In re Motel Inv. Group, Inc.

• Decision Date: 23 February 1994
• Docket Number: 93 A 00595.,Bankruptcy No. 93 B 04960
• Citation: 164 BR 283
• Parties: In re MOTEL INVESTMENT GROUP, INC., Debtor. MOTEL INVESTMENT GROUP, INC., Plaintiff, v. Michael WU, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

164 B.R. 283 (1994)

In re MOTEL INVESTMENT GROUP, INC., Debtor.

MOTEL INVESTMENT GROUP, INC., Plaintiff, v. Michael WU, Defendant.

Bankruptcy Nos. 93 B 04960, 93 A 00595.

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

February 23, 1994.

COPYRIGHT MATERIAL OMITTED

Michael J. Davis, Flynn, Cosentino, Ltd., Lisle, IL, for plaintiff.

Thomas Jaros, Smith, Williams & Lodge, Chicago, IL.

Arnold Landis, Chicago, IL, for defendant.

J. Joseph Little, Hamblet, Casey, Oremus & Valin, Chicago, IL.

William Hunter, Chicago, IL.

Edward Bradley, Chicago, IL.

MEMORANDUM OPINION AND FINDINGS OF FACT AND CONCLUSIONS OF LAW

ERWIN I. KATZ, Bankruptcy Judge.

Motel Investment Group, Inc. ("Debtor") is a corporation formed to acquire a motel property (the "Motel"). The Motel was owned and operated by Michael Wu ("Wu"). Wu, together with John Huang, William Lin and Judy Chen, formed the corporate debtor as a vehicle to transfer the property to the new group who would then finance its rehabilitation and conversion into a Best Western Inn. After Debtor acquired the Motel through an oral installment contract (the "Agreement"), and renovations were completed, a dispute arose between Wu and the other shareholders. Debtor fell into arrears on payments due under the Agreement. Wu filed suit against Debtor in state court seeking Debtor's ouster under the Illinois Forcible Entry and Detainer Act (735 ILCS §§ 5/9-101—321 (1993)). A Default Judgment and Order of Possession was entered in Wu's favor. Debtor succeeded in having the default judgment vacated and obtained leave to answer or otherwise plead. However, rather than wage the battle for possession in state court, Debtor chose to file its bankruptcy petition. It then filed this Complaint for Turnover of the Motel under 11 U.S.C. § 542. Wu objects to the turnover and seeks, by counterclaim, a judicial determination that the Agreement is null and void, and that Debtor has forfeited all its rights thereunder, including any right to recover payments made thereunder, and its interest in the Motel. After considering the evidence and arguments presented, the Court finds that Debtor may be entitled to turnover of the Motel if it can demonstrate that Wu's interest will be adequately protected. Because the Court finds that the Agreement does not include an express forfeiture provision, the prayer in Wu's counterclaim for forfeiture of Debtor's rights and interests under the Agreement is denied. The Court applied a preponderance of the evidence standard to this trial.¹ No final order will be entered pending the conclusion of the adequate protection hearing.

The Court's jurisdiction to hear this matter derives from 28 U.S.C. § 1334 and General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. It is a core matter under 28 U.S.C. § 157(b)(2)(A) and (E).

FACTS

Introduction

Many of the material facts are not in dispute. The parties entered into the Agreement in early September, 1990, wherein Wu was to convey the Motel to Debtor for a purchase price of $1.2 million. The purchase price included the assumption of a $280,000 mortgage (the "Benyon Mortgage") and $920,000 to be paid to Wu. While Debtor did not formally assume the Benyon Mortgage, it was responsible for paying the monthly installments of $4,000 and, in addition, real estate taxes and insurance premiums after September, 1990. The parties disagree as to whether the Agreement included a $300,000 downpayment to Wu, when the installments due to Wu were to commence, and when title was to pass.

Debtor concedes that it defaulted under the Agreement. As of mid-November, 1992, it had failed to make at least three payments on the Benyon Mortgage, and had not paid an aggregate of $63,605.98 in real estate taxes for 1991 and 1992, or $5,785.00 in insurance premiums. Wu advanced these payments in Debtor's stead to protect the property and was not reimbursed. In November, 1992, Wu served Debtor with a Notice to Declare Forfeiture, listing the admitted defaults as well as the failure to pay 27 installments of $6,335.03 each that Wu claimed were due to him. The claimed defaults were not cured within the allotted 30 days, and Wu thereupon served Debtor with a Declaration of Forfeiture and instituted forcible entry proceedings in the Circuit Court of Cook County to retake possession of the Motel. He won a default judgment and order of possession and evicted Debtor. He has remained in possession ever since, notwithstanding that Debtor was successful in having the default judgment vacated.

