Bank’s Guaranty Claims Prevail Over Guarantor’s Estate (Part II of II)

In addition to affirming the trial court’s striking the Estate’s affirmative defenses, the First District in JPMorgan Chase Bank, N.A. v. East-West Logistics, LLC, 2014 IL App (1st) 121111 also upheld the Section 2-615 dismissal of the Estate’s fraud-based counterclaims and the summary judgment awarded the plaintiff bank on its breach of guaranty claim against the Estate.  

Fraud and Consumer Fraud

To state a common law fraud claim  in Illinois, a plaintiff must allege (1) a false statement of material fact; (2) by one who knows or believes it to be false; (3) made with the intent to induce action by another in reliance on the statement; (4) action by the other in reliance on the truthfulness of the statement; and (5) injury to the other resulting from that reliance.  Intentional concealment of a material fact is  the same as an express false statement under the law.  Where a person has a duty to speak, his failure to disclose material information constitutes fraudulent concealment.  (¶¶ 65-68).                                                                                                              

A colorable consumer fraud claim requires allegations of (1) a deceptive act or practice by defendant, (2) an intent on the defendant’s part that plaintiff rely on the deception, and (3) deception that occurs in the course of conduct involving trade or business.  The plaintiff must also show that the consumer fraud proximately caused his injury.

The Court rejected the Estate’s argument that the plaintiff committed fraud by not telling the deceased guarantor that the bank was increasing his risk by continuing to loan monies to a financially distressed corporate borrower.  The Estate argued that this amounted to deceptive conduct.  The Court disagreed.  Under the plain text of the guaranty, the plaintiff bank had no duty to give information to the guarantor that could increase his risk of liability under the guaranty.  In fact, it was just the opposite: the guaranty required the guarantor to actively monitor the borrower’s economic condition and loan status.  The guaranty didn’t saddle the plaintiff bank with a duty to continually update the guarantor on the loan or borrower. (¶¶ 69-70).

The Estate also failed to adequately plead reliance – another common law fraud element.  A fraud claimant must show he justifiably reliance on a material false statement.  To determine whether reliance is justified, the court considers the facts the party knew and those facts it could have learned through ordinary prudence. 

Since the Estate didn’t allege that the guarantor made any effort to obtain information about the loan he guaranteed, the Estate wasn’t able to plead that the bank deceived the guarantor.  The Court found the Estate also pled insufficient facts to back up its consumer fraud claims that the plaintiff planned to deceive the guarantor by hiding the corporate borrower’s precarious monetary condition from the guarantor.  Absent more factual specifics, the Estate’s fraud counterclaims failed. (¶¶ 73-78).

Summary Judgment Affidavits and Computerized Business Records – Supreme Court Rule 191, IRE 803(6)

Affirming summary judgment for the plaintiff on its breach of guaranty count, the Court sustained the plaintiff’s two supporting affidavits: one from a bank vice president, the other from a bank analyst. Both agents testified that they reviewed the loan documents, payment history and pay-off documents. They also swore that the supporting documents were prepared and kept in the regular course of plaintiff’s business. (¶¶ ‏86-93).

Supreme Court Rule 191 governs summary judgment affidavits.  It requires that affidavits be made on personal knowledge, to be based on admissible facts and to attach sworn or certified copies referenced in the affidavit. See Ill. S.Ct. R. 191(a).  In the context of business records, the author or creator of the record doesn’t have to testify. Instead, the custodian or other person familiar with the business and its mode of operation can provide the foundational testimony. A record author’s failure to testify affects only weight, not admissibility of the record.  (¶¶94-98).

Evidence Rule 803(6) – the business records rule – allows the introduction of computerized and paper “records of regularly conducted activity” 99-101. A computer-generated business record is admissible where it’s shown that(1) the computing equipment is recognized as standard; (2) the input is entered in the regular course of business reasonably close in time to the happening of the recorded event and (3) the source of the information, method and time of preparation are trustworthy.  (¶¶ 99-101).

