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BMO Harris Bank N.A. v. Joe Contarino, Inc.

Court of Appeals of Illinois, Second District

March 23, 2017

BMO HARRIS BANK N.A., f/k/a Harris N.A., as Assignee of the Federal Deposit Insurance Corporation, as Receiver for Amcore Bank, N.A., Plaintiff-Appellant,
v.
JOE CONTARINO, INC., d/b/a Contry Homes of Illinois, JOE CONTARINO, UNKNOWN OWNERS, and NONRECORD CLAIMANTS, Defendants Joe Contarino, Inc., d/b/a Contry Homes of Illinois, and Joe Contarino, Defendants-Appellees; Midwest Community Bank, Rockford Bank & Trust, and Byron Bank, Intervenors-Appellees.

         Appeal from the Circuit Court of Winnebago County. No. 13-CH-1148 Honorable Ronald A. Barch, Judge, Presiding.

          JUSTICE JORGENSEN delivered the judgment of the court, with opinion. Justices McLaren and Burke concurred in the judgment and opinion.

          OPINION

          JORGENSEN, JUSTICE

         ¶ 1 Plaintiff, BMO Harris Bank N.A., f/k/a Harris N.A., as assignee of the Federal Deposit Insurance Corporation, as receiver for Amcore Bank, N.A., filed a mortgage-foreclosure complaint against defendants, Joe Contarino, Inc., d/b/a Contry Homes of Illinois (JCI), Joe Contarino, unknown owners, and nonrecord claimants. BMO obtained a $1.5 million judgment against JCI and Contarino. As relevant here, in supplementary proceedings, BMO caused the issuance of a citation to discover assets to JCI (JCI citation) and, subsequently, a third-party citation to discover assets to Briargate Management LLC (Briargate citation), a property management company that collected rents for the JCI properties. Midwest Community Bank (Midwest), Rockford Bank & Trust (Rockford), and Byron Bank (Byron) (collectively Adverse Claimants) sought to intervene in the supplementary proceedings, to assert adverse claims on rents Briargate held. They claimed that their interests in the rents (via assignment-of-rents provisions in their mortgages on JCI properties and separate forbearance agreements) were superior to any interest BMO had by virtue of the JCI and Briargate citations.

         ¶ 2 The trial court ruled in Adverse Claimants' favor and against BMO, finding that BMO did not have priority as to the rents. Specifically, the court found, pursuant to section 31.5 of the Conveyances Act (765 ILCS 5/31.5 (West 2014)), that rental agreements such as the forbearance agreements here are beyond the reach of a third party such as BMO. BMO appeals. We affirm.

         ¶ 3 I. BACKGROUND

         ¶ 4 Contarino was sole owner and president of JCI. JCI's assets included several income properties that were managed by Briargate, which was owned by Contarino's wife. Briargate collected rents for the properties and transferred them to JCI.

         ¶ 5 On August 27, 2013, BMO filed a complaint against defendants, seeking to foreclose on four mortgages on several lots in subdivisions in Rockford, Roscoe, and Machesney Park. The complaint also included counts alleging breach of a promissory note (executed by JCI) and breach of a guaranty (by Contarino). On April 11, 2014, the trial court entered foreclosure judgments. On August 27, 2014, the trial court entered judgment in BMO's favor and against JCI and Contarino in the amount of $1, 569, 610.45 each. It also confirmed sales of the lots and issued orders of possession.

         ¶ 6 On November 7, 2014, BMO initiated supplementary proceedings to enforce the judgment and filed the JCI citation. The citation was served on JCI on November 20, 2014, and was subsequently extended several times. See Ill. S.Ct. R. 277(f) (eff. Jan. 4, 2013) (citation automatically terminates six months from the date of the respondent's personal appearance or upon expiration of extensions entered "as justice may require").

         ¶ 7 On August 20, 2015, BMO filed the Briargate citation, and Briargate was served on August 28, 2015.

         ¶ 8 In its response, Briargate asserted that it did not hold any JCI assets and that it was a mere management agent and conduit for Adverse Claimants, secured lenders that were entitled to the rents. Subsequently, Adverse Claimants moved to intervene to assert their adverse claims, based on rent-assignment agreements that predated BMO's citations.

