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Lewis Brothers Bakeries, Inc. v. Bittle

December 17, 2007

LEWIS BROTHERS BAKERIES, INC., PLAINTIFF/COUNTER-DEFENDANT,
v.
RICHARD W. BITTLE AND PAMELA K. BITTLE, DEFENDANTS/COUNTER-PLAINTIFFS/THIRD-PARTY PLAINTIFFS,
v.
OLD NATIONAL BANK, THIRD-PARTY DEFENDANT/COUNTER-DEFENDANT.



The opinion of the court was delivered by: Herndon, Chief Judge

MEMORANDUM & ORDER

I. INTRODUCTION

Before the Court is third-party/counter defendant Old National Bank's ("ONB") Motion to Dismiss Third-Party Complaint (Doc. 76), filed by defendants/counter-plaintiffs/third-party plaintiffs Richard W. Bittle and Pamela K. Bittle ("the Bittles"). ONB makes its motion pursuant to FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6), for failure to state a claim upon which relief can be granted. The Bittles have responded in opposition (Doc. 86) to which ONB has replied (Doc. 90). For reasons discussed herein, the Court grants the Motion (Doc. 76) and dismisses the third party suit without prejudice.

II. FACTS

Plaintiff Lewis Brothers Bakeries, Inc. ("Plaintiff" or "Lewis Bros")filed its First Amended Complaint (Doc. 5) against the Bittles on March 9, 2006. On January 30, 2007, the Bittles filed a Third-Party Complaint (Doc. 55) against ONB. Additionally, along with their Third Amended Answer, the Bittles have filed a Second Amended Counterclaim against Lewis Bros and ONB (Doc. 113). Construing the well-pled facts in favor of the nonmoving party, the Court derives the following factual account from the allegations in the Bittles' Third-Party Complaint.On July 19, 1988, Illinois Hotel Group, Inc. ("IHG") executed a Promissory Note ("the IHG Note") in favor of ONB for the principle amount of $2,056,000 (Doc. 5, Ex. 1; Doc. 55, ¶ 19). IHG was formed several years earlier, in 1985, for the purpose of constructing a hotel on land originally owned by the Bittles in Marion, Illinois (Doc. 55, ¶ 8). The Bittles owned forty percent of IHG stock. The majority sixty percent stock was held by William and Patricia Lewis ("the Lewises")*fn1 (Id.). Lewis Bros is partly owned by the Lewises; along with their daughter, they own thirty percent of Lewis Bros stock (Id. at ¶ 9). The majority stockholder of Lewis Bros is Jack Lewis, William's brother. Jack Lewis is also president of Lewis Bros (Id.). William Lewis, a licensed attorney, also acts as a director and an Illinois registered agent for Lewis Bros (Id. at ¶ 13). Moreover, William Lewis was, or currently is, general counsel for Lewis Bros -- one of his two primary clients (Id). Jack and William Lewis also own/control Bakery Investments, LLC (Id.). Jack Lewis was, or currently is, a director of ONB (Id. at ¶ 11). Thus, the Bittles have alleged that a symbiotic relationship exists between ONB and Lewis Bros as well between the Lewises and Lewis Bros (Id. at ¶¶ 15-16).

To secure the IHG Note, the Bittles executed an unconditional guaranty in the amount of $2,056,000 (Doc. 5, Ex. 2; Doc. 55, ¶ 19). This was an unsecured guaranty (Doc. 55, ¶ 19). However, the Bittles allege that it was not their guaranty that truly convinced ONB to lend the $2,056,000 to IHG, but instead, it was a secured guaranty on the IHG Note provided by the Lewises, as well as a secured guaranty by Lewis Bros for up to $500,000 of the loan amount (Id.). Further, the IHG Note was secured by a mortgage executed by IHG in favor of ONB, providing a mortgage lien on the real property on which the hotel (constructed by IHG) was located (Id. at ¶ 20).

IHG constructed a hotel on the grounds formerly owned by the Bittles in Marion, Illinois, and initially it was operated as a Shoney's Inn franchise in 1989, managed by Richard Bittle (Id. at ¶ 21). Because the $2,056,000 loan did not provide enough funding to both build and operate the hotel, the Lewises advanced approximately $1,900,000 as operating funds for the hotel, pledging their Lewis Bros stock as collateral (Id. at ¶ 26). In turn, IHG issued promissory notes to the Lewises to repay this amount, secured by second and third mortgages on the hotel's real property (Id.). The Bittles allege that when IHG could not make its Note payments, Lewis Bros made payments on behalf of IHG directly to ONB (Id. at ¶ 27 and Ex. E). Richard Bittle continued working as hotel manager from when the hotel closed in 1999 until the spring of 2001, even though IHG could not pay him after 1999 pursuant to the terms of his management contract (Id. at ¶ 28). In 1991, because Shoney's Inn was continuing to decline as a supportive franchisor due to its own financial management issues, Richard Bittle began exploring other hotel franchise options, such as Hampton Inn or Holiday Inn Express, but William Lewis would not approve transferring the hotel from a Shoney's to either of these two hotel franchises because he refused to sign a personal guaranty (Id. at ¶¶ 32-33). However, William managed to negotiate a termination of the relationship between IHG and Shoney's Inn sometime in 1997 (Id. at ¶ 35).

