FYI: 7th Cir Holds Judgment Against Bankruptcy Debtor's Husband Did Not Violate Co-Debtor Stay

The U.S. Court of Appeal for the Seventh Circuit recently held that a bank's lawsuit against the husband of a debtor who had filed for bankruptcy did not violate the co-debtor stay because the husband's credit card debts were not a consumer debt for which the debtor was personally liable.

 

A copy of the opinion is available at:  Link to Opinion

 

A debtor filed for bankruptcy in 2011. During the course of the bankruptcy proceedings, a bank filed suit and obtained a judgment against the debtor's husband on a credit card debt that he owed.

 

In 2015, the debtor initiated an adversary proceeding in bankruptcy court against the bank, alleging violations of the co-debtor stay, 11 U.S.C. § 1301(a); the Wisconsin Consumer Act, Wis. Stat. § 427.104; and the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692(d)-(e). The debtor claimed that her husband's credit card debt was covered by the co-debtor stay due to the operation of Wisconsin marital law, Wis. Stat. § 766.55.

 

As you may recall, in addition to automatically staying claims against the debtor, the Bankruptcy Code provides protections when co-debtors are involved.  See 11 U.S.C. § 1301(a).

 

For the co-debtor stay to apply: 1) there must be an action to collect a consumer debt (11 U.S.C. §§ 101(8), (12)); 2) the consumer debt must be of the debtor (Id. § 102(2)); and 3) the action to collect must be against an individual that is liable on such debt with the debtor. (11 U.S.C. § 1301(a).)

 

Here, the parties agreed that the debtor's husband's credit card debt was a "consumer debt" and that the bank's action was against the husband, but disagreed as to whether the credit card bills were a "consumer debt of the debtor," which triggered the co-debtor stay protections, as opposed to simply being a consumer debt of the husband.

 

The bankruptcy court granted summary judgment for the debtor, holding that the bank's lawsuit against the debtor's husband violated the co-debtor stay due to the operation of Wisconsin marital law, Wis. Stat. § 766.55, which makes marital property available to satisfy certain kinds of debts.

 

On appeal, the district court reversed the bankruptcy court, holding that the husband's credit card debt was not the debtor's consumer debt, and the co-debtor stay did not apply despite the application of Wisconsin marital law. The district court concluded that "consumer debt of the debtor," as used in 11 U.S.C. § 1301(a), does not include a debt for which the debtor is not personally liable but which may be satisfied from the debtor's interest in marital property.

 

The debtor then appealed to the Seventh Circuit, arguing that under a broader definition of "consumer debt of the debtor," and by operation of Wisconsin marital law, her husband's credit card debt became her debt for purposes of the co-debtor stay.

 

The Seventh Circuit disagreed with the debtor, and agreed with the bank that the credit card debt was not covered by the co-debtor stay.

 

Relying on In re Thongta, 401 B.R. 363, 368 (Bankr. E.D. Wis. 2009), and River Rd. Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642, 651 (7th Cir. 2011), and noting that any attempt to collect a judgment from a spouse's marital property would likely violate the automatic stay that already protects the filing spouse, the Court observed that interpreting the co-debtor stay to eliminate the same liability, and thus providing the same protections against collection, would impermissibly render that co-debtor stay duplicative of the automatic stay applicable to the debtor.

 

The Court therefore held that because the debtor did not demonstrate that her husband's credit card debt was her own, the co-debtor stay did not apply. 

 

Moreover, because Wisconsin courts made clear that the state's marital laws do not give rise to liability on the part of the non-incurring spouse, the Court held that the debtor, as the non-incurring spouse, was not liable for her husband's credit card debt.

 

The Court noted that, in Wisconsin, "married individuals can have both individual and marital property." See Wis. Stat. § 766.55.  "Debts incurred during marriage are 'presumed to be incurred in the interest of the marriage or the family,' id. § 766.55(1), and '[a]n obligation incurred by a spouse in the interest of the marriage or the family may be satisfied only from all marital property and all other property of the incurring spouse' [the debtor's husband], id. § 766.55(2)(b)."  In addition, "in order to satisfy a judgment for a debt, a successful creditor 'may proceed against either or both spouses to reach marital property available for satisfaction of the judgment.' Id. § 803.045(3)."

