APPEAL from the Circuit Court of Will County; the Hon. JOHN
VERKLAN, Judge, presiding.
MR. JUSTICE BARRY DELIVERED THE OPINION OF THE COURT:
Rehearing denied October 6, 1981.
This case comprises two appeals from the Circuit Court of Will County. Case No. 80-672 is an interlocutory appeal brought by the defendants from a November 25, 1980, order of the circuit court of Will County naming plaintiff Home Savings and Loan Association of Joliet (Home) receiver of the principal, interest, and other amounts due and owing mortgagee defendant Samuel T. Isaac and his corporation, Samuel T. Isaac and Association, Inc. (STI), under a 40-year note and mortgage securing plaintiffs' $6.6 million construction loan for the Salem Village III housing project in Joliet, and enjoining STI and Isaac from exercising any right or claim they may have in the note and mortgage. Case No. 81-126 is an appeal by defendants from an adverse summary judgment entered on February 20, 1981. As a result of the entry of summary judgment, constructive and resulting trusts were impressed upon the loan instruments held by defendants, these instruments were reformed to name plaintiffs as the parties in interest, and Isaac and STI were directed to execute to plaintiffs an assignment of all rights, title and interest defendants had in the loan documents. Home was also relieved of its duties as receiver.
Numerous issues are raised by defendants in each appeal. For the sake of simplicity, we will address the merits of each appeal separately. First, however, we will present the pertinent facts.
Samuel T. Isaac, a Lexington, Kentucky, mortgage banker, through his corporation STI, was to arrange financing for the construction of the Salem Village III housing project in Joliet. This project, which was the third of three such projects, was sponsored by the Lutheran Social Services of Illinois (LSSI) and would provide low rent housing for the elderly and handicapped.
In 1976, Isaac obtained commitments from plaintiffs, financial institutions in the Joliet area, to provide construction loans for the Salem Village III project. The terms of the loan agreement were virtually identical with the terms of the agreements for Salem Villages I and II, which had been successfully completed. Under this loan agreement (the Participation Agreement) STI was named as mortgagee and payee on the 40-year note and mortgage securing plaintiffs' $6.6 million construction loan. Salem Village III was mortgagor. The Participation Agreement provided that STI was to have full control over all documents, including the note and mortgage. STI was also obligated to service the construction loan. It was to receive the loan advance from the plaintiffs, pay the building contractors, receive the monthly mortgage interest payments from LSSI and the Department of Housing and Urban Development (which was to subsidize the interest payments made by LSSI), pay the insurance premiums, and transmit the monthly interest payments to plaintiffs. It is uncontested that plaintiffs entered into the participation agreement relying upon STI's representation that it would obtain long term permanent financing from the Government National Mortgage Association (GNMA). The plaintiffs understood that their construction loan would be repaid in full within 22 months of their first advance.
Despite STI's assurances that it would obtain a GNMA commitment, without notice to plaintiffs Isaac determined that he would seek private placement of the loan with the Teachers' Retirement System of Kentucky. The only benefits of private placement would be to defendants. STI could retain the GNMA fee of over $100,000, and in addition could service the permanent loan for a substantial fee during the 40-year term, which it would have been unable to do if long-term financing had been obtained from GNMA. However, because of the prevailing high interest rate Isaac was unable to obtain "private investor takeout." In May of 1979, subsequent to the date the construction phase of Salem Village III officially closed, one of the plaintiffs realized that no pay-off was forthcoming because no long-term permanent financing had been obtained. It was at this time that the Federal Home Loan Bank and the Federal Home Bank Board, from whom plaintiffs had borrowed the construction loan money, began to look to the plaintiffs for repayment. With no long-term financing available, plaintiffs concluded that an emergency existed.
In June of 1979, representatives of the plaintiffs went to Kentucky to meet with Isaac. In that month, and again in July, plaintiffs demanded that Isaac assign the note and mortgage to them. On both occasions Isaac refused, taking the position that STI had the right to sell the note to a private investor, even if the plaintiffs may incur a loss. Fearing that defendants would sell or otherwise encumber the loan documents, and concerned with the increasing delinquency of defendants' remittances of principal and interest, plaintiffs brought the instant suit against Isaac and STI in August of 1979. In this action plaintiffs sought reformation of both the note and mortgage on the grounds that they had been procured by defendants' fraud. Plaintiffs also sought the impression of constructive and resulting trusts over these loan documents. To preserve the note and mortgage from the threat of sale during the pendency of the action, plaintiffs further sought the appointment of a receiver pendente lite and preliminary injunctive relief. The next month the case was removed to the Federal District Court for the Northern District of Illinois on petition by the Department of Housing and Urban Development.
