Inland Mortgage Capital Corporation v. Chivas Retail Partners, LLC

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 12‐3648
INLAND M ORTGAGE CAPITAL C ORPORATION,
Plaintiff‐Appellee,
v.
C HIVAS R ETAIL P ARTNERS, LLC, et al.,
Defendants‐Appellants.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 11 C 6482 — Milton I. Shadur, Judge.
____________________
A RGUED SEPTEMBER 26, 2013 — D ECIDED J ANUARY 29, 2014
____________________
Before P OSNER , MANION, and KANNE , Circuit Judges.
P OSNER , Circuit Judge. Before us is the defendants’ appeal
in a diversity suit (governed by either Illinois or Georgia
law, or maybe both, as we’ll see) to enforce a written guaran‐
ty. The district court granted summary judgment in favor of
the plaintiff and awarded $17 million in damages (we round
off all dollar figures to the nearest million).

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2 No. 12‐3648
The plaintiff, Inland Mortgage Capital Corporation,
which the parties call IMCC, in 2007 agreed to lend a com‐
pany named Harbins Crossing TC $60 million to buy a tract
of land in Georgia on which Harbins wanted to build a
shopping center anchored by a Wal‐Mart. In addition to the
usual security provided by the borrower, including a mort‐
gage on the tract of land, IMCC obtained from defendant
Chivas Retail Partners, LLC, and others (also named as de‐
fendants, but to simplify our opinion we’ll pretend that
Chivas is the only one), a loan guaranty agreement. Chivas
guaranteed “absolutely, unconditionally and irrevocably …
the full, complete and punctual observance, payment, and
performance and satisfaction of all of the obligations … of
[Harbins] under the Loan Documents.” Critically, the guar‐
anty agreement also provided that “if Lender [that is, IMCC]
forecloses on any real property collateral … the amount of
the debt may be reduced only by the price for which that col‐
lateral is sold at the foreclosure sale, even if the collateral is
worth more than the sale price; and Lender may collect from
Guarantor [that is, Chivas] even if Lender, by foreclosing on the
real property collateral, has destroyed any rights Guarantor may
have to collect from Borrower or anyone else” (emphasis added).
The agreement states that any dispute arising from it is to be
resolved under Illinois law.
Fourteen months after the loan agreement was signed,
Harbins defaulted (apparently because Wal‐Mart decided
not to open a store in the proposed shopping center). Thir‐
teen months later IMCC foreclosed on its mortgage. The
foreclosure proceeding was nonjudicial; the mortgaged land
was auctioned off at a public foreclosure auction conducted
by the local sheriff after public notice of the auction. IMCC
made a credit bid (that is, a bid financed by money owed it

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No. 12‐3648 3
as a creditor, rather than a cash bid) for $7 million. That was
the only bid, so IMCC became the owner of the land.
IMCC then filed in a Georgia court a petition to confirm
that the auction had conformed to Georgia law. It did this
because, unless such a petition is granted, a mortgagee who
obtains property in a nonjudicial foreclosure sale can’t ob‐
tain a deficiency judgment should the property turn out to
be worth less than the balance owed him on the mortgage.
Ga. Code § 44‐14‐161(a). And the court “shall not confirm
the sale [i.e., grant the petition] unless it is satisfied that the
property so sold brought its true market value on such fore‐
closure sale.” § 44‐14‐161(b); see American Century Mortgage
Investors v. Strickland, 227 S.E.2d 460, 462 (Ga. App. 1976);
Thompson v. Maslia, 195 S.E.2d 238, 241–42 (Ga. App. 1972);
Walton Motor Sales, Inc. v. Ross, 736 F.2d 1449, 1455 (11th Cir.
1984); Surety Managers, Inc. v. Stanford, 633 F.2d 709, 710–11
(5th Cir. Unit B 1980).
At the close of a one‐day evidentiary hearing, the court in
which IMCC had filed its petition denied confirmation on
the ground that IMCC had not satisfied statutory require‐
ments. No further explanation was offered but the parties
agree that the reason for the denial was that the court
thought the land worth more than $7 million. IMCC ap‐
pealed, but the appellate court affirmed without an opinion.
So IMCC decided to invoke the guaranty agreement, and
when Chivas refused to honor it brought the present suit for
the difference between what it had paid for the land in the
foreclosure sale ($7 million, by writing off that amount of
Harbins’s debt to it in exchange for acquiring the land) and
the unpaid balance of the debt, including taxes, penalties,
and interest, totaling $24 million—hence $17 million, the

