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Calumet Federal Savings and Loan Association of Chicago v. Lake County Trust Co.

decided: January 17, 1975.

CALUMET FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO, A CORPORATION OF THE UNITED STATES OF AMERICA, PLAINTIFF-APPELLANT,
v.
LAKE COUNTY TRUST COMPANY, A CORPORATION OF INDIANA, AS TRUSTEE UNDER TRUST AGREEMENT DATED FEBRUARY 1, 1966, AND KNOWN AS TRUST NO. 1217; LEE LARSON; HIL-BUDD CORPORATION, A CORPORATION OF NEW YORK; "UNKNOWN BENEFICIARY OR BENEFICIARIES" UNDER TRUST NO. 1217; "UNKNOWN OWNERS"; AL SHINN, GEORGIANA SHINN, HIS WIFE, AND E. J. LEWIS INVESTMENT CO., INC., DEFENDANTS-APPELLEES. CALUMET FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHICAGO, A CORPORATION OF THE UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE, V. E. J. LEWIS INVESTMENT CO., INC., AL SHINN AND GEORGIANA SHINN, DEFENDANTS-APPELLANTS, AND HIL-BUDD CORPORATION, DEFENDANT-APPELLEE, ET AL.



Appeals from the United States District Court for the Northern District of Indiana, South Bend Division Nos. 69 S 33 thru 38 and 69 S 49 thru 54 Robert A. Grant, Judge.

Hastings, Senior Circuit Judge, Stevens and Sprecher, Circuit Judges.

Author: Sprecher

SPRECHER, Circuit Judge.

There are two major questions raised by the two consolidated appeals of this diversity case. First, whether the mortgage held by the plaintiff, Calumet Federal Savings and Loan Association of Chicago (Calumet), was in default, and second, whether and to what extent Hil-Budd Corporation (Hil-Budd) as holder of a second mortgage on the subject properties was entitled to damages because of Calumet's failure to give them thirty days notice of intent to foreclose, pursuant to an agreement between the two. Since these two appeals arise from the same set of transactions, they have been consolidated and we deal with the facts together.

I

In early 1966 Hil-Budd negotiated a construction loan with defendant-borrowers*fn1 in the amount of $192,307.64.*fn2 These funds were to be used for the construction of homes on 25 parcels in Meadowdale Subdivision, Michigan City, Indiana and were secured by a blanket mortgage. Borrowers' note was to be paid in full by January 31, 1967 and to bear interest at 6 percent per annum from February 1, 1966. In addition, upon any event of default, interest from that time was to accrue at the rate of 2 percent per month. The Hil-Budd mortgage went into default no later than December 1966.

Prior to the Hil-Budd mortgage, on January 18, 1966 Calumet issued a letter of commitment addressed to Hil-Budd in which it promised to make 25 $8,000 mortgage loans on the Meadowdale properties. Calumet in January 1967 declined to honor this commitment because its appraisers informed them that the improvements on the subject properties did not meet the terms and conditions of the commitment agreement.

Subsequent to this, a meeting of the parties was held in Chicago. Calumet agreed to make the 25 $8,000 loans. In regard to each loan, a 6 percent note was given by borrowers calling for monthly payments of $58 per month*fn3 with payments to begin April 30, 1967.*fn4 Calumet further required as part of the compromise agreement that a collateral pledge of $37,500 ($1,500 for each loan) be deposited with it to further secure the 25 notes and mortgages.

Hil-Budd received $156,875 from the proceeds of the Calumet loan and there was then left a balance of approximately $30,000 on the Hil-Budd loan. Since federal regulations required that Calumet have a first lien, Hil-Budd agreed to subordinate its first mortgage on the property to Calumet's individual mortgages. In consideration for Hil-Budd agreeing to accept a junior status Hil-Budd and Calumet executed the following agreement:

In consideration of the subordination of Hil-Budd's prior mortgage, as aforesaid, the Association has agreed and hereby confirms its agreement, that in the event any default shall exist, in any of the Association's $8,000 mortgage loans, or in the notes evidencing the same, or the mortgages serving the same, the Association will give Hil-Budd written notice of such default and 30 days to cure such default prior to the Association's institution of foreclosure proceedings upon its said mortgages.*fn5

The first payments on the subject notes and mortgages were due in June 1967. The monthly payment for each parcel was $58 for principal and interest and $40 for the tax and insurance escrow. Borrowers paid $2,920 in August 1967 and were in default from the start.

In August 1968, proceeds of the previously established pledge accounts were applied to cure the delinquencies on the various loans. Calumet took the position that the pledged savings account had to be maintained at the full level. Stock in the name of Anna Lewis and Georgiana Shinn was deposited with Calumet with the understanding that if the money to replenish the pledge accounts was not forthcoming within 30 days, the stock would be sold. Pursuant to that agreement the stock was sold and $5,300 was applied to further delinquencies on loan accounts and the balance was applied to the pledge accounts.

II

On March 4, 1969 Calumet filed foreclosure actions on all 25 of its loans to borrowers. Hil-Budd immediately sought to have the action dismissed or in the alternative be granted summary judgment, pleading that the action should not have been filed until they had received 30 days notice of Calumet's intent to foreclose and an opportunity to cure.*fn6 Calumet affirmatively opposed Hil-Budd's motions on the grounds that an agent of Hil-Budd had represented to Calumet that Hil-Budd had sold its interest in these properties and that therefore notice was no longer necessary.*fn7 ...


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