Court: United States Bankruptcy Court, N.D. Illinois; October 29, 2015; Us Bankruptcy; United States Bankruptcy Court
Schaumburg Bank's motion to dismiss Settlers’ Housing Service, Inc.'s Third Amended Complaint for Equitable Subordination and other relief, as well as objections to claims, is based on a lack of subject matter jurisdiction under Rule 12(b)(1). The court, overseen by Bankruptcy Judge Jack B. Schmetterer, will grant the motion in part and deny it in part.
Settlers, an Illinois nonprofit focused on housing for legal immigrants, filed for Chapter 11 bankruptcy on July 12, 2013. Schaumburg Bank submitted a proof of claim totaling $4,921,425.97, secured by mortgages on properties valued at $2,721,000. Consequently, $2,200,425.97 of the claim is unsecured. Settlers initiated this adversary proceeding on November 20, 2013, aiming to disallow Schaumburg Bank's claim due to alleged fraud and misconduct by The Bank of Commerce, its predecessor.
The Third Amended Complaint, filed on July 28, 2014, originally contained fourteen counts, six of which have been dismissed for failing to state a claim. The remaining eight counts set for trial include claims such as Equitable Subordination, Aiding and Abetting Breach of Fiduciary Duty, various forms of fraud, and other related claims. Schaumburg Bank's motion targets these eight counts, asserting a lack of jurisdiction for their adjudication.
Schaumburg Bank's motion to dismiss asserts that the court lacks subject matter jurisdiction over claims related to The Bank of Commerce's actions prior to the FDIC receivership, as these claims must adhere to FDIC claims procedures. The debtor contests this jurisdictional bar, arguing that the claims could not have been timely filed under the administrative procedures applicable to FDIC receiverships. In reviewing the motion to dismiss the Third Amended Complaint, the court considered the motion (Dkt. 104), supporting memorandum (Dkt. 105), the Third Amended Complaint itself (Dkt. 56), and various responses and briefs from both parties (Dkts. 120, 129, 136, 137, 153, 155). The court also recognized the contents of the case docket.
The Third Amended Complaint alleges that The Bank of Commerce secured a mortgage related to Schaumburg Bank's claim without Settlers' knowledge or consent. In July 2008, Settlers owned five properties in DuPage County and a thirteen-unit property in Oak Park, Illinois. They later acquired additional properties, the Faulkner Properties, through a transaction facilitated by The Bank of Commerce, assuming an $8.4 million loan from another bank customer. During the August 1, 2008 closing at The Bank of Commerce’s offices, Settlers claim that the bank concealed documents in a stack of closing paperwork, which unknowingly authorized a line of credit secured by the Washington-Taylor Property and cross-collateralized with the Faulkner Properties. Settlers’ executive director, K.J. Lodico, signed these documents without being aware of the line of credit's implications.
In late 2008, Settlers was unable to pay the second installment of the 2007 real estate taxes for the Faulkner Properties. K.J. Lodico contacted The Bank of Commerce to secure a loan, only to discover that Settlers had a previously authorized line of credit. However, K.J. Lodico was unaware that this line of credit was secured by the Washington-Taylor Property and that the loans were cross-collateralized. Settlers claims it did not learn about the mortgage on the Washington-Taylor Property until January 2009, five months after the Faulkner Properties sale. The complaint alleges that The Bank of Commerce facilitated the sale to mitigate losses from declining property values and needed extra collateral to avoid regulatory shutdown. The bank was closed in March 2011, with the FDIC appointed as receiver, subsequently assigning its assets to Schaumburg Bank.
After the asset assignment, Settlers informed Schaumburg Bank of alleged misconduct by The Bank of Commerce related to the Faulkner Properties sale. In January 2012, Schaumburg Bank instructed Settlers' tenants to pay rent directly to them, despite Settlers retaining possession of the properties. Schaumburg Bank then initiated foreclosure actions against both the Faulkner and Washington-Taylor Properties, which were ongoing when Settlers filed for bankruptcy in July 2013.
Schaumburg Bank's motion was granted for Counts 5 and 10 but denied for Counts 1, 3, 6, 8, 9, and 11. The court found that Counts 1, 3, 6, and 9, arising from actions of The Bank of Commerce prior to FDIC receivership, were not jurisdictionally barred when raised defensively against Schaumburg Bank's proof of claim. Additionally, jurisdiction was established for Counts 8 and 11 based on Schaumburg Bank's post-receivership conduct.
