1756 W. Lake Street, LLC v. American Chartered Bank et al
Filing
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MEMORANDUM Opinion and Order. Defendants motion for summary judgment 18 is granted. Civil case terminated. Signed by the Honorable Charles P. Kocoras on 10/9/2014. Mailed notice(vcf, )
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
1756 W. LAKE STREET, LLC,
Plaintiff,
v.
AMERICAN CHARTERED BANK and
SCHERSTON REAL ESTATE
INVESTMENTS, LLC,
Defendants.
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14 C 1869
MEMORANDUM OPINION
CHARLES P. KOCORAS, District Judge:
This matter comes before the Court on the motion for summary judgment by
Defendants American Chartered Bank (“American Chartered”) and Scherston Real
Estate Investments, LLC (“Scherston”) (collectively “Defendants”) pursuant to
Federal Rule of Civil Procedure 56. For the reasons set forth below, Defendants’
motion is granted.
BACKGROUND
The following facts are derived from the parties’ respective statements and
exhibits filed pursuant to Northern District of Illinois Rule 56.1 (“Local Rule 56.1”).
The Court reviews each Local Rule 56.1 statement and disregards any argument,
conclusion, or assertion unsupported by the evidence in the record.
Plaintiff 1756 W. Lake Street, LLC (“Lake Street”) is the physical location of
the property at issue in this case, and also an Illinois limited liability company. Lake
Street was the borrower of several loans made by American Chartered between
October 2006 and April 2008. American Chartered is an Illinois banking corporation.
Scherston is also Illinois limited liability company and an affiliate of American
Chartered.
On October 25, 2006 (“Closing Date”), American Chartered and Lake Street
executed a promissory note in which Lake Street would borrow $1,475,000 (“Original
Note”). The Original Note was evidenced and secured by a mortgage in favor of
American Chartered for real property located at 1756 W. Lake Street, Chicago,
Illinois (“Property”), certain assignments of rents as to the Property, and personal
guaranties from Lake Street’s principals were also included in the transaction. Lake
Street retained the deed to the Property on the Closing Date.
On April 21, 2008, Lake Street executed another promissory note in favor of
American Chartered in the amount of $100,000 (“Note 2”) (Original Note and Note 2
collectively referred to as “Loans”). On March 31, 2009, American Chartered and
Lake Street, in conjunction with their affiliate 1800 W. Lake Street LLC, (“1800”),
entered into a Forbearance Agreement (“Original Forbearance Agreement”).
In
accordance with the Original Forbearance Agreement, American Chartered agreed to
forego enforcing their rights and remedies specified in the Loans.
American
Chartered agreed to extend the forbearance period through November 30, 2009.
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A year later, on March 31, 2010, American Chartered and Lake Street, in
conjunction with their affiliate 1800, entered into an Amended and Restated
Forbearance Agreement (“A&R Forbearance Agreement”). Pursuant to the A&R
Forbearance Agreement, American Chartered agreed to further extend the forbearance
period through October 1, 2010, and if certain conditions were met, through October
1, 2011.
Additionally, as part of the A&R Forbearance Agreement, American
Chartered agreed to make a new loan to Lake Street’s affiliate, 1800, in the amount of
$299,000, for the payment of past due real estate taxes on a specific commercial
property owned by 1800. Over the course of the next three and a half years the parties
executed eight more amendments to the A&R Forbearance Agreement.
In August 2010, American Chartered and Lake Street, in conjunction with
1800, entered into a second amendment to the A&R Forbearance Agreement (“Second
A&R Forbearance Agreement”).
Pursuant to the Second A&R Forbearance
Agreement, American Chartered agreed to make a new $350,000 loan to API Signs
LLC, (“API”), an operating affiliate of Lake Street, provided that Lake Street gives
American Chartered the deed for the Property to be placed in escrow, as collateral. A
deed in lieu of foreclosure agreement for the Property (“1756 Lake Street Deed
Agreement”) was entered into, specifying the events that would trigger American
Chartered enforcing the 1757 Lake Street Deed Agreement.
The 1757 Lake Street
Deed Agreement detailed the procedures American Chartered would take in the event
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of forbearance.
Specifically, American Chartered would take possession of the
Property by recording the deed.
On March 30, 2011, American Chartered and Lake Street, in conjunction with
1800, entered into a third amendment to the A&R Forbearance Agreement (“Third
A&R Forbearance Agreement”). The accommodations made in favor of Lake Street
in the Third A&R Forbearance Agreement were numerous.
