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U.S. Bank National Association v. Randhurst Crossing LLC

Court of Appeals of Illinois, First District, Fourth Division

March 29, 2018

U.S. BANK NATIONAL ASSOCIATION, as Trustee, Successor-in-Interest to Bank of America, N.A., as Trustee Successor to Wells Fargo Bank, N.A., as Trustee for the Registered Holders of Wachovia Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2003-C5, By and Through Its Special Servicer, CWCapital Asset Management, LLC, Plaintiff-Appellee,

          Appeal from the Circuit Court of Cook County. No. 13 CH 14977 The Honorable Anna M. Loftus, Judge Presiding.

          JUSTICE GORDON delivered the judgment of the court, with opinion. Presiding Justice Burke and Justice McBride concurred in the judgment and opinion.



         ¶ 1 The instant appeal arises from the foreclosure of defendant Randhurst Crossing LLC's mortgage on commercial property. During the course of the foreclosure proceedings, prior to the appointment of a receiver, defendant filed for Chapter 11 bankruptcy in federal court, which stayed the foreclosure proceedings. After the automatic stay was lifted in the bankruptcy action, a receiver was appointed in the foreclosure proceedings, and the trial court ordered all rents paid during the bankruptcy to be turned over to the receiver. The trial court ultimately granted summary judgment in plaintiff's favor concerning the foreclosure action. In the judgment of foreclosure and sale, the trial court also awarded plaintiff its attorney fees, as provided in the loan documents. On appeal, defendant challenges: (1) the order requiring turnover of the prereceivership rents; (2) the trial court's award of attorney fees; and (3) the trial court's denial of defendant's request that the property manager that managed the property during the bankruptcy proceedings be paid. For the reasons that follow, we affirm the trial court's judgment.

         ¶ 2 BACKGROUND

         ¶ 3 The parties have engaged in years of extensive litigation, in both state court and in bankruptcy court. The instant appeal concerns three narrow issues: whether the trial court properly awarded plaintiff prereceivership rents; whether the trial court properly awarded plaintiff its attorney fees; and whether the trial court properly denied defendant's request that the property manager be paid. We focus on the facts relevant to those issues and provide other facts only as required for context.

         ¶ 4 I. Prebankruptcy Proceedings

         ¶ 5 In defendant's own words, defendant "is a single-asset real estate entity that was engaged in the business of owning and operating a retail shopping center located at the northwest corner of Rand Road, Route 83, and Kensington Road, in Mt. Prospect, Illinois" (the property). Defendant was the obligor on a note executed on October 31, 2002, in the amount of $3.9 million, which was secured by a mortgage on the property; the maturity date on the note was November 11, 2012. The plaintiff trust is the successor in interest to the note and mortgage, and the current lawsuit is being pursued by its servicer on its behalf; we refer to the trust and the servicer interchangeably as "plaintiff."

         ¶ 6 On the same day as the execution of the mortgage and note, defendant also executed an "Assignment of Leases and Rents, " which provided, in relevant part, that defendant

"is hereby permitted, and is hereby granted a revocable license by Assignee, to retain possession of the Leases and to collect and retain the Rents unless and until there shall be an Event of Default under this Assignment, the Mortgage or the other Loan Documents. In the event of such Event of Default, the aforementioned license granted to Assignor shall automatically terminate without notice to Assignor, and Assignee may thereafter, without taking possession of the Property, take possession of the Leases and collect the Rents."

         This assignment of leases and rents was recorded on November 4, 2002.

         ¶ 7 On December 18, 2012, plaintiff sent a letter to defendant, informing defendant that an event of default had occurred due to defendant's failure to pay the outstanding indebtedness due on November 11, 2012, the maturity date, and making a demand for the payment of all unpaid amounts due and owing. On the same day, plaintiff sent a letter to defendant providing that, upon execution of the agreement by both parties and the payment of a forbearance fee of $20, 000, the letter would constitute a forbearance agreement by which plaintiff would forbear exercising its rights and remedies against defendant and the property from November 11, 2012, through March 18, 2013. This letter was executed by both parties, with defendant executing it on January 23, 2013, and there is no dispute that defendant paid the $20, 000 forbearance fee.

