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07/29/88 Marengo Federal Savings v. First National Bank of

July 29, 1988

MARENGO FEDERAL SAVINGS AND LOAN ASSOCIATION, PLAINTIFF-APPELLEE

v.

FIRST NATIONAL BANK OF WOODSTOCK, TRUSTEE, ET AL., DEFENDANTS-APPELLANTS



APPELLATE COURT OF ILLINOIS, SECOND DISTRICT

527 N.E.2d 121, 172 Ill. App. 3d 859, 122 Ill. Dec. 749 1988.IL.1173

Appeal from the Circuit Court of McHenry County; the Hon. Michael J. Sullivan, Judge, presiding.

APPELLATE Judges:

JUSTICE NASH delivered the opinion of the court. DUNN and UNVERZAGT, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE NASH

Defendants, First National Bank of Woodstock (First National), as trustee, O. Edwin Malenius, and Edwin A. Malenius, appeal from a judgment reforming four promissory notes executed by the Maleniuses and payable to plaintiff, Marengo Federal Savings and Loan Association (Marengo), to show that the notes are secured by second mortgages executed by First National at the Maleniuses' direction. Defendants contend that reformation was improper because there was no evidence that the parties intended, at the time the notes were executed, that the notes be secured by mortgages. Alternatively, defendants argue that plaintiff's negligence in drafting the loan documents bars reformation.

The Maleniuses had been customers of plaintiff for several years, borrowing money for construction of residences and apartment buildings secured by first mortgage liens on the premises constructed. If additional funds were needed the Maleniuses obtained loans from plaintiff in exchange for unsecured promissory notes. Plaintiff alleges that commencing in July 1979 the Maleniuses were informed that future loans had to be secured by second mortgages. The notes and second mortgages involved in this case relate to properties held by First National Bank of Woodstock, as trustee; the Maleniuses were the beneficial owners of the trust and had the power of direction.

In July 1979 the Maleniuses contacted plaintiff to obtain additional funds for improvements to a house they had constructed. The Maleniuses signed a promissory note dated July 6, 1979, a retail installment contract-home improvement, a notice of right of rescission, and a mortgage dated July 7, 1979. Edwin A. Malenius also prepared and executed a directional order to First National, as trustee, to sign the mortgage; the trustee did on July 30, 1979, returned it to plaintiff, and it was thereafter recorded. The mortgage was for the same amount and repayment period as the promissory note and was the only document which indicated that plaintiff had acquired a security interest in the related real property. The Maleniuses obtained three additional loans related to apartment buildings they owned, two in October 1979 and one in November 1979, which were processed in the same manner as the July loan. Plaintiff's letters to the Maleniuses requesting that they have First National execute these mortgages were dated up to five days after the promissory notes were signed, and Edwin A. Malenius sent letters directing First National to execute these mortgages, which were thereafter delivered to and recorded by plaintiff. The later three mortgages were also for the same amount and repayment period as the related promissory notes, and stated that they were executed to secure the payment of the notes executed by the Maleniuses.

In January 1981, First National, at the direction of Edwin A. Malenius, entered into a contract to sell the property which was allegedly used as security for the July 1979 loan. The installment note for warranty deed expressly acknowledged the second mortgage "dated July 7, 1979," which is the subject of this litigation.

In January 1982, the Maleniuses each filed a voluntary petition for reorganization pursuant to chapter 11 of the United States Bankruptcy Code (11 U.S.C. § 101 et seq. (1982)) with the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, and in a statement of financial affairs to the court filed in February 1982, the Maleniuses reported the loans at issue in this case as secured loans. On September 19, 1985, the Maleniuses entered into an agreed order in the bankruptcy proceedings in which they acknowledged the validity of the loans in question as secured debts and which authorized plaintiff to foreclose the mortgages.

On February 19, 1986, plaintiff commenced an action to foreclose the mortgages at issue, and defendants answered asserting the invalidity of the mortgages and denying that the notes were secured by mortgages. Plaintiff's amended complaint sought reformation of the promissory notes, alleging that because of a mutual mistake, the loan documents did not reflect the parties' intent to have the mortgages signed by First National secure the notes signed by the Maleniuses, and requested the court to order the Maleniuses to direct First National to sign the notes. Thereafter, the Maleniuses filed an adversary complaint in the bankruptcy court because of a disagreement as to the terms of their agreed order entered into on September 19, 1985. An unsigned copy of the court's order dated May 8, 1986, which defense counsel stipulated was an order entered in the bankruptcy proceedings, found that the Maleniuses had "for more than four years acknowledged the mortgage indebtedness of both the first and second mortgages affecting the premises described in the Agreed Order entered herein on September 19, 1985 . . . and have admitted the validity of said mortgages in the said Agreed Order dated September 19, 1985," and estopped the Maleniuses from asserting that the debts in question were not secured debts for purposes of the bankruptcy proceedings.

At trial, plaintiff called Edwin A. Malenius as an adverse witness pursuant to section 2-1102 of the Code of Civil Procedure (Ill. Rev. Stat. 1985, ch. 110, par. 2-1102). He testified that he was authorized to sign letters of direction to First National; that he consulted with his father, O. Edwin Malenius, to determine whether a particular document should be signed; and that he prepared and executed letters directing First National to sign the four mortgages in this case. Respecting the July 1979 loan, the following colloquy occurred between plaintiff's counsel and Edwin A. Malenius:

"A. Yes, but I knew it was ...


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