The Third A&R
Forbearance Agreement provided: (1) an extension on the maturity dates of the Loans
and the note executed by 1800; (2) a provision that converted payments under certain
notes to interest only absent a default, thereby reducing the monthly payment; (3) the
amortization schedule of several notes to be extended, reducing the required monthly
payments; (4) additional financing under the 1800 tax note; and (5) for decreasing the
interest rate under the Note 2.
The next several amendments to the A&R Forbearance Agreement only dealt
with extending the maturity dates on the numerous loans made by American
Chartered. Between July 2011 and May 2012 American Chartered and Lake Street, in
conjunction with 1800 executed the fourth, fifth, sixth, and seventh amendments to
the A&R Forbearance Agreement. The seventh amendment to the A&R Forbearance
Agreement extend the maturity date under the Note to June 1, 2012.
On July 31, 2012, American Chartered and Lake Street in conjunction with
their affiliate, 1800, entered into their eighth amendment to the A&R Forbearance
Agreement (“Eighth A&R Forbearance Agreement”).
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In the Eighth A&R
Forbearance Agreement, American Chartered agreed to: (1) further extend the
maturity dates under all notes for one year, until July 31, 2013; and (2) extend the
amortization schedule under all notes to allow for smaller required monthly principal
payments.
On July 31, 2013, Lake Street and their affiliate 1800, amended the A&R
Forbearance Agreement for the ninth and final time. The ninth amendment further
extended the maturity dates under all notes until January 31, 2014. On October 1,
2013, Lake Street defaulted on their obligation under the A&R Forbearance
Agreement. Pursuant to the terms of the A&R Forbearance Agreement, on October
15, 2013, American Chartered, through its affiliate, Scherston 1 recorded the deed with
the Cook County Recorder of Deeds, in Chicago, Illinois (“Transfer Date”). The
combined outstanding balance due under the Loans was approximately $1,517,506 as
of October 18, 2013. In addition to the Loans, American Chartered made various
loans to Lake Street’s affiliates and principals totaling several million dollars,
including nearly $2.3 million still outstanding as of the Transfer Date owed to
American Chartered by Lake Street and its affiliates, 1800 and API.
On February 19, 2014, Lake Street filed for Chapter 11 bankruptcy in the
Northern District of Illinois. On March 17, 2014, Lake Street filed a one-count
complaint seeking to establish that Defendants’ recording of the deed was a fraudulent
1
Scherston, an affiliate of American Chartered, held the deed on American
Chartered’s behalf because the American Chartered’s charter does not permit it to
hold real estate.
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transfer under 11 U.S.C. § 548 of the United States Bankruptcy Code (“Bankruptcy
Code”) and therefore should be avoided. On September 2, 2014, Defendants moved
for summary judgment.
LEGAL STANDARD
Summary judgment is appropriate when the pleadings, discovery, disclosures,
and affidavits establish that there is no genuine issue of material fact, such that the
movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56 (a); Winsley v.
Cook Cnty., 563 F.3d 598, 602-03 (7th Cir. 2009). The moving party bears the initial
burden of showing that no genuine issue of material fact exists. Celotex Corp. v.
Catrett, 477 U.S. 317, 325 (1986). The burden then shifts to the non-moving party to
show through specific evidence that a triable issue of fact remains on issues on which
the non-movant bears the burden of proof at trial. Id. The non-movant may not rest
upon mere allegations in the pleadings or upon conclusory statements in affidavits; he
must go beyond the pleadings and support his contentions with proper documentary
evidence. Id. The court considers the record as a whole and draws all reasonable
inferences in the light most favorable to the party opposing the motion. Bay v.
Cassens Transport Co., 212 F.3d 969, 972 (7th Cir. 2000). A genuine issue of
material fact exists when “the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986).
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DISCUSSION
Lake Street seeks to avoid the recording of the deed to the Property by
American Chartered’s affiliate, Scherston in October 2013.
It asserts that the
recording was a fraudulent transfer because reasonably equivalent value was not
received. Lake Street, as the debtor, has standing to bring this adversarial proceeding
pursuant to section 1107(a) of the Bankruptcy Code, which vests a debtor-inpossession the same rights, powers and duties of a trustee serving in a case under
Chapter 11.
11 U.S.C. § 1107(a).
Section 548(a)(1) of the Bankruptcy Code
provides a stand-alone cause of action for the recovery of a fraudulent transfer that
allows a bankruptcy trustee or debtor to avoid fraudulent transfers, including both
those that were “infected by actual fraud” and those that were merely “constructively
fraudulent.” BFP v. Resolution Trust Corp., 511 U.S. 531, 535 (1994). At issue in
this case is the latter category, under which a debtor will prevail if it is proven that:
(1) the transfer occurred on or within two years before the date of the filing of the
petition; (2) the debtor “received less than a reasonably equivalent value in exchange”
for the transfer; and (3) they were insolvent on the date of the transfer or became
insolvent because of the transfer. 11 U.S.C. § 548(a)(1)(B). The parties do not
address the first and third elements of establishing a constructive fraud claim. The
parties only contest whether Lake Street received reasonably equivalent value in
exchange for the transfer of the deed to American Chartered.
