Opinion
No. 99 C 3558.
September 29, 2000.
MEMORANDUM OPINION AND ORDER
On Appeal from the U.S. Bankruptcy Court for the Northern District of Illinois, Hon. Joan Lefkow, Presiding Bk Case No. 99 B 5379.
BACKGROUND FACTS
Plaintiff, Prairie Crossing, L.L.C., an Illinois Limited Liability Company, ("the Debtor") appeals from a final judgment of the Bankruptcy Court that granted certain relief from the automatic stay imposed by Section 362 of Title 11, United States Code ("the Bankruptcy Code"), to First Bank Trust Company of Illinois ("First Bank"), the predecessor-in-interest to L.I. Development, L.L.C. ("LID"), pursuant to First Bank's Motion for Relief From Automatic Stay.
The Debtor is an Illinois limited liability company whose principal asset was its ownership of the beneficial interest in a land trust known as Trust No. 10-2067, of which First Bank was land trustee pursuant to a trust agreement dated September 27, 1996. Rec. #3, par. 2; Rec. #20, par. 2. The Land Trust held title to the Property, which consisted of contiguous real property and improvements located at 7522-30 North Ashland Avenue and 1609 West Howard Street. Id. At all relevant times, it was uncontested that First Bank held a valid, perfected, first priority lien against the Property (including any personal property) pursuant to a Mortgage, Security Agreement and Financing Statement granted to First Bank by the land trustee and the Debtor on September 30, 1996. Rec. # 3, par. 3; Rec. # 20, par. 3. The Mortgage was recorded against the Property on October 3, 1996. Id. The Mortgage secured (a) a Secured Demand Note dated September 30, 1996 in the amount of $800,000 (the "1996 Note") and (b) a Secured Demand Note dated May 30, 1997, in the amount of $50,000 (the "1997 Note") (collectively "the Notes"). The Notes matured on September 30, 1997. Rec. #3, par. 7 and Exs. B and C. As of December 22, 1998, there remained due and owing under the Notes not less than $1,164,206.10. Rec. #3, par 22 and Ex. E; Rec. #26, item 9.
Subsequently, and due to the Existing Defaults alleged in First Bank's Relief Motion, First Bank commenced a foreclosure action in the Circuit Court of Cook County, Case No. 97 CH 16235, seeking to foreclose on its interest in the Property. Rec. #3, par. 14; Rec. 20, par. 14. On or about December 22, 1998, the Debtor and First Bank entered into a Deed In Lieu of Foreclosure Agreement. Rec. #3, par. 20 and Exhibit E; Rec. #26, item 9. Pursuant to the Deed In Lieu of Foreclosure Agreement, the Debtor executed and placed in escrow with Chicago Title and Trust Company a trustee's deed, conveying the Property to First Bank. Rec. #3, par. 19 and 23, and Exhibit B; Rec. # 26, items 9, 10, and 11. The Deed in Lieu of Foreclosure Agreement further provided that if the Debtor did not pay First Bank the full amount of the indebtedness, plus applicable interest and expenses due under the Notes, by February 22, 1999, the Trustee's Deed was to be delivered to First Bank to enable First Bank to record it and market the Property. Id.
As the February 22, 1999 deadline approached, a principal of the Debtor sought from First Bank an extension of time to refinance the indebtedness under the Notes, but First Bank refused. Rec. #3. par. 28; Rec. #20, par. 28, On February 19, 1999, Debtor filed its voluntary petition under Chapter 11 of the Bankruptcy Code. Rec. #1. As of April 24, 1999, the Debtor still had not paid to First Bank the amount of the Indebtedness. Rec. #37, p. 2.
In the Circuit, when a petition in bankruptcy is filed before the expiration of the applicable state redemption period, Section 108(b) extends a debtor's right of redemption for at least 60 days after the petition is filed. In re Tynan, 773 F.2d 177, 179 (7th Cir. 1985).
