Settlers' Hous. Serv., Inc. v. Bank of Schaumburg (In re Settlers' Hous. Serv., Inc.)

• Citation: 520 B.R. 253
• Decision Date: 18 November 2014
• Docket Number: Bankruptcy No. 13–bk–28022.,Adversary No. 13–ap–1328.
• Parties: In re SETTLERS' HOUSING SERVICE, INC., Debtor. Settlers' Housing Service, Inc., Plaintiff v. Bank of Schaumburg, Defendant.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

520 B.R. 253

In re SETTLERS' HOUSING SERVICE, INC., Debtor.
Settlers' Housing Service, Inc., Plaintiff
v.
Bank of Schaumburg, Defendant.

Bankruptcy No. 13–bk–28022.
Adversary No. 13–ap–1328.

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

Signed Nov. 18, 2014

Granted in part and denied in part.

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The Law Office of William J. Factor, Ltd, Northbrook, IL, for Plaintiff.

Thompson Coburn LLP, Chicago, IL, for Defendant.

MEMORANDUM OPINION ON BANK OF SCHAUMBURG MOTIONS TO DISMISS AND STRIKE
JACK B. SCHMETTERER, Bankruptcy Judge.

This adversary proceeding arises out of and relates to the Chapter 11 case of Settlers' Housing Service Inc. (“Settlers' ”). Debtor–Plaintiff Settlers' is an Illinois nonprofit dedicated to fulfilling the housing needs of recently arrived legal immigrants. Two pending motions concern the Third Amended Complaint (“Complaint”). The prior procedural history is detailed in a prior memorandum opinion dismissing parts of the Second Amended Complaint. In re Settlers' Housing Service Inc., 514 B.R. 258 (N.D.Ill.2014).

The Third Amended Complaint (“Complaint”) alleges the following: At the closing of the sale of multiple properties from another bank customer to Settlers', the Bank of Commerce set a trap by surreptitiously burying a document providing for a line of credit secured by a mortgage on the Washington–Taylor Property, and cross-collateralizing of all outstanding mortgages, into a thick stack of closing documents. An outright loan and documents for it at the time would have aroused suspicions of Settlers' president KJ Lodico because she hadn't asked for any additional loan for Settlers'. The alleged trap was sprung when Settlers' later found itself in need of money to pay property taxes, which the Bank of Commerce allegedly knew would happen because the properties sold to Settlers' could not generate enough income to pay necessary expenses. Once the need became manifest, Settlers' drew upon the line of credit, and the equity Settlers' had held in the Washington–Taylor Property became additional collateral of Bank of Commerce's that secured the entire Settlers' loan portfolio. The Bank of Commerce allegedly needed that collateral to help it fend off being shut down by banking regulators.

The Third Amended Complaint is pleaded in fourteen Counts:

1. Equitable Subordination

2. Aiding and Abetting Breach of Fiduciary Duty

3. Fraudulent Misrepresentation

4. Fraudulent Concealment

5. Breach of Illinois Consumer Credit Act

6. Fraud, Illegality and Unenforceability Regarding Washington–Taylor Mortgage

7. Constructive Fraud

8. Setoff

9. Unjust Enrichment

10. Conspiracy to Defraud and Civil Conspiracy

11. Tortious Interference With Contract

12. Breach of Fiduciary Duty

13. Conversion and Accounting

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14. Improper Post–Petition Interest and Receiver's Fees

Relief requested in the complaint seeks disallowance or equitable subordination of the Bank's claim, avoidance or rescission of the mortgage on the Washington–Taylor Property, compensatory, statutory, and punitive damages, attorney's fees, and any other relief that may be warranted.

The Bank filed an answer, and simultaneously filed a Motion to Strike Counts 2 and 12 along with certain factual allegations in the complaint, and a separate Motion to Dismiss Counts 3, 4, 5, 6, 7, 10, 13, and 14, with prejudice. For reasons discussed below, the Bank's motions to dismiss and strike will be granted in part, and Counts 2, 4, 7, 12, 13, and 14 will be dismissed with prejudice, and otherwise denied.

FACTS AS PLEADED

The following facts are as alleged in Settlers's Complaint. Because this is a motion to dismiss, all well-pleaded facts are taken as true. All inferences drawn from them are drawn in favor of Settlers'.

Settlers' is a non-profit organization under Illinois law that seeks to provide lowcost housing to refugees with resident alien status in the United States. Settlers' was originally organized in 1992 by KJ Lodico (“KJ”) and Joe Lodico (“Joe”), who were married at the time. Settlers' acquired its properties through grants provided directly or indirectly through the Department for Housing and Urban Development (“HUD”). Debtor's mission included acclimating recently arrived immigrants to American life, including provision to its residents of training in how to own and care for property. Many of the properties originally acquired from HUD were rented to and eventually sold to the residents, with proceeds from the sales funding further work by Settlers'. By July of 2008, KJ and Joe Lodico were no longer married, and KJ had replaced Joe as Settlers's executive director.

