” Fed. R. Civ. P. 56(a).
This Court only overturns the bankruptcy court’s denial of a motion to
reconsider for an abuse of discretion. See Fed. R. Bankr. P. 9023 (incorporating
Fed. R. Civ. P. 59); Matter of Prince, 85 F.3d 314, 324 (7th Cir. 1996) (Rule 59
motions to alter or amend judgments reviewed for abuse of discretion); Matter of
Busick, 719 F.2d 922, 925 (7th Cir. 1983) (applying rule to bankruptcy court order).
Generally, a court abuses its discretion when it relies upon “an incorrect legal
principle or a clearly erroneous factual finding, or when the record contains no
evidence on which the court rationally could have relied.” In re KMart Corp., 381
F.3d 709, 713 (7th Cir. 2004).
III.

Analysis
Plaintiff’s adversary complaint challenged UPB’s interest rates on the Note

on the grounds that: (1) ShoreBank’s Index became unavailable upon its closure,
requiring UPB to set a new, reasonable interest rate for the Note; and (2) UPB
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violated the terms of the Note by failing to appropriately adjust the interest on the
Note according to prevailing national rates.

[8-3] at 10–13.

Those two issues

provided the basis for the bankruptcy court’s challenged orders and remain the sole
focus of this appeal. This Court first addresses those issues and the bankruptcy
court’s summary judgment ruling before turning to Plaintiff’s subsequent motion to
alter or amend the judgment.
A.

The Index

Under the terms of the Note, its interest rate was “subject to change from
time to time based on changes” to “ShoreBank’s internal commercial lending rate
for multi-family dwellings”—the Index.

[8-4] at 76.

If the Index became

unavailable, the “Lender” could “designate a substitute index” after notifying the
borrowers.

Id.

The nub of Plaintiff’s argument, both here and before the

bankruptcy court, is that ShoreBank’s Index became unavailable automatically
when the FDIC closed ShoreBank. See [8-15] at 26; [14] at 10–13. That argument
fails for multiple reasons.
First, as the bankruptcy court noted, Plaintiff simply possesses no evidence
that the Index actually became unavailable at any point. Not surprisingly, Plaintiff
offered no evidence to rebut McCartney’s testimony that UPB received the records
of ShoreBank’s commercial lending rate for multi-family dwellings—the technical
definition of the Index, according to the Note—along with the other records relevant
to the Note when UPB acquired it from the FDIC-R.
Instead of submitting evidence, Plaintiff quarreled with UPB’s failure to
maintain a written policy for setting interest rates and asserted—without
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analysis—that the continued existence of the Index demanded the continued
existence of ShoreBank. See [8-15] at 27–28. Nothing in the Note requires the
interest-holder to delineate its method of setting the Index in writing; indeed, it
says that the “Lender” sets the Index “in its sole discretion.” [8-4] at 76. Nor does
the Note require that ShoreBank continually and eternally set the Index regardless
of any subsequent transfer of interest.
The Note defines the Index as “ShoreBank’s internal commercial lending rate
for multi-family dwellings,” to be “set by Lender in its sole discretion.” Id. The
unrebutted evidence before the bankruptcy court and this Court shows that UPB
acquired ShoreBank’s commercial lending rate for multi-family dwellings and
maintained that rate in its internal records, occasionally adjusting the rate, as
committed to its discretion by the terms of the Note.

See id. at 58–59.

UPB

inherited the full rights and powers of the original lender—ShoreBank—through
the chain of assignment from ShoreBank to the FDIC-R to UPB. See id. at 58–59,
79; 12 U.S.C. § 1821(c)(3)(a); see also, e.g., Strosberg v. Brauvin Realty Servs., Inc.,
691 N.E.2d 834, 842 (Ill. App. Ct. 1998) (noting that when the interest in a
negotiable instrument is transferred, the assignee “acquires all the rights of his
assignor”). That included the ability to set the Index—now in UPB’s possession—at
its sole discretion. See [8-4] at 76. The idea that the Index could not be transferred
along with the Note belies common sense and the plain terms of the agreement
itself; if merely naming the original lender in a note meant that parties could not
assign the powers and interests enshrined in that instrument, basic commercial

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transactions would collapse. Nor do the terms of the Note require such an absurd
result.

