Mellon Bank, N.A. v. Midwest Bank & Trust Co.

• Decision Date: 03 May 1993
• Docket Number: No. 1-91-3648,No. 85-02-4625,85-02-4625,1-91-3648
• Citation: 265 Ill.App.3d 859,638 N.E.2d 640,202 Ill.Dec. 772
• Parties: , 202 Ill.Dec. 772 MELLON BANK, N.A., Plaintiff-Appellant/Cross-Appellee, v. MIDWEST BANK & TRUST COMPANY, as Trustee under Trust, et al., Defendants (Waveland Associates--Phase I Limited Partnership, Defendant-Appellee; Development Management Group, Inc., Defendant-Appellee/Cross-Appellant).
• Court: United States Appellate Court of Illinois

Page 640

638 N.E.2d 640

265 Ill.App.3d 859, 202 Ill.Dec. 772

MELLON BANK, N.A., Plaintiff-Appellant/Cross-Appellee, v. MIDWEST BANK & TRUST COMPANY, as Trustee under Trust No 85-02-4625, et al., Defendants (Waveland Associates--Phase I Limited Partnership, Defendant-Appellee; Development Management Group, Inc., Defendant-Appellee/Cross-Appellant).

No. 1-91-3648.

Appellate Court of Illinois First District, First Division.

May 3, 1993.

Sidley & Austin, Chicago (Gerald L. Angst, Lisa A. Hausten, Robert T. Biskup, of counsel), for plaintiff-appellant/cross-appellee.

Pope & John, Chicago (William R. Quinlan, Bruce R. Meckler, Brian J. Williams, of counsel), for defendant-appellee.

Rudnick & Wolfe, Chicago (Theodore A. Shapero, David G. Lynch, of counsel), for defendant-appellee/cross-appellant.

Justice BUCKLEY delivered the opinion of the court:

Plaintiff Mellon Bank, N.A. (Mellon) filed this action to foreclose a 1989 mortgage on the "New York," a high-rise apartment complex located at 3660 North Lake Shore Drive in Chicago, which is beneficially owned by the mortgagor/defendant, Waveland Associates-Phase I Limited Partnership (the Phase I Partnership). As part of this action, Mellon moved pursuant to the Illinois Mortgage Foreclosure Law (the IMFL) (Ill.Rev.Stat.1989, ch. 110, par. 15-1101 et seq.) for the appointment of a receiver to manage and conserve the subject property during the pendency of the foreclosure action.

The Phase I Partnership defended on the merits against the appointment of a receiver and alleged affirmative defenses seeking to bar Mellon's claims. Defendant Development Management Group, Inc. (DMG) objected to Mellon's motion and counterclaimed, alleging that it had a superior lien on the property. DMG sought foreclosure and the sale of the New York, and an order placing it, not Mellon, in possession.

The circuit court denied relief to both Mellon and DMG. Mellon appeals the denial of its motion to have a receiver appointed. DMG has cross-appealed the circuit court's denial of its motion for possession of the property and the right to appoint a receiver based on its superior interest.

At oral argument, counsel for the Phase I Partnership raised the issue that this appeal is moot in light of Mellon's filing of another action seeking to foreclose a "senior" mortgage executed in 1985. The appointment of a receiver is sought in that action as well. We allowed both Mellon and the Phase I Partnership to address the issue of mootness through additional briefing. For reasons we later express, we find this appeal not moot.

The Phase I Partnership is an Illinois limited partnership with "Waveland Associates, an Illinois Limited Partnership" (the Phase I General Partner) as the sole general partner. The general partner of the Phase I General Partner is Lake Shore Land Limited Partnership, which has three general partners, two of which are DMG and Archer Corporation. Louis R. Silverman is the sole shareholder of DMG and Archer.

In 1980, DMG purchased the land upon which the New York now rests for $3,635,000. DMG in turn sold the property to the Phase I General Partner under an installment contract dated October 1, 1980. The Phase I General Partner made a down payment to DMG, and the balance accrued interest at 18% per annum through October 1, 1982, and 20% per annum thereafter. By December 1985, the balance due DMG was $14,527,000.

In November 1985, DMG and the Phase I General Partner agreed to amend the installment contract. The amended installment contract allowed the parties to divide the land into two parcels, one encompassing the New York, the other encompassing the remaining land, the latter being reserved for future development. DMG and the Phase I General Partner allocated $11,180,000 of the debt to the New York, with the Phase I General Partner making a $6,365,000 down payment and the balance being paid on a deferred basis. The amendment contained the following provision: "The payments provided for hereunder shall be contractual obligations of [the Phase I General Partner] or its assignee which shall not be secured by the real estate."

The Phase I General Partner subsequently assigned to the Phase I Partnership its right to acquire the New York. The Phase I Partnership assumed the Phase I General Partner's obligations under the installment contract.

