Successful appeal of Bankruptcy Court order denying objection to lender’s claim

Brian obtained the reversal of the Bankruptcy Court’s order denying a Chapter 11 debtor’s objection to the claim of a commercial mortgage lender. The mortgage lender obtained “full and complete” relief from the automatic stay to continue with its state law foreclosure of a property owned by a non-debtor. The debtor was a guarantor of the indebtedness. In the order confirming the foreclosure sale, the lender obtained only an “in rem” deficiency judgment against the debtor. The debtor filed an objection to the lender’s claim in the bankruptcy court for the deficiency, arguing that by obtaining “full and complete relief” from the automatic stay, but by failing to obtain an “in personam” deficiency judgment against the debtor, the lender had waived its right to assert the debtor’s personal liability in the Chapter 11 case. The Bankruptcy Court disagreed, and overruled the claim objection. The debtor appealed to the District Court, which reversed the Bankruptcy Court, finding that the lender was barred by res judicata from asserting the debtor’s personal liability in the Chapter 11 case. The lender appealed the District Court’s ruling to the Seventh Circuit Court of Appeals, which agreed with the debtor, affirmed the District Court and held that, the lender had its chance in state court and it was too late to hold the debtor liable for a deficiency judgment in the Chapter 11 case.