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Bernardi Bros. Inc. v. Great Lakes Distributing

July 28, 1983


From the United States District Court for the Northern District of Illinois, Eastern Division. No. 81 C 5084 -- George N. Leighton, Judge.

Cummings, Chief Judge, Cudahy and Posner, Circuit Judges.

Author: Cudahy

CUDAHY, Circuit Judge.

This is an appeal from an order granting summary judgment for plaintiff Bernardi Brothers Incorporated ("Bernardi") and finding defendant Great Lakes Distributing Incorporated ("Great Lakes") liable on a contract of guaranty. A cross-motion by Great Lakes for summary judgment was denied. Jurisdiction is based on diversity of citizenship. 28 U.S.C. § 1332(a)(1).*fn1


Bernardi manufactures commercial car wash equipment, and Great Lakes distributes Bernardi's products. In the fall of 1978, Andres Estevez ("Estevez"), with the assistance of Great Lakes, submitted a proposal to plaintiff for the purchase of car wash equipment. Estevez planned to open and operate a car wash business in Chicago, Illinois with the equipment to be purchased.

The anticipated transaction involved installment payments totalling approximately $100,000 over a five year period. Bernardi intended to "factor," or assign, this account receivable to CIT Corporation ("CIT"). Because of the length of the term of the installment note, both Bernardi and CIT wanted Great Lakes to guarantee the note. On February 15, 1979, defendant executed a written guaranty covering the extension of credit to the buyer, denominated "Andre Estevez Car Wash," an unincorporated sole proprietorship.

The equipment sales contract, in the form of a security agreement, was not executed until March 26, 1979. In the interim between the Great Lakes' guaranty and the execution of the security agreement, Estevez incorporated his business and named it "Finest Car Wash, Inc." ("Finest"). The security agreement listed "Finest Car Wash, Inc." as the debtor, and was signed by Estevez in his capacity as president of Finest. Affidavits filed by the parties in support of their respective motions for summary judgment indicate that Great Lakes was fully aware of these events as they transpired. The affidavit of Robert Jabaay, president of Great Lakes at the time of these events, states: "That at the time the guaranty agreement was signed, [he] was not aware that the sale was being made to anyone other than Andres Estevez." The affidavit of John Witmer, the officer of Bernardi responsible for the transaction in question, does not contradict this, but simply states that: "Both Great Lakes and Mr. Jabaay were well aware of this name selection [the incorporation and name change to Finest], at and after the execution of the Bernardi/Finest Car Wash, Inc. sale contract." These statements are not in conflict. Mr. Jabaay could not have known of the incorporation and name change at the time his guaranty was given, since these developments had not yet occurred. And Mr. Witmer's statement does not cast doubt on Mr. Jabaay's lack of knowledge at the time the guaranty was given.

At the same time the equipment sales contract was executed, a second guaranty was also executed. This document guaranteed an extension of credit to "Finest Car Wash, Inc." of Chicago, Illinois. This printed-form guaranty had the following notation at the bottom: "Note: Insert exact name of company in top blank line, with city and state. Individual guarantors must sign guaranty without titles. Sign simply 'John Smith,' not 'John Smith, President.'" A line on the form was designated "For Individual Guarantors" by a notation printed next to a bracket which indicated the designated line. On this line, the name "Andres Estevez" was typed, together with Estevez' home address. Immediately below that line was another line designated "For Corporate Guarantor." This line had the further designation "President" printed immediately beneath it. Estevez signed his name on this line. "Imida Estevez" signed a line marked "Attest" next to Estevez' signature.

By mid-1981, the installment loan was in default. In August of 1981, Bernardi repurchased the delinquent account from CIT, CIT reassigned all its rights to Bernardi and this suit on the guaranty followed. Great Lakes argued in the district court that it had only guaranteed the debt of Andres Estevez Car Wash, and not the debts of Finest, the corporate form of the debtor. The district court rejected this theory, finding that: "The two [Finest and Estevez Car Wash] are in fact one and the same. . . . The incorporation changed nothing but the form of the business, which is not sufficient to discharge the guarantor." The court entered judgment for the plaintiffs in the amount of $79,893.01 and this appeal followed.


Great Lakes argues first that the district court erred in denying defendant's motion for summary judgment because as a matter of law Great Lakes' obligations under the guaranty were extinguished by material changes in the guaranteed obligation. It is fundamental that "a guarantor is not liable for anything which he did not agree to and if the creditor and principal have entered into an agreement materially different from that contemplated by the instrument of guaranty, the guarantor shall be released." Claude Southern Corp. v. Henry's Drive-In, Inc., 51 Ill. App. 2d 289, 201 N.E.2d 127, 132 (1964); 20 Illinois Law and Practice, Guaranty § 63 (1956); Annot., 69 A.L.R. 3d 567, 572 (1976). But, as this court has said: "Unless there is some material change in the business dealings between the debtor and the creditor-guarantee and some increase in the risk undertaken by the guarantor, the obligation of the guarantor is not discharged." Essex International, Inc. v. Clamage, 440 F.2d 547, 550 (7th Cir. 1971) (applying Illinois law). Thus, we must determine whether the incorporation and name change of the car wash business was a "material" change in the loan relationship so as to justify releasing Great Lakes from its guaranty obligations.

Many cases have addressed the question of materiality of change. On the one hand, it is clear that a mere change in the name of a debtor (without a change in legal status) does not release a guarantor from liability. Scovill Manufacturing Co. v. Cassidy, 275 Ill. 462, 114 N.E. 181 (1916). On the other hand, a guarantor is released from its obligations where the entity whose debts are guaranteed undergoes a change which significantly changes the nature of the guarantor's undertaking; an alteration in risk is particularly pertinent to materiality. Thus, in Teledyne Mid-America Corp. v. Hoh Corp., 486 F.2d 987 (9th Cir. 1973), a married couple guaranteed the debts of a sole proprietorship run by the husband. Some time later, the business was incorporated, new stockholders acquired more than a 50% interest in the business and the corporation merged into another corporation. The Teledyne court refused to hold the guarantors liable for the debts of the corporate entity, since fundamental changes had occurred in the nature of the entity whose debts were guaranteed. Id. at 991.

Here we agree with the district court that the circumstances before us do not entail a material change in the guaranty entered into by Great Lakes. While here there has been more than a mere change of name, as in Scovill, events have not resulted in any material change in Great Lakes' obligation. One fundamental aspect of the transaction brings the case closer to Scovill than, for example, to Teledyne. Great Lakes, through its written guaranty, agreed to guarantee the debts of the "Andre Estevez Car Wash," an entity which was a sole proprietorship at the time this guaranty was made. Since the time of that guaranty, Andres Estevez has remained personally liable for the debt in question.*fn2 The only significant change which has presumably occurred in the economic relationships of the parties as a result of Finest's incorporation has been the division of what were Estevez' personal assets into the corporate assets of Finest and what remain as the personal assets of Andres Estevez. Because both ...

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