To finance the construction of the New York, a commitment was obtained from the City of Chicago to issue low-interest, tax exempt revenue bonds. This arrangement, and the related financing of the New York, consisted of the following seven elements:

1. The Loan Agreement and Indenture: Pursuant to a loan and disbursement agreement (Loan Agreement), the Phase I Partnership obtained a commitment from the City of Chicago for the issuance of $62,600,000 in bonds, which included both the amount projected for construction of the New York ($56,400,000) and a debt service reserve fund (the Reserve Fund) of $6,200,000 as security for the bonds. The Loan Agreement set forth the terms and conditions under which the bonds were to be issued and the proceeds thereof loaned to the Phase I Partnership.

The City also entered into a trust indenture (the Trust Indenture) with The First National Bank of Chicago (the Bond Trustee) setting forth the terms and conditions under which the bonds were to be issued and repaid. The City then assigned its interest in the Loan Agreement to the Bond Trustee.

2. The Reserve Fund Investment Agreement: The Bond Trustee entered into an investment agreement with Mellon (the Reserve Fund Investment Agreement) wherein the Bond Trustee deposited the Reserve Fund with Mellon for investment, and Mellon agreed to pay the Bond Trustee a rate of return equal to the interest that would accrue on $6,200,000 of bonds.

3. The Letter of Credit: As security for the bonds, the Phase I Partnership obtained Mellon's commitment to issue a direct pay letter of credit in the amount of $57,810,000, which covered construction costs ($56,400,000) and two months interest. Mellon's letter of credit operated as follows: On the first day of each month, the Bond Trustee would draw down Mellon's letter of credit in an amount equal to the debt service payment and distribute it to the bondholders. The Phase I Partnership was obligated pursuant to both the Loan Agreement and a Reimbursement Agreement to deposit an equal amount with the Bond Trustee on the same day, and the Trustee would immediately reimburse Mellon for the amount drawn of the letter of credit.

Mellon's letter of credit was the subject of a confirmatory letter of credit issued by the Deutsche Bank in the amount of $57,810,000 [the Deutsche Bank Confirmation], which guaranteed Mellon's obligations. The Deutsche Bank also issued an irrevocable standby letter of credit in the amount of $6,355,000 which guaranteed Mellon's obligations relative to the Reserve Fund [the Standby Letter of Credit].

In its motion for the appointment of a receiver, Mellon alleges that the Phase I Partnership is in default under the Reimbursement Agreement in the amount of about $3.5 million.

4. The Remarketing Agreement: Bondholders were permitted to tender the bonds for payment in full at any time. Mellon and the Phase I Partnership entered a Remarketing Agreement (the Remarketing Agreement) whereby Mellon, for a fee, agreed to pay off or resell any bonds tendered by the bondholders. Mellon alleges in its motion that the Phase I Partnership is in default under this agreement.

5. The Interest Rate Exchange Agreement: The bonds were issued at a floating rate of interest, and the Phase I Partnership wanted protection against rate fluctuations. Accordingly, the Phase I Partnership and Mellon entered into an Interest Rate Exchange Agreement whereby the Phase I Partnership agreed to pay Mellon a fixed rate of interest each month and Mellon agreed to bear the risk of the rate fluctuations. Mellon alleges in its motion that the Phase I Partnership is in default under this agreement in the amount of about $1.2 million and further owes Mellon $7 million in connection with the termination of this agreement.

6. The Collateral Assignment: As additional security to Mellon, DMG assigned to Mellon its right to receive the deferred payments under the amended installment contract to purchase the New York (the Collateral Assignment).

7. The 1985 Mortgage and Assignment of Rents and Leases: As further security to Mellon, the Phase I Partnership executed a senior mortgage (the 1985 mortgage) on the New York. The Phase I Partnership additionally gave Mellon an assignment of rents and leases from the New York.

By 1989, the Phase I Partnership had exhausted all, except for the Reserve Fund, of the bond proceeds under the Loan Agreement. However, the Phase I Partnership had not paid all of the construction costs and was delinquent in its payments to Mellon. A plan was devised in which the Reserve Fund could provide additional funds to the project at a low cost.

On November 1, 1989, the Phase I Partnership and the Bond Trustee executed an amendment to the Loan Agreement. This amendment: (1) eliminated the Reserve Fund requirement; (2) increased Mellon's letter of credit by $6.355 million--an amount equal to the prior Reserve Fund plus certain interest; and (3) cancelled the Reserve Fund Investment Agreement.

The newly released monies were used to pay DMG the deferred payments on the property, and DMG immediately loaned the money back to the Phase I Partnership for its use. The purpose of this latter transaction was to preserve the low interest rate and tax exempt status of the bonds. Concomitantly, as part of this transaction, Mellon agreed to rescind the Collateral Assignment between it and DMG so that DMG could receive the deferred payments.

As security for Mellon's agreement to increase its letter of credit by $6.355 million, the Phase I Partnership executed a junior mortgage on the property (the 1989 m...