First Bank filed its Motion For Relief From the Automatic Stay seeking among other things, relief from the Automatic Stay to allow it to enforce its rights under the Deed in Lieu of Foreclosure Agreement, dated December 22, 1998, by and between the Debtor, First Bank and the land trustee with regard to that certain real property located at 7522-30 North Ashland Avenue and 1609 West Howard Street, and to otherwise foreclose upon its collateral. In its Relief Motion, First Bank argued that it should be granted relief from the Automatic Stay because cause existed under Section 362(d)(1), as the Debtor was in default under its obligations to First Bank because (i) either the Debtor's business generated insufficient income to pay the matured debt due under certain promissory notes and to maintain the Property, or the Debtor improperly diverted rents generated by the Property (which was the collateral of First Bank), (ii) the Debtor allowed mechanics's liens to be perfected against the Property, (iii) the Property's 1995, 1997 and 1998 real estate taxes remained unpaid and the 1996 taxes were sold and (iv) on information and belief, the Property was depreciating in value, as reflected by the City of Chicago building code violation complaint.
First Bank also asserted that it was entitled to relief under Section 362(d)(2), because it appeared that the Debtor had no equity in the property (because over an extended period of time, the Debtor was unable to refinance the subject indebtedness and pay First Bank) and it was not necessary for an effective reorganization. Finally, First Bank argued that is would also be entitled to relief under Section 362(d)(3), because on or before May 20, 1999, the expiration of the 90-day period proscribed by Section 362(d)(3), because the Debtor could not file a plan of reorganization with a reasonable possibility of being confirmed within a reasonable period of time nor would it be commencing monthly payments to First Bank in an amount equal to interest at a current fair market rate of the creditor's interest in the real property as provided in Section 362(d)(3)(B).
In its Supplement to its Relief Motion, First Bank also asserted that it was entitled to relief from the Automatic Stay because, as of April 23, 1999, the Debtor no longer had any interest in the Property, due to the fact that the Debtor had traded its rights to the equity in the property when it entered into the Deed in Lieu of Foreclosure Agreement in exchange for one last extension of time to pay and then failed to pay the full amount of the indebtedness it owed to First Bank by April 23, 1999, the date agreed upon in the Deed in Lieu of Foreclosure Agreement as extended by 11 U.S.C. § 108.
The Debtor in response to First Bank's initial motion, addressed each allegation of the Relief Motion on a paragraph by paragraph basis. Later, in Debtor's response to the Supplement, the debtor generally raised the issue of lack of consideration and Section 547. The Debtor never filed an adversary complaint against First Bank asserting either the existence of a voidable transfer to First Bank or any right to recover under a preferential transfer from First Bank. In anticipation of the hearing on the Relief Motion, the parties entered into a Joint Stipulation of Exhibits, setting forth the 15 items that the parties agreed were authentic and should be admitted into evidence.
On April 27, 1999 the Bankruptcy Court conducted its hearing on the Relief Motion and two days later, issued its ruling that underlies this appeal. This hearing solely addressed the question of law, whether the automatic stay prevented the operation of a pre-petition Agreement For Deed In Lieu of Foreclosure in which the debtor agreed to cause title to be conveyed to Bank and held in escrow. The April 29, 1999 order provided the following:
First Bank is granted relief from the automatic stay to exercise and pursue any and all rights and remedies arising under, or in connection with, the Agreement For Deed In Lieu of Foreclosure . . . and all of the related settlement and loan agreements and documents between, among others, First Bank and the Debtor. Without in any way limiting the foregoing relief, First Bank is authorized to obtain from Chicago Title and Trust Company, and have recorded in is favor, the Trustee's Deed to the Property . . .
Rec. #39, par. 33.
The Bankruptcy Court decided that, as a matter of law, the Debtor had no interest in the Property after April 23, 1999, thus technically making a modification of the Automatic Stay unnecessary. Rec. #37, Op. p. 2. The Bankruptcy Court noted that the Order may only be a comfort order, as First Bank's Relief Motion could be viewed as moot. Rec. #37, Op., p. 6 and n. 3. Accordingly, First Bank was entitled to relief from the Automatic Stay. Rec. #37, pp. 5-6. First Bank sold all of its rights, title and interest in the real estate for $1,325,000 to L.L.C. Development. Subsequently, the Debtor filed its Notice of Appeal.
JURISDICTION
This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a).
