Petition for Writ of Certiorari — Everett v. Continental Bank, N. A.

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SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1992

ROBINSON O. EVERETT, INDIVIDUALLY,

ROBINSON O. EVERETT, EXECUTOR

OF KATHRINE R. EVERETT,

and J. H. FROELICH,

Petitioners,

CONTINENTAL BANK, N. A.

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS,

SEVENTH CIRCUIT

Robinson O. Everett

COUNSEL OF RECORD

Everett, Gaskins,

Hancock & Stevens

P.O. Box 586

Suite 300 FUNB Bldg.

301 W. Main Street

Durham, North Carolina

27702

(919) 682-5691

QUESTIONS PRESENTED

WHETHER THE DISTRICT COURT'S DENIAL OF

PETITIONERS' MOTION TO DISMISS FOR LACK OF

PERSONAL JURISDICTION DEPRIVED THEM OF DUE

PROCESS OF LAW?

II.

WHETHER THE APPLICATION OF A 1989 STATUTE

TO A 1984 CONTRACT DENIED PETITIONERS DUE

PROCESS AND IMPAIRED THEIR CONTRACT WITH

RESPONDENT?

III.

WHETHER, IN GRANTING SUMMARY JUDGMENT

AGAINST PETITIONERS ON THEIR DEFENSES AND

COUNTERCLAIMS, THE DISTRICT COURT DEPRIVED

THEM OF THEIR SEVENTH AMENDMENT RIGHT TO A

JURY TRIAL?

IV.

WHETHER THE COURT OF APPEALS’ DENIED

PETITIONERS PROCEDURAL DUE PROCESS- BY

IMPROPERLY INVOKING WAIVER?

TABLE OF CONTENTS

QUESTIONS PRESENTED

TABLE OF AUTHORITIES

OPINION BELOW

JURISDICTION

CONSTITUTIONAL AMENDMENTS AND

STATUTES INVOLVED

STATEMENT OF THE CASE

ARGUMENT

I. THE PETITIONERS DID NOT

HAVE THE MINIMUM CONTACTS

WITH ILLINOIS NECESSARY TO

CREATE PERSONAL JURISDICTION

II. THE COURT OF APPEALS ERRED

IN APPLYING A 1989 AMENDMENT

OF THE ILLINOIS LONG-ARM

STATUTE TO A 1984

AGREEMENT

Page

III. THE DISTRICT COURT'S GRANTING

OF SUMMARY JUDGMENT AS TO

LIABILITY VIOLATED PETITIONERS'

RIGHT TO A JURY TRIAL .... . 25

IV. THE COURT OF APPEALS

DENIED PETITIONERS’ DUE

PROCESS BY ITS IMPROPER

INVOCATION OF WAIVER .... . 29

CONCLUSION .. ++ © © © © © © « »@ 32

TABLE OF AUTHORITIES

Page

Anderson v. Bessemer City,

470 U.S. 564 (1985) ...... 27

Anderson v. Liberty Lobby, Inc.

477 U.S. 242 (1985) . . «© « « « 27

Asahi Metal Industry Co. Ltd.

v. Superior Court of

California, Solano County,

480 U.S. 102(i967) « « « © » « £3,15,18

Bouie v. City of Columbia,

376 U.S. 347( 19964) .« «© « « « 22,23

Brinkerhoff-Faris Co. v. Hill

2Gh UsOs GTS Tasee) « « 4 we ss 23,32

Burger King Corporation v.

Rudzewicz, 471 U.S. 462

‘O.) |) Oe ee ee er ee ee Coe ee |

Burnham v. Superior Court of

California, 110 S.Ct. 2105

[2gee@) «© & & 6 © 6 4 ee Ue 16

Continental Bank, N.A. v.

Everett, et al, 964 F.2d

[vum Gare Beever « 2 s& 6 es e «ew Behe ae

Continental Bank, N.A. v.

Everett, et al, 742 F.Supp.

wen Cc. ERRs 2PPOG} « «6 s+ 6 te 2,10

Continental Bank, N.A. v.

Everett, et al, 760 F.Supp.

FAS (Mss EAS APE} 2 « te tt te BSAA

Continental Bank, N.A. v.

Everett, et al, 768 F.Supp.

256 (HW.Rs Zhi EFL) « « ee 2,12,31

In re Entz-White Lumber &

Supply Co., 850 F.2d

igge (en GAk. S300 & « 2 & 30

Ettor v. Tacoma, 228 U.S. 148

ciel) « 6 oe Se Oe ee lhl 22

In re Guilford Telecasters,

__Inc., 128 B.R. 622 (Bankr.

BM Rae. . > & Peg ee ee ee i3

Hanson v. Denckla, 357 U.S.

235 (1958) tis « “eiwde «& #26 & 15

Helicopteros Nacionales de

Colombia, S.A. v. Hall,

466 U.S. 408 (1984) ..... . 15

International Shoe Co. v.

Washington, 326 U.S. 310

(1945) 0 eee ee ee er ee ee ee 14, 40,49

Johnson v. Zerbst, 304 U.S.

458 (1938) kis a es & Oe 31

Marks v. United States, 430

7 Ft Oe) ca) ere ee ee 22

Milliken v. Meyer. 311 U.S.

Go? (i960) «§ 1 & & & © & * 14

In re Southeast Co., 868 F.2d

1338(9th Cir. 1989) a ae ae ae 30

CONSTITUTIONAL PROVISIONS:

1 Paes | ae | ee Pe fe | eee ee Pp P|

U.S. Const. Q@enme. F<. »« « « -& 4,24

U.S. Const. amend. VII .... . 4

J.8. COnSt. OBORG. AlV « <« © « « Seaasae

STATUTES:

a6 U.S.C. 22560) «2 2 ew wT 3

ae U:3.6. tape «6 «2s: eee 3

20 U.S.0s 2368 sss ~~ % eer 3

Ill. Rev. Stat.

Gh. 130 © 2-203)G « « « « @y SO, eee ansas

FED. R. CIV. PB. 36 6-4 4 «STS 21,49

In the

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1992

ROBINSON O. EVERETT, INDIVIDUALLY,

ROBINSON O. EVERETT, EXECUTOR

OF KATHRINE R. EVERETT,

and J. H. FROELICH,

Petitioners,

Vv.

CONTINENTAL BANK, N. A.

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS,

SEVENTH CIRCUIT

Petitioners, Robinson 0O. Everett,

Individually, Robinson O. Everett,

Executor of Kathrine R. Everett, and J. H.

Froelich, respectfully pray that a writ of

certiorari issue to review the judgment

and opinion of the United States Court of

Appeals, Seventh Circuit, entered on May

21, 1992, with rehearing denied on August

i2, 1992.

OPINION BELOW

The opinion of the United States

Court of Appeals, Seventh Circuit is

reported in 964 F.2d 701 and is reproduced

in the Appendix. The opinions of the

United States District Court for the

Northern District of Illinois are reported

in 742 F.Supp. 508 (personal =juris-

diction); 760 F.Supp. 713 (liability), and

768 F.Supp. 246 (damages).

JURISDICTION

Jurisdiction in the District Court

was founded upon diversity of citizenship

under 28 U.S.C. § 1332. Respondent, which

initiated the action, is a national

banking association with its principal

place of business in Chicago, Illinois.

See, 28 U.S.C. 1348. Petitioners are

citizens of North Carolina. The amount in

controversy exceeds $50,000.

Final judgment as to damages was

entered in the District Court on July 22,

1991; and petitioners filed their notice

of appeal on August 20, 1991. Appeal was

taken to the Court of Appeals pursuant to

28 U.S.C. 1291; and after it rendered its

opinion and judgment on May 21, 1992, a

petition for rehearing was filed, which

was then denied on August 12, 1992. The

jurisdiction of this Court is invoked

pursuant to 28 U.S.C. 1254(1).

CONSTITUTIONAL AMENDMENTS AND

STATUTES INVOLVED

U.S. CONST. art. I, § id:

No state shall ... pass any bill of

attainder, ex post facto law, or law

impairing the obligation of contracts...

U.S. CONST. amend. V:

No person shall be . . . deprived of

life, liberty, or property, without due

process of law.

U.S. CONST. amend. VII:

In suits at common law, where the

value in controversy shall exceed twenty

dollars, the right of trial by jury shall

be preserved

U.S. CONST. amend. XIV:

No state shall . . . deprive any

person of life, liberty, or property,

without due process of law.

