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Bank of America, N.A., A National Banking v. Laurance H. Freed and

March 27, 2012

BANK OF AMERICA, N.A., A NATIONAL BANKING ASSOCIATION, SUCCESSOR BY MERGER TO LASALLE BANK NATIONAL ASSOCIATION, AS AGENT FOR LENDERS,
PLAINTIFF-APPELLEE,
v.
LAURANCE H. FREED AND, DDL LLC, AN ILLINOIS LIMITED LIABILITY COMPANY,
DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Cook County. No. 09 CH 39930 Honorable, Margaret Brennan Judge Presiding.

The opinion of the court was delivered by: Presiding Justice Quinn

PRESIDING JUSTICE QUINN delivered the judgment of the court, with opinion. Justices Cunningham and Harris concurred in the judgment and opinion.

OPINION

¶ 1 Defendants, Laurance H. Freed and DDL LLC, appeal from an order of the circuit court holding them in civil contempt for transferring almost $5 million in violation of citations to discover assets served on them by plaintiff, Bank of America, N.A.(Bank), to enforce a $110,956,772 judgment and from an order appointing a receiver as a remedy for the finding of contempt. On appeal, defendants contend that the trial court's finding of contempt was against the manifest weight of the evidence and that, even if they were in contempt, the trial court's order appointing a receiver as a sanction is invalid because: (1) it provides no viable means of purging the contempt; (2) it impermissibly punishes defendants for their past conduct; and (3) the investigatory authority granted to the receiver is not permitted under section 12-1402 of the Illinois Code of Civil Procedure (735 ILCS 5/2-1402 (West 2008)) or Illinois Supreme Court Rule 277 (eff. July 1, 1982). For the reasons set forth below, we affirm the finding of contempt and affirm the order appointing a receiver but reverse that part of the order addressing purge and remand to the trial court so that it may enter a proper purge provision.

¶ 2 I. BACKGROUND

¶ 3 This case arises out of the foreclosure of a mortgage on commercial property located at 108 North State Street in Chicago, Illinois, commonly referred to as "Block 37." The history of the development of this property is long, but only a brief summary is needed to address the issues raised in this appeal. Block 37 had been vacant for more than a decade when the City of Chicago (City) sold it in 2005 to Mills Corporation (Mills), a Virginia-based real estate investment company. Pursuant to an agreement between Mills and the City, the property was to be developed into a shopping, dining, and entertainment destination and a new subway station was to be built underneath. Mills ran into financial problems and sold the property in 2007 to Joseph Freed and Associates, LLC (JFA), a Chicago-based real estate developer. On or about March 22, 2007, JFA entered into a construction loan agreement with LaSalle Bank, N.A., (Bank),*fn1 with a maximum principal amount of $205 million. JFA's president, Laurance H. Freed, and JFA's parent company, DDL LLC, guaranteed the loan.

¶ 4 The loan agreement required that the loan be "in balance" at all times, meaning that the funds available under the loan had to equal or exceed the amount budgeted to complete the project. The loan was not in balance almost immediately after JFA acquired the property and determined that an additional $26 million would be needed to improve and change the physical space. JFA and the Bank tried but were unable to agree to a loan modification and instead entered into a series of separate letter agreements between March 2008 and August 2009, whereby the Bank continued to disburse funds despite the default. However, in October 2009, after the Bank and JFA could not agree on a plan to add a movie theater to the mall, which would have required additional funding, the Bank filed a foreclosure action in the circuit court of Cook County against defendants as guarantors of the mortgage. The Bank also filed an emergency petition for the appointment of a receiver, which the trial court granted. Defendants filed an interlocutory appeal of that order, and this court filed an opinion affirming the trial court (Bank of America, N.A. v. 108 N. State Retail LLC, 401 Ill. App. 3d 158 (2010), appeal denied 237 Ill. 2d 552 (2010)). On December 22, 2010, the trial court entered judgment against defendants in the amount of $206,700,222.39 pursuant to their guaranty of the loan. A foreclosure sale was confirmed on April 26, 2011, and the amount bid reduced the judgment to$110,956,772.20.

¶ 5 On January 3, 2011, the Bank served citations to discover assets on both Freed and DDL. The citations included the following standard provision:

"You are prohibited from making or allowing any transfer or other disposition of, or interfering with, any property not exempt from execution or garnishment belonging to the judgment debtor or to which the judgment debtor may be entitled or which may be acquired by or become due to the judgment debtor and from paying over or otherwise disposing of any money not so exempt, which is due or becomes due to the judgment debtor, until further notice of court or termination of the proceedings. You are not required to withhold payment of any money beyond double the amount of judgment."

¶ 6 On June 9, 2011, the Bank filed a motion for rule to show cause pursuant to section 2-1402 of the Illinois Code of Civil Procedure (735 ILCS 5/2-1402 (West 2008)) (Code) and Illinois Supreme Court Rule 277 (eff. July 1, 1982), alleging that defendants had dissipated almost $5 million in assets in violation of the citations served on them. The trial court granted the Bank's motion and held an evidentiary hearing on the rule to show cause on August 26, 2011.

