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Kramer v. Exchange National Bank

OPINION FILED DECEMBER 18, 1985.

SHARON KRAMER ET AL., PLAINTIFFS-APPELLEES,

v.

EXCHANGE NATIONAL BANK OF CHICAGO, DEFENDANTS-APPELLANTS (LA SALLE NATIONAL BANK, TRUSTEE, DEFENDANT).



Appeal from the Circuit Court of Cook County; the Hon. Albert S. Porter, Judge, presiding.

JUSTICE MCNAMARA DELIVERED THE OPINION OF THE COURT:

Rehearing denied February 7, 1986.

As the result of Arnold and Sharon Kramer's default on a loan, Exchange National Bank acquired title to certain property at a non-judicial sale where Exchange was the successful bidder. The note involved in the defaulted loan recited that it was specifically secured by property in New York and Illinois. Exchange brought a forcible entry and detainer action to obtain possession of the Illinois property. Prior to trial on Exchange's action for possession, the Kramers filed a complaint to enjoin the forcible entry action and for other relief. The two actions were consolidated. Both sides sought summary judgment, and the trial court granted summary judgment in favor of the Kramers. In so holding, the trial court found that, unknown to the Kramers, Exchange materially altered the note after it had been executed by the Kramers and delivered to Exchange. The court thus held that the note and sale were voided. Exchange appeals.

On June 1, 1972, La Salle National Bank became the trustee of a land trust which held title to a single-family home in Evanston, Illinois. The sole beneficiaries were the Kramers, who reside in the home. On February 13, 1973, the Kramers assigned to Exchange 100% of their beneficial interest in the trust which held title to their home. The assignment was collateral security for loans made by Exchange to the Kramers.

In 1978, Arnold Kramer, an attorney, applied to Exchange for a loan for American Properties Corporation (APC) and Ferridge Properties of New York, companies for which Kramer was the sole shareholder and president. On September 25, 1978, in anticipation of the loan, the Kramers entered into a security agreement with Exchange. The agreement stated that the Kramers gave Exchange a further collateral assignment of beneficial interest in the land trust to secure the payment of "all obligations of the [Kramers and APC] * * * whether now or hereafter existing, due or become due, direct or indirect, absolute or contingent, joint and/or several, and any and all extensions and renewals of any of the foregoing all collectively herein called (the `Debt') * * *."

On the same day, the Kramers also signed a "continuing guarantee" in consideration of "financial accommodation concurrently herewith being afforded or hereafter to be afforded to" APC. The Kramers guaranteed payment to Exchange of "all indebtedness, obligations and liabilities of every kind and nature" of APC to Exchange, "whether now existing or hereafter created or arising, direct or indirect, absolute or contingent, or joint or several * * * whether through * * * direct loan or as collateral." The guaranty was deemed to be "continuing, absolute and unconditional, and shall remain in full force and effect * * * until written notice of its discontinuance * * *." Finally, the guarantee stated that it was a security interest in the beneficial interest in the land trust and that Exchange could set off "indebtedness at any time credited by or due from the Bank to any of the undersigned" and that Exchange had the rights of a secured party under the Uniform Commercial Code of Illinois, including "the right to sell or otherwise dispose of said property."

Exchange then loaned $300,000 to APC, as evidenced by a note dated November 30, 1979 (the APC note). The APC note lists, as specific collateral, a trust deed on an individual building in Buffalo, New York, owned by Ferridge. The APC note also lists as specific collateral "Assignment of Beneficial Interest in La Salle National Bank Trust No. 44263," which is the trust that holds title to the Kramer home. Exchange admits adding the quoted language to the APC note after the Kramers signed and delivered the note. The Kramers and APC subsequently defaulted.

In 1981, the Kramers filed a bankruptcy action in Buffalo, New York. That filing created an automatic stay on the foreclosure proceedings brought by Exchange regarding the New York real estate. On August 13, 1981, Exchange filed a complaint for relief from the automatic stay. After a final hearing held in January 1984, the court ordered the stay vacated. The New York bankruptcy court found that the APC note was "valid and binding." The court recognized that the beneficial interest in the land trust in Illinois was collateral for the APC note.

In Illinois, Exchange advertised a public UCC sale of the beneficial interest in the land trust to be held on June 23, 1981. On June 22, the Kramers filed a bankruptcy petition in the Northern District of Illinois. The filing created an automatic stay of the UCC sale. On August 7, 1981, Exchange filed a complaint in the bankruptcy court asking for relief from the automatic stay. The court heard testimony from seven witnesses, including Arnold Kramer, and received documentary evidence. The bankruptcy court found that APC and the Kramers owed Exchange $431,676.85 on the APC note. In its order, the court stated, "As collateral security for the indebtedness of Exchange, the debtors granted to Exchange a security interest in the beneficial interest in Trust No. 44263 of La Salle National Bank of Chicago, the res of said trust being a single family residence located at 926 Edgemere Court, Evanston, Illinois." The court continued the hearing on the request to vacate the automatic stay on the condition that the Kramers pay to Exchange current interest on the debt. On November 15, 1982, the bankruptcy court found the Kramers in default on the current interest payments and vacated the automatic stay of the sale of the beneficial interest in the land trust. On May 3, 1983, with the Kramers' attorney present, Exchange conducted the sale. Exchange was the highest bidder, and purchased the beneficial interest for $120,000.

After Exchange sought possession of the Illinois home, the Kramers filed their complaint for injunctive relief, claiming that the sale of the beneficial interest was void because it was not in compliance with the applicable code provisions. The actions were consolidated. Thereafter, the trial court granted the Kramers' motion for summary judgment, finding that the sale of the beneficial interest was "void and of no legal force and effect" because Exchange materially altered the note after execution and delivery by adding the beneficial interest as specific collateral. The court also declared that the APC note was void and unenforceable.

• 1 On appeal, Exchange contends that the Kramers are precluded, under the doctrine of collateral estoppel or res judicata, from raising the previously litigated issue of the note's validity; and that the trial court erred in finding that the APC note was materially altered.

In our view, the dispositive issue on appeal is whether Exchange materially altered the APC note. The Illinois Commercial Code provides for the discharge of a debt where the note has been altered by the holder both materially and fraudulently unless the other party assents or is precluded from asserting the defense. (Ill. Rev. Stat. 1983, ch. 26, par. 3-407(2)(a).) We find no material alteration or fraud in the present case.

An alteration to commercial paper is material when there is a change in "the writing as signed, by adding to it or by removing any part of it." (Ill. Rev. Stat. 1983, ch. 26, par. 3-407(1)(c).) On the APC note, on blank lines under the heading "specific collateral," Exchange added the words "Assignment of Beneficial Interest in La Salle National Bank Trust No. 44263" after the words "Trust Deed on property commonly known as 1200 Niagara Street, Buffalo, New York."

The assignment to Exchange of the Kramers' beneficial interest in the land trust which held title to the Evanston home was meant to cover all obligations of the Kramers and APC "whether now or hereafter existing." The entire interest was originally assigned to Exchange in 1973, and further assigned to Exchange in 1978 along with a "continuing guarantee" which listed the beneficial interest as security. The documents in the record which portray the relationship between Exchange and the Kramers indicate that the beneficial interest was continually used as security collateral. Thus, we ...


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