In re Cadwell's Corners Partnership
| Decision Date | 17 November 1994 |
| Docket Number | Bankruptcy No. 94 B 17359. |
| Citation | 174 BR 744 |
| Parties | In re CADWELL'S CORNERS PARTNERSHIP, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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John D. Lien, Bradley S. Block, Foley & Lardner, Chicago, IL, for Massachusetts Mutual Life Ins. Co.
Daniel A. Zazove, Siegan, Barbakoff, Gomberg & Kane, Chicago, IL, for the receiver.
Mark S. Lieberman, Joseph A. Baldi, Rosenthal & Schanfield, Chicago, IL, for debtor Cadwell's Corners Partnership.
The Debtor, Cadwell's Corners Partnership (the "Debtor" or "Cadwell's") is the owner of a strip shopping center subject to a first mortgage and assignment of rents held by Massachusetts Mutual Life Insurance Company ("Mass Mutual"). Upon default by the Debtor, Mass Mutual obtained the appointment of a receiver in a state court foreclosure action. Soon thereafter, the Debtor filed this Chapter 11 case. The Debtor now requests this Court to direct the receiver to turnover the subject property pursuant to Bankruptcy Code section 543,1 for an accounting of rents and profits, and for authority to use cash collateral. In response, Mass Mutual contends that rents from the Debtor's property are not property of the estate and, therefore, the Debtor cannot use these proceeds to fund a plan of reorganization. Mass Mutual thus requests this Court to excuse the receiver from turning over the property2 and to modify the automatic stay or, in the alternative, to dismiss the case. For the reasons stated below, this Court finds that postpetition rents generated from the Debtor's Property constitute cash collateral and relief from the automatic stay shall be granted due to Debtor's inability to propose a successful plan of reorganization.
The Debtor is an Illinois limited partnership and is the beneficial owner of Cadwell's Corners Shopping Center (the "Property"), the Debtor's sole asset, located at 3-57 North Waukegan Road, Deerfield, Illinois. Legal title to the Property is held by American National Bank & Trust Company of Chicago as Trustee under Trust No. 48023, dated October 1, 1979. Debtor is the sole beneficiary of the land trust. The Debtor's principal business consists of owning and operating the Property, a strip shopping center with approximately 89,000 square feet of gross leasable space. The Debtor and Mass Mutual have stipulated that, for purposes of these hearings, the value of the Property is $7 million. The general partners of the Debtor are Salvatore C. Buccola and James Di Pietro.
Mass Mutual holds a first mortgage on the Property secured by a nonrecourse Amended and Restated Promissory Note and Mortgage, Security Agreement and Financing Statement. Mass Mutual's loan is also secured by a separate Assignment of Leases and Rents, granting Mass Mutual an interest in the rents from and leases of space in the Property.3 The amended note refinanced the original note and mortgage agreement. The original note, mortgage agreement and assignment of leases and rents is dated November 1, 1982. The amended note, mortgage and assignment of leases and rents is dated March 21, 1988. Mass Mutual properly recorded the original mortgage and assignment of rents in Lake County, Illinois on November 12, 1982. The amended mortgage and assignment of rents were recorded on April 8, 1988. The amended note matured, as extended, on February 1, 1994. The amounts due under the amended note presently remain unpaid by the Debtor.
Mass Mutual filed a foreclosure and receivership action against the Debtor on February 7, 1994, in the Circuit Court of Lake County, Illinois, Case No. 94-CH-86. Mass Mutual's foreclosure complaint alleges that the unpaid principal balance of the amended note is $7,770,064.86, and that the total amount due as of February 4, 1994 was $7,849,546.14. On February 23, 1994, the state court entered an order appointing C. Michelle Panovich ("Receiver") as the receiver for the Property. Pursuant to the state court's order, the Receiver was authorized to manage the Property, collect rents from tenants, pay taxes and other necessary expenses, and negotiate and execute proposed leases. The Receiver was further authorized to employ Mid-America Asset Management Company to manage the Property for a fee not to exceed four percent of gross rents collected. The Receiver has been managing the Property since February 23, 1994 until the present.