¶ 7 Prior to the commencement of the hearing, the trial court granted defendants' motion in limine to bar any testimony regarding their compliance with the disclosure requirements under the citations and to limit the hearing to testimony regarding dissipation of assets. The Bank's first witness at the hearing was Nancy Ross, a financial consultant retained by the Bank to review documents produced by the defendants and other evidence to determine if defendants had transferred assets after receiving the citations. Ross testified that Freed's checking account showed that $245,000 was transferred out of a Deustsche Bank account to DDL and Danlar, LLC, an investment holding company owned by Freed and his brother, and that $193,739.64 was transferred out of a DDL Harris Bank account, leaving $98,667.01 remaining when the account was subsequently closed. Ross also testified that the check registers for Freed and DDL showed numerous "book entries," which are transfers of funds that belonged to or were owed to Freed or DDL, such as Freed's salary, tax refunds, and investment income, but which were not actually deposited into defendants' accounts but instead went to other entities, such as Danlar, DDL, and other Freed-owned limited liability companies (LLCs). Although this money never transferred through defendants' accounts, the JFA accounting department noted these transactions in check registers to account for defendants' assets and to have a record of where the assets went. Ross said that Freed would then use the funds that were transferred to other entities to pay a variety of obligations, such as the JFA payroll, mortgage payments, and defendants' attorney fees. Ross opined that Freed was using Danlar as a depository for his cash assets and that the accounting records show that money that belonged to DDL was being transferred to various LLCs. Ross testified that Freed's check register indicates that $1,028,226 was transferred out of his account after the citations were issued, with $7,748.23 going to Bank of America, and that DDL's check register shows transfers totaling $3,946,606.72 after the citations were issued. Ross further stated that these transfers did not create value for the Bank.

¶ 8 Next, Caroline Walters testified that she oversees the accounting department at JFA. She said that the accounting department prepares bank reconciliations, which show all money booked through a particular entity and are used to ensure that all entries are correct. Walters testified that she received copies of the citations but did not discuss them with Freed and was never told by Freed that the citations prevented any transfers of his or DDL's assets. She said that she thought the citations pertained to the collection of documents. Walters acknowledged that Freed's Deutsche Bank bank statement showed a transfer of $245,000 to a Danlar account at Northern Trust Bank and that the bank statement for DDL's account at Harris Bank notes transfers totaling $193,739.64 to various entities. She testified that she was never told not to make those transfers.

¶ 9 Pamela Bazan testified that she is a corporate controller at JFA and also handles Freed's personal accounting. She stated that she had been shown a copy of the citations but was never told that they prohibited transfers of Freed's or DDL's assets and that she did not change how she handled Freed's or DDL's business after the citations were served. She acknowledged that after receiving the citations, $245,000 was transferred from Freed's Deutsche Bank account and into Danlar's Northern Trust account and that even though the money never went into Freed's bank account, she made a book entry showing that it did. She also acknowledged the transfer of $193,739.64 from DDL's account at Harris Bank after the citations were received.

¶ 10 Defendant Freed testified on his own behalf, stating that he discussed the citations with JFA's attorney, Jeff Arnold, and delegated to Arnold the task of discussing them with the accounting department staff. During a deposition, Freed stated that he did not discuss with JFA's accounting staff whether DDL could make any payments in light of the citations and that he took no steps to make sure that DDL did not make any payments.

¶ 11 Defendants also called Ryan Pistarik as a witness. Pistarik, a forensic accountant, was retained by defendants to review 43 book entry transactions that the Bank claimed were a violation of the terms of the citations. Pistarik opined that none of the cash related to those transactions came from either DDL's or Freed's bank statements and that none of the transfers involved cash being disbursed from DDL to a DDL subsidiary. Instead, Pistarik said, these transactions involved cash going from one DDL subsidiary to another DDL subsidiary, neither of which was subject to the citations, and that those transfers did not affect the DDL balance sheet. Pistarik said that the JFA accounting department could have recorded the transactions as loans, but that the book entry method was easier. On cross-examination, Pistarik acknowledged that he was only given a select group of book entry transactions to review and did not review any cash transfers by DDL or Freed. Pistarik also acknowledged that some of the transfers were used to pay defendants' obligations, such as attorney fees, JFA payroll, and loans.

¶ 12 On October 5, 2011, the trial court entered an order finding defendants in contempt. The court noted that Freed acknowledged receipt of the citations and that he understood that they prevented him from transferring his or DDL's assets but that he took no action to prevent such transfers by informing JFA's accounting staff. The trial court found, based on the testimony and records submitted, that $1,020,377.81 had been transferred from Freed's accounts and $3,946,606.72 had been transferred from DDL's accounts after the citations had been served. Therefore, the court found that the Bank sustained its burden of proving by a preponderance of the evidence that defendants violated the citations to discover assets.

¶ 13 The court then addressed whether defendants had acted willfully and contumaciously. The court acknowledged defendants' argument that the transfers were made to fulfill obligations under the operating agreements for the LLCs or to preserve the value of assets but found that the transfers violated the citations, which prohibited defendants "from making payments, including payments of ordinary business expenses." The court noted that defendants did not rebut the testimony of the Bank's expert, Nancy Ross, who testified that the transfers by Freed and DDL did not create value for the Bank. The court also found that Freed is not unsophisticated, that he has an ownership interest in numerous LLCs, is a real estate developer, and has prior experience with citations. However, the court noted, "[w]hen served with the citations at issue here, the evidence is clear that he did not address the need to prevent the dissipation of assets with those responsible for doing the accounting and paying the bills, namely Pamela Bazan and Caroline Waters [sic]. This failure to act is clearly willful and contumacious."

ΒΆ 14 Turning to the issue of a sanction, the court found that appointing a receiver was ...


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