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06/30/97 N.W.I. INTERNATIONAL v. EDGEWOOD BANK

June 30, 1997

N.W.I. INTERNATIONAL, INC., PLAINTIFF-APPELLEE/CROSS-APPELLANT,
v.
EDGEWOOD BANK, DEFENDANT/CROSS-APPELLEE, AND CHARLES A. BRUNING, DEFENDANT/CROSS-APPELLEE.



Appeal from the Circuit Court of Cook County. Honorable Cyril J. Watson, Judge Presiding.

As Modified on Denial of Rehearing September 5, 1997. Released for Publication September 11, 1997.

Presiding Justice Greiman delivered the opinion of the court. Theis, J., and Quinn, J., concur.

The opinion of the court was delivered by: Greiman

Modified Upon Denial Of Petition For Rehearing

PRESIDING JUSTICE GREIMAN delivered the opinion of the court:

Plaintiff, NWI International, Inc. (NWI), borrowed operating capital from Edgewood Bank (Edgewood or the bank) over several year with loans secured by notes and a security agreement. Eventually, the bank required that all obligations be consolidated into a single note that incorporated the security agreement by reference. Soon after, the bank deemed itself insecure and called the note, collecting part from funds on deposit and the balance by exercise of assignments of accounts receivable.

NWI brought this action against Edgewood, alleging breach of the parties' lending agreement with respect to the loan. Following a jury trial, the trial court entered judgment on the jury's verdict in favor of NWI in the amount of $4,700,001. The bank appeals the verdict and judgment entered against it.

The central issues before us are whether: (1) the note executed by NWI was a demand note, or otherwise, and who should make that determination; (2) the jury was properly instructed with regard to the character of the instrument; (3) the bank's declaration of default was proper; (4) the instructions to the jury as to damages available for breach of a lending agreement were appropriate, whether the damages assessed by the jury for lost profits were proper and whether the jury's verdict was against the manifest weight of the evidence.

Additionally, issues have been raised relating to whether NWI materially breached the agreement between the parties, thus precluding recovery, mitigated its alleged damages and whether the trial court erred in excluding evidence of NWI's failure to perform under the terms of a contract that was the basis for a claim upon NWI's performance bond.

NWI cross-appeals from directed verdicts in favor of the bank on NWI's conversion and tortious interference counts, alleging trial court error in directing those verdicts.

The Illinois Bankers Association was given leave by this court to file an amicus curiae brief which supports Edgewood's stance on appeal and argues that the note was a demand instrument and that the jury should have been instructed to apply a subjective standard as to whether the bank had reason to deem itself insecure.

We do not lightly overturn jury verdicts, particularly where plaintiff's counsel have conducted such a thorough presentation, however, for the reasons that follow, we affirm in part, reverse in part and remand.

NWI was incorporated in 1975 by its principal, John Robertson (Robertson). Prior to its dissolution in 1992, NWI was a welding company specializing primarily in metal fabrication and repair and whose customers included Commonwealth Edison (Com Ed), nuclear utilities and the United States military.

NWI's initial contact with Edgewood came in 1979 or 1980, when Edgewood's president, Charles Bruning (Bruning), introduced himself to Robertson. A relationship soon began, and in the spring of 1980, Edgewood extended a $375,000 line of credit to NWI for working capital. The line was increased to $500,000 a year later, and to $800,000 in May of 1982. Bruning served as the loan officer and NWI's primary contact with Edgewood from 1980 until 1983.

In drawing on the line of credit, NWI executed 90-day notes, and when the note matured it either paid the interest and renewed the note or paid it off entirely. Most often, NWI would pay the interest and roll over the principal to a new 90-day note. The interest rate on NWI's loans was prime plus 1%, which ranged between 11% and 22% over the course of the parties' relationship. NWI was required to execute a typewritten security agreement dated September 23, 1980, that set forth Edgewood's right to accelerate the loan in the event of default, including failure to make required payments or impairment of collateral and at least 10 other events of default. The agreement also provided "that the Bank shall not be liable for any error of judgment or mistakes of fact or law."

