In re Watkins

298 B.R. 342

In re Evelyn WATKINS, Debtor.

No. 03 B 21660.

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

August 22, 2003.

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Mindy D. Smith, Alan S. Farnell, Oak Brook, IL, for Movant, GMAC.

Neal Gainsberg, Chicago, IL, for Debtor and for Staver & Gainsberg, P.C.

Richard Mason, trustee.

MEMORANDUM OPINION

JACQUELINE P. COX, Bankruptcy Judge.

Background and Procedural History

Evelyn Watkins, a chapter 7 debtor since May 15, 2003, purchased a 1999 Chevrolet Malibu (the "Malibu") on August 31, 1999, only to have this vehicle stolen and totaled five months later. GMAC, the lender who financed her purchase of the car and retained a purchase-money security interest in it, had required Watkins to contractually agree to purchase physical-damage insurance, which she obtained in September 1999 from National Heritage Insurance Company ("National"). The policy listed both Watkins and GMAC as a loss payees, and GMAC could use any proceeds therefrom, which were also encumbered with GMAC's perfected security interest under the security agreement, to reduce Watkins' car debt in the event of loss or damage.

After the destruction of the Malibu, National, however, did not immediately agree to reimburse Watkins for the damage. Rather, Watkins hired attorney Jared Staver to recover damages from National under a contingency-fee agreement whereby Staver would receive a percentage of any total recovery. To secure this percentage, Staver claimed a statutory attorney's lien on the insurance proceeds by sending the requisite notice to National informing it of the lien on April 5, 2001. Staver was eventually able to negotiate a settlement of $11,437.35, representing the value of the vehicle at the time of the loss less the deductible, payable jointly to Staver, Watkins, and GMAC. In accordance with Illinois law, National also requested the title to the Malibu in order to obtain the salvage rights.

After excluding from the settlement amount his attorneys' fees, Staver offered the remaining $7,620.95 to GMAC and requested a release of its lien on the totaled car so that the title could be transferred free and clear to National for salvage. GMAC believed it was entitled to the full $11,437.35 and would neither endorse the settlement check from National nor release the lien on the Malibu. Its actions prompted Watkins to file a three-count suit against it in the Circuit Court of Cook County. Count I requested a declaratory judgment adjudicating the priority of Staver's attorney's lien over GMAC's security interest in the insurance proceeds. Count II alleged that GMAC had breached the retail installment contract by refusing to accept the payment of the $7,620.95 that Staver had offered on behalf of Watkins. County III alleged that because Watkins' attorney Staver had "created" the insurance proceeds in which GMAC also had an interest, Watkins was entitled to reimbursement of litigation expenses from such proceeds under the "common fund doctrine."

The parties filed cross motions for summary judgment on all three counts, with the state court ruling in favor of GMAC on all six motions on October 9, 2001. The Appellate Court of Illinois affirmed the judgment in favor of GMAC, adopting the reasoning of the state trial court in all respects except one: it declined to reach the issue of whether Staver's lien ever attached to the insurance proceeds at all, instead finding the superiority of GMAC's perfected security interest to be a sufficient basis for the Count I judgment.

After prevailing in this lawsuit, GMAC asserted that its superior perfected security interest in the insurance proceeds engulfed the entire $11.437.35, as Watkins had an outstanding balance due under the installment retail contract of $8,612.51 and allegedly owed attorneys' fees related to collection costs totaling $14,846.51 — a sum well beyond the amount of the insurance proceeds. After Watkins filed the bankruptcy petition now before this Court, GMAC filed a motion requesting relief from the automatic stay in order to pursue its state-law rights and remedies with respect to the Malibu. Additionally, pursuant to Bankruptcy Rule 9013 it requested an order directing National to pay the full $11,437.35 in proceeds to GMAC in order to fulfill the state-court judgment denying declaratory relief in favor of Watkins.

In addition to responding with the arguments discussed below, Watkins has affirmatively requested (1) an equitable lien on the proceeds securing Staver's attorneys' fees related to the settlement negotiations with National and (2) an exclusion of $1,950 for the benefit of Watkins under the wildcard provision in the Illinois personal property exemption statute.

Discussion and Conclusions of Law

A. Motion to Modify the Automatic Stay

Watkins does not oppose this portion of GMAC's motion because the vehicle is now worthless. The ground for relief alleged in the motion is also sufficient under 11 U.S.C. § 362(d)(2). That is, Watkins is not currently in a reorganization chapter of bankruptcy, and she has no equity in a totaled vehicle for which she still owes $8,612.51. Whatever salvage value the Malibu may still have is GMAC's, because it has an unreleased, first-priority security interest in the collateral.