See, e.g., Suburban Auto Rebuilders, Inc. v. Associated Tile Dealers

Warehouse, Inc., 902 N.E.2d 1178, 1190 (Ill. App. Ct. 2009) (noting that courts
“construe a contract reasonably to avoid absurd results”).
In sum, the undisputed facts show that ShoreBank assigned its interest in
the Note to the FDIC-R, which assigned that interest to UPB, which received the
Note and all its relevant records—including the Index, which it has maintained ever
since. Those undisputed facts include UPB’s statements of fact that Plaintiff failed
to adequately deny. See, e.g., [8-15] at 42; Aberman v. Bd. of Ed. of Chi., 242 F.
Supp. 3d 672, 677 (N.D. Ill. 2017) (deeming statements of fact admitted when
denials lacked evidentiary support). On this record, Plaintiff fails to show that the
Index ever became “unavailable,” which, under the Note, forms a precondition to his
requested relief: the substitution of a new interest rate. See [8-4] at 76.
The Fifth Circuit precedents that Plaintiff cited on his motion to alter or
amend the bankruptcy court’s summary judgment order, and presented to this
Court on appeal, do not affect this conclusion. First, Plaintiff failed to offer these—
or any other precedents—in his response to UPB’s motion for summary judgment.
Thus, his argument based upon those precedents was not before the bankruptcy
court at summary judgment and is waived on appeal from that order. See e.g., In re
Sokolik, 635 F.3d 261, 268 (7th Cir. 2011) (noting that arguments “never raised in
the bankruptcy court” are waived on appeal).

Even considering those cases,

however, they are neither binding upon this Court nor persuasive.

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In Ginsberg 1985 Real Estate Partnership v. Cadle Company, the note in
question was payable to one bank, with its interest rate tied to the “prime” rate
charged by a second bank. 39 F.3d 528, 530 (5th Cir. 1994). Both of those banks
failed and the note was transferred to other banks. Id. Nothing in that opinion
indicated that the parties disputed the unavailability of the failed bank’s interest
rate, or than any successor in interest acquired that bank’s records. See id. at 531–
33. Such facts obviously differ from the present case: ShoreBank itself initially set
the Index, by determining—in its discretion—a commercial lending rate for multifamily dwellings. See [8-4] at 76. When UPB inherited ShoreBank’s interest and
records, it became the “Lender” and set the Index—which it now possessed—in its
discretion.

These facts contrast sharply with note drafted by the parties in

Ginsberg, which pegged the interest rate to a rate set by a third party that never
interacted with the note’s interest holders. Once that third party ceased to exist,
none of the parties to the note claimed to possess any interest in or information on
that party’s rate.
In FDIC v. Blanton, the district court apparently found—after a trial—that
the parties agreed to a particular substitute rate when the original rate identified in
the note became unavailable. See 918 F.2d 524, 533–34 (5th Cir. 1990). True, the
rate specified in the note was that of a failed bank, and the parties and the court
treated that rate as having “evaporated.” See id. at 533. But as in Ginsberg, the
opinion does not indicate that the failed bank’s records survived its closure, that
any party in interest held those records, that the relevant rate was committed to

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the discretion of the lender, or any other facts that would place that case on par
with this one. Neither Ginsberg nor Blanton actually address the issue of what
makes a particular interest rate “unavailable”; in both cases, the parties apparently
agreed that the relevant rate no longer existed, so the court had no occasion to
elaborate upon a standard for unavailability or even delve into the facts relevant to
that issue. See id. at 533–34; Ginsberg, 39 F.3d at 531–33. The other Fifth Circuit
cases noted by Plaintiff are similar, and likewise fail to persuade this Court that
ShoreBank’s closure mandates finding that the Index ceased to exist.
In sum, Plaintiff failed to produce any evidence or argument contradicting
UPB’s evidence showing that the Index remained available to it. This Court affirms
the bankruptcy court’s grant of summary judgment to UPB on that issue.
B.

Breach of Contract

Plaintiff next contended that UPB breached the terms of the Note by failing
to change the variable interest rate every two years.

[8-3] at 10–11.

