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Exchange Nat'l Bank v. Degraff





Appeal from the Circuit Court of Cook County; the Hon. Brian B. Duff, Judge, presiding.


Rehearing denied November 17, 1982.

Plaintiff, Exchange National Bank of Chicago (Bank), appeals from a judgment entered against it upon a jury's verdict that found defendants not personally liable for certain loan guarantees. The Bank contends that: (1) the trial court erroneously admitted parol evidence regarding conversations between the parties prior to defendants' execution of the guarantees; (2) the trial court erroneously permitted cross-examination of a Bank officer regarding his alleged conflict of interest in the corporate debtor; (3) the trial court erred in giving certain jury instructions over plaintiff's objections; (4) the trial court erred in refusing to direct a verdict against defendants; and (5) the trial court erroneously disqualified a witness without conducting a hearing. Defendants cross-appeal for certain expenses and attorney fees. We reverse the judgment and remand the cause for a new trial because we find that several jury instructions were improperly given.

The pending litigation concerns the liability of defendants Melvin DeGraff, Burton Kaplan, and Anthony Corso, as guarantors of the Bank's loans to Tulane Industries. Defendants were shareholders of Tulane, which was dissolved in 1974.

According to the parties' stipulations, Tulane Industries, Inc., was organized on or about March 28, 1972. Defendants signed certain guarantee forms furnished by the Bank, which initially extended credit to Tulane on November 1, 1972, in the amount of $60,000. Defendants identified their signatures on the printed forms, which they said were exact copies "in their present condition," but denied that the copies of the guarantees were in the same condition as when they were signed. The stipulation further stated that the initial $60,000 loan had been repaid, as had eight others in varying amounts over a period of time from January 1973 to September 1973. Four loans to Tulane remained outstanding at the time the stipulation was adopted, totaling over $137,000 in principal and $79,500 in interest, which was accruing at the rate of $39.54 per day. In December 1974, the Secretary of State dissolved Tulane.

According to testimony adduced at trial, Tulane Industries in 1971 was a dormant company that Simon Bernstein had organized. He met Richard Curtis, a businessman who had developed and sold several hundred laundromat facilities in several States. The two men agreed to activate Tulane as a company that would develop and sell laundromat facilities at various locations. Tulane would sell equipment to the laundromats, but once they were in operation, separate partnerships would be formed to buy the facilities and Tulane would not own or operate them. In addition to Bernstein and Curtis, the other shareholders in Tulane were Burton Sapoznick and Samuel Beglin, not parties to this appeal, and defendants DeGraff, Kaplan, and Corso.

At its inception, the assets of Tulane included an airplane, approximately $100,000 in cash, and some laundry equipment. To obtain further operating capital, DeGraff arranged a meeting between Curtis, Tulane's president, and Henry Hindin, one of the Bank's vice presidents. DeGraff, a certified public accountant, knew Hindin as a client of DeGraff's accounting firm. Hindin's duties included bringing new business to the Bank. Hindin introduced Curtis to Bruce Hepner, a loan officer at the Bank, who handled the Tulane account from 1972 until he was notified that the corporation would be unable to make further payments.

Hepner testified that after a brief meeting with Curtis, he met with DeGraff, Curtis, Corso, and possibly Kaplan and Hindin in the latter part of 1972. Others were present at the meeting, but Hepner could not recall specific names. At this meeting the loan to Tulane was discussed. Regarding the guarantees, Hepner testified that he could only recall someone asking him if the guarantees could be limited and he replied in the negative. Hepner identified the guarantee forms signed by defendants and stated that he gave out blank forms at the meeting. Although he did eventually receive signed and completed forms from defendants, he was unsure as to the dates that he received the forms. He thought Corso's had been completed and returned during the meting. Hepner also admitted that in his deposition he had testified that he did not specifically recall when the guarantees were actually received by the Bank and that it was possible that some of them may have been received after the Bank disbursed the initial loan to Tulane. Hepner further testified that in 1972, the Bank did not have a separate printed form for limited guarantees. If the Bank agreed to grant a limited guarantee, the regular form would be given to in-house counsel for inclusion of the necessary wording.

Defense witnesses testified as follows. Curtis related that he and DeGraff met with Hepner and Hindin at the Bank in late 1972 to discuss the Tulane loan. Hepner advised that the loan would be approved if the shareholders agreed to guarantee the loans. DeGraff told Hepner that he lacked authority to accept on behalf of the other shareholders but that he would discuss the matter with them and report back to the Bank.

Shortly thereafter, the Tulane shareholders met. Present were Curtis, DeGraff, Kaplan, Corso, Sapoznick, and Bernstein, via a speaker phone. Hindin was also present during part of the meeting. At this meeting, it was suggested that the shareholders provide guarantees limited to their pro-rata stock ownership. Alternatively, it was suggested that if the Bank did not find the pro-rata proposal acceptable, they would agree to guarantee a maximum of $60,000 aggregate, to cover the first loan. According to DeGraff's testimony at trial, Hindin was present during these discussions and, when asked for his opinion, told them to present their proposals to the Bank. The other shareholders agreed to these alternatives and directed DeGraff and Curtis to present them to the Bank.

In a subsequent meeting with Hepner, DeGraff, Curtis and Corso, Hepner rejected the pro-rata suggestion but agreed to accept the $60,000 limitation. Further, Hepner stated that any future loans to Tulane would be made upon the financial strength of the corporation.