B. Motion to Issue Order Directing National to Pay Insurance Proceeds

Whenever a debtor has more than a minimal equitable interest in a piece of property, such property in its entirety becomes property of the bankruptcy estate under § 541(a) even if it is also subject to the interests of others. In re Bennett, 133 B.R. 374, 380 (Bankr.N.D.Tex.1991); In re Leff, 88 B.R. 105, 107-08 (Bankr.N.D.Tex.1988), affirmed sub nom. Stewart v. Law Offices of Dennis Olson, 93 B.R. 91 (N.D.Tex.1988), affirmed by 878 F.2d 1432 (5th Cir.1989) (concluding that Supreme Court decision United States v. Whiting Pools, 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), implicitly rejected argument that only a debtor's limited interest in property, as opposed to the property as a whole, became property of the bankruptcy estate). Estate property is then subject to being administered under the Bankruptcy Code through the Court's jurisdiction under 28 U.S.C. § 1334(e). Here, Watkins has an interest in the insurance proceeds because she would be entitled to at least a portion of them if she paid in full her debt to GMAC, thereby extinguishing its security interest. The $11,437.35 is thus property subject to administration as part of the bankruptcy estate under this Court's authority.

1. Watkins' Attorney's Right to an Equitable Lien

Watkins argues that the attorneys' fees resulting from her attempt to collect insurance proceeds from National should be paid out of the proceeds (rather than from her other assets) because her attorney, Mr. Staver, is entitled to a superior equitable lien on them as a result of their contingency-fee agreement. GMAC responds by asserting the defense of res judicata. The Court agrees with GMAC's assertion.

Congress has mandated that "judicial proceedings [of any State] ... shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken." 28 U.S.C. § 1738. Because of this Full Faith and Credit Statute,¹ this Court must afford the Circuit Court of Cook County judgment in favor of GMAC the same preclusive effect that Illinois courts would afford it. See Long v. Shorebank Development Corp., 182 F.3d 548, 560 (7th Cir.1999). Under Illinois law, a prior suit has a res judicata effect on a claim in a subsequent suit when (1) a court of competent jurisdiction in the prior suit issues a final judgment on the merits; (2) the causes of action, defined by the group of operative facts giving a party a legal right to relief, see Torcasso v. Standard Outdoor Sales, 157 Ill.2d 484, 193 Ill.Dec. 192, 626 N.E.2d 225, 228 (1993), are identical; (3) the relevant parties, or those in privity with them, are identical in the two suits; and (4) the cause of action in the prior suit and all theories thereof either were actually litigated or could have been raised and decided in such suit. See Robinson v. Toyota Motor Credit Corp., 315 Ill.App.3d 1086, 249 Ill.Dec. 120, 735 N.E.2d 724, 731 (2000), affirmed in part and reversed in part by 201 Ill.2d 403, 266 Ill.Dec. 879, 775 N.E.2d 951 (2002); Philips Electronics, N.V. v. New Hampshire Insurance Co., 312 Ill.App.3d 1070, 245 Ill.Dec. 574, 728 N.E.2d 656, 664-66 (2000). Res judicata is broader than collateral estoppel (issue preclusion) in that it bars a party from asserting remedies and legal theories that potentially could have been adjudicated as part of a given nucleus of operative facts, not just remedies and legal theories that were actually litigated during the course of the prior preclusive suit. Stathis v. First Arlington Nat'l Bank, 226 Ill.App.3d 47, 168 Ill.Dec. 225, 589 N.E.2d 625, 630-630 (1992); cf. Torcasso v. Standard Outdoor Sales, 157 Ill.2d 484, 193 Ill.Dec. 192, 626 N.E.2d 225, 228 (1993); Fayyumi v. City of Hickory Hills, 18 F.Supp.2d 909, 918 (N.D.Ill.1998).

Here, the Chancery Division of the Circuit Court of Cook County, a court with original and general jurisdiction over contract and property disputes, issued a judgment on the merits binding the same two parties presently before this Court. The causes of action in this prior civil suit and the present contested matter both involve the parties' respective rights to insurance proceeds stemming from the August 1999 retail installment contract and security agreement, the contingency-fee agreement between Watkins and Staver, and GMAC's refusal to endorse National's settlement check and receive only the portion remaining after Staver deducted his legal fees. The equitable lien that Watkins now asserts in favor of Staver is simply an alternative remedy and theory of recovery that...