         ¶ 8 On April 12, 2013, plaintiff sent a letter to defendant, indicating that plaintiff would agree to extend the forbearance period to June 16, 2013, upon execution by both parties of the letter and upon tender by defendant of an additional forbearance fee of $30, 000. This letter purports to have been executed by defendant on March 14, 2013;[1] the copy of the letter contained in the record on appeal does not contain plaintiff's signature.[2]

         ¶ 9 On June 18, 2013, plaintiff filed a complaint for foreclosure against defendant, alleging that defendant was in default and, in addition to a judgment of foreclosure and sale, requested the appointment of a receiver.

         ¶ 10 On June 20, 2013, plaintiff filed a separate motion for appointment of a receiver, as authorized by the mortgage. The motion claimed that upon its appointment, the receiver would also provide property management services. On September 23, 2013, the motion was entered and continued to November 14, 2013.

         ¶ 11 On March 17, 2014, the day that the motion for appointment of receiver was to be heard, the trial court entered an order staying the case due to defendant's March 14, 2014, filing of Chapter 11 bankruptcy.

         ¶ 12 II. Bankruptcy Proceedings

         ¶ 13 As relevant to the instant appeal, on May 14, 2014, plaintiff filed a motion in bankruptcy court, in which plaintiff requested that the rents collected from the property's tenants be considered "cash collateral" pursuant to the Bankruptcy Code (11 U.S.C. § 363(a) (2012)) and that defendant be prohibited from using such cash collateral. The motion claimed that plaintiff had sent defendant a letter stating that the rents were considered cash collateral under the Bankruptcy Code and "the Debtor did not have permission to use cash collateral." However, the motion claimed that "[t]he Debtor's first Small Business Monthly Operating Report *** raises significant questions about whether the Debtor is engaging in the unauthorized use of Cash Collateral and properly segregating and accounting for these funds." Accordingly, plaintiff sought a court order "prohibiting the Debtor from further use of [plaintiff's] Cash Collateral and compelling the Debtor to account for and segregate all Cash Collateral, together with such other relief as may be just and proper."

         ¶ 14 On May 20, 2014, the bankruptcy court entered an order that "[u]pon the Motion of [plaintiff] to Prohibit Use of Cash Collateral and Compel Segregation and Accounting; the Court being duly advised in the Premises; it is hereby: ORDERED, the Debtor is prohibited from using any proceeds of the real property *** without permission from the Trust or Court authorization" and further ordering defendant to segregate all proceeds of the property. We refer to this as the "cash collateral order."[3]

         ¶ 15 On July 15, 2014, the bankruptcy court held a hearing on a "Motion to Hold the Debtor in Contempt" filed by plaintiff due to defendant's lack of compliance with the cash collateral order and, on March 30, 2015, the bankruptcy court entered an order holding defendant in contempt. The transcript of the hearing and the order reflect that defendant had made postpetition payments from a bank account containing rents collected from tenants without first seeking the bankruptcy court's permission, and the order required defendant to return the payments to the account.

         ¶ 16 On April 28, 2015, the bankruptcy court continued defendant's motion to dismiss the bankruptcy action, [4] but indicated that it would be inclined to lift the automatic stay, noting:

"I had said at the last hearing that what I was thinking about doing was vacating the automatic stay upon appropriate motion to permit the parties to go back to the state court or the state court to appoint the receiver. Upon reflection-and then the receiver could come back, and we could proceed with the dismissal and let things proceed.
On reflection, it occurs to me that I think that would be putting my thumb on the scale too much for one side or the other. It seems to me the state court has the option to let the debtor have the money and the property, to appoint a receiver to do it, to let the trust have the money. I have no idea what the state court would want to do.
But it strikes me that we have what is-what at this point both parties admit is a two-party dispute and that the appropriate place for that to be determined is not in this court, but in state court.
My main concern just to simplify everything and what I'm trying to accomplish- and I don't really care how we accomplish it-but this is what I want to see done, is to ensure that in the process of transferring the litigation and the dispute from this court to the state court, that neither side is advantaged or disadvantaged by the fact that the bankruptcy was filed in the first place or how the bankruptcy is dismissed."