Ill. Rev. Stat. ch. 110 § 2-209(a):

(a) Any person, whether or not a

citizen or resident of this State, who in

person does any of the acts hereinafter

enumerated, thereby submits such person,

and, if an individual, his or her

representative, to the jurisdiction of the

courts of this State as to any cause of

action arising from the doing of any of

such acts.

(7) The making or performance of any

contract or promise substantially

connected with this State

STATEMENT OF THE CASE

In the fall of 1983, Guilford

Telecasters, Inc. (hereinafter Guilford)

which operates WGGT-TV, a television

station in Greensboro, North Carolina,

negotiated a $4,200,000 loan from

respondent, Continental Bank, N.A.

(hereinafter "Continental"). AS a

condition of this loan, each of Guilford's

stockholders was required to execute loan

guaranties with limits in proportion to

ownership of the stock. The loan was

closed by mail early in January 1984 and

the various guaranties were executed, as

required initially by the loan commitment

and thereafter by the loan documents. The

loan was to be repaid quarterly over a

seven-year period with interest floating

above prime and with reduction of

principal to begin in 1986.

As a result of cash flow problems, on

December She 1986, Guilford filed a

petition for reorganization under the

bankruptcy laws. Pursuant to a consent

order, Guilford was allowed use of cash

collateral; but it was to pay interest to

Continental on a weekly basis and also to

amortize principal in weekly instalments

of $5,250. This amortization was slightly

greater than the amount of principal

reduction that would have taken place in

1987 under the original loan agreement.

After a few months Guilford was

unable to make these payments; and so,

beginning in May 1987, they were paid by

the guarantors on a pro rata basis. For

its convenience, as well as that of the

guarantors, Continental billed and

collected payments of interest and

principal from the guarantors at four-week

intervals, rather than weekly.

Meanwhile, in August 1987, the

Bankruptcy Judge had ruled that, because

of its failure to file properly the

financing statements required by the

Uniform Commercial Code and other laws,

Continental was not entitled to the

security interest it claimed in the

broadcast license of WGGT-TV and in

valuable tower and studio leases that

Guilford had negotiated for the television

station.

In the fall of 1989 disagreement

arose between the guarantors and

Continental over at least two topics.

First, on September 1, 1989, Continental

notified the guarantors that it wanted to

collect by December whe 1989, the

difference between the amount of principal

that would have been collected under the

payment terms of the original loan

agreement and the amount of principal

Continental had received under the $5,250

per week principal-reduction schedule.

The guarantors, on the other hand,

maintained that Continental had agreed

with them on an amortization of the

principal at the $5,250 per-week level

until a reorganization plan was confirmed

Or until Guilford's principal asset, WGGT-

TV, was sold.

Secondly, Guilford and its stock-

holders had filed a reorganization plan in

August 1989, which provided for full

repayment to Continental of principal and

interest over a period of several years;

but, despite their pleas for Continental's

approval, the Bank voted against the plan.

Because of these disagreements, the

guarantors stopped paying at the beginning

of 1990, whereupon, in March 1990,

Continental initiated this diversity

action against the petitioners and other

guarantors.

The petitioners initially moved to

dismiss because of lack of personal

jurisdiction over them and because they

had not done business in Illinois, within

the meaning of Ill. Rev. Stat. Chapter

The other stockholder guarantors who

were sued reached settlements with

Continental; and, as to them, the suit was

dismissed.

110, §§ 2-209. The District Court denied

this motion to dismiss; but noted that,

for purposes of the motion, "disputed

facts are viewed in favor of the party

asserting jurisdiction", 742 F.Supp. 508,

n.l, and that, "Despite its ability to

avoid dismissal at this early stage of the

litigation, Continental must nonetheless

adduce sufficient facts at trial

demonstrating the existence of personal

jurisdiction." 742 F.Supp. 512, n.7.

Petitioners then filed answers with

several defenses and counterclaims. They

alleged that they had been induced to

guarantee the Guilford loan because, as a

result of Continental's misrepresen-

tations and failure to disclose,

petitioner believed that they would have

subrogation rights in Guilford's valuable

broadcast license for WGGT-TV. Another

defense -- based on the 1987 ruling by the

Bankruptcy Judge -- was that Continental

had impaired petitioners' subrogation

rights in various collateral. The

petitioners also alleged Continental's

breach of its agreement with the

guarantors that the amortization schedule

would remain at $5,250 per week until a

plan of reorganization was confirmed or

WGGT-TV was sold.

The District Court then entered

summary judgment against petitioners on

these defenses and counterclaims. 760

F.Supp. 713. In the same opinion the

court found from its review of the summary

judgment exhibits that the facts

Supporting the court's earlier

determination of personal jurisdiction

"are not in dispute"; and so there were

"no jurisdictional barriers to the entry

of summary judgment." 760 F.Supp. at 725.

In July 1991 the District Court

entered summary judgment against the

petitioners for amounts close to the

limits provided in the guaranties, 768

F.Supp. 246 -- even though the combined

liability limits exceeded the unpaid

balance of Guilford loan. Despite

petitioners' protests, the District Court

declined to determine the balance of that

loan, but it commented that "Continental

certainly cannot collect more than is due

and owing." 768 F.Supp. 247, n.1.

Meanwhile, over Continental's

objection, the bankruptcy judge had

confirmed Guilford's plan of reorgani-

zation after finding that the Bank would

be paid in full and that the plan's

treatment of Continental was "overly

generous." In_ re Guilford Telecasters,

Inc., 128 B.R. 622, 627 (Bankr. M.D.N.C.

1991). The plan then was consummated on

July 1, i399l. By December 31, 1991, the

end of the loan term under the original

loan agreement, Guilford had paid

Continental in full, except for some

penalty interest.

ARGUMENT

qe THE PETITIONERS DID NOT HAVE THE

MINIMUM CONTACTS WITH ILLINOIS

NECESSARY TO CREATE PERSONAL

JURISDICTION.

As the Court has made clear:

The Due Process Clause of the

Fourteenth Amendment limits the

power of a state court over a

nonresident defendant. See Asahi

Metal Industry Co., Ltd. v7.

Superior Court of California, Solano

County, 480 U.S. 102, 108-9 (1987). .

’ Since this is a diversity action,

the criteria for personal jurisdiction are

the same as they would be for the exercise

of personal jurisdiction over petitioners

by an Illinois State Court.

A State assertion of personal

jurisdiction must not violate "traditional

notions of fair play and_ substantial

justice." International Shoe Co. vy.

Washington, 326 U.S. 310, 316 (1945),

quoting Milliken v. Meyer, 311 U.S. 457,

463 (1940).

In determining whether personal

jurisdiction exists, the "constitutional

touchstone remains whether the defendant

purposefully established ‘minimum

contacts’ in the forum State." See Burger

King Corporation v. Rudzewicz, 471 U.S.

462, 474 (1985), quoting International

Shoe Co. v. Washington, 326 U.S. 310, 326

(1945).

Furthermore, "it is essential in each

case that there be some act by which the

defendant purposefully avails itself of

mm wm me mm er

the privilege of conducting activities

within the forum State, thus invoking the

benefits and protections of its laws."

See Burger King, supra, at 475, quoting

Hanson v. Denckla. Jo7°6| UW. ye ao0

(1958). See also, Asahi Metal, Supra at

Lid. This "purposeful availment"

requirement ensures that a defendant will

not be haled into court in a distant

location as the result of the "unilateral

activity of another party or a third

party", see Helicopteros Nacionales’ de

Columbia, S.A. v. Hall, 466 U.S. 408, 417

(1984).

Apparently there is an open issue as

to whether the exercise of personal

jurisdiction over nonresident individuals

must be given even closer scrutiny than

the exercise of such jurisdiction over

foreign corporations. Cf. Burnham v.

Superior Court of California, _ U.S.

__, 110 S.Ct. 2105, 2110, n.1 (1990).

Petitioners did not have the "minimum

contacts" with Illinois which would be

necessary to establish personal

jurisdiction over them in the courts of

that state. They are residents of North

Carolina, who guaranteed a loan to a North

Carolina corporation of which they are

stockholders. That corporation does

business only in North Carolina. All the

collateral was located in that State.

None of the petitioners went to Illinois

to procure, negotiate, or close the loan.

On the other hand, 4a Continental vice-

president came to North Carolina from

Chicago before the loan was made and later

mailed the loan commitment to Guilford's

president in North Carolina. The loan

itself was closed by mail.

