FYI: 4th Cir Holds BK Trustee Could Not Pursue Claims Against Parent Bank's Directors and Officers

The U.S. Court of Appeals for the Fourth Circuit recently held that a bankruptcy trustee could not assert claims against a parent bank's directors and officers allegedly responsible for the mismanagement and failure of a subsidiary bank. 

 

More specifically, the Court ruled that, as derivative claims related to the mismanagement of the wholly-owned subsidiary, the claims could be brought only by the Federal Deposit Insurance Corporation as the receiver of the failed subsidiary bank, because the trustee had failed to show that the bank holding company had suffered damages separate and distinct from those at the subsidiary level.

 

The Court also ruled, however, that a separate trustee claim against the officers and directors for improperly subordinating the bank holding company's majority interest in a real estate investment entity could proceed.

 

A copy of the opinion is available at:  

http://www.ca4.uscourts.gov/Opinions/Published/112019.P.pdf.

 

When a wholly-owned subsidiary bank ("Subsidiary Bank") failed due to insolvency, the Federal Deposit Insurance Corporation was appointed receiver ("FDIC-R") and liquidated all of Subsidiary Bank's assets.  As a result of Subsidiary Bank's failure and liquidation, its parent company ("Debtor Parent Bank") filed for Chapter 7 bankruptcy.  The directors and officers (collectively, "Directors") of Debtor Parent Bank also served as the officers and directors of Subsidiary Bank.

 

The bankruptcy trustee ("Trustee") later filed an adversary proceeding, asserting breach of fiduciary duty and negligence against Directors in their capacity as officers and directors of Debtor Parent Bank resulting in the failure of Subsidiary Bank, and the improper subordination of Debtor Parent Bank's interest in a real estate holding entity in which Debtor Parent Bank held a majority interest.

 

In response, Directors moved the bankruptcy court to, among other things, transfer the action to federal district court or to dismiss the case for failure to state a claim under the Federal Rules of Civil Procedure.  The bankruptcy court transferred the case to district court.

 

The lower court granted the Directors' motion to dismiss, concluding that Trustee lacked standing to bring the action as Trustee had pled only claims derivative of Director's operation of Subsidiary Bank and the right to bring such claims belonged exclusively to FDIC-R.    Trustee appealed, arguing, first, that the claims were direct claims against Directors and, alternatively, that, because FDIC-R declined to pursue its claims against Directors, Trustee was free to bring those claims even if they were derivative in nature. 

 

The Fourth Circuit affirmed as to the claims related to management and failure of Subsidiary Bank, but reversed as to the claim for improper subordination of Debtor Parent Bank's interest in the real estate holding company. 

 

As you may recall, FDIC-R succeeds "to all rights, titles, powers, and privileges of the insured depository institution, and of any shareholder . . . of such institution with respect to the institution and the assets of the institution."  12 U.S.C. § 1821(d)(2)(A)(i) ("Section 1821(d)(2)(A)(i)"). 

 

Noting that, although under bankruptcy law Trustee had the authority to assert any cause of action that Debtor Parent Bank could have brought in its own right, including derivative claims as the sole shareholder of Subsidiary Bank, the Fourth Circuit pointed out that Section 1821(d)(2)(A)(i) exclusively vests FDIC-R with causes of action for losses sustained by Subsidiary Bank.  The court thus focused on whether Trustee pled a basis of liability that stemmed only from Directors' duties in their operation and management of Subsidiary Bank or whether Trustee also pled additional causes of action related to Directors' duties toward Debtor Parent Bank. 

 

Concluding that Trustee pled primarily causes of action for liability derivative of the alleged mismanagement of Subsidiary Bank, the court ultimately ruled that, with the exception of the claim that  Debtor Parent Bank improperly subordinated its majority interest in the real estate entity, Trustee lacked standing to assert claims belonging exclusively to FDIC-R. 

