Bruegge v. WBCMT 2007-C33 Mid Am. Lodging, LLC (In re Hie of Effingham, LLC)

Decision Date29 March 2013
Docket NumberBankruptcy No. 10–60534.,Adversary No. 12–6024.
Citation490 B.R. 800
PartiesIn re HIE OF EFFINGHAM, LLC, Debtor(s). Robert T. Bruegge, Trustee of the Estate of HIE of Effingham, LLC, Plaintiff(s), v. WBCMT 2007–C33 Mid America Lodging, LLC, Defendant(s).
CourtU.S. Bankruptcy Court — Southern District of Illinois

OPINION TEXT STARTS HERE

Mary E. Lopinot, Mathis Marifian and Richter Ltd., Belleville, IL, for Debtor.

Steven M. Wallace, Kunin Law Offices LLC, Collinsville, IL, for Plaintiff.

Brian A. Audette, Perkins Coie LLP, Chicago, IL, for Defendant.

OPINION

WILLIAM V. ALTENBERGER, Bankruptcy Judge.

This matter is before the Court on the Trustee's Motion to Modify the Stipulation and Agreed Order resolving WBCMT 2007–C33 Mid America Lodging, LLC's (the Defendant) Motion for Relief from Stay as well as on the Defendant's Motion to Dismiss the Trustee's Complaint to Avoid Mortgage Lien.

FACTS

HIE of Effingham, LLC (the “Debtor”) filed a petition under Chapter 11 on September 27, 2010. Prior to and throughout the course of its Chapter 11 case, the Debtor operated a Holiday Inn Express in Effingham, Illinois.

In 2007, the Debtor borrowed $7.2 million from Barclays Capital Real Estate, Inc. In exchange, the Debtor granted Barclays a mortgage lien against the hotel, as well as a security interest in substantially all of the Debtor's other assets, including revenues. The loan and mortgage were subsequently transferred to the Defendant pre-petition.

The mortgage was recorded in the office of the Effingham County Recorder on July 24, 2007. The mortgage states that it is given in favor of Barclays Capital Real Estate, Inc. and that it secures an obligation in the maximum principal amount of $7,200,000.00. It is undisputed that the mortgage states neither the interest rate nor the maturation date of the underlying indebtedness. However, it does include the following provisions:

Section 3.01 Debt. This Security Instrument and interests created in favor of Lender hereunder are given for the purpose of securing (a) payment of principal, interest and all other amounts due at anytime under the Loan Agreement, the Note and each of the other Loan Documents....

Section 8.01 Incorporation from Loan Agreement. All provisions of Articles 17 and 18, inclusive of the Loan Agreement are incorporated into this Security Interest by this reference, as if fully reproduced herein.

See Plaintiff's Complaint to Avoid Mortgage, Exhibit A (Adv. Doc. 1–1).

On March 22, 2011, while the case was in Chapter 11, the Defendant filed a Motion for Relief from Stay (BK Doc. # 102). The motion requested that the Defendant be granted relief from the automatic stay to pursue all of its state law rights and remedies against the Debtor and its assets, including the hotel. The motion did not, however, request abandonment, nor was a separate Motion for Abandonment filed with the Court. The Motion for Relief from Stay and the accompanying notice were served on the Debtor, Debtor's counsel, the United States Trustee, and counsel for interested parties, Holiday Hospitality Franchising and Heritage Builders of Effingham. See BK Docs. # 102 and # 103. No other creditors were served with the motion.

A trial on the Motion for Relief from Stay was scheduled for January 4, 2012. 1 After extensive negotiation, the Defendant and the Debtor, along with counsel for the United States Trustee, appeared before the Court and announced that they had reached a resolution. The parties represented that pursuant to their agreement, the automatic stay would remain in place for 90 days in order to permit the Debtor to pay the Defendant $7.5 million in full satisfaction of the Defendant's claims. If the Debtor failed to pay the Defendant within the allotted 90–day period, the Defendant would not only be entitled to relief from stay, but it was agreed that the Debtor's case would be converted to a proceeding under Chapter 7 and the hotel would be deemed abandoned. Upon hearing the parties' agreement, the Court expressed reservations about the propriety of abandoning the property. Trial Transcript, p. 6, Jan. 4, 2012. However, the Court was assured by the parties that abandonment in this instance would be “fine.” Id. Based on this representation, the parties were directed to submit a stipulated order reflecting their settlement.

A Stipulation and Agreed Order was entered by this Court on January 18, 2012 memorializing the parties' agreement. Paragraph (4)(c) of the stipulation provided that if the Debtor failed to make any of the payment obligations as agreed, the bankruptcy case would be immediately converted to Chapter 7 and “the Hotel [would] be deemed abandoned pursuant to 11 U.S.C. § 554.” The Debtor also agreed, in the event that payment was not made, that it would

(i) not contest or oppose in any way the Foreclosure Case or any and all other rights and remedies that [Defendant] may choose to exercise against the Debtor and/or the Hotel under the Loan Documents; (ii) not raise or file any affirmative defenses, claims or counterclaims against [Defendant] in the Foreclosure Case or otherwise; (iii) be deemed to have waived and released any and all claims and/or causes of action that it might have against [Defendant] related to the Loan and/or any of the Loan Documents....

