Tag: guaranty

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.

 

Material Changes to Office Lease Insulates Guarantor From Liability For Corporate Tenant Defaults – Illinois Court

The Illinois First District recently examined the reach of a corporate officer’s commercial lease guaranty in a case involving a multi-year and multi-suite office lease.  The office landlord plaintiff in Stonegate Properties, Inc. v. Piccolo, 2016 IL App (1st) 150182, sued to hold a corporate tenant’s CEO and lease guarantor liable for rental damages after the corporate tenant defaulted and declared bankruptcy.

The five-year lease was amended several times through the years – each time by the corporate tenant through its CEO and lease guarantor – culminating in an amended lease for three additional office spaces (compared to the original lease’s two spaces) in nearly triple the monthly rent amount from the original lease.

After the corporate tenant defaulted and filed for bankruptcy protection, the plaintiff landlord sued the guarantor defendant to recover nearly $1.4M in unpaid lease rental payments. The guarantor defendant successfully moved to dismiss on the basis that she was released from the guaranty since the lease parties made material changes to the lease and increased the guarantor’s risk with no additional consideration to the guarantor.

Affirming, the First District examined the scope of guarantor liability when the lease guarantor is also the corporate tenant’s principal officer.

The Court cited and applied these operative contract law principles in siding for the guarantor:

– A lease is a contract between a landlord and tenant, and the general rules of contract construction apply to the construction of leases;

– A guaranty is a promise by one or more parties to answer for the debts of another.  A clearly-worded guaranty should be given effect as written;

– A guaranty is considered a separate, independent obligations from the underlying contract.  Where a guaranty is undated, a court will still consider it as drafted contemporaneously with the underlying lease if the guaranty refers to that lease;

– A guaranty signed at the same time as the underlying contract is supported by adequate consideration.  A contractual modification – something that injects new elements into a contract – must be supported by consideration to be valid and binding.  Pre-existing obligations are not sufficient consideration under the law;

– In the context of commercial lease guaranties, a guaranty’s term is only extended if the underlying lease term is also extended in accordance with the lease terms;

– Common guaranty defenses involve changes to the underlying contract that materially increase the guarantor’s financial risk;

– Where the risk originally assumed by a guarantor is augmented by acts of the principal (the person whose debts are being guaranteed), the guarantor is released from his contractual obligations;

– Where a corporate principal signs a lease in her corporate capacity, she is not personally responsible for her corporate employer’s lease obligations.  This is because a corporation is a separate legal entity from its component shareholders.

(¶¶ 40-45, 46-55, 60-62, 65-66)

Applying these principles, the Court sided in favor of the guarantor.  The court noted that the lease addendum materially modified the underlying lease obligations and increased the guarantor’s fiscal risk. In addition, the guaranty was silent on whether it applied to material lease modifications.  Because of this, the court found that the guarantor’s consent to the lease changes was required in order to bind the guarantor to the changes.

Since the guarantor never gave her express consent to the lease changes (broadening the leased premises from two office suites to 5; tripling the monthly rent), she was immunized from further guaranty obligations once the corporate tenant and office landlord signed the lease addendum.

The Court also rejected the office lessor’s attempt to fasten liability to the guarantor under a piercing the corporate veil/alter-ego theory.  Since the plaintiff didn’t sue to pierce the corporate veil (such as under an alter-ego theory), the Court found that the guarantor’s execution of the lease addendum as an agent of the corporate tenant didn’t bind the defendant personally to the corporation’s lease obligations. (¶¶ 72-77).

Afterwords:

Stonegate provides a thorough analysis of the contours of a commercial lease guarantor’s liability.  While a guaranty is construed as written under black-letter contract law principles, if the guarantor’s principal (here, the corporate tenant) changes the underlying lease obligation so that the guarantor’s original risk is increased, the change in lease term will not be binding on the guarantor.  This is so even where the corporate agent who agreed to the material lease amendment is the lease guarantor.

Apparent Agency Questions Defeat Summary Judgment in Guaranty Dispute – IL ND

The Northern District of Illinois recently examined the nature of apparent agency liability in the context of a breach of guaranty dispute involving related limited liability companies (LLCs).  The plaintiff in Hepp v. Ultra Green Energy Services, LLC, 2015 WL 1952685 (N.D.Ill. 2015) sued to enforce a written guaranty signed by the defendant company in connection with a $250K-plus promissory note signed by a company owned by the defendant’s managing member.

The court denied the plaintiff’s summary judgment motion.  It found there were material and triable fact issues as to whether the person signing the guaranty had legal authority to do so.

The court first addressed whether the guaranty was supported by consideration.  Consideration is “bargained-for exchange” where the promisor receives something of benefit (or the promisee suffers detriment) in exchange for the promise.  A guaranty’s boiler-plate provision that says “For Value Received” creates a presumption (but one that can be rebutted) of valid consideration.

Where the guaranty is signed at the same time as the underlying note, the consideration for the note transfers to the guaranty.  But where the guaranty is signed after the note, additional consideration (beyond the underlying loan) needs to flow to the guarantor.  A payee’s agreement to forbear from suing can be sufficient consideration.

Here, the plaintiff agreed to extend the deadline for repayment of the note by thirty days.  According to the court, this was sufficient consideration for the plaintiff to enforce the guaranty.  **3-4.

Next, the court shifted to its agency analysis and considered whether the LLC manager who signed the guaranty had authority to bind the LLC.  Answer – maybe not.

Apparent agency arises where (1) the principal or agent acts in a manner that would lead a reasonable person to believe the actor is an agent of the principal, (2) the principal knowingly acquiesces to the acts of the agent, and (3) the plaintiff reasonably relies on the acts of the purported agent.

When considering whether a plaintiff has shown apparent agency, the focus is on the acts of the principal (here, the LLC), and whether the principal took actions that could reasonably lead a third party to believe the agent is authorized to perform the act in question (here, signing the guaranty on the LLC’s behalf).

The scope of an apparent agent’s authority is determined by the authority that a reasonable person might believe the agent has based on the principal’s actions.  Also, a third party dealing with an agent has an obligation to verify the fact and extent of an agent’s authority.  **5-6.

The court found there material questions of disputed fact as to whether the plaintiff reasonably relied on the LLC manager’s representation that he had authority to sign the guaranty for the LLC.  The court noted that this was an unusual transaction that was beyond the ordinary course of the LLC’s business (since it implicated a possible conflict of interest (the manager who signed the guaranty was an officer of the corporate borrower) and it resulted in a pledge of the LLC’s assets), and culminated in the LLC taking on another $125,000 in debt in exchange for a short repayment time extension.  * 7.

The anomalous nature of the transaction coupled with the affidavit testimony of several LLC members who said they had no knowledge of the manager signing the guaranty, created too many unresolved facts to be decided on summary judgment.

Take-aways:

1/ A guaranty signed after the underlying note requires additional consideration running to the guarantor;

2/ Great care should go into drafting an Operating Agreement (OA).  Here, because the OA specifically catalogued numerous actions that required unanimous written consent of all members, the LLC defendant had ammunition to avoid the plaintiff’s summary judgment motion.