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United States District Court, Northern District of Illinois, E.D

June 19, 1985


The opinion of the court was delivered by: Shadur, District Judge.


Northern Trust Company ("Bank")*fn1 has sued E.T. Clancy Export Corporation ("Exporter") and its president E.T. Clancy ("Clancy") to recover amounts outstanding on two notes Bank purchased from Exporter. Now Bank moves under Fed.R.Civ.P. ("Rule") 12(c) for a judgment on the pleadings on the issue of liability under Counts II through IV of its four-count Amended Complaint (the "Complaint"). For the reasons stated in this memorandum opinion and order, Bank's motion is granted as to Counts II and III and denied without prejudice as to Count IV.


In January 1982 Bank agreed with Exporter to finance sales of equipment to certain Mexican corporations ("Buyers"). Under that agreement Bank was to purchase from Exporter notes issued by Buyers in a total principal amount not to exceed $1,239,257.50, with interest computed at 1/2% per annum over Bank's floating prime rate. To guarantee payment on the notes Exporter was to obtain insurance against Buyer's default from the Foreign Credit Insurance Association ("FCIA") and Export-Import Bank of the United States (collectively "Insurers"), and to assign the proceeds of the insurance policy to Bank. Under the terms of the policy Insurers were to pay the notes to the extent of (1) 100% of any unpaid principal amount, plus interest at 6%, if the cause of the default was "political" and (2) 90% of any unpaid principal, plus interest at 6%, if the cause of the default was "commercial."

On January 22, 1982 Buyers issued a note payable to Exporter in the principal amount of $618,757.50, with interest at the prime-linked rate (the "First Note"). Payments were to be made in twelve approximately equal quarterly installments. Three days later Exporter and Bank entered into a Promissory Note Purchase Agreement (the "Agreement"), which included the following paragraph (the emphasized portion indicates language typed in with a different type face and juxtaposed to the handwritten initials "ETC"*fn3):

    4. All Notes acquired by the Bank will be purchased
  with full recourse to the Exporter for the uninsured
  amount or any amount not recovered under the FCIA
  policy, including any interest rate differential or
  unrecovered past due interest.

By its terms the Agreement covered only the First Note, which was endorsed over to Bank by means of an unrestricted endorsement: "Pay to the Order of The Northern Trust Co." Bank purchased the first note from Exporter as endorsed.

At the same time the Agreement was executed, Clancy signed an undertaking (the "Guaranty") guaranteeing personally the prompt payment of any amount due Bank from Exporter.*fn4 Under the Guaranty Clancy also agreed to pay any expenses incurred by Bank in collecting amounts owing from Exporter or in enforcing the Guaranty. But the Guaranty expressly provided:

  The right of recovery against the undersigned is,
  however, limited to the amount of $61,875.75 plus the
  interest on such amount and plus all expenses
  hereinbefore mentioned.

Less than two months later (on March 15) Buyers issued another note payable to Exporter (the "Second Note"), with terms matching those of the First Note except for its principal amount: this time, $306,446.25. Several days later Exporter endorsed the Second Note:

  Pay to the Order of Northern Trust Co. 90% without
  recourse, 10% with recourse.

With that endorsement, Bank purchased the Second Note from Exporter without the parties having executed any amendment to the Agreement or a separate note purchase agreement.

Buyers defaulted on both the First and Second Notes, and Bank then filed a claim with Insurers. Characterizing the default as resulting from "political" causes, Insurers paid 100% of the principal amount outstanding on both Notes plus interest at 6%. But because the notes by their terms had accrued interest at the substantially higher rate of 1/2% over Bank's floating prime rate, large amounts remained due on the notes: $181,935.21 on the First Note and at least $38,998.40 on the Second Note.*fn5 Bank made demand on Exporter for both amounts, but Exporter refused payment, contending it was not liable for the deficiencies. Bank then filed this action.

Contentions of Parties

Bank's Complaint alleges four theories of recovery:

    1. Count I alleges Agreement ¶ 4 obligates Exporter
  to make up any difference between the total amount
  due and owing on the First Note and the insurance
  proceeds paid Bank by Insurers after Buyers' default.

    2. Count II seeks recovery from Clancy on the
  Guaranty: its stated limit of $61,875.75 plus
  attorneys' fees, costs and expenses incurred in the
  enforcement of the Guaranty.

    3. Count III alleges Exporter's endorsement of the
  Second Note makes Exporter liable to Bank for any
  deficiency resulting from Buyers' default, to the
  extent of 10% of the total amount (principal plus
  interest) payable on the Second Note.

    4. Count IV seeks recovery of amounts due and owing
  on the First Note on Exporter's blank endorsement of
  the instrument.

