Inland Mortg. Capital Corp. v. Chivas Retail Partners, LLC

884 F.Supp.2d 702

INLAND MORTGAGE CAPITAL CORPORATION, Plaintiff,

v.CHIVAS RETAIL PARTNERS, LLC, et al., Defendants.

No. 11 C 6482.

United States District Court,

N.D. Illinois,

Eastern Division.

Aug. 3, 2012.

William J. McKenna, Jr., Thomas Charles Hardy, Foley & Lardner, Chicago, IL, for Plaintiff.

James Kenneth Borcia, Tressler LLP, Chicago, IL, for Defendants.

MEMORANDUM OPINION AND ORDER¹

MILTON I. SHADUR, Senior District Judge.

Inland Mortgage Capital Corp. (“Inland”) loaned Harbins Crossing TC, LLC (“Harbins”) $59,670,000 (I. St. ¶ 8). Harbins used the money to build a retail shopping center in Gwent County, Georgia (a part of metropolitan Atlanta) ( id. ¶ 10). Inland secured the loan by executing a security deed on the property ( id. ¶ 9). Chivas Retail Partners, LLC, the TJD Separate Property Trust and the Walter L. Brown Jr. Revocable Trust (collectively “Guarantors”) executed a Loan Guaranty Agreement (“Guaranty Agreement”) with Inland ( id. ¶ 11).

Harbins defaulted on the loan (I. St. ¶ 13), so Inland foreclosed on the property and put it up for auction ( id. ¶ 15). Inland itself won the auction with a bid of $7 million ( id. ¶ 16). Inland then commenced what is called a “confirmation proceeding” in a Georgia state court. Because Georgia is a non-judicial-foreclosure state, lenders can foreclose on mortgaged property without court intervention. When the property does not fetch the full amount of the loan, the lender is left with a deficiency: the difference between the amount outstanding on the debt and the successful bid for the foreclosed property.²

Non-judicial foreclosures are fast and efficient, because the process does not require court proceedings. But during the Great Depression lenders abused the lack of court oversight, not advertising foreclosure auctions and then underbidding for the properties, leaving the lender with a windfall and the debtor with an excessive obligation (Zachary Kimball and Paul Willed, U.S. Mortgage Foreclosure Law, New Palgrave Dictionary of Economics (2012 online ed.) § 3.3). Georgia created confirmation proceedings to lend judicial oversight to the foreclosure process ( Harris & Tilley, Inc. v. First Nat'l Bank of Cartersville, 157 Ga.App.88, 276 S.E.2d 137, 140–41 (1981)). To obtain a deficiency judgment against a borrower, a lender must first receive confirmation from a court that the lender followed proper sale procedures and obtained the fair market value for the property ( id.).

In this instance Inland's confirmation action in the Georgia court named both Harbins and Guarantors as respondents. But after the Georgia court refused to confirm Inland's sale (G. St. ¶ 17), Inland brought this lawsuit against Guarantors ³ for breach of the Guaranty Agreement and promptly moved for summary judgment. Guarantors contend that this action is blocked by the Georgia court's rejection of Inland's confirmation petition, but Inland counters that Guarantors waived any such defense in the Guaranty Agreement.

Choice of Law

Inland and Guarantors waste substantial space in their memoranda debating which state's law controls: Inland says Illinois, while Guarantors say Georgia. Inland is correct as to the meaning and effect of the Guaranty Agreement ¶ 26, which states that the Guaranty Agreement “shall be construed for all purposes and enforced in accordance with the laws of the State of Illinois.” On the other side of the coin, Guarantors are correct as to the effect of the Georgia confirmation proceeding (subject, of course, to the possibility that the later-discussed waiver provision in the Guaranty Agreement may trump that effect). As Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) teaches relevant to the Georgia confirmation proceeding:

The preclusive effect of a state court judgment in a subsequent federal lawsuit generally is determined by the full faith and credit statute, which provides that state judicial proceedings “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. This statute directs a federal court to refer to the preclusion law of the State in which judgment was rendered.

