In re Vernon Hills, Inc.

• Decision Date: 14 July 1965
• Docket Number: No. 14854,14855.,14854
• Citation: 348 F.2d 4
• Parties: In the Matter of VERNON HILLS, INC., a corporation, Debtor (two cases). SERVICE SAVINGS AND LOAN ASSOCIATION, Petitioner-Appellant, v. Charles David MALEY, Trustee-Appellee. ILLINOIS CAPITAL INVESTMENT CORPORATION, Petitioner-Appellant, v. Charles David MALEY, Trustee-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

348 F.2d 4 (1965)

In the Matter of VERNON HILLS, INC., a corporation, Debtor (two cases).

SERVICE SAVINGS AND LOAN ASSOCIATION, Petitioner-Appellant, v. Charles David MALEY, Trustee-Appellee.

ILLINOIS CAPITAL INVESTMENT CORPORATION, Petitioner-Appellant, v. Charles David MALEY, Trustee-Appellee.

Nos. 14854, 14855.

United States Court of Appeals Seventh Circuit.

July 14, 1965.

Richard Weinberger, Joseph Z. Willner, Allan R. Bloch, Chicago, Ill., for appellant.

Herbert L. Stern, Jr., Mark S. Liebermann, Chicago, Ill., for appellee. Gottlieb & Schwartz, Chicago, Ill., of counsel.

Before HASTINGS, Chief Judge, and KNOCH and KILEY, Circuit Judges.

KNOCH, Circuit Judge.

Vernon Hills, Inc., is the subject of proceedings for reorganization filed December 4, 1962, under Chapter X of the Bankruptcy Act, Title 11 U.S.C.A. § 501 et seq.

Early in June, 1963, the attorney for Service Savings and Loan Association, petitioner-appellant in Appeal No. 14854, hereinafter called "Service," ascertained, while checking some real estate bills, that the legal description set out in Service's mortgage, security for a loan made to the debtor herein, included only a part and not all of the eighteen holes of the Vernon Hills Country Club golf course.

On June 19, Illinois Capital Investment Corporation, petitioner-appellant in Appeal No. 14855, hereinafter called "Illinois," sought leave of the District Court to begin foreclosure proceedings on its second and junior mortgage on property of the debtor herein. In the response to that petition, the Trustee denied that the Illinois mortgage included the entire eighteen holes of the golf course. That petition was denied.

On December 16, 1963, Charles David Maley, the duly appointed and acting Trustee of the estate of the debtor, respondent-appellee in both appeals, petitioned the District Court to determine the value of Service's security and to declare Service an unsecured creditor for the amount of its claim in excess of that value pursuant to Title 11 U.S.C.A. § 597. The District Judge referred the matter to a special master for hearing, report and recommendations.

During the pendency of the hearing relative to valuation, on January 9, 1964, Service petitioned to reform its mortgage to include the whole of the eighteen holes of the golf course; and on January 20, 1964, Illinois filed a similar petition to reform its second and junior mortgage on the same property.

Both reformation petitions attributed the failure to include the whole of the eighteen holes of the golf course in the legal descriptions of the mortgages to mutual mistake of fact arising from scrivener's error.

After the parties rested and proofs were closed, on May 4, 1964, Service was granted leave to file an amended and supplemental petition based on allegations of fraud and deceit, to which the Trustee filed a response.

Meanwhile, on February 14, 1964, Federal Savings and Loan Insurance Corporation, as assignee of Hillside Savings and Loan Association, hereinafter called "Federal," filed its answer to Service's reformation petition alleging, inter alia, that Federal was the owner and holder of certain mortgages constituting first and prior liens on a part of the property sought to be included in the Service mortgage. The resolution of the issues thus raised was held in abeyance pending the outcome of the reformation petitions.

The Special Master, with the consent of the parties, considered both the valuation and reformation matters, although for the purpose of taking evidence and hearing oral arguments the valuation petition was heard separately. Extensive testimony was heard, numerous exhibits offered and the case tried without a jury from time to time for about four months.

