In re Lunan Family Restaurants, Bankruptcy No. 94 B 21227. Adv. No. 95 A 00110.

• Decision Date: 03 April 1996
• Docket Number: Bankruptcy No. 94 B 21227. Adv. No. 95 A 00110.
• Citation: 194 BR 429
• Parties: In re LUNAN FAMILY RESTAURANTS, Debtor. MARRIOTT FAMILY RESTAURANTS, INC., Plaintiff, v. LUNAN FAMILY RESTAURANTS and Bank of America Illinois, Defendants. BANK OF AMERICA ILLINOIS, Cross-Plaintiff and Counterplaintiff, v. LUNAN FAMILY RESTAURANTS, Cross-Defendant, and Marriott Family Restaurants, Counterdefendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

194 B.R. 429 (1996)

In re LUNAN FAMILY RESTAURANTS, Debtor.

MARRIOTT FAMILY RESTAURANTS, INC., Plaintiff, v. LUNAN FAMILY RESTAURANTS and Bank of America Illinois, Defendants.

BANK OF AMERICA ILLINOIS, Cross-Plaintiff and Counterplaintiff, v. LUNAN FAMILY RESTAURANTS, Cross-Defendant, and Marriott Family Restaurants, Counterdefendant.

Bankruptcy No. 94 B 21227. Adv. No. 95 A 00110.

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

April 3, 1996.

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Mitchell E. Jones, John A. Lipinsky, Rooks Pitts and Poust, Chicago, IL, for Plaintiff Marriott.

Thomas S. Kiriakos of Mayer Brown & Platt, Chicago, IL, for Defendant Bank of America Illinois.

Thomas E. Raleigh, Brenda Porter Helms, Raleigh Helms & Finke, Chicago, IL, for Defendant Lunan.

MEMORANDUM OPINION ON BAI'S MOTION FOR SUMMARY JUDGMENT

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary case relates to the bankruptcy proceeding filed by Lunan Family Restaurants ("Lunan" or "Debtor") under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. Plaintiff Marriott Family Restaurants, Inc. ("Marriott") has filed a three-count Adversary Complaint against Lunan and Bank of America Illinois ("BAI") (formerly known as Continental Bank) to determine the validity, extent, and/or priority of BAI's lien and the interests of Marriott and Lunan in certain proceeds from sale of Debtor's restaurant property. Marriott also maintains in each count that it is entitled to an administrative priority claim from the sale.

BAI filed an answer, cross-claim, and counterclaim to determine the validity, priority, and extent of its asserted liens or other interests in the property that was sold and for declaratory relief. Both the Complaint and Counterclaim seek a declaration as to whether BAI (as mortgagee secured by the sold properties) or Marriott (as lessee or sublessor of those properties) is entitled to proceeds from sale of four restaurants (known as the Leased Restaurants) which Lunan formerly owned in fee simple.

The defendant BAI moved for summary judgment on all three counts of the complaint and on both counts of its cross-claim and counterclaim. The parties filed statements and cross-statements of undisputed facts under Local Bankruptcy Rule 402.M and N.¹ Pursuant thereto and to the Adversary pleadings, the undisputed facts follow. Based on those facts and for reasons stated herein, by separate order BAI's Motion for Summary Judgment is allowed.

Facts as to Which There is No Material Dispute

Lunan Family Restaurants, the Debtor, is an Illinois Limited Partnership. The purpose of this partnership was to acquire, develop, and operate Shoney's franchises in the Chicagoland and Northern Indiana area. In October 1990, Lunan entered into a Market Development Agreement with Shoney's to develop the Shoney's franchises; operations began in October 1991. Also in October 1991, Lunan acquired 29 properties from Marriott which were then operating under the name of WAGS restaurants. Some of the WAGS restaurants were sold to Lunan in fee simple and some of them were leased from Marriott to the Debtor. BAI provided the financing necessary to complete acquisition of stores as well as funds for remodeling and converting the stores into Shoney's. The purchase price was $19.2 million, $12 million of which was paid by Lunan to Marriott in cash. Marriott also provided $7 million in subordinated notes and $1.5 million in equity through loans to two of Lunan's principals. Repayment of the notes was subordinated to repayment of the debt due to BAI.

At the end of 1993, Debtor posted a loss and realized that anticipated sales were not sufficient to meet the debt obligations. Thus, on March 30, 1994, Lunan, BAI, and Marriott entered into an asset transfer and debt restructuring agreement ("Restructuring Agreement"). In this agreement, Marriott extinguished the $7 million in subordinated notes and the $1.5 million in loans in exchange for a "leasing" arrangement on certain properties owned by Lunan in fee and for proceeds from sale of certain other fee properties.

