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Barkhausen v. Cont. Ill. Nat. Bank





APPEAL from the First Division of the Appellate Court for the First District; — heard in that court on appeal from the Circuit Court of Cook County; the Hon. HARRY M. FISHER, Judge, presiding.


Rehearing denied July 13, 1954.

This cause reaches this court as a result of the allowance of plaintiffs' petition for leave to appeal from the judgment entered by the Appellate Court for the First District, reversing the judgment entered in their behalf in the circuit court of Cook County. The plaintiffs in this proceeding are L.H. Barkhausen and Randolph Bohrer, co-partners, doing business as the Doubleby Co., pursuant to a partnership agreement effective as of January 31, 1940. The defendant is the Continental Illinois National Bank and Trust Company of Chicago, as trustee under a certain indenture of mortgage dated May 1, 1935, representing a group of bondholders numbering more than 1000, with bonds totaling $2,300,000. The individual owners of these securities were not made parties defendant. The lower court ruled that they were adequately and properly represented by the trustee. The Appellate Court affirmed this ruling, and its propriety is not challenged here.

These are the salient facts that precipitated the legal controversy before us: The interested bondholders appearing in this case were originally owners of bonds in the United Masonic Temple Corporation, which bond issue defaulted, and the mortgage securing them was foreclosed. A reorganization followed resulting in the formation of 32 West Randolph Corporation, a new company organized for the purpose of taking title to the property as a result of the foreclosure sale. This foreclosure sale wiped out the former owners of the property, and the bondholders became the owners. Each of the bondholders received the same principal amount of bonds in the new company that he had owned in the old company, and in addition received his proportionate share of stock (at the rate of 10 shares for each $1000 bond) of the new company representing ownership of the equity. This stock, for the purpose of insuring continuity of management, was placed in a voting trust. The 32 West Randolph Corporation caused to be issued on May 1, 1935, a mortgage indenture which purported to secure first mortgage leasehold bonds, which might be issued, in the principal sum not to exceed $2,678,500 and would be due on May 1, 1960. There are presently $2,300,000 in bonds outstanding, and the interest on them was paid in full to and including April 30, 1951. This obligation was secured by mortgage assets.

Late in 1945 plaintiffs became interested in the purchase of the equity of 32 West Randolph Corporation, as mortgagor in the mortgage assets, and, on January 29, 1946, all the right, title and interest of the mortgagor in the mortgaged property, and the right, title and interest of mortgagor under a certain lease to Oriental Theater Corporation dated January 1, 1936, and all the equipment and personal property in and about the Oriental Theater was conveyed to Herman Brash, as trustee, under a trust agreement of the same date, hereafter referred to as the Brash Trust. The purchase price ultimately agreed upon for this sale was $165,000. By this agreement it was recited that Brash, as trustee, was about to take title to the above mentioned property; that the beneficiaries of the trust were the plaintiffs; that the interest of the beneficiaries should consist solely of a power of direction to deal with the title to the trust property and to manage and control that property, and the right to receive the proceeds therefrom; and that the trustee agreed to deal with the trust property only when authorized to do so in writing by the beneficiaries.

It further appears that on the same date, January 29, 1946, plaintiffs assigned their beneficial interest in the Brash Trust to the Continental National Bank as security for the mortgage indebtedness; that by a written instrument, hereinafter referred to as the assumption agreement, Brash, not in his individual capacity but in his capacity as trustee under the Brash Trust, assumed all of the covenants of the mortgagor in the mortgage indenture of May 1, 1935; and that the assumption agreement was executed pursuant to written authority, direction, consent and approval of plaintiffs as beneficiaries of the Brash Trust. Defaults occurred under the covenants of the mortgage indenture on May 1, 1952, in that the installment of interest on the bonds and the first installment of the real-estate taxes on the mortgaged property for the year 1951, due and payable on May 1, 1952, were not paid on that date, and there was a failure to deposit the fee rentals under the ground leases. As a result of the foregoing defaults, plaintiffs were notified by the Continental as trustee that foreclosure was contemplated, and that the bondholders would ultimately rely upon the plaintiffs to pay the entirety of the mortgage indebtedness. It was contemplated that there would be a deficiency of large proportions.