         An order granting the motion to lift the automatic stay does not appear in the record on appeal but, according to plaintiff's motion for appointment of a receiver, the bankruptcy court entered such an order on May 12, 2015.

         ¶ 17 III. Postbankruptcy Proceedings

         ¶ 18 On May 22, 2015, plaintiff filed a new motion for the appointment of a receiver. Paragraph 9 of the motion provided:

"On April 14, 2015, the Bankruptcy Court granted the Defendant/Debtor's Motion to Dismiss but deferred dismissal of the Bankruptcy Case so that the status quo could be maintained, until Plaintiff obtained an order from this Court on either a motion for appointment of a Receiver or for other relief in order to secure the real estate and funds held by the Defendant/Debtor, during the pendency of the foreclosure case."

         ¶ 19 On June 8, 2015, the trial court granted plaintiff's motion. With respect to the issue of rents, the order provided that

"[t]he receiver is authorized to collect all rents relating to the Property, and the tenants of the Property are directed to pay rent to the receiver from the effective date of this order, until further notice. The receiver shall allocate all receipts from the operation of the real estate and other property subject to the mortgage in accordance with 735 ILCS 5/15-1704(d) [(West 2014)]. Within 21 days, the receiver shall provide notice to any and all occupants of the property as required by 735 ILCS 5/1704(f) [(West 2014)]. The receiver shall also have the right to collect past due rents from the tenants of the Property."

         The trial court's order became effective on June 17, 2015, upon the court's approval of the receiver's bond.

         ¶ 20 On the same day as the trial court granted plaintiff's motion for appointment of a receiver, it also entered a scheduling order on "[t]he motion of plaintiff *** to obtain pre-receivership rents (¶ 9 of motion), " setting a briefing schedule on the issue and setting it for hearing on July 20, 2015.

         ¶ 21 On June 26, 2015, defendant filed a response to plaintiff's request to receive prereceivership rents, arguing that plaintiff had no actual or constructive possession of the property until the effective date of the receiver's appointment and there was no legal support for its claim to prereceivership rents. In reply, plaintiff argued that the receiver would have been appointed in March 2014 had defendant not filed for bankruptcy protection and further argued that the cash collateral order entered by the bankruptcy court that restricted the use of the rents was "in every way the functional equivalent of a receiver." Thus, plaintiff argued that defendant should be ordered to turn over at least the rents collected after the entry of the bankruptcy court's order, which was entered on May 20, 2014. Plaintiff further claimed that it had been paying the real estate taxes owed on the property during the pendency of the bankruptcy.

         ¶ 22 Defendant filed a surreply to the motion, disputing plaintiff's contention that the cash collateral order was in any way analogous to the appointment of a receiver. Defendant argued that obtaining injunctive relief in bankruptcy court was a more extensive process and that the cash collateral order "is nothing more than a regurgitation of the language in the Bankruptcy Code related to the use of cash collateral." Defendant further argued that plaintiff had cited no case in which such a cash collateral order was considered to be the functional equivalent of the appointment of a receiver. Defendant also claimed that plaintiff voluntarily paid the real estate taxes owed on the property and that defendant "was willing and able to pay the real property taxes from the rents it received, but could never do so because Lender always beat it to the punch."

         ¶ 23 On July 20, 2015, the parties appeared before the trial court for a hearing on the motion concerning prereceivership rents and, on August 18, 2015, the trial court entered an eight-page order granting plaintiff's motion. The court found that "[u]nder the applicable Illinois Law, Bankruptcy Law, public policy, and equitable principles, [plaintiff's] interest in the proceeds of the subject real estate vested-as that term was used by the Second District in De Kalb Bank [v. Purdy, 166 Ill.App.3d 709, 719 (1988)]-on May 20, 2014. [Citation.] As such, [plaintiff] is entitled to have those proceeds turned over to the court-appointed receiver, for use in preserving the subject property, whenever the funds are released from [defendant's] DIP [(debtor-in-possession)] account." The court found that "[u]nder Illinois law, asserting control over rents and profits through proper procedure[ ] is sufficient to vest the plaintiff's interest in those rents and profits. [Citation.] The Bankruptcy Court, on [plaintiff's] motion, asserted that type of control over the tenants' rents and other payments when it issued the May 20, 2014[, ] order pursuant to 11 U.S.C. Section 363(e)." The court further found that "[t]he Bankruptcy Court's order of May 20, 2014, *** accomplished everything that appointing a receiver would have accomplished: it placed the rents in the court's control-its constructive possession-pending a determination of the parties' relative rights."