ONB required the hotel to maintain a "brand name," so IHG subsequently entered into a franchise agreement and property improvement plan ("PIP") with Ramada Franchise Systems, Inc. ("Ramada"), to turn the Shoney's Inn into a Ramada Inn. This time, only Richard Bittle executed a personal guaranty (Id. at ¶¶ 36-37). The PIP required IHG to expend approximately $400,000 to get the hotel up to Ramada franchise standards. William Lewis and Lewis Bros refused to provided the necessary financing; the Bittles were unable to obtain financing otherwise (Id. at ¶¶ 40-41). Ramada filed suit against IHG and Richard Bittle, as personal guarantor, for breach of the franchise agreement and PIP, the Lanham Act and Richard's personal guaranty (Id. at ¶ 42). In February, 2004, the lawsuit resulted in a summary judgment in favor of Ramada, holding Richard Bittle liable in the amount of $384,000 (Id. at ¶ 57). IHG later began to independently operate the hotel under the name Brentwood Inn & Suites sometime in 1998, but eventually closed for business during December 1999 (Id. at ¶¶ 43 & 48).

ONB filed suit to foreclose on its mortgage against IHG on May 14, 2001, but made no claims on any of the guaranty agreements securing the IHG Note (Id. at ¶ 44). The Lewises were listed as additional Defendants because they held second and third mortgages on IHG's property (Id.). ONB, through William Lewis, told the Bittles that it did not wish to restructure IHG's debt unless IHG filed for Chapter 11 bankruptcy (Id. at ¶¶ 45-46). Although the Bittles claim they did not agree with this idea, they nevertheless signed documents allowing William Lewis to become treasurer of IHG and authorizing its Chapter 11 bankruptcy proceedings (Id. at ¶ 47 and Ex. C). William acted as IHG's representative and debtor in possession during the entire bankruptcy proceeding (Id. at ¶ 54).

The Bittles allege that through August 5, 2002, the hotel owned by IHG had a fair market value exceeding its liabilities to cover the full balance owed to ONB on the IHG Note (Id. at ¶ 49). Richard Bittle alleges he provided William Lewis and IGH with prospective purchasers for the hotel, allegedly willing to pay $1,800,000, but that this proposal was rejected by the Chapter 11 bankruptcy trustee (Id.). Further, although on August 1, 2002, ONB issued a statement that the IHG Note balance was $1,563,090.18, four days later, the parties to the Debt Recasting Agreement stated that IHG owed ONB $1,895,454.99; the Bittles were not parties to the Agreement (Id.).

The Lewises were listed as unsecured creditors of IHG in the amount of approximately $1,500,000, in addition to the second and third mortgages they held on the real property on which the hotel building was located (Id. at ¶ 52, Ex. B). The Bittles did not participate in the Chapter 11 bankruptcy proceedings other than to file claims for the amounts due to Richard Bittle under his management contract with IHG and to enforce his indemnity agreement (Id. at ¶ 53). However, the Bittles' claims against IHG were discharged through bankruptcy (Id.). William Lewis, as acting debtor in possession, ultimately reaffirmed the loan obligations of IHG to ONB (Id. at ¶ 55). In sum, the Bittles allege that the bankruptcy proceedings left Richard Bittle "exposed" to claims by Ramada on his personal guaranty under the Ramada franchise agreement and PIP, while removing his indemnity and reimbursement rights from IHG for these losses (Id. at ¶ 56).

The Bittles believe William Lewis excluded them from the Chapter 11 bankruptcy proceedings and other germane negotiations with ONB (Id. at ¶ 58). Yet, they claim that William Lewis expressly indicated he would negotiate with ONB in order to remove the Bittles' obligations under their Guaranty on the IHG Note, as expressed in an October 20, 2001 e-mail sent from William to Richard Bittle, stating that he met with ONB and the parties had "hammered out an agreement that will remove yours and Kay's [(Richard's wife)] obligations to the Bank, if I [(William)] can meet certain conditions" (Id. at ¶ 60 and Ex. D). Sometime thereafter, a "Work Out Agreement" was reached between ONB, the Lewises, Lewis Bros and other parties affiliated with Lewis Bros (Id. at ¶ 62; see also Doc. 5, Ex. 3, p. 2, ¶ 5; Doc. 113, Ex. G). The Bittles claim William Lewis advised them of this Agreement, but failed to mention that he did not obtain ONB's release of the Bittles' obligations. The Bittles claim they were also not aware that the Lewises, Lewis Bros and ONB entered into a Debt Recasting Agreement with Hospitality Joint Venture ("HJV")*fn2 on August 5, 2002, until they received Plaintiff's Amended Complaint in this case (Doc. 55, ¶ 64; see also Doc. 5, Ex. 3).