Subject matter jurisdiction for bankruptcy proceedings is established under 28 U.S.C. § 1334, with the district court having the authority to refer these proceedings to a bankruptcy judge as per 28 U.S.C. § 157 and District Court Operating Procedure 15(a) for the Northern District of Illinois. Venue is governed by 28 U.S.C. § 1409. A motion to dismiss under Rule 12(b)(1) can challenge the court's jurisdiction, which may be raised by any party or the court itself at any time, as supported by United States v. Ruiz and Arbaugh v. Y. H Corp. If the court determines a lack of subject matter jurisdiction, it must dismiss the case according to Federal Rule of Civil Procedure 12(h)(3), applicable in bankruptcy proceedings via Fed. R. Bankr. P. 7012. In evaluating a motion to dismiss, the court must accept the complaint's well-pleaded facts as true and can consider additional submitted evidence to verify jurisdiction, as indicated in Miller v. F.D.I.C.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) restricts judicial review of claims against the FDIC and its successors. Specifically, 12 U.S.C. § 1821(d)(13)(D) states that courts do not have jurisdiction over claims pertaining to the assets of a depository institution under FDIC receivership unless the claims have undergone FIRREA's administrative claims process. Courts can only review such claims after the completion of this administrative exhaustion requirement, which applies regardless of the named defendant, focusing instead on the responsible entity for the alleged wrongdoing, as clarified in Farnik v. F.D.I.C. Claims functionally against a failed bank fall under FIRREA's jurisdictional constraints.
Section 1821(d)(13)(D) is determined to be jurisdictional rather than merely a claims processing rule. Settlers argue it is a claims processing scheme that was waived since the Bank did not raise it in prior motions. They reference Campbell v. FDIC, which asserts that compliance with FIRREA's rules is not strictly jurisdictional. However, the context of Campbell involved a claimant's challenge against a time-barred denial, and the subsequent case of Miller v. FDIC clarified that the characterization of FIRREA’s rules pertains specifically to claims submission and the consequences of missed deadlines. The court distinguishes between jurisdictional rules and claims processing rules based on congressional intent, noting that Section 1821(d)(13)(D) explicitly states that "no court shall have jurisdiction," indicating it is indeed jurisdictional. Settlers also cite Reed Elsevier, Inc. v. Muchnick, which involved a statute using the term "jurisdiction" but allowed court adjudication under certain conditions, differing from the absolute jurisdictional command present in Section 1821(d)(13)(D). Additionally, the Farnik case distinguishes itself from Campbell, as the plaintiffs there sought to bypass administrative procedures altogether, similar to Settlers' approach in this case. Consequently, the court concludes that 1821(d)(13)(D) is a jurisdictional provision and that the issue has not been waived.
Settlers contends that dismissing its claims against the FDIC would violate its due process rights due to inadequate notice of the FIRREA bar date. FIRREA, which allows the FDIC to manage claims against failed banks, mandates specific administrative processes for claim submission. Claimants must present claims to the FDIC, which is required to publish notice of the claim deadline monthly for three months, with the deadline set at least 90 days after the first publication. Additionally, the FDIC must mail notice to all creditors listed in the bank’s records. If a claim is not submitted by the established deadline, it is automatically disallowed and considered final.
Settlers are unlikely entitled to written notice under FIRREA, which mandates the FDIC to publish a notice to creditors and mail a similar notice to those on the institution's books. While notice was given by publication, there is no record of written notice to Settlers. Even if Settlers were entitled to such notice, late claims must still comply with FIRREA's administrative procedures, which disallow untimely claims except under specific conditions. Settlers' claim to lack notice is weakened by their actual knowledge of the receivership and related events, as evidenced by their communication regarding alleged fraud. Consequently, Settlers cannot contest the FDIC’s notice procedures as constitutionally inadequate.
Affirmative defenses, however, are not barred by FIRREA provisions that restrict claims against the FDIC. An affirmative defense, being a response rather than a claim, does not require administrative exhaustion. Courts can determine whether an assertion is a defense or a claim. Settlers assert that their remaining counts are defenses to Schaumburg Bank’s proof of claim, while Schaumburg Bank categorizes them as offensive claims. The distinction between a defense and a claim is a matter for judicial determination.
