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Alton Banking & Trust Co. v. Schweitzer





Appeal from the Circuit Court of Madison County; the Hon. Joseph J. Barr, Judge, presiding.


Defendants-Appellants, Charles W. Schweitzer, Robert W. Schwartz, Myrna P. Lewis, Fred Kettlekamp, and Jerry Todd, appeal from the judgment of the circuit court of Madison County which found them jointly and severally liable to Alton Banking and Trust Company as guarantors for loans to Metals Recycling Corporation on which that corporation defaulted. In addition to the principal amount of $114,792.41, the court ordered appellants to pay $43,839.25 in accrued interest, $17,000 in attorney fees and $428.90 in costs. A sixth defendant, Richard Laughlin, does not appeal.

In January 1978, Schweitzer, Schwartz, Lewis, Kettlekamp, Todd and Laughlin purchased stock in Metals Recycling Corporation (Metals Recycling). Laughlin and Eugene St. Cin, who later purchased Todd's shares, asked the six investors to sign a guaranty to insure the payment of all of Metals Recycling's debts to Alton Banking and Trust. In consideration of the guaranty signed by the six investors, on January 26, 1978, the bank loaned the corporation $100,000 at 10% interest. The bank's ledger shows that the $100,000 debt was renewed several times with increased interest rates.

The guaranty which all six investors signed on January 23, 1978, provided that they would guarantee "all indebtedness * * * now or hereafter to become due" and that "indebtedness" was used in its "broadest possible sense to cover any and all liability now or hereafter incurred in any possible manner whatsoever, direct or contingent" to the Alton Bank. The guarantors' liability was not to be affected by extensions granted to the corporation, acts or omissions of the bank relative to the debt, or "any compositions, settlements or substitutions" the bank might make respecting the debt. No dollar amount was placed on the liability of the guarantors; the guaranty covered "the ultimate remaining balance due." It was to remain effective until the full liability was paid. In addition to the principal, the guaranty covered interest and all costs reasonably incurred, including "attorneys' fees involved in making collection" against the debtors and guarantors. A guarantor could terminate his liability for future indebtedness by giving the bank written notice of his intention to withdraw as a guarantor, but he remained liable for debts existing at the time of his written notice. No guarantor ever served written notice of withdrawal on the bank.

By September 1980, the corporation had reduced its debt to $85,000. The bank and corporation negotiated a note for $85,000 due in 1983 bearing an interest rate of 17.75%. This note was specially prepared by Chris Johnson, an officer of the bank. At the bottom of the note was a single guaranty paragraph:

"For value received, the undersigned do hereby jointly and severally guarantee the payment of th within note and interest at maturity, or at any time thereafter, with eight per cent interest per annum from maturity until paid, upon the same terms, conditions, and covenants, including same power-of-attorney, as the makers hereof."

Johnson asked James Hair, chief financial manager of the corporation, to have the six guarantors sign the new note. Johnson said he would contact Todd because Hair did not know him, but no one ever told Todd about the 1980 note. The other five guarantors signed the new note and returned it to Hair, who gave it to the bank. Although most of those who signed the second note recalled that Hair's cover letter led them to believe the 1980 guaranty replaced the 1978 guaranty, the letter itself did not mention any guaranty. The copy sent to Kettlekamp spoke only of notes:

"Please find enclosed the note * * * that we discussed on the telephone. As I indicated, this replaces the $100,000.00 that Metals Recycling Corporation had previously.

After you sign the note, return it to me, as I need one additional signature * * *."

On January 12, 1981, the corporation signed a note for $114,792.41 at 22.5% interest with a maturity date of March 19, 1981. It encompassed the $85,000 debt on which no payments had been made and $18,045.30 representing overdrafts on the corporation's checking accounts and interest due. The note for $85,000 was marked "Paid by renewal" on January 19, 1981, Metals Recycling defaulted on the January 12 note. On May 11, 1981, the bank filed suit against Schweitzer, Schwartz, Kettlekamp, Laughlin, Lewis, and Todd under the terms of the 1978 guaranty which made them liable for all indebtedness of Metals Recycling.

When Todd did not answer the bank's complaint or appear, the court entered a default judgment against him. The default was later set aside and Todd testified in his own defense that when he sold his shares to St. Cin he had talked with the bank about substituting St. Cin in his place as a guarantor. The 1978 guaranty was not modified to substitute St. Cin. Todd never gave the bank written notice that he was withdrawing as a guarantor. He also testified that after suit had been filed a bank officer had assured him that the bank would not "pursue" him. After a bench trial, the court found in favor of the bank and against all guarantors, including Todd.

A flurry of post-trial motions followed. All defendants but Laughlin joined in a motion to vacate or amend the judgment. The motion alleged that the first guaranty merged into the second and that the material alteration in the obligation secured by the second guaranty discharged the guarantors from any liability to the bank. The defendants also objected that the interest had been improperly calculated and the award of attorney fees was excessive. The motion was denied. Schweitzer, Schwartz, Kettlekamp and Lewis sought to stay enforcement of the judgment by posting an appeal bond. The motion was denied. Kettlekamp and Laughlin stipulated that Laughlin agreed on April 28, 1981, to indemnify Kettlekamp fully for his liability as a guarantor. The court ordered Laughlin to indemnify Kettlekamp according to their agreement. We granted leave to file a late notice of appeal. Schweitzer, Schwartz, Lewis, Kettlekamp and Todd appealed from the judgment of the trial court and the denial of the post-trial motion.

We are asked to decide whether (1) the note and guaranty of September 17, 1980, replaced the guaranty of January 23, 1978; (2) the calculation of interest is correct; and (3) the award of $17,000 in attorney fees is an abuse of the court's discretion. We find the second guaranty did not replace the first and affirm the trial court's judgment as to the liability of all six of the original guarantors. We remand the case, however, for further proceedings with regard to awards of attorney fees and interest.

• 1, 2 The appellants argue that the 1978 guaranty merged into the 1980 note and guaranty. We believe reliance on the doctrine of merger in the present case is inappropriate because merger is generally limited to cases in which a contract for the sale of land is fulfilled by delivery of a deed (Harris Trust & Savings Bank v. Chicago Title & Trust Co. (1980), 84 Ill. App.3d 280, 405 N.E.2d 411) or where all prior negotiations between the parties are presumed to merge into a written contract (World Insurance Co. v. Smith (1975), 28 Ill. App.3d 1022, 329 N.E.2d 518). Even where merger might be expected to occur, it will fail if the second contract does not satisfy all the terms of the original agreement. (Harris Trust & Savings Bank v. Chicago Title & Trust Co. (1980), 84 Ill. App.3d 280, 405 N.E.2d 411; Hakala v. Illinois Dodge City Corp. (1978), 64 Ill. App.3d 114, 380 N.E.2d 1177.) Merger may not occur when the second contract "covers only a part of the subjects embraced in the prior one, and it plainly appears, from the character of the contracts, that the last one was not intended to be in performance or supersedure of the former one, and that the provisions in the former, not embraced in the latter, were intended to remain unaffected." (Ely v. Ely (1875), 80 Ill. 532, 537.) No argument has been made that the guaranty by five parties of a single note for $85,000 constituted performance of the original guaranty which provided for a continuing obligation of six guarantors for all debts owed to the bank by the corporation. A comparison of the ...

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