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09/27/94 BANK CHICAGO v. PARK NATIONAL BANK

September 27, 1994

BANK OF CHICAGO, FORMERLY KNOWN AS BANK OF CHICAGO-GARFIELD RIDGE, AN ILLINOIS BANKING CORPORATION, PLAINTIFF-APPELLEE AND CROSS-APPELLANT,
v.
PARK NATIONAL BANK, A NATIONAL ASSOCIATION, DEFENDANT-APPELLANT AND CROSS-APPELLEE, AND SHELDON BERNSTEIN, AN INDIVIDUAL, CROSS-APPELLEE.



Appeal from the Circuit Court of Cook County. Honorable Thomas J. O'Brien, Judge Presiding.

Hartman, DiVITO, McCORMICK

The opinion of the court was delivered by: Hartman

JUSTICE HARTMAN delivered the opinion of the court:

On November 4, 1988, plaintiff Bank of Chicago (formerly Bank of Chicago-Garfield Ridge) (Garfield) entered into a loan participation agreement with defendant Park National Bank (Park) in which Garfield purchased a $1 million participation in Park's loans, to Evron Industries, Ltd. (Evron), secured by a blanket assignment of Evron's corporate assets. Evron subsequently defaulted on its loans and filed for bankruptcy. Garfield commenced this lawsuit against Park and its senior vice-president, Sheldon Bernstein. Following a bench trial, the circuit court determined that Park had breached its agreement to subordinate its interest in the Evron collateral to Garfield and had breached its agreement to obtain Garfield's consent to a change in the interest rate on the Evron lending. The court entered judgment in favor of Bernstein on Garfield's claim against him personally. The court also entered judgment against Park on its counterclaim, denying it pro rata reimbursement for its costs in liquidating the Evron collateral. *fn1

The issues presented in this appeal are whether the circuit court erred (1) in finding that Park subordinated its interest in the Evron collateral to Garfield and in awarding Garfield the amount of its original $1 million participation plus pre-judgment interest; (2) in ruling that Park breached the agreement by increasing Evron's interest rate without Garfield's consent; (3) in finding that Garfield was not obligated to contribute a pro rata share of Park's expenses in liquidating the Evron collateral; (4) on cross-appeal, in finding against Garfield on its claims of fraud or misrepresentation; (5) on cross-appeal, in determining that Park had no duty to repurchase Garfield's participation; (6) on cross-appeal, in holding that Park did not breach its agreement by releasing a guarantor without Garfield's consent; and (7) on cross-appeal, in denying Garfield's motion to amend its pleadings during trial.

On October 15, 1988, Bernstein wrote a letter to Garfield's executive vice-president, Marc J. Holland, soliciting Garfield's participation for $1 million in Park's lending to Evron. Bernstein's letter asked Holland to participate "in either of the two notes we hold for the company's revolving line of credit (original balances of $1,400,000.00 and $1,000,000.00 respectively)" and to commit "for up to one year." Holland testified that Garfield's executive committee agreed to participate upon the following three conditions: (1) the total lending to Evron not exceed the aggregate of 75% of Evron's accounts receivable and 25% of its inventory; (2) Garfield would have a first position ahead of Park in the collateral; and (3) the participation would last 90 to 120 days. Holland relayed the three conditions to Bernstein that same day, and Bernstein agreed to them. Bernstein acknowledged the three conditions as "provisos."

On November 4, 1988, Garfield and Park signed a participation agreement certificate that obligated Park to remit to Garfield its proportionate share of principal and interest payments as they were received from Evron; in the event of default, collateral was to be applied pro rata to the payment of the balances of principal and interest then due on the respective participations. Park expressly stated that it made no representation or warranty and had no responsibility for the collectibility of the loan or Evron's financial condition. On the same day the parties signed the certificate agreement, however, Bernstein gave Holland a letter (Letter) which, in its entirety, provided:

"Park National Bank of Chicago agrees that future advances to Evron Industries will not exceed the total of 75% of their receivables due within 90 days plus 25% of their inventory. In addition, Park National Bank subordinates its position on the collateral pledged to secure this loan to Garfield Ridge Trust and Savings Bank. This participation will expire on March 3, 1989." (Emphasis added.)

