Page 12 - John Hundley 2018

Cash Collateral Order Results In “Constructive Possession”

A creditor’s obtaining a cash collateral order in a bankruptcy court is sufficient to show that it obtained
constructive possession over rents so as to make appropriate a turnover of those rents in post-bankruptcy
proceedings, a panel of the Appellate Court in Chicago has held.
Ruling in U.S. Bank N.A. v. Randhurst Crossing LLC, 2018 IL App (1st) 170348,
the panel dealt with the situation where the creditor’s foreclosure action and motion
for a receiver were stayed by the debtor’s Chapter 11 bankruptcy. However, in the
bankruptcy court the creditor sought and received a segregation and accounting
order on the ground that rents from the mortgaged property were the creditor’s “cash
collateral.” Some $278,000 in rents accumulated during the bankruptcy. After the
bankruptcy stay was lifted and the creditor sought a turnover order in the foreclosure
court, the debtor objected on grounds that the creditor had not received possession,
a typical prerequisite for collection of rents.

The Appellate Court ruled that obtaining the cash collateral order was sufficient.
Likening the situation to a case in which a creditor had obtained an injunction against use of the rents and
to a case in which the creditor had obtained an order that the rents be paid into the clerk of court, the panel
found there was a doctrine of “constructive possession” which also sustained creditors’ claims to rents. The
cash collateral order in the bankruptcy court granted the creditor “constructive possession,” the court said,
and it awarded the accumulated rents to the creditor.
New Guaranty Requires New Consideration

A guaranty executed after all the other documents in a transaction requires new consideration, a panel
of the Appellate Court in Chicago has held.

Ruling in L.D.S., LLC v. Southern Cross Food, Ltd., 2017 IL App (1st) 163058, the panel dealt with a
situation where a lessor demanded the guaranty in exchange for the lessor’s
performance of duties he already was obligated to perform under a lease that was
fully executed several days before.

The court recognized that if a guaranty is executed contemporaneously with
the original contract, the consideration for the original contract is sufficient
consideration for the guaranty. However, it said, “[i]f a guaranty is executed after
the underlying obligation was entered into, new consideration is generally
needed.”

A couple of observations are appropriate. First, the case dealt with a
homemade guaranty which did not recite that it was given for consideration. The
case thus is not dispositive of the more common situation when the guaranty recites it is for consideration,
but the guarantor denies any new consideration was given.

Second, lessee in L.D.S. was not in default. The case thus also does not reach the common situation
where the lender requires a personal guaranty as a condition of forbearing from exercising its default rights.

Brenda\SharpThinking\#151.pdf
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