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Metropolitan Life Ins. Co. v. Whitestone Management Co.

April 17, 1935


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; James H. Wilkerson, Judge.

Author: Sparks

Before ALSCHULER, SPARKS, and FITZHENRY, Circuit Judges.

SPARKS, Circuit Judge.

The issues in these cases are identical. In cause No. 5288, the Metropolitan Life Insurance Company of New York filed a bill to foreclose its deed of trust executed March 3, 1926, by the Whitestone Company, then the owner in fee of the Drake Hotel in Chicago, to secure a $4,000,000 loan made by the Metropolitan. The bill was filed on April 4, 1933, upon default in certain principal and interest payments due under the note. The defendants to the bill were the Whitestone Company; its successor, the Whitestone Management Company; the Chicago Title and Trust Company (trustee under the trust deed); the National Realty and Investment Company (holder of a junior mortgage on the premises); and a group of subtenants occupying quarters on the premises. Included in this latter group were Tracy C. Drake, his wife and daughter, and John B. Drake and his wife and two daughters whose interest in the premises was said to arise out of an agreement, dated July 15, 1932, and duly filed for record, between the Whitestone Management Company, party of the first part, and Tracy C. Drake and John B. Drake, parties of the second part. The bill prayed for an accounting, for a foreclosure and for a receiver.

On the day the bill to foreclose was filed, W. M. Walker, appellee in No. 5289, filed a creditors' bill against the Whitestone Management Company, in which he asked for the appointment of a receiver. Thereupon, the court appointed appellee Williamson receiver in both causes, whereupon with the approval of the court, he notified the Drakes that he elected to disaffirm the contract between them and the Whitestone Management Company on the ground that the contract was detrimental to the interests of the estate.

In cause No. 5288, the two Whitestone Companies and the Drakes filed an answer to the bill neither denying nor affirming the allegations and demanding proof. The Drakes were permitted to intervene in cause No. 5289, and filed an answer in the nature of a cross bill to the bill of complaint in each cause. It was claimed in those answers and is now contended: (1) That the loan of March 3, 1926, and the mortgage securing it were invalid by reason of the Metropolitan's failure to obtain a license as a foreign corporation to transact business in Illinois; (2) that the Metropolitan was estopped to deny that the lien, leasehold and annuity interests of the Drakes, by virtue of their operating contracts of March 18, 1919 (hereinafter referred to) and on July 15, 1932, were prior and superior to the 1926 mortgage lien; (3) that the Metropolitan had come into equity with unclean hands, and that it must do equity to the Drakes before it could be permitted to have the relief sought; (4) that the receiver had no power to disaffirm the Drakes' operating contract of July 15, 1932. Both causes were referred to a master to hear the evidence and to report his findings of fact and his conclusions of law thereon. That report was adverse to each contention now urged by appellants, as set forth above. Exceptions to the master's findings and conclusions were filed by the Drakes. They were overruled by the court and the master's report was confirmed. The Drakes' cross bill and intervening petition were dismissed for lack of equity and the court retained jurisdiction until final decrees on the complaints.

The facts as found by the master, and which are supported by substantial evidence, are as follows:

In 1919 the Whitestone Company was organized for the purpose of building the Drake Hotel in Chicago. With a $5,000,000 first mortgage loan from Straus & Company the site was procured and the buildings were erected which are now in foreclosure.Tracy C. and John B. Drake were officers, directors and stockholders of the Whitestone Company, as well as of the Drake Hotel Company which managed another local hotel, the Blackstone.

On March 18, 1919, a management contract was entered into between the Whitestone Company and the Drake Hotel Company for a term of twenty-five years. This vested exclusive management of the new hotel in the Drake Hotel Company, provided for compensation to the managing company in the amount of $30,000 annually and a percentage of the profits, together with board and lodging accommodations to the active managers and employees of the operating company without expense to them, to such extent as had been usual in the Blackstone. John B. Drake moved to the new hotel and Tracy Drake remained at the Blackstone. In 1922 the Drakes caused the Drake Hotel Company to adopt a resolution which purported, without consideration, to assign the operating contract to themselves as individuals and to extend the benefits of that contract to their sons and grandsons.

