1756 W. Lake Street LLC v. American Chartered Bank

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-3435
1756 W. LAKE STREET LLC,
Plaintiff-Appellant,
v.
AMERICAN CHARTERED BANK and SCHERSTON REAL ESTATE
INVESTMENTS, LLC,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 14 C 1869 — Charles P. Kocoras, Judge.
____________________
ARGUED APRIL 6, 2015 — DECIDED MAY 15, 2015
____________________
Before POSNER and SYKES, Circuit Judges, and SIMON, Chief
District Judge. *
POSNER, Circuit Judge. The plaintiff, a debtor in possession
in a Chapter 11 bankruptcy, brought this adversary proceed-
ing against a bank that had lent it money and an affiliate of
*Hon. Philip P. Simon of the Northern District of Indiana, sitting by des-
ignation.
2 No. 14-3435
the bank, claiming that the bank (with assistance from the
affiliate) had defrauded the plaintiff. A debtor in possession
has the powers of a trustee in bankruptcy, 11 U.S.C.
§ 1107(a), including the power to sue to prevent or recapture
a fraudulent transfer of property of the debtor. See
§ 548(a)(1)(B). The district court granted summary judgment
in favor of the bank, however, so the plaintiff has appealed.
As well as defending the district court’s decision on the
merits, the bank challenges our appellate jurisdiction, and
we’ll begin there. Rule 3(c)(1)(A) of the Federal Rules of Ap-
pellate Procedure requires, so far as pertains to this case, that
the notice of appeal “specify the party or parties taking the
appeal by naming each one.” The notice of appeal in this
case is a mess. It states that “Chris Bambulas, the Defendant
herein, appeals under Rule 4 of the Federal Rules of Appel-
late Procedure.” Bambulas is not the defendant; he is the co-
owner (with his wife) of the debtor-plaintiff, 1756 W. Lake
Street LLC. At the bottom of the notice is printed “CHRIS
BAMBULAS, Plaintiff,” followed by Bambulas’s signature,
under which appear the words “pro se.” He is no more the
plaintiff than he is the defendant. Lake Street argues in its
opening brief that Bambulas was appealing as its agent, but
the notice of appeal doesn’t say that and anyway a limited
liability company, like a corporation, cannot litigate pro se or
be represented in the litigation by a nonlawyer.
Although there thus were multiple violations of the fed-
eral rules, they were harmless. The function of a notice of
appeal is to notify the opposing party and the trial and ap-
pellate courts of the appeal and the party taking the appeal.
The notice was properly captioned—Lake Street versus the
bank (the bank’s affiliate was not mentioned, but is anyway
No. 14-3435 3
immaterial to the appeal, as we’ll see)—and knowing that
Bambulas was not either plaintiff or defendant the bank had
to know that the appeal was by Bambulas’s company, not by
Bambulas himself. See Spain v. Board of Education, 214 F.3d
925, 929 (7th Cir. 2000) (“even though Mr. Spain was not
named in the body of the notice of appeal, his ‘intent to ap-
peal is otherwise clear from the notice’”). Lake Street was
between lawyers when its notice of appeal was due, and the
notice that Bambulas filed achieved the purpose of a notice
of appeal—to notify. And because Lake Street is represented
by counsel in the appeal there is no meaningful violation of
the requirement that a limited liability company be repre-
sented in litigation by a lawyer. See United States v. Hager-
man, 549 F.3d 536, 538 (7th Cir. 2008).
Although Torres v. Oakland Scavenger Co., 487 U.S. 312
(1988), had held that naming the appellant is a jurisdictional
requirement for an appeal and its absence could not be ex-
cused as harmless, that decision preceded by five years a re-
vision of Federal Rule of Appellate Procedure 3(c)(4), which
now states (so far as relates to this case) that “an appeal must
not be dismissed … for failure to name a party whose intent
to appeal is otherwise clear from the notice.” See, e.g., John-
son v. Teamsters Local 559, 102 F.3d 21, 29 n. 4 (1st Cir. 1996).