The Estate’s main challenge to plaintiff’s summary judgment affidavit involved a “pay off calculator” document that itemized the loan payments and history.  The Court found that the “Calculator Document” complied with Rule 803(6).  The Court found that the payoff calculator document satisfied the admission standards for a computerized business records.  It was prepared at or near the time of the events recorded, it was kept in the regular course of the bank’s lending business and it was authenticated via affidavit by someone who qualified as a custodian because of her (the affiant) personal knowledge of the bank’s lending and record-keeping processes.  (¶¶104-105).

Take-aways: For commercial litigators, the case is a useful summary of computerized business records foundation rules and summary judgment affidavit requirements. The case also provides some needed clarity on (IL) Supreme Court Rule 236 – the rule that governed business records before Evidence Rule 803(6)’s adoption.  The Court makes it clear that the two rules can be viewed in tandem and that caselaw construing Rule 236 is still relevant to the business records admissibility question.  Finally, East-West Logistics cements the proposition that a fraud plaintiff must prove that the deceptive conduct or misrepresentation actually reached him.  Otherwise, he won’t be able to establish the reliance element.

Illinois Guaranty Law: Increasing Guarantor’ Risk or Changing the Terms = Discharged Guaranty

In Southern Wine and Spirits of Illinois, Inc. v. Steiner, 2014 IL App (1st) 123435, the First District outlined and applied the rules governing the interpretation and enforcement of written guaranty agreements in Illinois.

The plaintiff wine distributor purchased the assets of another distributor that had previously entered into a contract with a liquor store company; a contract personally guaranteed by the individual liquor store owners.

The year after the asset purchase, the plaintiff began supplying wine to the defendants’ liquor store on account.  But neither the plaintiff nor the purchased distributor informed the guarantors of the asset purchase.  Because of this, the guarantors had no idea that the assets of the distributor were sold to the plaintiff.  The defendants also didn’t know that the plaintiff now held the guaranty given by the liquor store owners to purchased distributor.

When the liquor store defaulted on about $20,000 worth of merchandise, the plaintiff sued under the guaranty signed by the liquor store owners.

The defendants moved to dismiss on the basis that the personal guaranty wasn’t assignable to the plaintiff since defendants didn’t know they were guaranteeing the liquor store’s contract obligations to the plaintiff.  The trial court agreed and plaintiff appealed.

Result: Trial court affirmed.

Rules/Reasoning:

In Illinois, a guaranty is simply a contract where a guarantor promises to pay the debts of a “principal” (the main debtor) to a third party creditor.

A guaranty is construed like any other contract and a guarantor is given the benefit of any doubts that may arise from the language of a guaranty.  A guarantor’s liability can’t exceed the scope of what he has agreed to accept and guaranties are strictly construed in favor of the guarantor; especially when the creditor drafted the guaranty.  ¶ 16. 

Guaranty agreements are generally not assignable but a guaranty can be assigned where the essentials of the original contract are not changed and the performance required under the guaranty isn’t materially different from what was originally contemplated

Where (1) a guarantor’s risk is increased or (2) performance is materially changed by the assignment of a guaranty or a merger involving the plaintiff-creditor, the guarantor’s obligations can be discharged. ( ¶ 18).

The Court held that because the defendants didn’t know that the guaranty was assigned to the plaintiff and because the amount owed the plaintiff fluctuated from month-to-month (in contrast to the  fixed amount the guarantors owed the original distributor), the defendants’ risk under the guaranty was materially increased by the assignment to plaintiff.

This was deemed a material change in the terms of the agreement that defendants entered into with plaintiff’s predecessor and changed defendants’ risk from known to completely unknown.  (¶¶ 21-22).

The Court also held that the trial court properly struck key parts of the plaintiff’s affidavit filed in response to defendants’ motion to dismiss.

The plaintiff filed the affidavit of its credit manager who testified that she reviewed the payment history involving the purchased distributor and the guarantors’ liquor store business.  The credit manager attached about two years’ worth of invoices and a payment ledger to her affidavit.

