The Illinois Appellate Court, First District, recently ruled that in filing an interlocutory appeal of an order appointing a receiver, the guarantors of a construction loan were liable for the full repayment amount under a "carve-out" provision that provided for full repayment liability if the guarantors took any action to "contest, delay or otherwise hinder" the lending bank's efforts to appoint a receiver or enforce the terms of the loan agreement.
The Appellate Court also ruled that under the Illinois Limited Liability Company Act and Uniform Partnership Act, a court need only have jurisdiction over a judgment debtor to enter charging orders against the judgment debtor's transferable or distributional interests in limited liability companies and limited partnerships.
A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2012/1stDistrict/1110749.pdf.
A real-estate developer ("Developer") purchased commercial property located in Chicago, Illinois (known here as "Block 37"), and financed the purchase with a construction loan from plaintiff bank ("Bank") for a total of about $205 million. The loan was guaranteed by both the president of the real estate development company as well as its parent company (collectively, "Defendants").
The guaranty provided that the Defendants' liability for the loan would be capped at just over $50 million, subject to a so-called "carve-out" provision that operated as an exception to the cap on liability. Specifically, the carve out provision provided that the guaranty would become a full repayment guaranty if "the Borrowers contest, delay or otherwise hinder any action taken by . . . the Lenders in connection with the appointment of a receiver for the Premises or the foreclosure of the liens, mortgages or other security interests created by any of the Loan Documents."
The developer defaulted on the loan and Bank initiated a foreclosure action seeking in part to enforce the guaranty against Defendants. Although the complaint originally sought judgment only on the guaranty for the amount of the liability cap, Bank subsequently amended the complaint to seek the full repayment amount of the loan from Defendants pursuant to the carve-out provision, arguing that Defendants had contested the foreclosure and the appointment of a receiver by filing an interlocutory appeal following the lower court's grant of Bank's emergency petition for the appointment of a receiver.
In response, Defendants filed a motion to dismiss, arguing that the carve-out provision was an unenforceable penalty. The lower court denied the motion. Bank filed a motion for summary judgment, which the lower court granted. The lower court entered judgment against Defendants for over $206 million pursuant to the guaranty and carve-out provision, certifying under Illinois Supreme court Rule 304(a) that there was no just reason to delay enforcement or appeal of the judgment.
About a month after the entry of judgment, Defendants filed a motion to reconsider the Rule 304(a) certification, which the lower court denied. Bank then served citations to discover assets on Defendants. Several months after the grant of summary judgment and the entry of judgment against Defendants for the full repayment amount, Defendants appealed.
Defendants also filed a motion for substitution of judge as of right, asserting that service of the citations to discover assets commenced a new supplementary proceeding under section 2-1402(a) of the Illinois Code of Civil Procedure, entitling Defendants to substitution of judge prior to a ruling on any substantial issue. The lower court denied the motion for substitution of judge, ruling that the citation to discover assets was part of the same proceeding as a means to enforce the judgment.
Bank then filed a motion for a charging order to cause distributions from various limited liability companies ("LLCs") in which Defendants had an interest to be paid to Bank, and to bar Defendants from transferring or impairing their assets. Bank also later filed a motion for rule to show cause why Defendants should not be held in contempt for dissipating almost $5 million in assets in violation of the citations.
Finding Defendants in contempt of the citations, the lower court, following appeal and remand on the charging orders, ultimately imposed charging orders on Defendants' distributions on additional limited liability companies as well as on limited partnerships in which Defendants held an interest, for a total of 72 such entities. The lower court also ordered the foreclosure of all the charging orders, and appointed a receiver for all the interests pursuant to section 30-20 of the Limited Liability Company Act. Defendants appealed again.
The Appellate Court affirmed the lower court's: (1) grant of summary judgment; (2) judgment in Bank's favor pursuant to the carve-out provision; (3 ) orders imposing charging orders on Defendants' limited liability companies and limited partnerships; and, (4) order denying Defendants' motion for substitution of judge as of right.
As you may recall, the Limited Liability Company Act provides in part that "[o]n application by a judgment creditor of a member of a limited liability company or of a member's transferee, a court having jurisdiction may charge the distributional interest of the judgment debtor to satisfy the judgment." 805 ILCS 180/30-20.
