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GASKILL v. GORDON

August 26, 1993

PAUL GASKILL, et al., Plaintiffs,
v.
EARL DEAN GORDON and KENNETH F. BOULA, et al., Defendants.


Williams


The opinion of the court was delivered by: ANN CLAIRE WILLIAMS

Receiver Jeffrey Cagan and Cagan Realty Inc. ("Receiver") brought this motion to establish a $ 339,096 lien on the Governor's House Apartments ("Governor's House"), with priority over the pre-existing mortgage of Mutual Benefit Life Insurance Co. ("Mutual Benefit"). The Receiver requests such lien as reimbursement for its capital expenditures on Governor's House. Subsequently, the court requested detailed documentation of the Receiver's expenses and further briefing regarding whether the requested expenses should be decreased or offset by the unpaid rents. After providing this documentation, the Receiver moved to amend his petition to increase the lien to $ 365,755. For the reasons explained below, the Receiver's amended motion for a $ 365,755 lien is granted.

 Background

 This matter arises out of a class action suit brought by Paul Gaskill and Alan Hess on behalf of numerous investors in Financial Concepts, a collection of limited and general real estate partnerships marketed by Earl Dean Gordon and Kenneth F. Boula. The suit alleged securities fraud and other violations against Gordon and Boula, and several entities owned and controlled by them. *fn1" During the pendency of the suit, the court appointed Jeffrey Cagan and Cagan Realty as federal receiver to marshal and preserve the assets of Financial Concepts for the benefit of the investors. (Order of July 14, 1988). Specifically, the Order establishing the receivership authorized the Receiver to receive and collect rents, manage and operate numerous properties owned by Gordon and Boula, including Governor's House. *fn2"

 Governor's House is a 96 unit, 92,288 square foot, eight building, residential apartment complex located in the Village of University Park, Illinois ("Village" or "University Park"). Mutual Benefit is the owner and holder of a mortgage on Governor's House in the principal amount of $ 1,300,000. On October 25, 1988, four months after the Receiver was appointed, Mutual Benefit sought to intervene as a matter of right. In support, Mutual Benefit asserted: "Mutual Benefit has an interest in [Governor's House] and . . . is so situated that the disposition of the action may impair or impede Mutual Benefits's ability to protect [Governor's House] and to maintain its mortgage lien." (Petition for Intervention, p. 2). The Receiver countered that "Neither the receiver nor any other party to this action has sought to deny the validity or priority of the mortgage Mutual Benefit holds on [Governor's House], therefore, the disposition of the action will not impair or impede Mutual Benefit's interest in the property." (Memorandum in Opposition to Petition for Intervention, p. 2). The court denied the motion after concluding that Mutual Benefit had not met the requirements of Federal Rule of Civil Procedure 24(a), and that "the collateral is sufficiently protected by the receiver. . . ." (November 3, 1988 Transcript).

 Subsequently, the Receiver requested a first priority lien on Governor's House to reimburse it for $ 339,096 in capital expenditures. Mutual Benefit objected and emphasized that its first mortgage "would be relegated to a second position without sufficient value in the real estate to satisfy both liens." (Answer of Mutual Benefit to Motion and Memorandum of the Receivership Estate to Establish Priority Lien ("Answer"), p. 1). Alternatively, Mutual Benefit argued that any lien should be offset by the amount of unpaid rents that the Receiver owed. *fn3"

 The court reserved ruling on the Receiver's motion pending review of supporting documentation such as copies of the University Park Building violations which were brought up to code, receipts of the repairs and improvements, and any other documents or affidavits supporting the requested lien. The court also requested further briefing on the offset issue. *fn4" Shortly after providing this information and reviewing its bills through the end of December, 1992, the Receiver moved to increase the lien amount to $ 365,755. *fn5"

 Receivership Lien for Reimbursement of Expenditures

 The general rule regarding payment of receivership expenses is that the:

 
Costs and expenses of a receivership, including compensation for the receiver, counsel fees, and obligations incurred by him in the discharge of his duties, constitute a first charge against the property or funds in the receivership. . . .

 66 Am. Jur. 2d Receivers § 281 (1973). See also Donovan v. Robbins, 588 F. Supp. 1268, 1271 (N.D. Ill. 1984) ("As a general rule, the expenses and costs of a receivership are charged to the property or fund administered."); In re Spice Wood Associates, 445 F. Supp. 564, 570 n.5 (N.D. Ill. 1977) ("Fees and expenses of a receiver in administering a property are properly chargeable against the owner thereof and/or against the proceeds from the sale thereof."); Union Trust Co. v. Illinois Midland Ry. Co., 117 U.S. 434, 454-56, 29 L. Ed. 963, 6 S. Ct. 809 (1886) (noting that the costs of preserving and managing receivership property may be chargeable as a lien against the property). However, it is clear that "appointment of a receiver does not vest a court with general authority to displace vested contract liens." Rosenblatt v. Michigan Ave. Nat'l Bank, 70 Ill. App. 3d 1039, 389 N.E.2d 182, 186, 27 Ill. Dec. 370 (Ill. App. 1979) (citing Kneeland v. American Loan & Trust Co., 136 U.S. 89, 34 L. Ed. 379, 10 S. Ct. 950 (1890)).

 The issue in this case is whether the court may establish a first priority lien to reimburse the Receiver for repairs and improvements on Governor's House. After reviewing the rather scarce authority on this issue, the court determined that it could properly award a first lien for receivership expenses superior to Mutual Benefit's pre-existing mortgage if it was "fair and appropriate based on the facts and circumstances of this case." Gaskill v. Gordon, No. 88 C 3404, 1993 U.S. Dist. LEXIS 2888 *12 (N.D. Ill. March 5, 1993). See generally 66 Am. Jur. 2d Receivers § 282 (collecting cases discussing courts' discretion to establish priority receiver's liens to pay for costs of preserving and caring for receivership property). See also Cody Trust Co. v. Hotel Clayton Co., 293 Ill. App. 1, 12 N.E.2d 32, 39 (Ill. App. 1937) ("The question of making receiver's certificates a first lien superior to prior vested liens, is purely an equitable one, and to be determined upon just and equitable principles, as the circumstances of the case shall warrant."). In making this determination, the court noted that it would weigh the documentation verifying the expenses, benefit to the property, and mortgagee's acquiescence in the Receiver's management. *fn6" Gaskill, 1993 U.S. Dist. LEXIS at *13-15.

 In its first brief, the Receiver argued that it was entitled to a first priority lien because "all of [the] costs and expenses have added value to the property . . . [and] "the mortgagee, Mutual Benefit Insurance Company, was aware of the appointment of the Receiver, has never objected to the appointment of the Receiver, has not tried to have its own receiver appointed, nor until recently has it attempted to foreclose its mortgage." (Receiver's Motion to Establish Lien on Governor's House Apartments ("Motion"), p. 14). The Receiver also maintained that:

 
The expenditures which the Receiver made to correct code violations and to keep the property in compliance with the Village of University Park codes were required to be incurred by the Receiver in order to discharge his obligations under 28 U.S.C. Section 959(b) which requires that a receiver shall manage and operate property according to the requirements of the valid laws in the state in which the property is situated in the same manner as an owner or other possessor would be bound to do. Pursuant to federal law, the receiver ...

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