Appeal from the United States Bankruptcy Court for the Northern District of Illinois Case No. 07-20088
The opinion of the court was delivered by: Judge Robert W. Gettleman
MEMORANDUM OPINION AND ORDER
Claimant-appellant Mirabella Foundation ("Mirabella") appeals from an order of the United States Bankruptcy Court for the Northern District of Illinois disallowing an amended claim filed by The Formula Inc. ("The Formula"). For the following reasons, the court affirms the ruling of the bankruptcy court.
Debtor-appellee Chicago H&S Hotel Property LLC ("Debtor") acquired Hotel 71-a 40-story, 437-room hotel in Chicago-in 2005, intending to convert some or all of it into a condominium hotel. In preparation for the conversion project, debtor entered into presale agreements with a corporation known as The Formula, through which individual investors ("unit buyers") were offered the opportunity to buy condominium units in Hotel 71 when completed. Through The Formula, debtor entered into a Right of First Offer Agreement with each of 170 unit buyers. Each unit buyer executed a substantially similar agreement that entitled The Formula to a fee when the unit was resold. The unit buyers all made earnest money deposits of $10,000 into an interest-bearing escrow account at Chicago Title & Trust.
In spring 2005, debtor and The Formula had a dispute over whether the unit buyers could resell their units before the remaining unsold units were sold. To resolve that dispute, debtor and The Formula entered into individual settlement agreements with the unit buyers. Each settlement agreement, entitled "Listing Agreement to Right of First Offer Agreement and Listing Agreement to Upcoming Contract for Purchase and Sale," included three provisions at issue in the instant case. Paragraphs 11 and 12 required debtor to resell the unit and pay 17.65 percent of the purchase price ("resale profits") to the unit buyer. Paragraph 31 specified that if debtor failed to provide "condo docs" (a term defined in the settlement agreement) within six months of the unit buyer's initial deposit, the unit buyer could choose between two remedies, one of which entitled the unit buyer to monthly $10,000 "extension fees" until the buyer was offered a purchase contract. This provision expressly stated that if a unit buyer elected the extension fees, those fees were to be received by the buyer. Paragraph 27 required debtor to pay a six percent sales commission to a broker appointed by The Formula. Mirabella now alleges that debtor failed to perform its obligations under the settlement agreements by failing to resell and pay resale profits, failing to pay extension fees, and failing to pay the sales commissions.
Debtor never filed a condominium declaration, and by the end of 2005 it was apparent that the Hotel 71 condominium project would not be completed. In October 2007, debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, and in December 2007, debtor filed its Chapter 11 Plan of Reorganization.
While that was pending, in January 2008, The Formula sent letters to all of the unit buyers, offering each of them the option to "assign all of their contractual rights to Formula in exchange for payment of $10,000." 87 unit buyers accepted this offer, executing opt-in agreements that assigned their rights to The Formula. The Formula objected to the hotel sale and plan of confirmation on their behalf.
While the bankruptcy case was pending, Chicago Title & Trust (where the $10,000 deposits were being held in escrow) brought an adversary proceeding seeking to distribute the funds it was holding in escrow. In a contested bankruptcy court proceeding, Mirabella (as The Formula's assignee) claimed the interest earned on the deposits made by the 87 unit buyers. The other unit buyers were paid the interest earned on their deposits. 136 unit buyers filed proofs of claims, and the bankruptcy court disallowed all claims in excess of the $10,000 deposit and earned interest.
In February 2008, The Formula filed an amended claim, seeking $22,098,390 in three types of payments on behalf of 78 unit buyers: (1) resale profits, calculated based on the default closing price specified in the settlement agreements; (2) extension fees of $10,000 per unit per month; and (3) commissions of 6 percent of the default purchase price of the 78 units. None of the 78 unit buyers whom The Formula purported to represent had assigned their rights to The Formula.
On March 21, 2008, after a lengthy trial, the bankruptcy court confirmed debtor's plan of reorganization and authorized the sale of Hotel 71. The plan provided for the $10,000 escrowed deposits to be returned, with earned interest, to the unit buyers, in full settlement of the unit buyers' claims. The sale closed, and the plan became effective, on July 16, 2008.
In August 2008, The Formula assigned its claim to Mirabella. Debtor filed an objection to the claim in January 2010, based on various theories including The Formula's lack of contractual rights, the complete satisfaction of the claim by the full return of the unit buyers' deposits and earned interest, and subordination under the Bankruptcy Code. In March 2010, the bankruptcy court disallowed the claim, finding that the settlement agreements' terms gave the unit buyers exclusive rights to the resale profits and extension fees, and gave the exclusive rights to commissions to a broker to be appointed by The Formula.