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06/30/95 SIGNAL CAPITAL CORPORATION v. LAKE SHORE

June 30, 1995

SIGNAL CAPITAL CORPORATION, A DELAWARE CORPORATION, AS SUCCESSOR IN INTEREST TO TEXTRON FINANCIAL CORPORATION, A DELAWARE CORPORATION, PLAINTIFF-APPELLANT,
v.
LAKE SHORE NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, AS TRUSTEE UNDER TRUST NO. 4967, ET AL., DEFENDANTS. AETNA LIFE INSURANCE COMPANY, A CONNECTICUT CORPORATION, INTERVENOR-PLAINTIFF, V. LAKE SHORE NATIONAL BANK, A NATIONAL BANKING ASSOCIATION, AS TRUSTEE UNDER TRUST NO. 4967, ET AL., DEFENDANTS. ELKAY MANUFACTURING COMPANY, AN ILLINOIS CORPORATION, COUNTERPLAINTIFF-APPELLEE, V. SIGNAL CAPITAL CORPORATION, A DELAWARE CORPORATION, AS SUCCESSOR IN INTEREST TO TEXTRON FINANCIAL CORPORATION, A DELAWARE CORPORATION, COUNTERDEFENDANT-APPELLANT.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE JOHN N. HOURIHANE, JUDGE PRESIDING.

As Corrected August 9, 1995.

Presiding Justice Campbell delivered the opinion of the court: Buckley, J., and Wolfson, J., concur.

The opinion of the court was delivered by: Campbell

PRESIDING JUSTICE CAMPBELL delivered the opinion of the court:

Signal Capital Corporation (Signal), appeals from an order of the circuit court of Cook County, entered on September 15, 1993, granting summary judgment in favor of defendant, Elkay Manufacturing Company (Elkay). On appeal, Signal contends that: (1) the trial court erred in finding that Elkay had a perfected purchase money security interest in certain telephone equipment which is superior to Signal's interest; and (2) the trial court erred in rendering moot Signal's motion to compel pro-rata payment for the telephone equipment. For the following reasons, we affirm the judgment of the trial court.

The record discloses the following relevant facts. On February 26, 1985, Chicago Huron Partners (CHP) entered into a lease agreement with the RCA Corporation (RCA), for certain telephone equipment to be used at the Sheraton Plaza Hotel, 140-160 East Huron Street, Chicago, Illinois (Sheraton). Pursuant to the lease, RCA retained title to the telephone equipment. The lease provided that the telephone equipment would remain personal property and not become a fixture to the premises. CHP warranted that there existed no financing statements on file in any public office covering the telephone equipment, and agreed not to allow any lien, encumbrance or security interest to be created or attach to the telephone equipment. The lease required CHP to make 120 monthly rental payments, RCA reserving the right to repossess the telephone equipment for CHP's failure to pay. In the event of termination of the lease, CHP was required to return the telephone equipment to RCA, but RCA reserved the right to abandon the equipment in place. RCA was responsible for maintaining the telephone equipment. At the end of the 120 payments, and in exchange for consideration of $1, title to the telephone equipment would vest in CHP.

On January 25, 1988, Lake Shore National Bank (Lake Shore), a national banking association, not personally but solely as Trustee under Trust agreement dated November 30, 1984, and known as Trust No. 4967, entered into a mortgage, as mortgagor, with Signal. Signal drafted the mortgage, which specifically provided that its lien interest, pursuant to the mortgage, extended to "all buildings, materials, goods, construction matters, furnishings, fixtures and equipment (excluding leased equipment) and all other tangible property of mortgagor * * *." The mortgage did not designate CHP as a mortgagor.

On January 25, 1988, Lake Shore and CHP, as debtors, entered into a security agreement with Signal, granting Signal a security interest in certain collateral. Signal drafted the security agreement specifically excluding "equipment leased by Debtor." Paragraph 3 of the security agreement set forth "Restrictions and Debtor's Warranties," providing, inter alia:

"Debtor represents and warrants to Secured Party that (a) Debtor has title to the Collateral free and clear of all liens, security interests, taxes, charges restrictions, setoffs, adverse claims, assessments, defaults, prepayments, defenses and conditions precedent other than those to which Secured Party has consented;

(b) the financing statements to be executed and delivered in connection herewith comply with applicable laws concerning form, content, and manner of preparation and execution;

(c) no financing statement covering any of the Collateral is on file in any public office other than that which reflects the security interest created by this Security Agreement and those to which Secured Party has consented;

(d) the execution and delivery of this Agreement will not violate any law or agreement governing Debtor or to which Debtor is a party."

