484 F.2d 713 (7th Cir. 1973), 72-1579, Stanish v. Polish Roman Catholic Union of America
|Citation:||484 F.2d 713|
|Party Name:||Paul STANISH, Plaintiff-Appellee, v. POLISH ROMAN CATHOLIC UNION OF AMERICA, Defendant-Appellant.|
|Case Date:||July 30, 1973|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued April 26, 1973.
Rehearings Denied Sept. 20, 1973.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Keith F. Bode, Chicago, Ill., for defendant-appellant.
Peter C. Bomberger, Charles G. Bomberger, Hammond, Ind., for plaintiff-appellee.
Before MOORE, [*] CUMMINGS and PELL, Circuit Judges.
MOORE, Circuit Judge:
I. Background of This Case
This diversity action comes to us on appeal from a judgment of the United States District Court for the Northern District of Indiana, George N. Beamer, Chief Judge, which awarded plaintiff-appellee, Paul Stanish (Stanish) an Indiana resident, damages in the amount of $707,000. This action was brought to recover sums allegedly lost (by Stanish) when defendant-appellant, Polish Roman Catholic Union (PRCU), an Illinois not-for-profit fraternal benefit society, refused to honor an alleged commitment to lend plaintiff-appellee $260,000, to be used to partially finance construction of a high-rise apartment building.
Early in 1966, Stanish 1 began investigating the feasibility of building an apartment complex in Whiting, Indiana. He located an appropriate site on the shore of Lake Michigan. Stanish, his attorney, and several others then met with three members of the PRCU loan committee to discuss financing of part of the project. PRCU expressed interest in making a mortgage loan, indicated that they could lend only up to two-thirds of the appraised value of the real estate, and asked for an independent appraisal of the land for use in determining the amount PRCU could properly lend on the site.
Stanish then hired an appraiser whose appraisal stated that the land, approximately 8.341 acres, was valued at $1.00 per square foot, or $363,350 in its undeveloped condition, i. e., "as is". The appraisal further stated, however, that with the "positive assurance" that an apartment complex of at least 250 units would be built on the site within two years, the land would have a value of nearly $1,000,000. 2 In addition to the commitment to build a 250-unit apartment building on the site, the $1,000,000 appraisal was conditioned on nine further points including such items as appropriate rezoning to permit the construction of an apartment building, availability of city sewage and water connections at the site, and successful conclusion of tests to establish that the soil at the site could support the proposed building. 3
This appraisal was submitted to the PRCU loan committee, together with a request for a mortgage loan of $650,000 at 6% interest. On August 1, 1966, PRCU approved the requested loan.
By this time Stanish had reached an agreement to purchase the land for $291,935. PRCU informed Stanish that its funds were then committed and suggested that, if he needed funds to purchase the site immediately, he could take a "letter of commitment" from PRCU stating that it would lend him the money and use that letter to obtain interim financing elsewhere. Such interim financing was arranged at the Hoosier State Bank of Indiana (Hoosier).
The Letter of Commitment, dated August 11, 1966, provided that PRCU would make a $650,000 mortgage loan to Stanish on the 8+ acre site. It further provided that the site would be divided into five parcels and that the mortgage would include a clause permitting the mortgagor to effect release of any of these parcels upon payment of $666.67 per individual apartment unit to be constructed on that parcel. The letter further stated that Hoosier planned to lend $300,000 to Stanish, secured by a mortgage on the tract, that within six months PRCU would pay out $300,000 to liquidate this loan, and that with respect to this loan from Hoosier, no cancellation of the PRCU commitment to lend money to Stanish could be made. The Letter of Commitment included the statement that said Letter was irrevocable for six months.
On August 19, 1966, using the Letter of Commitment, Stanish borrowed $300,000 from Hoosier and purchased the site. Three months later Stanish requested a preliminary disbursement of $150,000 from PRCU. Stanish was informed that because of existing commitments, no disbursement could be made at that time, but that the full commitment would be honored by February 10, 1967.