The plaintiffs instituted this suit in the circuit court of Cook County seeking a declaratory judgment exonerating them from any personal liability for the pre-existing mortgage debt of more than $2,300,000. The trial court entered summary judgment for the plaintiffs holding there was no personal liability on their part. The Appellate Court, holding to the contrary, reversed the judgment of the circuit court without remanding and entered summary judgment against plaintiffs for more than $2,300,000. This determination was predicated upon the following instruments: (1) the indenture of mortgage executed by 32 West Randolph Corporation dated May 1, 1935, (2) a typical Illinois land trust agreement dated January 29, 1946, with Herman Brash as trustee and the plaintiffs as beneficiaries, and (3) an agreement dated as of January 29, 1946, assuming the pre-existing mortgage indebtedness, executed by Herman Brash, not individually but solely in his capacity as trustee of the land trust. In support of plaintiffs' motion for summary judgment was attached the affidavit and additional affidavit of Randolph Bohrer and to it were attached several exhibits. Affidavits were also filed on behalf of defendants supporting their motion to strike plaintiffs' motion for summary judgment. Those documents provided the factual background.

The uncontradicted proof before us demonstrates that plaintiffs never contemplated assuming personal liability in negotiating for the purchase of the Oriental property. Likewise, it is equally clear that the bondholders never contemplated any such liability on the part of the plaintiffs. They were repeatedly advised, in the negotiations for the sale, that the plaintiffs were not assuming any responsibility for the mortgage indebtedness. The plaintiffs in their offer to purchase provided for the transfer of the assets to the purchaser's nominee, Herman Brash as trustee, and provided for the pledge with the Continental Bank as mortgage trustee, of the purchaser's beneficial interest in the trust. The offer contained nothing with respect to any assumption of the bond obligations or personal liability on the part of the purchasers, but the schedule of assets, attached to and made a part of the offer, expressly specified that such assets were being purchased subject to the mortgage. The 32 West Randolph Corporation, in transmitting the plaintiffs' offer of purchase to the voting trust certificate holders, who were also the bondholders, to obtain their consent to the sale, made it extremely clear in unmistakable language that the sale was subject to the underlying mortgage without any assumption of personal liability. Their first communication on this subject read as follows:

"Recently a proposal has been made to the company by Mr. L.H. Barkhausen and Mr. Randolph Bohrer, co-partners (doing business as Doubleby Co.) to purchase all of the assets of the corporation, subject to all of its liabilities (included in the liabilities are your bonds in the amount of approximately $2,525,500.00) paying therefor the sum of $140,305.50, which is equal to $5.00 per share for the stock outstanding, or at the rate of $50.00 for each $1,000.00 bond outstanding. * * * These gentlemen agree that if they become the purchasers they will deposit with Continental Illinois National Bank & Trust Co. of Chicago, the trustee under the mortgage securing your bonds, all evidences of ownership of the equity purchased, pledging that which they have purchased (that is, all of the assets of the corporation, subject to all of its liabilities) as further security for your bonds. In the event of any forfeiture due to default on the payment of interest or principal of your bonds, or any other default whatsoever under the mortgage securing your bonds, they would lose their entire investment.

"From the enclosed statement you will see that after providing for depreciation, and interest is paid on the bonds there is nothing left for the stock and this purchase by these men represents a speculation on their part." (Emphasis supplied.)

Not receiving the requisite number of consents to the sale a follow-up letter was sent to the bondholders by the voting trustees which read as follows:

"Several days ago the undersigned sent you a registered letter containing the offer made by L.H. Burkhausen and Randolph Bohrer to purchase all of the assets of 32 West Randolph Corporation subject to all of the liabilities of every kind and nature and specifically subject to your bonds which are outstanding in the approximate amount of $2,525,000.00.

"To refresh your memory, if you have mislaid our original letter, the purchasers propose to pay the sum of $140,305.50 into the Corporate treasury to be distributed to the holders of Voting Trust Certificates which means the receipt by every holder of a $1,000.00 bond the sum of $50.00. You are not selling or parting with your bond. That you retain as in the past. The $50.00 you will receive for each bond (if you have not parted with your stock) will be distributed as a liquidating dividend to you. Everything that will be purchased under this proposal will be turned over and assigned to the Continental Illinois National Bank and Trust Company of Chicago, as Trustee under the mortgage securing your bonds as additional security for the payment of interest and principal on your bonds so that if there is a forfeiture due to default in the payment of principal or interest on your bonds or any other provision of the mortgage the buyer would lose the investment made ($140,305.50) and the Continental Illinois National Bank & Trust Company as Trustee would acquire for the bondholders the assets so purchased and you would have had $50.00 in cash for each $1,000.00 bond owned. In other words, you bondholders must be paid out or the purchaser will lose his investment." (Emphasis supplied.)

The affidavit of Randolph Bohrer discloses that shortly before he instituted this action, he sought from the officers of the defendant bank a report of their recollection of the Oriental transaction, after consultation and study of the files and memorandum made contemporaneously therewith. Based on such records and their ...

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