On January 26, 1988, Signal recorded its mortgage in the Office of the Cook County Recorder of Deeds. Two days later, on January 28, 1988, Signal filed Financing Statements pursuant to the requirements of the Uniform Commercial Code (UCC), in the Office of Illinois Secretary of State as to Lake Shore and CHP, and in the Office of the Cook County Recorder of Deeds as to Lake Shore only. The Statements included the same language used in the security agreement describing "collateral," and excluding "equipment leased by Debtor."

On December 18, 1989, Textron purchased Signal's right, title, and interest in and to the mortgage and security agreement, obtaining all of Signal's rights thereunder.

On July 27, 1990, Elkay and CHP entered into a security agreement and promissory note to advance funds to CHP to enable CHP to purchase and acquire rights and title to the leased telephone equipment. The Elkay agreement and note provided that once purchased, the telephone equipment would not become a fixture to the Sheraton, but would remain CHP's personal property. CHP executed a UCC-1 Financing Statement as debtor, naming Elkay as the secured party for the telephone equipment.

Elkay advanced CHP funds by wire transfer to the General Electric Capital Corporation (GECC),(successor in RCA's interest to the lease), on August 8, 1990. On August 10, 1990, Elkay filed a Financing Statement in the Office of the Illinois Secretary of State.

On September 21, 1990, CHP received a bill of sale from GECC for the purchase of the telephone equipment. The bill of sale indicated that GECC delivered the legal and beneficial title to the telephone equipment to CHP.

On May 18, 1992, Textron brought an action seeking to foreclose CHP's mortgage against the Sheraton. In count I, Textron alleged that CHP and Lake Shore were in default under the loan documents. In count II, Textron sought to foreclose its lien interest against the telephone equipment collateral, which it alleged was subject to the mortgage, as well as the security agreement naming Lake Shore and CHP as debtors. Textron further requested a declaration that Elkay's interest in the telephone equipment was inferior to Textron's interest.

Elkay filed a counterclaim on October 19, 1992, seeking a declaration of the rights and relative priority of the parties, including Textron, as to the telephone equipment, and asserting affirmative defenses. In count I, Elkay asserted that Textron's mortgage did not place a lien upon CHP's property, and that the telephone equipment was not a fixture subject to the Illinois Mortgage Foreclosure law. In count II, Elkay alleged that it had a purchased money security interest in the telephone equipment which was superior to Textron's rights and interests.

On November 12, 1992, Textron filed a motion for summary judgment asserting that it held a first and superior lien against the telephone system. Textron alleged that Elkay's answers to its complaint failed to raise a genuine issue of material fact, and therefore Textron is entitled to relief as a matter of law. Textron argued that its mortgage liens extend to the telephone equipment, and that its mortgage recorded January 26, 1988, was recorded prior to any interest recorded by Elkay in 1992. Textron argued that the telephone equipment constitutes a fixture, not personal property.

On December 12, 1992, Elkay filed a cross-motion for summary judgment, attaching the affidavits of David Buffam, managing partner of CHP, and Clark G. Carpenter, Chief Financial Officer of Elkay. Elkay asserted that no genuine issue of material fact existed to preclude summary judgment in its favor. In count I, Elkay argued that the telephone equipment is personal property, not a fixture, and that this intent was set forth in the RCA lease agreement and the security agreement between CHP and Elkay. Elkay further argued that Lake Shore never obtained an interest in the telephone equipment, and that the equipment is not subject to the mortgage, as leased equipment is specifically excluded. In count II, Elkay asserted that it has a perfected purchase money security interest in the telephone equipment which has priority over Textron's security interest.

On December 16, 1992, the trial court entered an agreed judgment of foreclosure and sale to Aetna Life Insurance Company (Aetna), specifically reserving all issues regarding the telephone ...


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