Tag: guarantor

7th Cir. Addresses Guarantor Liability, Ratification Doctrine in Futures Trading Snafu

Straits Financial v. Ten Sleep Cattle, 2018 WL 328767 (N.D.Ill. 2018) examines some signature business litigation issues against the backdrop of a commodities futures and trading account dispute. Among them are the nature and scope of a guarantor’s liability, the ratification doctrine as applied to covert conduct and the reach of the Illinois consumer fraud statute.

The plaintiff brokerage firm sued a Wyoming cattle rancher and his company to recover an approximate $170K deficit in the defendants’ trading account. (The defendants previously opened a non-discretionary account with plaintiff for the purpose of locking in future livestock prices.)

The ranch owner counter-sued, alleging a rogue trader of plaintiff made unauthorized trades with defendants’ money over a three-month period.  Defendants counter-sued for consumer fraud, breach of fiduciary duty and conversion. After a seven-day bench trial, the court entered a money judgment for the defendants and the plaintiff appealed.

In substantially affirming the trial court, the Seventh Circuit first tackled the plaintiff’s breach of guaranty claim.  In Illinois, guarantees are strictly construed and a guarantor’s liability cannot extend beyond that which he has agreed to accept.  A proverbial favorite of the law, a guarantor is given the benefit of any doubts concerning a contract’s enforceability.  A guarantor’s liability is discharged if there is a “material change” in the business dealings between the parties and an increase in risk undertaken by a guarantor.

Here, the speculative trading account (the one where the broker made multiple unauthorized trades) differed vastly in form and substance from the non-discretionary account.

Since the two trading accounts differed in purpose and practice, the Court held that it would materially alter the guarantor’s risk if he was penalized for the plaintiff’s broker’s fraudulent trading spree.  As a result, the Seventh Circuit affirmed the trial judge’s ruling for the defendant on the guarantee claim.

The Court then rejected plaintiff’s ratification argument: that defendants’ authorized the illegal churned trades by not timely objecting to them
An Illinois agency axiom posits that a person does not have an obligation to repudiate an illegal transaction until he has actual knowledge of all material facts involved in the transaction. Restatement (Third) of Agency, s. 4.06.

Illinois law also allows a fraud victim to seek relief as long as he renounces the fraud promptly after discovering it. A party attempting to undo a fraudulent transaction is excused from strict formalism, too.

Here, the ranch owner defendant immediately contacted the plaintiff’s broker when he learned of the improper trades and demanded the return of all money in the non-discretionary trading account. This, according to the Court, was a timely and sufficient attempt to soften the impact of the fraudulent trading.

The Court affirmed the trial court’s attorneys’ fees award to the defendants on its consumer fraud counterclaim. The Illinois Consumer Fraud Act, 815 ILCS 505/10a(c)(the “CFA”) allows a court to assess attorneys’ fees against the losing party.

The plaintiff argued that the trial judge errored by awarding attorneys’ fees expended by defendants in both CFA and non-CFA claims. Plaintiff contended  the trial judge should have limited his fee award strictly to the CFA claim.

Rejecting this argument, the Seventh Circuit noted that under Illinois law, where statutory fraud (which allow for fees) and common law (which don’t) claims arise from the same operative facts and involve the same evidence at trial, a court can award all fees; even ones involved in prosecuting or defending non-fee claims. And since facts tending to prove fraudulent trading “were woven throughout [the] case and the work done to develop those facts [could] not be neatly separated by claim,” the District court had discretion to allow defendants’ attorneys’ fees claim incurred in all of its counterclaims and defenses.

The Court then reversed the trial judge’s holding that the defendants failed to mitigate their damages by not reading plaintiff’s trading statements or asking about his accounts.  A breach of contract or tort plaintiff normally cannot stand idly by and allow an injury to fester without making reasonable efforts to avoid further loss.

But here, since the plaintiff’s broker committed fraud – an intentional tort – any “contributory negligence” resulting from defendant not reading the mailed statements wasn’t a valid defense to the rogue broker’s fraudulent conduct.