The Debt Recasting Agreement obligated HJV to assume all of IHG's indebtedness to ONB and to pay the IHG Note to ONB. The Debt Recasting Agreement shortened the maturity date on the loan from January 1, 2014 (as stated in the IHG Note) to August 5, 2004. The Bittles allege the shortened maturity date and changed rate of interest resulted in increasing the principle amount due under the IHG Note by more than $100,000 (Doc. 55, ¶ 66). Additional security for the Debt Recasting Agreement listed: (1) a commercial guaranty from William G. Tullar, covering the entire amount of the "recast" IHG Note for $1,895,454.99, and (2) an assignment by HJV of the "Contract to Purchase Motel," entered into by IHG, as seller, and HJV, as buyer (Doc. 5, Ex. 3, pp. 1-2). The Contract to Purchase Motel required prior approval by ONB (Id.). These two security documents were created as "a further inducement to ONB to approve the Contract [to Purchase Motel]" (Id. at p. 2, ¶ 3).

The Debt Recasting Agreement also stated that the IHG Note was previously secured by an Unconditional Guaranty from the Lewises (the "Lewis Guaranty") and that the IHG Note and the Lewis Guaranty, in turn, were secured "by virtue of several Security Agreements (the 'Lewis Security Agreements') covering their shares in certain common capital shares of [Lewis Bros]" (Doc. 5, Ex. 3, p. 1, ¶ 3). Further, the Debt Recasting Agreement clarified that it did not "operate to release any collateral pledged to secure the IGH Note or the Lewis Guaranties. The parties hereto specifically ratify and reaffirm their obligations as set out in a certain Workout Agreement dated November 9, 2001" (Doc. 5, Ex. 3, p. 2, ¶ 5). Therefore, by the terms of the IHG Note and Debt Recasting Agreement, HJV agreed that if it defaulted on the note payments, ONB or its successors and assigns, could accelerate the Note and demand payment in full of the entire amount due from HJV or any other party acting as a guarantor of the IHG Note and/or Debt Recasting Agreement (Doc. 5, ¶ 12, Ex. 3).

On September 20, 2004, ONB and Lewis Bros entered into an Assignment Agreement whereby ONB assigned, sold and transferred all of its right, title and interest in and to the IGH Note, Debt Recasting Agreement, Commercial Guaranty and other loan documents to Lewis Bros (Doc. 5, ¶ 11, Ex. 4). This Assignment Agreement, by way of the terms of the Debt Recasting Agreement, allegedly gave Lewis Bros the right to collect on the IHG Note, and, if defaulted upon, require immediate payment in full of all amounts due from the Note's guarantors, including the Bittles (Doc. 5, ¶ 12).

HJV defaulted under the IHG Note and Debt Recasting Agreement by failing to make the required monthly payments (Doc. 5, ¶ 13). Due to the default, Lewis Bros, as assignee of ONB's rights under the IHG Note and Debt Recasting Agreement, declared the entire principal sum, together with accrued interest and late charges, immediately due and payable (Doc. 5, ¶ 14). The Bittles allege that Lewis Bros, after declaring a default by HJV on the IHG Note and Debt Recasting Agreement, sold the hotel to a new purchaser, allegedly by the name of Navarang Corporation, on June 15, 2004 for the purchase price of approximately $1,600,000 (Doc. 55, ¶ 69). Lewis Bros also subsequently filed suit in Indiana against William G. Tullar under the terms of his Commercial Guaranty of the Debt Recasting Agreement (Doc. 55, ¶ 70). Lewis Bros and Tullar allegedly settled out of court in the amount of $150,000. The Bittles contend that aside from the suit against Tullar, neither ONB nor Lewis Bros ever acted to recover any of the alleged deficiencies under the IHG Note or the secured guaranty agreements executed by the Lewises and Lewis Bros (Doc. 55, ¶ 72).

On September 27, 2004, seven days after the Assignment Agreement, Lewis Bros sent a demand letter to the Bittles. Also due to HPV's default, Lewis Bros filed suit against the Bittles (the instant action) seeking reimbursement under their Unconditional Guaranty on the IHG Note in the principle amount of $864,429.28, together with interest, late fees, court costs and attorneys' fees (Doc. 5, ¶ 15).

III. DISCUSSION

A. Legal ...


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