In re Luedtke

• Decision Date: 03 September 2008
• Docket Number: Adversary No. 08-7041.,Bankruptcy No. 07-70924.
• Citation: 394 B.R. 893
• Parties: In Re John Robert LUEDTKE, Debtor. John Robert Luedtke, Plaintiff, v. Commerce Bank N.A., Defendant.
• Court: U.S. Bankruptcy Court — Central District of Illinois

394 B.R. 893

In Re John Robert LUEDTKE, Debtor John Robert Luedtke, Plaintiff, v. Commerce Bank N.A., Defendant.

Bankruptcy No. 07-70924.

Adversary No. 08-7041.

United States Bankruptcy Court, C.D. Illinois.

September 3, 2008.

Sumner Bourne, Peoria, IL, for Plaintiff.

Christopher E. Sherer, Giffin, Winning, Cohen & Bodewes, P.C., David A. Herman, Springfield, IL, for Defendant.

OPINION

MARY P. GORMAN, United States Bankruptcy Judge.

The Plaintiff, John Robert Luedtke, is the Debtor in a case filed under Chapter 11 of the Bankruptcy Code and is in the process of carrying out the terms of his confirmed, liquidating Chapter 11 Plan. Mr. Luedtke has filed an Amended Complaint which seeks to avoid the lien of the Defendant, Commerce Bank N.A., on real estate which is held in a land trust. Mr. Luedtke is one of the beneficiaries of the land trust. Count One of the Amended Complaint is based on the Debtor's status as a hypothetical lien creditor under 11 U.S.C. § 544(a)(1), and seeks to avoid the lien of Commerce Bank against his beneficial interest in the land trust because the lien was not properly created pursuant to the terms of the trust agreement. Count II of the Amended Complaint seeks a declaratory order that the Commerce Bank mortgage is not a valid lien against the real estate and the land trust because it was not signed by the trustee of the land trust as required by the trust agreement. Commerce Bank has filed a Motion to Dismiss both counts of the Amended Complaint. For the reasons set forth herein, the Motion to Dismiss will be granted without prejudice.

Mr. Luedtke holds a 10% beneficial interest in Trust Number TW711 ("Trust TW711").¹ Trust TW711 was executed on June 25, 1996, and holds title to an apartment building located at 711 South Towanda Avenue, Normal, Illinois ("the Towanda Property"). Bank of Illinois in Normal is the trustee of Trust TW711. There are eight other beneficiaries, and they hold the remaining 90% beneficial interest in Trust TW711. Neither the remaining beneficiaries nor the trustee are parties to this proceeding.

Commerce Bank claims a mortgage against the Towanda Property. The mortgage was recorded with the McLean County Recorder of Deeds on October 12, 2001. The mortgage was executed by two of the land trust beneficiaries—Mr. Luedtke and Michael R. Hill. Mr. Luedtke signed the mortgage as "Authorized Signer for Trust Number TW711, Bank of Illinois in Normal, Trustee of Trust Number TW711" and as "Trustee of Bank of Illinois in Normal". Mr. Hill signed the mortgage as "Trustee of Bank of Illinois in Normal".

Mr. Luedtke alleges that the mortgage was not properly created pursuant to the terms of Trust TW711 because the mortgage was signed by two of the beneficiaries of the trust rather than by the trustee. Therefore, Mr. Luedtke argues that the Commerce Bank mortgage should be voided as a lien against his beneficial interest in the land trust, the Towanda Property, and the land trust. Commerce Bank's Motion to Dismiss asserts that Mr. Luedtke has not stated causes of action upon which relief may be granted, and that he does not have standing to contest the validity of the mortgage on the Towanda Property.

In order for a plaintiff to defeat a motion to dismiss a complaint under Federal Rule of Civil Procedure 12(b)(6) and its counterpart Federal Rule of Bankruptcy Procedure 7012, it must appear from the pleadings that the plaintiff has set forth sufficient factual matter to establish plausible—not just speculative—grounds to be entitled to the relief requested. Bell Atlantic Corporation v. Twombly, 550 U.S. ___, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007). The court must take as true all well-pleaded material facts in the complaint, and must view these facts and all reasonable inferences which may be drawn from them in a light most favorable to the non-moving party. See Northern Trust Co. v. Peters, 69 F.3d 123, 129 (7th Cir. 1995). Documents attached to a complaint are considered part of the pleadings. See Fed.R.Civ.P. 10(c); Fed.R.Bankr.P. 7010; McCready v. eBay, Inc., 453 F.3d 882, 891 (7th Cir.2006).

