In re Commercial Loan Corp., 04 B 19846.

• Decision Date: 17 November 2004
• Docket Number: No. 04 B 19846.,04 B 19846.
• Citation: 316 B.R. 690
• Parties: In re COMMERCIAL LOAN CORP., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

316 B.R. 690

In re COMMERCIAL LOAN CORP., Debtor.

No. 04 B 19846.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

November 17, 2004.

COPYRIGHT MATERIAL OMITTED

Robert M. Fishman, Brian L. Shaw, Shaw Gussis Fishman Glantz Wolfson & Tobin LLC, Chicago, IL, for Chapter 11 Trustee Richard Fogel.

Bryan I. Schwartz, Gary I. Blackman, Christopher S. Griesmeyer, Levenfeld Pearlstein, LLC, Chicago, IL, for JDI Loans, Inc.

Michael L. Molinaro, Synde B. Keywell, Neal, Gerber & Eisenberg LLP, Chicago, IL; Thomas Wilson Waters, Kemp & Grzelakowski, Ltd., Oak Brook, IL, for Flower Bank FSB, West Town Savings Bank, Howard Savings Bank and Lincoln State Bank.

David K. Welch, Arthur G. Simon, Jeffrey C. Dan, Crane, Heyman, Simon, Welch & Clar, Chicago, IL, for Ottawa Savings Bank and Twin Oaks Savings Bank.

Douglas J. Lipke, Michael M. Eidelman, Allyson B. Russo, Vedder, Price, Kaufman & Kammholz, P.C., Chicago, IL, for Citizens Financial Services, FSB.

Timothy R. Casey, Mark S. Melickian, Jason Goitia, Gardner, Carton & Douglas

LLP, Chicago, IL, for Platinum Community Bank.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This matter is before the court on trustee Richard Fogel's motion to authorize a settlement with JDI Loans, Inc., a creditor in this chapter 11 case. The motion was originally filed in June 2004 and drew objections from several other creditors, objections to which the trustee and JDI responded. In August, after a short discovery period, the court held an evidentiary hearing on the motion. The parties submitted post-hearing memoranda and replies to those memoranda in late September and early October. The matter is now ready for ruling. Having carefully considered the parties' memoranda and the evidence, the court makes the following findings of fact, reaches the following conclusions of law, and grants the trustee's motion.

I. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). The trustee's motion is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (N). The court accordingly may enter a final judgment.

II. Findings of Fact

A. The Transaction

Debtor Commercial Loan Corporation ("CLC") was engaged in the business of originating and servicing commercial real estate loans. As part of its business, CLC sold participations in the loans. Most if not all of the participations were sold to financial institutions.

On March 29, 2004, CLC entered into an agreement entitled "Mortgage Loan Sale and Servicing Agreement" with an entity called "JDI Loans." Under the agreement, CLC was to "sell, assign, transfer and convey" to JDI all of CLC's "right, title and interest" to seven mortgage loans with a value of roughly $3.6 million. In return, JDI would pay a "purchase price" to CLC of just over $3.2 million, or about 90% of the loans' face value. CLC would continue to service the loans and presumably would remit the proceeds it received to JDI. However, CLC would receive no compensation for servicing the loans.

The agreement also gave both CLC and JDI virtually unrestricted rights to undo the deal. CLC could repurchase one or more of the loans at any time for any reason simply by paying a defined "repurchase price" at least equal to the face amount of the loans. JDI likewise could insist that CLC repurchase any or all of the loans by paying a defined amount representing a 10% profit to JDI. JDI's option was slightly more limited than CLC's: it could only be exercised 120 days after the date of the agreement — unless a lien or other title problem arose, in which case it could be exercised immediately. The evidence indicates that it was JDI's intention even before the closing to exercise its option and require CLC to repurchase the loans.

As it happened, all seven loans were subject to 100% participations that CLC had previously sold to certain banks. The participation agreements between CLC and the banks appear to have been fairly typical of agreements of this kind. The participating banks obtained an equitable interest in the loans. Legal title to the loans, however, remained with CLC. CLC acted as the servicer on the loans, remitting the proceeds to the participants.

JDI knew that the loans were subject to 100% participations. On several occasions before the closing, JDI asked CLC's president Peter Heuser, to identify the loan participants. JDI also asked for information about a payoff of the participating banks, and there was some discussion among counsel over whether CLC would provide payoff letters from the banks confirming that the proceeds had been used to satisfy the banks' interests. In addition, JDI's counsel proposed that CLC's counsel act as escrowee for the purpose of forwarding the funds.