Afterwords:

This case shows the length a court will go to make sure a fraud perpetrator doesn’t benefit from his improper conduct.  Even if a fraud victim is arguably negligent in allowing the fraud to happen or in responding to it, the court will excuse the negligence in order to affix liability to the fraudster.

This case also illustrates how guarantors are favorites of the law and an increase in a guarantor’s risk or a marked change in business dealings between a creditor and a guarantor’s principal will absolve a guarantor from liability.

Finally, Ten Sleep shows that a prevailing party can get attorneys’ fees on mixed fee and non-fee claims where the same core of operative facts underlie them.

Lender’s Reliance on Predecessor Bank’s Loan Documents Satisfies Business Records Hearsay Rule – IL First Dist.

A commercial guaranty dispute provides the background for the First District’s recent discussion of some signature litigation issues including the voluntary (versus compulsory) payment rule and how that impacts an appeal, the business records hearsay exception, and governing standards for the recovery of attorneys fees.

The lender plaintiff in Northbrook Bank & Trust Co. v. Abbas, 2018 IL App (1st) 162972 sued commercial loan guarantors for about $2M after a loan default involving four properties.
On appeal, the lender argued that the guarantors’ appeal was moot since they paid the judgment. Under the mootness doctrine, courts will not review cases simply to establish precedent or guide future litigation. This rule ensures that an actual controversy exists and that a court can grant effective relief.

A debtor’s voluntary payment of a money judgment prevents the paying party from pursuing an appeal. Compulsory payment, however, will not moot an appeal.
The court found the guarantors’ payment compulsory in view of the lender’s aggressive post-judgment efforts including issuing multiple citations and a wage garnishment and moving to compel the guarantors’ production of documents in the citation proceeding. Faced with these post-judgment maneuvers, the Court found the payment compulsory and refused to void the appeal. (⁋⁋ 24-27)

The First District then affirmed the trial court’s admission of the lender’s business records into evidence over the defendant’s hearsay objection.  To admit business records into evidence, the proponent (here, the plaintiff) must lay a proper foundation by showing the records were made (1) in the regular course of business, and (2) at or near the time of the event or occurrence. Illinois Rule of Evidence 803(6) allows “records of regularly conducted activity” into evidence where (I) a record is made at or near the time, (ii) by or from information transmitted by a person with knowledge, (iii) if kept in the regular course of business and (iv) where it was the regular practice of that business activity to make the record as shown by the custodian’s or other qualified witness’s testimony.

The theory on which business records are generally admissible is that their purpose is to aid in the proper transaction of business and the records are useless unless accurate. Because the accuracy of business records is vital to any functioning commercial enterprise, “the motive for following a routine of accuracy is great and motive to falsify nonexistent.” [¶¶ 47-48]

With computer-generated business records, the evidence’s proponent must establish (i) the equipment used is industry standard, (ii) the entries were made in the regular course of business, (iii) at or near the time of the transaction, and (iv) the sources of information, method and time of preparation indicate the entries’ trustworthiness. Significantly, the person offering the business records into evidence (either at trial or via affidavit) isn’t required to have personally entered the data into the computer or even learn of the records before the litigation started. A witness’s lack of personal knowledge concerning the creation of business records affects the weight of the evidence; not its admissibility. [¶ 50]

Here, the plaintiff’s loan officer testified he oversaw defendants’ account, that he personally reviewed the entire loan history as part of his job duties and authenticated copies of the subject loan records. In its totality, the Court viewed the bank officer’s testimony as sufficient to admit the loan records into evidence.

Next, the Court affirmed the trial court’s award of attorneys’ fees to the lender plaintiff. Illinois follows the ‘American rule’: each party pays its own fees unless there is a contract or statutory provision providing for fee-shifting. If contractual fee language is unambiguous, the Court will enforce it as written.

A trial court’s attorneys’ fee award must be reasonable based on, among other things, (i) the nature and complexity of the case, (ii) an attorney’s skill and standing, (iii) degree of responsibility required, (iv) customary attorney charges in the locale of the petitioning party, and (v) nexus between litigation and fees charged. As long as the petitioner presents a detailed breakdown of fees and expenses, the opponent has a chance to present counter-evidence, and the court can make a reasonableness determination, an evidentiary hearing isn’t required.