That is this case, and so allows us to entertain the appeal
even though Lake Street’s name appeared only in the cap-
tion of the notice of appeal and the body of the notice named
only Bambulas as the appellant. Cf. Bowles v. Russell, 551 U.S.
205, 210–12 (2007), which holds that deadlines established by
federal rules, as distinct from deadlines established by stat-
utes (such as 28 U.S.C. § 2107(c)), are not jurisdictional; vio-
lations can therefore be ignored when harmless. The differ-
ence in this regard between rules and statutes is the basis for
4 No. 14-3435
our having jurisdiction of the appeal, even though the bob-
ble in this case concerned names rather than a deadline.
So we come to the merits. Before it went bankrupt, Lake
Street was obligated to repay a $1.5 million loan made to it
by American Chartered Bank (actually a pair of loans,
though that’s an unimportant detail) secured by a mortgage.
Unable to repay, Lake Street negotiated with the bank sever-
al forbearance-to-foreclose agreements. The most important
of them required Lake Street to give the deed to the mort-
gaged property (its only significant asset) to an escrow agent
who in the event of default would give the deed to Scher-
ston—the other defendant, an affiliate of the bank. The rea-
son for bringing the affiliate into the picture was that the
bank’s charter forbids it to own real estate.
Lake Street defaulted, Scherston recorded the deed in its
own name, and Lake Street now complains that the record-
ing was a fraudulent transfer. It focuses on the deed rather
than on the mortgage because it claims that the deeded
property is worth more than the mortgage. But it was its
own decision to give the deed to the bank (via the escrow
agent and Scherston) in the event that it defaulted on the
mortgage loan; it did so in order to induce the bank’s for-
bearance to foreclose, by giving the bank additional security.
There is no contention that the bank employed unlawful or
unethical practices to induce Lake Street to transfer the deed,
or that any unsecured creditors were harmed by the transac-
tion—there is only one unsecured creditor in this bankrupt-
cy, and his claim is worth less than a thousand dollars. We
therefore don’t understand the contention that the transfer of
the property was fraudulent.
No. 14-3435 5
At the time that Lake Street agreed to place its deed in
escrow (the first step on the road to the deed’s eventual
transfer to the bank’s affiliate), the property may have been
worth $1.7 million. That is Lake Street’s contention, at any
rate, and let’s assume it’s true. Lake Street could have al-
lowed the bank to foreclose the mortgage. The foreclosure
sale would have yielded Lake Street, if its valuation of the
property is correct, $200,000 (the difference between the
property’s value—$1.7 million—and Lake Street’s $1.5 mil-
lion debt to the bank, which the bank would collect by fore-
closing). If instead Lake Street placed the deed in escrow,
then while it would risk losing the $200,000 because the
bank would now own the property rather than being enti-
tled just to the payment of Lake Street’s debt to it, Lake
Street would be continuing to use the property in its busi-
ness with the hope (which may have come to pass, as we’ll
see) that the use would yield it income greater than $200,000,
and even (as we’ll also see) that it might keep the property.
So why did Lake Street file for bankruptcy? The only rea-
son that comes to mind is that the Bankruptcy Code allows a
trustee in bankruptcy (and therefore, as we noted at the out-
set of this opinion, a debtor in possession) to avoid a transfer
of the debtor’s property if, so far as concerns this case, the
debtor “received less than a reasonably equivalent value in
exchange for such transfer … and was insolvent on the date
that such transfer was made or such obligation was in-
curred.” 11 U.S.C. §§ 548(a)(1)(B)(i), (B)(ii)(I). That describes
Lake Street’s contention, and so the case is an avoidance ac-
tion misnamed. Lake Street argues that because it obtained
an appraisal of the property for $1.7 million yet owed the
bank only $1.5 million, the $200,000 difference demonstrates
6 No. 14-3435
that Lake Street “received less than a reasonably equivalent
value in exchange” for giving its deed to the bank’s affiliate.
