Illinois app. The Court (1st Dist) holds a “continuing” security applied to the bond per note subsequently issued
The Illinois First District Court of Appeals recently upheld a trial court’s order granting summary judgment in favor of a creditor against a guarantor, finding that the warranty continued and applied. therefore to a subsequent note obligation, even if the note had been issued approximately two years after the guarantee.
A copy of the notice in Amos Financial LLC v Szydlowski is available at: Link to Opinion.
The matter arose from a note issued by a corporate borrower in 2010 (“Note”) which was subsequently assigned. In May 2008, prior to the issuance of the note, several individual guarantors executed a “continuing” commercial guarantee (“guarantee”) as security on a prior 2008 note by the same borrower to the same lender.
Plaintiff, the current assignee of the note and security (“Assignee”), has filed a complaint against one of the guarantors (“Guarantor”) alleging breach of security. The assignee alleged that because the borrower failed to honor the note, the guarantor owed money to the assignee under the guarantee.
The trial court granted summary judgment in favor of the assignee and guarantor on appeal.
On appeal, the Court of Appeal noted that because a warranty is a contractual obligation, a claim for breach of warranty is governed by the same principles as a claim for breach of contract. See Riley Acquisitions, Inc. v. Drexler, 408 Ill. App. 3d 397, 402-03 (2011). Thus, to recover the security, the assignee had to establish (1) that a valid and enforceable contract existed; (2) that there was performance by the plaintiff; (3) that the defendant breached the contract; and (4) that there was resulting harm to the plaintiff. Zirp-Burnham, LLC v E. Terrell Associates, 356 Ill. App. 3d 590, 600 (2005). ¶ 34
The guarantor argued that the summary judgment was improper because the assignee failed to establish that he was the current assignee of the warranty and therefore failed to establish that there was a valid and enforceable contract between the parties. The guarantor further argued that even if the assignee had been the current assignee of the guarantee, there were still genuine questions of material fact as to the extent of the guarantor’s liability.
In support of its arguments, the guarantor argued that neither the note nor the two elongates endorsing it expressly referred to or attributed the guarantee to the assignee, so as to establish that the assignee was the present owner of the guarantee. The guarantor further argued that at the very least, looking at the evidence in the light most favorable to the guarantor, the trial court should have decided that there remained a genuine question of material fact as to the extent of its liability under the warranty.
The assignee responded that the guarantor’s arguments were irrelevant because the trial court correctly found that the plain language of the warranty established that it was a “continuing” warranty, which obligated the guarantor to all future liabilities arising from the previous relationship established in the 2008 note.
The Court of Appeal agreed with the assignee and found that the warranty was “continuing” and that the trial court had correctly held that summary judgment was appropriate.
A “continuing guarantee is a contract under which a person agrees to be a secondary debtor for all future obligations of the primary debtor to the creditor”. TH Davidson & Co. v. Eidola Concrete, LLC, 2012 IL App (3d) 110641, ¶ 11 (citing Restatement (Third) of Suretyship and Guaranty § 16 (1996)). As warranties are interpreted according to the general principles of the contract, “[w]whether a warranty is continuous will depend on the language of the contract, interpreted according to the intention of the parties as manifested in their writings. 20 Ill. L. and Prac., Guaranty § 15, p. 369-370 (2010); see also McLean County Bank v. brokaw119 Ill. 2d 405, 412 (1988); Blackhawk Hotel Associates v. Kaufman85 Ill.2d 59, 64 (1981).
In general, “[w]here, according to the terms of the written guarantee, it seems that the parties look to a future course of transactions or a succession of credits”, it is considered a continuous guarantee. Scovill Manufacturing Co. vs. Cassidy275 Ill. 462, 467 (1916); Weger vs. Robinson Nash Motor Co., 340 Ill. 81, 92 (1930); see also CCP Ltd. Partnership v. First Source Financial, Inc., 368 Ill. App. 3d 476, 483 (2006). ¶ 40.
The Court of Appeal held that a review of the warranty in this case established unequivocally that a future course of action was contemplated by the parties. The Court pointed to a section of the guarantee that contained a heading “CONTINUING GUARANTEE” which explicitly provided that the guarantor would remain responsible for its share of the borrower’s debt “now existing or to be born or acquired, on a continuing basis”. The provision further stated that any payment made on the debt would not release or diminish the guarantor’s obligations for any “remaining and subsequent debt”.
The Court of Appeal further noted that the warranty provided no limitation on the duration of the warranty. Further, the Guarantor expressly authorized the Original Lender, “without notice or demand” and “without diminishing” liability under the Guarantee, to “make one or more additional loans secured or unsecured*** or otherwise to make additional credit” to the borrowing company.
Thus, the Court of Appeal concluded that there was no doubt that a future course of action was contemplated by the parties and that the 2008 contract was for an ongoing guarantee. See for example, Harris Bank Argo v Midpack Corp., 151 Ill. App. 3d 293, 295-296 (1986).
The Court of Appeal further found that the assignee’s failure to attach the 2008 note to the complaint was irrelevant and that the 2010 note was evidence of the borrower’s indebtedness and an obligation “arising hereunder” under the warranty. Further, the Court of Appeal found that the 2010 note was a future obligation between the original parties referenced in the guarantee for which the guarantor was liable.
The guarantor further argued that the assignee should not be allowed to enforce the warranty because it only claimed to be the security holder by way of assignment and there was no assignment of the security.
The Court of Appeal disagreed, finding that this was essentially an argument of lack of standing. The Court of Appeal concluded that the guarantor had provided no evidence to show that the assignee was not the holder of the guarantee and had therefore failed to discharge its burden of pleading and proving the affirmative defense of lack of standing.
The Court of Appeal also held that no express assignment of security was necessary for the assignee to enforce the note, as the assignee need only prove that he was the noteholder.
The Court of Appeal found that comment f to Section 13 of the Third Restoration of the Act, Suretyship and Guarantee, relied on by the trial court, was instructive here. Article 13 provides that “…It may generally be assumed that the person who assigns an underlying obligation intends to assign with it any secondary obligation supporting it. Thus, unless otherwise agreed or assignment is prohibited, *** the assignment of the underlying obligation also assigns the secondary obligation. (Third) reformulation of suretyship and guarantee § 13, comment f. (1996).
The Court of Appeal held that the security in this case explicitly authorized the original lender to “assign or transfer” the security from time to time. Further, the warranty stated that it “shall bind and inure to the benefit of the parties, their successors and assigns.” Accordingly, the Court of Appeal concluded that when the note was assigned to the assignee, the security was also assigned and summary judgment was therefore appropriate in favor of the assignee.
Therefore, the Court of Appeal upheld the judgment of the trial court.