City of Chicago v. Michigan Beach Housing Co-op.
| Decision Date | 26 January 1993 |
| Docket Number | Nos. 1-92-1496,s. 1-92-1496 |
| Citation | 609 N.E.2d 877,182 Ill.Dec. 343,242 Ill.App.3d 636 |
| Court | United States Appellate Court of Illinois |
| Parties | , 182 Ill.Dec. 343, 21 UCC Rep.Serv.2d 786 The CITY OF CHICAGO, a municipal corporation, Plaintiff-Appellant, v. MICHIGAN BEACH HOUSING COOPERATIVE, an Illinois not-for-profit corporation; Jayson Investments, Inc., an Illinois corporation, as general partner on behalf of Michigan Beach Cooperative Partners Limited; Michigan Beach Limited Partnership, an Illinois limited partnership; Michigan Beach Development Corporation, an Illinois corporation; National Tax Credit, Inc. II, a California corporation; National Partnership Investments Corporation, a California corporation, as general partner on behalf of National Tax Credit Investors II, a California limited partnership; Metropolitan Community Foundation, Inc., an Illinois not-for-profit corporation; ICF Development Corporation, an Illinois corporation; Ida C. Fisher; Cincinnati Mortgage Corporation, an Ohio corporation; Government National Mortgage Association (GNMA), a Federal agency corporation; Huntoon Paige Associates, Ltd., a New Jersey corporation; Braden-Jayson Construction, Inc., an Illinois corporation; Sound, Inc., an Illinois corporation; Reliance Elevator Co., an Illinois corporation; Zera Construction Co., Inc., an Illinois corporation; Jamerson & Bauwens Electrical Contractors, Inc., an Illinois corporation; Midwest Construction and Development Corporation, an Illinois corporation; Northern Trust Corporation, an Illinois corporation; Title Services, Inc., an Illinois corporation; Levenfeld, Eisenberg, Janger, Glassberg, Somotony & Halper, an Illinois partnership; Klayman & Korman, an Illinois corporation; and Elliot, Dudnik & Associates, an Illinois corporation; and R. Carter Sanders, Jr., a resident of Washington, D.C., Defendants-Appellees. The CITY OF CHICAGO, a municipal corporation, Plaintiff-Appellant, v. MICHIGAN BEACH HOUSING COOPERATIVE, an Illinois not-for-profit corporation; Jayson Investments, Inc., an Illinois corporation, as general partner on behalf of Michigan Beach Cooperative Partners |
Kelly R. Welsh, Corp. Counsel, Chicago (Lawrence Rosenthal, Deputy Corp. Counsel; Benna Ruth Solomon, Chief Asst. Corp. Counsel; Mardell Nereim, Asst. Corp. Counsel; Joan Boman, Asst. Corp. Counsel, of counsel), for plaintiff-appellant.
Torshen, Schoenfeld & Spreyer, Ltd., Chicago (Jerome H. Torshen, of counsel), Canel, Davis & King, Chicago (Jay A. Canel, of counsel), for defendants-appellees Jayson Investments, Inc.; Michigan Beach Ltd. Partnership; Michigan Beach Development Corp.; Braden-Jayson Const., Inc.; and Michigan Beach Housing Co-op.
McDermott, Will & Emery, Chicago (Alan S. Rutkoff, Scott W. Ammarell, of counsel), for defendants-appellees National Tax Credit Investors II; National Tax Credit, Inc. II; and National Partnership Investments Corp.
Fred Foreman, U.S. Atty., Chicago (Linda A. Wawzenski, Asst. U.S. Atty., Nancy K. Needles, Executive Asst. U.S. Atty., of counsel), for defendant-appellee Government National Mortg. Ass'n.
Jones, Day, Reavis & Pogue, Chicago (James R. Daly, Carol A. Tiesi, of counsel), for defendant-appellee Huntoon Paige Associates, Ltd.
John K. Kallman, Chicago, for defendants-appellees Metropolitan Community Foundation, Inc.; Sound, Inc.; Zera Const. Co., Inc.; Jamerson & Bauwens Elec. Contractors, Inc., Midwest Const. and Development Corp., Northern Trust Corp.; Title Services, Inc.; Levenfeld, Eisenberg, Janger, Glassberg, Somotony & Halper; Gremley & Biedermann, Inc.; Klayman & Korman; Elliot Dudnik & Associates; and R. Carter Sanders, Jr.
