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
In essence, plaintiffs contend that they and defendants entered
into an alleged agreement to pursue a joint venture — that being
to make plaintiff, Holiday
Lodge, Inc., of which plaintiff Bromberg was president at all
times relevant hereto, a franchise member of the Holiday Inns'
system. Allegedly, the agreement created a fiduciary relationship
between the parties. Plaintiffs aver that defendants treated the
agreement as terminated, and after the motel property was
acquired in a foreclosure sale by the first mortgagee, First
Federal Savings and Loan Association of Chicago, defendants
purchased the property for themselves, in derogation of the
alleged fiduciary relationship.
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
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
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
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
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 ...