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Schranz v. I.l. Grossman

OPINION FILED NOVEMBER 7, 1980.

PAUL J. SCHRANZ, II, ET AL., PLAINTIFFS-APPELLEES,

v.

I.L. GROSSMAN, INC., ET AL., DEFENDANTS-APPELLANTS.



APPEAL from the Circuit Court of Cook County; the Hon. JEROME LERNER, Judge, presiding.

MR. JUSTICE LORENZ DELIVERED THE OPINION OF THE COURT:

Plaintiffs brought this action on a promissory note made by defendant I.L. Grossman, Inc. (Grossman), and guaranteed by defendant Evans Mill Supply Co. (Evans), to a third party Pro's, Inc. (Pro's), who later transferred these instruments to the plaintiffs. Following a bench trial, the trial court found plaintiffs to be holders in due course of a security interest in these instruments and awarded plaintiffs a judgment of $49,194.77. Defendants, Grossman and Evans, appeal, and plaintiffs cross-appeal from the trial court's judgment.

As grounds for reversal, defendants maintain that (1) two parties, William C. Nicholus, d/b/a Enterprise Sales Co., and Melvin Bressler were improperly aligned by the trial court as defendants; (2) that Louis Rifkin and Pro's, Inc., were necessary parties to this action and were not joined; (3) that the Evans guaranty was not assignable, and in addition, the assignment of the guaranty in this case materially altered the terms of Evans' obligation as guarantor resulting in a discharge of the guarantor; (4) that the Grossman note was not negotiated to plaintiffs; (5) that plaintiffs were not holders in due course of these instruments, and (6) that the trial court made several erroneous evidentiary rulings during the trial.

Plaintiffs, in their cross-appeal, maintain that they are holders in due course for the full amount of the Grossman note and Evans guaranty. Consequently, plaintiffs seek a remand to the trial court for purposes of receiving a judgment for the full amount of the note and guaranty.

The pertinent facts are as follows:

In December of 1970, William C. Nicholus, d/b/a Enterprise Sales Co., Melvin Bressler and plaintiffs became shareholders of Pro's. One year later, Federal litigation commenced between Pro's and plaintiffs along with Bressler and Nicholus. In settlement of this litigation, the parties entered into an agreement in April 1973 whereby Pro's paid plaintiffs, Bressler and Nicholus, a $15,000 cashier's check and executed a promissory note for $60,000 which was secured by a promissory note of $135,000 made by Grossman and payable to the order of Pro's and a guaranty by Evans of the Grossman note. Both the Grossman note and the Evans guaranty were negotiated by Pro's to plaintiffs, Bressler and Nicholus. In return for this consideration, plaintiffs, Bressler and Nicholus, executed a release of their claims against Pro's and transferred to Pro's their shares in that corporation. After the note and guaranty were placed into an escrow with Chicago Title and Trust Company, plaintiffs' attorney and agent, Philip Bloom, sent Grossman and Evans notices of negotiation by Pro's of the note and guaranty. The notices also included the name of Louis Rifkin as an endorsee of the note and guaranty. However, neither the note nor the guaranty were actually endorsed to Rifkin.

In January 1974 Grossman refused to make further payment to Pro's on Grossman's note of $135,000 whereupon Pro's terminated its payments to plaintiffs under the $60,000 promissory note. Following Pro's default, Bloom notified the escrowee, Chicago Title and Trust, of Pro's default, and Chicago Title and Trust, consistent with the terms of the escrow agreement, gave Bloom possession of the Grossman note and the Evans guaranty. Plaintiffs subsequently brought the instant action on the note and guaranty.

At this point, a brief procedural history of this action is warranted. On December 6, 1974, nine months after the complaint was filed, plaintiffs moved to join William C. Nicholus, d/b/a Enterprise Sales Co., and Melvin Bressler as plaintiffs. The trial court on February 18, 1975, granted this motion nunc pro tunc to December 6, 1974. On February 4, 1975, defendants filed their answer including affirmative defenses to the plaintiffs' complaint. Defendants denied that plaintiffs were holders of these instruments; that plaintiffs gave value for the instruments; and that plaintiffs received the instruments in good faith and without notice of any defenses against the instruments. As affirmative defenses, defendants claimed that Louis Rifkin is a necessary party to the present action; that the Evans guaranty is not assignable; and that the purported assignment of the Evans guaranty materially altered the guarantor's obligation, thereby resulting in a discharge of the guarantor. Finally, defendants assert that the note and guaranty were issued to Pro's as a result of significant misrepresentations which would constitute valid defenses against a mere holder.

