490 B.R. 800
Bankr. S.D. Ill.2013Background
- Debtor HIE of Effingham, LLC filed Chapter 11 on Sep. 27, 2010, operating a Holiday Inn Express in Effingham, IL.
- In 2007, Debtor borrowed $7.2 million from Barclays Capital Real Estate, Inc. and granted a mortgage lien on hotel and substantially all assets.
- Mortgage naming Barclays was later transferred to Defendant and recorded July 24, 2007; it did not state interest rate or maturity date but incorporated Loan Agreement terms.
- On Mar. 22, 2011, Defendant moved for relief from stay (no abandonment request at that time); 90-day stay to permit payment in full was later agreed.
- January 18, 2012, Stipulation and Agreed Order provided that if Debtor failed to pay, case would convert to Chapter 7 and hotel would be deemed abandoned under § 554; Debtor failed to pay and case converted May 11, 2012.
- Trustee filed Aug. 7, 2012, a complaint to avoid Defendant’s mortgage under § 544(a)(3) and moved to modify the abandonment portion of the January 18, 2012 order, arguing improper abandonment and notice defects.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether abandonment was properly effectuated under § 554 and Rule 6007. | Bruegge argues abandonment was ineffective due to lack of proper notice and compliance. | Mid America Lodging contends abandonment followed Rule 6007 and local practice; service was appropriate. | Abandonment ineffective; ordered to strike abandonment provisions. |
| Whether Trustee is estopped by cash collateral orders or waiver from challenging the lien. | Bruegge argues no estoppel; orders did not resolve avoidability. | Mid America asserts estoppel/waiver from cash collateral orders and January 18 order. | No estoppel or waiver barred avoidance action. |
| Whether res judicata or collateral estoppel bars the avoidance action. | Bruegge contends cash collateral orders did not adjudicate avoidability. | Mid America relies on prior determinations of lien validity. | Res judicata and collateral estoppel do not bar the avoidance action. |
| Whether the January 18, 2012 order’s waiver bars Trustee from challenging the loan documents. | Bruegge seeks to avoid waiver effect, arguing it did not address avoidability. | Mid America argues waiver extends to post-conversion context. | Waiver does not bar avoidance action. |
| Whether the mortgage satisfies Illinois Conveyances Act § 11 to impart constructive notice to a bona fide purchaser under § 544(a)(3). | Bruegge argues failure to state rate and maturity on face defeats constructive notice. | Mid America contends incorporation by reference to the note suffices; § 11 is permissive. | mortgage is sufficient to provide constructive notice; § 544(a)(3) action fails. |
Key Cases Cited
- Broadway City, LLC v. Chitech, Inc., 358 B.R. 628 (Bankr.S.D.N.Y. 2007) (cash collateral orders do not preclude avoidance actions; lien issues separate from cash collateral)
- Ehrlich v. Goldberg, 59 B.R. 646 (Bankr.N.D. Ill. 1986) (constructive notice and incorporation by reference in mortgages)
- In re Caron, 50 B.R. 27 (Bankr.N.D. Ga. 1984) (consent motions cannot bypass Rule 6007 notice requirements)
- In re Klasi Properties, LLC, 2013 WL 211111 (Bankr.S.D. Ill. 2013) (permissive reading of § 11; incorporation by reference acceptable)
- Matter of Vitreous Steel Prods. Co., 911 F.2d 1223 (7th Cir. 1990) (collateral estoppel and res judicata limits on avoidability)
- Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950) (due process requires notice reasonably calculated to inform interested parties)
- In re Crane, 487 B.R. 906 (C.D. Ill. 2013) (district court held § 11 permissive; incorporation by reference suffices)
- In re Broadway City, LLC, 358 B.R. 628 (Bankr.S.D.N.Y. 2007) (see Broadway City above)
- In re Shara Manning Props., Inc., 475 B.R. 898 (Bankr.C.D. Ill. 2010) (constructive notice standards for recordation)
- In re Ehrlich, 59 B.R. 646 (Bankr.N.D. Ill. 1986) (constructive notice and integration principles)