Trinity 83 Development LLC v. Colfin Midwest Funding LLC ( 2019 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 18-2117
TRINITY 83 DEVELOPMENT, LLC,
Plaintiff-Appellant,
v.
COLFIN MIDWEST FUNDING, LLC,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 17 C 2844 — Thomas M. Durkin, Judge.
____________________
ARGUED JANUARY 18, 2019 — DECIDED MARCH 1, 2019
____________________
Before EASTERBROOK, BARRETT, and SCUDDER, Circuit
Judges.
EASTERBROOK, Circuit Judge. In 2006 Trinity 83 Develop-
ment borrowed about $2 million from a bank, giving in re-
turn a note and a mortgage on certain real property. In 2011
the bank sold the note and mortgage to ColFin Midwest
Funding. ColFin relied on Midland Loan Services to collect
the payments. In 2013 Midland recorded a document (cap-
tioned “satisfaction”) stating that the loan had been paid and
2 No. 18-2117
the mortgage released. But the loan was still outstanding,
and Trinity continued paying. In 2015 ColFin realized Mid-
land’s mistake and recorded a document cancelling the satis-
faction. Soon afterward Trinity stopped paying, and ColFin
filed a foreclosure action in state court.
Trinity commenced a federal bankruptcy proceeding,
which stayed the state-court action. It then filed an adversary
action against ColFin, contending that the release extin-
guished the debt and security interest. Bankruptcy Judge
Thorne disagreed, however, holding that the release was a
unilateral error that could be rectified unilaterally—and, as
no one else had recorded a security interest between those
two events, ColFin retained its original rights. A district
judge affirmed, and Trinity appealed to us.
Before the appeal was heard, the property was sold un-
der the bankruptcy court’s auspices. ColFin contends that
this moots the appeal. It relies on 11 U.S.C. §363(m), which
reads:
The reversal or modification on appeal of an authorization under
subsection (b) or (c) of this section of a sale or lease of property
does not affect the validity of a sale or lease under such authori-
zation to an entity that purchased or leased such property in
good faith, whether or not such entity knew of the pendency of
the appeal, unless such authorization and such sale or lease were
stayed pending appeal.
ColFin also relies on In re River West Plaza—Chicago, LLC, 664
F.3d 668 (7th Cir. 2011), which holds that §363(m) blocks not
only a request to upset the sale but also any possibility of
ordering the recipient of the sale’s proceeds to turn that
money over to the bankruptcy estate (the relief that Trinity
now seeks), which makes an appeal moot.
No. 18-2117 3
Mootness is a constitutional doctrine designed to avoid
the issuance of advisory opinions. “[A] suit becomes moot,
when the issues presented are no longer live or the parties
lack a legally cognizable interest in the outcome. [This oc-
curs] only when it is impossible for a court to grant any
effectual relief whatever to the prevailing party.” Chafin v.
Chafin, 568 U.S. 165, 172 (2013) (internal citations and quota-
tion marks omioed). It is possible for a court to grant relief
here, as it was possible in River West: one side wants money
from the other. That request may be inconsistent with a stat-
ute, but a defense to payment concerns the merits, not moot-
ness. Courts do not say, when a defendant wins on the law,
that the case is moot. Cf. Bell v. Hood, 327 U.S. 678 (1946).
Many a statute forecloses particular relief. Think of the
Norris-LaGuardia Act, 29 U.S.C. §101, which prohibits the
use of injunctions in some labor disputes. When a court con-
cludes that the Act applies, it dismisses the suit but does not
declare it moot. See, e.g., Burlington Northern R.R. v. Brother-
hood of Maintenance of Way Employes, 481 U.S. 429 (1987). The
request for an injunction against an ongoing strike presents a
real case or controversy within the scope of Article III, a con-
troversy not eliminated by a statute that entitles the defend-
ant to prevail. Just so with §363(m). There is a live controver-
sy about who should get the money generated by the sale.
That’s why we held long ago that §363(m) does not concern
mootness. See In re UNR Industries, Inc., 20 F.3d 766, 769 (7th
Cir. 1994). Accord, In re 203 N. LaSalle Street Partnership, 126
F.3d 955, 961 (7th Cir. 1997), reversed on the merits, 526 U.S.
434 (1999). A defense, even an ironclad defense, does not de-
feat jurisdiction, see, e.g., Builders Bank v. FDIC, 846 F.3d 272
(7th Cir. 2017), and mootness is a jurisdictional doctrine. The
opinion in River West does not cite UNR or LaSalle Street
4 No. 18-2117
Partnership and so created an unappreciated intra-circuit
conflict.