Bank's motion for a Rule 12(c) judgment on Counts II through IV claims the First Note, Second Note and Guaranty unambiguously establish Exporter's and Clancy's respective liabilities for the claimed amounts. On the other hand, defendants argue the Agreement, First Note, Second Note and Guaranty, read together, are susceptible of more than one interpretation. As a consequence, defendants contend, a determination of the parties' obligations under the documents is impossible without reference to extrinsic evidence, foreclosing judgment on the pleadings alone.

Count IV

Because the parties have failed to address Illinois case law*fn6 that appears to bear directly on Bank's Count IV claim, this Court declines at this juncture to chart a course through the parties' contract law arguments on that count. Section 3-414 of Illinois' version of the Uniform Commercial Code (Ill.Rev.Stat. ch. 26, ¶ 3-414*fn7) provides a blank endorsement on a negotiable instrument constitutes the endorser's engagement:

  that upon dishonor and any necessary notice of
  dishonor and protest he will pay the instrument
  according to its tenor at the time of his indorsement
  to the holder or to any subsequent indorser who takes
  it up. . . .

But the First Note is not a negotiable instrument. Under Code § 3-104 a writing is not a negotiable instrument unless among other things it contains "an unconditional promise or order to pay a sum certain in money." Code § 3-106 goes on to list various contingencies in spite of which the sum payable on an instrument is a "sum certain." Code Comment 1 to Code § 3-106, which Illinois has adopted, describes the purpose of that section (emphasis added):

  The section rejects decisions which have denied
  negotiability to a note with a term providing for a
  discount for early payment on the ground that at the
  time of issue the amount payable was not certain. It
  is sufficient that at any time of payment the holder
  is able to determine the amount then payable from the
  instrument itself with any necessary computation.
  Thus a demand note bearing interest at six per cent
  is negotiable. A stated discount or addition for
  early or late payment does not affect the certainty
  of the sum so long as the computation can be made,
  nor do different rates of interest before and after
  default or a specified date. The computation must be
  one which can be made from the instrument itself
  without reference to any outside source, and this
  section does not make negotiable a note payable with
  interest "at the current rate."

Interest payable on the First Note cannot be computed without reference to Bank's prime rate in effect from time to time. Under prevailing law that renders the sum payable uncertain and the instrument itself nonnegotiable. See F. Hart & W. Willier, Commercial Paper Under the Uniform Commercial Code § 2.11[1], at 2-98 to -99 (1985); 4 W. Hawkland & L. Lawrence, Uniform Commercial Code Series § 3-106:03, at 95 & n. 5 (1984). Accordingly the First Note is outside the purview of Article 3 in general and Code § 3-414 in particular.*fn8 Resort must be had to the Illinois common law to determine the legal effect of Exporter's endorsement of the First Note.

Early Illinois cases raise serious doubt whether blank endorsement of a nonnegotiable instrument makes the endorser liable upon the obligor's default. Smith v. Myers, 207 Ill. 126, 127, 69 N.E. 858 (1904) considered the effect of blank endorsement of a note promising payment on a specified date of a fixed principal amount "with interest at six per cent per annum and taxes." Because the amount of taxes payable remained uncertain, Smith held the instrument was not by any general definition a promissory note (id. at 131, 69 N.E. 858):

  [I]n order to constitute a promissory note the
  instrument must be for a specified sum or certain sum
  of money.

Consequently Smith, id. at 130, 69 N.E. 858 said the instrument was not covered by the common-law rule (now embodied in the Code) that a blank endorsement on a promissory note constituted the endorser's warranty to pay the note if the principal obligor did not:

  Upon a mere contract for the payment of money or the
  performance of any other covenant, where the
  instrument is not such as comes within the definition
  of a negotiable instrument, one by merely signing his
  name upon the back thereof does not become either a
  guarantor or an endorser, within the law merchant.

See also First National Bank of Cass Lake v. Lamoreaux, 255 Ill. App.? 15, 19-20 (1st Dist. 1929) (adhering to Smith); Annot., 79 A.L.R. 719, 728 (1932).

While those are older cases whose reasoning runs against the heavy weight of authority in other jurisdictions, see Annot., 79 A.L.R. at 723-28, they cannot now be ignored by this Court.*fn9 If those cases control, the nonnegotiability of the First Note (for much the same reason found controlling in Smith) would mean Exporter's blank endorsement does not by itself render it liable to Bank. Instead liability vel non must be established by reference to evidence of the actual agreement between the parties. See Smith, 207 Ill. at 130, 69 N.E. 858.

Of course reference to the Agreement might well establish Exporter consented to some measure of liability on the First Note. But that possibility stands beyond the ken of this opinion, for (1) Bank's current motion does not address the Count I claim and (2) Count IV looks only to Exporter's blank endorsement of the First Note.

At least until the parties have adequately explored the issues identified in this opinion, prudence forbids entry of judgment on the Count IV claim. Accordingly Bank's motion is denied as to Count IV, though without prejudice to its renewal "within such time as not to delay trial" (Rule 12(c)).

Count III

Bank's Count III claim, founded on Exporter's endorsement of the Second Note, is not subject to the same treatment as the Count IV claim. Here Exporter's endorsement was not in blank. Instead the endorsement itself specified the terms of the actual agreement between the parties by means of the phrase "90% without recourse, 10% with recourse." That phrase leaves no doubt Exporter was meant to have some secondary liability on the Second Note.

In this instance the ground of dispute shifts to the extent of the intended liability. Bank contends Exporter was to be liable for 10% of the total amount payable on the Second Note. Exporter maintains it was to be liable for any deficiency on the Second Note only if Insurers characterized Buyers' default as resulting from "commercial" causes. Exporter proposes to prove that account of the parties' agreement by extrinsic evidence.

Unquestionably the Second Note (perhaps by itself, but surely if taken together with the First Note, Agreement*fn10 and Guaranty) represents at least a partial integration of the agreement between the parties. What is at stake is the construction of the writing. To that end the parol evidence rule provides evidence of prior or contemporaneous transactions or facts may be admitted to ascertain intent only if the writing is ambiguous. Otherwise "an agreement must be given a fair and reasonable interpretation by the courts based on a consideration of the language and provisions contained therein." Arthur Rubloff & Co. v. Comco Corp., 63 Ill.App.3d 362, 367, 20 Ill.Dec. 338, 342, 380 N.E.2d 15, 19 (2d Dist. 1978).

In that light the Second Note endorsement gives no pause. Though laconic it is not ambiguous. To any reasonable reader it imports Exporter's liability for up to 10% of the total amount payable on the Second Note if Buyers default. By itself the endorsement provides no basis whatever for defendants' proposed interpretation. Nor is defendants' ill-labeled "middle ground" reading (Def.Mem. 13) — that Exporter is liable for 10% of any deficiency on the Second Note — at all plausible. It would distort normal language to read the endorsement as limited to any unrecovered portion of the Second Note rather than as applying to the Note itself. In short, the endorsement's clear effect is to treat the Second Note as though comprising two amounts, one 90% and the other 10% of the total amount payable on the Second Note — and the endorsement plainly says the first of those amounts stands without, and the second stands with, recourse against the endorser.

Nor is that reading contradicted or narrowed by anything in the First Note, Agreement or Guaranty. Under the endorsement on the First Note and the language of Agreement ¶ 4, Bank is to have recourse against Exporter for "any amount not recovered on the FCIA policy." That language by its terms imposes greater First Note liability on Exporter than the Second Note endorsement. Nothing about Bank's having, by choice or inadvertence, purchased the Second Note with lesser recourse against Exporter creates any ambiguity as to the later document. By the same token, the dollar recovery limit incorporated in the Guaranty does not cast doubt on the meaning of the Second Note endorsement.*fn11 While perhaps — as defendants contend — the recurrence of the 10% figure in these documents and the terms of Agreement ¶ 4 reflect broader discussions than the documents themselves portray, the parol evidence rule bars introducing evidence of such discussions to vary or contradict the clear terms of writings that constitute at least a partial integration of the parties' contract. To ascertain Exporter's obligations under the Second Note as endorsed, this Court may not inquire into evidence dehors the Note.

In sum, the pleadings raise no issue of fact as to the Second Note endorsement. Under Rule 12(c) Bank is entitled to a judgment on Count III for any amount due and owing on the Second Note, but not more than 10% of the total amount payable on the instrument.

Count II

There is no dispute between the parties as to construction of the Guaranty. Rather Clancy opposes Bank's motion by contending Bank's failure to establish Exporter's liability precludes recovery on the Guaranty.

Because Clancy's liability is concededly derivative, this opinion's holding (or more accurately non-holding) on Count IV does bar recovery on the Guaranty as to the First Note. But this opinion has gone on to rule Exporter liable on its endorsement of the Second Note to Bank. Accordingly Bank may proceed against Clancy on the Guaranty on the same liability, subject only to the express limit on recovery under the Guaranty. Of course Bank may only collect that sum once, whether from Exporter on the Second Note or from Clancy on the Guaranty.*fn12


Bank's Rule 12(c) motion for a judgment on the pleadings as to liability is granted as to Complaint Counts II and III. It is denied without prejudice as to Complaint Count IV.

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