 

In so ruling, the Court of Appeals noted that Trustee largely failed to plead distinct and separate harm specific to Debtor Parent Bank at the holding company level and that, being Debtor Parent Bank's only asset, the Subsidiary Bank incurred damages no different from any damages incurred at the parent level.  Cf. Lubin v. Skow (In re Integrity Bancshares, Inc.), 382 Fed. App'x 866 (11th Cir. 2010)(ruling that FDIC-R succeeded to all derivative claims against officers and directors of a failed subsidiary bank and that bankruptcy trustee could have asserted claims for direct harm to debtor holding company had trustee raised direct claims in his pleadings).   

 

In reaching this conclusion, the court also rejected Trustee's argument that she had standing as a result of a letter from FDIC-R declining for reasons of cost to pursue a civil claim against Directors.   As the court explained, not only was there no statutory authority by which the FDIC-R could transfer to another party its exclusive statutory rights, but the letter from FDIC-R contained nothing prohibiting it from proceeding at a later date against Directors if it so chose.

 

With respect to Trustee's allegation that Directors allowed Debtor Parent Bank to improperly subordinate its interest in a real estate holding company, the court ruled that this particular allegation supported a direct claim against Directors, because the Trustee adequately pled direct harm to Debtor Parent Bank unrelated to mismanagement of the Subsidiary Bank.  In ruling that this claim was not a derivative claim belonging to FDIC-R, the court concluded that the lower court erred in dismissing this particular claim and that Trustee could accordingly proceed with this claim.

 

The Court of Appeals thus affirmed the district court's dismissal of the derivative claims, but reversed as to the direct claim related to Debtor Parent Bank's interest in the real estate investment entity.

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

FYI: 4th Cir Holds State Debt Cancellation Agreement Law Not Preempted as to National Bank Assignee

The U.S. Court of Appeals for the Fourth Circuit recently held that Maryland's Credit Grantor Closed End Credit Provisions concerning debt cancellation agreements are not preempted by the National Bank Act, when the debt was extended by a non-depository lender rather than by a national bank.   

 

A copy of the opinion is available at:

http://www.ca4.uscourts.gov/Opinions/Published/112161.P.pdf.

 

A consumer purchased a used car from an auto dealership, financing the purchase with a Retail Installment Sale Contract ("RIC").  The RIC provided that the purchase price included a $600 charge for an "Optional Debt Cancellation Agreement."  The debt cancellation agreement provided that part of the outstanding debt was to be cancelled in the event of the "total destruction" of the car.  The dealership then sold and assigned the RIC to a national bank (the "bank"). 

 

The consumer suffered a total loss, but the amount paid by his insurance company did not cover the remaining balance of his loan.  The consumer submitted the claim to the debt's servicer, who denied the claim.  The bank then demanded payment of the outstanding balance of the loan. 

 

The consumer sued the bank and the servicer, among others, alleging violations of Maryland's Credit Grantor Closed End Credit Provisions (the "CLEC"), Md. Code Ann., Com. Law Sec. 12-1001 et seq., among others.  The consumer also brought a breach of contract claim.  The defendants removed the matter to federal court, and argued that the CLEC was preempted by the National Bank Act ("NBA").  The district court found that the CLEC was preempted, and dismissed the consumer's claims.  The consumer appealed only the dismissals of his CLEC and breach of contract claims against the bank. 

 

As you may recall, the Supreme Court has held that although nations banks are shielded from "unduly burdensome and duplicative state regulation," such banks are nevertheless subject to "state laws of general application...to the extent such laws do not conflict with...the NBA."  See Watters v Wachovia Bank, N.A., 550 U.S. 1, 11 (2007). 

 

Further, the NBA includes both a preemption provision and a savings clause, the latter of which provides that state laws concerning contracts and the right to collect debts are not preempted, to the extent that these laws "only incidentally affect the exercise of national banks' non-real estate lending powers."  12 C.F.R. 7.4008(e). 

 

The Office of the Comptroller of the Currency ("OCC") has promulgated regulations concerning debt cancellation contracts, which define such a contract as one in which " a bank agrees to cancel all or part of a customer's obligation to repay an extension of credit from that bank..." 12 C.F.R. 37.2(f). 

 

After considering the "plain language" of the above-referenced statutes, regulations and case law, the Fourth Circuit held that "the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank." 