Jurisdiction over the counts related to objecting and disallowing Schaumburg Bank's claim against the estate is established. Counts that function as defenses will remain, while those seeking affirmative relief are limited by 1821(d)(13)(D) and cannot be granted by the court. Procedural context shows that after the Debtor filed for bankruptcy, Schaumburg Bank submitted a proof of claim for nearly five million dollars secured by mortgages on the Debtor's property. The Debtor initiated this adversary proceeding to contest the allowance of this claim. Under Section 501(a) of the Bankruptcy Code, creditors may file proof of claims, which are presumed valid unless contested. If an objection is lodged, the court will determine the claim's amount after a hearing, but may disallow claims that are unenforceable against the debtor per Section 502(b)(1). The Debtor can challenge the Bank’s claim on any legal grounds regarding its validity or enforceability. While the objection is part of an adversary complaint, the counts that could disallow the claim are treated more as defenses than affirmative claims. Bankruptcy Rule 3007(b) mandates filing an adversary complaint for such objections, as claims regarding the validity or priority of a lien must be pursued through adversary proceedings according to Bankruptcy Rule 7001. Settlers appropriately filed its objection to the bank's claim as an adversary proceeding, incorporating both defenses and claims for affirmative relief.
Counts 3, 6, and 9 serve as defenses against Schaumburg Bank’s proof of claim, addressing fraudulent misrepresentation (Count 3), fraud and unenforceability related to the Washington-Taylor mortgage (Count 6), and unjust enrichment due to improper retention of a mortgage (Count 9). These counts challenge the validity of the bank's claim, providing grounds for disallowance. The defenses rely on two legal theories: (1) Settlers were deceived into signing a mortgage without knowledge or consent, and (2) Settlers held the property in trust under federal housing law, rendering the mortgage void ab initio. Counts 3 and 6 request damages and attorneys' fees, but Settlers cannot seek damages; instead, they aim to declare the mortgage void, which constitutes a valid defense. Therefore, Counts 3, 6, and 9 will not be dismissed but will be limited to disputing the bank's claim.
Conversely, Counts 5 and 10, alleging breach of the Illinois Consumer Credit Act and civil conspiracy based on the same fraud in execution, are not considered defenses. These counts attempt to impose liability based on pre-receivership actions and do not challenge the validity of Schaumburg Bank's claim. As counterclaims, they fall under jurisdictional bars and do not constitute defenses to the bank's claim. Therefore, Counts 5 and 10 will be dismissed for lack of subject matter jurisdiction.
Equitable subordination is not barred under FIRREA, as it is not classified as a 'claim' under 1821(d)(13)(D). The term 'claim' is specific to demands resolvable through FIRREA’s administrative process. A request for equitable subordination arises only in bankruptcy contexts and does not provide affirmative relief to the Debtor; it instead challenges a creditor's recovery rights. Although the Bank contends that equitable subordination resembles a claim, the legal distinction is that it cannot be resolved as a claim by the FDIC. The ability to raise equitable subordination is contingent upon the filing of bankruptcy, similar to how defenses are only raised after a lawsuit is initiated. Dismissing such a claim for not exhausting FIRREA's procedures would raise due process issues, akin to barring defenses not presented.
Counts 8 and 11, which are based on post-receivership conduct, are not jurisdictionally barred. Claims against a successor bank for its actions, distinct from those of the predecessor bank under FDIC receivership, do not fall within the jurisdictional restrictions of 1821(d)(13)(D). Count 11, alleging tortious interference with contract, pertains to actions taken by Schaumburg Bank after the receivership, while Count 8, concerning setoff, is contingent on the court's determination of mutual debts between Settlers and the Bank. Consequently, both Counts 8 and 11 will proceed and not be dismissed.
The motion to dismiss is partially granted and partially denied. Schaumburg Bank's motion is granted for Counts 5 and 10, while it is denied for Counts 1, 3, 6, 8, 9, and 11. Relief for Counts 3, 6, and 9 is restricted to matters necessary to challenge the validity of Schaumburg Bank's claim against the estate or to disallow the claim. Claim 12, initially filed by Schaumburg Bank, has been amended to supersede both claim 11 and the original claim 12. Following the Final Pretrial Order, Schaumburg Bank's counsel was substituted, as noted in the order from February 10, 2015. Although Schaumburg Bank objected to the Plaintiff's Sur-Reply for being late, the court modified the scheduling order to extend the deadline for filing sur-replies, making both parties' sur-replies timely and permissible for court consideration.