         ¶ 9 First, on September 29, 2015, Midwest moved to intervene in the supplementary proceedings, to assert an adverse claim to certain rents held by Briargate. 735 ILCS 5/2-1402(g) (West 2014). Midwest argued that, on September 15, 2015, it had filed a complaint in Boone County to foreclose its mortgage (which was recorded on October 7, 2010, and contained an assignment-of-rents clause) on real property at 413 Old Orchard Lane in Poplar Grove. In that action, it had asserted that it was entitled to possession of the property for the purpose of collecting rents. The trial court granted the motion to intervene on October 1, 2015, and, further, gave Byron and Rockford seven days to file their claims.[1] Subsequently, as noted below, Midwest asserted that, pursuant to a December 2014 forbearance agreement between it, JCI, and Briargate, Briargate began transmitting directly to Midwest the rents on the JCI-owned properties subject to Midwest's mortgages.

         ¶ 10 Second, on October 8, 2015, Byron moved to intervene, to assert an adverse claim on rents Briargate held. Byron asserted that it had a superior interest in the rents by reason of its mortgages (containing assignment-of-rents clauses) on JCI-owned properties and by reason of a December 2014 forbearance agreement between Byron, JCI, and Briargate, according to which, beginning December 1, 2014, Briargate began transmitting the rents on those JCI-owned properties directly to Byron.

         ¶ 11 Third, also on October 8, Rockford moved to intervene, to assert an adverse claim on rents held by Briargate, similarly arguing that its interest was superior by reason of its mortgages on JCI-owned properties and by reason of an August 20, 2013, forbearance agreement between it, JCI, and Briargate, according to which Briargate began transmitting the rents on those properties directly to Rockford.[2]

         ¶ 12 A. Trial Court Orders

         ¶ 13 On December 16, 2015, a hearing commenced on the adverse claims. On January 13, 2016, the trial court issued its memorandum of decision and order with respect to the Briargate funds.

         ¶ 14 As to Rockford, the trial court rejected BMO's claim that Briargate's transmittal of rents directly to Rockford violated the restraining component of the JCI and Briargate citations. It found that the forbearance agreement between JCI, Briargate, and Rockford was an enforceable contract modification that predated BMO's judgment and the JCI and Briargate citations. The court noted that, prior to BMO's judgment, Rockford enjoyed the benefits of secured contract rights, including the right to foreclose on JCI properties in the event of a default. In 2013, rather than pursue foreclosure, Rockford entered into a separate agreement-the forbearance agreement-that contractually obligated Briargate to transmit rents from JCI properties directly to Rockford. Rockford, the court found, forwent its right to foreclose and/or pursue receivership, and JCI contracted away its right to receive rents on the properties implicated by the mortgages. The court noted that the forbearance agreement did not run afoul of the rents-and-profit doctrine, because the contract dictated that all management expenses were to be deducted before any net rents were transmitted to Rockford. See Comerica Bank-Illinois v. Harris Bank Hinsdale, 284 Ill.App.3d 1030, 1034-35 (1996) (rent assignment unenforceable absent actual or constructive possession by lender, the latter of which must include court authorization; public policy seeks to prevent mortgagee from leaving the mortgagor and tenants without resources for maintenance or repair). Finally, the court rejected BMO's assertion that the forbearance agreement violated the restraining provisions of the JCI and Briargate citations, distinguishing case law BMO cited that addressed rent assignments. See Comerica, 284 Ill.App.3d at 1034-35; In re Wheaton Oaks Office Partners Limited Partnership, 27 F.3d 1234, 1241, 1245 (7th Cir. 1994) (lender seeking to enforce rent assignment will usually have to obtain preforeclosure possession by being placed in actual possession or through appointment of receiver; mortgagee must take certain steps to enforce lien; "failure to enforce an assignment of rents does not destroy the legal existence of an effective, enforceable security interest in those rents which came into being upon execution and was perfected upon recordation"); In re J.D. Monarch Development Co., 153 B.R. 829 (Bankr. S.D. Ill. 1993) (lender seeking to enforce rent assignment must first pursue debtor-in-possession status).

