In re Ehrlich

• Decision Date: 28 March 1986
• Docket Number: Adv. No. 85 A 649.,Bankruptcy No. 85 B 4065
• Citation: 59 BR 646
• Parties: In re Arthur EHRLICH, Debtor. Darrell J. GOLDBERG, Plaintiff, v. Arthur EHRLICH and The Cosmopolitan National Bank of Chicago as Trustee under Trust No. 21954, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

59 B.R. 646 (1986)

In re Arthur EHRLICH, Debtor Darrell J. GOLDBERG, Plaintiff, v. Arthur EHRLICH and The Cosmopolitan National Bank of Chicago as Trustee under Trust No. 21954, Defendants.

Bankruptcy No. 85 B 4065, Adv. No. 85 A 649.

United States Bankruptcy Court, N.D. Illinois, E.D.

March 28, 1986.

Paul McCambridge, Chicago, Ill., for plaintiff.

Douglas J. Lipke of Lord, Bissell & Brook, Chicago, Ill., for defendants.

Stanley M. Cahn and William R. Yowell, Chicago, Ill., Michael Weininger of Katz, Randall & Weinberg, Chicago, Ill., for Borg-Warner Acceptance Corp., intervenor.

MEMORANDUM AND ORDER

JOHN D. SCHWARTZ, Bankruptcy Judge.

This matter is before the Court on the motion of the intervenor Borg-Warner Acceptance Corporation ("Borg-Warner") for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) as incorporated by Bankruptcy Rule 7012(c).

Darrell Goldberg ("Goldberg") filed an adversary complaint against Arthur Ehrlich ("Ehrlich"), the debtor in a Chapter 11 proceeding under the Bankruptcy Code. (11 U.S.C. § 101 et seq.) Goldberg alleges that he was the sole beneficiary of a land trust, the subject of which was certain real estate ("Property"). Goldberg further alleges that Ehrlich fraudulently caused the conveyance of the Property to a second land trust and named himself the sole beneficiary of the second land trust. Goldberg also claims that Ehrlich fraudulently caused the second land trustee to mortgage the Property to secure his $600,000 loan from Borg-Warner.

Goldberg requests a reformation of the second land trust containing the Property. He also asks that any mortgages executed by Ehrlich be declared void and unenforceable.

Having received the Court's permission to intervene in the adversary proceeding, Borg-Warner in its motion asserts that its mortgage of property is valid and enforceable. Goldberg claims that Borg-Warner's mortgage is unenforceable because Borg-Warner knew or should have known of Goldberg's beneficial interest in the second land trust.

Thus, the issue before the Court as presented by Borg-Warner's motion is whether Borg-Warner is a bona fide mortgagee who took the mortgage on the Property without notice of Goldberg's alleged interest.

FACTS

Debtor-defendant Ehrlich listed the beneficial interest in a land trust on his schedule of assets in his Chapter 11 petition. Cosmopolitan National Bank of Chicago ("Cosmopolitan") as land trustee under Trust No. 21954, is the record owner of the Property which is located in Antioch, Illinois. Ehrlich asserts that he is the sole beneficiary of the land trust.

Goldberg asserts that Ehrlich's claim of ownership of the beneficial interest of the Cosmopolitan land trust is fraudulent and that he, Goldberg, is its sole owner. Goldberg asserts that his father, Jack Goldberg, acquired the Property in 1962, and placed it in Land Trust No. 1429 with the First National Bank of Waukegan. Pursuant to Jack Goldberg's will, upon his death, the Property became a part of the residuary trust which was administered by the American National Bank and Trust Company of Chicago ("American").

The Property is improved with a commercial building and is currently occupied by Jack's of Antioch, d/b/a Four Squires ("Jack's"). Jack's occupies the Property under a lease originally executed on August 14, 1959, for a term of fifteen years and four months. Four Squires Buying Group, Inc. took an assignment of the leasehold as evidenced by a Supplemental Lease Agreement dated January 22, 1964. As beneficiaries of the residuary trust with American, Goldberg and his brother, Jeffrey, received the rents and profits from the management of the Property until the trust terminated in October 1975.

