United States District Court, N.D. Illinois, Eastern Division
September 7, 2005.
LASALLE BANK NATIONAL ASSOCIATION, as Trustee for the registered holders of Commercial Mortgage Asset Trust, Commercial Mortgage Pass-Through Certificates, Series 1999-CI, Plaintiff,
THOMAS O. MUDD, III, Defendant.
The opinion of the court was delivered by: JOHN W. DARRAH, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff, LaSalle Bank National Association, as Trustee for
the registered holders of Commercial Mortgage Asset Trust,
Commercial Mortgage Pass-Through Certificates, Series 1999-CI
("LaSalle"), filed suit against Defendant, Thomas O. Mudd, III
("Mudd"), alleging Mudd defaulted on a fraud guaranty. Presently
before the Court is LaSalle's Motion for Summary Judgment.
In August 1998, Container Corporation executed and delivered to
Capital Company of America, LLC ("CCA") a mortgage note in the
original principal amount of $3,250,000 for a loan in that
amount. (Plaint.'s 56.1(a)(3) Statement ¶ 3). As security for the
Note and the loan, Container executed and delivered to CCA a
Mortgage, Assignment of Leases and Rents and Security Agreement
("Mortgage") of the premises located at and commonly known as
1524 Walnut Street, Streator, Illinois (the "Premises"). (Id., ¶
4). At the same time, Mudd executed and delivered to CCA a fraud
guaranty in which Mudd guaranteed and agreed that he would be
liable to CCA for fraud by himself or Container in connection
with the loan. (Id., ¶¶ 5, 7). In the Mortgage, Container assigned to CCA as mortgagee all of
Container's rights in and to the leases of and rents from the
Premises and agreed to hold the rents in an amount sufficient to
discharge all current sums due to the Mortgagee "in trust for the
benefit of Mortgagee." (Plaint.'s 56.1(a)(3) Statement ¶ 8).
Container also agreed not to collect any rents more than one
month in advance. (Id., ¶ 9). Mudd executed the Mortgage on
Container's behalf. (Id., ¶ 10).
In early December 1998, CCA assigned the Mortgage and the Note
to LaSalle, pursuant to an Assignment of Mortgage, Assignment of
Leases and Rents and Security Agreement. (Plaint.'s 56.1(a)(3)
Statement ¶ 11). The Mortgage required Container to hold the
prepaid rents which it collected "in trust for the benefit of
Mortgagee." (Id., ¶ 30). Container still could not collect any
rents more than one month in advance. (Id., ¶ 31).
Container defaulted on the Note and the Mortgage by failing to
make the monthly payment due under the Note on November 1, 2001.
As a result of the default, the Note became immediately due and
payable. Since that time, Container has not made any payments on
the Note. (Plaint.'s 56.1(a)(3) Statement ¶ 12). By reason of
Container's default under the Note and Mortgage, LaSalle was
entitled to foreclose the Mortgage and obtain the appointment of
a receiver; and, upon the appointment of a receiver, the rents
from the Premises would be paid to the receiver. (Id., ¶ 13).
From 1998 through the time when Mudd was no longer involved
with the Premises, there were two tenants of the Premises,
commonly referred to as Anchor Glass and Quad City. (Plaint.'s
56.1(a)(3) Statement ¶ 14). Mudd contacted both tenants to
discuss prepayment of their rent. (Id., ¶ 15). As a result of
Mudd's discussions with the tenants, both tenants prepaid their
rent. (Id., ¶ 16). In November 2001, the tenants prepaid rent in
the amount of $1,280,116.55. (Id., ¶¶ 17-18). From the prepaid
rents, among other things, Mudd made: a total investment in Enron
of $734,011,00; a payment of $133,000.00 for "bank obligations"; a payment of
$19,591.00 for "accounting & legal"; a payment of $5,677.00 for
"office rent"; and a payment of $38,068.00 for "management fees."
(Id., ¶¶ 23-27). The stock that Mudd purchased with the prepaid
rents ultimately became worthless. (Id., ¶ 20).
After Mudd collected the prepaid rents, there was no other
source of funds with which to make payments on the Mortgage.
(Plaint.'s 56.1(a)(3) Statement ¶ 28). Mudd never sought
LaSalle's consent to collect prepaid rents or to negotiate for
prepayment. (Id., ¶ 29).
Container failed to make any payments on the Note and the
Mortgage since its receipt of the prepaid rents. (Plaint.'s
56.1(a)(3) Statement ¶ 32). Container failed to pay amounts of
approximately $84,731.00 due to J.F. Ahern & Co. ("Ahern") for
work which Ahern did on the Premises. Subsequently, Ahern
asserted a mechanics lien on the premises which LaSalle settled
by paying Ahern $35,000. (Id., ¶¶ 33-34).
LaSalle commenced an action to foreclose the Mortgage and, in
June 2002, obtained the appointment of a receiver. Container
failed to turn over to the receiver the prepaid rents which it
had collected. (Plaint.'s 56.1(a)(3) Statement ¶ 35). As a result
of Mudd's collecting prepayments of their rents from the tenants,
LaSalle had to advance to the receiver funds necessary for
operation and management of the Premises. (Id., ¶ 26). At the
conclusion of the foreclosure, there was a deficiency after the
sale in the amount of $3,102,707.29. (Id., ¶ 37). LaSalle has
been unable to collect anything on the judgment. (Id., ¶ 38). ANALYSIS
Summary judgment is proper if "the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
affidavits, if any, show that there is no genuine issue as to any
material fact." Fed R. Civ. P. 56(c); see also Celotex Corp. v.