 

To reach that conclusion, the Fourth Circuit relied on the fact that the OCC regulations concern "debt cancellations entered into by national banks." Therefore, the Court reasoned that because the debt cancellation agreement was not entered into by a national bank, the federal regulations "do not expressly preempt the CLEC's regulation of debt cancellation agreements originated by local lenders and assigned to national banks." 

 

The Fourth Circuit next considered whether the federal regulations might "occupy the field" of debt cancellation agreements, and thus preempt local regulation of the same.  The Fourth Circuit again answered in the negative, holding that the federal regulatory regime "leaves room for state regulation of debt cancellation agreements entered into by entities other than national banks..."

 

The Fourth Circuit also concluded that the CLEC was not in conflict with federal banking regulations, and therefore not preempted on those grounds.  The Fourth Circuit noted that it is not "physically impossible" to comply with both laws, as the CLEC requires that a debt cancellation agreement must cancel all of the remaining debt, whereas federal regulations allow for the cancellation of "all or part of" the remaining debt. 

 

The bank countered that complying with the state regulations of debt cancellation agreements would burden its lending activities, such that preemption would be appropriate.  The Fourth Circuit disagreed, finding that complying with the CLEC's debt cancellation provision "would not burden [the bank] any more than the state laws it presumably already complies with," such as -- the court specifically noted -- state usury laws. 

 

Having determined that the RIC was subject to the terms of the CLEC, the Fourth Circuit next considered whether the bank breached those terms.  The Fourth Circuit was guided in its consideration of this issue by case law providing that preemption does not apply where to shield a party from liability for breach of a voluntarily-assumed obligation.  See Epps v. JP Morgan Chase Bank, 675 F.3d 315, 326-27 (4th Cir. 2012).  Here, the Court determined that the obligation was voluntarily assumed, and therefore held that the consumer adequately plead his breach of contract claim. 

 

Accordingly, the Fourth Circuit vacated the judgment of the lower court, and remanded the matter for further proceedings consistent with its opinion. 

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

 

 

 

 

FYI: 4th Cir Holds State Debt Cancellation Agreement Law Not Preempted as to National Bank Assignee

The U.S. Court of Appeals for the Fourth Circuit recently held that Maryland's Credit Grantor Closed End Credit Provisions concerning debt cancellation agreements are not preempted by the National Bank Act, when the debt was extended by a non-depository lender rather than by a national bank.   

 

A copy of the opinion is available at:

http://www.ca4.uscourts.gov/Opinions/Published/112161.P.pdf.

 

A consumer purchased a used car from an auto dealership, financing the purchase with a Retail Installment Sale Contract ("RIC").  The RIC provided that the purchase price included a $600 charge for an "Optional Debt Cancellation Agreement."  The debt cancellation agreement provided that part of the outstanding debt was to be cancelled in the event of the "total destruction" of the car.  The dealership then sold and assigned the RIC to a national bank (the "bank"). 

 

The consumer suffered a total loss, but the amount paid by his insurance company did not cover the remaining balance of his loan.  The consumer submitted the claim to the debt's servicer, who denied the claim.  The bank then demanded payment of the outstanding balance of the loan. 

 

The consumer sued the bank and the servicer, among others, alleging violations of Maryland's Credit Grantor Closed End Credit Provisions (the "CLEC"), Md. Code Ann., Com. Law Sec. 12-1001 et seq., among others.  The consumer also brought a breach of contract claim.  The defendants removed the matter to federal court, and argued that the CLEC was preempted by the National Bank Act ("NBA").  The district court found that the CLEC was preempted, and dismissed the consumer's claims.  The consumer appealed only the dismissals of his CLEC and breach of contract claims against the bank. 

 

As you may recall, the Supreme Court has held that although nations banks are shielded from "unduly burdensome and duplicative state regulation," such banks are nevertheless subject to "state laws of general application...to the extent such laws do not conflict with...the NBA."  See Watters v Wachovia Bank, N.A., 550 U.S. 1, 11 (2007). 