After the loan to Guilford was

Closed, Continental representatives came

to North Carolina on various occasions to

visit Guilford and to solicit new loan

business from other customers. After the

reorganization proceeding was commenced on

December 31, 1986 -- more than three years

before this action was commenced --

Continental representatives visited North

Carolina from time to time to participate

in that proceeding and to determine how

Guilford was progressing.

The guaranties executed by peti-

tioners are on standard forms prepared by

Continental's attorneys and recite that

they were "delivered at Chicago,

Illinois." This "delivery", however, was

accomplished by mail and under the

circumstances here could hardly constitute

one of the "minimum contacts" contemplated

by International Shoe. Some payments by

the petitioners were mailed to Chicago,

while others were mailed to Continental's

North Carolina attorney. Although the

loan documents prepared by Continental

stated that they were "governed by the

laws of the State of Illinois", they did

not reveal any "deliberate affiliation"

with Illinois and -- unlike a consent-to-

suit provision -- they did not suggest

"the reasonable foreseeability of possible

litigation" in Illinois. Cf. Burger King,

Supra, at 482.

There is no indication that the

courts be low conducted the thorough

evaluation which this Court has required

in ruling on personal jurisdiction. See

Asahi, supra, at 113-114. Indeed, in view

of the burden on petitioners in being

required to defend themselves in Illinois

when all of the events material to their

defenses had occurred in North Carolina,

it seems clear that such an evaluation

would have led inevitably to the

conclusion that exercise of personal

jurisdiction did not comport with "fair

play and substantial justice."

Often, just as here, individuals who

have invested in a corporation will

guarantee loans made to it by an out-of-

State lender. In light of this recurring

Situation, it is important that the Court

assure adherence to the principles

established by International Shoe and its

successors. Review should be granted

because those principles were disregarded

The burden on petitioners of

defending in Illinois is reflected in

Continental's claim for attorneys' fees

that exceeded $400,000 some months ago.

964 F.2d 701.

by the courts below.

II. THE COURT OF APPEALS ERRED IN

APPLYING A 1989 AMENDMENT OF THE

ILLINOIS LONG-ARM STATUTE TO A

1984 AGREEMENT.

In petitioners' unsuccessful motion

to dismiss for lack of jurisdiction, they

asserted that they were not transacting

business within the meaning of the

Illinois long-arm statute, Ill. Rev. Stat.

ch. 110 § 2-209(a)(1), and that, therefore

they were not subject to the State's

jurisdiction. After the District Court

ruled against them, petitioners raised the

issue again on appeal.

During oral argument, Circuit Judge

Easterbrook called attention to § 2-209

(a)(7) which had been approved and taken

effect on September 7, 1989. This new

provision -- which had not been mentioned

in any of the briefs -- stated that any

person submitted to Illinois jurisdiction

by "“[t]he making or performance of any

contract or promise substantially

connected with this State."

Subsequently, in the opinion by Judge

Easterbrook, the Court of Appeals ruled

that, by reason of § 2-209(a)(7),

petitioners had submitted tto Illinois

jurisdiction. Thus, because of the

promises they had made in 1984 and the

1989 addition of subsection (a)(7) to § 2-

209, petitioners were held to be subject

to suit in Illinois in March 1990.

Admittedly, this result does not

violate the ban against any ex post facto

law, because no criminal penalties are

involved. Arguably, it contravenes the

constitutional prohibition on impairment

of contracts, for the statutory change

———ee

alters the legal effect of the original

guaranty agreements between the

petitioners and Continental. Even more

applicable, however, is the Due Process

Clause of the Fourteenth Amendment.

In Bouie v. City of Columbia, 378

U.S. 347 (1964), the Court held that the

South Carolina Supreme Court had deprived

defendants of due process by giving

retroactive effect to its new construction

of a criminal statute. In Marks v. United

States, 430 U.S. 188 (1977), the Court

reversed a federal obscenity conviction

because of retroactive application of new

standards for imposing liability.

Although both Bouie and Marks are criminal

cases, petitioners submit that the basic

principle of notice which they involve is

equally applicable in this case.

Certainly when petitioners executed their

guaranties in 1984, they had no warning

that, because of an [Illinois statute

enacted more than five years later, they

were Submitting themselves to the

jurisdiction of Illinois courts. Thus,

petitioners were denied a meaningful

choice whether or not to submit themselves

to Illinois jurisdiction.

In Brinkerhoff-Faris Co. v. Hill, 281

U.S. 673, 678 (1930), -- which was cited

in Bouie, supra at 354 -- the retroactive

application of an overruling state supreme

court decision was held to have denied the

petitioner "due process of law -- using

that term in its primary sense of an

Opportunity to be heard and to defend its

substantive right" as to a tax assessment.

In Ettor v. Tacoma, 228 U.S. 148(1913), a

Property owner was denied due process

because of the effect of a new state law

on his accrued right to compensation for

consequential damages.

In light of this Court's prior

decisions concerning retroactive

legislation and adjudication, petitioners

submit that the Seventh Circuit's

retroactive application of ch. 110 § 2-

209(a)(7) violates their Fourteenth

* In view

Amendment right to due process.

of the importance of preventing

unconstitutional retroactive inter-

pretation of new legislation -- whereby

citizens are compelled to act without fair

warning of the consequences -- the Court

should grant certiorari to review this

4 Because the retroactive application

of this statute probably originated with

the Seventh Circuit -- rather than with

the Illinois legislature -- a violation of

Fifth Amendment due _ process is also

implicated.

issue.

IIit. THE DISTRICT COURT'S GRANTING OF

SUMMARY JUDGMENT AS TO LIABILITY

VIOLATED PETITIONERS' RIGHT TO

A JURY TRIAL.

In their answer petitioners allege

both as an answer and a counterclaim that

Continental had violated its own agreement

with the guarantors that reduction of

principal would remain at the same level

-- $5,250 per week -- until the plan of

reorganization had been confirmed or a

sale of television station WGGT-TV had

occurred. The District Court concluded

that the evidence was insufficient to

raise a genuine issue of fact as to the

existence of a binding agreement.

The District Court had before it

various affidavits from persons who

believed an agreement’ existed. In

addition, several documents’ related to

this issue. One was the cash collateral

order which had been entered with

Continental's written consent in the

winter of 1987 and which provided for the

principal reduction at a rate of $5,250

per week. Another was a Bank inter-office

memo dated August 8, 1988 which had been

initialed by all the Bank officials who

were handling the loan. This document

stated:

Until a plan is approved and under

the terms of a cash collateral

order, [Continental] is to receive

weekly principal ($5,250) and

accrued interest payments. Thess

payments, which began on January 23,

1987, were made by the station

through April 30, 1987. When WGGT

was no longer able to meet its debt

service obligations due to declining

sales, [Continental ] began

collecting the guarantors' pro rata

shares of these payments.

x ££ & &£¢ @ & &

Continental does, however, continue

to receive principal and interest

payments, on a monthly basis, from

the guarantors. Collection of these

Payments will continue until either

a plan of reorganization (which

incorporates the full repayment of

the Continental debt is approved and

implemented or, in the alternative,

the station is sold and the

Continental debt is repaid in full

with these sale proceeds.

In determining whether to grant

summary judgment under Federal Rule 56 of

Civil Procedure, a judge must recognize

that "inferences from documentary evidence

are as much the prerogative of the finder

of fact as inferences as to the

credibility of witnesses." see Anderson

v. Liberty Lobby, Inc., 477 U.S. 242, 271

(1986) (Rehnquist, J. dissenting), citing

Anderson v. Bessemer City, 470 U.S. 564,

574 (1985). Here the jury should have

been allowed to consider whether’ the

various documents executed or prepared by

Continental officers and agents

established the agreement. on payment

schedule.

In their answer petitioners also

asserted that in 1983 Continental not only

failed to disclose information concerning

the collateral it would obtain from

Guilford but also misrepresented what

collateral it would obtain. In that

regard, petitioners relied on provisions

of the loan commitment and loan documents

submitted by Continental to Guilford and

to petitioners. Just as with the

documents bearing on the repayment

schedule, the jury should have been

allowed to determine whether in their view

the loan commitment and loan documents

misrepresented matters known to

Continental and whether petitioner relied

on those representations. If a jury found

that such misrepresentations existed and

were relied on, then the conclusion of

both the District Court and the Circuit

Court that Continental was not liable

under Illinois law for failure to disclose

fails to address the gravamen of this

defense by petitioners.

