Settlers' Housing Service, Inc. v. Bank of Schaumburg (In re Settlers' Housing Service, Inc.)
520 B.R. 253
Bankr. N.D. Ill.2014Background
- Settlers’ Housing Service, an Illinois non-profit, purchased several properties from Bank of Commerce in 2008 by assuming indebtedness; Settlers’ alleges a surreptitious line-of-credit mortgage (cross-collateralizing the Washington–Taylor property) was slipped into closing documents.
- Two months after closing, Settlers’ drew on the line to pay taxes, which resulted in cross-collateralization of many Settlers’ units; Bank of Commerce later was taken by regulators and its assets acquired by Bank of Schaumburg/FDIC receiver, which foreclosed in 2012.
- Settlers’ filed an adversary complaint in its Chapter 11 case asserting 14 counts (fraud in the execution, fraudulent concealment, constructive fraud, aiding and abetting, breach of fiduciary duty, ICFA, trust/unenforceability of mortgage, conversion/accounting, objections to proof of claim, etc.).
- Bank moved to dismiss or strike many counts; prior opinion allowed some fraud-in-execution and conspiracy claims to proceed but dismissed fiduciary-duty-based claims because of D’Oench/12 U.S.C. § 1823(e); Settlers’ amended and repleaded several counts.
- This opinion: grants in part and denies in part the Bank of Schaumburg’s motions — dismissing with prejudice Counts 2 (aiding & abetting), 4 (fraudulent concealment), 7 (constructive fraud), 12 (breach of fiduciary duty), 13 (conversion & accounting), and 14 (improper interest/fees), while leaving other counts (including fraud-in-the-execution and civil conspiracy) to proceed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of fraud-in-the-execution / civil conspiracy claims | Settlers’ alleges documents were slipped into a closing stack and the Bank schemed to cross-collateralize property; conspirators (including Bank agents) acted in concert | Bank reasserts prior dismissal arguments that the pleadings are inadequate | Fraud-in-execution and civil conspiracy were plausibly pleaded and survive dismissal (prior rejection of dismissal arguments stands) |
| Fraudulent concealment & constructive fraud (requirement of fiduciary duty) | Settlers’ alleges Bank concealed material facts and thus had a duty to disclose; alternatively claims equitable duties | Bank invokes D’Oench/12 U.S.C. § 1823(e) and argues no fiduciary duty existed between bank and borrower | Claims based on a fiduciary duty dismissed with prejudice: no plausible fiduciary duty because D’Oench/§1823(e) precludes such implied obligations |
| Illinois Consumer Fraud Act statute of limitations (Count 5) | Injury discovered at foreclosure in 2012; savings provision (735 ILCS 5/13‑207) and 11 U.S.C. § 108(a) preserve counterclaims so action is timely | Bank argues savings clause inapplicable because of bona fide assignee language | ICFA claim not time‑barred: foreclosure filed within limitations and §13‑207 preserves counterclaim rights; timeliness preserved under §108(a) in bankruptcy |
| Trust status / unenforceability of Washington–Taylor mortgage (Count 6) | Washington–Taylor purchased with federal HOME/CDBG funds; property held in trust for beneficiaries, so mortgage may be unenforceable | Bank disputes trust status (footnote) and asserts mortgage not void by statute | Claim that property is held in trust plausibly pleaded; allegations of mortgage illegality (voidness) are speculative and dismissed as to illegality theory |
| Conversion and accounting (Count 13) | Bank’s letters to tenants to pay rent to the Bank converted Settlers’ rents; accounting requested | Bank says conversion claim fails for lack of demand (or allegation that demand would be futile); accounting is equitable but remedy at law is adequate | Conversion and accounting dismissed with prejudice for failure to plead demand or non‑futile excusal; accounting unavailable absent proper conversion/fiduciary breach |
| Objection to proof of claim / receiver fees / post‑petition interest (Count 14) | Bank’s proof of claim includes improper receiver fees and post‑petition interest | Bank points to its amended proof of claim ledger showing amounts as of petition date and argues bona fide purchaser defenses | Count dismissed with prejudice: challenges to receiver fees are waived (no state‑court objection) and objection to post‑petition interest is moot based on amended proof of claim |
Key Cases Cited
- Wellness Intern. Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013) (Seventh Circuit panel decision on bankruptcy adjudicative authority that was later addressed by the Supreme Court)
- Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014) (Supreme Court on bankruptcy judges’ authority to enter final judgments in certain "Stern" claims)
- D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942) (doctrine protecting FDIC and successors from unwritten side agreements affecting bank assets)
- Langley v. FDIC, 484 U.S. 86 (1987) (D’Oench/§1823(e) limits borrower claims premised on undocumented bank obligations)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standard: plausibility requirement under Rule 8)
- United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988) (bankruptcy: allowance of postpetition interest for oversecured creditors)