Lunan filed its voluntary petition for Chapter 11 reorganization on October 25, 1995. Subsequently, the four restaurants involved in this adversary proceeding (the "Leased Restaurants") were sold free and clear of all liens with liens to attach to sale proceeds. The Hoffman Estates Property was sold pursuant to an order dated January 26, 1995. Under the terms of that sale, Lunan neither assumed nor rejected Marriott's leasehold interest. See Order Authorizing Sale of Hoffman Estates and Buffalo Grove Properties and Payment of Real Estate Commission dated as of January 26, 1995 ("Hoffman Estates Order"). The Orland Park Property was sold pursuant to an order dated March 17, 1995. That sale was expressly made free and clear of Marriott's interest in the Orland Park Property. See Order Authorizing the Sale of Property of the Estate Other than in the Ordinary Course of Business; Approving the Assumption and Assignment of Subleasehold Interests; and Authorizing Payment of Broker's Commission, dated March 17, 1995 at ¶ 3 ("Orland Park Order"). On April 27, 1995, the Ashland Avenue Property was sold pursuant to order. See Order Authorizing Sale of Ashland and Addison Properties and Payment of Real Estate Commission ("Ashland Order"). On August 31, 1995, the Evergreen Park Property was sold pursuant to order. See Order Authorizing Sale of Evergreen Park Property and Payment of Real Estate Commission ("Evergreen Park Order"). Marriott's lease and sublease in the Ashland Avenue and Evergreen Park Properties were deemed to be rejected. See Ashland Order at ¶ h; Evergreen Park Order at ¶ b.

To supply more detail to the foregoing, the following additional facts are found to be without material dispute:

1. Marriott Family Restaurants, Inc. ("Marriott") is a Maryland Corporation. 402.M at ¶ 1.

2. Lunan is an Illinois Limited Partnership and the debtor in these bankruptcy proceedings. 402.M at ¶ 2.

3. BAI is a state banking corporation. 402.M at ¶ 3.

4. Prior to March 30, 1994, Lunan had committed certain defaults under the September 30, 1991, Loan and Security Agreement ("Bank Agreement")² between Lunan and BAI as amended by the First Amendment and Extension Agreement dated as of November 29, 1993. 402.M at ¶ 8.

5. On March 30, 1994, BAI and Lunan entered into an Amended and Restated Loan and Security Agreement ("Amended Bank Agreement") and related security agreements, instruments, and documents. 402.M at ¶ 9.

6. To secure its obligations under the Loan Agreement, Lunan executed a mortgage in favor of BAI and covering, inter alia, the Leased Restaurants, which was recorded October 2, 1991 ("Mortgage"), as document number XX-XXXXXX with the Cook County Recorder and which was amended by the First Amendment to Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement which was recorded in the Cook County Recorder's office on April 22, 1994, as Document No. 94361947 ("Amended Mortgage"). 402.M at ¶ 10.

7. Prior to March 30, 1994, Lunan was in default under the terms and conditions of a Restaurant Purchase Agreement dated September 25, 1990, by and between Marriott and Lunan, and as amended, and all related documents, including, without limitation, certain subleases for various premises, concerning the sale to Lunan by Marriott of 29 former Wag's Restaurants. 402.M at ¶ 11.

8. As part of the restructuring, Lunan wanted to restructure its debt with Marriott and change its equity position with respect to certain Restaurants. In order to accomplish the restructuring, Lunan, Marriott, and BAI entered into an Asset Transfer and Debt Restructuring Agreement dated as of March 30, 1994 ("Restructuring Agreement"). 402.M at ¶ 12.

9. In pertinent part, the Restructuring Agreement provided:

(i) Lunan would terminate Subleases on six Restaurants and turn the Restaurants over to Marriott. BAI agreed to release its liens on the leasehold interests and the furniture, fixtures and equipment located at those six restaurants;

(ii) Lunan would lease to Marriott four of the Restaurants owned in fee by Lunan at a rental of one dollar per year. Marriott would sublease the Leased Restaurants back to Lunan for an annual rental per unit of $25,000 for the first year and increasing each year that the New Subleases were in effect. Upon Lunan\'s repayment to BAI of all Liabilities owing to BAI, BAI agreed to release its lien on the Leased Restaurants and Lunan agreed to transfer its fee interests in the Leased Restaurants to Marriott for ten dollars each;

(iii) Lunan would sell two Restaurants to BC Chicago, Inc. BAI agreed to release its liens on the two Restaurants and agreed that 50% of the net proceeds would be distributed to Marriott and 50% would be distributed to BAI; and

(iv) Lunan would actively market and sell four restaurants owned in fee by Lunan, and BAI agreed that 20% of the net proceeds would be distributed to Marriott (until Marriott was paid a total of $600,000 from the sales to BC Chicago, Inc. and these sales) and 80% would be distributed to BAI. 402.M at ¶ 13.

10. Certain "Leased Restaurants" referenced herein, were owned in fee simple by Lunan and consisted of the following properties: (a) 14860 LaGrange Road, Orland Park, Illinois; (b) 3020 North Ashland Avenue, Chicago, Illinois; (c) 2250 Barrington, Hoffman Estates, Illinois; and (d) 2507 West 9th Street, Evergreen Park, Illinois. 402.M at ¶ 14.

11. The provisions of the leases and the new subleases were set forth in Section 2.13.1 of the Restructuring Agreement. 402.M at ¶ 15.

12. In the Restructuring Agreement, Marriott acknowledged that the Mortgage continued to be superior and in all respects senior to leases on the Leased Restaurants and the new subleases with respect to the Leased Restaurants.³ 402.M...