DISCUSSION
Once a debtor filed a petition in bankruptcy an automatic stay takes effect which precludes certain actions against the debtor or property of his estate. 11 U.S.C. § 362. The purpose of the automatic stay is to provide the debtor with a breathing spell from his creditors. The filing of the petition stops all collection efforts, harassment and foreclosure actions.
Section 541(a) of the bankruptcy statue provides that upon commencement of a case by a debtor under Section 301, 302, or 303 an estate is created. 11 U.S.C. 541(a). The estate created is comprised of all the following property, wherever located and by whomever held:
(1) *** all legal or equitable interests of the debtor in property as of the commencement of the case.
* * *
(5) Any interest in property that would have property of the estate is such interest has been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date ***11 U.S.C. § 541(a)(1)(5).
Debtor raises three issues on appeal. First, Debtor argues that the Bankruptcy Court erred in lifting the automatic stay where the appraised value of the real estate far exceeded the money owed to First Bank. Second, Debtor argues that the Deed In Lieu of Foreclosure Agreement constituted a fraudulent conveyance pursuant to 11 U.S.C. § 548, et seq. of the United States Bankruptcy Code. Finally, Debtor disputes whether the Deed In Lieu of Foreclosure Agreement constituted a preference pursuant to 11 U.S.C. § 547 et seq. of the United States Bankruptcy Code.
Debtor's first argument contends that the Bankruptcy Court erred as a matter of law when it failed to contrast the value of the mortgage debt to the value of the property when lifting the automatic stay. This is a question of law subject to de novo review by this Court. Debtor argues that it had until May 20, 1999 to file a reasonable plan of re-organization pursuant to § 362(d)(3)(B) and by virtue of the lifting of the automatic stay and the immediate sale of the primary asset of the debtor's estate, the debtor was deprived of the plenary opportunity to submit a plan consistent with § 362(d)(3)(A). Debtor relies on In Matter of Vitreous Steel Products Co., 911 F.2d 1223, 1232 arguing that the $3.0 million value of the real estate far exceeded the $850,000 full mortgage obligation.
Section 362(d) provides the following:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as, by terminating, annulling, modifying, or conditioning such stay:
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if
(A) the debtor has filed a plan of reorganization; or
(B) such property is not necessary to an effective reorganization; or
(3) with respect to a stay of an act against singled asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after entry of the order for relief(or such later date as the court may determine for cause by order entered within that 90-day period):
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien), which payments are in the amount equal to interest at a current fair market rate on the value of the creditor's interest in the real estate.11 U.S.C. § 362(d).
At the outset, the appraised value of the real estate Debtor seeks to rely on was never presented to, nor accepted by the Bankruptcy Court when ruling on First Bank's Motion For Relief From Automatic Stay. Rather this appraised value was introduced by Debtor as part of an Emergency Motion for the use of Collateral Cash which was stricken as moot by the Bankruptcy Court after ruling on First Bank's Motion for Relief from the Automatic Stay. The record further reveals that the mortgage obligation plus interest and costs with respect to the Property in question was in excess of $1,100,000 not the $850,000 as Debtor has argued.
