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Psl Realty Co. v. Granite Investment Co.





APPEAL from the Circuit Court of Madison County; the Hon. JOSEPH J. BARR, Judge, presiding.



We consider this case on appeal a second time. On the first appeal (42 Ill. App.3d 697, 356 N.E.2d 605) we dissolved a preliminary injunction and a receivership for the reason that the plaintiffs in their complaint had sought only ancillary and temporary relief; no attempt was made to obtain relief on the merits of any claimed cause of action. We remanded the cause for a hearing to determine the proper expenses of the receivership and, after appropriate pleadings on the matter, for a determination of the plaintiffs' entitlement to be paid accrued, unpaid installments upon the contracts for deed which gave rise to this lawsuit.

This second appeal considers the propriety of the action of the trial court in striking certain petitions filed by the defendants and the final order of April 29, 1977, discharging the receiver and denying other petitions filed by defendants.

Since our disposition of the first appeal was upon procedural grounds the facts attending this case were rather sparsely stated. For disposition of this appeal a more complete statement of a complicated factual situation must be furnished.

Prior to August 1, 1970, the defendant James Green, in conjunction with others, developed and constructed several apartment complexes in Madison, Clinton, St. Clair and Sangamon Counties, Illinois. To obtain funds for the projects first lien mortgages were executed in favor of Piasa Savings and Loan Association (Piasa). Financial difficulties were encountered in the completion and operation of the units and restructuring of the debt and provision of additional construction funds became necessary. To accomplish this the parties entered into a lengthy and detailed agreement, termed the base agreement, on August 1, 1970. Under its terms title to the units was conveyed to a newly formed corporation named PSL Realty Co., wholly owned by Piasa Savings and Loan Association, and PSL Realty Co. (PSL) then entered into contracts for deed to the same properties with Granite Investment Company (Granite), a limited partnership of which James Green (Green) was the principal, to reconvey when the provided payments were made and conditions fulfilled. Piasa Savings and Loan Association continued to hold the first lien mortgages as mortgagee.

By the terms of the base agreement all rental proceeds of the units were to be delivered to PSL by Granite, 20% of which were to be used for expenses of operating the properties, such as utilities, taxes, repairs, etc., and 80% of which were to be applied to debt service on the mortgages. Financial matters apparently did not go well for either party. Assertedly Piasa was so adversely affected by the situation that in order to protect its depositors it was merged with the Illini Savings and Loan Association (Illini) and ceased to exist as a separate operating entity. The merger was procured by the Federal Savings and Loan Insurance Corporation (FSLIC) to prevent losses to Piasa's depositors and avoid insurance payments to cover those losses. As part of the merger Illini became the owner of the mortgages, 48 in number, upon the apartment units and a residence of James Green. They also became the sole owner of PSL Realty Co. which, under the base agreement, was holder of legal title to the units, subject to the contracts for deed with Granite, and entitled to the gross rentals from operation of the units.

Matters pertaining to the financial management and operations of the units reached a climax in March 1972. In later testimony Green admitted that the apartments were losing about $30,000 per month at the time. On March 27 PSL and Illini demanded the books and records from Granite, but they were refused. On April 11 PSL and Illini sought, and received, a temporary injunction, without notice but with a bond of $50,000, security waived. The injunction ordered Granite and Green to refrain from collecting rents and to not interfere with plaintiffs collecting rents. Granite and Green were also directed to turn over their books for examination. Notice of default and forfeiture of the contracts for deed between PSL and Granite were served upon Granite's attorney on April 20 and upon Green on April 21. On April 21 Granite and Green filed a motion to quash the temporary injunction and a counterclaim for an injunction against PSL and Illini that would prevent their interference with defendants' operations. Hearings were held on April 21, 24 and 26. During the hearing on the 26th the plaintiffs made an oral motion for the appointment of a receiver for all the units. Green and Granite voiced no specific objection to the appointment of FSLIC. On April 28, 1972, the court entered an order denying the motion of Green and Granite to dissolve the temporary injunction and appointing FSLIC receiver. The April 28 order delineated the powers and duties of the receiver as follows:

"IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the Federal Savings and Loan Insurance Corporation be appointed Receiver herein, with the usual powers of Receiver in Chancery, without bond, to manage, lease, rent, pay all bills, collect rents, issues and profits from the premises, pay all wages due or to become due to employees, supervise, repair, rehabilitate, insure and to perform all duties of Receiver in connection with the real estate involved in this suit and described in the exhibits attached to the complaint herein, and to report to this Court by the 15th of each month commencing May 15, 1972, and each thirty (30) days thereafter the income received from said properties by it, and the expenditures made in connection with the management of said premises. Said Receiver is herewith authorized and empowered to designate as its local agent to act on its behalf, in connection with the foregoing, any person, firm or corporation, including any of the parties to this litigation."