Throughout the discovery stage of this litigation, defendants sought repeatedly to obtain the deposition of Bressler and Nicholus. Neither plaintiff responded to the notices of deposition. In March 1978, plaintiffs' attorney moved to re-align Bressler and Nicholus as defendants under section 23 of the Civil Practice Act (Ill. Rev. Stat. 1977, ch. 110, par. 23), which motion was denied on March 7, 1978. One week later, defendants moved for sanctions against plaintiffs because of the refusal of Bressler and Nicholus to appear for deposition. After hearing the arguments of both sides, the trial court on March 14, 1978, entered an order realigning Bressler and Nicholus as defendants, confessing judgments against Bressler and Nicholus, and barring Bressler and Nicholus from providing testimony favorable to the remaining plaintiffs. Thereafter, plaintiffs' counsel, Philip Bloom, moved to withdraw as counsel for Bressler and Nicholus. Bloom informed the court that Bressler had requested Bloom's firm to withdraw as counsel, and that Bressler had assigned all his interest in the Grossman note and the Evans guaranty to the remaining plaintiffs, Schranz, Redhead and Sebrowski. A written assignment by Bressler was attached to the motion. Bloom also represented to the court that he had been unable to contact Nicholus and that he believed Nicholus has either left the jurisdiction permanently, or is dead. The trial court granted the motion to withdraw as counsel for Bressler and Nicholus.

Finally, immediately prior to trial on August 7, 1978, the trial court found as a matter of law that the Evans guaranty was assignable. The trial court also concluded that the terms of the assignment of the Evans guaranty from Pro's to the plaintiffs did not materially alter Evans' obligation as guarantor, and therefore did not discharge Evans' obligation as guarantor of the Grossman note.

• 1 The resolution of this case rests in part on several documents which were introduced into evidence at the trial below. We note that it is the burden of the appellant to furnish a record sufficient to establish reversible error. (Sandberg v. American Machining Co. (1975), 31 Ill. App.3d 449, 334 N.E.2d 246.) Where the record is lacking, a reviewing court will indulge every presumption favorable to the judgment or order appealed from. (Sandberg.) Here, the appellant has failed to include the agreement embodying the settlement of the Federal litigation between plaintiffs and Pro's and the escrow agreement in the record before this court. Consequently, we will assume that the terms of both the settlement agreement and the escrow agreement support the trial court's ultimate findings in this case.

The first issue we face is defendants' contention that the trial court's order of March 14, 1978, re-aligning Bressler and Nicholus as defendants was improper. This order came as a result of the defendants' motion for sanctions under Supreme Court Rule 219 (Ill. Rev. Stat. 1977, ch. 110A, par. 219). Since Bressler and Nicholus had failed to appear for their depositions, the trial court believed severe sanctions were required. The trial court, however, was concerned by the requirement of section 3-116 of the Uniform Commercial Code (Ill. Rev. Stat. 1977, ch. 26, par. 3-116). Section 3-116 of the Uniform Commercial Code provides in pertinent part:

"An instrument payable to the order of two or more persons * * *

(b) if not in the alternative is payable to all of them and may be negotiated, discharged or enforced only by all of them." (Ill. Rev. Stat. 1977, ch. 26, par. 3-116.)

The trial court apparently felt that it could not dismiss these two parties without eliminating the remaining plaintiffs' cause of action by virtue of section 3-116 of the Commercial Code. Consequently, the trial court attempted to sanction Bressler and Nicholus as severely as possible without dismissing them from the suit. This was accomplished by the March 14, 1978, order.

• 2 In our view, the purpose of section 3-116 is to protect the interest of all parties entitled to payment under the instrument. (See Kanelos v. Tzamalis (1966), 73 Ill. App.2d 283, 219 N.E.2d 755.) By this rule, an instrument payable to two or more persons, and not in the alternative, could only be enforced jointly by those persons. While the trial court's action in this case of re-aligning these parties was unusual, we believe it in no way violated the purpose of section 3-116 or prejudiced the interests of the defendants.

First, Bressler and Nicholus were joined as plaintiffs to this suit and thus had the opportunity to reap the benefits of enforcing the note and guaranty. They voluntarily chose not to participate in this litigation. Their interest in the note and guaranty was not denied them by a clandestine act of less than all the parties seeking to enforce the instruments, but rather by their own indifference. In fact, Bressler assigned his interest in the instruments to the remaining plaintiffs. The purpose of section 3-116, to protect the interest of all parties, has not been violated.

• 3 Second, the trial court's order of March 14, 1978, did not prejudice these defendants. Before reaching defendants' main argument on this point, we must dispose of their contention that the trial court's order confessing judgment against Bressler and Nicholus without notice was improper. Simply stated, defendants lack standing to contest an order which solely affects the interests of other parties. The propriety of this order could only be contested by Bressler or Nicholus. No prejudice or harm resulted to defendants.

Defendants' more significant argument is that the trial court's order barring the testimony of Bressler and Nicholus greatly impaired their ability to show that either the plaintiffs, Bressler, or Nicholus had notice of available defenses against the Grossman note and Evans guaranty. This notice, of course, would defeat plaintiffs' claim to holder in due course status. Our review of the hearings between counsel and the court on March 14, 1978, and on August 7, 1978, reveals that the trial court did not prohibit defendants from obtaining the testimony of Bressler or Nicholus. On both occasions, the trial court stressed that Bressler and Nicholus would only be prevented from providing testimony favorable to the remaining plaintiffs. Defendants were free to call them on their own behalf, and if necessary, they could be treated as hostile witnesses. (See Ill. Rev. Stat. 1977, ch. 110A, par. 238.) We also note that the record is barren as to what steps defendants took to obtain the testimony of Bressler and Nicholus once they were re-aligned as defendants. Consequently, there remains the possibility that defendants could have obtained the testimony of Bressler and Nicholus had they chosen to do so. In addition, defendants provided no specific factual offer of proof describing the relevant and significant testimony which could be provided by Bressler and Nicholus. General references that Bressler and Nicholus had notice of defenses to the note and guaranty are not sufficient to show prejudice. The trial court's order of March 14, 1978, does not constitute reversible error.