On August 30, 1994, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On September 20, 1994, Mass Mutual filed a proof of claim, alleging a secured claim in the amount of $8,653,747.35, plus fees and costs. Debtor filed an objection to Mass Mutual's claim on October 4, 1994, asserting, among other things, that Mass Mutual improperly included a default rate of interest, late charges, unreasonable attorneys' fees and costs, accelerated accrued interest, and interest on interest. The actual value of Mass Mutual's claim has not yet been determined. But, according to a letter from Mass Mutual dated June 24, 1993, which was presented by the Debtor as evidence in this matter, the Debtor's balance on the Mass Mutual loan was $7,776,400 as of December 1, 1993. Furthermore, Mr. Buccola testified that no loan payments were made to Mass Mutual after February 1994. In addition, Debtor's objection to Mass Mutual's claim does not quantify the amount to which Debtor objects, nor does the Debtor suggest what the balance on the Mass Mutual loan might be. Accordingly, given the accruing late fees and interest charges, Mass Mutual's claim is well over $7 million.
This Court's jurisdiction derives from 28 U.S.C. § 1334 and General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. This proceeding is a core matter under 28 U.S.C. § 157(b)(2)(A), (E), (G), and (M).
Mass Mutual asserts in its motions to excuse the receiver from turnover and to modify the automatic stay that the Debtor has no funds available to reorganize because future rents from the mortgaged Property are not property of the estate. Both motions ultimately turn on whether rents from Debtor's Property are cash collateral pursuant to section 363 of the Bankruptcy Code and, consequently, property of the estate as defined in section 541 of the Code. If the rents are cash collateral, then the Debtor may use the rents to fund a proposed plan of reorganization, provided that Mass Mutual's interest in the rents are adequately protected. If the rents are not cash collateral, but rather Mass Mutual's property, then the Debtor must demonstrate that there are alternative sources available with which to achieve an effective reorganization. Thus, the Court will address the cash collateral issue first.
Mass Mutual asserts that the prepetition appointment of the Receiver perfected Mass Mutual's assignment of leases and rents and, therefore, the Debtor had no interest in present or future rents generated from the Property at the time the bankruptcy petition was filed. Mass Mutual thus claims that rents from the Property are not cash collateral under section 363, and cannot be used by the Debtor to fund a plan of reorganization.
Section 552(b) of the Bankruptcy Code provides that a prepetition security interest can extend to postpetition rents to the extent that such security interest has been perfected under applicable state law. See Butner v. United States, 440 U.S. 48, 52, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). In turn, proceeds included under section 552(b) are, pursuant to section 552(b), subject to section 363, and may be treated as cash collateral under section 363(a), which permits a trustee or debtor in possession to use such proceeds if adequate protection for the secured creditor's interest is provided. The central issue, therefore, is whether the Debtor's estate has any interest in rents of the mortgaged Property.
To determine the competing interests of the Debtor and Mass Mutual in rents generated from the mortgaged Property, this Court must look to applicable state law, in this case Illinois law, to determine whether, as of the date of the petition, the Debtor's interest had been terminated prepetition. See Butner, 440 U.S. at 55, 99 S.Ct. at 918. A brief history of Illinois mortgage law will be useful to this determination.
There are two divergent theories of mortgages, title theory and lien theory. Jurisdictions which follow the title theory adhere to the common law precept that the execution of a mortgage conveys legal title to the mortgaged property to the mortgagee during the pendency of the mortgage and the mortgagor only holds equitable title. See Harms v. Sprague, 105 Ill.2d 215, 222, 85 Ill.Dec. 331, 334, 473 N.E.2d 930, 933 (1984); Ortengren v. Rice, 104 Ill.App. 428, 431 (1st Dist. 1902). Lien theory jurisdictions, however, follow the rule that a mortgage is merely a lien on the property rather than a conveyance of title from the mortgagor to the mortgagee. See Harms, 105 Ill.2d at 222, 85 Ill.Dec. at 334, 473 N.E.2d at 933. Early Illinois caselaw generally followed an intermediate version of the title theory of mortgages. See, e.g., Van Antwerp v. Horan, 390 Ill. 449, 453-54, 61 N.E.2d 358, 360 (1945) (); Rohrer v. Deatherage, 336 Ill. 450, 454, 168 N.E. 266, 268 (1929) (same). These early cases, however, recognized that the "title" which the mortgagee held was anomalous and existed only as between the mortgagor and mortgagee as security for the debt for which the property was pledged. For example, the Illinois Supreme Court in Rohrer v. Deatherage, 336 Ill. 450, 168 N.E. 266 (1929), explained that, "while a mortgage conveys a title as between the...
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