In re Cutty's-Gurnee, Inc., Bankruptcy No. 88 B 14750
| Citation | 133 BR 934 |
| Decision Date | 07 August 1991 |
| Docket Number | 89 A 1100.,Bankruptcy No. 88 B 14750 |
| Parties | In re CUTTY'S-GURNEE, INC., Debtor. GREAT AMERICAN INSURANCE CO., Plaintiff, v. Kenneth J. BAILEY, Cristel Bailey, et al., Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
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Philip Martino, Rudnick & Wolfe, Chicago, Ill., for plaintiff.
Jon Furlow, Sonnenschein, Nath & Rosenthal, Chicago, Ill., for defendants.
This matter comes before the Court on the Complaint of Great American Insurance Company to determine the validity, extent and priority of the liens claimed by various defendants, including MorAmerica Capital Corporation. A Counterclaim was filed by MorAmerica Capital Corporation (hereinafter MorAmerica) against Great American Insurance Company (hereinafter Great American) and this matter was set for trial. Prior to trial, MorAmerica and Great American filed cross-motions for summary judgment. The parties then agreed in lieu of trial to rest their proofs in this matter on their Stipulation of Facts, filed December 5, 1990. Oral arguments were presented by the parties and this matter was taken under advisement on January 14, 1991. The Court has jurisdiction in this core proceeding pursuant to 28 U.S.C. ? 1334(b) and 28 U.S.C. ? 157(b)(2)(A), (B), (K) and (O). The following memorandum opinion shall constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
The debtor, Cutty's-Gurnee, Inc., filed its petition in bankruptcy on September 28, 1988, and both MorAmerica and Great American timely filed their proof of claims in this case. Great American holds a collateral assignment of the beneficial interests in two land trusts holding title to the "Spruce Lake Resort" property executed by Kenneth Bailey, President of the debtor, Cutty's-Gurnee, Inc. Based on these collateral assignments Great American asserts a first-priority security interest against the proceeds from the sale of the Spruce Lake property. MorAmerica, however, has filed a counterclaim against Great American asserting that MorAmerica holds a valid mortgage interest in the Spruce Lake property which is superior to the collateral assignments of beneficial interest to Great American on these grounds: (1) the debtor granted the mortgage interest to MorAmerica prior to the assignment to Great American and Great American took such assignment with actual notice of MorAmerica's prior interest; (2) Great American knowingly and purposefully used its dominion and control over the debtor and its principal, Bailey, for its own benefit, and the claim of Great American must be equitably subordinated to the MorAmerica claim pursuant to ? 510(c) of the Bankruptcy Code to prevent unjust enrichment of Great American and inequitable detriment to MorAmerica; (3) Great American has intentionally and tortiously interfered with the contractual rights of MorAmerica by refusing to exercise the power of direction over the land trusts to allow the debtor to fulfill its contractual obligation to direct the land trustees to execute a valid, enforceable mortgage instrument in favor of MorAmerica on the Spruce Lake property; and (4) that Great American breached a contractual obligation of good faith under the Uniform Commercial Code ? 1-203. Great American denies these allegations in its answer to the counterclaim.
FACTS:
The parties have stipulated to the relevant material facts to be considered by the Court and have further stipulated to the admissability of all documents contained in their respective proofs of claim, the appendices to their cross-motions for summary judgment and to the deposition testimony relied upon in their respective memoranda and appendices. On the basis of this evidence, the Court makes the following findings of fact.
The debtor herein, Cutty's-Gurnee, Inc., was incorporated on September 30, 1983, by Kenneth J. Bailey, Cutty's, Inc. and MorAmerica Capital Corporation, to develop the Spruce Lake Resort property as a trailer park. Title to the property was held in the name of two land trusts. The beneficiary of the land trusts was Kenneth Bailey. Bailey transferred his beneficial interest in the two land trusts to the debtor in exchange for (1) a mortgage on the property in the original principal amount of $1,450,656 and (2) one-third of the shares of common stock in Cutty's-Gurnee, Inc. MorAmerica contributed $300,000 in startup capital in exchange for 295,000 shares of preferred stock and one-third of the shares of common stock. Cutty's, Inc., agreed to contribute expertise and services in developing the trailer park in exchange for one-third of the shares of common stock. In May 1984, MorAmerica loaned an additional $100,000 to the debtor to be used as working capital in exchange for a promissory note and a security interest in certain retail installment contracts for the sale of trailer park units held by the debtor.