Stipulation at ¶ 4. Defendant acknowledges that the January 18, 2012 Order was not served on all creditors. See Defendant's Objection to Motion to Modify Stipulation and Agreed Order ¶ 35 (the “overwhelming majority” of the creditors received notice).

The Debtor failed to make the payments as required. Consequently, the case was converted to a proceeding under Chapter 7 on May 11, 2012. Plaintiff Robert Bruegge (Trustee) was appointed Trustee to administer the Debtor's estate.

On August 7, 2012, the Trustee filed a complaint to avoid the Defendant's mortgage lien on the hotel property pursuant to 11 U.S.C. § 544(a)(3). The basis of the complaint is that because the interest rate and maturity date of the indebtedness are not set forth on the face of the mortgage, the Defendant's mortgage fails to comply with the Illinois Conveyances Act and, therefore, is invalid as to the Trustee as a bona fide purchaser of the real property. In conjunction with his complaint, the Trustee has also filed a Motion to Modify the Agreed Order entered January 18, 2012. He requests that the Court strike the abandonment portion of the order because the parties and the Court failed to comply with the requirements of 11 U.S.C. § 554 and Federal Rule of Bankruptcy Procedure 6007. Specifically, the Trustee maintains that the abandonment is ineffective because the Defendant failed to provide notice of the proposed abandonment to all creditors.

For its response, the Defendant has moved to dismiss the Trustee's complaint for failure to state a cause of action. It also objects to modification of the January 18, 2012 Order. The Defendant's Motion to Dismiss is predicated on three arguments. First, the Defendant maintains that the hotel is not property of the Debtor's estate because it was deemed abandoned prior to the conversion of the case to Chapter 7. Alternatively, it argues that even if the hotel has not been abandoned, the Chapter 11 debtor in possession previously admitted that the Defendant's mortgage lien is valid and, therefore, waived the estate's right to now challenge the lien's validity. Finally, the Defendant asserts that it does, in fact, hold a valid, perfected mortgage lien that is sufficient to impart constructive notice of the Defendant's interest to a bona fide purchaser. Hence, it argues, the Trustee has failed to state a cause of action.

This Court will first address the issue of abandonment. “Abandonment is a term of art with special meaning in the bankruptcy context. It is the formal relinquishment of the property at issue from the bankruptcy estate.” Catalano v. C.I.R., 279 F.3d 682, 685 (9th Cir.2002). The requirements for an effective abandonment are set forth in § 554 of the Bankruptcy Code. It states, in pertinent part:

(a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

(b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.

* * *

(d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the bankruptcy estate.

11 U.S.C. § 554.

Section 554 must be read in tandem with Federal Rule of Bankruptcy Procedure 6007, which delineates the procedural requirements for effectuating abandonment. Rule 6007 provides as follows:

(a) NOTICE OF PROPOSED ABANDONMENT OR DISPOSITION; OBJECTIONS; HEARING. Unless otherwise directed by the court, the trustee or debtor in possession shall give notice of a proposed abandonment or disposition of property to the United States trustee, all creditors, indenture trustees, and committees elected pursuant to § 705 or appointed pursuant to § 1102 of the Code. A party in interest may file and serve an objection within 14 days of the mailing of the notice, or within the time fixed by the court. If a timely objection is made, the court shall set a hearing on notice to the United States trustee and to other entities as the court may direct.

(b) MOTION BY PARTY IN INTEREST. A party in interest may file and serve a motion requiring the trustee or debtor in possession to abandon the property of the estate.

Fed. R. Bankr.P. 6007(a) and (b). Failure to comply with the requirements of § 554 and/or Rule 6007 renders a proposed abandonment ineffective. Morlan v. Universal Guaranty Life Ins. Co., 298 F.3d 609, 618 (7th Cir.2002); Sierra Switchboard Co. v. Westinghouse Electric Corp., 789 F.2d 705, 709 (9th Cir.1986); In re...

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    ...not invalidate the mortgage, as the provision is permissive. Bruegge v. WBCMT 2007–C33 Mid Am. Lodging, LLC (In re HIE of Effingham, LLC), 490 B.R. 800, 806 (Bankr.S.D.Ill.2013).8 Similarly, in a Central District of Illinois Bankruptcy Court case, the court explained that § 11 creates a “sa......
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    ...the absence of some terms listed in the statute, see Bruegge v. WBCMT 2007–C33 Mid America Lodging, LLC (In re HIE of Effingham, LLC), 490 B.R. 800, 818–20 (Bankr.S.D.Ill.2013) (mortgage missing interest rate and maturity date); Banbury Metrolofts, LLC v. BMO Harris Bank, N.A. (In re Banbur......
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