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December 23, 1966


The opinion of the court was delivered by: Marovitz, District Judge.


This is an equitable action in which plaintiffs ask this Court to impose a constructive trust in their favor upon the motel property located at 4800 Marine Drive in Chicago, by virtue of an alleged breach of a fiduciary relationship. Jurisdiction is founded upon diversity of citizenship and the requisite jurisdictional amount.

Defendants deny that any agreement was reached, that any fiduciary relationship was created, and that their purchase of the disputed property in any way infringed upon plaintiffs' legal rights.

Prior to November 15, 1958, Bromberg and his wife, who owned vacant real estate at 4800 Marine Drive, organized 4800 Marine Drive, Inc., an Illinois corporation, and conveyed this real estate to that corporation. First Federal made a first mortgage loan to 4800 Marine Drive, Inc., for $750,000, amortized over a fifteen year period, evidenced by a note and a mortgage covering said real estate, payable in monthly installments. The mortgagor also assigned to First Federal all leases and the rents, issues and profits.

Prior to the organization of 4800 Marine Drive, Inc., Bromberg organized the plaintiff, Holiday Lodge, Inc., which took a lease of the premises for 25 years, from May 1, 1959. The lease provided that it was subordinate to the lien of any mortgage upon the premises and all advances made on the security thereof.

A motel was constructed on the premises and operations commenced in December, 1959. Financial problems arose in meeting the mortgage payments. Holiday Lodge's business did not produce sufficient income to pay the rent, taxes and required mortgage payments, amounting in all to $10,300 a month. Partial payments were made on the mortgage, but were only sufficient to make the payments through June, 1960.

In October, 1960, the creditors of Holiday Lodge, formed a committee to try to work out the problems of the motel. But on January 30, 1961, an involuntary petition in bankruptcy was filed against Holiday Lodge and there was a general order of reference. In December, 1960, First Federal had accelerated the maturity of its mortgage note and declared the entire balance due.

On February 1, 1961, petitioning creditors filed a motion to adjudicate Holiday Lodge a bankrupt and to restrain First Federal from taking any legal action or commencing any proceeding to foreclose the trust deed executed by the "alleged bankrupt and secured on its realty" located at 4800 Marine Drive, until further order of the court. Such a restraining order was entered on February 3, 1961.

On the same day, Holiday Lodge filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, and was given authority to operate its business. On February 15, 1961, First Federal filed a petition to vacate the restraining order and for leave to join Holiday Lodge as a defendant in its proposed foreclosure.

Numerous hearings followed before a referee until April 12, 1961 when, no plan or arrangement having been filed by Holiday Lodge, the referee entered a rule a show cause why the proceedings should not be dismissed.

On April 14, 1961, Holiday Lodge's petition to make an arrangement was dismissed, an order of adjudication was entered, and a receiver appointed. On May 8, 1961, the referee vacated the restraining order of February 3. This was followed by the filing of a foreclosure suit on May 11, 1961, by First Federal in the Superior Court of Cook County, Illinois.

On its review of the order of May 8, 1961, the District Court, on July 18, 1961, commenced a de novo hearing on the petition to vacate the restraining order of February 3, 1961. On July 31, 1961, the court made its findings, entered an order reversing the referee's orders, except the one appointing a receiver, referred the case to another referee, and specifically continued the restraining order against First Federal and denied its motion to vacate said order. An appeal followed.

On March 13, 1962, the Seventh Circuit reversed the order restraining First Federal from taking action to foreclose the mortgage. In the Matter of Holiday Lodge, Inc., 7 Cir., 300 F.2d 516, cert. denied Holiday Lodge, Inc. v. First Federal Savings and Loan Ass'n, 371 U.S. 824, 83 S.Ct. 43, 9 L.Ed.2d 63.

Thereafter, the foreclosure action was reactivated and the findings of the Master who heard the foreclosure matter were filed in November, 1962. A decree of foreclosure was entered April 10, 1963. This decree contained a finding that there was due to First Federal the sum of $949,426.30. At a Master's sale, First Federal was the sole bidder. Subsequently the sale was confirmed by the court. The association was put in possession on June 30, 1963. On May 12, 1964, the appeal from the foreclosure decree was dismissed. First Federal Savings & Loan Ass'n v. 4800 Marine Drive, Inc., et al., 49 Ill. App.2d 218, 198 N.E.2d 583.

In the period from February of 1961 to April of 1961, Holiday Lodge operated the motel as debtor in possession. The receiver operated the property from April of 1961 to January, 1962, when Holiday Lodge again operated the property as ...

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