Afterwords:

Abbas presents a useful, straightforward summary of the business records hearsay exception, attorneys’ fees standards and how payment of a judgment impacts a later right to appeal that judgment.

The case also illustrates how vital getting documents into evidence in breach of contract cases and the paramount importance of clear prevailing party fee provisions in written agreements.

 

Non-shareholder Liable For Chinese Restaurant’s Lease Obligations Where No Apparent Corporate Connection – IL Case Note

fortune-cookiePink Fox v. Kwok, 2016 IL App (1st) 150868-U, examines the corporate versus personal liability dichotomy through the lens of a commercial lease dispute.  There, a nonshareholder signed a lease for a corporate tenant (a Chinese restaurant) but failed to mention the tenant’s business name next to his signature.  This had predictable bad results for him as the lease signer was hit with a money judgment of almost $200K in past-due rent and nearly $20K in attorneys’ fees and court costs.

The restaurant lease had a ten-year term and required the tenant to pay over $13K in monthly rent along with real estate taxes and maintenance costs.  The lease was signed by a non-shareholder of the corporate tenant who was friends with the tenant’s officers.

The non-shareholder and other lease guarantors appealed a bench trial judgment holding them personally responsible for the defunct tenant’s lease obligations.

Held: Affirmed

Reasons:

The first procedural question was whether the trial court erred when it refused to deem the defendants’ affirmative defenses admitted based on the plaintiff’s failure to respond to the defenses.

Code Section 2-602 requires a plaintiff to reply to an affirmative defense within 21 days.  The failure to reply to an affirmative defense is an admission of the facts pled in the defense.  But the failure to reply only admits the truth of factual matter; not legal conclusions. 

A failure to reply doesn’t admit the validity of the unanswered defense.  The court has wide discretion to allow late replies to affirmative defenses in keeping with Illinois’ stated policy of having cases decided on their merits instead of technicalities.  (¶ 55)

The appeals court affirmed the trial court’s allowing the plaintiff’s late reply.  The court noted the defendants had several months to seek a judgment for the plaintiff’s failure to reply to the defenses yet waited until the day of trial to “spring” a motion on the plaintiff.  Since the Illinois Code is to be construed liberally and not in a draconian fashion, the Court found there was no prejudice to the defendants in allowing the plaintiff’s late reply.

The court next considered whether the trial court properly entertained extrinsic evidence to interpret the commercial lease.  The body of the lease stated that the tenant was a corporation yet the signature page indicated that an individual was the tenant.  This textual clash created a lease ambiguity that merited hearing evidence of the parties’ intent at trial.

Generally, when an agent signs a contract in his own name and fails to mention the identity of his corporate principal, the agent remains liable on the contract he signs.  But where an agent signs a document and does note his corporate affiliation, he usually is not personally responsible on the contract.  Where an agent lacks authority to sign on behalf of his corporate employer, the agent will be personally liable.  (¶¶ 76-77)

Since the person signing the lease testified at trial that he did so “out of friendship,” the trial court properly found he was personally responsible for the defunct Chinese restaurant’s lease obligations.

The court also affirmed the money judgment against the lease guarantors and rejected their claim that there was no consideration to support the guarantees.

Under black letter lease guarantee rules, where a guarantee is signed at the same time as the lease, the consideration supporting the lease will also support the guarantee.  In such a case, the guarantor does not need to receive separate or additional consideration from the underlying tenant to be bound by the guarantee.

So long as the primary obligor – here the corporate tenant – receives consideration, the law deems the same consideration as flowing to the guarantor.

Afterwords:

1/ Signing a lease on behalf of a corporate entity without denoting corporate connection is risky business;

2/ If you sign something out of friendship, like the defendant here, you should make sure you are indemnified by the friend/person (individual or corporation) you’re signing for;

3/ Where a guaranty is signed at the same time as the underlying lease, no additional consideration to the guarantor is required.  The consideration flowing to the tenant is sufficient to also bind the guarantor.