A land trust is a device by which real estate is conveyed to a trustee under an arrangement wherein the full management and control of the property is reserved for the beneficiaries. See generally, Henry W. Kenoe, Kenoe on Land Trusts (Illinois Institute for Continuing Legal Education, 1989). Land trusts are typically created with two instruments, a deed in trust and a trust agreement. The deed in trust transfers all legal and equitable title to real property to the trustee. People v. Chicago Title & Trust Co., 75 Ill.2d 479, 488, 389 N.E.2d 540, 543, 27 Ill.Dec. 476, 479 (1979). Generally, a trust agreement is executed with the deed in trust and describes the rights of the beneficiaries to retain control over the management, use, and disposition of the property, and to receive all proceeds from the property. The trustee usually has no duties or powers other than to convey, mortgage, or deal with real estate as directed by the beneficiaries, or to sell or liquidate the property at the termination of the trust. Because the beneficiaries hold only personal property interests in the trust, they do not possess a direct interest in the real estate owned by the trust. Redfield v. Continental Cas. Corp., 818 F.2d 596, 607 (7th Cir.1987).

Trust TW711 is a conventional Illinois land trust. A standard trust agreement form was used to create the trust. Trust TW711 provides that the title to the Towanda Property has been transferred to Bank of Illinois in Normal as trustee and that the beneficiaries are entitled to the earnings and proceeds of the property. As trustee, Bank of Illinois in Normal holds legal and equitable title to the Towanda Property, but its powers are limited to entering into real estate transactions and bringing legal actions regarding the property at the direction of Mr. Luedtke or Mr. Hill. The authority to make "deeds or mortgages or trust deeds" is specifically delegated to the trustee. The beneficiaries hold a personal property interest in the land trust. Thus, Mr. Luedtke does not hold a direct ownership interest in the Towanda Property.

Mr. Luedtke does have the "rights and powers of ... a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien" on property in question.² 11 U.S.C. § 544(a)(1); see also 11 U.S.C. § 1107. The Seventh Circuit has explained that this "strong arm power" functions much like a foreclosure:

If at the time of ... filing some hypothetical unsecured creditor could have obtained a judicial lien superior to the interest of the party bringing a secured claim in the bankruptcy proceeding, the estate can avoid the interest. See In re Leonard, 125 F.3d 543, 545 (7th Cir. 1997). But unlike a regular foreclosure, the property simply becomes the estate's free of the secured lien.

In re Airadigm Communications, Inc., 519 F.3d 640, 650 (7th Cir.2008).

In Count I of the Amended Complaint, Mr. Luedtke seeks to "void the Commerce Mortgage as an alleged lien against the Debtor's beneficial interest in the Land Trust pursuant to 11 U.S.C. § 544(a)(1)". Commerce Bank does not dispute Mr. Luedtke's status as a hypothetical judicial lien creditor. However, Commerce Bank does not claim a lien on Mr. Luedtke's beneficial interest in the land trust. Commerce Bank's mortgage claims a lien only on the Towanda Property. Because the Court cannot avoid a lien that does not exist, i.e. a Commerce Bank lien on Mr. Luedtke's beneficial interest in the land trust, Count I must be dismissed for failure to state a claim for relief. Mr. Luedtke has not set forth sufficient factual matter to be entitled to the relief he requested in Count I.

In Count II of the Amended Complaint, Mr. Luedtke seeks a declaratory order finding that "the Commerce Mortgage is not a valid lien against the Towanda property and the Land Trust due to the lack of a signature by the Trustee as required by the explicit provisions of the Trust Agreement." Commerce Bank urges dismissal of this Count because Mr. Luedtke lacks standing to assert that the mortgage does not create a valid lien against the Towanda Property and the land trust. The burden is on the plaintiff to plead sufficient facts for the court to find that he has standing. Warth v. Seldin, 422 U.S. 490, 501-02, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975).

Pursuant to the terms of his confirmed, liquidating Chapter 11 Plan, Mr. Luedtke is charged with the task of recovering, managing and selling all "property of the estate" which is broadly defined in the Bankruptcy Code. See 11 U.S.C. § 541. The nature of a debtor's interest in property is determined by reference to state law. Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 1205, 167 L.Ed.2d 178 (2007). But federal bankruptcy law determines what constitutes property of the estate for § 541 purposes. Matter of Yonikus, 996 F.2d 866, 869 (7th Cir.1993); In re Fetter, 354 B.R. 242, 245 (Bankr. C.D.Ill.2006). A trustee or debtor in possession clearly has standing to challenge liens asserted against property of the bankruptcy estate. In re Total Containment, Inc., 335 B.R. 589, 622 (Bankr. E.D.Pa.2005). The converse is also true: a debtor in possession does not have standing to challenge liens asserted against property that is not property of the estate. See In re Marrs-Winn Co., Inc., 103 F.3d 584, 589 (7th Cir.1996)(bankruptcy court's jurisdiction does not extend beyond a debtor's interest in certain property).

It is well-settled that the owner of a beneficial interest in an Illinois land trust does not have standing to maintain a quiet title action. In In re Stowe, 355 B.R. 88 (Bankr.N.D.Ill.2006), for example, the Chapter 7 trustee removed a state court action in which the debtor, as one of the beneficial...