 

Further, the NBA includes both a preemption provision and a savings clause, the latter of which provides that state laws concerning contracts and the right to collect debts are not preempted, to the extent that these laws "only incidentally affect the exercise of national banks' non-real estate lending powers."  12 C.F.R. 7.4008(e). 

 

The Office of the Comptroller of the Currency ("OCC") has promulgated regulations concerning debt cancellation contracts, which define such a contract as one in which " a bank agrees to cancel all or part of a customer's obligation to repay an extension of credit from that bank..." 12 C.F.R. 37.2(f). 

 

After considering the "plain language" of the above-referenced statutes, regulations and case law, the Fourth Circuit held that "the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank." 

 

To reach that conclusion, the Fourth Circuit relied on the fact that the OCC regulations concern "debt cancellations entered into by national banks." Therefore, the Court reasoned that because the debt cancellation agreement was not entered into by a national bank, the federal regulations "do not expressly preempt the CLEC's regulation of debt cancellation agreements originated by local lenders and assigned to national banks." 

 

The Fourth Circuit next considered whether the federal regulations might "occupy the field" of debt cancellation agreements, and thus preempt local regulation of the same.  The Fourth Circuit again answered in the negative, holding that the federal regulatory regime "leaves room for state regulation of debt cancellation agreements entered into by entities other than national banks..."

 

The Fourth Circuit also concluded that the CLEC was not in conflict with federal banking regulations, and therefore not preempted on those grounds.  The Fourth Circuit noted that it is not "physically impossible" to comply with both laws, as the CLEC requires that a debt cancellation agreement must cancel all of the remaining debt, whereas federal regulations allow for the cancellation of "all or part of" the remaining debt. 

 

The bank countered that complying with the state regulations of debt cancellation agreements would burden its lending activities, such that preemption would be appropriate.  The Fourth Circuit disagreed, finding that complying with the CLEC's debt cancellation provision "would not burden [the bank] any more than the state laws it presumably already complies with," such as -- the court specifically noted -- state usury laws. 

 

Having determined that the RIC was subject to the terms of the CLEC, the Fourth Circuit next considered whether the bank breached those terms.  The Fourth Circuit was guided in its consideration of this issue by case law providing that preemption does not apply where to shield a party from liability for breach of a voluntarily-assumed obligation.  See Epps v. JP Morgan Chase Bank, 675 F.3d 315, 326-27 (4th Cir. 2012).  Here, the Court determined that the obligation was voluntarily assumed, and therefore held that the consumer adequately plead his breach of contract claim. 

 

Accordingly, the Fourth Circuit vacated the judgment of the lower court, and remanded the matter for further proceedings consistent with its opinion. 

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

 

 

 

 

FYI: 4th Cir Holds State Debt Cancellation Agreement Law Not Preempted as to National Bank Assignee

The U.S. Court of Appeals for the Fourth Circuit recently held that Maryland's Credit Grantor Closed End Credit Provisions concerning debt cancellation agreements are not preempted by the National Bank Act, when the debt was extended by a non-depository lender rather than by a national bank.   

 

A copy of the opinion is available at:

http://www.ca4.uscourts.gov/Opinions/Published/112161.P.pdf.

 

A consumer purchased a used car from an auto dealership, financing the purchase with a Retail Installment Sale Contract ("RIC").  The RIC provided that the purchase price included a $600 charge for an "Optional Debt Cancellation Agreement."  The debt cancellation agreement provided that part of the outstanding debt was to be cancelled in the event of the "total destruction" of the car.  The dealership then sold and assigned the RIC to a national bank (the "bank"). 

 

The consumer suffered a total loss, but the amount paid by his insurance company did not cover the remaining balance of his loan.  The consumer submitted the claim to the debt's servicer, who denied the claim.  The bank then demanded payment of the outstanding balance of the loan. 

 

The consumer sued the bank and the servicer, among others, alleging violations of Maryland's Credit Grantor Closed End Credit Provisions (the "CLEC"), Md. Code Ann., Com. Law Sec. 12-1001 et seq., among others.  The consumer also brought a breach of contract claim.  The defendants removed the matter to federal court, and argued that the CLEC was preempted by the National Bank Act ("NBA").  The district court found that the CLEC was preempted, and dismissed the consumer's claims.  The consumer appealed only the dismissals of his CLEC and breach of contract claims against the bank. 