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Determining “reasonably equivalent value” is a two-step inquiry. Anand v.
Nat'l Republic Bank of Chi., 239 B.R. 511, 516–17 (Bankr. N.D. Ill. 1999). A court
must first determine whether the debtor received value, and then examine whether the
value is reasonably equivalent to what the debtor gave up. Id. at 517. The second
inquiry, whether what the debtor gave up was reasonably equivalent to what he
received, is more difficult for the court to establish. Id.
A. Lake Street Received Value
The parties have not addressed the requisite initial inquiry to determine if value
was received by Lake Street. In the absence of argument by either party, the Court
will decide if Lake Street received value in exchange for American Chartered’s
recording the deed to the Property, in October 2013. For the purposes of determining
a fraudulent conveyance, value is defined as “property, or satisfaction or securing of a
present or antecedent debt of the debtor . . .” See 11 U.S.C. § 548(d)(2)(A).
On the Transfer Date, the outstanding balance due for the Loans was
approximately $1,517,506. Under the terms of the 1756 Deed Agreement, American
Chartered had the right to record the deed in the event of a default. According the
agreement between the parties, upon the proposed sale of the Property any proceeds
American Chartered receives will be applied to the outstanding balance of Lake
Street’s Loans. Any excess funds, if any exist, will be applied to Lake Street’s
affiliates loans and any other loans cross collateralized with the Notes. Although the
sale of the Property has not materialized, in part due to the initiation of this case, Lake
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Street did in fact receive value at the time of the transfer. The prospective application
of any proceeds of the sale of the Property to Lake Street’s $1,517,506 outstanding
balance is value for the purposes of section 548. Having determined that Lake Street
did receive value, the Court will proceed with the second inquiry and determine if
Lake Street obtained reasonably equivalent value from American Chartered.
B. Lake Street Received Reasonably Equivalent Value
American Chartered argues that Lake Street received reasonably equivalent
value for the conveyance of the deed to the Property when viewed in light of all the
economic realities of the transaction. American Chartered asks the Court to consider
the deed transfer as part of a larger economic relationship between the parties which
spans multiple years, includes several properties and has seen numerous modifications
to the parties’ loan commitments. Conversely, Lake Street argues that the Court
should relegate its consideration of reasonably equivalent value to strictly the
submitted appraised value of the Property versus the value of the debt forgiven. Lake
Street asserts that American Chartered received a property worth $1,720,000 in
satisfaction for the debt of only $1,517,506. Lake Street concludes that American
Chartered’s windfall of more than $200,000 establishes that they did not receive
reasonably equivalent value for the Property.
“Equivalent value must be measured as of the time of the transfer.” Baldi v.
Lynch (In re McCook Metals LLC), 319 B.R. 570, 589 (Bankr. N.D. Ill. 2005).
Whether “reasonably equivalent value” has been given is a question of fact that
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depends on the circumstances surrounding the transaction. Leibowitz v. Parkway Bank
& Trust Co. (In re Image Worldwide LLC), 139 F.3d 574, 576 n. 2 (7th Cir. 1998).
The factors utilized to determine reasonably equivalent value are: (1) whether the
value of what was transferred is equal to the value of what was received; (2) the fair
market value of what was transferred and received; (3) whether the transaction took
place at arm's length; and (4) the good faith of the transferee. Barber v. Golden Seed
Co., Inc., 129 F.3d 382, 387 (7th Cir. 1997); Grigsby v. Carmell (In re Apex Auto.
Warehouse, L.P.), 238 B.R. 758, 773 (Bankr. N.D. Ill. 1999). The determination of
whether a debtor received reasonably equivalent value in exchange for a transfer does
not require a dollar-for-dollar equivalency. Barber, 129 F.3d at 387.
The trustee
bears the burden of proof on this issue. Id.
At the outset it is important to note that the value of the Property is subject to
differing opinions. Lake Street initially claimed that the Property was valued at
$2,000,000, as reflected in their Chapter 11 filings and further in their Complaint filed
in the case at bar. Now, Lake Street has supplied an appraisal for the Property which
places a fair market value at $1,720,000. On the other hand, American Chartered has
submitted an appraisal for the property with an “as is” market value of $1,300,000. In
addition, American Chartered supplements its asserted valuation by an offer to
purchase the Property for approximately $1,300,000 which was received after the
Property was marketed for sale.