All three defendants testified as to their understanding that their personal aggregate liability was limited to a maximum $60,000 of total corporate indebtedness. All three signed the forms in blank; that is, they testified that when they returned the forms, nothing except their signatures was written on the guarantees. Curtis testified that he returned his form in November, after the initial loan had been disbursed. Kaplan testified that he authorized Curtis to return his signed form to the Bank with the express understanding that his liability would be limited to $60,000. DeGraff testified that he did not sign his form until December of 1972 or January of 1973, but that Hepner had asked him to backdate the form to November 1, the date of the first loan. Corso testified that he signed his form several weeks after November 1, 1972, although the form bears that date. He also testified that Hepner told him personally that his liability under the guarantee would be limited to $60,000.

Defendants also introduced into evidence two standard bank confirmation inquiry forms relating to Tulane's account status at the Bank as of July 31, 1973, and December 31, 1973. The July inquiry indicated that the loans then outstanding were unsecured. The December inquiry indicated that Tulane's loan liability as of that date was secured by a life insurance policy. Neither inquiry referred to any guarantees. According to Hepner's testimony, a guarantee was considered to be a form of security for a loan. A 3-year employee of the Bank, George Krumm, identified the Bank inquiry forms as having been completed under his supervision.

Plaintiff called Henry Hindin to testify in rebuttal and moved to bar any cross-examination regarding his investment in partnerships created by Tulane Industries. Hindin testified that he did not remember introducing defendants to Hepner, but stated that it was possible that he had. He also denied participating in any discussions of loans to Tulane in 1972. The court denied plaintiff's motion to bar cross-examination regarding Hindin's interest in four of the laundromats developed by Tulane and Hindin admitted that he did not disclose his interests to the Bank on the disclosure forms he was required to complete. He denied any conflict of interest or wrongdoing. He also said that the Bank's in-house counsel agreed that he had done nothing wrong in investing in the laundromats.

Both sides moved for a directed verdict and the court reserved its ruling. After a lengthy instruction conference and closing arguments, the jury returned its verdict in favor of defendants.



In its motion in limine to exclude certain evidence, the Bank urged the trial court to construe the signed forms as the final and complete expression of the contracts of guarantee. The Bank's printed forms include the following language and blanks:


FOR VALUE RECEIVED and in consideration of advances, credit, or other financial accommodation concurrently herewith being afforded or hereafter to be afforded to ______________ _______________________________________ (hereinafter called the `Debtor'), by EXCHANGE NATIONAL BANK OF CHICAGO, or its successors or assigned (hereinafter called the `Bank'), the undersigned hereby guarantees the full and prompt payment to the Bank at maturity and at all times hereafter of all indebtedness, obligations and liabilities of every kind and nature of the Debtor to the Bank (including all indebtedness, obligations and liabilities of partnerships, created or arising while the Debtor may have been or may be a member thereof), howsoever evidenced, whether now existing or hereafter created or arising, direct or indirect, absolute or contingent, or joint or several, and howsoever owned, held or acquired, whether through discount, overdraft, purchase, direct loan or as collateral, or otherwise; and the undersigned further agrees to pay all expenses (including court costs and attorneys' fees), paid or incurred by the Bank in endeavoring to collect such indebtedness, obligations and liabilities, or any part thereof, and to enforce this guaranty.

The undersigned's liability hereunder shall in no wise be affected or impaired by any of the following (any or all of which may be done or omitted by the Bank without notice to any one and irrespective of whether the guaranteed debt shall be increased or decreased thereby), namely: (a) any acceptance by the Bank of any security or collateral for, or other guarantors or obligors upon, any guaranteed debt; (b) any compromise, settlement, surrender, release, discharge, renewal, extension, alteration, exchange, sale, pledge or other disposition of, or substitution for, or indulgence with respect to, or failure, neglect or omission to realize upon, or to enforce or exercise any liens or rights of appropriation or other rights with respect to, any guaranteed debt or any security or collateral therefor or any claims against any person or persons primarily or secondarily liable thereon; (c) the granting of credit from time to time by the Bank to the Debtor in excess of the amount, if any, to which the right of recovery under this guaranty is limited; or (d) any act of commission or omission of any kind or at any time upon the part of the Bank with respect to any matter whatsoever, other than the execution and delivery by the Bank to the undersigned of any express written release or cancellation of this guaranty.

SIGNED AND DELIVERED by the undersigned, at Chicago, Illinois, this ____ day of ____, 19__ ___________________________"

Plaintiff argues that the trial court violated the parol evidence rule by erroneously admitting evidence of prior negotiations between the parties. According to defendants' testimony, the Bank loan officer, Hepner, agreed to the $60,000 limitation on the shareholders' liability for the corporate indebtedness. Plaintiff contends, however, that this testimony should not have been admitted because the signed guarantee forms are facially complete, unlimited and unconditional. Consequently, defendants' evidence of the limitation impermissibly contradicted the terms of the instrument.

• 1 In response, defendants raise several grounds to justify the admission of the evidence. Initially, they argue that plaintiff has waived the issue. We disagree, however, because plaintiff made a motion in limine to exclude the extrinsic evidence relating to the guarantees. Therefore, the Bank preserved its objection to the introduction of the extrinsic evidence. We do agree with defendants, however, that the trial court did not abuse its discretion in admitting the testimony. Defendants' primary theory is that the guarantees never became binding contracts because their effectiveness was conditioned on the Bank's agreement to ...

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