Rule 56 performs a useful service

when properly used; but when improperly

used, it violates the Seventh Amendment

right to a jury trial. In this case, the

misuse of the Rule resulted from a

conflict with this Court's decisions that

it is the jury's prerogative to draw

inferences from documentary evidence.

IV. THE COURT OF APPEALS DENIED

PETITIONERS DUE PROCESS BY ITS

IMPROPER INVOCATION OF WAIVER.

On July 22, 1991, the District Court

entered summary judgments against the

petitioners for damages based on their

limits of liability. At that time

Guilford owed Continental a substantial

amount under the plan of reorganization.

However, by December 31, 1991 -- the date

when under the original loan agreement the

balance of the loan was to be repaid --

all the principal and interest owed to

Continental by Guilford had been paid.

The Ninth Circuit has held that a

default is "cured" when the debtor ina

reorganization pays the principal and

interest owed and therefore the creditor

is not entitled to default interest. In

re Southeast Co., 868 F.2d 335 (9th Cir.

1989); In re Entz-White Lumber & Supply

Co., 850 F.24 1338 (Sta Cir. 1960). If

this premise is correct, then it would

appear that the default would also be

"cured" as to a surety.

Petitioners recognize that dis-

charge of a debtor in bankruptcy does not

discharge a surety. However, the Ninth

In discussing penalty interest in the

last paragraph of its opinion, the Court

Of Appeals states:

The district court held, 768 F.Supp.

at 247, n.4, that penalty interest

is due from January 1, 1990, when

the defendants dishonored their

guarantees. The guarantors did not

present this as an issue on apeal

separate from their main argument.

Any additional arguments they may

have, they have Waived. 964 F.2d at

708. (Emphasis supplied)

According to the classic definition,

"A waiver is Ordinarily an intentional

relinquishment or abandonment of a known

right or privilege." Johnson v. Zerbst,

304 U.S. 458, 464 (1938). Until Guilford

made the final payment to Continental on

December 31, 1991, long after the appeal

had been taken in this case, petitioners

had no "right" to claim whatever benefit

Circuit cases involve "cure" of default

rather than discharge of a debtor.

might accrue from payment. To hold that

petitioners have "waived" this argument

long before it became available to them

denies "due process of law -- using that

term in its primary sense of an

opportunity to be heard and to defend

[their] substantive right." See

Brinkerhoff-Faris, supra at 678.

Because of the conflict with this

Court's applicable decisions, review

should be granted on this issue.

CONCLUSION

The petitioner has raised some

important issues as to which the decision

of the court below conflicts with

applicable decisions of this Court.

Review should be granted so that the

issues may be briefed, orally argued, and

then receive the thorough consideration of

the Court.

November,

Respectfully submitted this 10th day

1992.

Robinson O. Everett

COUNSEL OF RECORD

Everett, Gaskins, Hancock

& Stevens

P.O. Box 586

Suite 300 First Nationa]

Bank Building

301 W. Main Street

Durham, N.C. 27701

(919) 682-5691

APPENDIX

PANS LR. RZ: el AEN lane) SP)

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diitd tale tat aa

Qu the

United States Court of Appeals

For the Seventh Circuit ©

No. 91-2979

CONTINENTAL BANK, N.A..

Plaontiff-Appellee,

Rosinson O. Everett, et al.,

Defendants-Appellants.

Appeal from the United States District Court

for the Northern District of Miinois, Easterr. Divisior.

No. 90 C 1476—Nicholas J. Bua, Judge.

ARGUED APRIL 13, 1992—Decipep May 21, 1992

Before CUDAHY, EASTERBROOK, and KANNE, Circuit

Judges.

EASTERBROOK, Circuit Judge. Guilford Telecasters, Inc.,

which operates WGGT-TY in Greensboro, North Carolina,

borrowed $4.2 million from Continental Bank in 1984. Con-

tinenta] obtained guarantees from the firm’s stockholders,

each of whom is jointly and severally liable up to a limit

based on his proportional ownership of the stock. Robin.

son Everett and the estate of Kathrine Everett, his

mother, own 65% of the stock between them. Each guar-

anteed roughly $1.6 million of Guilford’s debt. J.H. Froe.

lich, who owns a smaller bloc, guaranteed about $545,000

of the debt. Other investors assumed proportional obliga-

tions.

Guilford encountered cash flow problems and in 1986

filed a bankruptcy petition. Continental, which had a se-

curity interest in Guilford’s receivables, consented to their

use in operating the business, if Guilford remained cur-

rent on the loan—which it did, until May 1987. Then the

guarantors took over, in order to fulfill the condition on

which Guilford had access to cash. During 1989 the guar-

antors and Continental reached a pass over two topics.

First, Continental insisted that the guarantors pay accord-

ing to the schedule negotiated before the bankruptcy,

under which the payments increase with time to retire

additional principal. The guarantors insisted that they had

to pay only the amount due each month when the bank-

ruptcy began. Second, Continental as creditor voted

against the plan of reorganization proposed by the deb-

tor and supported by the guarantors in their roles as its

investors and managers. (Robinson Everett, a professor

of law who was at the time the Chief Judge of the United

States Court of Military Appeals, was not a manager of

the TV station but took an active role as an investor.)

At the beginning of 1990 the guarantors stopped paying.

Continental responded with this diversity action. All guar-

antors except Froelich and the two Everetts paid up.

Fromnow on, we refer to these three collectively as ‘‘the

guarantors.”

Initially the guarantors attempted to persuade the dis-

trict judge that the court lacked perscnal jurisdiction over

them. The judge disagreed, holding that by guaranteeing

a loan with a Chicago bank, promising to pay in Illinois,

agreeing that any dispute would be resolved under the

law of Illinois, and so on, the defendants were doing busi-

ness in Illinois for purposes of Ill. Rev. Strat. ch. 110

q2-20%aX1). 742 F. Supp. 508 (N.D. Ill. 1990). Next the

court granted summary judgment for the Bank, 760 Fr.

Supp. 713 (1991), and finally determined the sums remain-

ing to be paid on the guarantees, 768 F. Supp. 246 (1991).

Meanwhile the bankruptcy judge confirmed Guilford’s plan

of reorganization, cramming the plan down an objecting

Continental’s throat after finding that the Bank would be

paid in full. In re Guilford Telecasters, Inc., 128 B.R. 622

(Bankr. M.D. N.C. 1991). Guilford has since paid principal

and interest—but not in full. It did not pay the penalty

interest that the Bank has claimed from the guarantors on

account of the default in January 1990. This sum of ap

proximately $75,000, plus the legal fees the Bank has in.

curred pursuing the guarantors, are the remaining stakes.

Appellate jurisdiction is the first topic. The guarantees

entitle the Bank to recover the attormeys’ fees incurred

in the course of collection. The fees are substantial, ex.

ceeding $400,000, as the guarantors have fired off a fusil

lade of defenses. The district cowt entered judgment on

the guarantees but put off determining the precise amount

payable as fees. An upen issue about legal fees, contrac.

tual or otherwise, does not affect our jurisdiction to re.

solve the appeal on the guarantees of the principal and

interest. Budinich v. Becton Dickinson & Co., 486 U.S.

196 (1988) (merits and fees appealable separately); Buggs

v. Elgin, Joliet & Eastern Ry., 852 F.2d 318, 321 n.3 (7th

Cir. 1988) (failure to quantify award of fees does not pre-

vent appeal on the merits); Exchange National Bank v.

Daniels, 763 F.2d 286 (7th Cir. 1985) (fees due under con-

tract and those required by law are treated the same for

purposes of appellate jurisdiction). Contra, Justine Realty

Co. v. American National Can Co., 945 F.2d 1044 (&th

Cir. 1991) (when fees are provided by contract, judgment

on the merits is not appealable until fees have been quan-

tified).

Next comes personal jurisdiction. The district court con-

cluded that the entire course of dealings amounted to

“transaction of any business within” Illinois. Dl. Rev. Stat.

ch. 110 42-209(aX1). Whether the court’s understanding of

“business” is correct does not matter. Late in 1989, before

the Bank commenced this suit, Illinois amended its long:

arm statute to assert personal jurisdiction over those who

participate in “[tJhe making or performance of any con-

tract or promise substantially connected with this State”’,

§2-209(aX7). The loan and guarantees are “substantially

connected with” Illinois—the documents recite that they

eerie

were delivered and executed in Mlinois, the loan was to

be repaid in Illinois, and the guarantors agreed that Ilb-

nois law would govern. These same considerations show

that personal! jurisdiction is consistent with the due proc

ess clause of the fourteenth amendment. Heritage House

Restaurants, Inc. v. Continental Funding Group, Inc., 9%

F.2d 276, 283-84 (7th Cir. 1990); Madison Consulting Group

y. South Carolina, 752 F.2d 1193 (7th Cir. 1985); O’Hare

International Bank v. Hampton, 437 F.2d 1178 (7th Cir.

