Bank of Am., N.A. v. Freed

• Decision Date: 28 December 2012
• Docket Number: 1–11–2112,1–11–3372.,Nos. 1–11–0749,s. 1–11–0749
• Citation: 983 N.E.2d 509,368 Ill.Dec. 96,2012 IL App (1st) 110749
• Parties: BANK OF AMERICA, N.A., a National Banking Association, Successor by Merger to LaSalle Bank National Association, as Agent for Lenders, Plaintiff–Appellee, v. Laurance H. FREED and, DDL LLC, an Illinois Limited Liability Company, Defendants–Appellants.
• Court: United States Appellate Court of Illinois

2012 IL App (1st) 110749

983 N.E.2d 509

368 Ill.Dec. 96

BANK OF AMERICA, N.A., a National Banking Association, Successor by Merger to LaSalle Bank National Association, as Agent for Lenders, Plaintiff–Appellee,

v.Laurance H. FREED and, DDL LLC, an Illinois Limited Liability Company, Defendants–Appellants.

Nos. 1–11–0749, 1–11–2112, 1–11–3372.

Appellate Court of Illinois,

First District, Second Division.

Dec. 28, 2012.

Louis D. Bernstein, Michael T. Herbst, Tracey M. Guerin, James D. Trail, Bernstein Law Firm, Chicago, IL, Scott M. Day, Day & Robert, PC, Naperville, IL, for appellants.

John H. Anderson, Jerome F. Buch, Seyfarth Shaw LLP, Chicago, IL, for appellee.

OPINION

Justice QUINN delivered the judgment of the court, with opinion.

[368 Ill.Dec. 97]¶ 1 This consolidated appeal arises out of an action by plaintiff, Bank of America, N.A., to foreclose a $205 million loan guaranteed by defendants, Laurance H. Freed and DDL LLC. On appeal, defendants argue that the trial court erred by: (1) entering a judgment against them in the amount of $206,700,222.39, pursuant to a “carve-out” provision of the guaranty that required them to pay the full amount due, plus costs and interest, if they took “any action” in connection with the appointment of a receiver or the foreclosure of the lien; (2) denying their motion for a substitution of judge as of right in the citation to discover assets proceeding that was commenced after the foreclosure judgment was entered; and (3) entering charging orders against 72 limited liability companies and limited partnerships in which defendants have an interest, where those entities were not made parties to the action. For the reasons set forth below, we affirm the trial court.

¶ 2 I. BACKGROUND

¶ 3 This case, which has been before this court on two previous occasions, arises out of the foreclosure of a mortgage on property located at 108 North State Street in Chicago, Illinois, commonly referred to as “Block 37.” The Block 37 project has a long history ¹ but only a brief summary of recent events is needed to address the issues raised in this appeal. Block 37 was vacant for more than a decade when, in 2005, the City of Chicago (City) sold it to Mills Corporation (Mills), a Virginia-based real estate investment company. Pursuant to an agreement between Mills and the City, the property was to be developed into a shopping, dining, and entertainment destination, and a new subway station was to be built underneath. Mills ran into financial problems and in 2007 sold the property to Joseph Freed and Associates, LLC (JFA), a Chicago-based real estate developer. On or about March 22, 2007, JFA entered into a construction loan agreement with LaSalle Bank, N.A.,² (Bank) with a maximum principal amount of $205 million. JFA's president, Laurance H. Freed, and JFA's parent company, DDL LLC, guaranteed the loan. Sections 1(a) and (b) of the guaranty placed a $50,325,000 limitation on the guarantors' liability, subject to section 1(c) of the guaranty. Section 1(c) contained four “carve-outs” to the liability limitation of the guaranty, one of which provided that the guaranty would become a full repayment guaranty if “the Borrowers contest, delay or otherwise hinder any action taken by the Agent or the Lenders in connection with the appointment of a receiver for the Premises or the foreclosure of the liens, mortgages or other security interests created by any of the Loan Documents.”

¶ 4 The loan agreement required that the loan be “in balance” at all times, meaning that the amount of funds available under the loan had to equal or exceed the amount budgeted to complete the project. The loan was out of balance almost immediately after JFA acquired the property, and JFA and the Bank tried but were unable to agree to a loan modification. Instead, the parties entered into a series of separate letter agreements between March 2008 and August 2009, whereby the Bank continued to disburse funds despite the default. However, in October 2009, after the Bank and JFA could not agree on a plan to add a movie theater to the mall, which would have required additional funding, the Bank filed a two-count mortgage foreclosure complaint in the circuit court of Cook County. Count I sought to foreclose on the mortgage on Block 37; count II was against defendants as guarantors of the mortgage. ³ Count II originally sought judgment on the guaranty for the limited principal amount of $50,325,000. However, on December 23, 2009, the Bank filed an amended count II, seeking the full amount of the loan from Freed and DDL, $144,263,189.76, plus interest, costs, and attorney fees. In its amended count II, the Bank asserted that because defendants had contested the foreclosure and the appointment of a receiver, they were liable for the full amount of the loan pursuant to Section 1(c)'s carve-out provision. Defendants filed a motion to dismiss amended count II, arguing that section 1(c) of the guaranty was an unenforceable penalty. The trial court denied that motion.