Catrett, 477 U.S. 317, 322-323 (1986) (Celotex). All of the
evidence and the reasonable inferences that may be drawn from the
evidence are viewed in the light most favorable to the nonmovant.
Miller v. American Family Mutual Ins., 203 F.3d 997, 1003 (7th
Cir. 2000). Summary judgment may be granted when no "reasonable
jury could return a verdict for the nonmoving party." Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (Anderson).
However, a party cannot defeat summary judgment by relying on
unsubstantiated facts. See Greer v. Board of Educ. of the City
of Chicago, 267 F.3d 723, 729 (7th Cir. 2001) (Greer).
LaSalle argues that Mudd is liable under the Guaranty for
constructive fraud in the amount of $892,269.00, based on the
disbursements Mudd made with the prepaid rents which Mudd
collected were not used for expenses in connection with the
Mudd argues that LaSalle does not have the right to enforce the
Guaranty because it was specifically assigned to CCA and not
LaSalle. However, the Guaranty provides, "The provisions of this
Agreement will bind and benefit the heirs, executors,
administrators, legal representatives, nominees, successors and
assigns of Guarantor and Lender. `Lender' as used herein shall
mean each holder of the Note and its successors and assigns." In
early December of 1998, CCA assigned the Mortgage and the Note to
LaSalle, pursuant to the Mortgage. The language of the Guaranty
demonstrates that LaSalle, as lender and assign, is a beneficiary
of the Guaranty. Therefore, LaSalle is entitled to enforce the
Guaranty. Mudd also argues that LaSalle's motion fails because LaSalle
must prove actual fraud or an intentional misrepresentation, not
Paragraph 1 of the Guaranty states, "Guarantor hereby
guarantees and agrees that it shall be liable to Lender for
fraud or intentional misrepresentation by Guarantor . . ."
(Emphasis added). The Guaranty does not limit liability to a
specific type of fraud; therefore, liability for fraud under the
Guaranty may be actual or constructive. See LaSalle Nat'l. Trust
v. Bd. of Dirs. of the 1100 Lake Shore Drive Condominium,
287 Ill. App. 3d 449, 455 (1997) (Lasalle Nat'l Trust).
Accordingly, LaSalle need not prove actual fraud or an
Constructive fraud is a well-established doctrine in Illinois.
Constructive fraud is "any act, statement or omission that
amounts to positive fraud or that courts construe as fraud
because of its detrimental effect upon public interests and
public or private confidence." Beaton & Assoc., Ltd. v. Joslyn
Man. & Supply Co., 159 Ill. App. 3d 834, 843-44 (1987)
(Beaton). Where there is a breach of legal duty arising out of
a fiduciary relationship, a presumption of constructive fraud
arises. Constructive fraud does not require actual dishonesty or
intent to deceive; breach of fiduciary duty is enough. LaSalle
Nat'l. Trust, 287 Ill. App. 3d at 455, 457.
LaSalle argues that the Mortgage created an express trust, and
Mudd breached its fiduciary duty by using the prepaid rents for
his own purposes. Mudd argues that a trust was not created; thus,
he did not breach any fiduciary duty by dissipating the prepaid
An express trust is a trust which is created in express terms
in a written instrument. Price v. State, 79 Ill. App. 3d 143,
147 (1979). The clearest indication of the parties' intent is the
language of the mortgage itself. See Cromeens, Holloman, Sibert,
Inc. v. AB Volvo, 349 F.3d 376, 394 (7th Cir. 2003). Mudd cites
to Judd v. First Federal Savings & Loan Ass'n of Indianapolis,
710 F.2d 1237 (7th Cir. 1983) (Judd). In Judd, the Seventh Circuit
affirmed the district court's finding that a fiduciary
relationship was not created in a mortgage "despite the scattered
use of the words `trust' and `trustee' and the phrase `in
trust'." Judd, 710 F.3d at 1241. Here, as distinguished from
Judd, the Mortgage expressly stated that Mudd would hold the
rents in an amount sufficient to discharge all current sums due
to the Mortgagee "in trust for the benefit of Mortgagee."
(Emphasis added). Mudd's interpretation "would contradict the
well-settled rules of contract construction, that all provisions
are presumed to have been inserted for a purpose, and that a
contract should be interpreted to give meaning and effect to each
provision contained therein." Dolezal v. Plastic &
Reconstructive Surgery, 266 Ill. App. 3d 1070, 1081 (1994).
Mudd had a fiduciary duty, arising out of the express trust
created by the Mortgage, to hold rents for the benefit of
LaSalle. Mudd does not dispute that he collected and dissipated
prepaid rents. These undisputed actions constitute a breach of
Mudd's fiduciary duty and presume a claim for constructive fraud.
LaSalle Nat'l. Trust, 287 Ill.App.3d at 455. Under the
Guaranty, Mudd is liable for the constructive fraud.
For the foregoing reasons, LaSalle's Motion for Summary
Judgment is granted.
© 1992-2005 VersusLaw Inc.