In 1926 it became necessary to refinance the mortgage on the Drake Hotel property by obtaining a smaller loan for a longer period. Tracy Drake conducted these negotiations and, as a result, a $4,000,000 forst mortgage loan was obtained from the Metropolitan Life Insurance Company. In obtaining this loan Tracy Drake and his principal, the Whitestone Company, represented the title to the premises to be free and clear of any lien or encumbrance except that of the Straus mortgage, and at no time during the negotiations was any claim made by the Drakes, or the Drake Hotel Company, or the Whitestone Company that the contract of 1919 created a lien or charge upon the mortgaged property.

On February 23, 1927, the Drake Hotel Company (by Tracy Drake, its president, and A. B. Mapes, its assistant secretary) agreed with the Whitestone Company (by the same Drake and Mapes) to extend the operating contract of 1919 for a period of fifty years.

In the latter part of 1931 the Whitestone Company was delinquent in the payment of its principal and interest to the Metropolitan in the approximate amount of $270,000; it was delinquent in the payment of its taxes for 1929 and 1930 in excess of $300,000; and it lacked sufficient working capital to continue operations. Negotiations were had looking to a reorganization by the Drakes, Benjamin H. Marshall and other interested parties. Marshall was a stockholder of the Whitestone Company, and was also president and a director of the National Realty and Investment Company. The latter company offered to provide additional working capital under a plan of reorganization, provided the mortgagee waived existing defaults, and the Drakes canceled the contract of 1919. The plan finally agreed upon provided (1) the formation of the Whitestone Management Company to take over the assets and certain liabilities of the old company in return for part of its capital stock, (2) the purchase by the National Realty and Investment Company, for cash, of $100,000 par value of the reorganized company's capital stock, (3) the advancement by the same company of additional funds for working capital, to be secured by mortgage subordinate to the Metropolitan mortgage, (4) the cancelation of the operating contract of 1919 and the release of all rights thereunder by the Drakes. The plan was conditioned upon the willingness of the Metropolitan Company to cure the mortgage defaults by extending certain serial principal prepayments to the final maturity of the mortgage, and to lend sufficient money to the new company to pay the delinquent taxes. This plan was approved by the board of directors and the stockholders of the Whitestone Company. The Drakes attended each meeting and voted in favor of the plan which was consummated on July 15, 1932. Thereupon, the Drakes gave to the Whitestone Company and to the Whitestone Management Company a release of all claims and a covenant not to sue either of the companies; the Drake Hotel Company expressly canceled the 1919 contract and all amendments and assignments thereof, and released both Whitestone companies thereunder; and the Drakes and the Drake Hotel Company jointly and severally released and quitclaimed to the Whitestone Management Company all their right, title and interest in the property. The Whitestone Management Company thereupon paid the Drakes $50,000 in cash, gave them its promissory note for $50,000, and issued to them certain stock in the new company. The new company also canceled all indebtedness due the Whitestone Company from the Drakes and the Drake Hotel Company. At the same time the Metropolitan extended the payment of the principal then due on its mortgage and advanced $300,000 for the payment of the delinquent taxes. This advancement was secured by a mortgage on all furniture, fixtures and real estate of the new company. The National Realty and Investment Company purchased 20,000 shares of the Class B stock of the new company for $100,000 in cash and loaned $35,000 to that company for which it received the new company's note secured by a mortgage, subordinate to the Metropolitan's two mortgages.

On the same day, and in consummation of the plan agreed upon, the contract upon which the Drakes base their claim of a lien was entered into between them and the new company. The pertinent provisions are set forth in the margin.*fn1 It was referred to as an employment contract by the parties themselves in the releases which they concurrently executed and delivered, and the contract recited that all parties thereto mutually desired to enter into an employment contract in relation to the services and employment of the Drakes. It further recited that the new company employed the Drakes to serve in an advisory and administrative capacity in the operation of the hotel for a peeriod of six and one half years, the Drakes to perform such duties, except mere clerical duties, as might be assigned to them by the board of directors. In consideration of the performance of those services and the other covenants of the Drakes, the new company agreed to pay each of them $15,000 annually for six and one-half years; to rent, lease and demise an apartment in the hotel to John B. Drake for that period, and to do the same for Tracy C. Drake, in case he became dispossessed of the apartment then occupied by him in the Blackstone Hotel; and the company further agreed to furnish them, in connection with the apartments, food, laundry, and such other hotel services as were customarily furnished to the hotel's guests.

In April, 1933, the funds of the new company had been depleted to the extent that it had only $27,000 in cash with only $8,000 available for operating the hotel, and acting under its chattel mortgage the Metropolitan placed a ...

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