The Michigan Beach Apartments (the building) is comprised of 240 units, all of which were rented to low-income families after the building was erected in 1967. It was financed by a Federally-insured mortgage upon which the building was in default from 1971 until 1984, when the United States Department of Housing and Urban Development (HUD), its sole creditor, finally foreclosed on the obligation. The owner thereupon declared bankruptcy.
In 1986, defendant Jayson Investments, Inc. (Jayson), whose only two shareholders are Jay Canel and Scott Canel (the developers), presented to the bankruptcy court a plan of reorganization which promised to restructure the building as a cooperative, and to which HUD agreed.
Pursuant to the reorganization plan, the developers created defendant Michigan Beach Housing Cooperative (Cooperative), a not-for-profit corporation without assets, which served as the entity through which the developers obtained title to the building from HUD, and through which the residents of the building would manage it. The plan further obligated the developers to hire defendant ICF Development Corporation (ICF) to sell the cooperative units and the bankruptcy court required that 50% to 70% of them be sold before the plan was to take effect.
In addition to the developers' sponsorship, the Cooperative obtained two loans. The first was a HUD co-insured $6.4 million first mortgage loan from defendant Cincinnati Mortgage Company (CMC). CMC eventually defaulted on its obligations under the co-insurance program and turned over its portfolio of loans, including the Cooperative loan, to defendant GNMA, which became the senior mortgagee. GNMA later hired defendant Huntoon Paige Associates, Ltd. (Huntoon) to service the Cooperative loan.
The second loan acquired by the Cooperative was from plaintiff, City of Chicago (the city), in an amount of approximately $3.3 million; in exchange, the Cooperative granted it a security interest in the building and other related assets. The city's mortgage explicitly stated that it was junior to CMC's and that all payments due under the note secured by the city's mortgage were to be made only from "surplus cash" as defined in the senior mortgage. The city's mortgage also provided that if the Cooperative failed to make its payments on the note, the city could not institute foreclosure proceedings against the building without the consent of the senior mortgagee. The city recorded its mortgage and filed a financing statement with the Illinois Secretary of State.
In April 1989 the developers learned that despite ICF's assurances to the contrary, less than 20% of the building's units had been sold prior to closing, and that consequently, the Cooperative was not optimistic about its ability to make future loan payments. The developers thus proposed to the city and to HUD a new plan, one that would involve the Cooperative's transferring the building to a new limited partnership which would operate the building as a rental complex as opposed to a cooperative. The developers also requested that the city, as well as the State of Illinois, grant the yet-to-be-formed limited partnership low-income housing tax credits so that the interests in the limited partnership could be sold to a syndicator who would in turn sell interests in the partnership to investors. 1
Throughout 1989 and 1990, the developers negotiated with the city and HUD. The city committed $300,000 worth of income tax credits to the building in June of 1989; subsequently, the developers also obtained $480,000 worth of tax credits from the Illinois Housing Development Authority.
In early 1991, the developers and HUD agreed to a plan that would restructure the ownership of the building as a limited partnership. The city, in a letter dated February 14, 1991, informed the developers and HUD that it rejected the new plan; apparently, the city wanted to maintain the building as a cooperative instead of an apartment complex. Nevertheless, the restructuring plan was completed and executed at a closing, which the city did not attend, on June 12, 1991. The developers, who had earlier repurchased the building from the Cooperative, 2 transferred it and its related assets to a newly-created entity, defendant Michigan Beach Limited Partnership (the limited partnership). The limited partnership's general partners consisted of defendant Michigan Beach Development Corporation (of which the developers were the sole shareholders) and National Tax Credit Inc. II. The major limited partner was the syndicator, defendant National Tax Credit Investors II, a limited partnership with National Tax Credit Inc. II as its general partner (NTC defendants). The NTC defendants, which had given the limited partnership a promissory note for $3,975,000 in January 1991, paid it $2,925,129 toward the...
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