Goldberg alleges that the monthly rents from the Property are first applied to the monthly mortgage installment to the Riverdale Bank, mortgagee, with the balance deposited to Goldberg's accounts at the Riverdale Bank. Goldberg alleges that he has paid all real estate taxes, insurance premiums, annual trustee's fees, and repairs for the Property since its conveyance to the Cosmopolitan Trust.

Goldberg claims that he placed his confidence in Ehrlich and relied on him for financial advice regarding the management of the Property. In March 1976, Goldberg requested Ehrlich's assistance in obtaining a loan. Ehrlich assured Goldberg that Goldberg could obtain a loan at either the Riverdale Bank or the Cosmopolitan Bank. Goldberg claims that Ehrlich recommended that the Property be transferred from Trust No. 1429, with the First National Bank of Waukegan, to a land trust at Cosmopolitan in furtherance of the loan transaction.

In March 1976, Goldberg and his brother, as owners of the beneficial interest, signed a letter directing the First National Bank of Waukegan, as land trustee under Trust No. 1429, to convey the Property to Cosmopolitan as land trustee under Trust No. 21954. (Adversary Complaint, Paragraph 9.) Goldberg makes no claim that he and his brother were unaware they were authorizing the conveyance when they signed the letter of direction. The conveyance of the Property was completed in March 1976. Goldberg asserts that Ehrlich never made any of the trust documentation available to Goldberg or to his brother Jeffrey after the conveyance of the Property to the Cosmopolitan trust. Goldberg also contends that since Jeffrey's death in January 1977, Ehrlich has represented to Goldberg that Goldberg should be sole beneficiary of the Cosmopolitan trust.

Borg-Warner obtained the mortgage on the Property from the Cosmopolitan as land trustee and mortgagor on December 7, 1983. The mortgage secured Ehrlich's debt to Borg-Warner of $600,000 and was recorded on December 15, 1983, in the office of the Recorder of Deeds of Lake County, Illinois, as document 2256711. Borg-Warner's mortgage is junior to a mortgage lien created by a trust deed from Cosmopolitan to the Riverdale Bank, securing a debt of $105,000. This lien is dated December 8, 1976, and was recorded in the office of the Recorder of Deeds of Lake County, Illinois on January 3, 1977, as document 21954.

Goldberg further alleges that in late March 1985, Jack's notified Goldberg that Borg-Warner had served notice of an assignment of rents executed by Cosmopolitan and Ehrlich, naming Ehrlich as sole beneficiary of the Cosmopolitan land trust. Jack's made the $2,000 monthly rent check for May 1985 payable to Borg-Warner pursuant to the assignment of rents agreement, although Borg-Warner later released the check to be credited to the Riverdale Bank mortgage account. After the deduction of the Riverdale Bank mortgage payment, the balance of the rent check was credited to Goldberg's accounts. Goldberg claims that Ehrlich represented to Goldberg that Ehrlich's loan obligation to Borg-Warner had been settled.

Borg-Warner has interposed two affirmative defenses to Goldberg's claim. First, Borg-Warner asserts it is a bona fide mortgagee because it relied on the deed in trust to the mortgagor, Cosmopolitan and took the mortgage without knowledge of Goldberg's alleged interest in the Property. Borg-Warner recorded its junior mortgage on the Property on December 15, 1983, and asserts that pursuant to the Illinois Recording Act, it is entitled to priority over unrecorded interests of which it had no notice. ("An Act concerning conveyances". Ill. Rev.Stat. ch. 30 ¶ 29 (1983); hereinafter, the "Recording Act".)

Second, Borg-Warner contends that it was Plaintiff's lack of due care and misplaced trust in Ehrlich which allowed the execution of Borg-Warner's junior mortgage to secure the $600,000 loan, whereas Borg-Warner took all the necessary legal steps to safeguard its interest in the Property. Therefore, Borg-Warner asserts that it should prevail under...