In 1981, NWI was awarded a subcontract worth approximately $1 million on a Department of Energy project contracted to Dynamic Industrial Contractors (DICON). The project involved onsite fabrication of aluminum pipe, which, according to NWI, was a unique application for the DICON job. NWI purchased $250,000 of equipment to use at the DICON site and began work in May 1982.

In early 1983, NWI was on schedule with the DICON project, but DICON had stopped paying its subcontractors, leaving NWI with a receivable of $579,000. In response, NWI discontinued work for DICON. DICON, however, prevented NWI from removing its equipment from the worksite and filed a claim against NWI's performance bond on the project. The DICON project ultimately resulted in litigation between DICON and NWI.

In March 1983, Robertson and his attorney met with Bruning to discuss the effect of the DICON situation and whether Edgewood would continue to finance NWI. According to Bruning, he had concerns about NWI's survival due to its diminishing cash flow after the failure of the DICON project. Bruning was aware that the total loss to NWI as a result of the DICON project, including the receivable and lost equipment, was roughly $800,000.

As a result, Edgewood required NWI to submit more frequent financial statements, updated accounts receivable and additional collateral in the form of Robertson's personal residence. For the first and second fiscal quarters of 1983, NWI failed to pay the Internal Revenue Service (IRS) payroll withholdings and social security (FICA) taxes in the amount of $200,000. In April 1983, state bank examiners classified the NWI loan as "substandard," causing Edgewood to place the loan on its "watch list." During and following this period, NWI went through three accountants who produced conflicting financial statements, all of which documented losses by the company. In short, Edgewood maintains that it then viewed the loan as "insecure."

In July 1983, Foothill Capital Corporation (Foothill), a venture capital firm, was contacted as a possible successor lender for alternate or additional financing to NWI for working capital. NWI was, however, reluctant because the terms of any financing through Foothill imposed substantially higher interest.

Edgewood advised NWI that it was at its legal lending limit and contacted LaSalle National Bank (LaSalle) as a potential third-party lender. LaSalle agreed to lend NWI $100,000, which was necessary to allow NWI to bid on a Com Ed job valued at $500,000, which NWI subsequently received.

An agreement was discussed between NWI, Edgewood and LaSalle to finance NWI for the next five years, assuming the company remained "viable." As part of this agreement, Edgewood asked Robertson to execute a consolidated note for $800,000, dated October 31, 1983. This note consolidated all outstanding notes NWI had with Edgewood and represents the agreement here at issue. The note was a printed form with the words "on demand" typed in after the amount of the loan is described and after the explanation as to when the loan is payable. However, in addition, there is a typed statement that the security agreement of September 23, 1980, would be incorporated by reference. Hence, both the notation that the instrument is payable on demand and the incorporation by reference in the agreement that sets out the events of default have been typed onto the form note. Robertson testified that he "knew" the note was a demand instrument and that none of the prior notes contained demand language.

Watching its investment, LaSalle embarked on a collateral review of NWI through the accounting firm of Friedman Raemer & Schwartz. Through its representative, Gene Leeb (Leeb), the firm's investigation of NWI revealed "inconsistencies" in NWI's bookkeeping, prompting Leeb to contact Edgewood. Unable to reach Bruning, who was out of town, Leeb spoke with Andrew Collins (Collins), who was new on the NWI account but functioned as Edgewood's chief loan officer, and expressed his concerns about NWI's financial status.

While Leeb's audit was ongoing, NWI deposited the $500,000 from the Com Ed project in its account with Edgewood. Leeb advised Collins that, given his analysis of NWI's future as uncertain, he should "lock-up" the $500,000 deposit as collateral on the outstanding $800,000 loan.

The next day, Leeb met with Collins to discuss his findings. This meeting prompted Collins to review the NWI file, which caused Collins additional "concern" about the loan's status and NWI's future viability. As a result, Collins, in perhaps the move which most angered NWI and served as the primary basis for NWI's original complaint in this ...


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