In July, 2008, Settlers' owned five properties in DuPage County and a thirteen-unit property in Oak Park (“the Washington Taylor Property”). In July, 2008, Settlers' acquired additional properties (“the Faulkner Properties”) through the Bank of Commerce in exchange for assuming a $3.4 million loan. Allegedly, the loans to Jan Faulkner secured by the Faulkner Properties were delinquent, and Bank of Commerce was at risk of being closed by the its banking regulators as a result of its portfolio of delinquent loans. It is further alleged that the Bank of Commerce could not avoid being closed by the banking authorities if it agreed to a short sale of the Faulkner Properties because a short sale to an outside party would have forced the bank to recognize the loss. The only way to avoid closure by the regulatory authorities was by a transaction wherein some buyer would assume Faulkner's debt, such as the sale that eventually took place to Settlers'. Robert Markay (“Markay”) and John Frale (“Frale”), two officers of Bank of Commerce, hired Joe Lodico (the same Joe Lodico who was formerly married to KJ, and formerly the executive director of Settlers') to arrange sale of the Faulkner Properties to Settlers' in exchange for an assumption of the loans, by having Joe show to Settlers' allegedly stale appraisals that overstated value of the properties. Those appraisals shown to Settlers' reflected a valuation of the Faulkner Properties of approximately $4.3 million. The Bank of Commerce offered to transfer the properties to Settlers in exchange for Settlers' assuming approximately $3.4 million in debt.

The closing for the sale to Settlers' of the Faulkner Properties was held on August 1, 2008 in a Bank of Commerce's

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office, when KJ had only a few hours between her flight from California and her flight leaving the country. Pressed for time, KJ claims that she only reviewed the closing documents for one of the properties and signed the rest based on an oral representation at the time from Connie Saiger (“Saiger”) that the remaining documents were the same, except that they covered the other properties included in the transaction. Unbeknownst to KJ (she says), one of the documents in the stack was not the same as the others, but was a line of credit mortgage which cross-collateralized the Washington–Taylor Property and the Faulkner properties.

Two months later, in October of 2008 when the second installment of 2007 real estate taxes came due, Settlers' lacked enough funds to pay those taxes, so KJ called the Bank of Commerce to arrange a loan. KJ was then told that Settlers' already had a line of credit which it could draw on—the one Settlers' now alleges had been surreptitiously slipped among the earlier closing documents. Settlers' drew upon that line of credit, thereby cross-collateralizing the Faulkner Properties and the Washington–Taylor Property. As a result, forty-nine rental units now owned by Settlers' are encumbered by mortgages that were executed in favor of the Bank of Commerce (“the Bank of Commerce Properties”).

This result is alleged to have been planned by officers of the Bank of Commerce. The Bank of Commerce assertedly sold the underwater Faulkner Properties to Settlers' for an assumption of debt knowing in advance that the properties would fail to generate enough cashflow to cover expenses such as real estate taxes. Once the taxes came due, Settlers' would need a loan to cover that expense, which would then be extended under the line of credit slipped into the closing documents. Drawing on that line of credit would then bring about of cross-collateralizing of most of Settlers' properties, thus giving the Bank of Commerce valuable collateral.

In 2011, Schaumburg Bank acquired assets of the Bank of Commerce through a receivership of the Federal Deposit Insurance Company (“FDIC”). In 2012, the Bank of Schaumburg foreclosed on the Settlers' properties. In the state court foreclosure proceedings, Stephen H. Baer was named receiver for the properties. Debtor filed an answer together with counterclaims and third-party claims against individuals associated with Bank of Commerce, asserting an allegedly fraudulent scheme whereby Bank of Commerce sold Debtor the Faulkner properties and obtained a mortgage on the Washington–Taylor Property.

Further details of the pleadings appear in the discussion below.

ANALYSIS I. Jurisdiction & Venue

Jurisdiction lies under 28 U.S.C. §§ 157(b)(2)(C), (G) and (K) 4 and 1334. Venue is proper in this District under 28 U.S.C. § 1409. The case is referred here by Internal Procedure 15(a) of the District Court for the Northern District of Illinois.

Since some Adversary Proceeding counts are counterclaims by the estate, the statute provides that they are core, § 157(b)(2)(C), but Article III of the Constitution may not always allow entry of final judgment by a bankruptcy judge. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011). Recently, a Seventh Circuit panel ruled that the bankruptcy has no statutory authority to do anything in those cases. Wellness Intern. Network, Ltd. v. Sharif, 727 F.3d 751, 772 (7th Cir.2013). However, in

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