APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FOURTH DIVISION
CARL H. KLEHM et al., d/b/a The Charles Klehm & Son
518 N.E.2d 187, 164 Ill. App. 3d 610, 115 Ill. Dec. 662 1987.IL.1667
Appeal from the Circuit Court of Cook County; the Hon. Joseph Wosik, Judge, presiding.
JUSTICE JOHNSON delivered the opinion of the court. McMORROW, P.J., and LINN, J., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE JOHNSON
This appeal arises from a countercomplaint by defendant-counterplaintiff, Bank of Palatine (hereinafter referred to as the Bank), to foreclose three mortgages securing three commercial loans to defendants-counterdefendants Kostas Konstantopoulos and Peter Aivaliotis (hereinafter also referred to as the debtors), totaling $700,000 in principal. All three loans were secured by real estate located in Arlington Heights, Illinois, housing a restaurant which, at the time the loans were made, was known as the Grecian Chalet. The debtors filed an affirmative defense of unclean hands, alleging that the Bank improperly allocated and disbursed the third loan's proceeds. After a bench trial, the court adopted the debtor's findings of fact and Conclusions of law and denied the Bank the right to foreclose as to all three mortgages. The Bank appeals, raising three issues: (1) whether the trial court erred by denying the Bank the right to foreclose the first mortgage on the basis of the debtors' affirmative defense arising from the disbursement of the third mortgage loan; (2) whether the trial court erred by ruling that the assignment of the second loan was defective and, as a result, denying foreclosure of the second mortgage; and (3) whether the trial court erred by denying the Bank foreclosure on the third mortgage, which secured a loan guaranteed by the Small Business Administration.
The record reveals that the Bank loaned the debtors $170,000 on March 9, 1981, to enable them to purchase a restaurant property from counterdefendant Patrick Puccia. The note and first mortgage, which secured the note, were signed by counterdefendant, the Bank & Trust Company of Arlington Heights as trustee of the land trust in which the debtors and certain family members (counterdefendants Dina Aivaliotis and Vasilios, Voula, and Mary Jane Konstantopoulos) held the beneficial interest.
On the same day, the debtors, through their land trustee, signed a $255,000 note and second mortgage held by Patrick Puccia, the seller of the property at issue. Puccia credited the debtors with $255,000 toward the purchase price of the restaurant property. The second mortgage provided that payments were to be made to the Bank. At the closing of the sale of the restaurant, Puccia signed an assignment prepared by the Bank's attorney transferring the note and mortgage to the Bank as collateral for other obligations he owed the Bank. Puccia later signed another assignment prepared by the Bank's president. Thereafter, Puccia delivered the note and mortgage to the Bank.
The debtors opened the restaurant for business on May 1, 1981. Between June and December 1981, they borrowed an additional $57,000 from the Bank in three short-term loans. These loans were secured by an assignment of the beneficial interest in the land trust that owned the property.
The debtors, by early 1982, had fallen nine months behind in both their first and second mortgage payments, and they were in default on their three short-term loans from the Bank. Contingent upon approval from the Small Business Administration (hereinafter referred to as the SBA), the Bank agreed to loan an additional $275,000. The SBA agreed to guarantee 87% of the loan and issued a loan authorization on January 8, 1982. Thereafter, the Bank paid out the proceeds in 16 disbursements.
In April 1983, the restaurant was leased to counterdefendant Mark Dalen. Dalen reopened the restaurant under the name of Bacarak's and paid rent of $11,000 per month. Pursuant to a written direction signed by the debtors, the Bank acted as collection agent for the rent and applied $8,500 of it to the first and second mortgage obligations.
The SBA granted the debtors an extension of six months on making any payments under the third mortgage loan, at the request of the Bank, expressing the hope that the lease would allow the debtors to retire their entire mortgage indebtedness. The SBA granted a second extension, forestalling principal payments until January 1, 1984, after the Bank pointed out that Dalen had an option to purchase the property on that date. After seven months, Dalen stopped paying rent and the debtors returned to the restaurant, reopening it as the 62nd Street Tavern and Grill, but made no further mortgage payments.
On November 17, 1982, plaintiffs-counterdefendants Carl H. Klehm, Arnold Klehm and Roy G. Klehm, d/b/a the Charles Klehm & Son Nursery, filed a lawsuit to foreclose a mechanic's lien against the Grecian Chalet restaurant. The Bank filed a three-count countercomplaint to foreclose the three mortgages on May 8, 1984. The debtors raised as an affirmative defense that the Bank disbursed the proceeds of the third mortgage loan in a manner that prevented the debtors from repaying their obligations and in a manner that benefitted the Bank. On September 13, 1985, the debtors filed a counterclaim against the Bank alleging that they were damaged by the same conduct.
Debtors have been operating the restaurant since 1983 or early 1984. On March 1, 1986, after the trial of this case had begun, Konstantopoulos purchased a new restaurant and Aivaliotis ...