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4 No. 12‐3648
amount the district court in Chicago, where the suit was
brought, awarded.
The Georgia statute, a bit of Southern populism left over
from the 1930s depression—the statute was enacted in 1935
and has not been materially changed since; see Thompson v.
Maslia, supra, 195 S.E.2d at 241–42; Davie v. Sheffield, 180
S.E.2d 263, 264 (Ga. App. 1971)—is odd by modern stand‐
ards in extinguishing the mortgagee’s right to any deficiency
judgment whatsoever no matter how slight the underpay‐
ment for the land. (A bill to inter this legislative fossil is lan‐
guishing in the Georgia legislature. See Ga. S.B. 106, 152d
General Assembly (2013–2014 Regular Session).) One might
think that if the land that IMCC acquired was worth $8 mil‐
lion rather than $7 million, the deficiency judgment to which
it would be entitled would be $16 million rather than $17
million—not zero. But zero is the answer that Georgia gives
in such a case. Powers v. Wren, 31 S.E.2d 713, 716–17 (Ga.
1944); Turpin v. North American Acceptance Corp., 166 S.E.2d
588, 592 (Ga. App. 1969); Craig Pendergrast & Sara LeClerc,
“Georgia Foreclosure Confirmation Proceedings in Today’s
Recessionary Real Estate World,” 16 Ga. Bar J., No. 4, Dec.
2010, at 11, 14. Otherwise the failure of the Georgia courts in
this case to venture any estimate of the value of the land in
question would be inexplicable.
Chivas argues that the $17 million awarded IMCC by the
federal district court in Chicago is a deficiency judgment,
and that the Georgia courts have determined that because
the land is worth more than $7 million IMCC is not entitled
to a deficiency judgment. But IMCC is not seeking a defi‐
ciency judgment. Such a judgment is sought against a bor‐
rower, usually and in this case a mortgagor. The borrower,

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No. 12‐3648 5
the mortgagor, is Harbins. Harbins is not a defendant in this
suit; Chivas, the guarantor, is. By virtue of the Georgia
judgment, IMCC can’t obtain a deficiency judgment, which
is to say can’t sue Harbins for the balance of Harbins’s debt
to it. But there is nothing to prevent it from suing the guar‐
antor. “Failure to obtain confirmation of a sale does not op‐
erate to extinguish the remaining debt” and thus “does not
estop a creditor from pursuing other contractual security on
the debt.” Taylor v. Thompson, 282 S.E.2d 157, 158 (Ga. App.
1981); see also cases cited in that opinion and HWA Proper‐
ties, Inc. v. Community & Southern Bank, 746 S.E.2d 609, 615–
16 (Ga. App. 2013). The purpose of a loan guaranty is to
make the lender whole if the borrower is unable to repay the
loan in full. The fact that the Georgia courts have prevented
IMCC from obtaining full repayment by its debtor (the bor‐
rower) is what triggered Chivas’s liability to IMCC as guar‐
antor of the debt.
Chivas argues that the district court’s award of damages
gives IMCC a windfall. The Georgia courts have determined
that the land is worth more than $7 million. Suppose it’s
worth $10 million. Then the award of damages will result in
IMCC’s recovering a total of $27 million ($10 million + $17
million) when it’s actually owed only $24 million. Of course
all we know is that the land is worth (or so at least the Geor‐
gia courts have ruled) more than $7 million. We don’t know
how much more. There is no evidence of the land’s value in
the record. It could be only $7,000,001. Chivas could have
offered evidence of the actual value of the land in the district
court, but it didn’t. Actually that would have been a waste of
everyone’s time. For remember that the guaranty agreement
guarantees IMCC the difference between what it pays for the
land and the unpaid balance of the loan to Harbins, even if

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6 No. 12‐3648
the land is worth more than what IMCC paid for it. The
guaranty agreement couldn’t be clearer. Nor is there any ar‐
gument that the agreement is unconscionable or otherwise
unlawful, even though it indeed has built into it the possibil‐
ity of a windfall. Chivas concedes that if IMCC had sued it to
enforce the guaranty without first seeking confirmation in
Georgia, it would have no defense; the guaranty agreement
is lawful under Georgia law as well as Illinois law, HWA
Properties, Inc. v. Community & Southern Bank, supra, 746
S.E.2d at 617; Taylor v. Thompson, supra, 282 S.E.2d at 158,
though remember that the agreement states that disputes
arising under it are to be resolved in accordance with Illinois
law.
Chivas argues that IMCC should be collaterally estopped
to sue it, for the unpaid balance of the loan to Harbins, by
the judgment of the Georgia courts that barred it from seek‐
ing a deficiency judgment. But that repeats the argument, in
another guise, that the suit against Chivas seeks a deficiency
judgment. It doesn’t. Chivas can plead collateral estoppel
successfully only on the issue actually litigated in and decid‐
ed by the Georgia courts in the confirmation action: namely
whether the property is worth more than $7 million. See Al‐
exander v. Weems, 277 S.E.2d 793, 794 (Ga. App. 1981); Walton
Motor Sales, Inc. v. Ross, supra, 736 F.2d at 1455. But IMCC’s
suit is based on the guaranty, not on the confirmation; and in
that suit the value of the land, as distinct from what IMCC
paid for it, is irrelevant.
Chivas’s defense if accepted would incite the beneficiary
of a guaranty to sue the guarantor first, rather than the debt‐
or, because if the beneficiary lost a suit against a debtor the
guaranty would (were Chivas’s defense accepted) be down

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No. 12‐3648 7
the drain. To avoid that risk the creditor would bypass the
debtor and sue the guarantor. Guaranties would no longer
back up creditors; instead they would give debtors a free
pass.
What a topsy‐turvy world the defense rightly rejected by
the district court would create!
A FFIRMED.

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