There is a further problem with River West—one inde-
pendent of the question whether §363(m) concerns moot-
ness. Section 363(m) does not say one word about the dispo-
sition of the proceeds of a sale or lease. The text is straight-
forward: “The reversal or modification on appeal of an au-
thorization … of a sale or lease of property does not affect
the validity of a sale or lease … to an entity that purchased
or leased such property in good faith”. What should be done
with the proceeds is a subject within the control of the bank-
ruptcy court. We have recognized this multiple times. See,
e.g., In re Lloyd, 37 F.3d 271, 273 (7th Cir. 1994); In re Edwards,
962 F.2d 641, 643–44 (7th Cir. 1992). Many decisions from
outside this circuit after River West likewise hold that
§363(m) does not specify what happens to the money. E.g.,
In re Hope 7 Monroe Street L.P., 743 F.3d 867, 872–73 (D.C. Cir.
2014); In re ICL Holding Co., 802 F.3d 547, 554 (3d Cir. 2015);
In re Brown, 851 F.3d 619, 623 (6th Cir. 2017). River West con-
flicts with Lloyd and Edwards, and the panel did not appreci-
ate that it was creating a second intra-circuit conflict.
River West relied on In re Sax, 796 F.2d 994 (7th Cir. 1986),
which held an appeal to be moot when the appellant sought
to undo a sale that came within the scope of §363(m). Sax
arose from a challenge to the sale itself, not a dispute about
who was entitled to the proceeds. It therefore does not sup-
port the conclusion of River West that §363(m) prevents any
judicial order requiring proceeds to be handed over to a
trustee or estate in bankruptcy. In re Edwards, 962 F.2d at 644,
observed that it would be mistaken to read Sax as limiting
judicial control over the disposition of the money generated
No. 18-2117 5
by a sale—yet that is what River West did, citing Sax but not
Edwards.
The disagreement among panels must be cleared up. We
now hold that §363(m) does not make any dispute moot or
prevent a bankruptcy court from deciding what shall be
done with the proceeds of a sale or lease. River West is over-
ruled, as is Part III of Sax (which treated as moot all disputes
within the scope of §363(m)). Any other decision in this cir-
cuit that treats §363(m) as making a controversy moot, rather
than giving the purchaser or lessee a defense to a request to
upset the sale or lease, is disapproved. This opinion has been
circulated before release to all active judges. See Circuit Rule
40(e). None wanted to hear the appeal en banc.
This brings us to the merits. Trinity maintains that the re-
lease erroneously filed in 2013 abrogated ColFin’s rights. If
that’s so, then the proceeds from the sale must be distributed
among Trinity’s other creditors. The bankruptcy judge and
district judge concluded, however, that Trinity did not ob-
tain rights from the 2013 filing, for it was unilateral and
without consideration. It therefore was not a contract, and
because no one (including Trinity) detrimentally relied on
the release, ColFin could rescind it.
That conclusion is sound as a maoer of Illinois law,
which applies to ColFin’s security interest. Illinois treats a
mistaken release of a mortgage as ineffective between the
mortgagor and mortgagee, see Hale v. Morgan, 68 Ill. 244
(1873); Ogle v. Turpin, 102 Ill. 148 (1881); LennarU v. Quilty,
191 Ill. 174, 179–80 (1901), although third parties that rely on
the mistake may obtain security given the apparent lack of a
senior security interest. Bank of New York v. Langman, 2013 IL
App (2d) 120609 ¶21.
6 No. 18-2117
Trinity relies on this clause in the mortgage: “Lender
shall not be deemed to have waived any rights under this
Mortgage unless such waiver is given in writing and signed
by Lender.” Trinity treats this as if it read: “Lender shall be
deemed to have irrevocably waived any rights under this
mortgage whenever it or its agent signs a wrioen document
to that effect.” But that’s not what the clause provides. It
says that only an authorized writing accomplishes a waiver,
not that any particular document does so. To say “only A can
accomplish B” is not at all to say “every A accomplishes B.”
The no-waiver clause negates oral waivers and waivers im-
plied from conduct; accepting a late payment thus does not
waive the deadline for payments. This language does not
mean that mistaken unilateral writings are beyond recall.
According to Trinity, In re Motors Liquidation Co., 777 F.3d
100 (2d Cir. 2015), shows that a mistaken release cannot be
undone. That may be true if, as in Motors Liquidation, the er-
ror comes to light only after bankruptcy. The Bankruptcy
Code gives the Trustee or debtor in possession the rights of a
hypothetical lien creditor. 11 U.S.C. §544(a)(1). Because a
mistaken release in Illinois allows third parties to take effec-
tive security interests if they act before the release is rescind-
ed, a mistake not caught before the date of the bankruptcy
filing brings §544(a)(1) into play and prevents the secured
creditor from regaining its original position. That’s what
happened in the Second Circuit’s case, leaving the secured
creditors to argue that the release (which all conceded to be
mistaken) should be disregarded because it had been unau-
thorized. The Second Circuit concluded that the release had
been authorized, so it counted—and §544(a)(1) did the re-
maining work. But ColFin caught the problem before Trinity
filed its bankruptcy petition, so a hypothetical lien perfected
No. 18-2117 7
on the date of the bankruptcy would have been junior to
ColFin’s interest.
AFFIRMED