CLC, however, refused to identify the participants, never provided a payoff letter, and never established an escrow. According to David Rattner, the JDI officer involved in the transaction, JDI ultimately decided that since it was not a party to the participation agreements, it had no legal responsibility to ensure that CLC paid off the participating banks. Nonetheless, a provision was tacked onto the end of the "Mortgage Loan Sale and Servicing Agreement" stating that CLC would use "all of the purchase price" to pay amounts owed to any participants. There may also have been a separate letter agreement to the same effect.

The transaction between CLC and JDI closed on March 31, 2004. JDI wired the $3.2 million to CLC's counsel. In mid-April, the mortgages and accompanying notes were transferred to JDI's counsel. They are still in counsel's possession. The $3.2 million, however, was not used to pay amounts owed to the participants, as the agreement required. For reasons that are unclear, the entire amount was paid to a single bank, Umbrella Bank (now known as Flower Bank).

About three weeks after the notes were transferred, Rattner faxed Heuser a letter in which Rattner said that JDI had been unable to reconcile with the amounts in the loan agreements the amounts JDI had received from CLC as April payments on the loans. Apparently in response, on May 20, 2004, CLC sent JDI a check for a little more than $185,000. The money came from a CLC operating account at Oak Brook Bank, an account in which CLC had commingled funds it had received on participated loans.

B. The Bankruptcy

Meanwhile, on May 13, 2004, CLC filed a petition for relief under chapter 11 of the Bankruptcy Code. Almost immediately, the U.S. Trustee and the debtor jointly asked the bankruptcy court to appoint a chapter 11 trustee. Several creditors made the same request, alleging that the principals of CLC, Heuser included, had been engaged in a massive fraud. Federal and state banking authorities, including the FDIC and the OTS, have been, and perhaps still are, investigating CLC's business. There are rumors of a federal grand jury investigation as well. On May 26, 2004, Richard Fogel was appointed trustee.

Even before Fogel was appointed, JDI had moved to modify the automatic stay to enable JDI itself to service the loans. Citing section 541(d) of the Code, 11 U.S.C. § 541(d), JDI argued the loans were not property of the estate (in which case, of course, a motion to modify the stay was unnecessary), and JDI should be allowed to exercise its rights in the loans. JDI's motion was opposed by four banks: Flower Bank, West Town Savings Bank, Howard Savings Bank, and Lincoln State Bank. Although he filed no formal objection, Fogel also disputed the merits of the motion. The court set a briefing schedule on the motion that extended into early July 2004.

C. The Proposed Settlement

At the end of June 2004, however, Fogel filed a motion under Bankruptcy Rule 9019(a), Fed. R. Bankr.P. 9019(a), and section 363(b) of the Code, 11 U.S.C. § 363(b), asking the court to approve a settlement with JDI, a settlement he said had been reached only after extensive discussions with JDI and his own independent investigation. Six creditors oppose the settlement: the four banks that objected to JDI's motion to modify the stay, as well as Ottawa Savings Bank and Twin Oaks Savings Bank.¹

Under the proposed settlement, JDI agrees to pay the trustee $205,000; JDI assigns to the trustee its rights to any proceeds received on the loans pre-petition and deposited in the commingled CLC operating account; and JDI releases the trustee and the debtor from any claims arising out of JDI's dealings with CLC. The trustee and the debtor, in turn, release JDI from claims relating to the JDI-CLC transaction. The trustee and the debtor also acknowledge and agree that as a result of the release JDI is "the sole owner of the loans and loan documents" involved in the transaction, and the debtor relinquishes any claim it might have to the loans or loan documents. Any proceeds the trustee has received on the loans post-petition are assigned to JDI.²

The proposed agreement does leave the trustee an out: if within 270 days of the agreement's execution the trustee discovers facts that lead him in good faith to believe JDI engaged in "fraudulent acts" (a defined term) in connection with the JDI-CLC transaction, and if he reasonably expects to obtain more than $300,000 in damages, he can bring an action against JDI. The trustee's recovery in such an action is limited to $1 million. If less than $300,000 in damages is awarded, the trustee gets nothing.

At the evidentiary hearing on the motion, Fogel attested to his nearly 25 years of experience as a bankruptcy lawyer and panel trustee, described the investigation he had undertaken before reaching the settlement, and explained why he preferred to settle rather than fight with JDI.

Fogel said he considered the JDI-CLC transaction to be what it appeared to be: a loan sale. The transaction, he added, was not post-petition. (That matters, presumably, because it rules out a claim under section 549, 11...