¶ 5 On September 8, 2010, the Bank filed a motion for summary judgment, which the trial court granted. Then on December 22, 2010, the trial court entered judgment against defendants in the amount of $206,700,222.39, pursuant to their guaranty of the loan.⁴ The order contained a finding under Illinois Supreme Court Rule 304(a) (eff. Feb. 26, 2010), that there was no just reason to delay enforcement or appeal of the judgment. On January 21, 2011, defendants filed a motion to reconsider the Rule 304(a) certification, which the trial court denied on February 8, 2011. On March 9, 2011, defendants filed a notice of appeal of the November 19, 2010, order granting summary judgment and the December 22, 2011, judgment against them.

¶ 6 In the meantime, on January 3, 2011, the Bank served citations to discover assets on Freed and DDL. On January 13, 2011, defendants' new attorneys filed an appearance in the case, and on January 20, 2011, they filed a motion for substitution of judge as of right pursuant to section 2–1001(a) of the Code of Civil Procedure (735 ILCS 5/2–1001(a)(2) (West 2008)) (Code), asserting that service of the citations to discover assets commenced a new supplementary proceeding under section 2–1402(a) of the Code (735 ILCS 5/2–1402(a) (West 2008)), entitling them to substitution of judge before a trial or hearing has begun or the presiding judge has ruled on any substantial issue. Judge Brennan, who had presided over the mortgage foreclosure action, denied the motion for substitution, stating in part, as follows:

“I would take this proceeding as much more similar to a 2–1401 petition, where, yes, you do have certain provisions of the Code of Civil Procedure that apply, certainly service of summons and service of the citation, things of that nature. But not so much that it removes it to be an entirely kind of start-over. It's a continuing of the same proceeding, just as to enforcement of the judgment terms. * * * We have had your clients in this case since its inception and, therefore, your motion for substitution of judge as of right is denied.”

¶ 7 On May 24, 2011, pursuant to section 30–20(a) of the Illinois Limited Liability Company Act (805 ILCS 180/30–20(a) (West 2008)) and section 2–1402 of the Code (735 ILCS 5/2–1402 (West 2008)), the Bank filed a motion for charging orders on the distributional interests of Freed and DDL in certain limited liability companies. The motion asked the court to order defendants to cause any distributions from those companies to be paid to the Bank and to bar defendants from transferring, disposing, or impairing any of JFA's assets. Shortly thereafter, on June 9, 2011, the Bank filed a motion for rule to show cause why Freed and DDL should not be held in contempt for dissipating almost $5 million in assets in violation of those citations. After an evidentiary hearing, the trial court entered an order on October 5, 2011, finding defendants in contempt and appointing a receiver. Defendants appealed, and this court affirmed but remanded to the trial court with orders to enter a proper purge provision. Bank of America, N.A. v. Freed, 2012 IL App (1st) 113178, 361 Ill.Dec. 565, 971 N.E.2d 1087 (referred to below as the “second appeal”).

¶ 8 On June 22, 2011, the trial court imposed charging orders on defendants' distributional interests in 46 limited liability companies. On July 21, 2011, defendants filed a notice of appeal of that order, as well as the order denying their motion for substitution of judge. On October 24, 2011, the trial court imposed charging orders on 26 additional limited liability companies (LLCs) and limited partnerships in which defendants have an interest, ordered the foreclosure of all of the charging orders, and appointed a receiver for all of the interests, pursuant to section 30–20 of the Limited Liability Company Act (805 ILCS 180/30–20 (West 2008)). On November 23, 2011, defendants filed a notice of appeal of the October 24, 2011, order imposing additional charging orders, as well as the January 22, 2011, order denying their motion for substitution of judge. The following orders were consolidated in this appeal: (1) the November 19, 2010, order granting the Bank's motion for summary judgment and the December 22, 2010, judgment in the Bank's favor in the amount of $206,700,222.39; (2) the trial court's January 21, 2011, order denying defendants' motion for substitution of judge in the citation to discover assets proceeding; and (3) the June 22, 2011, and October 24, 2011, orders imposing charging orders and foreclosing upon distributional and transferable interests in 72 limited liability companies and limited partnerships in which Freed and DDL have an interest.

¶ 9 II. ANALYSIS

¶ 10 A. Standard of Review

¶ 11 The trial court's grant of summary judgment in favor of the Bank and its judgment against defendants for the full amount of the indebtedness under section 1(c) of the guaranty are...