APPEAL from the Circuit Court of Du Page County; the Hon.
HARRY D. STROUSE, Judge, presiding.
JUSTICE REINHARD DELIVERED THE OPINION OF THE COURT:
Plaintiff, the Gary-Wheaton Bank (bank), brought this suit against the defendant, Henry J. Burt, Jr., seeking to collect on a "duplicate original" promissory note given to the bank as collateral for a loan it made to Little Bear, Ltd. The bank alleged that it had loaned money to Little Bear, Ltd., a limited partnership of which Burt was a limited partner, taking as collateral an assignment of this note which was payable to Little Bear, Ltd., by Burt as payor. The loan was not paid when it became due, and the bank obtained a default judgment against Little Bear, Ltd. for the amount of the loan plus interest. That judgment was not paid, and the bank in this action is seeking payment from Burt alone. Following a bench trial, the court found for Burt and against the bank.
The evidence is substantially undisputed. It shows that in 1973, Burt purchased, in his name alone, a three-tenths interest in Little Bear, Ltd., a limited partnership. The interest which was in Burt's name was in fact a joint venture consisting of Burt, James Knippen, Fredrick Noorlag and Paul Matson. In June 1974, Burt acquired another three-tenths interest. For each three-tenths interest, Burt paid $30,000 cash and executed a nonnegotiable note for $121,200 which was in his name alone. The notes were to be paid in annual installments of $24,240 over a period of five years. The first note, the subject of this suit, was executed on December 15, 1973, and the first installment was due November 15, 1974. The second note was executed June 15, 1974, and the first installment was due December 1, 1974. The notes were made payable to Little Bear, Ltd.
Colorado Little Bear Company, Inc., was the general partner of Little Bear, Ltd. Donald Janson was the president and shareholder of Colorado Little Bear Company, Inc. The stated purpose of Little Bear, Ltd., was to purchase and develop land in Colorado, specifically, 290 acres known as the Hagemeister Ranch. In late 1973 or early 1974, Donald Janson, acting for Little Bear, Ltd., bought the Hagemeister property under contract.
In June 1975, Janson contacted Burt about seeking a loan for Little Bear, Ltd., so it could meet its obligation on the next installment due on the Hagemeister property contract. Burt had thought the payments from his and the other limited partners' capital notes were sufficient to pay the installments on the Hagemeister contract when they fell due. When Burt asked Janson about this, Janson told him that he had run into unexpected expenses when trying to get the Hagemeister property rezoned. Janson also informed Burt that he was negotiating for the purchase of a piece of property contiguous to the Hagemeister property which already had the suitable zoning.
Burt agreed to contact Jerry Bradshaw, president of the Gary-Wheaton Bank, to arrange a meeting to discuss a loan. On June 9, 1975, Burt and Janson met with Bradshaw to discuss the loan. Charles Thorson, vice-president and Loan Division manager, was also present at the meeting. The amount of the loan discussed was $38,000. It was to be used to make an installment payment under the land purchase contract with Hagemeister.
Since Burt's father was a director of the bank and Burt's law firm had represented the bank from time to time in the past, Bradshaw wanted to act favorably on the loan request. When it was agreed that the loan would be made, Bradshaw gave Thorson the authority to structure the loan as he saw fit. Thorson requested that Burt personally guarantee the note evidencing the loan, which Burt refused to do. Burt agreed that the note which he had executed December 15, 1973, be used as collateral for the loan. Thorson requested an assignment of the note from Little Bear, Ltd., and delivery of the original note for their files. Thorson also requested financial statements of Janson, Little Bear, Ltd. and Burt. The loan was to be due in six months, on December 18, 1975, and to be repaid from amounts due the partnership as evidenced by Burt's note.
Janson took the financial statements and a photocopy of Burt's note to Thorson's office on June 17, 1975. At that time Thorson requested the original of the note. Janson then went to Burt and requested that he execute a duplicate original of the note as the original was in safe keeping in Colorado. Burt said Janson told him he wanted to expedite matters and believed it would take too long for the original note to arrive from Colorado. Burt then agreed to execute the duplicate on the condition that the words "DUPLICATE ORIGINAL" were typed across the face "so that the Bank would know that that was not the note that they agreed to accept as collateral." Burt further told Janson that he conditioned the signing of the duplicate original on the ground that the monies for the loan would not be disbursed until the bank received the original note. Burt signed an unsigned photocopy of the original note which he had executed on December 15, 1973, and typed at the top "DUPLICATE ORIGINAL."
Thorson testified that Janson returned on June 18, 1975, with the assignment of the note and the "duplicate original" note. Janson told Thorson the original note was safe in Colorado. However, he never told Thorson to delay disbursement of the funds until the original was presented. The bank accepted the note marked "DUPLICATE ORIGINAL" as collateral for the loan. The bank paid $40,000 to Colorado Little Bear Company, Inc., in check number 018643 dated June 18, 1975. Thorson never tried to obtain the original of the note which had been pledged to the bank.
Burt testified that he was not actively involved in any transactions negotiated on behalf of Little Bear, Ltd. He believed that his note and the notes of the other limited partners were the only assets of the partnership. Burt made no representations at the June 9, 1975, meeting concerning Little Bear, Ltd.'s financial condition. Also, Burt did not know his December 15, 1973, note had in fact been previously pledged by Janson to Hans Hagemeister as security for the payments on the land contract.
Within one or two months after the bank had loaned Little Bear, Ltd., the money, Burt learned that his note had been used to secure the Hagemeister contract. Both Burt and Thorson testified that Burt contacted Thorson in the fall of 1975 to warn him of financial problems of Little Bear, Ltd. Prior to Burt's warning, Thorson had been told by another bank employee that Hawthorne Bank was involved in litigation concerning capital contribution notes of Little Bear, Ltd. *fn1
Hagemeister sued Burt and the other limited partners of Little Bear, Ltd., on Burt's original note in Federal district court in Chicago. There was a release of the note pursuant to a settlement in excess of $100,000. Burt paid his share of the settlement, which amounted to $36,500. Burt was also involved in another case with Hawthorne Bank concerning the second note he had executed. The Gary-Wheaton bank was not involved in either of these suits. In an order dated June 13, 1977, in the litigation with Hawthorne Bank, Burt was relieved of all responsibility to the limited partnership.
Bradshaw testified that at the time the loan was finalized by Thorson, that he, Bradshaw, did not know that the note which was used for collateral was a duplicate original. In his experience as a banker, he has never seen as collateral a note marked "duplicate original." Thorson also testified that he had never seen a duplicate original promissory note used as collateral. Burt called William J. Davis to testify as a banking expert. After a hypothetical question had been presented to him, Davis testified that good banking practice requires that you should inquire into the whereabouts of the original document. Davis believed that here there was a deviation from reasonable banking standards in effect at the time of the transaction.
The trial court found against the bank on all three of its theories stated in its second amended complaint which were based upon (1) an obligation created by the "duplicate original" note; (2) an implied contract which guaranteed the loan to Little Bear, Ltd.; and (3) an actual or constructive fraud by Burt. On appeal the bank raises the following issues: (1) that the court erred in not finding a constructive fraud; (2) that the court erred in not finding an implied contract; (3) that the court erred in not finding an obligation was created by the "duplicate original" note; (4) that Burt was estopped from raising any defense against the validity of the "duplicate original" note; (5) that two of Burt's affirmative defenses, failure of consideration for the note and collateral estoppel by a judgment entered in ...