Pursuant to the last sentence of the above FSLIC designated Illini as its local agent in the management of the receivership properties. As agent it collected the rents, paid the expenses, selected managers, kept the books on the transactions, etc.

Green and Granite appealed the April 28, 1972, order and we reversed for the reasons already stated. In our original opinion we presumed that plaintiffs had been paid the installments on the contracts for deed which had come due while the case was pending settlement negotiations and appeal. We dissolved the temporary injunction and the receivership and remanded the cause for a hearing to determine the fees and expenses of the receiver.

Both plaintiffs and defendants filed petitions for rehearing. The plaintiffs pointed out that they had received no installment payments on the contracts for deed and requested an order of this court directing the receiver to apply accumulated moneys in its hands to the contracts. Granite and Green asserted certain considerations due them and that as a result the plaintiffs were not entitled to have the accumulated moneys in the hands of the receiver applied to the contracts. After reconsideration we stated: "In view of the apparent factual dispute regarding plaintiffs' entitlement to payments on the contract it is necessary that the question be determined in the first instance by the trial court after pleadings and a hearing on the merits." We thereon directed that upon remand the trial court should call for pleadings upon the issue of plaintiffs' entitlement to receive from funds in the hands of the receiver the accrued, unpaid installments of the contracts for deed, hold a hearing and render a decision upon the merits.

The original opinion of this court dissolving the injunction and receivership was filed July 23, 1976. On August 13, 1976, PSL and Illini filed their petition for rehearing. On August 18, 1976, FSLIC purchased the first lien mortgages on all units in the receivership for $10,673,000 from Illini. On August 26, 1976, without notice to the defendants, the trial court or this court, the receiver, FSLIC filed a mortgage foreclosure action in the Federal District Court for the Southern District of Illinois on all 48 mortgages purchased from Illini. The foreclosure complaint alleged that no payments on principal or interest had been made on the notes since March 31, 1972. On August 31, 1976, Granite and Green filed their petition for rehearing in this court. The supplemental opinion upon rehearing was filed on September 23, 1976, and the mandate issued October 13, 1976.

On October 28, 1976, the receiver filed a petition in the trial court for an order directing it to file a final report and setting a hearing thereon. On November 1, 1976, Granite and Green filed a petition alleging that FSLIC had wilfully represented to the court that it was an impartial third party, neutral in all respects, and capable of administering the properties without favoritism and without self-interest or profit. It was further alleged that such representations were false in that FSLIC did in fact have a substantial self-interest in the properties, had contributed $6,000,000 to the plaintiffs and was contractually liable to contribute much more in certain events directly related to the subject matter of the lawsuit. The petition further asserted that FSLIC was the instigator of the wrongful forfeitures of the contracts for deed by PSL, that it had the right to purchase assets of Piasa, predecessor of Illini, at book value; that FSLIC as receiver expended hundreds of thousands of dollars toward capital improvements of the properties, thus adding to their value, and expended hundreds of thousands of dollars in renovation, upgrading and maintenance of the properties, thus adding to their value, all of which funds were taken from rental receipts, and notwithstanding that it collected over $6,000,000 in rents it made no payments of principal or interest on the mortgages on the properties. The petition finally alleged that in breach of its fiduciary duty it purchased the 48 mortgages on the properties of which it was receiver, without notice to or approval of the court, accelerated the payments due upon such mortgages, and, on August 26, 1976, without notice to or permission of the court, filed suit to foreclose all 48 mortgages, all contrary to its fiduciary duty to the parties and adverse to the specific rights of the petitioners. The petition concluded with a prayer that the receiver be ordered to immediately reassign the mortgages to Illini, account for all its expenditures, pay into the rental fund all money paid to officers and employees of Illini and PSL, pay any excess of money to Granite for use in paying its obligations, turn over all books and records and return physical possession and management of the properties to petitioners. Granite and Green also filed an objection to the petition of FSLIC for authority to file a final report on the grounds that they had filed a petition for affirmative relief against the receiver and the case had not reached the stage for a final report.