As an original matter one might think that having given
up its deed to the property to avoid foreclosure, thus gam-
bling that the property might eventually be worth even more
than it was thought to be worth—and if it was worth more
than Lake Street’s mortgage debt the surplus would accrue
to the bank as owner of the property by virtue of having ac-
quired the deed—Lake Street has no ground to stand on. But
the parties agree, rightly or wrongly, that the transfer of the
deed was intended merely as a substitute for foreclosure—
that it was not intended (any more than foreclosure would
be intended) to yield the bank a ”profit,” which is to say a
value in excess of the $1.5 million that Lake Street owed the
bank. Claiming that the property is worth $1.7 million, Lake
Street wants it back, thus changing the bank’s remedy from
owning (and doubtless selling) the property to foreclosing
its mortgage and collecting its $1.5 million debt at the fore-
closure sale.
The bank ripostes that even if Lake Street’s appraisal is
sound, $1.5 million is 88 percent of $1.7 million and so by
being forgiven its $1.5 million debt to the bank Lake Street
has received the statutory “reasonable equivalent” of the
value of the property. The bank further argues, on the basis
both of its own appraisal and of a purchase offer that it re-
ceived, that the property is actually worth only $1.3 million.
And finally it argues that the various forbearances that it
granted to Lake Street, including loans to Lake Street affili-
ates, repeated extensions of the maturity date of the bank’s
loan, and reductions in monthly payments and interest rates
on the loan, were worth at least $200,000 to Lake Street and
No. 14-3435 7
therefore closed the gap between the $1.5 million in debt
forgiveness (for with the property in the bank’s hands, and
assuming it’s worth $1.5 million and not the $1.3 million ar-
gued by the bank, the bank is being repaid in full) and the
$1.7 million that Lake Street claims the property is worth.
The bank’s first argument is no good. Reasonably equiva-
lent should be understood to mean not part payment but
that the debtor received or will receive value for the proper-
ty that he transferred that is as close to true equivalence as
circumstances permit. Evidence of reasonable equivalence in
this case includes the fact that both parties were sophisticat-
ed business firms negotiating in good faith and at arms’
length, so that a disparity in the value of the deal to each
party may have stemmed from uncertainty or disagreement
about the value of the property rather than from sharp prac-
tices by the bank.
As for the bank’s second argument, concerning the con-
flict in appraisals, the record compiled in the summary
judgment proceeding (for there has yet to be a trial) does not
permit a confident inference as to which appraisal is more
accurate. Real estate appraisal is not a science, and each par-
ty doubtless hired an appraiser who it had reason to believe
would provide an appraisal favorable to it. We also know
nothing about the purchase offer that the bank claims to
have received—whether for example the offerer had the fi-
nancial wherewithal to close the deal.
But the bank’s third argument—that it gave at least
$200,000 worth of forbearances to Lake Street—is solid, de-
spite the scantiness of the briefs and record, which leaves us
with an imperfect understanding of the transactions between
the parties. The mortgage loan had been issued in 2006 in the
8 No. 14-3435
amount of $1,400,000. The bank had lent Lake Street another
$100,000 in 2008. By 2013, $1,500,000 was due on the com-
bined loans. But Lake Street must have missed payments re-
quired by the mortgage (such as payment of real estate tax-
es), or otherwise courted default, earlier. For beginning in
2009 and ending in 2013 (which was when it defaulted and
the deed was given by the escrow agent to the bank), it ne-
gotiated no fewer than eleven forbearance agreements with
the bank, agreements that by easing the repayment terms of
the loans kept Lake Street out of bankruptcy for the next
four years. The agreements also provided additional loans to
Lake Street’s affiliates of $650,000, though the bank received,
besides the deed, some guarantees from affiliates of Lake
Street and the Bambulases, along with other consideration
designed to ensure repayment. The other consideration in-
cluded, among other things, a perfected security interest in
certain assignments of rent, the listing of an affiliate’s prop-
erty for sale, the requirement that all bank accounts of Lake
Street and its affiliates be at American Chartered Bank, an
agreement that Lake Street would pay all mortgage and tax-
related liabilities before paying its own operating expenses,
and a blanket release of the bank from any liabilities to Lake
Street that the bank might have incurred up to the date of
the agreement.
