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KOLSON v. VEMBU

November 28, 1994

Rob Kolson, Eric Weinstein and Irwin Weinstein, Plaintiffs,
v.
Rajan V. Vembu, Robex USA, Ltd., Defendants.



The opinion of the court was delivered by: MILTON I. SHADUR

 Rob Kolson ("Kolson") and Eric ("Eric") and Irwin ("Irwin") Weinstein (collectively "Weinsteins") have sued Rajan Vembu ("Vembu") and Robex USA, Ltd. ("Robex"), charging that Vembu fraudulently induced Kolson and Weinsteins to lend $ 150,000 to Sylvester Whey Products, Inc. ("Sylvester Whey") in violation of Illinois law. Kolson and Weinsteins also assert that Robex breached its obligations under several guaranties when Robex failed to repay the $ 150,000 (plus interest) upon default by Sylvester Whey. Finally, they contend that Vembu is personally liable for the entire sum guaranteed by Robex either under a common-law theory allowing such creditors to "pierce the corporate veil" or under the Illinois Business Corporation Act, 805 ILCS 5/8.65 and 5/9.10.

 Kolson and Weinsteins have moved for summary judgment under Fed. R. Civ. P. ("Rule") 56 on their breach-of-contract claim against Robex and their derivative claim against Vembu. In turn Vembu and Robex have moved for summary judgment under Rule 56, arguing that the fraudulent inducement claim is time-barred under the applicable Illinois statute of limitations. For the reasons stated in this memorandum opinion and order, the Kolson-Weinsteins motion is granted while the Vembu-Robex motion is denied.

 Summary Judgment Principles

 Familiar Rule 56 principles impose on each movant the burden of establishing the lack of a genuine issue of material fact ( Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986)). For that purpose this Court is "not required to draw every conceivable inference from the record--only those inferences that are reasonable"--in the light most favorable to each nonmovant ( Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir. 1991) and cases cited there).

 This District Court's General Rule ("GR") 12(m) and 12(n) respectively require the submission of factual statements in support of and in opposition to Rule 56 motions. Because the summary judgment motions in this case were filed concurrently, each side has complied generally with those rules by filing a GR 12(m) statement (respectively cited "P. 12(m) P --" and "D. 12(m) P --") and a GR 12(n) response (respectively cited "P. 12(n) P --" and "D. 12(n) P --"). *fn1" Facts asserted and adequately supported by each moving party will be credited in this opinion unless controverted by the opposing party ( Stewart v. McGinnis, 5 F.3d 1031, 1034 (7th Cir. 1993)). *fn2"

 Facts *fn3"

 Kolson, Irwin and Eric are respectively citizens of Illinois, Florida and New York (P. 12(m) P1). Kolson first became involved with Wisconsin citizen Vembu (id. P2) in 1986, when the latter approached Harris Bank of Chicago for $ 7.5 million in financing (Kolson Aff. P3). Vembu wanted the funds to build a manufacturing facility for Sylvester Whey, a company to be formed by him to process milk whey into lactose powder and protein powder (P. 12(m) P7; Kolson Aff. P3). Harris Bank employee Kolson agreed to seek the requested financing and also to try to locate investors who would supply an additional $ 150,000 (Kolson Aff. P4)

 In an effort to secure the extra $ 150,000 requested by Vembu, Kolson communicated with Weinsteins, who are his cousins (Kolson Aff. P5). Between August 1986 and May 1987 Kolson and Weinsteins loaned $ 150,000 to Sylvester Whey in five installments (P. 12(m) PP7, 8). Though there is some dispute about the amount of Kolson's contribution, all parties agree that Kolson provided some portion of the financing (id. P12); Vembu Dep. 4). Sylvester Whey executed a promissory note for each installment (P. 12(m) P8 and Ex. B).

