Appeal from the Circuit Court of Cook County. Honorable Aaron Jaffe, Judge Presiding.
Rehearing Denied December 18, 1995. Released for Publication December 21, 1995.
The Honorable Justice McNULTY delivered the opinion of the court: Gordon and T. O'brien, JJ., concur.
The opinion of the court was delivered by: Mcnulty
JUSTICE McNULTY delivered the opinion of the court:
Plaintiff the Northern Trust Company (Northern) brought suit against defendants VIII South Michigan Associates, Eight South Development Corporation, James Loewenberg, Marvin Fitch, Paul Cocose and William Cocose, seeking foreclosure on a building located at 8 South Michigan Avenue as well as money damages. Eight South Development Corporation, Loewenberg, Fitch and the Cocoses brought counterclaims and affirmative defenses alleging that Northern committed fraud and breached its duty of good faith and fair dealing, had unclean hands and was equitably estopped from asserting its claims. The trial court dismissed the counterclaims and affirmative defenses and entered partial summary judgment against Loewenberg, Fitch and the Cocoses (the Guarantors) for $9,932,213.19. The Guarantors appeal from these rulings. (A stipulation was later entered dismissing Loewenberg and Fitch from this appeal.) We affirm.
The following facts are alleged by the Guarantors in their counterclaims and affirmative defenses. In late 1987, the Guarantors formed an Illinois limited partnership, VIII South Michigan Associates (VIII South), to acquire a 38-story office building located at 8 South Michigan Avenue in Chicago. The Guarantors were the officers and directors of Eight South Development Corporation, the corporate general partner of VIII South.
In December 1987, VIII South applied to Northern for a short-term acquisition loan in the amount of $7.05 million in order to purchase the 8 South Michigan Avenue building. In connection with that application, VIII South advised two of Northern's officers, vice-president John Klopp and head of Northern's commercial real estate lending division Scott Lafferty, that over half of the tenants of the building were not paying rent or were paying below current market rate and, therefore, VIII South's projections showed that the building would likely be operating with a minimal net operating income and negative cash flow in the early years. In addition, significant physical improvements to the building would become necessary as new tenants were brought into the building.
VIII South and Northern discussed the terms of the loan and the potential for renewal and extension of the loan. VIII South recognized that Northern would probably not be the source of its permanent financing and that such financing would likely be obtained instead from some other lender.
VIII South initially requested a one-year loan. VIII South contemplated that it would obtain take-out financing during the course of that year and would use part of the proceeds to pay offNorthern's loan. Lafferty advised VIII South to seek a one-year term loan with a one-year option. Lafferty explained that this would give the partnership more flexibility in obtaining favorable permanent financing. Lafferty also indicated that, because the building would not reach full leasing capacity for several years, Northern would consider offering the partnership additional options to extend the loan term, provided that the loan was current when it became due and that the partnership was otherwise performing in conformity with its projections. Lafferty advised VIII South that Northern could not formally commit to offering it these additional option periods at the onset of the loan.
In January 1988, Northern agreed to make a loan of $7.05 million to VIII South Michigan for one year with VIII South having an option to renew the loan for a second year. The loan was secured by a mortgage and an assignment of rents on the 8 South Michigan Avenue building, and it was personally guaranteed by the Guarantors and VIII South's corporate partner pursuant to a written guaranty of payment and performance.
In August 1988, Northern increased the principal amount of the loan to VIII South by $450,000. In late 1988, VIII South was able to obtain long-term refinancing for the building from Lemont Savings and Loan (Lemont). Lemont offered to loan VIII South $11.5 million, $7.5 million of which was to be used to repay Northern and $4 million of which was to be used for tenant and capital improvements. Northern, however, encouraged VIII South to keep the loan at Northern. Lafferty advised VIII South that if it would decline financing from Lemont, Northern would renew the loan and increase the principal amount of the loan by $3 million, to $10.5 million, without seeking additional equity, collateral or guaranties. In January 1989, the term of the loan was extended for one year to January 1990, and the amount of the loan was increased by $3 million to a total of $10.5 million.
Lafferty informed Loewenberg that until the partnership obtained other reasonable take-out financing, Northern would continue to renew the loan if VIII South continued to manage and lease the building in accordance with its projections and representations. The Guarantors claim that as a result of the statements and conduct made of behalf of Northern, VIII South and the Guarantors continued to forgo other take-out opportunities that would have enabled them to retire the Northern loan and extinguish any potential liabilities arising under the guaranty.
In January 1990, VIII South borrowed an additional $300,000, and in June 1990 VIII South borrowed another $1 million, bringingthe total loan to $11.8 million. The loan maturity date was extended to September 1991. The Guarantors claim that these last two loan increases resulted in the amount of the loan further exceeding the building's market value.
Between 1988 and 1990, Guarantor Loewenberg was one of the largest customers of Northern's commercial real estate lending division. The Guarantors claim that as of 1989, Northern was also financing two other real estate partnerships in which Loewenberg was a principal owner of limited partnership interests. These were State/Delaware Associates (State/Delaware), whose principal asset was a building located at 1 East Delaware, Chicago, and Gold Coast Galleria (Gold Coast), whose principal asset was a building located at 111 West Maple, Chicago.
As a result of Northern's interest in developing a lending relationship with Loewenberg, in July 1987, Northern issued letters of credit on behalf of State/Delaware for over $2.7 million, all of which were unsecured. In late 1988, Northern also issued a letter of credit on behalf of Gold Coast in the amount of $1.4 million. In 1989, Northern increased this amount to $5 million, $2.2 million of which was unsecured. Loewenberg was a guarantor of both the State/Delaware and Gold Coast letters of credit. Neither VIII South Michigan nor the Cocoses ever owned an interest in either State/Delaware or Gold Coast, nor did VIII South or the Cocoses ever guaranty any portion of the State/Delaware or Gold Coast letters of credit. In addition, in 1988 and 1989, Northern made unsecured personal loans to Loewenberg to fund interest payments that were being made by Loewenberg on behalf of VIII South and Loewenberg for Loewenberg's other personal business needs. Unbeknownst to VIII South and to the Guarantors, during that period from 1989 through 1990, Northern was concerned over the status of its overall relationship with Loewenberg and the aggregate amount of unsecured funds lent to the partnership entities in which Loewenberg held an interest. Northern's concern over the aggregate amount of funds lent to three partnerships was premised on the facts that (1) of the approximately $7.7 million of credit extended by Northern on State/Delaware and Gold Coast, approximately $5 million was unsecured, and (2) Northern perceived itself to have extended over $22 million in related credit to Loewenberg, of which it considered over $7 million to be unsecured and at significant risk. Northern also lacked confidence in the State/Delaware and Gold Coast projects, which as early as 1989 caused Northern to downgrade these loans and place them on its "watch list." In January 1990, Northern noted in a credit committee document that a basis to consider not lending further funds toVIII South was Northern's overall "unsecured exposure to [the] Loewenberg entities."
The Guarantors claim that as Northern's concern over its overall relationship with Loewenberg and its aggregate unsecured exposure mounted, Northern became more intent on maintaining its lending relationship with VIII South Michigan and its security interest in the building. Northern was evaluating its loans to State/Delaware and Gold Coast by aggregating them with its loan to VIII South. There were, however, no cross-collateralization agreements between the three partnerships. Northern's concern for maintaining its lending relationship with VIII South was a factor that caused Northern to ...