The Illinois Appellate Court, First District, recently upheld a lower court's order dismissing a loan assignee's complaint against the guarantor of a loan for failure to state a cause of action.
In reaching its decision the Court noted that: (1) absent an ambiguity in the terms of a guaranty, parole evidence cannot be used to alter the agreement; (2) a party's allegations in its verified complaint constitute judicial admissions; and (3) the drafting party cannot, as a matter of law, reasonably rely upon statements made by the non-drafting party during the negotiations of the agreement to the extent that they differ from the written instrument.
A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1121702.pdf
A bank extended an $8.1 million loan to a business for the development of an athletic training facility. The loan was generally guaranteed by the business, its parent company, and the parent company's owner. The bank also obtained a limited guaranty from the owner of the parent company.
The loan was finalized on August 24. However, the limited guaranty erroneously made reference to a loan agreement reached on July 27. The bank drafted the limited guaranty.
The loan and related guaranties were sold and assigned. Following the default on the loan, the owner of the loan ("Loan Owner") brought an action which sought, in part, to enforce the limited guaranty.
The Loan Owner brought three verified complaints: the original, the first amended and the second amended. In its first amended complaint the Loan Owner admitted that there was no loan agreement dated July 27. The guarantor successfully moved to dismiss this complaint, bringing about the Loan Owner's second amended complaint.
The Loan Owner's second verified complaint contained four counts against the guarantor: 1) breach of guaranty; 2) reformation of the guaranty; 3) enforcement of the reformed guaranty; and 4) fraudulent misrepresentation. This time the lower court dismissed the second amended complaint with prejudice.
In its appeal, the Loan Owner argued that the trial court erred in its ambiguity consideration by not considering extrinsic loan documents from the August 24 loan which the Loan Owner argued were incorporated by the integration clause. The Loan Owner further argued that the lower court erred because an intrinsic ambiguity was evident on the face of the limited guaranty.
Addressing the Loan Owner's arguments, the Appellate Court first noted that public policy favors greater protection for guarantors of debts incurred after the execution of the guaranty. The Court also noted that a guaranty's terms are strictly construed in favor of the guarantor, especially when the agreement is prepared by the creditor.
Nevertheless, when the guaranty's language is unequivocal the agreement must be construed in accordance with the terms and language used.
Utilizing these general rules, the Appellate Court determined that the guaranty was not ambiguous. In fact, the Court noted that the guaranty is exactingly clear as to the date of the loan agreement – July 27.
Because the Appellate Court determined that no ambiguity existed, the Court rejected the Loan Owner's attempts to introduce extrinsic evidence due to the parole evidence rule. As you recall, the parole evidence rule prohibits any evidence outside the terms of the written instrument from altering or adding to the agreement unless an ambiguity exists. The exclusion of extrinsic evidence was further supported by the existence of an integration clause in the agreement, as noted by the Court.
Moreover, the Appellate Court also held that the Loan Owner's amended verified complaints made multiple judicial admissions that worked against the Loan Owner, including that no loan agreement dated July 27 existed. The Court explained that the Loan Owner's attempts to broaden its allegations through amended complaints were of no avail.
The Loan Owner additionally argued that the reformation of the guaranty was appropriate based upon mutual mistake of fact, or based upon its unilateral mistake as furthered by a fraud perpetrated by the guarantor. However, the Court determined that both of these allegations failed, as the Loan Owner failed to sufficiently plead a variance between the original agreement and the written agreements.
Once again, the Court found that the Loan Owner's verified complaint was the source of its own demise. Therein, the Loan Owner had admitted that both parties at the time the guaranty was drafted intended for the guarantor to be liable for a loan executed on July 27 but not August 24. Thus, no variance between the actual terms of the guaranty and the alleged mistaken terms existed which required the reformation.
Due to the lack of ambiguity of the guaranty and the Loan Owner's judicial admissions, the Court concluded dismissal regarding the counts alleging breach of guaranty, or seeking to reform the guaranty were appropriate.
Finally, the Loan Owner argued that the lower court's dismissal of its fraudulent misrepresentation count against the guarantor was in error because a determination of reasonable reliance is a question of fact.
In rejecting this argument, the Appellate Court noted that in assessing whether a party's reliance was justifiable, a court must consider all the facts known to the plaintiff and those facts that the plaintiff could have learned through the exercise of ordinary prudence.
The Appellate Court held that as a matter of law the Loan Owner could not have reasonably relied upon the statements made by the guarantor which contradicted the terms of the instrument the Loan Owner in fact drafted.
Accordingly, the Appellate Court upheld the lower court's dismissal of the complaint against the guarantor.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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Chicago, Illinois 60602
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