 Although Vembu negotiated the $ 250,000 loan on behalf of Sylvester Whey (P. 12(m) P8), at Vembu's direction Kolson and Weinsteins made all five installment payments to Robex, another of Vembu's companies (id. P10). In return, Vembu arranged for Robex to issue five guaranties--one covering each installment--pledging repayment of all amounts due under the Sylvester Whey notes (id. P11). Vembu does not dispute Robex' issuance of all five installment guaranties (Vembu Dep. 4), but he claims an oral agreement with Kolson under which the guaranties were to be effective only until construction of the Sylvester Whey plant was completed (D. 12(n)(1) P11).

 Vembu had formed Robex as a sole proprietorship in 1981 and later (in 1984) incorporated the company. Its purpose is to develop and promote aerobic and anaerobic technologies to convert waste into usable resources (P. 12(m) P16). From 1984 to the present Vembu has been Robex' sole shareholder, director, president and treasurer (id. P23), with others having held the offices of vice-president and secretary until 1993 (id. P24). Since 1993, however, Vembu has been the only corporate officer (id. P23). Robex has never had any other employees (id. P25). According to Vembu, Robex was to take credit for developing the Sylvester Whey project so that the company might later secure other projects (Vembu Dep. 138).

 As the notes came due the parties agreed to a series of extensions, ultimately extending the maturity dates until December 15, 1989 (P. 12(m) P14 and Ex. B). When Sylvester Whey later announced that it was unable to pay any portion of the notes, Kolson and Weinsteins refused to provide further extensions and Sylvester Whey filed for Chapter 11 bankruptcy (id. P14). Kolson and Weinsteins then turned to Robex to recover their funds under the guaranties, but they learned from Vembu that Robex was also unable to pay any portion of the $ 150,000 (id. P15).

 Breach of Contract

 Amended Complaint ("AC") Count II alleges that Robex breached its contract with Kolson and Weinsteins when it failed to honor its guaranties of the Sylvester Whey notes. In response Vembu and Robex argue that the language of the guaranties as to the waiver of defenses is ambiguous and that they are not precluded from arguing the guaranties' invalidity. They further claim that Kolson orally promised, but failed to include a provision in the guaranties, to terminate Robex' obligations upon completion of the Sylvester Whey plant. In light of the guaranties' clear language and given Vembu's review of the documents at the time of their execution (albeit it was concededly cursory in nature), this Court concludes that the guaranties must stand. But before this opinion turns to that analysis, two preliminary issues must be addressed briefly.

 First, Kolson and Weinsteins have produced only the first and third guaranties totalling $ 105,000 (P. 12(m) Ex. C), but they claim the enforceability of the entire $ 150,000 in guaranties. For his part Vembu admits that Robex guaranteed the entire $ 150,000 in notes (Vembu Dep. 4), and he and Robex do not contend that the other three guaranty documents are any different from the two in the record. In light of the identical nature of those two guaranties and the total absence of any facts from which this Court might reasonably infer that the three remaining guaranties differ from them in any respect, *fn4" this opinion will deal with the enforceability of all five guaranties.

 Second, those guaranties refer only to Robex and Weinsteins (P. 12(m) Ex. D). From that fact Vembu and Robex contend that Kolson should be barred from any recovery. But it is plain from the record that Weinsteins signed the relevant documents both for themselves and as nominees for Kolson. *fn5" Kolson explained that his name was omitted from those documents due to his position at Harris Bank and his uncertainty about the rules governing investment in clients (P. 12(m) P13), but Kolson's oral agreement with Weinsteins is that he will be repaid his pro rata share if the notes are repaid (Kolson Aff. P8). And Vembu was well aware that Kolson had contributed funds to the project (id. ; Vembu Dep. 4). Consequently this opinion will entertain Kolson's contractual claims along with Weinsteins'.

 Now to the merits, as to which the parties implicitly agree that Illinois substantive law should control. Each of the promissory notes contains a choice-of-law clause to that effect, *fn6" and each side has chosen to argue Illinois law in its briefs. Where as here this Court's subject matter jurisdiction is unaffected ( National Ass'n of Sporting Goods Wholesalers, Inc. v. F.T.L. Marketing Corp., 779 F.2d 1281, 1285 (7th Cir. 1985)) and the parties' choice is not unreasonable ( Marriage of Adams, 133 Ill. 2d 446, 551 N.E.2d at 639 (1990)), *fn7" no dispute will be generated where the parties have not chosen to create one ( Wood v. Mid-Valley Inc., 942 F.2d 425, 426-27 (7th Cir. 1991)).