         ¶ 15 Turning to Byron, the trial court overruled Briargate's objection to document discovery concerning rents it transmitted to Byron. The court determined that Byron's adverse claim reflected that its forbearance agreement with JCI was executed on December 1, 2014. The JCI citation was filed on November 7, 2014, and JCI appeared of record no later than November 24, 2014. Thus, the forbearance agreement was executed after the JCI citation's restraining provision came into effect. The court ordered Briargate to supplement its citation production to include records of all rent transmittals to Byron.

         ¶ 16 As to Midwest Bank, the trial court reserved ruling on Briargate's objection to document discovery concerning rental payments it transmitted to Midwest. The court noted that it was not clear whether the forbearance agreement between JCI and Midwest was executed before or after BMO filed the JCI citation. It directed JCI, Briargate, and Midwest to furnish to BMO all documentation concerning the execution date of the forbearance agreement and directed Briargate to supplement its citation production to include records of all rent transmittals to Midwest.

         ¶ 17 Finally, the court overruled Briargate's objection that the Briargate citation was untimely under the six-month, automatic-termination provision in Rule 277(f).

         ¶ 18 B. Ruling on BMO's Motion to Clarify and Reconsider

         ¶ 19 On February 12, 2016, BMO moved to clarify and reconsider, arguing that the court misapprehended the facts. Specifically, it argued that: (1) as to Rockford, the court was mistaken as to the timing of the receipt of funds, as BMO was the only party with a lien on the funds currently held by Briargate; (2) as to Rockford, the court misstated the law in holding that a forbearance agreement (which, BMO claimed, gives rise only to a contractual claim, not a lien, on collected rents) takes priority over a lien right; and (3) as to Rockford, even if Rockford's claim was superior to BMO's claim, the forbearance obligations were never proved up and JCI might not owe Rockford any funds, due to a subsequent consent foreclosure judgment.

         ¶ 20 On March 16, 2016, JCI and Briargate filed a response to BMO's motion, noting that section 31.5 of the Conveyances Act, which was enacted in 1996 (i.e., after BMO's proffered cases were decided), controlled the issue of priority between Adverse Claimants and BMO. Specifically, they argued, the statute dictated that Adverse Claimants were entitled to the rents at every juncture of the case, including postjudgment and postcitations, because Adverse Claimants exercised their rights to collect the rents. JCI and Briargate argued that the issue was not about priorities between forbearance agreements and citation liens. In their view, any agreement by which a bank enforced a recorded assignment of rents trumped a citation lien. That is, so long as Adverse Claimants established that they had recorded assignments of rents and then directed the rents to be paid pursuant to the assignments, Adverse Claimants had priority over BMO. See West Bend Mutual Insurance Co. v. Belmont State Corp., 712 F.3d 1030, 1034-35 (7th Cir. 2013) (reviewing Illinois law and noting that a lockbox arrangement or other direct payment system constitutes sufficient enforcement of an assignment of rents). JCI and Briargate also asserted that a claim by BMO for rents due to Adverse Claimants could have arisen only if BMO had sought a turnover order for the rents or sought its own receiver. Had it done so, they argued, BMO's claim would have jumped ahead until Adverse Claimants asserted their assignments.

         ¶ 21 In its response, Rockford relied on the Conveyances Act, as did Midwest (in its separate response), which also noted that it had provided to BMO the court-ordered documentation.[3] As to lien priority, Midwest argued that, when it set up the direct-payment system, it was asserting its rent assignment. At that time, BMO had not sought a turnover of any of the rents and, therefore, Midwest's lien was superior to BMO's, because Midwest asserted its rights to the rents before BMO perfected the citation lien. According to Midwest, since the recorded mortgage and rent assignment gave it priority over a third party such as BMO, Midwest's interest in the rents was prior in both right and time to any claim by BMO based upon the citations. Midwest requested that the court find that BMO had no right to the rents due to Midwest.

