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Northwestern National Insurance Co. of Milwaukee, Wis. v. Lutz

December 5, 1995






Appeal from the United States District Court for the Central District of Illinois, Springfield Division. No. 88-C-3078--Richard Mills, Judge.

Before CUMMINGS, RIPPLE and MANION, Circuit Judges.

CUMMINGS, Circuit Judge.



In June 1985, defendant Jerry Lutz signed various documents relating to the purchase of units of Plantation Oaks, a Texas limited partnership. The documents were used by Plantation Oaks to obtain a loan from the European American Bank ("Bank"), and to persuade the plaintiff, Northwestern National Insurance Company of Milwaukee, Wisconsin ("Northwestern"), to issue a financial guarantee bond to the Bank. Thereafter Lutz made no payments to the Bank under his investor note, causing the Bank to make demands for payment by Northwestern. Northwestern made payments totaling $248,832, an amount corresponding to three units of the partnership. Northwestern subsequently sued Lutz for this amount. Following a one-day bench trial, the district court held that because Lutz's note had been altered Northwestern was entitled to judgment against Lutz for an amount corresponding to one unit of the partnership. Northwestern appeals and Lutz cross-appeals that judgment. For the following reasons, we affirm.


Plantation Oaks is a Texas limited partnership created for the purpose of purchasing and operating an existing apartment complex in College Station, Texas. *fn1 To finance the purchase, Plantation Oaks sold units in the partnership to investors for $77,263 per unit. The investors obtained the units by executing an investor note payable to Plantation Oaks for $69,308 per unit and paying the balance in cash.

James Spolyar was one of four general partners of Plantation Oaks. On June 2, 1985, Spolyar and Lutz met at Lutz's home to discuss various business ventures, including Plantation Oaks. Spolyar testified that he informed Lutz that Plantation Oaks needed to sell between one and three units to close the deal, and that if Lutz purchased units Spolyar would buy him out of them within 120 days after the closing. [Tr. pp. 47-49]. Spolyar further testified that Lutz orally agreed to this arrangement.

On June 6, 1985, Lutz received from Spolyar various subscription documents relating to Plantation Oaks, including an investor note ("Note") and a document entitled "Estoppel Letter and Indemnity Agreement" ("Indemnity"). The Note recites that it evidences a portion of the purchase price of Lutz's subscription of units in the partnership and that it "is secured by a Surety Bond issued in favor of the Bank." The Indemnity is addressed to an unidentified bonding company, but provides that Lutz will "indemnify the Company and hold harmless against it all loss, liability, costs, claim, damages and expense, internal or external, of whatever kind and nature * * * caused by a default under the promissory note(s) of [Lutz]."

Lutz signed the Note and returned it to Spolyar. However, Lutz did not fill in a small blank space at the top of the Note indicating to the partnership the number of units subscribed for. Subsequently, someone in Spolyar's office inserted the number "3" in the blank space. Additionally, two substantial handwritten changes were made to the Note. First, the Note stated on its face that "[Lutz] unconditionally promises to pay to the order of Plantation Oaks * * * the principal sum of $69,308." However, someone in Spolyar's office inserted a handwritten caret, "^", and the language "per unit" above the $69,308 figure. Second, the Note listed a payment schedule dictating four payments that totalled $69,308. Directly below this someone inserted the handwritten language "$69,308 X 3 units = $207,924." The initials "RAB" were added next to these insertions. We were informed by Northwestern's counsel at oral argument that the initials were presumably those of Richard A. Berish, another Plantation Oaks partner. The original Note revealed that Lutz's signature was in black ink, while the inserted information was in two different shades of blue ink.

At the loan closing in July 1985, Spolyar endorsed the investor notes, including Lutz's note, to the order of the Bank. The Bank accepted the notes and issued a loan to Plantation Oaks. As further security for the loan, Plantation Oaks provided the Bank with a financial guarantee bond issued by Northwestern in the amount of $2,772,320. The bond designated the Bank as the obligee and 24 limited partners in Plantation Oaks, including Lutz, as the individual principals. With respect to Lutz, his investor note was bonded for three partnership units, or $207,924. There was no testimony or other evidence as to whether Northwestern saw the original Note or a copy thereof when it issued its bond.

Thereafter, Lutz made no payments to the Bank under the Note. The Bank made demands for payment by Northwestern under its bond, and Northwestern made six payments to the Bank totaling $248,832, an amount corresponding to three units. Northwestern filed suit against Lutz on April 4, 1988. In partially granting Northwestern's motion for summary judgment, the district court concluded:

"[T]his court finds that there is no controversy on the question that [Lutz] did execute the Investment Note and Estoppel Letter and Indemnity Agreement and that both are enforceable against him. This Court also finds that due to an alleged alteration of the amount on the Investment Note, an issue of material fact remains as to the total for which [Lutz] must reimburse [Northwestern]. However, the minimum amount for which [Lutz] is liable is for one unit." [Order dated 3-17-92 p.3-5].

Following a one-day bench trial, the district court concluded that the Note was "clearly altered," and that Lutz did not implicitly or explicitly authorize the alterations. Therefore, the district court found that Lutz was liable for one unit only and entered judgment for Northwestern for a corresponding amount. Northwestern appeals that ...

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