 

The debtor contended that once the bank obtained a judgment against her husband, it created a liability on her part under the co-debtor stay.

 

Again, the Court disagreed. Noting that simply obtaining a judgment against a non-filing spouse who happens to have shared property interests with the filing spouse -- without more -- did not make the husband's debts the debts of the filing spouse under Wisconsin law, the Seventh Circuit held that Wis. Stat. § 766.55(2) did not create a direct cause of action against the debtor. See St. Mary's Hosp. Med. Ctr. v. Brody, 186 Wis. 2d 100, 519 N.W.2d 706, 711 (Wis. Ct. App. 1994).

 

Here, the bank had not attempted to sue the debtor directly, and had not sought to satisfy its judgment against the debtor's husband from any of the debtor's individual or marital property. Accordingly, the Court concluded the debtor had no liability for her husband's credit card bills.

 

The debtor next argued that she was liable for a direct cause of action against her for her husband's credit card debts under Wisconsin's "doctrine of necessaries," because Wis. Stat. § 765.001(2) provided a direct cause of action against one spouse for any marital "necessaries" incurred by the other spouse during the marriage.  Essentially, the debtor argued that "the possibility of a direct cause of action against her for her husband's credit card debts brings those debts within the co-debtor stay."

 

The Seventh Circuit again disagreed, holding that because she raised this theory for the first time on appeal, it was therefore waived.  Even if the argument had not been waived, the Court observed that the debtor provided no evidence that the credit card debt was for necessaries, as opposed to ordinary consumer goods, nor did she explain why this situation would trigger the co-debtor stay, as opposed to the automatic stay.

 

A, the Seventh Circuit held that since the bank in the collection proceeding was not a creditor of the debtor and the bank was not seeking payment of the credit card debts under the debtor's bankruptcy plan, there was no risk of preferential treatment, the bank's lawsuit against the debtor's husband did not violate the co-debtor stay, and the debtor's adversarial proceeding was properly dismissed.

 

Thus, the Seventh Circuit affirmed the judgment of the district court.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments 

 

FYI: Ill Sup Ct Holds Mortgagee Trespass Not "Extreme and Outrageous" As a Matter of Law

The Supreme Court of the State of Illinois recently affirmed the dismissal of a borrower's claims for intentional and negligent infliction of emotional distress against her mortgagee, property inspection and preservation company and its local subcontractors, who entered the home after the borrower's default to secure the property.

 

In so ruling, the Court held that:

 

(a) a direct victim's claim for emotional distress must include an allegation of contemporaneous physical injury or impact that caused emotional distress, or that she was a bystander in a zone of physical danger that caused her to fear for her own safety and that she suffered physical injury or illness as a result of the emotional distress; and

 

(b) as a matter of law, the conduct was not so extreme and outrageous that it went beyond all possible bounds of decency.

 

A copy of the opinion is available at:  Link to Opinion

 

The borrower signed a promissory note secured by a mortgage on her home in 1997 and defaulted in 2007.  The mortgage contained a paragraph allowing the mortgagee to enter the property in the event of default in order to protect its rights in the property and make repairs.

 

The mortgagee filed a foreclosure action and obtained a final judgment of foreclosure on May 25, 2010. Under Illinois law, the borrower had the right to continue in possession until her redemption period expired on August 25, 2010.

 

The mortgagee contracted with a company to provide property inspection and preservation services (the "preservation company"), which in turn contracted with local vendors to perform the inspections and repairs.

 

In June of 2010, the preservation company received a report that the subject property was vacant and asked its local contractor to obtain access to the property by changing one of the locks and "winterize" the house by turning off the utilities. The local contractor hired two individual subcontractors to carry out the work order.

