Illinois Credit Agreements Act and the Unclean Hands Defense – No Writing = Difficulty Defeating Breach of Guaranty Claim

handsAmerican Chartered Bank v. Cameron. 2014 IL App (1st) 132231-U, an unpublished First District case, glaringly illustrates the difficulty of defeating a lender’s breach of guaranty claim when the defenses are based on the lender’s oral promises.  The case also sheds light on the nature of the borrower-lender relationship and the contours of the unclean hands defense in the context of a breach of contract action.

The defendant guaranteed a commercial loan made to a business that defendant invested in. After the borrower defaulted, the plaintiff sued the corporate borrower and guarantor defendant and won summary judgment of nearly $150K. The guarantor appealed arguing the guaranty wasn’t enforceable.

Held: summary judgment for the bank affirmed. Defendant’s defenses are defeated by the Illinois Credit Agreements Act 815 ILCs 160/1, et seq. (ICAA) and the express language of the guaranty.

Reasons:

The Court rejected the guarantor’s defense based on the clear guaranty language that specified the bank didn’t have to first proceed against the loan collateral (the bank could immediately go after the guarantor).  The guaranty also had a non-reliance clause: the guarantor waived his reliance on verbal statements by the bank’s agents.

The ICAA also trumped the defenses.  The ICAA prevents a debtor (here, the guarantor) from suing or defending a suit under a “credit agreement” unless it’s in writing and signed by both creditor and debtor” 815 ILCS 160/2.

The ICAA defines a “credit agreement” as an agreement to lend money, extend credit or to delay or forbear repayment of money that is not for consumer (personal, family or household) purposes and that doesn’t involve credit cards. 815 ILCS 160/1(1).  ICAA Section 3(3) negates any claims based on a creditor’s promise to modify, amend or forbear from enforcing a credit agreement.  815 ILCS 160/3

Illinois courts construe the ICAA broadly and describe it as a strengthened Statute of Frauds (740 ILCS 80/0.01 et seq.) that bars all actions at all related to a credit agreement.  The ICAA case law makes clear that the statute prevents a borrower from alleging he relied on any oral statements of a lender.

Here, the guarantor’s claim that the bank agent made verbal misstatements to induce the execution of the guaranty was clearly governed and defeated by the ICAA.  The court also found the ICAA negated the defendant’s argument that the bank officer orally modified the guaranty terms.(¶¶ 33-35).

The defendant’s “unclean hands” defense also failed.  This defense, which posits that a litigant can’t take advantage of his own wrongful conduct, was premised on the claim that the bank breached a fiduciary duty to inform the defendant of the bank’s intention to enforce the guaranty if there was a loan default.  The Court rejected this defense for two reasons: first, the lender-borrower relationship is not a fiduciary one as a matter of law.  Additionally, unclean hands defense only applies in equity cases: it doesn’t affect legal (actions at law) claims. (¶¶ 38-40)

The other argument raised and rejected by the guarantor was that since he successfully opened a confessed judgment in favor of the bank, this was tantamount to a summary judgment-defeating fact question claimed that since the trial court found that he satisfied the standard for opening a confessed judgment under Rule 276, this was tantamount to a summary judgment-defeating fact question.

Afterwords:

Cameron illustrates the expansive applicability of the ICAA and how that statute will bar almost all claims and defenses related to a promise to lend money.  The case also clarifies that the unclean hands defense will only apply in an equitable case (e.g. an injunction, declaratory judgment suit, etc.); not in a garden-variety breach of contract claim for money damages.  Procedurally, the case’s lesson is that opening a confessed judgment involves different evidentiary standards than does showing a fact question sufficient to defeat a summary judgment motion.

 

 

Integration Clause Bars Trader’s Commission Claims Against Financial Firm

Integration clauses – also called “merger” clauses – are staples of commercial contracts in diffuse business settings.  The Northern District of Illinois recently found that an integration clause in a compensation agreement defeated a futures trader’s claims for unpaid commissions in Colagrossi v. UBS Securities, LLC, 2014 WL 2515131 (N.D.Ill. 2014).
The plaintiff alleged that in 2005, he and his then employer entered into an oral agreement for commission payments earned on foreign futures transactions.  When that employer was absorbed by another entity in 2006, the plaintiff signed a written employment agreement with the new company –  one that contained an integration clause.  The agreement was silent on the oral futures deal that plaintiff cut with his ex-employer. Plaintiff’s successor employer then folded into a third entity.  Plaintiff signed a second employment agreement in 2007 with the new (“third”) employer.  That agreement also contained an integration clause and made no mention of the 2005 oral commission arrangement.
After he was fired, the plaintiff sued his new employer for unpaid commissions and bonuses totaling about $2M in total.  He filed counts for breach of oral contract and a claim under the Illinois Wage Payment and Collection Act.  The defendant moved for summary judgment on plaintiff’s claims.
 Ruling: Motion granted.  Summary judgment for defendant.  Plaintiff’s claims dismissed.
 Q: Why?
 A:  Both written employment agreements (the one he signed in 2005 with defendant’s predecessor and the one he signed with defendant in 2006) contained integration clauses that provided that the agreement stated the entire terms of the parties’ agreement and superseded all prior verbal agreements or representations touching on the plaintiff’s employment. 
    