1971).

On to the merits. All of the guarantors’ defenses (and

mirror-image counterclaims) are variations on the theme

that the Bank left the loan undersecured, exposing the

guarantors to more risk than they anticipated. Continen-

tal’s obligation to Guilford was contingent on Guilford’s

providing the Bank with security interests in, among other

things, its broadcasting license and its leased broadcasting

facilities. Continental funded the loan without obtaining

a security interest in the license, having concluded that

such an interest is legally impossible. And although Gui-

ford took the steps necessary to grant a security interest

in its leaseholds, the Bank failed to perfect that interest.

The Bank obtained an interest in Guilford’s receivables

and other assets, but the guarantors say this is insuffi.

cient, that the Bank’s taking the full security was es

sential for their protection. They add that the Bank de

frauded them by not revealing what it knew and they did

not: that because a broadcast license is not property, 47

U.S.C. §301, and may not be assigned or transferred with.

out the FCC’s permission, 47 U.S.C. §310(d), the license

itself is not a store of value on which the Bank could levy.

Stephens Industries, Inc. v. McClung, 769 F.2d 386,

390-91 (6th Cir. 1984); In re Merkley, 94 F.C.C.2d 829

(1988). Cf. R.H. Coase, The Federal Communications

Commission, 2 J.L. & Econ. 1, 25-40 (1959).

Although the guarantors argue that the Bank defrauded

them, that effective security was a condition precedent

to the effectiveness of the lodn and guarantees, and that

the Bank impaired the value of the collateral, these

amount to the same thing, and we treat the position as

oné argument. Professor Everett, arguing un behalf of all

three guarantors, conceded that he had not found a case

in Illinois (or any other jurisdiction) requiring a lender

to reveal to a guarantor the value of the borrower's assets

as collateral. No surprise. It amounts tu saying that a

potential debt investor in a firm (which a bank is) owes

a duty of care, perhaps even a duty of loyalty, to the

existing equity investors (which Guilford's guarantors are)

or contingent debt investors (which all guarantors are,

given the possibility of subrogation, see Levit v. Inger-

soll Rand Financial Corp., 874 F.2d 1186, 1194-97 (7th

Cir. 1989)). That is unheard-of in either corporate or bank-

ing law. A bank making a commercial loan depends large].

on the success of the business for repayment. The firm

has the best information about its business and prospects

and accordingly may be obliged to disclose some details

to the bank and the guarantors. Even that duty is attenu

ated, for persons negotiating for a contract usually may

keep valuable information to themselves. They may not

lie, but they need not volunteer. The ability to capitalize

on private information is an important goad to create that

knowledge, which may be important in matching assets

with their most productive use. See generally E. Allan

Farnsworth, 1 Contracts §4.11 at 406-10 (1990), and An-

thony T. Kronman, Mistake, Insclosure, Information, and

the Law of Contracts, 7 J. Legal Stud. 1 (1978), both of

whom collect and analyze the cases. Banke’ self-interest

leads them to nose out the value of collateral; if they do

not, they are apt to suffer loss. Borrowers and guarantors

have their own reasons to know the value of the assets.

None acts as fiduciary of another. Farmer City State

Bank v. Guingrich, 139 Ill. App. 3d 416, 423, 487 N.E.2¢

758, 763 (4th Dist. 1985),

The general principle that parties to arms’ length nego-

tiations need not open their files to each other is especially

apt here, because the bit of information the guarantors

wanted Continental to reveal—that it could not obtain a

security interest in a broadcast license—is both public and

irrelevant. It is public because it is a legal conclusion, hav-

ing nothing to do with facts peculiar to WGGT-TV or in-

formation buried in Continental’s vaults. One side ir.

negotiations need not disclose the United States Code to

the other; the statutes, regulations, and cases are available

to all. Like other states, Illinois takes the position that

failure to disclose the law cannot be the foundation for

redress. E.g., Aurora v. Green, 126 I. App. 3d 6&4, 655,

467 N.E.2d 610, 613 (2d Dist. 1984); Hamming v. Murphy,

83 I. App. 3d 1130, 1185, 404 N.E.2d 1026, 1030 (2d Dist.

1980). So, too, Illinois expects guarantors to inquire into

risks. St. Charles Natwonal Bank v. Ford, 39 Ill. App.

3d 291, 295, 349 N.E.2d 430, 434 (2d Dist. 1976). If Guu-

ford and the guarantors wanted to know whether a broad-

cast license may be used as collateral, they had only to

ask their own lawver. McLean County Bank v. Brokaw,

119 Ml. 2d 405, 417, 519 N.E.2d 453, 458 (1958). Not sur-

prisingly, they had counsel to advise them about the intri-

eacies of communications law. If as the guarantors now

say the use of a license as collateral is a debatable issue,

so that their lawyer’s views were unreliable, it is al] the

more reason why Continental cannot be accused of “fraud”

for failing to “reveal,” as if it were a fact, its view of

the law. But the whole subject is irrelevant. A broadcast

license is not a tangible asset. It can’t be melted down,

sold as scrap, or packed up and sent to Alaska. Its value

lies in access to a given frequency in a specific place,

which yields time that may be sold by the minute to

advertisers. The value of the license to Guilford lay in

the income stream from those advertisers. Continental

wanted, and got, a security interest in that income, which

it could enjoy while Guilford remained the owner of the

license and operator of WGGT-TV. What more would it

have had with a security interest in the lcense? An ability

to sell the license to someone able to extract greater

revenues is not much different from the ability to replace

Guilford’s managers in the bankruptcy. This makes it hard

to see how the Bank’s failure to reveal 47 U.S.C. $301

to the guarantors did them injury.

In the end the parties’ nights are fixed by their enn.

tracts, which contain three dispositive provisions, First.

they sav that the security is for the benefit of the lender.

not of the borrower or guarantors. Second, they provide

that the “Bank shall have no duty as to the collectior,

or protection of the Collateral or any part thereof or any

income thereon, or as to the preservation of any rights

pertaining thereto, beyond the safe custody of any Col

lateral actually in the Bank’s possession.” Third. the guar-

antors “‘expressly waivel].. . al] diligence in collection

or protection of or realization upon . . , any security for’

the loan to Guilford, and permit the Bank to “release...

any property securing” the loan without notice to them.

It could hardly be clearer that the lender is free to do

what it wants with the collateral. 760 F. Supp. at 719.

Illinois enforces clauses of this kind, which are fata] to

the guarantors’ position. Lawndale Steel Co. v. Appel, 9x

Ill. App. 3d 167, 172, 423 N_E.24 957. 961 (24 Dist. 1981):

Ishak v. Elgin National Bank, 45 Tl. App. 3d 614, 617-18,

363 N.E.2d 159,.161-62 (24 Dist. 1977); see also FDIC x

Nanula, 898 F.2d 545, 550 (7th Cir. 1990) (Illinois lav)

Guarantors may elect to rely on the lender’s attention to

its own interests as their best protection, preferring

market incentives over legal remedies and receiving lower

interest rates in exchange.

The guarantors rely on cases such as Langeveld v.

L.R.Z.H. Corp., 74 NJ. 45, 876 A.2d 931 (1977), and First

Citizens Bank & Trust Co. v. Sherman’s Estate, 2) App.

Div. 339, 294 N.Y.S. 131 (1937), in which the contracts

were silent, and the courts concluded that in the absence

of agreement the bank had to maximize its realization on

the collateral to reduce the guarantors’ risk. Judicial at-

tempts to draft standby terms that will govern when the

parties neglect to address the Subject are just guesses

about what the parties would prefer. When the contract-

ing parties draw up their own provisions, courts enforce

them. People write things duwn in order to assign, duties

and allocate risks—functions vital to economic life yet

defeated if courts prefer hypothetical bargains over rea!

ones or use the ambiguities present in all language to

frustrate the achievement of certainty. Cf. Concast, Inc.

v. AMCA Systems, Inc., No, 91-2179 (7th Cir. Mar. 10,

1992).