Judge Lefkow's opinion addressed the legal effect of Deed In Lieu of Foreclosure voluntarily entered into between Debtor and First Bank. First Bank, relying on Matter of Tynan, 773 F.2d 177, 179-80 (7th Cir. 1985), maintained that its right to obtain release of the title was subject only to the debtor's right to redeem its interest in the property by paying First Bank the full amount of the outstanding indebtedness by April 23, 1999. First Bank argued that Debtor no longer had any interest in the property to which the stay could apply inasmuch as it was stipulated that the Debtor did not pay First Bank the full amount of outstanding indebtedness by April 23, 1999. Judge Lefkow agreed finding that the transfer of title [to First Bank] had already occurred before the filing of the bankruptcy petition noting that the Agreement had been signed by the parties in December of 1998 and the Debtor had deposited all the documents, including the Deed, into escrow. Judge Lefkow stated "In other words, prior to the filing of the petition, Debtor had completely performed the acts required of it under the Agreement. Bank was entitled to the documents in escrow and to take other actions as specified in the Agreement once the date for payment passed with the contingency unfilled." Op. p. 5. Judge Lefkow then concluded that the equity interest in the property did in fact belong to First Bank and not to Debtor, thus warranting lifting of the automatic stay. There was no need to weigh the value of the property against the amount owed by debtor as debtor had, by virtue of the voluntary agreement, given up its legal rights to recovery of its equity in the property. Once the date for redemption passed under the agreement, debtor would no longer be entitled to any equitable interest in the property and, therefore, the secured property is worthless in the hands of the debtor. In reaching its conclusion, the Court found significant "the only thing standing between the transferee and the deed was the expiration of the redemption period." Op.p. 4. In light of this conclusion, Judge Lefkow would not have evaluated the equity in the property for purposes of Section 362(d)(2)(A) because at this point it would be irrelevant. Debtor claims that the bankruptcy filing was before the operative date of the agreement because the Deed In Lieu of Foreclosure provided up to and including February 22, 1999 for the Debtor to pay the outstanding balances. However, Debtor fails to develop this argument. Debtor sets forth no persuasive case law. Debtor gave up its legal rights to equity in the property when it agreed to execute and deliver a deed pursuant to the escrow provisions. Debtor cites no facts, whatsoever, to support the contention that it retains any interest in the property now that the period for fulfilling the contingency has expired. Possibly, Debtor retained a contingent right if redemption was made within the required period, but it is undisputed that the title document was transferred to First Bank pursuant to the Deed In Lieu of Foreclosure prior to the filing of the bankruptcy petition and Debtor failed to make the required redemption payments within the required period. Therefore, title transferred to First Bank upon the expiration of the redemption period under the agreement without any act by anyone. Judge Lefkow also concluded that the agreement was not executory in nature and analyzed the parties rights under section 362(d)(3)(B) concluding that First Bank's interest in the property fell under the judgment lien language of 11 U.S.C. § 362(d)(3)(B).
Further, Debtor's reliance on "reasonably equivalent value" and the Seventh Circuit's decision in In re Vitreous Steel Products Co., 911 F.2d 1223, 1232 (7th Cir. 1990) is misplaced. "Reasonably equivalent value" is a concept that is germane only to a fraudulent transfer disputes, and the cases cited by Debtor all address fraudulent transfer issues under Sections 548 or 544(b), not the Automatic Stay provisions under Section 362(d). Furthermore, in Vitreous the Seventh Circuit did not hold that the only issue relevant to modification of the automatic stay was whether the debtor has an equity interest in the subject property. Id. Rather, the Seventh Circuit acknowledged that the automatic stay could be lifted under several circumstances. Vitreous, 911 F.2d at 1232.
Judge Lefkow applied the undisputed fact that Debtor had given First Bank a Deed in Lieu of Foreclosure and the fact that Debtor had not redeemed the property pursuant to the terms of the agreement as well as the extension afforded under 11 U.S.C. § 108 (b). Therefore, it cannot be concluded that the Bankruptcy Court erred in lifting the automatic stay.
Debtors second and third arguments claim that the deed in lieu of foreclosure constituted a fraudulent or preferential conveyance pursuant to 11 U.S.C. § 548 et seq. In Vitreous, the Seventh Circuit stated that "[i]t was not necessary to reach questions of whether Champlin had colluded with the Bank, or questions of preferential transfers under § 547, or questions of fraudulent conveyances under § 548. or questions of commercial reasonableness of the sale under state law, Indeed, none of these issued could properly have been raised, and therefore the § 362 hearing was not res judicata as to those issues." Id. at 1234. Furthermore, Judge Lefkow found that Debtor could not assert that it satisfied the elements of section 547(b) to establish the existence of a preference. Op. p. 5. Moreover, Debtor's argument under Section 548 of the Bankruptcy Code, is also insufficient as a matter of law. Debtor did not raise the Section 548 issue to the Bankruptcy Court and it is now waived. See, Fish Market Nominee Corporation v. Pelfosky, 72 F.3d 4, 6 (1st Cir. 1995). In addition, it is undisputed that Debtor never filed an adversary complaint alleging the existence of a fraudulent conveyance or transfer. Finally, the Bankruptcy Court found that Debtor's argument under Section 547 to be inapplicable to the resolution of the Relief Motion and overruled the same.
CONCLUSION
For the foregoing reasons, Judge Lefkow's order of April 29, 1999 is affirmed and Debtor's appeal from the same is denied.