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In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the Supreme Court
considered the application of §548 in determining the relationship between fair market
value and reasonably equivalent value in the context of a mortgage foreclosure. The
Court noted that in many situations reasonably equivalent value means fair market
value, so a court can evaluate whether a debtor received reasonably equivalent value
by comparing the fair market value of the property lost to the amount that the debtor
received from the transfer. BFP, 511 U.S. at 545 (the Court rejected fair market value
as a benchmark in the context of mortgage foreclosures which are not in accordance
with acquiring fair market value through a forced sale).
Determining a definite value for the Property based on dueling appraisal
valuations is a purely theoretical exercise.
The two different appraisals of the
Property are based on recent sales of nearby comparable properties. This approach is
deemed to be a well-accepted method of determining a properties valuation, but it is
by no means a scientific procedure. See Sidabras v. TCF National Bank (In re
Sidabras), 13 B.R. 01201, 2014 WL 1682796 *2 (Bankr. N.D. Ill. 2014). It relies on
subjective selection of “comparable” properties that have been sold and judgments to
make adjustments in the sale price. Id. Appraisals of commercial properties are
beneficial to ascertain a valuation range, however obtaining a definitive valuation
requires submitting the Property to the market place where buyers at arm’s length can
determine the fair market value. Fair market value is defined as “the price that a seller
is willing to accept and a buyer is willing to pay on the open market and in an arm's- 11 -
length transaction; the point at which supply and demand intersect.” Black's Law
Dictionary 1587 (8th ed. 2004). American Chartered has submitted evidence that the
Property was marketed for sale and an offer was obtained. Lake Street does not rebut
the legitimacy of the $1,300,000 offer to purchase the Property. Although BFP warns
that fair market value cannot be obtained through a mortgage foreclosure sale, the
Court finds that submitted offer to purchase was not based on the forced sale concerns
present in BFP. Here, American Chartered obtained the deed of the Property after
Lake Street’s default on the Loans. Having the deed to the Property in escrow and
immediately recording it upon Lake Street’s default eliminated the drawn out
foreclosure process which can yield depressed pricing for properties when sold. In
consideration of American Chartered’s appraisal, combined with an offer to purchase
the property at $1,300,000, the Court concludes that the fair market value of the
Property is $1,300,000.
Based on the fair market valuation of the Property at
$1,300,000, the Court finds that Lake Street did obtain reasonably equivalent value
compared to Lake Street’s outstanding balance of approximately $1,517,506.
Assuming arguendo that an accurate fair market value cannot be gained from
the offer to purchase the Property, the Court will consider Lake Street’s argument that
the Court should only consider their submitted appraised valuation of $1,700,000
versus the loan amount forgiven. The obvious problem with Lake Street’s narrow
approach is that the limited comparison of the dollar amounts that changed hands does
not reflect the totality of the economic realities of the October 2013 deed recording.
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See 4100 West Grand LLC v. TY Grand LLC, 481 B.R. 444, 458 (Bankr. N.D. Ill.
2012). The record clearly indicates that over the time span of six years American
Chartered worked to: (1) provide $750,000 in new loans to Lake Street or their
affiliates; (2) extend forbearance periods for four and half years; (3) extend the
maturity dates on the Loans nine times; (4) acquiesce to numerous interest rate
reductions; and (5) provide amortization adjustments to lower payments.
Over the course of the American Chartered’s relationship with Lake Street,
American Chartered provided nearly $750,000 in additional financing to Lake Street
and its subsidiaries. These new loans were incorporated into the existing A&R
Forbearance Agreements, and were provided to assist Lake Street and its subsidiaries
to pay delinquent tax debts and provide interim financing between forbearance dates.
Not only did American Chartered provide additional loans, but they also worked to
reduce the payments which Lake Street was obligated to make by manipulating
amortization tables and lowering interest charges. Additionally, it is worth noting that
only reason the deed to the Property was held in escrow by American Chartered’s
affiliate, Scherston, is due to its inclusion as collateral for the August 2010 loan to
API totaling $350,000.
Lake Street’s failure to acknowledge American Chartered’s assistance in
advocating for a limited consideration of the value of the Property is glaring. The
record is replete with numerous instances when American Chartered acted in good
faith and amended the terms of the Forbearance Agreements to acquiesce to Lake
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Street’s financial needs. Thus, the Court finds that Lake Street received reasonably
equivalent value for the transfer of the deed to American Chartered.
CONCLUSION
For the aforementioned reasons, the Court grants Defendants’ motion for
summary judgment is granted.
_____________________________________
Charles P. Kocoras
United States District Judge
Dated:
10/9/2014
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