Wednesday, April 23, 2014

FYI: Ill App Ct Rejects Alleged Modification of Commercial Loan for Non-Compliance with Illinois Credit Agreements Act

The Illinois Appellate Court, First District, recently reversed and remanded judgment in a commercial foreclosure, holding that a settlement agreement was unenforceable because it was a modification of the mortgage documents and subject to the requirements of the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq. (“Credit Act”).


A copy of the opinion is available at:


In 2008, a company (“Company”) borrowed money from a bank (“Bank”) to purchase and develop a piece of commercial real estate.  Company granted Bank a mortgage on the property, secured by two promissory notes.  Ten individual organizers of Company signed commercial guaranties promising to pay Company’s debts.  Company failed to raise the necessary capital and the planned development never materialized.


A construction company commenced an action to foreclose on its mechanics liens on the property.  Bank filed a cross-complaint against Company to foreclose on its mortgage and for breach of the promissory notes, and a third party complaint against the guarantors for breach of the guaranties.  Throughout the proceedings, Company and eight of the guarantors were all represented by the same attorney.  Of the two remaining guarantors, only one is relevant to this action (hereinafter, “Guarantor P”).


During the course of litigation, the parties began settlement negotiations which occurred mostly in e-mails over the course of a year.  Throughout the negotiations, the parties attempted to resolve their differences regarding the guarantors’ ability to pay, the mechanism for determining whether they had experienced an increase in ability to pay, and the role of Guarantor P in the settlement.  Counsel for Bank repeated stated that any settlement offer required approval by Bank.


Although subsequent e-mails between counsel for Company and Bank indicated that settlement had not been finalized, Company argued that the e-mail exchange between the parties culminated in a settlement agreement.  The Bank eventually rejected the settlement offer from Company and guarantors.


Bank moved for summary judgment in the amount of over $1.8 million.  Company and the guarantors filed an emergency motion to enforce the settlement, alleging that the parties agreed to a deed in lieu of foreclosure and a $350,000 payment.  Bank argued that no agreement was ever reached, and even if one was reached, it was unenforceable because the purported agreement was not signed by the parties as required under the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq. (“Credit Act”).


The trial court determined that the agreement between the parties constituted a binding agreement when the piecemeal terms in e-mails were read together.  In addition, the trial court found that the settlement agreement was not a new credit agreement, but rather a modification of an existing mortgage agreement and did not invoke the Credit Act.


On appeal, the Illinois Appellate Court first considered whether the purported settlement agreement was encompassed by the Credit Act.


As you may recall, section 1(1) of the Credit Act defines “Credit agreement” as “an agreement or commitment by a creditor to lend money or extend credit or delay or forbear repayment of money not primarily for personal, family or household purposes, and not in connection with the issuance of credit cards.”  815 ILCS 160/1(1) (West 2010).  Section 2 of the Credit Act states that “[a] debtor may not maintain an action on or in any way related to a credit agreement unless the credit agreement is in writing, expresses an agreement or commitment to lend money or extend credit or delay or forbear repayment of money, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor.”  815 ILCS 160/2 (West 2010).


Section 3 of the Credit Act states in pertinent part:


The following actions do not give rise to a claim, counter-claim, or defense by a debtor that a new credit agreement is created, unless the agreement satisfies the requirements of Section 2:



(3) the agreement by a creditor to modify or amend an existing credit agreement or to otherwise take certain actions, such as entering into a new credit agreement, forbearing from exercising remedies in connection with an existing credit agreement, or rescheduling or extending installments due under an existing credit agreement.” 


815 ILCS 160/3 (West 2010).


In light of these provisions, the Appellate Court found the purported settlement agreement to be a modification of an existing agreement, i.e., the mortgage documents.  But unlike the trial court, the Appellate Court determined that the modification invoked the Credit Act by its plain terms.


The Court relied on Teachers Insurance and Annuity Ass’n of America v. La Salle National Bank, 295 Ill. App.3d 61, 70 (1998), holding that the parties’ original written agreement did not require the creditor to restructure the loan at issue, and their subsequent agreement to that effect fell within Section 3 of the Credit Act and could not be enforced absent a signed writing.  As applied to this case, the guarantors had not established any provision in the parties’ original agreement that required Bank to accept a lower sum than what was otherwise due.  The intent of the purported settlement agreement was to have Bank refrain from collecting the remaining sum due and from exercising its right to foreclose on the property.  Therefore, the Appellate Court held that the purported modification agreement triggered application of Section 3 of the Credit Act and could not be enforced absent a signed writing.


The Appellate Court next considered whether the record supported a finding of an enforceable settlement agreement.  In the Court’s own words, “little proof exists that a meeting of the minds occurred here.”  The e-mails did not evince the relevant terms of the agreement, did not recite the names of every party to be bound, and Guarantor P’s role in the settlement had not been finalized.  Moreover, the e-mails did not set forth the specific property to be transferred in the deed, the legal instruments to be rendered inoperable by the agreement, and provided no deadlines for the parties to fulfill their obligations under the agreement. 


The Appellate Court further noted that Company and the guarantors failed to develop any argument regarding the signatures of the parties at issue.  The Court considered cases involving an attorney’s ability to bind her clients and found that even if Bank’s attorney had authority to bind the Bank, her e-mails clearly stated that any settlement was conditioned upon Bank’s approval, which did not appear in the record.


Accordingly, judgment was reversed and remanded for further proceedings.







Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
(312) 551-9320
(312) 284-4751
(312) 493-0874


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





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