In Illinois, where contracting parties include a contractual integration clause (i.e., a clause stating that the written agreement is complete and final and reflects the entire understanding of the parties), they are manifesting their intent to protect themselves against after-the-fact changes to the contract.  The purpose of an integration clause is to establish that negotiations leading up to a written contract are not the agreement and to also guard against a party to the agreement trying to alter the contract’s meaning by trying to explain his state of mind when the contract was signed.
 Here, both written employment agreements contained an integration clause that stated the parties’ entire agreement was reduced to writing and that also precluded plaintiff’s attempt to rely on oral promises that pre-dated the contracts’ execution.  The clauses broadly applied to bar reliance on oral agreements relating to the “subject matter” of the contracts.  Since plaintiff’s oral contract claim for commissions  went to the heart of the employment agreements’ purpose, the oral agreement was defeated by each contract’s integration clause. (*4-5).
The Court also rejected the plaintiff’s claim for bonus payments that was premised on the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 (the Wage Act).  The Wage Act applies broadly to wages, salaries, commissions and bonuses; so long as they are based on an employment agreement (written or oral).  820 ILCS 115/2 (http://paulporvaznik.com/the-illinois-wage-payment-and-collection-act-some-basics/697).  Here, the plaintiff’s Wage Act claim was not only defeated by the two integration clauses (one in each employment contract) but also because an employer’s past practice of paying bonuses isn’t enough to make out a viable Wage Act count. (*6-7); Carroll v. Merrill Lynch, 2011 WL 1838563 *17 (N.D.Ill. May 13, 2011) (granting summary judgment to employer on employee’s Wage Act claim because “past practice itself is not enough to support a wage claim”); Stark v. PPM America, Inc., 354 F.3d 666, 672 (7th Cir.2004)(same).
Take-aways: Integration clauses will be enforced as written.  If they are broad and clearly-worded, the clauses will defeat a party’s attempt to modify the plain text of a contract.  The case is also noteworthy for its discussion of the Wage Act.  While the Wage Act’s scope is broad, this case clearly illustrates that a claim based on the Act must allege more than an employer’s past practice or course of conduct in making bonus payments.  Instead, there must be an express agreement – written or oral – to support an employee’s claim under the Act.

Franchisor’s Financial Projections Don’t Equal Fraud – Ill. Law

In many fraud cases, defendants reflexively assert some variant of the “forward looking” or “promissory” fraud defense: that the misstatement relates to a future event and is therefore a non-actionable statement of opinion.

Illinois fraud rules require a misrepresentation to be material and present-tense factual  to be actionable.  Statements of future intent – like a forecast or projection (“this company is gonna make millions within its first year!”) are considered opinions and do not equal fraud under the law.

The First District delves into the scope of promissory fraud in Avon Hardware v. Ace Hardware, 2013 IL App (1st) 130750, a franchise dispute between an independent store against a national chain.

The plaintiffs, two hardware store franchisees, sued Ace on various fraud theories after their franchises failed.  Plaintiffs claimed that Ace made false statements of past and future financial performance in several documents supplied by the hardware giant.

The documents all contained cautionary language warning the plaintiffs not to rely on them and said the financial projections were “mere estimates.”  They also contained a non-reliance clause explicitly stating the franchisee was not relying on any sales or profits guarantees.  ¶¶ 5-7.

Despite the rampant warnings, Plaintiffs sued Ace for fraud when the stores failed.  Plaintiffs claimed that in order to entice their investment, Ace painted a too-rosy financial picture of what plaintiffs could expect to earn from the franchises and distorted results of similar Ace franchisees.

Ace moved to dismiss based on the documents’ cautionary language and disclaimers. The trial court granted Ace’s motion to dismiss all complaint counts.

Held: Affirmed.

Rules and Application:

In Illinois, a fraud plaintiff must prove:  (1) a false statement of material fact; (2) knowledge of or belief in the statement’s falsity; (3) intention to induce the plaintiff to act on the statement; (4) reasonable reliance on the statement’s truth by the plaintiff; and (5) damage to the plaintiff resulting from the reliance. ¶ 15.

Negligent misrepresentation has the same elements as fraud except instead of proving defendant’s knowledge of falsity, plaintiff only has to show that defendant was careless or negligent in ascertaining the truth of the challenged statement.  ¶ 15.

Fraud and negligent misrepresentation claim must be based on a present statement of fact.  Financial projections are generally considered statements of opinion, not fact.  And while statements of future income are not actionable, statements of historical income of a business are sufficiently factual for fraud claims. ¶¶ 16-17.

The Court dismissed plaintiffs’ fraud claims because much of the challenged data was forward-looking and contained expansive cautionary language: the documents were “replete with warnings” that defendants shouldn’t rely on them.  Moreover, Ace’s documents contained anti-reliance language that stated that plaintiffs hadn’t received or relied on any Ace guarantees of future sales, profits or success.  ¶¶ 9, 21.

Taken together, the Ace documents’ glaring disclaimers prevented plaintiff from alleging Ace’s material misstatement or reliance – two necessary fraud elements.

Take-aways: Cautionary language or anti-reliance clauses in a contract will be upheld if the terms are textually clear and there’s no disparity in bargaining power between the parties.

The case also reaffirms that statements of future economic prospects are considered opinions; while statements of historical financial performance are factual enough for a fraud claim.