During the next five months discovery proceeded, and the crumbling financial status of Isaac and STI came to light. An audit of STI's books and records on all three Salem Village projects by the HUD office of Inspector General disclosed a number of other misrepresentations by defendants. As a result of these disclosures, plaintiffs sought the issuance of a temporary restraining order in March of 1980 for the purpose of preventing the delivery of the March principal and interest payments to STI. The temporary restraining order was entered on March 14, 1980.
In September, the Federal district court, finding that Federal jurisdiction did not exist because HUD was too nominal a party, remanded the cause to the circuit court of Will County. Following a hearing, the circuit court entered the order which is the subject of the interlocutory appeal (No. 80-672) on November 25, 1980. In its order, the court found, inter alia, that defendants fraudulently induced plaintiffs to advance construction funds for the Salem Village III project by knowingly misrepresenting the fact that defendants would seek and obtain a GNMA commitment for long-term financing, and that it was as a result of this fraud that defendants held the note and mortgage. Finding that "threatened injury to HUD, Salem Village defendants and to the plaintiffs by voluntary or involuntary sale or encumbrance of the note and mortgage, failure to insure, dissipation of installments of principal and interest, [and] invasion of and use of escrows for purposes for which they were not intended outweighs any conceivable harm which the appointment of a receiver and preliminary injunction order may cause to defendants Isaac and STI," the court granted plaintiffs equitable relief in the form of a receivership and preliminary injunction. Plaintiff Home was appointed as receiver, and was accordingly charged with the responsibility of collecting all amounts due in connection with the Salem Village III construction loan, as well as with making all necessary disbursements. The receiver was also to pay defendants the service fee, on the condition that STI and Isaac turned over all amounts and documents held in connection with the loan. Home was further required to make a monthly accounting to the circuit court. HUD, Salem Village III, and LSSI were ordered to make all future principal and interest payments to Home as receiver, and defendants were enjoined from exercising any right they may have had in the loan documents. Timely notice of interlocutory appeal (Ill. Rev. Stat. 1979, ch. 110A, par. 307(a)(1), (2)) was filed by defendants on December 18, 1980.
During the pendency of the interlocutory appeal, the circuit court entertained plaintiffs' motion for summary judgment. On February 20, 1981, summary judgment was entered for plaintiffs on three counts of the eight-count amended complaint. The court granted partial summary judgment on count I of the amended complaint, which alleged common law fraud by defendants, and also granted summary judgment on counts V and VI, which resulted in the imposition of constructive and resulting trusts over the note and mortgage. As previously stated, as a result of the February 20 order the loan instruments were reformed to name plaintiffs as the parties in interest, and defendants were ordered to assign all rights, title and interest they had in the loan documents to the plaintiffs. Both the receivership and the preliminary injunction were terminated. Following a denial of defendants' motion to stay the order of summary judgment pending appeal on March 4, timely notice of appeal was filed the next day.
Pursuant to an emergency motion by defendants filed on March 13, this court entered a temporary stay of enforcement of the February 20 and March 4 orders conditioned upon the filing of a $1,350,000 bond with the clerk of the appellate court. No bond was ever posted, and the stay was vacated April 7, 1981. Oral arguments on case No. 80-672 were heard the next day. On May 12, 1981, this court heard oral arguments on case No. 81-126.
With this factual and procedural background, we will now proceed to discuss the merits of each of defendants' appeals, beginning with the interlocutory appeal from the order of November 25, 1980 (No. 80-672).
On appeal from the November interlocutory order, defendants raise five issues: First, whether it was error for the circuit court to grant the equitable relief of a receivership and a preliminary injunction in the absence of "a showing of extreme urgency"; second, whether it was error to appoint a receiver and impose a preliminary injunction when such actions alter the status quo; third, whether it was error to appoint plaintiff Home, an adverse party, as receiver; fourth, whether it was error to enjoin defendants from performing a valid, legal act, i.e., selling the note and mortgage to a permanent mortgage lender; and finally, was it error for the circuit ...