What about the requirement of good faith that is part

of every contract? The guarantors say that they are en-

titled to a jury trial to determine whether the Bank acted

throughout in good faith. Once again, the guarantors mis-

understand how courts use such principles. The Uniform |

Commercial Code defines good faith as honesty in fact. |

UCC §1-201(19). See also 2 Farnsworth on Contracts at

§7.17a; Robert S. Summers, ‘‘Good Faith” in General

Contract Law and the Sales Provisions of the Uniform

Cummercial Code, 54 Va. L. Rev. 195 (1968). Beyond that,

and the obligation to be prudent in the exercise of discre-

tion conferred by contract, see Capital Options Invest.

ments, Inc. v. Goldberg Brothers Commodities, Inc., 95S

F.2d 186, 189 (7th Cir. 1992) (Illinois law), good faith is

another way to describe the effort to devise terms to

fill contractual gaps. Market Street Associates Limited

Partnership v. Frey, 941 F.2d 588, 595 (7th Cir. 1991);

Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 435-36,

43839 (7th Cir. 1987) (Illinois law); Tymshare, Inc. v.

Covell, 727 F.2d 1145, 1152 (D.C. Cir. 1984). As a method

to fill gaps, it has little to do with the formation of con-

tracts (a point Frey stresses, 941 F.2d at 595, but that

the guarantors, despite their heavy reliance on Frey, ig-

nore) and nothing to do with the enforcement of terms

actually negotiated. Because this duty is an estimate of

“what parties would agree to if they dickered about the

subject explicitly, parties may contract with greater spe-

cificity for other arrangements.” Jordan, 815 F.2d at 436.

Our guarantors negotiated with the Bank and agreed to

language establishing precisely what duties Continental

would have with respect to security: it must safeguard

collateral in its possession but has no other obligations.

Gap-filling methods such as good faith do not “block use

of terms that actually appear in the contract”. Kham &

Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 905

F.2d 1851, 1857 (7th Cir. 1990). Accord, Capital Onticms,

953 F.2d at 190-91. The guarantors released Continental

from any vbligation to use the collateral for their benefit

The guarantors may rue their decision but cannot escape it.

At last to the remedy. The parties debated in the dis

trict court how to determine the maximum obligation of

each guarantor. Under the contracts, payments were to

be credited against the caps but interest was to be de

ducted. Continental and the guarantors contested ho to

account for the simultaneuus payments and running af in

terest between May 1987 and Decemher 1989. None of

this matters any more, for both ‘he penalty interest and

liability for attorneys’ fees come on top of the cap.

Over the guarantors’ protest, the district court declined

to determine the amount of Guilford’s outstanding liability,

observing that because that liability exceeded any of the

three guarantors’ obligations, the precise figures did not

matter. Time has overtaken this assessment. The bank-

ruptcy judge in North Carolina determined the amount

Guilford owed. 128 B.R. at 628. Because the district court

must now determine the sum due as attorneys’ fees, it

is prudent for the court simultaneously to fix the amount

of penalty interest and enter,a single judgment, on which

the guarantors will be jointly and severally liable. We re-

mand the case for that purpose.

Only the amount of fees and enalty interest remains

in contention. The district court held, 765 F. Supp. at 247

n.4, that penalty interest is due from January 1, 1990,

when the defendants dishonored their guarantees. The

guarantors did not present this as an issue on appeal

separate from their main argument that they owe nothing.

Any additional arguments they may have, they have waived.

And it should go without Saying that the computation of

legal fees and costs is not an occasion to reopen any of

the substantive issues that we have resolved, or passed

in silence as requiring no Separate discussion.

AFFIRMED AND REMANDED

A true Copy:

Teste:

lla

United States Court of Appeals

For the Seventh Circuit

Chicago, Illinois 60604

No. 91-2979

Nicholas J. Bua, Judge.

August 12, 1992

CONTINENTAL BANK, N.A.

Piaintiff-A ppellee,

ROBINSON O. EVERETT, e¢ ai.

Defendants-A ppellants.

Hon. RickarpD D. Cupany, Circuit Judge

Hon. FRANK H. EASTERBROOK, Circuit Judge

Hon. MICHAEL S. KANNE. Circuit Judge

Appeal from the United States District Court for

the Northern District of Illinois, Eastern Division.

No. 90 C 1476

Nicholas J. Bua, Judge.

Order

Defendants-Appellants filed a petition for reheari

June 4, 1992. A majority of th

voted to deny rehearing.

therefore DENIED.

ng on

1e Judges on the panel have

The petition for rehearing is

12a

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

No. 90 C 1476

Honorable Nicholas J. Bua, Presiding

CONTINENTAL BANK N.A..

Plaintiff,

ROBINSON EVERETT, KATHRINE EVERETT. GEORGE

LYLES, and J.H. FROELICH,

Defendants.

ORDER

Defendants Kathrine Everett, Robinson Everett. and

J.H. Froelich have moved to dismiss this case for lack of

personal jurisdiction. For the reasons stated herein.

defendants’ motion to dismiss is denied.

I. FACTS!

Plaintiff Continental Bank N.A. (‘Continental’) is a na-

tional banking association which maintains its principal

place of business in Chicago, Illinois. In 1984, Continental

made a $4,200,000 loan to Guilford Telecasters, Inc. (‘‘Guil-

ford’), a North Carolina corporation. Guilford obtained the

loan to operate a television station in North Carolina.

On January 1, 1984, the parties executed a loan agree-

ment. The loan agreement provides that all payments are

‘For purposes of ruling on a motion to dismiss for lack of persona]

jurisdiction, disputed facts are viewed in favor of the party asserting

jurisdiction. Turnock v. Cope, 816 F.2d 332, 333 (7th Cir. 1987): Nelson

Park Indus., Inc., 717 F.2d 1120, 1123 (7th Cir. 1983). cert. denied,

465 U.S. 1024 (1984).

l3a

to be made to Continental in Chicago. Loan Agreement,

45.1. The loan agreement further provides that it shall be

“governed by the jaws of the State of Illinois.” Jd. 412.5.

Repayment of the loan was guaranteed by several in-

dividuals, all of whom are Shareholders of Guilford. These

individuals executed the guaranties in January 1984. Sim-

ilar to the loan agreement, the guaranties provide that

they shall be construed in accordance with Illinois law. See

Amended and Restated Guaranty, §8(e).

In 1986, Guilford began experiencing financial difficy]-

ties. Guilford eventually defaulted on its loan obligation

and, on December 31, 1986, Guilford filed for bankruptcy.

Guilford made several more loan payments until May 1987,

when it ceased paying altogether. For the next two years,

the guarantors continued to make the monthly payments.

By December 1989. however, each guarantor Stopped mak-

ing payment to Continental. According to Continental. ap-

proximately $3,500,000 remains due and owing on the loan.

Seeking to recover the balance of the loan. Continental

commenced this diversity action against the guarantors.

Three of the guarantors—Kathrine Everett, Robinson Ev-

erett, and J.H. Froelich—now claim that this court lacks

personal jurisdiction over them.”

II. DISCUSSION

In a case based on diversity of citizenship, a federal

court has personal jurisdiction over a nonresident defendant

only if a court of the state in which the district court sits

would have personal jurisdiction. Heritage House Restau-

rants, Inc. v. Continental Funding Group, Inc.. No. 88-

2716, slip op. at 4 (7th Cir. July 2, 1990); Turnock v. Cope,

* Continental has filed a separate lawsuit against guarantor James

Thrash. In that case. Thrash filed a motion to dismiss for lack of

personal jurisdiction, which was denied by Judge Plunkett. See Conti-

nental Bank, N.A. v. Thrash. No. 89 C 4865 (N.D. Ill. Oct. 3, 1989)

SS ————aeee

l4a

816 F.2d 332, 334 (7th Cir. 1987). Illinois courts have

personal jurisdiction over a nonresident defendant when

the defendant falls within the contours of the Illinois long-

arm statute, Ill. Rev. Stat. ch. 110, para. 2-209 (1989).

The Illinois long-arm statute provides in relevant part:

(a) Any person, whether or not a citizen or res-

ident of this State, who in person or through an

agent does any of the acts hereinafter enumer-

ated, thereby submits such person ... to the ju-

risdiction of the courts of this State as to any

cause of action arising from the doing of any of

such acts:

(1) The transaction of any business within

this State;

(f) Only causes of action arising from acts enum-

erated herein may be asserted against a

defendant in an action in which jurisdiction over

him or her is based upon subsection (a).

