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Johnson v. Burke Manor Bldg. Corp.

April 13, 1931


Appeal from the District Court of the United States for the Eastern Division of the Northern District of Illinois; George A. Carpenter, Judge.

Author: Fitzhenry

Before ALSCHULER and SPARKS, Circuit Judges, and FITZHENRY, District Judge.

FITZHENRY, District Judge.

Appellant's bill, to recover a preference, was dismissed for want of equity by the District Court. The Burke Manor Building Corporation owned, and leased to the bankrupt, a hotel property.In the lease there was a conveyance to the building corporation of all the furniture, furnishings, fixtures, and other equipment, and all renewals or replacements thereof, installed by the lessee, as security and pledge to the building corporation that the hotel company would meet its obligations under the lease. The hotel company defaulted in the payment of its rent after July 1, 1928.

The building corporation sued and recovered judgment for the rent for the months of July, August, and September. In November it instituted a second suit for rent, for the months of October and November, and also recovered a judgment. A creditors' bill was filed in the superior court of Cook county. On December 15, 1928, the Union Bank of Chicago was appointed receiver.

Prior thereto, October 10, 1928, a bill was filed in the superior court of Cook county by the building corporation against the hotel company and Erwin L. Wenzel to establish and foreclose its contract or equitable lien upon the pledged property of the hotel company in the leased premises. The receiver attempted to operate the hotel business, found it unprofitable, and, on February 2, 1929, petitioned the superior court for leave to cease operation of the business.

On February 4, 1929, the building corporation, appellee, filed its sworn petition in the creditors' suit, reciting its lease and the provisions thereof, the default of the hotel company, and the pendency of the foreclosure suit instituted October 10, 1928, and prayed that it be awarded the possession of the property, both real and personal, in the hands of the receiver. Both the receiver and the hotel company were ruled to answer the petition and duly served with notice. Later, the hotel company filed its demurrer thereto, which was overruled, and on February 14, 1929, the receiver was ordered by the court to deliver possession of the real and personal property in question to the building corporation.

On March 18 following, the master to whom had been referred the foreclosure suit filed his report, sustaining the contentions of the complainant therein in every particular. Three days thereafter, March 21, 1929, the petition in bankruptcy herein was filed. A temporary restraining order was issued by the referee, restraining the further prosecution of the foreclosure proceeding, which was later dissolved, and the foreclosure suit set for hearing in the superior court October 10, 1929. Appellant was elected trustee in bankruptcy.

The day prior to the hearing, appellant's bill in this case was filed in the District Court. An injunction, preventing the further prosecution of the foreclosure suit in the superior court, was prayed, and a motion for a temporary injunction was argued, but no order was made thereon. The foreclosure suit went to a hearing, and on October 15, 1929, a final decree was entered therein, declaring the lien of the building corporation and ordering a sale of the property to satisfy it, holding that the lien was superior to all liens, rights, titles, and interest in the property involved of the hotel company or Erwin L. Wenzel, and all parties claiming by, through, or under them, or either of them, and ordering that a sale be made; that the Wenzel chattel mortgage be set aside and the defendants and all persons claiming by, through, or under them, or either of them, subsequent to the commencement of this suit, be forever barred and foreclosed of and from any right, title, or equity of redemption or claim of, in, and to the property sold. The sale took place, the property was purchased by the building corporation, and the sale approved by the court.

October 21, 1929, the building association filed its answer to appellant's bill in this case, denying the jurisdiction of the court, and reciting the facts substantially as above outlined, and subject to its reservation upon the question of jurisdiction.

The lease in question was executed August 14, 1925. The bankrupt hotel company was organized July 25, 1925. The building involved and contracted for under the lease was completed early in 1927. There were some claims of breaches by the respective parties, but on March 10, 1927, a definite written agreement was entered into, settling all controverted questions, and the hotel company went into possession of the building and furnishings, as contemplated under the contract.

Appellee Erwin L. Wenzel was the controlling spirit and president of the hotel company from its beginning, and later, prior to September 12, 1928, became the sole equitable owner of the entire capital stock of the hotel company. The master in the superior court case, the foreclosure suit, found that Wenzel ordered his brother, the manager of the hotel, to cease paying any further rent to the building corporation, in an effort to force a voluntary reduction in the rent reserved. He was unsuccessful in this, then resigned as president, had the secretary resign, other officers elected, and caused the hotel company to execute a chattel mortgage to him, covering the furniture, furnishings, and fixtures of the hotel company in the building corporation's building, to secure the payment to him, the said Wenzel, of the sum of $44,466.62. The chattel mortgage was executed and acknowledged in due form and filed for record.

In the foreclosure suit, instituted October 10, 1928, the building corporation sought to set aside this chattel mortgage as fraudulent, in violation of the express provisions of the lease and the assignment and pledge sections thereof.

The equitable lien of the building corporation grew out of the written indenture of lease executed more than two and a half years prior to the filing of the petition in bankruptcy. The furniture, furnishings, and equipment of the hotel company were free and clear of liens of every kind and character until the equitable owner of the hotel company's entire property attempted to secure a lien for his own benefit, and, undoubtedly, for the purpose of forcing a reduction in the rent; and the property of the hotel company was regarded by the respective parties, and preserved, as security to the building corporation, according to the terms of the pledge; and it was considered there existed a valid, subsisting, binding lien, as between the building corporation and the hotel company, upon the ...

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