In re Kress Road Partnership
| Decision Date | 25 September 1991 |
| Docket Number | Bankruptcy No. B 05776,90 A 0242. |
| Citation | 134 BR 301 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re KRESS ROAD PARTNERSHIP, Debtor. KRESS ROAD PARTNERSHIP, Plaintiff. v. FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF ELGIN, et al. Defendants. |
F. Dean Armstrong of F. Dean Armstrong, P.C., Flossmoor, Ill., for plaintiff.
Ray Ostler of Gombert, Sharfman, Gold & Ostler, P.C., Chicago, Ill., for defendants.
The Defendant, First Federal Savings & Loan Association of Elgin1 ("First Federal"), has moved to dismiss counts one, four, five and six of the First Amended Complaint and Jury Demand ("Complaint") of the Plaintiff-Debtor Kress Road Partnership ("Kress Road" or "Partnership").2 Three grounds are set forth in support of First Federal's Motion: (i) The Complaint fails to set forth a claim upon which relief can be granted, (ii) The state court Judgment of Foreclosure and Sale is res judicata and (iii) Kress Road is collaterally estopped by the state court's Judgment of Foreclosure from relitigating the validity of First Federal's lien. For the reasons set forth in this Memorandum Opinion, First Federal's motion will be granted.
The following facts are gleaned from the Complaint and its exhibits. In June of 1980, Louis Ross ("Ross") and Francis Callaghan ("Callaghan") were attempting to find individuals to invest with them in a limited partnership to develop property. On July 1, 1980, various individuals entered into a limited partnership agreement ("Partnership Agreement") with Callaghan and Ross Development Corporation ("CRDC"), a company owned by Callaghan and Ross.3 (Complaint, Ex. A). Pursuant to the Partnership Agreement, CRDC was the general partner of Kress Road holding a ten percent interest in the profits and losses of the Partnership with the remaining ninety percent spread among the limited partners. The purpose of the Partnership was to "acquire" and "evaluate further construction" on ten acres of real estate improved with a partially completed building located in DuPage County, Illinois ("Property"). (Complaint, Ex. A at ¶ 3).
The Partnership Agreement provided with exceptions not pertinent here that: "the General Partner is hereby designated and given authority on behalf of the Partnership to sign, seal, deliver and accept ... notes, security deeds, mortgages ... and any and all other documents necessary incidental to the sale ... or evidencing of indebtedness of the Partnership." (Complaint, Ex. A at ¶ 19c). The Partnership Agreement also provided: "General Partner may not sell, mortgage ..., or refinance any mortgage on the Partnership's real estate or other property, or any substantial portion thereof, without the prior written consent of Partners owning 51% of the capital interest in the Partnership." (Complaint, Ex. A at ¶ 14).
The Complaint alleges that in January of 1986, Callaghan and Ross, without the knowledge or consent of the limited partners, caused the Property to be conveyed to a land trust with the Defendant Chicago Title and Trust Company as trustee ("CT & T" or "Trustee"). The trust agreement entered on January 20, 1986 was signed by CRDC by Callaghan and Ross and bore the legend "Amended" (Complaint, Ex. C). The Amended Trust Agreement provided that title to the Property was placed in trust with CT & T as Trustee, Kress Road as beneficiary, with the power of direction in CRDC. All notices or inquiries concerning the Property were to be sent to Callaghan and Ross Financial Corporation. (Complaint, Ex. C).
Pertinent parts of the Amended Trust Agreement are as follows:
Nowhere in the Amended Trust Agreement was there a provision similar to the one in the Partnership Agreement requiring CRDC to obtain approval of 51% of the limited partners before refinancing or mortgaging the Property.
According to the Complaint, Callaghan and Ross, without knowledge or consent of the limited partners, arranged for a $635,000 construction loan from First Federal. On March 14, 1986 a loan agreement was executed which provided that $635,000 would be loaned by First Federal to Callaghan & Ross evidenced by a mortgage note ("Mortgage Note") (Complaint, Ex. D) and secured by a mortgage on the Property ("Mortgage") (Complaint, Ex. F).
First Federal proceeded to loan $635,000 pursuant to the Mortgage Note and Mortgage duly executed by CT & T as Trustee. (Complaint, Exs. D and F). The Mortgage was dated March 14, 1986, and was recorded with the Recorder of Deeds for DuPage County, Illinois on April 10, 1986 as Document 86-3705. (Complaint, Ex. F). The Mortgage Note dated March 14, 1986 was due and payable on October 1, 1987. (Complaint, Ex. D). The purpose of the loan was to develop the Property. It is not clear from the Complaint if all funds were used for the Property. The court accepts for purposes of this motion that not all loan proceeds were used to improve the Property.
Though the Complaint also alleges that First Federal failed to secure a title policy, First Federal has supplied a copy of such a policy of even date with the recording date of the Mortgage and therefore the court will not consider this allegation as a well pleaded fact. (See Bankruptcy Rule 9011).
On June 13, 1988 sometime after the maturity date of the Mortgage Note, attorneys for First Federal notified Callaghan and Ross Financial Corporation that the loan was in default. (Complaint, Ex. H). On November 18, 1988, First Federal commenced suit in the Circuit Court of DuPage County to foreclose the Mortgage securing its Mortgage Note. A default Judgment of Foreclosure was entered on November 22, 1989, (Complaint, Ex. I). In the Judgment of Foreclosure, the Circuit Court found that First Federal held a valid mortgage lien on the Property.4 (Complaint, Ex. I).
On March 28, 1990, Kress Road commenced a case under Chapter 11 of the Bankruptcy Code. On April 3, 1990, Kress Road filed a complaint as an adversary proceeding within the bankruptcy case seeking relief against First Federal and others. Thereafter, First Federal sought permission of the court to sell the Property to the DuPage County Airport Authority for $960,000. (Complaint at ¶ 40). The court authorized the sale on July 15, 1990 and ordered delivery of $898,154.79 of the sale proceeds to First Federal. (Complaint at ¶ 41). The court retained jurisdiction over the funds until a ruling on the validity of First Federal's lien.
On January 23, 1991 Kress Road filed its First Amended Complaint and Jury Demand seeking among other relief to have the Mortgage securing First Federal's Mortgage Note declared invalid. First Federal subsequently filed a motion to dismiss the counts pertaining to it.
The court will first consider First Federal's allegation that the Complaint fails to state a cause of action. Such a motion is taken under Rule 7012(b) of the Federal Rules of Bankruptcy Procedure (hereinafter "Bankruptcy Rules") which incorporates Rule 12(b) of the Federal Rules of Civil Procedure.
A claim should not be dismissed for failure to state a cause of action unless the court is convinced that the Plaintiff can prove no set of facts in support of its claim which would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Miller v. School Dist., 495 F.2d 658, 661, reh. den., 500 F.2d 711 (7th Cir.1974); Yaworski v. Pate, 717 F.Supp. 624, 625 (N.D.Ill.1989); Davis v. Frapolly, 717 F.Supp. 614, 615 (N.D.Ill. 1989). The purpose of a motion to dismiss is to determine the sufficiency of the complaint, and not the merits of the case. Barkman v. Wabash, Inc., 674 F.Supp. 623, 629 (N.D.Ill.1987). In determining the sufficiency of the complaint, the court must accept the facts alleged in the complaint as true, together with all reasonable inferences and determine whether the Plaintiff has any basis for its claim. Yeksigian v. Nappi...
To continue reading
Request your trial