Wednesday, April 24, 2013

FYI: 7th Cir Upholds Summary Judgment in Favor of Bank as to Illinois Credit Agreements Act and Other Issues, Sanctions Guarantor for Frivolous Arguments

The U.S. Court of Appeals for the Seventh Circuit recently upheld summary judgment in favor of a bank on a loan guaranty, ruling that the loan guarantor, an attorney and sophisticated investor, lacked any defense to liability and that a purported promise on the part of the bank to purchase assets from the borrowing company did not satisfy the Illinois Credit Agreement Act's requirement that a modification to a written credit agreement be in writing and signed by both parties.  The Court also imposed sanctions on the guarantor under Federal Rule of Appellate Procedure 38  for filing a frivolous appeal.  A copy of the opinion is attached.


An investment company ("Company") obtained a $12.5 million revolving line of credit from plaintiff bank ("Bank") that was personally guaranteed by defendant ("Guarantor"), a managing member of Company.   The amount of the loan eventually increased to over $15 million, which amount was similarly guaranteed by Guarantor.  The agreement increasing the loan amount required Company to reduce its principal debt to Bank to less than 35% of the value of Company's assets by the end of each quarter and to make a principal payment of $3 million by a specified date.


The loan went into default, and the parties entered into a forbearance agreement that required Company to make the $3 million dollar principal payment several months later.   Bank also refused to accept several relatively small interest-only payments from Company. 


Company failed to make the principal payment, and Bank filed suit to collect the debt from Company and to enforce the guaranty.  Guarantor asserted defenses of fraud in the inducement, duress, and violation of the duty of good faith and fair dealing.


The lower court granted summary judgment in favor of Bank on all issues, except the calculation of prejudgment interest.  The parties subsequently stipulated as to the prejudgment interest, and a final judgment was entered in favor of Bank and against both Company and Guarantor in the principal amount of $15.5 million, plus almost $1 million in prejudgment interest.  Company and Guarantor filed separate appeals, which were consolidated.   


The Seventh Circuit affirmed, addressing only Guarantor's appeal due to Company's bankruptcy filing.  The Court also imposed sanctions on Guarantor for filing a frivolous appeal completely lacking in valid arguments.


Rejecting Guarantor's various assertions as meritless, the Appellate Court first addressed Guarantor's contention that the forbearance agreement was unenforceable because Bank fraudulently induced Company to execute the agreement by promising to help Company sell investments to pay its debt.  To show such a "promise" from Bank, Guarantor produced an email from a Bank employee to Guarantor stating the amount that Bank "would offer" to purchase certain assets from Company that day.  The Court found such evidence to be completely inadequate, partly because the email was not a promise to buy anything or an offer to help Company sells its assets, and Guarantor produced no evidence that Company or Guarantor had accepted the offer.


Second, the Seventh Circuit also ruled that in failing to produce a writing signed by both parties reflecting any promise by Bank that might defeat the guaranty, Guarantor was unable to meet the writing requirement under the Illinois Credit Agreement Act, 815 Ill. Comp. Stat. 160/1 et. seq. (the "Act").  Rejecting Guarantor's argument that the loan to Company was primarily for "personal, family or household purposes" and that the Act was thus inapplicable, the Court pointed out that Guarantor and Bank admitted before the lower court that the loan was not primarily for such purposes and that the original credit agreement expressly provided that the loan was primarily for the purpose of purchasing limited partnership equity interests in certain investment funds and for refinancing other assets. 


The Seventh Circuit also rejected Guarantor's other assertions that it was commercially unreasonable for Bank to accelerate the loan, because Bank rejected the interest-only payments Company attempted to make and because Company's tax returns showed it as having sufficient assets to satisfy the terms of the loan, finding these arguments to be meritless, particularly in light of Company's prior default and the poor economy.


Notably, the Seventh Circuit also imposed sanctions under Federal Rule of Appellate Procedure 38 on Guarantor for filing a frivolous appeal, explaining in detail the reasons for so doing.  Among those reasons were that Guarantor was an attorney and a sophisticated borrower and investor who clearly understood his obligations.


The Court further noted among other things that:  (1) the original credit agreement and guaranty were all undisputed;  (2) Guarantor conceded that the forbearance agreement required the principal payment and that Company was in default;  (3) Guarantor failed to present a coherent argument and a reasonable view of applicable law to support reversal of the lower court's judgment; and  (4) Guarantor attempted to dispute stipulated facts, to misrepresent the nature of Bank's email, and to get credit for a prejudgment interest payment that he apparently did not make.


The Seventh Circuit accordingly affirmed.




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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