Id.

Under the long-arm statute, jurisdiction will be proper

if the defendant transacted business in Illinois, and if the

cause of action arose from the in-state transaction. Jd. But

the invocation of jurisdiction must not only be appropriate

under the long-arm statute, it must also comport with the

requirements of due process. Heritage House Restaurants,

Inc., No. 88-2716, slip op. at 5.

A. Illinois Long-Arm Statute

Continental claims that defendants transacted business

in Illinois within the meaning of the long-arm statute. This

court agrees. In determining whether a defendant trans-

acted business in Illinois, the court should consider several

factors, including: which party initiated the transaction: |

where the parties entered into the contract; and where

Iisa iencetaieininlaenneeieamemmaiaaaidmamenmmuiieal

ee a

l5a

performance, or a substantial part thereof, was to take

place. Arthur Young & Co. v. Bremer. 197 II]. App. 3d

30, 36, 554 N.E.2d 671, 676 (1st Dist. 1990); Capital As-

socs. Dev. Corp. v. Roberts-Ohbayashi Corp., 138 Ill. App.

3d 1031, 1037, 487 N.E.2d 7, 11 (1st Dist. 1985).

With respect to the first factor, defendants argue that

they did not initiate the transaction because an agent of

Guilford—rather than the individual guarantors—made the

initial contact with Continental.? The long-arm statute ex-

plicitly states that actions taken by an agent may provice

the basis for asserting jurisdiction. Ill. Rev. Stat. ch. 110,

para. 2-209(a) (1989); see also Heritage House Restaurants.

Inc., No. 88-2716, slip op. at 8 (“the fact that [the

defendant] acted through an agent ... in its dealings with

[the plaintiff] does not affect our jurisdictional analysis’).

Nonetheless, defendants claim that Guilford’s agent was

not acting on their behalf when he initiated the transac-

tion. This argument is unpersuasive. As officers, directors,

and shareholders of Guilford, the guarantors naturally had

an interest in securing enough funds for Guilford’s con-

tinued viability. See Intamin, Inc. v. Figley-Wright Con-

tractors, Inc. 595 F. Supp. 1348, 1349 (N.D. II]. 1984).

Defendants would benefit, albeit indirectly, from Guilford’s

ability to obtain the financing necessary for its operations.

Although each of the defendants in this case did not per-

sonally contact Continental during the initial negotiations.

they played a central role in securing the loan. Their de-

cision to execute personal guaranties as an inducement for

granting the loan belies any other conclusion.

Another factor which supports a finding of personal ju-

risdiction is that the loan agreement and guaranties were

to be performed in Illinois. In fact, “contract performance

in Illinois has of itself been held a sufficient basis for

jurisdiction.” Jacobs/Kahan & Co. v. Marsh, 740 F.2d 587,

‘Defendants admit that Continental did not initiate the business

transaction at issue

l6a

590 (7th Cir. 1984) (citing Cook Assocs., Inc. v. Colonial

Broach & Mack. Co., 14 Ill. App. 3d 965, 304 N.E.2d 27

(1st Dist. 1973)). Defendants’ only obligation under the

loan contract and guaranties was to repay Continental.

Ultimately, defendants were responsible for ensuring that

payment was made to Continental in Chicago. Since pay-

ment was due in Illinois, the loan agreement and guar-

anties were to be performed primarily in Illinois. Jd. at

591; First Nat'l Bank of Chicago v. Boelcskevy, 126 IIl.

App. 3d 271, 274,466 N.E.2d 1182, 1185 (1st Dist. 1984)

(the guaranty unambiguously required performance in II-

linois because the demand notes were payable in Chicago);

see also Financial Management Servs., Inc. v. Sibilsky,

Inc., 130 Ill. App. 3d 826, 833, 474 N.E.2d 1297, 1303

(ist Dist. 1985). Moreover, from 1987 to 1989, the Ev-

eretts actually performed under the guaranties by sending

monthly payments to Continental in Chicago. Although

Froelich made several payments to Continental’s bank-

ruptcy counsel in North Carolina, he was not relieved of

this primary obligation to pay Continental at its offices in

Chicago.‘

A defendant transacts business in Illinois not only when

the contract is to be substantially performed in Illinois,

but also when the defendant invokes the “benefits and

protections” of Illinois law. Arthur Young & Co.., 197 Ill.

App. 3d at 36, 554 N.E.2d at 675-76; Boelcskevy, 126 Il.

App. 3d at 274, 466 N.E.2d at 1185; see also Ronco, Inc.

v. Plastics, Inc., 539 F. Supp. 391, 396 (N.D. Ill. 1982).

‘ The other factor set forth in Arthur Young & Co., supra—i.e., where

the contracts were formed—is inconclusive in this case. Defendants

contend that they never went to Illinois in connection with the nego-

tiation or execution of the loan agreement and guaranties. Continental,

on the other hand, claims that the loan agreement and guaranties were

executed in Illinois. See Affidavit of Kurt W. Anstaett, 46. The contracts

contain provisions stating that they were delivered and executed in

Chicago, Illinois. While these provisions are not dispositive as to the

place of contract formation, they are entitled to some weight.

ee |

l7a

The loan agreement and the guaranties unambiguously

State that Illinois law is to govern the transaction. See

Loan Agreement, 412.5: Amended and Restated Guaranty,

$8(e). ““By choosing to apply Illinois law to this transaction,

defendants sought to invoke the protections and benefits

of the law of Illinois.” Ronco, Inc.. 539 F-. Supp. at 396;

see also O’Hare Int’l Bank v. Hampton, 437 F.2d 1173.

1177 (7th Cir. 1971) (“the fact that the guaranty was to

be construed according to Illinois law and performed in

that state clearly demonstrates that the defendants ’in-

voked the benefits and protection’ of the state’). Having

invoked the benefits and protection of Illinois law,

defendants voluntarily submitted to the jurisdiction of II-

linois courts.

This conclusion is bolstered by the fact that Kathrine

and Robinson Everett both came to Chicago and discussed

the transaction with Continental.* See Ronco, Inc., 539 F.

Supp at 396 (“(wJhen a defendant comes to Illinois and

engages in negotiations of some substance regarding the

transaction from which the cause of action arises, then

the defendant is subject to suit in Illinois”). In August

1984, the Everetts first met with Continental in Chicago

and discussed the extent of their involvement with Guil-

ford.® Affidavit of Cathleen A. Strenk. $4. Over the next

several years, Robinson Everett met with Continental in

‘Even if none of the defendants traveled to Illinois in connection

with the transaction, the court may nonetheless obtain personal juris-

diction: “The physical presence of a defendants in Illinois during the

transaction is not necessary to obtain Jurisdiction under the long-arm

Statute.” Heritage House Restaurants, Inc.. No. 88-2716, slip op. at 8

A contractual relationship based on telephone and mail contacts may

be sufficient to establish jurisdiction over a defendant. Jd. Thus, the

mere fact that defendant Froelich was never physically present in []-

linois does not diminish the court's ability to exercise jurisdiction over

him.

*With a 65%- ownership interest, Kathrine and Robinson Everett

were the largest shareholders of Guilford

Chicago on three separate occasions to discuss Guilford’s

financial status and the guarantors’ obligations. Id. 445,

6, 7. Yet, the Everetts argue that they came to Chicago

on matters unrelated to the loan agreement, and met with

Continental only as a matter of convenience. This argu-

ment might have merit if the Everetts had been tricked

or lured into coming to Illinois. In the absence of any such

evidence, however, the Everetts’ appearances in Illinois

are significant. The Everetts veluntarily met with Conti-

nental in Chicago and discussed the transaction giving rise

to the cause of action. This court sees no reason to simply

disregard these meetings merely because the Everetts also

conducted other business while in Illinois. Jacobs/Kahan &

Co., 740 F.2d at 592 n.7.

All of the factors discussed above point in favor of as-

serting jurisdiction. Admittedly, no single factor standing

alone would appear to be sufficient to support in personam

jurisdiction over the defendants. AM Int'l Leasing Corp.

v. National Council of Negro Women, Inc., 627 F. Supp.

1302, 1307 (N.D. Ill. 1986). But the combined weight of

the factors persuades the court that defendants have trans-

acted business in Illinois.