Chronology

Throughout the events related herein, Wu has been the record owner of the Motel — a two-story, 53-unit building, built in the early 1960's. Prior to his association with Debtor, Wu owned the Motel individually, and operated it as a Royal 8 Motel. He bought the Motel in 1980 from Alfred Benyon for $850,000, making a $250,000 downpayment and giving Benyon a purchase money second mortgage for $420,000. NBD Skokie Bank held the first mortgage in the amount of $180,000. Wu operated the Motel from 1980 to 1990 with the help of his wife, family and a few employees. Prior to his dealings with Debtor, he never missed a payment on either mortgage in ten years.

In 1989, Wu received an offer to purchase the Motel for $1.23 million. William Lin, Wu's accountant since 1975, reviewed the books with the potential buyer's accountant. The sale wasn't completed because the buyer found another property. Wu estimates that his equity in the Motel in mid-1990 was approximately $800,000, based on the amount offered in 1989 less the balance on the two mortgages. In mid-1990, he owed $143,000 on the NBD mortgage and $280,000 on the Benyon mortgage.

In late spring of 1990, Wu entertained the idea of converting the Motel to a Best Western Inn, wanting to take advantage of its international reservation network. Wu told his idea to John Huang, whom he had known for ten years, and who Wu was aware had recently bought the Best Western in LaGrange, Illinois. When Huang heard Wu's plan, he offered to buy shares in the Motel and to assist him in obtaining the franchise. He told Wu that he had considered buying the Motel himself ten years earlier. The two had several conversations along these lines, and in early July, Huang introduced Wu to Judy Chen, one of his employees, who was also interested. Shortly thereafter, Lin joined the discussions.

Huang, Chen, Lin and Wu met twice in August, 1990 — on the 16th and the 22nd — to discuss the terms of the proposed venture. At the suggestion of Lin, who, as a CPA and director of New Asia Bank, was apparently the most commercially sophisticated and respected member of the group, they agreed to form a corporation which would acquire ownership and renovate the Motel so it could be operated as a Best Western Inn franchise. Debtor was formed in September, 1990, whereupon the parties entered into an oral purchase agreement.² The original investors were Lin, Huang, Judy Chen, Dr. Samuel Chen, and Wu. They each invested $100,000 in Debtor in August or September in return for a 20% interest.³ Dr. Chen subsequently changed his mind, and Wu bought out his interest, paying him $30,000 in April, 1991 and $70,000 in May, 1991. Thereafter, Wu had a 40% interest and Lin, Huang and Judy Chen each retained a 20% interest. The Debtor's four shareholders also became its directors and officers. Huang became the president, Wu the vice president, Chen the secretary and Lin the treasurer.⁴ Lin received the monthly bank statements and prepared all of Debtor's tax returns and financial statements.

Debtor agreed to buy the Motel for $1.2 million, with a $300,000 downpayment and the remaining $900,000 to be paid in monthly installments. The installments, amounting to approximately $10,000 per month, would include $4,000 per month on the balance of the Benyon Mortgage, and monthly payments of $6,335 to Wu on his balance of $620,000. The NBD mortgage was paid in full as part of Wu's downpayment.⁵ The corporation was responsible for real estate taxes and insurance premiums. There was contradictory testimony regarding when title was to pass to the Debtor under the Agreement. The Court finds, based on the parties' understanding of the nature of installment contracts for real estate, the unreliability of Debtor's witnesses, and the circumstances related herein, that the Agreement provided that title would pass after Wu had been paid in full.

Of the $500,000 invested by the individuals, $300,000 was deemed paid to Wu as a downpayment as follows: The first mortgage to NBD in the amount of $143,428.75 was paid in full; half of Wu's investment was credited in the amount of $100,000; $32,000 was paid in real estate taxes for the first eight months of 1990 when Debtor was not in possession; and $24,525.37 was paid to Wu in cash.

The Court finds that, unlike most land installment contracts, the Agreement did not include a forfeiture provision. The only evidence adduced to establish such a provision was testimony by Wu and Lin regarding the parties' understanding that if Debtor did not make all its payments under the Agreement it could lose the Motel. In view of the strictness with which Illinois courts construe forfeiture provisions⁶ and the fundamental principle that "equity abhors a forfeiture,"⁷ the fact that no written evidence was adduced to substantiate such a provision, and the weakness of the testimony on this point, the Court finds there is insufficient evidence to support the existence of a forfeiture provision.

On September 1, 1990, the Motel closed for renovations. Huang and Wu were to oversee the renovations. Because Wu lived five blocks from the Motel, and Huang lived in Milwaukee, Wisconsin, Wu would make payments from Debtor's checking account as they arose, and Huang would travel to Chicago once a week and initial the check stubs, as Debtor's president, to approve the payments. On August 27, 1990, Debtor entered...