The opinion of the court was delivered by: MORAN
JAMES B. MORAN, CHIEF UNITED STATES DISTRICT JUDGE
Before the court are motions by Home Savings Association of Kansas City, F.A. ("Home Savings") and Mid-Continent Builders, Inc. ("Mid-Continent") to dismiss certain counts of a counter and cross-claim filed by Wilbert J. Hanke, John H. Curran, and William M. Franz, and William M. Franz as Trustee of a trust deed. For the reasons stated herein, this court grants Home Savings' motion but denies that of Mid-Continent.
This case arises out of the financing for and construction of the Crystal Lake Holiday Inn, built in McHenry County, Illinois. Although this court has set out the background facts of this litigation in an earlier opinion, the relative complexity of the issues warrants reiteration. As is always the case with motions to dismiss, this court shall regard the facts alleged in the counter and cross-complaint as true. National Van Lines, Inc. v. United States, 326 F.2d 362, 372 (7th Cir. 1964).
Some time prior to 1986, Hanke, Curran and Franz acquired a vacant tract of land in Crystal Lake with the intent to develop a hotel. They placed the property in a land trust ("Trust 3033"), with the State Bank of Woodstock ("Woodstock") serving as trustee and themselves as owners of 100 percent of the beneficial interest. Their construction plans resulted in two loan transactions that involved Trust 3033 as collateral. In the first, the three decided to unite with Mid-Continent Builders, Inc. ("Mid-Continent"), headed by Gerald Stillman, to form the partnership that would develop the hotel. On September 30, 1986, Hanke, Curran and Franz sold to Mid-Continent an undivided two-thirds interest in the beneficial interest of Trust 3033 for $ 1,300,000. Mid-Continent paid $ 300,000 of the purchase price up front, and gave Hanke, Curran and Franz a promissory note for the remaining $ 1,000,000. Repayment of the note was secured by both a trust deed, in which Franz was named as trustee (hereinafter "Franz as Trustee") for the benefit of Hanke, Curran and himself, and a collateral assignment of Mid-Continent's beneficial interest in Trust 3033, of which Hanke, Curran and Franz were the assignees. According to the terms of the promissory note, the parties agreed that the note, trust deed, and collateral assignment would be subordinated to any construction loan obtained to develop the hotel. Mid-Continent, Hanke, Curran and Franz then formed Crystal Lake Hotel Limited Partnership (the "Partnership"), with Mid-Continent as general partner and Hanke, Curran, and Franz as limited partners. On October 1, 1986, Mid-Continent and Hanke, Curran and Franz assigned to the Partnership their collective undivided one hundred percent interest in the beneficial interest of Trust 3033. The Partnership then engaged Mid-Continent to construct the hotel.
Franz as Trustee signed this Subordination Agreement on July 23, 1987. It provided in part:
The Purpose of this Agreement [is] to subordinate all of
Franz's liens relative to the premises . . . such that the Franz Mortgage is and shall ever be inferior and junior in all respects to the liens of the Mortgage, Assignment, UCC-2 and the Security Documents [held by Home Savings].
(Subordination Agreement at 1). Included as Exhibit B was a list of Home Savings interests that were to be given priority, including Home Savings' mortgage and the Partnership's collateral assignment of its beneficial interest in Trust 3033 (Subordination Agreement Ex. B).
The project was funded after execution of the Subordination Agreement. Although eventually completed, it incurred substantial cost overruns, which Home Savings funded. These overruns apparently caused Mid-Continent to become unable to meet its financial obligations, not only to Home Savings but to its sub-contractors as well. Fifty-six mechanics' liens were filed against the project and on July 15, 1989, Home Savings declared the loan in default. In December 1989, Home Savings advanced additional funds to settle the mechanics' liens. According to Hanke, Curran and Franz, Home Savings advanced an additional $ 5 million in principal to settle these liens. According to count III of Home Savings' Second Amended Complaint, however, the bank seeks recovery for only $ 2,804,657.84 above its original $ 13 million commitment to Mid-Continent. In the process, Hanke, Curran and Franz allege, their equity was wiped out without their knowledge.
Hanke, Curran and Franz and Franz as Trustee contend that Home Savings' failure to supervise adequately the hotel project lies at the root of Mid-Continent's cost overruns and, consequently, the mechanics' liens that followed. They further contend that in settling these liens, Home Savings acted solely out of concern for its own interests. They allege that Home Savings was financing at least nine other Mid-Continent projects at the time, which resulted in substantial credit exposure for the bank. It was in Home Savings' best interests, they further assert, to continue funding the hotel project nonetheless because the bank believed that it had a more substantial equity cushion there than on the other Mid-Continent projects. They point out that the hotel was completed in October 1988, with most of the mechanics' liens being filed in January 1989. It was not until December 1989, when certain lien claimants filed an involuntary bankruptcy petition against Mid-Continent that Home Savings satisfied their claims. At the time, they assert, the Mid-Continent note already was seven months overdue.
Home Savings filed suit in this court against Woodstock, the Partnership, Mid-Continent, Hanke, Curran, Franz, and non-record claimants and unknown owners of beneficial interests in Trust 3033, seeking, inter alia, 1) foreclosure and sale of the beneficial interest in Trust 3033; 2) damages for alleged misrepresentations by Woodstock; and 3) foreclosure and sale pursuant to its mortgage with a joint and several judgment for any deficiency against the Partnership and Mid-Continent. At the court's suggestion, Home Savings dismissed Hanke, Curran and Franz when it appeared that they had no interest in Trust 3033.