Holland testified that Bernstein agreed to prepare the Letter as an "addendum" to their contract. If the certificate and "addendum" Letter conflicted, Holland understood that the Letter controlled. Bernstein testified that the letter was "additional information" and "did not know" if he intended the Letter to supplement or modify the agreement.

According to Holland, Bernstein never suggested that Park's subordination of its position in the Evron collateral would be restricted to future advances only. Although the term "future advances" in the letter's first sentence was inaccurate, Holland did not bring this to Bernstein's attention. Contrariwise, Bernstein believed the subordination condition, contained in the second sentence of the letter, was restricted to future advances only.

On February 28, 1990, Evron filed for bankruptcy. Five banks, including Garfield and Park, had participated in six Evron loans secured by a blanket assignment of its corporate assets, the principal loan amounts due being $4,873,993. The proceeds from the liquidation of the Evron collateral totalled $1,556,465 in cash and $500,000 in promissory notes executed by the purchaser of the assets. The interest paid on the notes and accrued on the cash portion of the liquidation proceeds totalled $149,095.81 at the time of trial. Park represented the lenders in the bankruptcy proceedings and incurred expenses totalling $302,577.42.

Garfield brought an action against Park for a declaratory judgment and rescission seeking, in count I, a declaration of Park's duty under the participation agreement to repurchase Garfield's interest. Count II sought a declaration of Park's duty to subordinate its interest in the Evron collateral in favor of Garfield. Count III sought damages for breach of contract alleging Park lent to Evron amounts in excess of the participation agreement formula; failed to obtain Garfield's consent when it increased Evron's interest rate; failed to obtain Garfield's consent before releasing a personal guaranty; and failed to pay Garfield interest accrued on the notes from the liquidation. In the alternative, counts IV and V requested rescission based on fraud and innocent misrepresentation. Count VI was a claim of fraud against both Park and Bernstein. Park's counterclaim sought to recover Garfield's proportionate share of the collection expenses incurred in liquidating the Evron collateral.

Following a bench trial, the circuit court found that Park had no duty to repurchase Garfield's participation and that neither Park nor Bernstein had made fraudulent or innocent misrepresentations. The court determined that Park had subordinated its position in the Evron collateral to Garfield. The court ruled that the subordination clause extended to all of Park's lending to Evron and that Park, as the drafter of the November 4 Letter, could have limited the subordination to future advances if that was its intent. The court awarded Garfield its $1 million participation, $118,356.66 in pre-judgment interest and $1000 in nominal damages for Park's breach of the participation agreement by failing to obtain Garfield's consent to the interest rate increase and by failing to remit interest on the loans received from the collateral sale. The court also entered judgment against Park on its counterclaim. The appeal and cross-appeal followed.

I.

Park contends the circuit court erred in declaring subordination of its interest and in awarding Garfield full repayment of its participation in the Evron lending.

Park argues the circuit court's finding that it owed a duty to subordinate is irreconcilable with the finding that it had no duty to repurchase Garfield's participation because the court found the Letter's subordination clause part of the participation agreement but disregarded the Letter's "expiration" language. The court's rulings were not inconsistent: the agreement's "expiration" language was not a specific promise to repurchase; the subordination language, however, was express.

Park asserts the court's ruling that it subordinated its interest in the collateral to Garfield is contrary to federal and state banking regulations that "require" pro rata sharing of collateral in a loan participation, citing 12 C.F.R. ยง 32.107 (1991) (section 32.107). Similarly, Park argues, the Federal Deposit Insurance Corporation's manual of examination policies as well as the Illinois Commissioner of Banks and Trust Companies policy guidelines preclude recourse agreements that defeat a proportionate sharing of the risk. The regulations do not "require" a pro rata ...


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