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Bank of America National Trust and Savings Association v. Schulson

June 30, 1999


Appeal from the Circuit Court of Cook County Nos. 94 L 15961 94 L 15960 (Consolidated) Honorable Paddy H. McNamara, Judge Presiding.

The opinion of the court was delivered by: Presiding Justice Cahill


Plaintiff Bank of America National Trust and Savings Association sued defendants Michael Schulson and Robert Blessing to enforce guaranties defendants made for a loan. The dispute centers around the meaning of a "burn down" clause that reduces the amount guaranteed as principal payments are made "with respect to the liabilities." The bank argues on appeal that the trial court erred in applying the burn down clause to collateral proceeds paid over to the bank in a bankruptcy action almost two years after the guarantors' obligations became due. The trial court interpreted the written guaranties as guaranties for collection. The bank insists they are guaranties for payment. We agree with the bank and reverse.

Defendants have filed a cross-appeal. They challenge attorney fees awarded to the bank without a hearing and the dismissal with prejudice of count II of defendants' counterclaim, which they attempted to voluntarily dismiss. We reverse the trial court on those orders as well.

Defendants formed a limited partnership (Lunan) in 1991 to own, lease, and operate family-style restaurants under franchise agreements with a restaurant chain. Defendant Schulson owned 85% of Lunan and was the president. Defendant Blessing owned 15% and was the vice-president and chief operating officer.

Bank of America loaned $13.5 million to Lunan on September 30, 1991. Under the loan and security agreement, the bank was given a security interest in Lunan's assets. The bank also took separate but identically worded personal guaranties from each defendant for up to $3 million each. Section I.A of the guaranties, entitled "Guaranty of Payment," at the heart of this dispute, reads:

"[T]he undersigned hereby unconditionally guarantee(s) the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, of all obligations of the Debtor to the Bank, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due (all such obligations, together with any extensions or renewals thereof, being hereinafter collectively called the 'Liabilities'), and the undersigned further agree(s) to pay all expenses, including, without limitation, attorneys' and legal assistants' fees (which attorneys and legal assistants may be employees of the Bank) and legal expenses, paid or incurred by the Bank in endeavoring to collect the Liabilities, or any part thereof, and in enforcing this guaranty. The right of recovery against the undersigned under this guaranty is, however, limited to the payment of the amount of $3,000,000.00 (or such lower amount as may be determined pursuant to Section 1.2 of this Guaranty), plus (a) interest on such amount and (b) all expense of enforcing this guaranty." (Emphasis in original.)

The parties agree that the reference to section 1.2 was intended as a reference to section I.B. Section I.B. contains the burn down clause, which reads:

"The amount of this Guaranty shall be reduced by an amount equal to 36% of any principal payments made with respect to the Liabilities, but only to the extent that the amount of any such principal payments are not subsequently reborrowed by Debtor."

By the end of 1993 Lunan had defaulted on its obligations. On March 30, 1994, the bank and Lunan entered into an amended and restated loan and security agreement. In May 1994, the bank was paid $18,300 from the sale of Lunan equipment. That amount was credited by the bank against unpaid principal in accord with the burn down clause. The parties do not dispute that defendants' guaranties were properly reduced by 36% of the $18,300.

Lunan filed a voluntary petition for bankruptcy later that year--on October 25, 1994. The parties agree that the filing of this petition was an "event of default" under the loan and security agreement and that obligations under the guaranties were then triggered. On November 10, 1994, the bank sent each defendant a notice of default and demanded payment under the guaranties in the amount of $2,993,412 in principal, plus $72,509.73 in interest.

Bankruptcy proceedings went forward, and Lunan's collateral was eventually sold. In September 1996, the bankruptcy Judge ordered $8,043,227.21 of the collateral collections from the sale of Lunan assets to be applied toward the unpaid principal of Lunan's loan.

Meanwhile, the bank filed separate suits against defendants Schulson and Blessing on December 15, 1994, seeking payment under the guaranties. The two cases were later consolidated. Defendants each filed a two-count counterclaim. Count I sought a declaration that defendants were entitled to a reduction of their guaranty obligations in the amount of 36% of the bankruptcy collateral collections paid to the bank. Count II alleged breach of express contractual conditions and an implied covenant of good faith and fair dealing of the guaranties.

The bank moved for summary judgment, arguing that the burn down clause applied only to principal payments made before the guarantors' obligations became due on November 10, 1994. In ruling on the bank's motion for summary judgment, the trial Judge first concluded that the burn down clause is ambiguous. The Judge then reviewed the negotiating history, which includes several drafts of the guaranties. The Judge concluded that the parties intended the burn down provision to apply to principal payments made at "any" time, including the bankruptcy collateral proceeds collected after Lunan's default. The bank's motion for summary judgment was denied.

After deciding that the 36% discount applied to principal payments made after Lunan filed bankruptcy, the trial court invited defendants to file their own motion to dispose of the case. Defendants then filed a "motion for entry of order in accordance with ruling." The Judge granted partial summary judgment for defendants. Judgment was entered for the bank in the amount of $97,850.20 plus interest for each guaranty, and for attorney fees in the amount of $320,022.35. Defendants' counterclaims were dismissed with prejudice.

The bank argues on appeal that the court erroneously read the guaranties as guaranties of collection. The bank asserts that the guaranties are unambiguous guaranties of payment that entitle the bank to prompt payment upon the debtor's default, notwithstanding the burn down clause. The bank alternatively argues that the trial court erred in not granting a trial on the proper interpretation of the burn down clause and that, even if the reduction formula applies to collateral proceeds, the court erred in relying on the bankruptcy court's distributions. Because we agree with the bank's first argument, we do not address the alternative arguments.

We review summary judgment de novo. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 102, 607 N.E.2d 1204 (1992). Summary judgment is proper when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter ...

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