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City of Chicago v. Michigan Beach Housing Cooperative

June 10, 1998


The opinion of the court was delivered by: Justice Cahill

Appeal from the Circuit Court of Cook County

No. 91 CH 5558

Honorable Albert Green, judge Presiding.

The City of Chicago appeals the trial court's grant of summary judgment for defendants on misrepresentation and breach of contract claims against defendants. We affirm summary judgment for all defendants on counts I and II of the city's complaint. We also affirm summary judgment for defendant Michigan Beach Housing Cooperative (Cooperative) on count II of its counterclaim. We affirm summary judgment for defendant Cincinnati Mortgage Corporation (CMC) on count III of the city's complaint, but reverse summary judgment for the remaining defendants on count III and remand.

The facts underlying this case are set out in City of Chicago v. Michigan Beach Housing Cooperative, 242 Ill. App. 3d 636, 609 N.E.2d 877 (1993) (Michigan Beach I). After Michigan Beach I was decided the trial court allowed the city to file a third amended complaint incorporating theories not resolved in the first appeal. We here summarize only those facts necessary to resolve the issues appealed.

In 1988, under a reorganization plan devised by Jayson Investments, Inc. (Jayson), the city loaned the Cooperative $3,295,230 to transform a high-rise rental apartment building into a cooperative. Before dispersing the loan, the city required written certification that 50% to 70% of the cooperative units had been sold. ICF Development Corporation (ICF) was hired to sell the units.

Defendant Ida Fisher, president of ICF, provided a sworn statement that "the 51% presale requirement of cooperative memberships [had] been satisfied as of the date of closing." Documents purporting to show who had bought the units were attached. The parties executed a promissory note and the city received a junior mortgage on the Michigan Beach property. Under the note, repayment is not due for 42 years from the date of the junior mortgage. Annual interest payments are to be paid only from "surplus cash." The terms of the mortgage prohibit the city from foreclosing without the consent of the senior mortgagee. CMC held the senior mortgage on a United States Department of Housing and Urban Development (HUD) co-insured loan.

On May 16, 1989, the developers informed the city's housing commissioner by letter that the cooperative project was not economically viable. The developers said, "[o]n the basis of recent audits, it is clear that the building was never 51% presold and that in fact the actual presale number was probably less than 20%. As a result, the building is more than $1,200,000 behind projections at this time and there is no way for it to make up lost ground." The developers asked the city to issue tax credits that the developers would then market to raise money. The developers said that if the city did not issue tax credits, "the present cooperative unit owners of the building will lose in excess of $250,000 and the City will lose its entire $3,300,000 loan."

The city continued to disburse money under the loan until mid-July 1989. In July 1989, the city also awarded $300,000 of low- income housing tax credits to Michigan Beach Limited Partnership (MBLP), an entity created by the developers to acquire title to the building from the Cooperative.

The developers then sought to convert the project back into low-income rental housing and to syndicate the tax credits granted by the city. The city objected to the conversion of the project to low-income rental housing, but did not rescind the tax credits. The property was later transferred from the Cooperative to Jayson, and then to MBLP, and the tax credits were syndicated. MBLP paid $1,065,600 on the senior mortgage under an agreement with HUD. In return, HUD agreed not to consent to an attempt by the city to foreclose on the property. As of June 12, 1991, the Michigan Beach property was converted back into a low-income rental project.

In July 1991, HUD sanctioned the city by deducting $1,383,240 from the city's grant of HUD rental rehabilitation program funds. This penalty was the amount of city loan funds HUD determined had been spent on items not eligible for reimbursement with rental rehabilitation program funds under HUD regulations. See 24 C.F.R. §§511.10(f) (1997). HUD claimed that city loan funds had been used to pay ineligible expenses, including a developer service fee, a marketing fee, organization expenses and financing-related expenses.

In an earlier appeal of this case, we reviewed the dismissal of counts I through V of the city's first amended complaint. Michigan Beach I, 242 Ill. App. 3d 636. In counts I through V, the city sought to accelerate payments under the city's note and to recover syndication proceeds, alleging that the syndication was an event of default under the mortgage. We affirmed the dismissal. We held that the city waived the right to declare default based on the syndication when it subsequently issued tax credits. We also held that the city was not entitled to recover syndication funds as collateral.

The city now appeals summary judgment granted to defendants on a third amended complaint and count II of MBLP's counterclaim. Counts I and II of the city's third amended complaint allege that the city is entitled to damages resulting from the developers' fraudulent (count I) or negligent (count II) misrepresentations that more than 50% of the cooperative units were presold. Count III alleges that CMC, MBLP, Jayson, and the Cooperative breached their agreements to ensure that city loan proceeds were spent only on expenses eligible for rental rehabilitation reimbursement. Count IV alleges that the developers and the Cooperative fraudulently transferred the project from the Cooperative to MBLP to prevent the city from obtaining a remedy for fraud. ...

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