         ¶ 24 The court also found that equitable considerations supported the turnover of rents to the receiver:

"On the last business day prior to the scheduled hearing on [plaintiff's] motion to appoint receiver-to which [defendant] had filed no objection within the time allowed, waiving its right to argue in opposition to that motion-[defendant] filed a petition for reorganization under Chapter 11. [Plaintiff] consistently asserted its interest in the property's proceeds during the bankruptcy case, and obtained a court order in relation thereto. To allow [defendant] to collect rents from well after March 17, 2014-when this court would have appointed a receiver but for [defendant's] unsuccessful bankruptcy petition-seems abundantly unfair. Such a holding could encourage other debtors to file borderline-frivolous bankruptcy petitions to delay adverse foreclosure orders, wasting the judicial resources of both the Bankruptcy Court as well as this court."

         ¶ 25 On September 29, 2015, plaintiff filed an amended motion for summary judgment.[5] The merits of the amended motion for summary judgment are not at issue on appeal. However, as part of the amended motion for summary judgment, plaintiff requested $572, 355.44 in attorney fees, as provided in the loan documents. Attached to the motion for summary judgment was a "schedule" of the invoices supporting plaintiff's request for attorney fees, redacted copies of which plaintiff claimed it had produced to defendant. The schedule listed 57 invoices dating from December 31, 2012, through September 9, 2015, 43 of which stated that they had been produced, and the schedule indicated that the invoices had a total value of $578, 974.71, with $549, 400.58 in fees and $29, 574.13 in costs.

         ¶ 26 Also attached to the amended motion for summary judgment was the affidavit of Gregory Akins, a senior vice president at plaintiff servicer.[6] With respect to the issue of attorney fees, Akins averred that "[a]s of the date of this Affidavit, the Loan remains outstanding and the total amount due and owing under the Loan Document is $5, 009, 794.05, which consists of: *** (vi) legal expenses total[ling] $572, 355.44 as of September 1, 2015." Akins further averred: "The fees and expenses detailed in Exhibits 4 and 5[[7] were all incurred in connection with the Trust's efforts to enforce the Loan Documents and have been paid or are in the process of being paid."

         ¶ 27 Finally, attached to the amended motion for summary judgment was an affidavit of Brent Procida, a New York attorney who was a partner in the law firm retained by plaintiff servicer in connection with the foreclosure action; Procida averred that he had been allowed, pursuant to Illinois Supreme Court Rule 707 (eff. July 1, 2007), to represent plaintiff in the instant litigation and pro hac vice in the bankruptcy court and that, over time, he became the primary attorney working on the instant litigation. Procida averred that he was personally involved with the legal services rendered to plaintiff in connection with: (1) the instant cause; (2) the bankruptcy case; (3) an adversary proceeding in bankruptcy court; and (4) a pending action in the circuit court of Cook County concerning a purported guaranty executed by defendant's principals. With respect to the issue of attorney fees, Procida averred:

"9. The attorneys' fees charged by [the firm] are based upon the amount of time spent on a particular client matter. We keep track of our time by filling out time sheets on a daily basis. The information from those time sheets is then made into an itemized invoice by using our computer billing program. I occasionally review the invoices to assure the accuracy and reliability of this system of generating invoices, and I have found it to be reliable and accurate.
10.My billing rate during the life span of this case has ranged from $550 to $600 per hour. A detailed listing of the attorneys' fees incurred by the Trust with regard to the above-captioned cause is attached to the Motion as Exhibit 4 and redacted invoices of all legal fees and ...

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