Thursday, July 5, 2012

FYI: Ill App Ct Rejects Challenge to Termination of Line of Credit Based on Alleged "Breach of Implied Covenant of Good Faith and Fair Dealing"

The Illinois Appellate Court, Third District, recently rejected claims that a bank breached an "implied covenant of good faith and fair dealing" in connection with terminating a line of credit.  The Court also held that the borrower's and guarantors' allegations were barred by res judicata or collateral estoppel, as the claims and issues presented arose from the same loan agreement and had been previously conclusively resolved. 
A copy of the opinion is available at: 
Defendant bank ("Bank") extended a revolving line of credit to an advertising company ("Company").  The line of credit was secured by a promissory note executed by Company and was guaranteed by a number of individuals associated with Company. 
Among other things, the Note required monthly payments of all accrued unpaid interest and provided that "[u]pon default, [Bank] may declare the entire unpaid principal balance due under this Note and all accrued interest immediately due . . ."  Included as examples of events or circumstances that constituted "an event of default," under the Note were:  "[t]he dissolution or termination of  [Company's] existence as a going business"; and Company's insolvency.  The Note further provided that Bank would have no further obligation to advance funds under the Note and could freeze and set off Company's accounts if Company or its guarantors defaulted, went out of business, or became insolvent.  Company and the loan guarantors also waived a number of rights including the right to require Bank to make any presentment, demand for payment, or notice of dishonor. 
Following a decline in Company's business, Bank demanded additional collateral and a cash infusion from Company and allegedly threatened to withhold credit if its demands were not satisfied.  Company advised Bank that it could not meet those demands and that it would have to cease doing business.  Bank then terminated Company's line of credit, placed a hold on Company's bank account, and applied proceeds from that account to cover the outstanding loan balance on the Note.  Bank later sent Company a notice of default, citing insolvency and closing of the business, and demanded payment of the outstanding principal and interest.
In separate actions against Company and the guarantors, Bank sought to collect the amounts due under the Note.  In each case, the trial court granted Bank's motion for summary judgment, rejecting Company's argument that there were triable issues, such as whether Company had been "in default" or "insolvent" under the Note, whether Bank's demand for additional collateral and a cash infusion caused Company to go out of business, and whether Bank breached its duty of good faith and fair dealing.  The Appellate Court affirmed the circuit court's judgments in each case and ruled in part that Bank had not breached its duty of good faith and fair dealing and that closing the line of credit was expressly authorized by the Note.
In the third lawsuit involving the same parties, Company and certain guarantors ("collectively Plaintiffs") filed a lawsuit against Bank and a loan officer (collectively, "Defendants"), asserting claims for breach of contract, breach of the implied duty of good faith and fair dealing, and tortious interference with contract and business relations.  Among the allegations were claims that Defendants: (1) improperly terminated the line of credit when Company was not "in default"; (2) had caused Company to go out of business; and (3) unreasonably demanded additional collateral and threatened to withhold credit.
Taking judicial notice of the judgments previously entered against Plaintiffs in the previous actions, the trial court granted Defendants' motion for summary judgment, ruling that those judgments had established res judicata and collateral estoppel as to Plaintiffs' various issues and claims.  The circuit court concluded in part that Bank was entitled to call the loan, declare a default on the basis of Company's insolvency, enforce the guaranty agreements, and that Defendants did not breach their duty of good faith and fair dealing.
Plaintiffs appealed. The Appellate Court affirmed.
The Appellate Court held that Illinois did not recognize a cause of action for "breach of the implied covenant of good faith and fair dealing."  
In addition, ruling that the lower court had properly entered summary judgment for Defendants because all claims were barred by res judicata or collateral estoppel, the Appellate Court noted that all the elements necessary for the application of these doctrines were present in this case.
In so doing, the Appellate Court applied the "transactional test" to determine identity of causes of action and observed that the very claims asserted by Plaintiffs in this case arose from the same loan transaction and involved the same actions taken by Bank that were litigated in the previous lawsuits.  The Court also ruled that adding a Bank employee as a defendant did not undermine the identity of parties or defeat the application of res judicata.
In addition, concerned with potentially invalidating the prior judgments, the Appellate Court further noted that res judicata barred not only matters actually litigated but also all matters that could have been presented and decided in the prior actions, either as a defense or counterclaim, such as the claim for tortious interference with business relations.   The Court thus ruled that res judicata barred any claims in the current action "where successful prosecution of the later action 'would either nullify the earlier judgment or impair the rights established in the earlier action.'"  See City of Rockford v. Unit Six of Policemen's Benevolent  Protective Ass'n., 362 Ill. App. 3d 556, 562-63 (2005).
Accordingly, the Appellate Court ruled that Plaintiffs were barred from raising any claims that arose from the line of credit transaction or Defendants' subsequent acts, because Plaintiffs had failed to raise those claims in the prior actions which resulted in final judgments on the merits and determined the parties' respective rights.  

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

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at: