Monday, July 23, 2012

FYI: Ill App Ct Rules Illinois Credit Agreements Act's Bar Against Borrower Actions on Unwritten Loan Agreements Did Not Apply When Bank Raised Agreement in Aff Defense

The Illinois Appellate Court, Third District, recently held that the Illinois Credit Agreements Act did not prohibit a challenge to a commercial security agreement, where the lender raised the security agreement as an affirmative defense in an action for conversion of personal property, and the borrowers argued that the agreement as drafted contained a mutual mistake of fact as to extent of the lender's security interest. 
Plaintiffs-borrowers ("Borrowers") took out a $30,000 loan (the "Loan") from a bank ("Bank"), executing a commercial security agreement ("CSA") that gave Bank a security interest in certain assets to secure payment on "Secured Debts."  Pursuant to the CSA, Borrowers granted Bank a security interest in Borrowers' personal property, including inventory, equipment, farm products and supplies.  At the time the Loan was made, Bank had already made 18 separate real estate mortgage loans to Borrowers.  Borrowers repaid the Loan in full the following month.
The CSA contained two boxes that could be checked to indicate whether "Secured Debts" referred to all the debts Borrowers owed to the bank or only to "Specific Debts" listed in the CSA.  The box for "All Debts" was checked.   
Bank later instituted foreclosure proceedings on the real estate mortgage loans against Borrowers, and also took possession of Borrowers' farm equipment, supposedly in accordance with the CSA.  Borrowers initially filed a complaint for declaratory and injunctive relief, seeking return of the personal property, and claiming that the farm equipment had allegedly been taken unlawfully. 
Borrowers ultimately filed a second amended complaint for conversion of the farm equipment, seeking the fair market value of the property.   The second amended complaint contained no mention of the CSA.  As its sole affirmative defense, Bank contended that the CSA secured "all present and future debts owed by [Borrowers]," including Borrowers' various real estate loans.   Moving for summary judgment, Bank argued that it had properly seized and sold the farm equipment pursuant to the CSA.
In response, Borrowers asserted that the CSA mistakenly indicated that the parties had intended to secure all debts to Bank, rather than just the Loan that had been paid off.   Bank then moved to strike and bar the testimony relating to errors in the written CSA, arguing that Borrowers were improperly attempting to modify the CSA in violation of the parol evidence rule and the Illinois Credit Agreements Act, 815 ILCS  160/1, et seq. ("ICAA").
The trial court granted Bank's motion to strike and bar the Borrower's testimony, and granted the Bank's the motion for summary judgment.  Borrowers appealed.  The Appellate Court reversed and remanded, ruling in part that Borrowers could challenge the validity of the CSA because it was raised as an affirmative defense to the Borrower's conversion action. 
As you may recall, the ICAA provides: "[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 forebear repayment of money, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor."  815 ILCS 160/2.
As to the question whether Borrowers had sufficiently raised a claim of mutual mistake of fact, the Appellate Court disagreed with Bank's argument that, because Borrowers did not actually plead reformation of the CSA, Borrowers were not permitted to raise the validity of the CSA as a challenge to the Bank's affirmative defense based on the CSA
In so ruling, the Appellate Court noted that Borrowers were not looking to reform the CSA, but instead were challenging the preclusive effect of the CSA as an affirmative defense.  In addition, the Court ruled that Borrowers had alleged all five elements necessary for a cause of action for conversion, had raised the validity of the CSA at the appropriate point in the proceedings, and had properly alleged that the CSA did not accurately reflect the parties' intent. 
The Appellate Court further ruled that, even if Borrowers were required to specifically plead a count of reformation, Borrowers had presented sufficient facts from which mutual mistake could be established. Accordingly, the Court ruled that no further pleadings were required to present the issue to the trial court. 
Turning to the issue as to whether the ICAA precluded a challenge to the validity of the CSA, the Appellate Court noted that Illinois courts have consistently ruled that the ICAA precluded actions by a debtor against a creditor "so long as the action is in anyway related to a credit agreement." See Bank One, Springfield v. Roscetti, 309 Ill. App. 3d 1048, 1055 (1999). 
Importantly, the Appellate Court pointed out, however, that the Borrowers had not raised an action against Bank under the CSA or any alleged oral modification of the CSA, but had instead only alleged that the CSA was not accurate once Bank had asserted it as an affirmative defense to the Borrowers' conversion action.
Ruling that there was "no clear and unambiguous prohibition" in the ICAA against a debtor's challenge to the validity of a credit agreement when first raised by a creditor as an affirmative defense against a debtor, the Appellate Court concluded that summary judgment in favor of Bank was improper.  The Court thus reversed and remanded.

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

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