 

As you may recall, the Supreme Court has held that although nations banks are shielded from "unduly burdensome and duplicative state regulation," such banks are nevertheless subject to "state laws of general application...to the extent such laws do not conflict with...the NBA."  See Watters v Wachovia Bank, N.A., 550 U.S. 1, 11 (2007). 

 

Further, the NBA includes both a preemption provision and a savings clause, the latter of which provides that state laws concerning contracts and the right to collect debts are not preempted, to the extent that these laws "only incidentally affect the exercise of national banks' non-real estate lending powers."  12 C.F.R. 7.4008(e). 

 

The Office of the Comptroller of the Currency ("OCC") has promulgated regulations concerning debt cancellation contracts, which define such a contract as one in which " a bank agrees to cancel all or part of a customer's obligation to repay an extension of credit from that bank..." 12 C.F.R. 37.2(f). 

 

After considering the "plain language" of the above-referenced statutes, regulations and case law, the Fourth Circuit held that "the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank." 

 

To reach that conclusion, the Fourth Circuit relied on the fact that the OCC regulations concern "debt cancellations entered into by national banks." Therefore, the Court reasoned that because the debt cancellation agreement was not entered into by a national bank, the federal regulations "do not expressly preempt the CLEC's regulation of debt cancellation agreements originated by local lenders and assigned to national banks." 

 

The Fourth Circuit next considered whether the federal regulations might "occupy the field" of debt cancellation agreements, and thus preempt local regulation of the same.  The Fourth Circuit again answered in the negative, holding that the federal regulatory regime "leaves room for state regulation of debt cancellation agreements entered into by entities other than national banks..."

 

The Fourth Circuit also concluded that the CLEC was not in conflict with federal banking regulations, and therefore not preempted on those grounds.  The Fourth Circuit noted that it is not "physically impossible" to comply with both laws, as the CLEC requires that a debt cancellation agreement must cancel all of the remaining debt, whereas federal regulations allow for the cancellation of "all or part of" the remaining debt. 

 

The bank countered that complying with the state regulations of debt cancellation agreements would burden its lending activities, such that preemption would be appropriate.  The Fourth Circuit disagreed, finding that complying with the CLEC's debt cancellation provision "would not burden [the bank] any more than the state laws it presumably already complies with," such as -- the court specifically noted -- state usury laws. 

 

Having determined that the RIC was subject to the terms of the CLEC, the Fourth Circuit next considered whether the bank breached those terms.  The Fourth Circuit was guided in its consideration of this issue by case law providing that preemption does not apply where to shield a party from liability for breach of a voluntarily-assumed obligation.  See Epps v. JP Morgan Chase Bank, 675 F.3d 315, 326-27 (4th Cir. 2012).  Here, the Court determined that the obligation was voluntarily assumed, and therefore held that the consumer adequately plead his breach of contract claim. 

 

Accordingly, the Fourth Circuit vacated the judgment of the lower court, and remanded the matter for further proceedings consistent with its opinion. 

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

 

 

 

 

FYI: Ill App Court Upholds Judgment in Full Against Guarantors Under "Carve-Out" Provision for Litigation Delay, Upholds Charging Orders Against Borrower's LLC/LLP Interests

The Illinois Appellate Court, First District, recently ruled that in filing an interlocutory appeal of an order appointing a receiver, the guarantors of a construction loan were liable for the full repayment amount under a "carve-out" provision that provided for full repayment liability if the guarantors took any action to "contest, delay or otherwise hinder" the lending bank's efforts to appoint a receiver or enforce the terms of the loan agreement.  

 

The Appellate Court also ruled that under the Illinois Limited Liability Company Act and Uniform Partnership Act, a court need only have jurisdiction over a judgment debtor to enter charging orders against the judgment debtor's transferable or distributional interests in limited liability companies and limited partnerships.

 

A copy of the opinion is available at: 

http://www.state.il.us/court/Opinions/AppellateCourt/2012/1stDistrict/1110749.pdf.

 

A real-estate developer ("Developer") purchased commercial property located in Chicago, Illinois (known here as "Block 37"), and financed the purchase with a construction loan from plaintiff bank ("Bank") for a total of about $205 million.  The loan was guaranteed by both the president of the real estate development company as well as its parent company (collectively, "Defendants").  

 

The guaranty provided that the Defendants' liability for the loan would be capped at just over $50 million, subject to a so-called "carve-out" provision that operated as an exception to the cap on liability.   Specifically, the carve out provision provided that the guaranty would become a full repayment guaranty if "the Borrowers contest, delay or otherwise hinder any action taken by . . . the Lenders in connection with the appointment of a receiver for the Premises or the foreclosure of the liens, mortgages or other security interests created by any of the Loan Documents."

 

The developer defaulted on the loan and Bank initiated a foreclosure action seeking in part to enforce the guaranty against Defendants.  Although the complaint originally sought judgment only on the guaranty for the amount of the liability cap, Bank subsequently amended the complaint to seek the full repayment amount of the loan from Defendants pursuant to the carve-out provision, arguing that Defendants had contested the foreclosure and the appointment of a receiver by filing an interlocutory appeal following the lower court's grant of Bank's emergency petition for the appointment of a receiver. 

 

In response, Defendants filed a motion to dismiss, arguing that the carve-out provision was an unenforceable penalty.   The lower court denied the motion.   Bank filed a motion for summary judgment, which the lower court granted.   The lower court entered judgment against Defendants for over $206 million pursuant to the guaranty and carve-out provision, certifying under Illinois Supreme court Rule 304(a) that there was no just reason to delay enforcement or appeal of the judgment. 

 

About a month after the entry of judgment, Defendants filed a motion to reconsider the Rule 304(a) certification, which the lower court denied.  Bank then served citations to discover assets on Defendants.  Several months after the grant of summary judgment and the entry of judgment against Defendants for the full repayment amount, Defendants appealed. 

 

Defendants also filed a motion for substitution of judge as of right, asserting that service of the citations to discover assets commenced a new supplementary proceeding under section 2-1402(a) of the Illinois Code of Civil Procedure, entitling Defendants to substitution of judge prior to a ruling on any substantial issue.  The lower court denied the motion for substitution of judge, ruling that the citation to discover assets was part of the same proceeding as a means to enforce the judgment.

 

Bank then filed a motion for a charging order to cause distributions from various limited liability companies ("LLCs") in which Defendants had an interest to be paid to Bank, and to bar Defendants from transferring or impairing their assets.  Bank also later filed a motion for rule to show cause why Defendants should not be held in contempt for dissipating almost $5 million in assets in violation of the citations. 

 

Finding Defendants in contempt of the citations, the lower court, following appeal and remand on the charging orders, ultimately imposed charging orders on Defendants' distributions on additional limited liability companies as well as on limited partnerships in which Defendants held an interest, for a total of 72 such entities.  The lower court also ordered the foreclosure of all the charging orders, and appointed a receiver for all the interests pursuant to section 30-20 of the Limited Liability Company Act.   Defendants appealed again.   

 

The Appellate Court affirmed the lower court's:  (1) grant of summary judgment; (2) judgment in Bank's favor pursuant to the carve-out provision; (3 ) orders imposing charging orders on Defendants' limited liability companies and limited partnerships; and, (4) order denying Defendants' motion for substitution of judge as of right.

 

As you may recall, the Limited Liability Company Act provides in part that "[o]n application by a judgment creditor of a member of a limited liability company or of a member's transferee, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment."  805 ILCS 180/30-20. 

 

Similarly, the Uniform Limited Partnership Act provides in part that "[o]n application to a court of competent jurisdiction by any judgment creditor of a partner or transferee, the court may charge the transferable interest of the judgment debtor with payment of the unsatisfied amount of the judgment interest."   805 ILCS 215/703(a).