 

When the two individual subcontractors arrived at the property, they observed that the landscaping was overgrown and there was a "for sale" sign on the property. There was a car and dumpster parked in the driveway. One of the men knocked on the front door, but there was no answer.

 

One of the subcontractors spoke with a neighbor, who told him that the house was unoccupied, but that a woman came and went occasionally. The neighbor also said she did not recognize the car, but that there was a school nearby and sometimes people from the school would park there because the property was vacant.

 

The two subcontractors tried knocking on the front door again, with the same result, then proceeded through a gate to the back, where they observed through a glass door boxes and debris on the floor.

 

They then removed the lock to the back door and one of them entered by climbing over the boxes. Once in, he was confronted by the borrower, who asked him to leave. The subcontractor explained that he was with the mortgage company and asked the borrower to go to the front door, but when he went around she did not answer.

 

The borrower called the police, who investigated by speaking with the parties and neighbor, but made no arrest.

 

In October of 2010, the borrower filed a five-count complaint against the mortgagee, the preservation company, and the two subcontractors, alleging claims for trespass, negligent trespass, private nuisance, intentional infliction of emotional distress, and negligence.

 

The defendants moved for summary judgment on all counts, and in response the borrower sought leave to amend by dropping the negligence claim and adding a claim for negligent infliction of emotional distress.

 

The trial court granted the defendants' motions for summary judgment as to the claims for private nuisance and intentional infliction of emotional distress, but denied summary judgment as to the trespass and negligent trespass claims. The trial court then dismissed the borrower's negligent infliction of emotional distress claim. The borrower appealed.

 

The Appellate Court affirmed the trial court's ruling.

 

Addressing the negligent infliction of emotional distress claim first, the Appellate Court reasoned that there are "two types of victims emotional distress cases: bystanders and direct victims." It then found that the borrower's negligent infliction of emotional distress allegations indicated she "was a direct victim and must allege 'some physical impact' from defendants' conduct." Because the borrower did not plead any physical contact, the Appellate Court found she could not state a claim for negligent infliction of emotional distress and that count was properly dismissed.

 

Turning to the intentional infliction of emotional distress claim, the Appellate Court found that summary judgment in the defendants' favor was proper because plaintiff could not show that the defendants' conduct was "extreme and outrageous." One justice dissented, arguing that the majority "was wrong in continuing to require physical impact in claims for negligent infliction of emotional distress for direct victims."

 

The borrower filed a petition for leave to appeal to the Illinois Supreme Court, which was granted. The Court also granted the Illinois Association of Defense Trial Counsel leave to file a brief amicus curiae in support of the defendants.

 

The Illinois Supreme Court first addressed the borrower's argument that her claim for negligent infliction of emotional distress was improperly dismissed because physical impact is not a required element for such a claim by a direct victim.  The defendants and amicus argued, in response, that the impact rule was still good law in Illinois "when a direct victim pleads negligent infliction of emotional distress."

 

The Court reviewed the history of the cause of action of negligent infliction of emotional distress and the impact rule, noting that in order "to state a claim for negligent infliction of emotional distress, a plaintiff must allege the traditional elements of negligence: duty, breach, causation, and damages. … And until this court's decision in Rickey, all plaintiffs were also required to allege a contemporaneous physical injury or impact. … This was known as the 'impact rule.' Under the impact rule, a plaintiff could recover damages if he suffered (1) emotional distress and (2) 'a contemporaneous physical injury or impact.' … Prior to Rickey, there was no distinction between a direct victim and a bystander in negligent infliction of emotional distress cases."

 

The Illinois Supreme Court explained that in Rickey, where a mother sued on behalf of her eight-year-old son for emotional distress caused when he witnessed his brother getting choked by a subway escalator, it "adopted the "zone-of-physical-danger rule" for bystanders who allege negligent infliction of emotional distress." Under this rule, "a bystander who is in a zone of physical danger and who, because of the defendant's negligence, has reasonable fear for his own safety is given a right of action for physical injury or illness resulting from emotional distress. … Therefore, this court held that a bystander must show physical injury or illness as a result of the emotional distress, caused by the defendant's negligence and not a contemporaneous physical injury or impact."