But the invoices didn’t  reference the prior wine distributor and only identified the guarantors’ liquor store.  The Court found that because the affidavit attachments failed to link the plaintiff directly to either the guarantor defendants or their liquor business, the plaintiff failed to lay an adequate foundation for the invoices as business records.

Take-aways:

– A guaranty agreement should specify whether or not it’s assignable and enforceable by third parties;

– Where a guaranty is assigned to a third party, the original creditor and assignee should both notify the guarantor and make it clear that the assignee creditor plans to hold the guarantor to the terms of the guaranty;

– Where an assigned or sold guaranty either changes the guarantor’s performance or materially increases his risk, for example by increasing the payment terms or frequency, the guaranty will likely not be enforceable by a third party/assignee.

Computer-Generated Business Records and Summary Judgment Affidavits – IL Law

bizrecordsIn US National Bank v. Avdic, 2014 IL App (1st) 121759-U, the First District provides a detailed analysis of both the evidentiary foundation requirements for computer-generated business records and the requirements of a valid summary judgment affidavit.

The plaintiff lender filed a foreclosure suit against the borrower defendant and moved for summary judgment.  The lender supported its motion with the affidavit of a bank officer who attached sworn copies of key loan documents, the promissory note and a computer-generated payment history for the defendant borrower’s account.

The defendant moved to strike the bank’s affidavit on the basis that it failed to lay a sufficient foundation for the attached loan and payment records and didn’t establish that the bank employee who signed the affidavit had first-hand knowledge of the defendant’s payment history.  The trial court entered summary judgment for the lender and denied the borrower’s motion to strike the affidavit.  The borrower appealed.

Result: Trial court affirmed. Plaintiff-lender wins.

Q: How Come?

A: The lender’s summary judgment affidavit complied with Illinois Supreme Court Rule 191 – the rule that governs summary judgment affidavits.  Rule 191 requires affidavit to state specific facts and to be based on personal knowledge instead of conclusions or guess-work.  Affidavits are substitutes for live trial testimony and because of that, must pass a stringent test for admission in evidence.  US Bank, ¶¶ 22-25.

To lay a foundation for admitting business records as a hearsay exception, the party must show that the records were (1) made in the regular course of business; and (2) at or near the time of the event or occurrence.  Rule 803(6) and Supreme Court Rule 236 work in tandem to codify the business records exception to the hearsay rule.  US Bank, ¶¶ 24-26.

Where computer-generated records are involved, the proponent must demonstrate (1) that the computer equipment is standard equipment, (2) the computerized entries were made in the regular course of business (3) at or reasonably near in time to the events recorded and (4) that the sources of information, the method of data entry and preparation are all trustworthy.  US Bank, ¶26.

The Court found that the lender’s affidavit met the relevant Rule 191 criteria.  The bank officer testified that she was familiar with the lender’s business practices, records and its manner of inputting, tracking and generating payment information.  She also testified in detail what steps the bank takes when creating, storing and printing loan and payment records.  The officer also said she reviewed the loan file, promissory note and related documents.  She also attached the key loan documents to the affidavit. ¶¶ 30-31.

The affidavit also met the admissibility standards for computer-generated payment records.  The bank officer described the computer software used by the bank to create and print out loan payment histories and testified that the software program used was standard and customary in the banking industry.  The officer even said that the computer equipment was periodically checked for accuracy. ¶¶ 29-30.

The court also found there was no requirement that the officer have first-hand knowledge of the borrower’s account or that she (the officer) personally made the payment entries into the bank’s computer for the affidavit to conform to Rule 191’s requirements.  Under Rule 236 and Illinois Evidence Rule 803(6), a lack of personal knowledge can affect the weight given to testimony; but it won’t bar that testimony outright.

Take-aways:  To get computer business records into evidence on summary judgment, the mo any should itemize each foundational requirement for those records.  A business entity plaintiff especially should establish that the person signing a summary judgment affidavit is familiar with the business’s record-keeping and billing processes and can testify to any unique billing and payment software used by the business.