Lake Street points out that the benefits of the forbearance
agreements to it and to the bank were not quantified and so
cannot be compared for purposes of determining whether
Lake Street received less than equivalent value for giving up
its property to the bank’s affiliate. It argues that the bank’s
failure to quantify them is fatal to the defense of reasonable
equivalence. But reasonable equivalence is not a defense. As
the plaintiff, Lake Street had the burden of proof, and sought
No. 14-3435 9
to carry it only by getting an appraisal of its property. And
that appraisal—its own appraisal—even if thought impecca-
ble, exceeded the debt forgiveness (having received the
property securing its mortgage, the bank had no further
claim to Lake Street’s repaying its loan) by only $200,000. If
the value it derived from the forbearance agreements and
related concessions from the bank equaled or exceeded that
number, Lake Street ended up where it wanted to be. It must
have known what benefits it derived from the bank’s con-
cessions, yet it failed to quantify them. All we know is that
the bank’s concessions kept its debtor in business for four
years, and that Lake Street’s Statement of Financial Affairs
lists gross income of $129,413 in 2011, $167,000 in 2012, and
$139,333 in 2013—three of the four years of extended life that
the bank gave it. The total, $435,746, though incomplete be-
cause of the missing year, is more than twice the amount by
which its appraisal of its property exceeded the bank’s.
It remains to note the oddity that an almost identical
case is pending in the same district court, though before a
different judge. That case is 1800 W. Lake Street, LLC v. Amer-
ican Chartered Bank & Scherston Real Estate Investments, LLC,
No. 14 C 420 (N.D. Ill.). 1800 W. Lake Street is another build-
ing owned by an LLC owned by Chris Bambulas (and one
other person) and financed by American Chartered Bank.
The case involves a similar series of forbearance agreements
culminating in a transfer of the deed to that property to the
bank after a default, and a fraudulent transfer action by the
debtor in possession (1800 W. Lake Street, LLC). The case is
a little behind this one in time, and when the judge ruled on
the defendants’ motion for summary judgment in that case
he had the benefit of the district court’s opinion in this one.
But he denied summary judgment in December of last year,
10 No. 14-3435
distinguishing the present case on the ground that in his case
the spread between the discharged debt and the plaintiff’s
appraisal was “greater by several orders of magnitude” than
in the present case. That is not technically correct, of course.
An order of magnitude is a multiple of 10. One order of
magnitude raises $200,000 to $2 million, two orders of mag-
nitude raise it to $20 million, and three orders (the smallest
number that one would refer to as “several”) to $200 million.
Nevertheless the spread between the plaintiff’s appraisal
and the discharged debt in the 1800 W. Lake Street case is
significantly greater than in the present case: it is the differ-
ence between $2,710,000 (the plaintiffs’ appraisal) and
$1,780,000 (the discharged debt), which is $930,000—that is a
lot more than the $200,000 spread in this case though not or-
ders of magnitude greater.
Still, the cases are very similar and arguably intertwined,
and it is surprising that they were not consolidated in the
district court, especially since the two bankruptcies are being
handled by the same bankruptcy judge. Overlap is possible,
for example if the bank in the ongoing proceeding concern-
ing 1800 West Lake Street argues that the forbearances
granted the Bambulases with regard to the property in our
case also benefited them with regard to the other property.
That would hurt 1800 W. Lake Street LLC’s avoidance case.
The issue is not argued in our case, however, and we leave it
to the district court in the 1800 W. Lake Street case to sort
out.
AFFIRMED