Similarly, the Uniform Limited Partnership Act provides in part that "[o]n application to a court of competent jurisdiction by any judgment creditor of a partner or transferee, the court may charge the transferable interest of the judgment debtor with payment of the unsatisfied amount of the judgment interest." 805 ILCS 215/703(a).
Before examining the enforceability of the carve-out provision in the guaranty agreement, the Appellate Court ruled on the timeliness of Defendants' notice of appeal and whether Defendants' post-trial motion for reconsideration tolled the time to appeal the judgment. The court ultimately concluded that Defendants had timely appealed, reasoning that because their nonspecific motion to reconsider the Rule 304(a) determination was for the purpose of modifying or vacating the underlying judgment, the motion to reconsider qualified as a proper post-trial motion. See Kingbrook, Inc. v. Pupurs, 202 Ill. 2d 24, (2002)(noting that neither the Code nor Illinois supreme court rules require specificity in post-judgment motions in non-jury cases); 735 ILCS 5/2-2-1203(allowing parties in non-jury cases to file a post-trial motion to modify or vacate a judgment); Ill. S. Ct. R. 303(a)(1)(tolling time in which to file a notice of appeal if a timely post-judgment motion "direct against the judgment" is filed).
Turning to the carve-out provision itself, the Appellate Court rejected Defendants' various assertions, including the argument that the carve-out provision was a vague, ambiguous, overly broad, and unenforceable penalty provision that failed to alert the borrowers of what acts would trigger full recourse liability and denied them their due process rights to defend themselves in a foreclosure action. In so doing, the court noted the plain language of the carve-out provision and concluded that "Defendants' interlocutory appeal of the trial court's appointment of a receiver clearly qualifies as contesting the Bank's actions in connection with the appointment of a receiver that would trigger full repayment liability." See J.B.Esker & Sons, Inc. v. Cle-Pa's Partnershhip, 325 Ill. App. 3d 276, 285 (2001); CSFB 2001-CP-4 Princeton Park Corporate Center LLC v. SB Rental I, LLC, 980 A.2d 1 (N.J. Super Ct. app. Div 2009)(nonrecourse loan with carve-out clause providing that the debt would become full recourse if borrower failed to obtain lender's prior written consent to subordinate financing on the property); G3-Purves Street, LLC v. Thomson Purves, LLC, 953 N.Y.S.2d 109, 114 (N.Y. App. Div. 2012)(carve-out provision that provided for the recovery of actual damages incurred by the lender did not constitute an unenforceable penalty).
The Appellate Court further noted that the carve-out provision did not preclude Defendants from defending against the foreclosure action, but simply resulted in Defendants' forfeiting their exemption from liability for full repayment of the loan. See Federal Dep. Ins. Corp. v. Prince George Corp., 58 F.3d 1041 (4th Cir. 1995)(rejecting borrowers' argument that waiver of right to file bankruptcy was void as against public policy and noting that the loan did not prohibit borrower from filing bankruptcy but merely imposed liability for any deficiency if borrower took certain actions such as filing bankruptcy).
With respect to the lower court's charging orders against the 72 LLCs and limited partnerships, the Appellate Court rejected Defendants' argument that those entities were "necessary parties" and that the lower court thus lacked jurisdiction to enter charging orders against them. In so ruling, the court reasoned that the Illinois Limited Liability Company Act and the Uniform Partnership Act both supported the conclusion that a court need only have jurisdiction over the judgment debtor to enter charging orders against the judgment debtor's transferable or distributional interest to satisfy a judgment and that the LLCs and limited partnerships accordingly did not need to be joined as parties for the lower court to enter the charging orders against them.
Finally, in addressing the issue whether Defendants had forfeited their right to substitution of judge as of right for failure to raise the issue in the earlier appeal of the contempt holding, the Appellate Court noted that the substitution of judge as of right was outcome determinative of the previous appeal and thus concluded that Defendants had forfeited their right to raise it in this particular appeal. See Sarah Bush Lincoln Health Center v. Berlin, 268 Ill. App. 3d 184, 187 (1994)(noting that motion for substitution of judge "directly bears upon the question of whether the order on appeal was proper" and that wrongful refusal of a proper request for motion for substitution of judge renders subsequent orders by that judge in the case void). See also 735 ILCS 5/2-1001(a)(2)(i), (ii).
Accordingly, the Appellate Court affirmed the rulings of the lower court in all respects.
Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mtwllp.com
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