In 1985, it became apparent to the shareholders of Cutty's-Gurnee that the debtor required additional funds to complete the development of the Spruce Lake property. One of the shareholders, Cutty's, Inc., had a falling out with the debtor and was no longer an active participant in the development. At this time, MorAmerica had not been repaid under the $100,000 loan and it was not anxious to remain in a $300,000 equity position with the debtor.
Bailey also owned a garden center near the Spruce Lake project. Great American had previously provided the necessary financing for that enterprise. Bailey approached Larry Foster, the loan officer at Great American who was responsible for collecting Bailey's defaulted garden center loan, to discuss obtaining additional financing for the Spruce Lake Resort project and to attempt to cure the garden center loan default. Bailey informed Foster of the debtor's corporate structure and the fact that Cutty's, Inc., and MorAmerica each held a one-third interest in the debtor-corporation. Various financing arrangements were discussed and Foster proposed that Great American (1) purchase the outstanding installment contracts held by the debtor for $1,200,000, (2) apply $700,000 of this purchase price to the defaulted garden center loan, and (3) disburse the remaining $500,000 to the debtor for the development of the Spruce Lake project. As security for this transaction, Foster proposed that 100% of the stock of Cutty's-Gurnee be pledged to Great American. Pursuant to this proposal, Foster requested by letter dated December 27, 1985, that Bailey furnish to Great American the Cutty's-Gurnee partnership documents and "a signed copy of the transfer or assignment from your partner to you of all of his rights and interests in Cutty's-Gurnee."
Bailey, acting on this request, persuaded Cutty's, Inc., to release the stock it held and fully terminate its interest in the debtor. Bailey also approached MorAmerica regarding the refinancing proposal of Great American and the need to restructure MorAmerica's equity position. On April 9, 1986, Bailey met with Jerry Burrows, President of MorAmerica, and the parties agreed to, drafted and executed the following one page agreement (hereinafter the April 9th Agreement) which provides:
This Agreement is made and entered into this 9th day of April, 1986, by and between Cutty\'s-Gurnee, Inc., Kenneth J. Bailey and MorAmerica Capital Corporation: (1) MorAmerica Capital Corporation agrees to convert its $400,000 investment in Cutty\'s-Gurnee, Inc., in the form of Common Stock, Preferred Stock and a $100,000 note into a $400,000 note due April 10, 1987. (2) Bailey and Cutty\'s-Gurnee, Inc., agree to pay off all obligations of Cutty\'s-Gurnee, Inc., to Greyhound Leasing Company. (3) Bailey and Cutty\'s-Gurnee, Inc., agree that upon the refinancing of the Gurnee Spruce Lake Project that it will provide MorAmerica Capital Corporation with a valid second mortgage on the Spruce Lake project.
The agreement is signed by Burrows on behalf of MorAmerica and by Bailey on behalf of Cutty's-Gurnee and himself.
In addition to the April 9th Agreement, the parties have stipulated to the admissibility of a brief letter dated April 9, 1986, from Burrows to Bailey, signed by Burrows and by Bailey on behalf of Cutty's-Gurnee, Inc., which states that it is intended to confirm the Agreement and its terms, and which authorized Bailey to surrender and cancel the MorAmerica stock certificates. This letter does not refer to the obligation to grant a second mortgage to MorAmerica upon refinancing.
Bailey and Burrows both testified that they intended the MorAmerica mortgage interest to be second to the first mortgage held by Bailey at that time. Burrows also testified that he understood the refinancing negotiations to be virtually completed and the actual loan to be imminent. Furthermore, Burrows stated that he understood that the purpose of the refinancing was to replace the existing line of receivables financing through Greyhound Leasing and that part of the loan was going to be used to clean up the prior financing.
Copies of the April 9, 1986 Agreement and the accompanying letter were delivered to Great American in December 1986. In a letter dated April 30, 1986, Ron Hayes, General Counsel for Great American, requested "all documents regarding the termination of the relationship with and the interest of Cutty's, Inc., Richard J. Cutler and MorAmerica Capital Corporation" in Cutty's-Gurnee. Bailey delivered the April 9 Agreement along with a number of other corporate documents to Foster in December of 1986 pursuant to this request. The documents included a two page table of contents which listed the "MorAmerica Agreement with Bailey" as item # 9.
No further action was taken by MorAmerica and Cutty's-Gurnee regarding the April 9 Agreement until August 12, 1986. At that time MorAmerica obtained a Mortgage Note from Cutty's-Gurnee,...
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