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06/08/87 Guaranty Federal Savings & v. American National Bank &

June 8, 1987

GUARANTY FEDERAL SAVINGS & LOAN ASSOCIATION, PLAINTIFF-APPELLEE

v.

AMERICAN NATIONAL BANK & TRUST COMPANY OF CHICAGO, AS TRUSTEE, ET AL., DEFENDANTS-APPELLANTS



APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FIRST DIVISION

509 N.E.2d 1313, 157 Ill. App. 3d 176, 109 Ill. Dec. 301 1987.IL.763

Appeal from the Circuit Court of Cook County; the Hon. George A. Higgins, Judge, presiding.

APPELLATE Judges:

PRESIDING JUSTICE QUINLAN delivered the opinion of the court. BUCKLEY and O'CONNOR, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE QUINLAN

The plaintiff, Guaranty Federal Savings & Loan Association (Guaranty), brought this action in the circuit court of Cook County to foreclose the mortgage on certain property located at 2701 North Lehmann Court in Chicago, Illinois. The defendants, American National Bank & Trust Company (American National), which held legal title to the property under the terms of a land trust agreement, and the beneficiaries under the trust agreement, Robert Najman and Marvin Lustbader (defendants), denied the existence of any mortgage and raised several affirmative defenses and counterclaims.

The plaintiff moved for summary judgment on the defendants' affirmative defenses and counterclaims, and the defendants moved to strike the affidavit of Jerome A. Maher which the plaintiff filed in support of its motion for summary judgment. The trial court granted the plaintiff's motion for summary judgment, refused to strike the Maher affidavit, and entered a judgment of foreclosure and sale. Subsequently, the trial court approved the sheriff's report of sale and distribution. The defendants now bring this appeal.

The issue presented by the appeal is whether the defendants' affirmative defenses and counterclaims presented any genuine issues of material fact. For the reasons that follow, we find that they did not and, accordingly, affirm the circuit court's order granting summary judgment for the plaintiff on the affirmative defenses and counterclaims and affirm the judgment of foreclosure and sale entered by the trial court.

In reviewing an order entering summary judgment, this court's duty is to determine whether "the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law." (Ill. Rev. Stat. 1985, ch. 110, par. 2-1005(c); see Rivera v. Mahogony Corp. (1986), 145 Ill. App. 3d 213, 494 N.E.2d 660.) The verified pleadings, depositions, affidavits and exhibits in the record before this court show that Lustbader and Najman conceived a plan to purchase and develop the Lehmann Court property by erecting and selling townhouses. The defendants planned to develop the property as a joint venture where they would provide the design concept and the developing and marketing expertise, while a "money partner" would provide all necessary funding for the project.

The defendants approached the plaintiff herein, Guaranty, in 1979 with their plan, and Guaranty agreed to participate in the project. However, Guaranty could not lend any more funds at that time to its investment/development subsidiary, the Venture Service Corporation (Venture), through which Guaranty participated in joint ventures, without violating section 5-16 of the Illinois Savings and Loan Act (Ill. Rev. Stat. 1979, ch. 32, par. 806, now Ill. Rev. Stat. 1985, ch. 17, par. 3305-16). 1 Section 5-16 of the Act imposed limitations on the amount lent to a single borrower by a savings and loan association, and Guaranty was above their permitted limit of loans to Venture at that time. Therefore, according to the defendants, it was arranged that the joint venture would be initially documented as a loan to Lustbader and Najman and secured with a standard mortgage and note. The defendants further alleged that certain officers of Guaranty told Lustbader and Najman that they would not be personally liable on the loan. Additionally, Lustbader and Najman claimed they were told the documentation would be changed to reflect a joint venture once Venture had liquidated other real estate projects which would permit Guaranty to lend money to Venture for use towards the Lehmann Court project without violating section 5-16.

Thereafter, Lustbader and Najman entered into an agreement with the owner of the Lehmann Court property to purchase the property for $555,000. The purchase price was to be paid in five installments. Later, Lustbader and Najman obtained a $3 million construction loan commitment from American National. As a precondition to obtaining the construction loan, however, Lustbader and Najman were required to secure a letter of credit to guarantee payment of the unpaid installments that remained at that time on the purchase price of the property.

In December of 1980, Guaranty issued its final commitment letter to Lustbader and Najman for the Lehmann Court project. The commitment provided for a $759,150 mortgage at 1.5% over the prime interest rate. This loan was to be funded in three phases, and each phase was to be secured by a separate note and mortgage, which would in turn be taken out by the succeeding loan. Additionally, an interest reserve was to be established from which interest payments on the loan were to be made. Guaranty funded the first phase, which was secured by a $365,000 note and mortgage. Guaranty also funded the second phase, which was secured by a $652,500 note and mortgage. However, due to rising interest rates and the fact that the interest reserve had been exhausted, Guaranty demanded the defendants pay the excess interest beginning March 3, 1982, and when the defendants failed to do so, the loan fell into default. The plaintiff then filed this action to foreclose on the second phase mortgage and note. Furthermore, because Guaranty did not fund the third phase of the loan, the construction lender paid the final installment of the purchase price by drawing on the defendants' letter of credit.

As an affirmative defense to the plaintiff's foreclosure suit, the defendants pleaded that the alleged joint-venture agreement which they claimed that Guaranty had entered into with them was for the purpose of developing the Lehmann Court property. The defendants asserted that under the terms of the agreement, Guaranty had agreed to provide the financial backing for the project, and Lustbader and Najman were only to contribute their expertise as developers and were not to be subject to any financial risk. They also alleged in their defense, as noted previously, that Guaranty documented this joint venture as a mortgage and note merely to avoid violating any State or Federal regulations and that it was not intended to be a loan, and, accordingly, they were not liable for any payment on the mortgage and note. In addition, the defendants raised a second defense asserting that Guaranty was not, under any circumstances, entitled to foreclose on the mortgage, even if the joint-venture agreement was illegal and unenforceable, because Guaranty had violated the "clean hands" doctrine by participating in the alleged illegal transactions.

The defendants also filed a number of counterclaims against Guaranty. One counterclaim was grounded in quantum meruit and sought to recover for time, effort, and money that they expended on the Lehmann Court project in furtherance of the joint venture. A second counterclaim sought the return of the amount drawn on their letter of credit by American National to make the final installment payment ...


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