 

Before examining the enforceability of the carve-out provision in the guaranty agreement, the Appellate Court ruled on the timeliness of Defendants' notice of appeal and whether Defendants' post-trial motion for reconsideration tolled the time to appeal the judgment.  The court ultimately concluded that  Defendants had timely appealed, reasoning that because their nonspecific motion to reconsider the Rule 304(a) determination was for the purpose of modifying or vacating the underlying judgment, the motion to reconsider qualified as a proper post-trial motion.  See Kingbrook, Inc. v. Pupurs, 202 Ill. 2d 24, (2002)(noting that neither the Code nor Illinois supreme court rules require specificity in post-judgment motions in non-jury cases); 735 ILCS 5/2-2-1203(allowing parties in non-jury cases to file a post-trial motion to modify or vacate a judgment); Ill. S. Ct. R. 303(a)(1)(tolling time in which to file a notice of appeal if a timely post-judgment motion "direct against the judgment" is filed). 

 

Turning to the carve-out provision itself, the Appellate Court rejected Defendants' various assertions, including the argument that the carve-out provision was a vague, ambiguous, overly broad, and unenforceable penalty provision that failed to alert the borrowers of what acts would trigger full recourse liability and denied them their due process rights to defend themselves in a foreclosure action.   In so doing, the court noted the plain language of the carve-out provision and concluded that "Defendants' interlocutory appeal of the trial court's appointment of a receiver clearly qualifies as contesting the Bank's actions in connection with the appointment of a receiver that would trigger full repayment liability."  See J.B.Esker & Sons, Inc. v. Cle-Pa's Partnershhip, 325 Ill. App. 3d 276, 285 (2001); CSFB 2001-CP-4 Princeton Park Corporate Center LLC v. SB Rental I, LLC, 980 A.2d 1 (N.J. Super Ct. app. Div 2009)(nonrecourse loan with carve-out clause providing that the debt would become full recourse if borrower failed to obtain lender's prior written consent to subordinate financing on the property); G3-Purves Street, LLC v. Thomson Purves, LLC, 953 N.Y.S.2d 109, 114 (N.Y. App. Div. 2012)(carve-out provision that provided for the recovery of actual damages incurred by the lender did not constitute an unenforceable penalty).

 

The Appellate Court further noted that the carve-out provision did not preclude Defendants from defending against the foreclosure action, but simply resulted in Defendants' forfeiting their exemption from liability for full repayment of the loan.  See Federal Dep. Ins. Corp. v. Prince George Corp., 58 F.3d 1041 (4th Cir. 1995)(rejecting borrowers' argument that waiver of right to file bankruptcy was void as against public policy and noting that the loan did not prohibit borrower from filing bankruptcy but merely imposed liability for any deficiency if borrower took certain actions such as filing bankruptcy).

 

With respect to the lower court's charging orders against the 72 LLCs and limited partnerships, the Appellate Court rejected Defendants' argument that those entities were "necessary parties" and that the lower court thus lacked jurisdiction to enter charging orders against them.  In so ruling, the court reasoned that the Illinois Limited Liability Company Act and the Uniform Partnership Act both supported the conclusion that a court need only have jurisdiction over the judgment debtor to enter charging orders against the judgment debtor's transferable or distributional interest to satisfy a judgment and that the LLCs and limited partnerships accordingly did not need to be joined as parties for the lower court to enter the  charging orders against them. 

 

Finally, in addressing the issue whether Defendants had forfeited their right to substitution of judge as of right for failure to raise the issue in the earlier appeal of the contempt holding, the Appellate Court noted that the substitution of judge as of right was outcome determinative of the previous appeal and thus concluded that Defendants had forfeited their right to raise it in this particular appeal.  See Sarah Bush Lincoln Health Center v. Berlin, 268 Ill. App. 3d 184, 187 (1994)(noting that motion for substitution of judge "directly bears upon the question of whether the order on appeal was proper" and that wrongful refusal of a proper request for motion for substitution of judge renders subsequent orders by that judge in the case void).  See also 735 ILCS 5/2-1001(a)(2)(i), (ii). 

 

Accordingly, the Appellate Court affirmed the rulings of the lower court in all respects.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com