         ¶ 22 On April 21, 2016, the trial court issued a written order, denying the motion to clarify and reconsider and finding that Adverse Claimants held liens superior to BMO's. The court noted that it previously addressed the cases upon which BMO relied. It also noted that there was no authority addressing the effect of a citation lien on a previously executed forbearance agreement. The court reiterated its previous finding that the forbearance agreements "were legally enforceable contractual agreements manifestly distinct from the assignments of rent agreements at issue in the cases relied upon by BMO." As to the prove-up issue, the court rejected it, noting that the existence of the forbearance agreements was not disputed and that BMO had cited no authority in support of its argument, which it asserted for the first time in its motion to clarify and reconsider. Further, case law instructed that "an express pledge of rents is not extinguished by a foreclosure sale which merges the title and the debt in the same party." In re Randall Plaza Center Associates, L.P., 326 B.R. 133, 141 (Bankr. N.D.Ill. 2005). Accordingly, the court denied BMO's motion to clarify and reconsider.

         ¶ 23 The court granted JCI and Briargate's request for clarification, finding that section 31.5 was added to the Conveyances Act in 1996 to address the holdings in Wheaton Oaks, J.D. Monarch, and Comerica. According to the court, those cases held that a lender may not collect rents directly under a rent-assignment agreement until the lender has first attained mortgagee-in-possession status or secured the appointment of a receiver. Section 31.5, the court determined, declares that rent-collection agreements, such as lockbox arrangements or the forbearance agreements in this case, "are beyond the reach of any third-party claims that are perfected or arise thereafter." Furthermore, the court found that, even if the statute is ambiguous on this point, the legislative history dictated that the legislature intended to override the case law finding that the recording of an assignment of rents alone is insufficient to defeat priority claims by subsequent lenders and lien claimants. See 89th Ill. Gen. Assem., House Proceedings, May 8, 1995, at 180-81 (statements of Representative Biggert) (noting that "court decisions have been highly inconsistent" and that most, but not all, courts have held that recording is sufficient).

         ¶ 24 The court summarized that, pursuant to section 31.5, Adverse Claimants' claims "trumped" BMO's claim to the rents generated by the JCI-owned properties (prior to BMO's judgment, between the judgment and the JCI and Briargate citations, and between the JCI and Briargate citations and Adverse Claimants' securing mortgagee-in-possession status).

         ¶ 25 Next, the trial court addressed, in the alternative, the effect of a ruling that the forbearance agreements here are indistinguishable from the rent-assignment agreements in Wheaton Oaks, J.D. Monarch, and Comerica. The trial court found that those cases stand for the proposition that a judgment creditor can establish an entitlement to collect rents by obtaining possession of a mortgagor's property before the mortgagee holding a previously recorded rent assignment takes steps to enforce its rights through foreclosure or the appointment of a receiver. It further noted that, to unseat a priority lienholder's right to receive rents, the judgment creditor or subordinate lienholder must gain possessor status or secure the appointment of a receiver. In this case, the trial court found, BMO secured a judgment and thereafter issued citations to discover assets. Its efforts to collect rents, however, did not progress any further, such as by seeking the appointment of a receiver or seeking possession of the JCI rental properties. Thus, the trial court determined in the alternative (i.e., if section 31.5 does not control) that BMO does not have a superior interest in the rents, because it "did not do all that was necessary, as a junior lienholder, to supplant the right of any of the lender banks, the undisputed senior lienholders, to the rental streams associated with the JCI properties, even on a temporary basis." Finally, the trial court found that there was no just reason to delay enforcement or appeal of its order. Ill. S.Ct. R. 304(a) (eff. Mar. 8, 2016). BMO appeals.

         ¶ 26 II. ANALYSIS

         ¶ 27 BMO argues that the trial court erred in finding that Adverse Claimants hold a superior lien on the rents Briargate collects. It contends that Adverse Claimants have no lien on the collected funds, while BMO has the only perfected judgment lien. Adverse Claimants' mortgages and rent-assignment agreements are not relevant to this case, BMO argues, until Adverse Claimants have been granted constructive or actual possession, through ...


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