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In re Southcreek Development

October 25, 2010


The opinion of the court was delivered by: Michael P. McCUSKEY Chief U.S. District Judge


This is an appeal from an Order entered by the United States Bankruptcy Court for the Central District of Illinois, Judge Gerald D. Fines. For the following reasons, the decision of the bankruptcy court is REVERSED and remanded.


Overview Appellant, Village of Manteno (the Village), Appellee South Creek Development, LLC (South Creek), and other parties entered into an annexation agreement (Original Annexation Agreement) in October 1996 which governed 314 acres of land at the southeast corner of I-57 and Manteno Road in unincorporated Kankakee County (Greater Property). The Original Annexation Agreement governed the way the Greater Property was to be zoned, developed, and ultimately annexed into the corporate limits of the Village. Eventually the other parties (excluding the Village) transferred their right, title, and interest in the Greater Property to South Creek after the Original Annexation Agreement was executed. The Village and South Creek then executed an Amended Annexation Agreement in September 1997 after South Creek became sole owner of record for the Greater Property. This amended agreement was intended to clarify and settle, among other things, a dispute regarding South Creek's obligation to improve a portion of the Frontage Road that runs through the Greater Property (the Subject Property). The amended agreement partitioned the obligation to improve the Subject Property between the Village and South Creek.

In October 1996 the Village annexed, zoned, and subsequently permitted the subdivision and development of the Greater Property. In 2009, the Village filed suit against South Creek seeking specific performance of its obligation to improve the Frontage Road because construction had not yet commenced. On February 24, 2010, South Creek filed its voluntary petition for Chapter 7 bankruptcy. The petition listed the Village as a creditor for the sum of $450,000 (the estimated cost of the Frontage Road improvement). The petition also listed the Subject Property as an asset of South Creek. South Creek's petition listed Centrue Bank (Centrue) as a secured party with an equitable interest in the Subject Property, and parts of the Greater Property, as a mortgagee since 2005. Centrue's interests in land outside the Subject Property have since been released through third-party sales.

Before South Creek filed its bankruptcy petition, Centrue filed an action to foreclose on its interest in the Subject Property in Illinois state court. It obtained an order of possession on August 26, 2009, and on March 23, 2010, the bankruptcy court entered an order in which Centrue agreed to stay its right to have the Subject Property sold at a foreclosure sale to provide the Trustee with an opportunity to sell the Subject Property on the open market. On April 7, 2010, the bankruptcy court granted the Trustee's petition to employ a real estate agent to sell the Subject Property. The Village then filed this motion to protect its interest in the Subject Property pursuant to 11 U.S.C. § 363(e) on April 12, 2010.

In the motion, the Village argued that the Subject Property, which is part of South Creek's estate, is also a part of the Greater Property and thus subject to the Original and Amended Annexation Agreements. The Village argued that the Trustee could only sell the debtor's (South Creek's) property free and clear of third-party (Village) interest if it met one of five exceptions under 11 U.S.C. § 363(f). The Village denied that any of the exceptions allowing sale of the land free and clear of the Village's interest applied. Centrue responded that the exceptions had been met. Centrue argued that a bona fide dispute existed as to whether the Amended Annexation Agreement at issue required Centrue, as mortgagee, to affirmatively build a road to certain specifications or, alternatively, to pay monetary damages in the amount of $450,000. Centrue argued that that issue was being litigated in the state courts and thus was in bona fide dispute.

The bankruptcy court issued its Order on May 18, 2010. In the Order, the court found that the Trustee was entitled to sell the property "free and clear of the obligations imposed under the Amended Annexation Agreement because there is a bona fide dispute regarding the validity of the Amended Annexation Agreement and, therefore, the obligations imposed thereunder." The court did not expand on its finding of a bona fide dispute, but did order that "any such sale shall be subject to court approval" and that the "Village is entitled to adequate protection in the amount of $83,565.00."


The Village has appealed the Order of the bankruptcy court. In their appeal, the Village argues (1) the bankruptcy court erred in finding there was a bona fide dispute as to the validity of the Amended Annexation Agreement and the obligations imposed thereunder and, (2) if the court finds there was a bona fide dispute, the bankruptcy court erred in ruling that $83,565.00 constituted adequate protection of the Village's interest in the Subject Property.

Standard of Review

The parties are in disagreement as to the standard of review. The Village claims the standard of review is de novo because the bankruptcy court's decision was solely based on interpretation of applicable law, while Centrue maintains the standard is clear error, as the bankruptcy court made a fact-based, or at least a mixed question of law and fact, decision.

The Seventh Circuit has not set a standard of review for the determination of whether a bona fide dispute exists in a bankruptcy setting. Rezko v. Sirazi, 2009 WL 1507660, at *3, fn. 2, (N.D. Ill. May 29, 2009). This court agrees with the holding of the Northern District of Illinois in Rezko, and will tie the standard of review to the nature of the decision made by the lower court- factual decisions will ...

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