 

The Court further explained that in its later Corgan ruling, which involved a patient suing her therapist who held himself out to be a licensed psychologist for sexually abusing her under "treatment," "this court made it clear that Rickey did not define the scope of negligent infliction of emotional distress as it applies to direct victims. … Corgan was a direct victim case, and the patient satisfied the impact rule; on multiple occasions, the psychologist had sexual relations with her. … Thus, Corgan is an example of the continued application of the impact rule in direct victim cases."

 

Finally, the Court noted that in its Pasquale decision, "where the husband of a spectator at a drag race, who was killed when she was struck by flying debris resulting from the failure of a clutch mechanism on a race car", it determined that the elimination of the contemporaneous injury or impact requirement for bystander recovery for emotional distress in the area of negligence" did not eliminate "the element of physical harm for a bystander's recovery for emotional distress under strict liability theory."

 

The Illinois Supreme Court concluded that "[t]his precedent makes clear that a direct victim's claims for negligent infliction of emotional distress must include an allegation of contemporaneous physical injury or impact." Contrary to plaintiff's argument, a close reading of Rickey, Corgan, and Pasquale "indicates that this court did not eliminate the impact rule for negligent infliction of emotional distress claims brought by direct victims."

 

Turning to whether the complaint contained sufficient allegations to state a cause of action for negligent infliction of emotional distress, the Court held that while the borrower alleged that the mortgagee and property preservation company negligently trained and supervised their employees, agents and contractors who entered the premises, "since plaintiff did not include an allegation of a contemporaneous physical injury or impact, as a direct victim, she failed to allege a cause of action for negligent infliction of emotional distress" and this count was properly dismissed.

 

The Illinois Supreme Court then addressed the borrower's argument that summary judgment on her intentional infliction of emotional distress claim was improper because a question of fact existed whether the subcontractors' conduct in entering the property was extreme and outrageous.

 

"First, the conduct involved must be truly extreme and outrageous. Second, the actor must either intend that his conduct inflict severe emotional distress or know that there is at least high probability that his conduct will cause severe emotional distress. Third, the conduct must in fact cause severe emotional distress. … It is clear that the tort 'does not extend to mere insults, indignities, threats, annoyances, petty oppressions, or other trivialities."

 

The Court stressed that "[l]iability has been found only where the conduct has been so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community."

 

Applying this rule, the Illinois Supreme Court held that the conduct of the two subcontractors that entered the home 'did not rise to the level of extreme and outrageous" because their investigation into whether the home was occupied was reasonable and they changed the lock not to take possession from the borrower, but to secure the property and make repairs.

 

The Court acknowledged "that under Illinois law, the sanctity of the home and right to be free from intrusion are important principles of law[,]" but the Court nevertheless rejected the borrower's argument that the entry into the home was, by itself, extreme and outrageous conduct, reasoning that the borrower knew that her property was in foreclosure and was still in the redemption period, but still refused to answer the door, which prevented the subcontractors from explaining who they were and why there where there.

 

Finally, the Court rejected the borrower's argument that the defendants had no right to enter the home without a court order under Illinois foreclosure laws, distinguishing between "the right to possession for residential purposes, which these statutes address, and the contractual right to enter to make repairs."

 

However, because mortgage gave the mortgagee and its agents the right to enter the property to secure it and make repairs, and the foreclosure judgment also contained language permitting repairs, the Illinois Supreme Court found that the mortgagee had "the right to enter the property to make reasonable repairs for the preservation of the property."

 

The Court concluded that as a matter of law "based upon this record in the context of mortgage foreclosure proceedings, it cannot be said that the entry, after which defendants left and never returned, is conduct so extreme and outrageous that it goes beyond all possible bounds of decency."  As there was no question of fact whether the inspection was outrageous, summary judgment against the borrower was proper on her intentional infliction of emotional distress claim. 

 

The case was remanded to the trial court for further proceedings on the borrower's remaining claims.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments