United States District Court, Northern District of Illinois, E.D
June 19, 1985
THE NORTHERN TRUST COMPANY, PLAINTIFF AND COUNTERDEFENDANT,
E.T. CLANCY EXPORT CORPORATION, DEFENDANT AND COUNTERPLAINTIFF, AND E.T. CLANCY, DEFENDANT.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
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
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
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
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
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
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
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
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, 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
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
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)).
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
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
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
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.
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.