FSLIC filed a response to the November 1, 1976, petition of Granite and Green in which they denied any wrongdoing in their actions as receiver. With regard to the allegations of wrongful purchase of the mortgages from Illini it asserted that the purchase was made, not as receiver, but in its capacity as an agency of the United States acting pursuant to the supervisory duties and powers granted it by Federal law. It further asserted that at no time had the notes and mortgages been in the possession of the receiver since the receiver was appointed "to perform all duties of receiver in connection with the real estate involved in this suit * * *." As count II FSLIC incorporated an affirmative response to the November 1, 1976, petition. In this FSLIC asserted that it did not seek the receivership and accepted the office only on condition that it be permitted to appoint Illini as its local agent. It made no representations regarding its qualifications to act and no questions were asked or objections raised, although its supervisory interest underlying the subject litigation was well known. In its supervisory capacity, and pursuant to its statutory duties, it suggested and implemented the merger of Piasa into Illini and as an incident of such merger entered into a financial agreement designed to minimize the danger to Illini's stability caused by the absorption of Piasa's assets and liabilities, and no secret has ever been made of FSLIC's involvement. It further asserted that its supervisory interest did not in any way disqualify it from serving as receiver and section 10-1 of the Illinois Savings and Loan Act (Ill. Rev. Stat. 1975, ch. 32, par. 921) specifically authorizes the appointment of FSLIC as receiver of closed associations. FSLIC finally asserted that it purchased the 48 mortgages for $10,673,000 under the terms of its financial assistance agreement with Illini which gave it the right to purchase at book value any asset of Piasa held by Illini which had not been liquidated. FSLIC purchased the mortgages and filed the foreclosure after the appellate court ruled that the receivership had to be dissolved and that these actions were not taken as receiver but as an agency of the United States acting in accordance with its functions under Federal law.

On December 22, 1976, acting on its own motion, the court struck the Granite and Green petition of November 1, 1976, and the response of FSLIC thereto for the reason that neither of the pleadings were responsive to the mandate of the appellate court. The order called for the final report of the receiver to be filed by February 10, 1977, and any objections thereto by February 25, 1977.

On January 3, 1977, Granite filed a petition charging plaintiffs with wrongful dispossession from the premises and wrongful procurement of a receiver, they asserted that plaintiffs had paid themselves and their agents large fees for management and prayed that the court order the receiver to pay petitioner a reasonable sum for loss of profits they would have derived from management. On the same day Green filed a petition for accounting in which he alleged he was the owner of laundry equipment in the Spencer Gardens apartment unit, that the plaintiffs and the receiver utilized such equipment in their operations, thereby converting them to their own uses. The petition further alleged that Green was the owner of all stoves, refrigerators and miscellaneous appliances in all units in the receivership and that the plaintiffs have refused to account for the profits therefrom. The petition prayed that the plaintiffs be ordered to account for all monies received from the laundromat and for all profits from rental of the appliances. Also filed on January 3, 1977, was a motion in aid of appellate court mandate by Granite in which it was alleged that the plaintiffs and the receiver have refused to restore petitioners to the status quo that existed at the time the temporary injunction was issued by returning possession of the units to petitioner. The prayer of the motion was for an order of court placing Granite in possession of the units.

The final report of the receiver was filed on February 9, 1977. It recited that FSLIC had served for 54 months and had filed with the court monthly reports of all monies collected and expended. Attached to the report was a consolidated statement which reflected income from rentals and expenditures for various categories such as taxes, utilities, management fees, legal fees, etc., all items being related to the several different rental units comprising the receivership property. The summary showed gross rentals of $5,734,933.89 and expenses of $4,149,835.79 and an undisbursed balance of $2,158,313. The excess over the arithmetical balance was interest earned on the receiver's account and certain adjustments. The final report concluded with a prayer for an award of fees to be paid from the balance on hand and the discharge of the receiver effective September 30, 1976.

On February 25, 1977, FSLIC filed a response to the Green petition of January 3, 1977, in which it denied his assertions regarding ownership of the laundry facilities at Spencer Gardens unit and the refrigerators, stoves and appliances at all units and alleged them to be attached to and part of the real estate. The response also alleged that the matters asserted in the Green petition were a duplication of a prior suit pending in the circuit court of St. Clair County, No. 73 L 1676, and the petition should accordingly be dismissed pursuant to section 48(c) of the Civil Practice Act (Ill. Rev. Stat. 1975, ch. 110, par. 48(c)).

Also on February 25, 1977, FSLIC filed a response to the Granite petition of January 3, 1977. It denied paying management fees to Illini or PSL and admitted paying monthly fees to resident unit managers. It further denied that Granite has been deprived of any profits since Granite had admitted to losing $30,000 per month by its management of the properties prior to appointment of the receiver. It concluded by stating that no management services were provided by Granite since the appointment of the receiver and therefore they were not entitled to fees.