On February 8, 1967, Stanish and his attorney met with officers of PRCU and executed and delivered five loan applications, each in the amount of $130,000 and each secured by a mortgage on one of the five parcels into which the building site had been divided, as provided in the Letter of Commitment. Later the same month the president of PRCU called Stanish's attorney to say that the general counsel of PRCU had reviewed the appraisal and was having second thoughts about it. On March 1, 1967, Stanish finally received a loan from PRCU of $390,000, which funds were sufficient to enable him to repay the Hoosier loan and to cover his expenses up to that point. This loan was secured by a single mortgage on the entire site,
not by separate mortgages on the five parcels which made up the site, as the parties had originally planned. This loan also involved several other variations from the arrangement described in the Letter of Commitment.
After securing this loan, Stanish obtained a commitment from Baird & Warner, Inc., Chicago mortgage brokers, to finance the $3,600,000 cost of the apartment building. This commitment was conditioned upon the agreement of the Federal Housing Administration (FHA) to insure the mortgage. Miscellaneous expenses not covered by the construction loan were to be met out of a $300,000 line of credit from the First National Bank of Chicago. This credit was also conditioned upon FHA mortgage insurance.
Stanish was ultimately successful in securing tentative FHA approval for mortgage insurance. The FHA, however, conditioned its insurance on a scaling down of the project from 250 to 180 units and on the establishment of a $150,000 loss reserve. In November, 1967, the FHA informed Stanish that it was ready to approve his application for insurance, but that he would first have to establish the loss reserve and secure clear title to the parcel on which the building would be built. Stanish then sought to borrow the $260,000 remaining on PRCU's $650,000 loan commitment. In accordance with the terms of the Letter of Commitment, Stanish proposed to pay back to PRCU $120,000 of this additional loan so that he could secure title to one of the parcels. 4
PRCU refused to advance further funds to Stanish until construction had begun. Stanish responded that no construction could begin until he had title to the parcel of land on which the building was to be built and the FHA had issued its mortgage insurance. PRCU refused to lend the additional funds; Baird & Warner thereupon withdrew from the project.
Stanish's later attempts to secure financing for his project were unsuccessful. PRCU has since instituted foreclosure proceedings to secure repayment of the $390,000 loan. 5
The district court held that defendant-appellant PRCU had breached a contract to lend plaintiff-appellee Stanish a total of $650,000 and to release the parcel upon which Stanish planned to build. The court found that Stanish could have built the apartment with the financing he had arranged and could have sold the building for $400,000 more than the mortgage. The court further found that the remaining parcels comprising the site also could have been sold for $280,000 above the mortgage they secured, and that Stanish's potential indebtedness to PRCU (on the $390,000 mortgage loan) was $27,000 more than the value of the land. Totalling these items, the district court concluded that Stanish had been damaged in the amount of $707,000 by PRCU's failure to lend the $260,000, and that PRCU was liable for these damages.
For the reasons discussed below, we reverse the decision of the court below and remand for further proceedings.
II. The Legality of the Contract to Lend
PRCU appeals the award of $707,000 damages to Stanish because it claims the loan commitment under which he recovered was illegal under the laws of Indiana and Illinois and in violation of PRCU regulations. PRCU is an Illinois corporation licensed to do business in Indiana. Indiana law provides that, as a fraternal benefit society, PRCU may legally invest its funds in accordance with Indiana law or in accordance with the laws of the state of its incorporation. 6 An Illinois statute restricts PRCU investments in land to loans secured by first mortgages on sites which are improved
by permanent buildings or which produce income. The statute also limits the amount of such an investment to 75% of the fair market value of the real estate. 7 In addition, PRCU's internal rules, of which both Stanish and his attorney admitted knowledge, limited PRCU mortgages to 66 2/3% of the value of the real estate.
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The foundation of PRCU's illegality argument is that the appraiser whom Stanish hired stated that the apartment site had a present value of $363,350 "as is". PRCU attacks the appraiser's alternative $1,000,000 valuation which was conditioned on positive assurance that a 250-unit apartment building would be built on the site within two years. PRCU says that no such "hypothetical" appraisal may be used to avoid the Illinois and PRCU percentage limitations on real estate investments. In addition, at the time it was to have made the loan, PRCU notes that the site was unimproved by...
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