• 4 Defendants' second contention on appeal is that Louis Rifkin was a necessary party to this action. In reaching this conclusion, defendants rely on the reference in the notices of negotiation to Rifkin as an endorsee of these instruments; Rifkin's involvement in the Federal litigation between Pro's and plaintiffs; and Rifkin's participation in the settlement agreement between Pro's and plaintiffs. Thus, they reason that Rifkin had an interest in the note which required him to be joined as a plaintiff in this action. (Ill. Rev. Stat. 1977, ch. 26, par. 3-116.) Section 3-116 requires only that an instrument made payable to two or more persons, not in the alternative, must be jointly enforced by all the parties. In this case, the instruments were endorsed to Schranz, Redhead, Sebrowski, Nicholus, d/b/a Enterprise Sales Co., and Bressler. The instruments were not endorsed to Rifkin. Moreover, according to Bloom, the inclusion of Rifkin's name as an endorsee in the notice of negotiation was a clerical mistake. We hold that Louis Rifkin was not a necessary party to this action under section 3-116 (Ill. Rev. Stat. 1977, ch. 26, par. 3-116).

• 5 Defendants' third contention is that the Evans guaranty was not assignable. The general rule in Illinois is that guaranties are nonassignable. (Second National Bank v. Diefendorf (1878), 90 Ill. 396.) This rule, however, is not applied automatically. Rather, the courts> will examine the facts of each case to determine whether the policy underlying the rule is applicable. The rule is a corollary of general contract principles that a party may be held only to the precise obligation which it undertook. (See Essex International, Inc. v. Clamage (7th Cir. 1971), 440 F.2d 547.) Thus, the assignment of the guaranty will not discharge the guarantor unless the "essentials of the original contact [of guaranty] have * * * been changed and the performance required of the principal is * * * materially different from that first contemplated." (Claude Southern Corp. v. Henry's Drive-In, Inc. (1964), 51 Ill. App.2d 289, 301-02, 201 N.E.2d 127, 133.) Defendants here contend that the simple assignment of the guaranty pursuant to a contract between the creditor-guarantee (Pro's) and third parties (plaintiffs) resulted in a material alteration of the guarantor's (Evans') obligation. We do not agree. As in Claude Southern Corp. neither the obligation of the guarantor (Evans) nor the extension of credit by the creditor (Pro's) nor the obligation of the principal (Grossman) was in any way altered by this assignment. Grossman is still obligated to make its payments to Pro's under the $135,000 note; Pro's extension of credit on the Grossman note remains; and only the direction of payment by Evans has been altered, not its obligation to pay. No material alteration of the guarantor's obligation has taken place. Thus, we hold that the simple assignment of the guaranty from Pro's to plaintiffs does not discharge Evans.

Defendants also contend that more than a simple assignment of the guaranty is involved in this case; the notice of negotiation of the Evans guaranty eliminated the option of prepayment and thus materially altered Evans obligation as guarantor. They point out that a material alteration of the guarantor's obligation will result in a discharge of the guarantor. (Claude Southern Corp. v. Henry's Drive-In, Inc. (1964), 51 Ill. App.2d 289, 201 N.E.2d 127.) In the case at bar, the underlying promissory note between Grossman and Pro's granted Grossman "full right of prepayment without penalty." By this language, Grossman could accelerate the payments and thus complete payment of the note before its maturity. Regardless of whether Grossman chose to exercise its prepayment option, Evans' duty as guarantor remained unaltered. It became liable to Pro's only when Grossman failed to make a timely payment to Pro's. The purported elimination of the acceleration clause by the notice of negotiation did not affect Evans; it remained liable only upon the default of Grossman. Thus, no material alteration of Evans' obligation occurred in this case.

Defendants next maintain that plaintiffs were not holders of a negotiable instrument. More specifically, they claim that the Grossman note was not negotiated to plaintiffs because of a lack of delivery. A holder has possession of an instrument which has been properly negotiated to him. (Ill. Rev. Stat. 1977, ch. 26, par. 1-201(20); Ill. Rev. Stat. 1977, ch. 26, par. 3-302.) Negotiation is defined as:

"(1) Negotiation is the transfer of an instrument in such form that the transferee becomes a holder. If the instrument is payable to order it is negotiated by delivery with any necessary endorsement; if payable to bearer it is negotiated by delivery." (Ill. Rev. Stat. 1977, ch. 26, par. 3-302.)

They do not contest that the Grossman note was payable to order (Ill. Rev. Stat. 1977, ch. 26, par. 3-110) and was properly indorsed by Pro's. Thus, the only question is ...


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