FSLIC filed on February 25, 1977, its motion to strike Granite's motion for an order in aid of appellate court mandate on the grounds that only the appellate court could render such an order, the motion was premature, and, in any event, FSLIC obtained possession of the units from PSL, not Granite, a fact it asserted was admitted by Granite in its petition and in two complaints filed in St. Clair County Circuit Court, Case Nos. 73 L 1674 and 73 L 1677.

On February 25, 1977, the plaintiffs field a response to the receiver's final report coupled with a petition for distribution of undistributed receipts. By this pleading the plaintiffs called upon the court to approve the final report of the receiver and order the undistributed balance of $2,158,313 applied to payment of past due mortgage payments which then aggregated $3,996,417.96.

The final filing on February 25, 1977, was plaintiffs' response to the January 3, 1977, petitions of Green and Granite and the motion in aid of appellate court mandate of Granite. They moved to strike, pursuant to sections 45 and 48 of the Civil Practice Act (Ill. Rev. Stat. 1975, ch. 110, pars. 45 and 48), all three pleadings upon the grounds that they raised issues that were outside the scope of the appellate court mandate and that the same issues were previously raised in suits previously filed in the circuit court of St. Clair County entitled Granite Investment Company v. PSL Realty, et al., No. 73 L 1677, and Granite Investment Company and James C. Green v. PSL Realty Co., No. 73 L 1676.

On February 28, 1977, the defendants filed a motion to strike and objections to the receiver's final report. The objections were that approval of the final report would be tantamount to approving all the actions of the receiver from April 28, 1972, to the present, thus immunizing the receiver from any subsequent action for wrongdoing despite the fact that defendants' petition of November 1, 1976, alleged misfeasance on the part of the receiver in that it had acted contrary to duties imposed by law. They further objected that their two petitions and motion filed January 3, 1977, were still pending and until they have been determined the court should not accept a final report.

A hearing was held on March 31 and April 4, 1977, on the final report of the receiver and all other pending pleadings filed on January 3, 1977, and subsequent thereto. The receiver, the plaintiffs and the defendants were present, presented evidence and made closing arguments. Findings of court were made and filed on April 13, 1977, the substance of which is as follows:

The court is limited by the mandate of the appellate court which read:

"Upon remand, the trial court should call for pleadings upon the issue of plaintiff's entitlement to receive from funds in the hands of the receiver the accrued, unpaid installments upon the contract for deed, and after a hearing, should determine the plaintiffs' entitlement upon the merits of the question. The direction to the trial court to conduct a hearing on the fees and expenses of the receivership, as provided in the original opinion, stands."

No monies are due Granite as prayed in its petition for reasonable profit, the petition of James Green for accounting for use of laundromat facilities is stricken for the reason that there is a companion case pending in St. Clair County Circuit Court and the matter is outside the purview of this court;

The motion in aid of the appellate court mandate filed by Granite is outside the jurisdiction of the court and outside the purview of these proceedings;

The final report filed by the receiver represents a consolidation of the 54 monthly reports of the income and expenses of the receivership which have hereto been submitted to and accepted by this court;

The receiver discharged its fiduciary responsibility in a prudent, businesslike and non-prejudicial manner having sought and received court approval for extraordinary expenditures and other activities; and Granite offered no evidence challenging the need for or appropriateness of any expenditures made by the receiver;

The order appointing the receiver did not authorize it to make any payment on the outstanding indebtedness and at no time during the original appeal of the case did any party make such a request that the income from the properties be disbursed in a manner other than as provided in the order of the circuit court of April 28, 1972;

The final report should be approved and all undistributed funds paid to FSLIC in its capacity as mortgagee, for application on mortgages encumbering the properties, from which funds were derived, together with a pro rata application of interest monies to each property on the ratio of income generated by each individual property to the aggregate income generated by all the properties, subject to a receiver's fee, which the court fixes in the sum of 4% of the income received by it;

The appellate court in the original appeal determined that the original proceedings herein were ancillary remedies only and in the absence of a substantive action, could not stand alone and should be dissolved. Defendants apparently recognized and pursued other substantive relief in three separate legal actions filed in the St. Clair County court for damages by reason of contract forfeiture, wrongful possession of laundromat facilities, alleged breach of contract, misapplication of rental incomes and specific performance;

Since the decision of the appellate court this court has been advised, and pleadings disclose, that foreclosure proceedings have been filed upon properties presently the subject matter of this receivership and said properties are now possessed by FSLIC, as mortgagee in the Federal Court, Southern District, Illinois;

Considerable legal services were rendered to the receiver in this cause by its attorneys and the receiver has not sought any compensation therefor.

The foregoing findings produced an order which was entered by the court on April 29, 1977, the ...

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