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Lawndale Steel Co. v. Appel





APPEAL from the Circuit Court of Lake County; the Hon. ROBERT K. McQUEEN, Judge, presiding.


This is an action by a creditor to collect on a contract of guaranty. After a bench trial, the Circuit Court of Lake County directed a verdict in favor of the defendant-guarantor. From this verdict, plaintiff appeals.

Lawndale Steel Company is engaged in the business of selling steel and steel products. Joe Appel is a steel broker. During the months of June and July 1973 Appel approached Lawndale on behalf of himself and Modular Technology Corporation to structure a business deal between the parties. Appel sought a commitment from Lawndale to supply to Modular all the steel it would need for a construction project in Lubbock, Texas. In return, Appel would receive a commission on the sale of the steel. Lawndale had never dealt with Modular before, and investigation showed that it was not a particularly strong company from a financial standpoint. In its negotiations with Modular, Lawndale therefore endeavored to secure guarantees that payment would be made.

A contract (hereinafter the Agreement) was initially prepared in June 1973. Although there is much confusion in the record with respect to the dating or post-dating of the Agreement, Appel testified that he signed the Agreement in June. Among other terms, the Agreement required that Modular purchase certain quantities of steel specified in purchase orders attached to the Agreement, at a rate of $13/cwt; that payment was to be made upon delivery; and that any future modification of terms be in writing. In addition, the Agreement provided:

"B. To secure payment, Buyer shall deliver an irrevocable, standby letter of credit drawn on the State Bank of St. Charles in the amount of Eighty Thousand dollars ($80,000.00) in favor of Seller, which letter of credit shall be paid over to Seller in the event that the full purchase price is not paid within forty-five (45) days from the date of invoice by Seller to Buyer. Said letter of credit shall be unconditional and in the event that the final delivery has not been made, or that the full purchase price has not been paid within five (5) days prior to the expiration of the letter of credit, Buyer shall either pay the full amount due in cash or shall substitute a new letter of credit on the same terms and conditions and for the same period of time or in the event that Buyer shall not so pay in cash or replace said letter of credit, Seller may, at its sole discretion, cash the then existing letter of credit for the full amount of the purchase price; and

C. Further, Buyer and Joe Appel shall personally guarantee the obligation it undertakes by corporate signature on appropriate notes, which notes shall be further guaranteed by the President of Buyer personally."

On August 14, 1973, the original Agreement was amended to make payment due within 45 days of Lawndale's invoice (rather than upon delivery) in order to comply with the terms of a letter of credit obtained by Modular. The amendment was signed by the presidents of both Lawndale and Modular, but not by Appel. Although Appel could not remember if he saw the amendment, the president of Lawndale, Stuart Barnett, testified that it was Appel who took the Agreement with the amendment to Modular for signature. Barnett added that Appel must have been aware of it since he spent "nearly every day through the entire running of this contract in our office, either directly involved with the Modular Technology matter, or using office space, or being generally concerned with the order. He was intimately involved with everything that was going on with the contract." Appel, too, admitted that he was often at Lawndale, until a "certail fall-out" at an unspecified time.

Upon execution of the Agreement and amendment, Lawndale began shipping steel to Modular, which paid for the steel according to the terms of the Agreement. Neither Appel nor the president of Modular, however, ever signed the "appropriate notes" specified in the Agreement, personally guaranteeing the contract.

In mid-1974, because of price increases of raw steel at the mill, Lawndale sought a modification in the contract price. Letters confirming an increase from $13/cwt to $17.56/cwt were exchanged between Lawndale and Modular on May 10 and July 31. Appel did not sign the modification, nor was he asked to. In their testimony, Appel and Barnett disagreed as to whether Appel ever saw the letters, although Appel admitted that he might have had a conversation with Barnett on the subject of price increases.

In August the final three orders of steel under the contract were delivered to Modular pursuant to the new price. On August 31 the letter of credit expired. When no payment for the final orders was received, Barnett, in October or November 1974, called Modular and arranged for interest at the rate of 1%/month on the amount due. According to Barnett, Appel listened on another telephone in Barnett's office to this conversation. Appel, however, denies any knowledge of the conversation.

No further payments were made by Modular. In February 1975 Modular filed a petition in bankruptcy. At the time of the August 1974 shipments, it was indebted to Lawndale for $18,976.95. Lawndale has since received $6,774.25 from the bankruptcy court, leaving $12,202.70 outstanding.

Based upon this evidence, the trial court found that "the guarantee of the Defendant as to instant contract was conditioned upon Plaintiff exercising its contractual right to hold an irrevocable standby letter of credit drawn on the State Bank of St. Charles to first secure payment." Accordingly, judgment was entered in favor of defendant Appel. No findings as to Appel's other defenses were made.


• 1, 2 Plaintiff first challenges the trial court's finding that Appel's guaranty was conditional. A guaranty may be absolute or conditional. A conditional guaranty requires the happening of some contingent event before the guarantor will be liable on his guaranty. (State Bank v. Cirivello (1978), 74 Ill.2d 426, 386 N.E.2d 43.) An absolute guaranty is an unconditional undertaking on the part of the guarantor that the person primarily obligated will pay or otherwise perform. Such guarantor is liable immediately upon default of the principal, without notice. An absolute guaranty, unlike a conditional one, imposes no duty upon the creditor ...

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