The Special Master found:

(1) that neither Service nor Illinois proved by clear and convincing evidence that a mutual mistake of fact occurred in setting out the legal descriptions in the mortgages;

(2) that Service failed to prove by clear and convincing evidence that the debtor or its agents engaged in fraudulent or deceitful conduct or by statements, misrepresentations, acts or conduct, misled or perpetrated a fraud on Service;

(3) that the legal description in the Service mortgage was prepared by the debtor at the request and with the consent of Service, but that Service did not rely on its accuracy;

(4) that the Illinois mortgage was prepared by Illinois's counsel who copied the legal description contained in the Service mortgage;

(5) that neither Service nor Illinois proved by clear and convincing evidence that the parties intended or agreed that the property now sought to be included by reformation of the mortgages was to be covered.

The Special Master recommended that the petitions to reform be denied. The District Court affirmed and approved the report in all respects, overruling and denying objections and exceptions filed thereto. Service was classified as a secured creditor to the extent of $730,000, the value of the security set out in the mortgage, and as an unsecured creditor for the balance of its claim. Illinois was classified as an unsecured creditor for the entire amount of its claim. These appeals followed.

Service contends that there was not even a scintilla of evidence that would suggest that anything was contemplated by Service or by the debtor other than to secure the Service loan by a first mortgage on the motel, restaurant, country club building, and the entire eighteen holes of the golf course; that the country club building would have no value if unconnected with a complete golf course.

The mortgage in the amount of $850,000, which Service sought to reform, was a refinancing of an earlier indebtedness evidenced by a note dated November 15, 1960, for $700,000 and secured by a mortgage containing the same legal description which was merely copied for the $850,000 mortgage.

The initial negotiations occurred in August, 1960, between William Szarabajka, president of Service, and one John Perisich, an agent and mortgage finder for debtor, who were brought together through Kenneth LaVoie, who was paid $42,000 for making this contact, according to Mr. Perisich's testimony. In addition, Mr. Perisich's own fee for his activities in connection with the Service mortgage for $700,000 was $21,000, plus $22,500 on the refinancing, or a total of $85,500 for this financing.

Mr. Perisich gave Mr. Szarabajka an appraisal dated July 15, 1960, which purported to value the golf course and two nonexistent tennis courts. The appraisal contained a map which omitted a part of the golf course and a legal description which was materially different from the legal description which appeared in the mortgage.

Joseph W. Nowak, who was Service's attorney at the time, testified that he noted that the appraiser didn't vouch for the legal description but suggested its submission to a licensed surveyor. Mr. Nowak testified further that at a meeting with Mr. Perisich and Mr. Szarabajka, he advised securing a legal description with a survey which would locate all of the improvements intended to be conveyed with the mortgage.

Later Mr. Szarabajka, Mr. Nowak, Mr. Perisich and Quinn Hogan, president of the debtor, met at the club and viewed the premises, including homes which surrounded the golf course.

About a week later, according to the testimony of Mr. Perisich, they all met at Service's offices and a loan application without legal description was presented by Mr. Hogan. Mr. Nowak repeated his request for a legal description and survey, and Mr. Szarabajka instructed Mr. Hogan to get those and to prepare the mortgage document.

Mr. Nowak received certain loan papers, including an undated mortgage copy and a sheet of paper containing a legal description, from Mr. Perisich, and finding no plat of survey in Service's file, called on the debtor for a survey against which to check the legal description. He then went out of the State on other business. This was about November 11, 1960. The Notary Public certified that the mortgage was signed November 15, 1960.

Three days later a signed mortgage with an attached piece of paper containing the legal description which is here sought to be reformed was delivered to the Lake County office of the Chicago Title and Trust Company to be returned to the debtor after recording.

Charles Rood, Chief Title Officer, testified that the mortgage was recorded November 18, 1960, and a title report mailed November 23, 1960.

At the country club meeting, when the premises were viewed, Mr. Hogan had told Mr....