Effect of the Georgia Confirmation Proceeding

Guarantors argue that the Georgia confirmation proceeding erased the deficiency or eliminated a necessary condition for Inland to collect on a deficiency. Guarantors repeat that contention twice more in their original Memorandum: once under the rubric of claim preclusion and once under the rubric of issue preclusion. But both preclusion arguments are rehashes of Guarantors' first argument, except that instead of arguing that the confirmation proceeding blocks the deficiency claim, Guarantors say that Inland already had the chance to litigate whether it could pursue a deficiency.

There's no need to traipse through each iteration of that position. This Court must instead answer two questions: what did the confirmation proceeding decide and does the Guaranty Agreement require Guarantors to pay the outstanding debt given the outcome of the confirmation proceeding?

Confirmation proceedings are creatures of statute, and so the statute is the best place to turn to understand their scope (Ga.Code.Ann. § 44–14–161):

(a) When any real estate is sold on foreclosure, without legal process, and under powers contained in security deeds, mortgages, or other lien contracts and at the sale the real estate does not bring the amount of the debt secured by the deed, mortgage, or contract, no action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceedings shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.

(b) The court shall require evidence to show the true market value of the property sold under the powers and shall not confirm the sale unless it is satisfied that the property so sold brought its true market value on such foreclosure sale.

(c) The court shall direct that a notice of the hearing shall be given to the debtor at least five days prior thereto; and at the hearing the court shall also pass upon the legality of the notice, advertisement, and regularity of the sale. The court may order a resale of the property for good cause shown.

Hence the court determines in Georgia confirmation proceedings whether “the property sold brought its true market value” and also “the legality of the notice, advertisement, and regularity of the sale.” Inland says that the Georgia court did not determine whether Inland could proceed with its claim on the Guaranty Agreement, which is after all the contract between it and the Guarantors. Guarantors urge that the Georgia court did more than that: It assertedly eliminated a condition essential to Inland's collection of a deficiency. According to Guarantors, this Court cannot award Inland a deficiency judgment without collaterally attacking the Georgia court's judgment.

But even apart from what the parties expressly agreed on that score in the Guaranty Agreement (of which more a bit later), that assumes that the Georgia court actually decided whether Inland could collect on a deficiency. It did not. Here is the full text of the Georgia court's order (filed as G. St. Ex. B):

ORDER AND JUDGMENT

THIS CASE having come before this Court on November 9, 2010 for hearing on Petitioner's Report of Foreclosure Sale and Application for Confirmation Thereof (“Petition for Confirmation”), all parties having been afforded the opportunity to present evidence and argument in support of their respective positions, and the Court having heard and considered such evidence and argument, it is hereby

ORDERED AND ADJUDGED that the Petitioner has failed to meet its statutory burden under O.C.G.A. § 44–14–161 for confirming the foreclosure sale in issue, and the Petition for Confirmation is therefore DENIED. Petitioner's request for a resale of the subject property is also DENIED.

There is no finding that a deficiency does not exist or that Inland can't pursue one. All that the court decided was that the sale was not properly conducted. And if there were any question that the Georgia court's decision was limited to not confirming the validity of the sale, the statute itself firmly answers it. Subsection (a) does not authorize Georgia courts to decide whether collection on a deficiency is appropriate—it merely makes the pursuit of such a remedy under the authority of that statute a consequence of other findings that the court must make. Subsection(c) directs the court to “pass upon the legality of the notice, advertisement, and regularity of the sale” but not on the existence or enforceability of a deficiency.⁴ So Guarantors and Inland have not litigated (and the Georgia court did not decide) whether Guarantors owed Inland the balance on the loan.

But as Guarantors would have it, even if the Georgia court did not decide whether they owed a deficiency, that is the effect of the decision, and this Court is bound to honor it. To that end Guarantors quote Gilbert v. Arneson, 142 Ga.App. 205, 235 S.E.2d 647, 648 (1977):

The obligation of the surety is accessory to that of the principal, and if the latter from any cause becomes extinct, the former shall cease.

In other words, if there's no underlying debt there's nothing to guarantee, and the Guarantors are assertedly off the hook.

Effect of the Guaranty Agreement

But that house of cards, sought to be erected by Guarantors, collapses in a heap under the weight of the express waivers that they committed to in the Guaranty Agreement. Here is the most specific of those waivers, set out as part of Guaranty Agreement ¶ 9 (emphasis added) ...