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06/29/87 the First National Bank of v. the Equitable Life

June 29, 1987





510 N.E.2d 518, 157 Ill. App. 3d 408, 109 Ill. Dec. 650 1987.IL.928

Appeal from the Circuit Court of Sangamon County; the Hon. Simon L. Friedman, Judge, presiding.


JUSTICE GREEN delivered the opinion of the court. SPITZ, P.J., concurs. JUSTICE LUND, specially Concurring.


The sum of $27,000 is contested here. Plaintiff, the First National Bank of Springfield (bank), asserting unjust enrichment, brought this action to require the return of that sum from the defendant, Equitable Life Assurance Society of the United States (Equitable). Equitable lays claim to the money as a valid prepayment penalty received under the terms of a promissory note and mortgage. The circuit court of Sangamon County considered motions for summary judgment on behalf of both parties and granted Equitable's motion. This appeal followed.

The following facts appeared of record at the time of entry of judgment. The note at the center of this controversy was executed on April 1, 1977, in the amount of $1.15 million by J&J Ranch, Inc., with the First National Bank of Decatur as trustee. Security for the loan was a mortgage taken by Equitable on two separate parcels of land: a 320-acre tract in Macon County and a 350-acre farm in DeWitt County. A clause in the promissory note states as follows:

Payment Privileges: Privilege to repay in whole or in part at any time provided payee may require payment of not more than six months advance interest on that part of the aggregate amount of all prepayment in one year which exceeds 20% of the original principal amount of this indebtedness." (Emphasis added.)

Further, the mortgage document, also dated April 1, 1977, contains what is commonly referred to as a "due-on-sale clause":

"That in the event mortgagor sells or conveys the premises described herein, or any portion thereof, then at the option of the mortgagee the entire indebtedness shall become due and payable."

Excerpts from portions of the deposition testimony attached to the respective motions for summary judgment allow us to further summarize the following facts: At some point subsequent to the first transaction, the First National Bank of Springfield loaned additional money to Greg Johnston, the owner of J&J Ranch. Johnston, however, began to suffer financial difficulties and several mortgage payments were not met. These parties later reached an agreement whereby the Johnstons would deed over the properties to the bank in return for cancellation of the debt. The bank would then assume total responsibility for the properties, including continued payments on the mortgage with Equitable. The bank also brought the Equitable loan up to date once the transaction was consummated.

Duane L. Gerlach, vice-president and chief lending officer of the bank, stated he discussed the ramifications of taking over the loan with Edwin J. Brown, regional vice-president of Equitable, in November of 1982. Brown stated Equitable would allow the bank to assume the principal and interest indebtedness on the mortgage under the existing terms and conditions for a one-year period. According to Gerlach, Brown could make no assurances beyond that time, indicating Equitable could impose a new higher interest rate not to exceed 12% per annum or it could call the loan due and payable when the year was up. Brown stated in his deposition he did write a letter informing the bank that Equitable may at its option either increase the interest rate or "call the loan in" at the end of one year. However, neither eventuality took place.

The transaction with the Johnstons was completed on December 6, 1982. In lieu of the outstanding debt, the bank received the deeds for both the Macon and DeWitt County properties and acquired possession of those parcels subject to the first mortgage to Equitable. The loan was then brought up to date. A representative of Equitable stated they were not informed of the deed over until March of 1983, however.

During the latter part of 1983, the bank found a potential buyer for the Macon County farm: the Creek Lake Corporation (Creek Lake). In October of 1983 the bank inquired whether Equitable would consider dividing the mortgage between the two parcels. Equitable responded it did not wish to split the loan. In December of 1983, John Slayton, agribusiness/overlying lending officer for the bank, contacted Ronald Rinkenberger, Equitable's area investment manager. Slayton wanted to know if Equitable would require prepayment of the entire loan, or whether the prepayment clause in the note could be negotiated or abolished. Rinkenberger responded the prepayment penalty was not subject to negotiation. If a ...

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