 Contractual meaning is ordinarily a question of law ( Conway Corp. v. Ahlemeyer, 754 F. Supp. 596, 599 (N.D. Ill. 1990)), as to which a court's primary objective is to ascertain and give effect to the intent of the parties (id.). In FIMSA, Inc. v. Unicorp Fin. Corp., 759 F. Supp. 1297, 1300 (N.D. Ill. 1991), this Court examined and quoted from Illinois case law under which guaranties are treated as contracts, legally enforceable in accordance with their express provisions:

 
A guaranty must be construed as any other contract to determine the intent of the parties. Where the language is not ambiguous, it must be construed according to its terms.
 
* * *
 
The rules of construction applicable to contracts generally also apply to contracts of guaranty, and if such a contract is unambiguous, it must be enforced as written. A guaranty contract which is unequivocal in its terms must be interpreted according to the language used, for it is presumed that the parties meant what their language clearly imports.

 In this instance there is surely no ambiguity in the guaranties' language (P. 12(m) Ex. C) (emphasis added):

 
The obligations of the Guarantor shall not be affected, diminished, released, modified or impaired upon the happening from time to time of any event.
 
* * *
 
This Guaranty shall be construed as a continuing, absolute and unconditional guaranty of payment with regard to the validity, regularity, or enforceability of the Note and without regard to any defense, set-off or counterclaim which may at any time be available to or be asserted by the Maker against Weinstein, or by any other circumstance whatsoever (with or without notice to or knowledge of the Maker or Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Maker for the liabilities under the Note, or of the Guarantor under this Guaranty.

 Thus Robex has expressly waived all defenses, set-offs and counterclaims. Illinois courts routinely enforce such waivers contained in guaranties ( FIMSA, 759 F. Supp. at 1301). *fn8"

 Next Robex seeks to introduce parol evidence that another portion of the guaranties' language does not accurately reflect the parties' agreement (P. 12(m) Ex. C):

 
The obligations of the Guarantor under this guaranty are absolute, continuing, unconditional and irrevocable, and shall remain in full force and effect until all the liabilities of Maker under the Note have been indefeasibly paid and until payments of the liabilities of Maker under the Note are not subject to rescission or repayment under any bankruptcy, insolvency, reorganization, receivership, arrangement or similar proceeding affecting the Maker.

 But such unambiguous contractual language normally carries with it the conclusive presumption that all material terms and all prior negotiations have been merged into it ( A-Tech Computer Serv., 254 Ill. App. 3d at 403, 627 N.E.2d at 29). Thus such a written agreement complete on its face supersedes all prior agreements on the same subject and bars introduction of parol evidence as to those prior matters ( Magnus v. Lutheran Gen. Health Care Sys., 235 Ill. App. 3d 173, 182, 601 N.E.2d 907, 914, 176 Ill. Dec. 209 (1st Dist. 1992)).

 There are however exceptions to that general bar of parol evidence. Those exceptions extend to proof of mutual mistake, conditional delivery, lack of consideration or fraud ( O'Brien v. Cacciatore, 227 Ill. App. 3d 836, 845, 591 N.E.2d 1384, 1390, 169 Ill. Dec. 506 (1st Dist. 1992)), including fraud in the inducement of the contract ( General Elec. Credit Auto Lease, Inc. v. Jankuski, 177 Ill. App. 3d 380, 386, 532 N.E.2d 361, 365, 126 Ill. Dec. 676 (1st Dist. 1988)).

 That last type of claim requires proof of a statement of material fact known to be false by the maker and made with the purpose of inducing another party to act ( Seward v. B.O.C. Div. of General Motors Corp., 805 F. Supp. 623, 630 (N.D. Ill. 1992)). In addition, the party claiming fraudulent inducement must reasonably believe and rely upon the statement to his, her or its detriment (id.). Once proved, fraudulent inducement is sufficient to invalidate the contract (id.).


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