Page 5 - John Hundley 2019

Sharp Thinking

No. 165 Perspectives on Developments in the Law from Sharp-Hundley, P.C. March 2019

7th Circuit Upsets Settled Thinking

On Bankruptcy, Foreclosure Interplay

By John T. Hundley, 618-242-0200, john@sharp-hundley.com
Seemingly settled practice regarding the interplay of bankruptcy and foreclosure law was turned on its
head late last month when the U.S. Court of Appeals for the Seventh Circuit held that a state court in a
foreclosure case has jurisdiction and authority to enter a deficiency judgment against a
debtor with a pending bankruptcy.
Moreover, the Seventh Circuit seemed to say that that was the case regardless of
what the bankruptcy judge may have said in granting relief from the bankruptcy stay.
In In re Anderson, __ F.3d __, 2019 WL 922586 (7th Cir. 2019), one of two joint
debtors filed bankruptcy after the lending bank commenced foreclosure with a
complaint that sought a deficiency judgment and also included a count based on the
note. The bank then sought and obtained relief from the automatic stay, the
bankruptcy court granting “full and complete relief from the [a]utomatic [s]tay of [11
U.S.C.] Section 362 to permit [bank] to proceed with the pending State Court
foreclosure litigation with respect to the property commonly known as [address]”. Hundley

The bank then prosecuted the foreclosure case to judgment, sale and confirmation, taking a
deficiency judgment against the non-bankrupt debtor but not against the bankrupt. It then made a claim in
the bankruptcy court for the deficiency amount against the bankrupt debtor. The debtor responded that
such a claim was barred under the doctrine of claim preclusion. The bankruptcy judge rejected the
argument but the district court agreed. The bank then appealed to the Seventh Circuit.

The court noted the parties focused on whether the bankruptcy court order authorized the state court
to enter a judgment against the bankrupt personally, and discussed claim preclusion as a secondary
issue. It said this was “backward” because the “effect of a state court’s decision
depends on state law” and state court judgments are to be granted full faith and credit
by federal courts under 28 U.S.C. § 1738.

Therefore, wrote Circuit Judge Frank H. Easterbrook, the issue was whether the
bank could file a new lawsuit in Illinois courts. Seeming to find a conflict among Illinois
Appellate Court panels on whether a party that brings a foreclosure case without also
seeking a deficiency judgment could later sue on the note, Easterbrook said that that
alleged conflict did not have to be resolved “because all of the state’s authorities agree
that, if a litigant presents both the mortgage and the note in a single action, and fails to
seek a deficiency judgment on the note, it cannot do so in a separate suit.” (The court
cited no case in support of that sentence.) Easterbrook

But, the bank argued, the automatic stay deprived the state court of jurisdiction to make any decision
except as permitted by the bankruptcy judge in the lift-stay order. Easterbrook rejected this argument
because the statute imposing the stay (11 U.S.C. § 362) “does not concern jurisdiction.” He suggested a

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Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking
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