The

bankruptcy court also granted UPB summary judgment on that issue, because UPB
had the right to refrain from adjusting the variable interest rate, and in any event,
the proper remedy would be damages, not reformation of the terms of the Note. See
[9] at 8.
On appeal, Plaintiff does not argue that UPB’s failure to adjust the interest
rate violated the express terms of the Note,1 but rather that UPB’s conduct violates

Nor could he because, as discussed, the lender sets the rate in its sole discretion, and, as the
bankruptcy court noted, the Note only indicates that changes in the interest rate “will not occur more
often” than every two years, not that the rate must change every two years. See [8-4] at 76
(emphasis added).
1

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the general duty of good faith and fair dealing. [14] at 16–17. Specifically, Plaintiff
contends that UPB violated its duty by: (1) failing to consider the Index unavailable;
and (2) setting the Note’s interest rate on an ad hoc basis. See id.
The duty of good faith and fair dealing requires that a “party vested with
contractual discretion must exercise that discretion reasonably, not arbitrarily,
capriciously, or in a manner inconsistent with the reasonable expectations of the
parties.” Cont’l Mobile Tel. Co., Inc. v. Chi. SMSA Ltd. P’ship, 587 N.E.2d 1169,
1174 (Ill. App. Ct. 1992). This Court has already found that the Index remained
available; UPB’s similar determination is not unreasonable.
Plaintiff’s second contention also fails because he does not support it with
relevant evidence. Plaintiff argues that, because two of UPB’s employees acted
swiftly and occasionally unilaterally in deciding to maintain the 7% interest rate,
they must have acted arbitrarily. [14] at 16–17. These actions do not prove that
UPB acted arbitrarily, given that the record includes the factors that UPB
considered when setting the rate. See, e.g., [8-5] at 15. Moreover, the fact that the
Note commits the interest rate to the lender’s sole discretion compels the conclusion
that the parties knew UPB could decline to adjust its interest rate at any time,
“thereby negating any inference that defendant’s actions were outside the
contemplation of the parties and could be characterized as a breach of good faith.”
Cont’l Mobile Tel. Co., 587 N.E.2d at 1174. This Court affirms the bankruptcy
court’s grant of summary judgment to UPB on the issue of the alleged breach of
contract or the duty of good faith and fair dealing.

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C.

Motion to Alter or Amend Judgment

Finally, this Court affirms the bankruptcy court’s denial of Plaintiff’s motion
to alter or amend its grant of summary judgment. First, as the bankruptcy court
noted, Plaintiff failed to meet—or even address—the standard set by the applicable
federal rule. See [12] at 24; [8-15] at 99–108. Federal Rule of Civil Procedure
59(e)—applicable to the bankruptcy courts through Federal Bankruptcy Rule of
Procedure 9023—allows courts to alter or amend judgments only if the moving
party “can demonstrate a manifest error of law or present newly discovered
evidence.” Obriecht v. Raemisch, 517 F.3d 489, 494 (7th Cir. 2008).
Here, Plaintiff failed to offer new evidence, so his motion depends upon
finding a manifest error of law in the bankruptcy court’s grant of summary
judgment. Id. To succeed, Plaintiff must “clearly establish” that the bankruptcy
court disregarded, misapplied, or failed to recognize “controlling precedent.”
Anderson v. Holy See, 934 F. Supp. 2d 954, 958 (N.D. Ill. 2013) (internal quotation
marks omitted) (citing Oto v. Metro. Life Ins., 224 F.3d 601, 606 (7th Cir. 2000);
Harrington v. City of Chicago, 433 F.3d 542, 546 (7th Cir. 2006)).
Plaintiff’s motion to alter or amend the judgment challenged only the
bankruptcy court’s decision on the availability of the Index and did not address his
breach of contract claim or the duty of good faith and fair dealing. See [8-15] at 99–
108. As to the Index, Plaintiff offered only Fifth Circuit cases—those discussed
above and two similar lower court decisions. See id. at 103. As the bankruptcy
court noted, none of those cases are controlling in this circuit.

[12] at 24.

Accordingly, Plaintiff failed to clearly establish that the bankruptcy court
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disregarded, misapplied, or failed to recognize controlling precedent, and the
bankruptcy court properly denied the motion.
Even reaching the merits, the arguments Plaintiff raised in his motion to
alter or amend mirror those he raises on appeal, which this Court has already
rejected. This Court affirms the bankruptcy court’s denial of Plaintiff’s motion to
alter or amend the judgment.
IV.

Conclusion
For the reasons explained above, this Court affirms the bankruptcy court’s

grant of summary judgment to UPB. This Court also affirms the bankruptcy court’s
denial of Plaintiff’s motion to alter or amend that judgment. Civil case terminated.
Dated: June 18, 2018
Entered:
____________________________
John Robert Blakey
United States District Judge

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