The Appellate Court of Illinois, First District, recently rejected a borrower's arguments that his breach of a forbearance agreement was immaterial, and that the lender was attempting to use the breach for an improper purpose by attempting to recover substantially more than the amount to which it was allegedly entitled.
A copy of the opinion is available at: Link to Opinion
A bank and a borrower entered into a loan and related agreements ("Agreement") under which the bank extended a $1.5 million revolving loan to the borrower secured by shares in a company. The borrower defaulted and the agreement was amended numerous times to provide the borrower an extension of the loan maturity date.
The bank and borrower eventually entered into a final fifth amendment and forbearance agreement. In the fifth amendment the borrower requested that the bank (a) forbear from exercising certain rights based on his existing defaults, (b) extend the loan maturity date, and (c) provide a new line of credit loan in the amount of $375,000. The bank agreed to these accommodations but required additional collateral of a California property owned by the borrower.
In the forbearance agreement, entered into by borrower and borrower's wife ("obligors"), the parties agreed that there were existing defaults under the loan documentation including: failure to make interest payments; failure to provide required financial statements, brokerage statements, and tax returns; failure to comply with net worth and liquidity requirements; defaulting on specified indebtedness to another lender; failing to deliver rental income from the California property and failing to timely replace the Company stock with other collateral when the stock diminished in value and failing to repay the bank in full on the revolving loan maturity date.
The forbearance agreement noted that the bank had commenced a non-judicial foreclosure as to the California property. The forbearance agreement provided that if the obligors "fully and timely" satisfied and performed each of the conditions, covenants, terms and provisions" set forth in the forbearance agreement – and no other breaches or defaults occurred under the forbearance agreement or the loan documentation – the bank agreed to forbear from exercising its rights and remedies arising from the existing defaults.
Among other things, the obligors agreed to make two payments: (a) all proceeds from the sale of the California property, on or before July 16, 2018, and (b) $300,000 on or before July 1, 2019. The obligors also agreed to pay the bank 80% of any net cash proceeds received from each cash bonus received by borrower from his employer ("employer pledge") in the forbearance period and to agree to make additional contributions from other income received ("investment pledge") during the forbearance period.
The California property was sold and the proceeds were received by the bank. However, the borrowers did not comply with the terms concerning the employer pledge and investment pledge. The bank filed a complaint for breach of the forbearance agreement against the obligors. The bank alleged the obligors did not comply with the terms of the employer or investment pledge. The bank sought the entire amount of the remaining indebtedness from the borrower in the amount of $766,737.58 and $300,000.00 from the borrower's wife under the forbearance agreement.
The obligors answered the complaint and alleged that the bank waived any claim of default under the forbearance agreement by previously waiving strict compliance with the loan documentation. In an affirmative defense, the obligors also alleged they had not breached the forbearance agreement because the payment of $300,000 was not due until July 1, 2019 which was a date after the lawsuit was originally filed.
Both parties filed motions for summary judgment which were both initially denied. The bank filed a second motion for summary judgment as to the borrower only, and both of the obligors filed a second motion for summary judgment arguing that their breach of nonmonetary terms of the forbearance agreement not damage the bank because the pledges were meant to secure the 2019 payment which was timely made by the obligors. The trial court ruled the obligor's breach was de minimis because the bank could not show some harm from the breach of the non-monetary failure to pledge collateral, and entered summary judgment in favor of the obligors. The bank appealed.
On appeal, the bank argued that: (a) the trial court improperly required that a material breach occur under the forbearance agreement even though the agreement did not so provide; and (b) even if the bank was required to prove a material breach occurred, the obligors' breach of the forbearance agreement was material. The obligors argued that the bank is not entitled to collect payment for the underlying debt as damages for the breach of the forbearance agreement.
The bank further argued that the intent of the forbearance agreement was for the bank to forbear from exercising its rights under the loan documentation – including its right to recover the entire amount due – only as long as the obligors complied with its terms. The obligors argued that the bank attempted to use their breach of the nonmonetary provisions for an improper purpose by attempting to recover substantially more than the amount to which it was allegedly entitled under the forbearance agreement.
In Illinois, when the language of a contract is clear and unambiguous, it must be given its plain, ordinary, and popular meaning. Ritacca Laser Center v. Brydges, 2018 IL App (2d) 160989, ¶ 15. However, if the contractual language is susceptible to more than one meaning, it is ambiguous, and a court may consider extrinsic evidence to determine the intent of the parties. Thompson v. Gordon, 241 Ill. 2d at 441 (2011).
Here, the Appellate Court held that, if the parties had wanted to impose a materiality requirement with respect to any breach or default of the forbearance agreement, they could have done so. Ritacca Laser Center, 2018 IL App (2d) 160989, ¶ 21. Here, the parties did not define or require the materiality of a breach of any of the terms or conditions.
On the contrary, the Appellate Court continued, the intent of the parties was clear because the language of the forbearance agreement contained the parties express agreement that the obligors "are and continue to be in default" under the loan documentation, and that the parties agreed the bank would "forbear from exercising certain of its rights and remedies" arising from the existing defaults and that the bank was "willing to provide such forbearance, but solely on the terms and subject to the conditions contained in this Agreement."
As a result, the Appellate Court held the bank was damaged by the obligors' failure to fully and timely comply with the forbearance agreement because it was inextricably linked to the loan documentation and the indebtedness.
Accordingly, judgment in favor of the borrower was reversed and the matter was remanded to the trial court with instructions to enter judgment in favor of the bank and against borrower.
Ralph T. Wutscher
Maurice Wutscher LLP
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