In order to fully satisfy the requirements of the Illinois

long-arm statute, Continental must not only demonstrate

that defendants transacted business in Illinois, Continental

must also show that its cause of action arose from

defendants’ transaction of business. Ill. Rev. Stat. ch. 110,

para. 2-209 (1989). That jurisdictional requirement is easily

satisfied in this case. Continental’s claim is based directly

on defendants’ obligations under the guaranties;

defendants’ obligation to pay Continental, and the failure

to make such payment, gave rise to Continental’s cause

of action. Therefore, jurisdiction is proper under the long-

arm statute.

19a

B. Due Process

After determining that jurisdiction is proper under the

long-arm statute, the court must also ensure that the ex-

ercise of jurisdiction does not violate due process. The Due

Process Clause protects an individual from the judgment

of a state with which he has no “contacts, ties, or rela-

tions.”” International Shoe Co. vy. Washington, 326 U.S.

310, 319 (1945). However, an individual will be Subject to

the jurisdiction of the forum state if he “purposefully avails

[himself] of the privilege of conducting activities” within

that state. Hanson v. Denckla, 357 U.S. 235. 253 (1958).

A relevant consideration in this due process analysis is

foreseeability—whether the defendant’s contacts with the

forum are such that he could reasonably have anticipated

being haled into court in the forum state. World-Wide

Volkswagen- Corp. v. Woodson, 444 U.S. 286, 297 (1980);

Heritage House Restaurants, Inc:, No. 88-2716, slip op. at

In this case, defendants’ contacts with Illinois were not

merely random or fortuitous. See Burger King Corp. v.

Rudzewicz, 471 U.S. 462. 475 (1985). Rather, defendants

purposefully conducted business with a corporation located

and doing business in Illinois. See Heritage House Restau-

rants, Inc., No. 88-2716, slip op. at 13: see also Lyons Sav.

and Loan Ass’n v. Geode, Inc., 626 F. Supp. 1141, 1143

(N.D. Ill. 1986) (by borrowing money from an Illinois cor-

poration, the defendant ‘purposefully availed itself of the

privilege of conducting business in Illinois’’). Defendants

understood the purpose behind the loan and the signifi-

cance of their guaranties to obtaining the loan. When they

failed to make the requisite payments, defendants reason-

ably could have anticipated being subject to litigation in

Illinois. See O’Hare Int’l Bank, 437 F.2d at 1177 (“The

defendants certainly must have contemplated the effects

in Illinois of a failure to make the monthly rental pay-

ments.’’); see also Geode Inc., 626 F. Supp. at 1143-44.

lL |

20a

Welles Prods. Corp. v. Plad Equip. Co., 563 F. Supp. 446,

449 (N.D. Ill. 1983).

Based on defendants’ contacts with Illinois in relation

to the loan transaction, the court concludes the the ex-

ercise of personal jurisdiction will not offend the Due Proc-

ess Clause. Besides, Illinois courts have held that the long-

arm statute is narrower in scope than the constitutional

due process test; by satisfying the requirements of the

Illinois long-arm statute, the plaintiff necessarily satisfies

the ‘“‘minimum contacts” test set forth in International

Shoe and its progeny. See Arthur Young & Co, 197 Ill.

App. 3d at 35, 554 N.E.2d at 675; Green v. Advance Ross

Elecs. Corp., 86 Ill. 2d 431, 436-37, 427 N.E.2d 1203, 1206

(1981); see also AM Int'l Leasing Corp., 627 F. Supp. at

1308.’

III. CONCLUSION

For the foregoing reasons, defendants’ motion to dismiss

for lack of personal jurisdiction is denied. Defendants are

hereby ordered to answer plaintiffs complaint within ten

days of receiving notice of this order.

IT IS SO ORDERED.

/s/ Nicholas J. Bua

Nicholas J. Bua

Judge, United States District Court

Dated: August 2, 1990

’ Despite its ability to avoid dismissal at this early stage of the lit-

igation, Continental must nonetheless adduce sufficient facts at trial

demonstrating the existence of personal jurisdiction. O'Hare Int'l Bank,

437 F.2d at 1177 n.2; Welles Prods. Corp., 563 F. Supp. at 449 n.5.

2la

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

——_————_—_—_

No. 90 C 1476

Honorable Nicholas J. Bua, Presiding

CONTINENTAL BANK N.A.,

Plaintiff,

Vv.

ROBINSON EVERETT, KATHRINE EVERETT, and J.H.

FROELICH,

Defendants.

ORDER

Continental Bank N.A. (“‘Continental”’) initiated this law-

suit to recover the balance of an unpaid loan from Robin-

son Everett, Kathrine Everett, and J.H. Froelich—three

guarantors of a bankrupt borrower. On March 28, 1991.

this court entered summary judgment in favor of Conti-

nental on the issue of liability. 760 F. Supp. 713 (N.D. II.

1991). Continental now moves for summary judgment on

the issue of damages.

An assessment of recoverable damages starts with the

language of the governing guaranty agreements. The li-

ability of Robinson Everett, Kathrine Everett, and J.H.

Froelich is limited under their respective guaranties. Con-

tinental cannot recover more than $1,569,445 (plus interest

and expenses) from Robinson Everett, $1,569,506 (plus in-

terest and expenses) from Kathrine Everett, and $544,866

(plus interest and expenses) from J.H. Froelich. See Guar-

anty Agreements, § 1. Liability is several, meaning that

each defendant is independently liable up to the liability

limits. Id. § 8 (d). ;

ca ae eae

22a

The parties do not dispute that the balance of the unpaid

loan is greater than any of the individual limits of liability.

For this reason, Continental may pursue each defendant

to the extent of the liability limits (along with interest on

such amounts) until the debt is satisfied. Since defendants’

liability is specifically circumscribed by the guaranties,

damages ordinarily would be relatively certain. But the

damage calculation is somewhat more complicated because

defendants made periodic payments for roughly two years.

As each defendant made a payment, Continental made

a corresponding reduction in that defendant’s limit of li-

ability. By January 1, 1990, defendants had stopped mak-

ing payments altogether. Crediting defendants with the

payments made prior to that date, Continental has deter-

mined that Robinson Everett is liable for $1,546,548.29,

Kathrine Everett is liable for $1,546,543.51, and J.H. Froe-

lich is liable for $561,913.68. As of April 10, 1991—the

cutoff date used by Continental in submitting its damage

calculations—interest continues to accrue at a rate of

$435.59 per day for Robinson and Kathrine Everett, and

$159.59 per day for J.H. Froelich.*

Continental’s calculations, which are based on a straight-

forward application of the guaranties, appear to accurately

reflect its actual damages. The defendants disagree. They

contend that the loan payments should have been applied

against the balance of the underlying loan, rather than

their respective guaranty limits. Under defendants’ ap-

proach, the principal of the loan is reduced by the pay- |

ments made by all of the guarantors, and interest is then

i Although the combined liability limits exceed the unpaid balance of

the loan, Continental certainly cannot collect more than is actually due

and owing.

2 The applicable interest rate, set forth in the term note, is equal to

Continental’s prime rate plus 3%. (Continental’s prime rate is currently

9%.)

iia item eaten

23a

determined according to each defendant’s pro rata share?

of the outstanding loan balance.

Defendants’ method of calculation, as Continental points

out, is inconsistent with the terms of the guaranty agree-

ments. There is nothing to suggest, in the guaranties or

the underlying loan documents, that interest is to be based

on the guarantors’ pro rata shares of the loan. On the

contrary, the guaranties provide, in unambiguous terms,

that defendants are liable for the stated limits of liability

“plus interest on such amount[s].” Id. § 1 (emphasis added).

Each defendant's liability is “independent of any other

guaranties ... [and] may be enforced in full regardless of

the existence of any such other guaranties.” Jd. § 8(d).

This language clearly demonstrates that payments made

by one guarantor do not serve to reduce another’s liability.

Continental properly calculated defendant’s liability for

principal and interest.‘

Having considered all of the parties’ submissions, in-

cluding their briefs, supporting affidavits, and exhibits, the

court finds that there is no genuine issue of material fact

with respect to the principal and interest due under the

loan. The court hereby enters judgment in favor of Con-

tinental and against defendant Robinson Everett in the

amount of $1,546,548.29, against Kathrine Everett in the

amount of $1,546,543.51, and against J.H. Froelich in the

* Pro rata liability is determined by each defendant's ownership in-

terest in the debtor company.

‘ Defendants also argue that Continental should not have applied the

default rate of interest as of January 1, 1990—even though that is the

date when defendants dishonored their guaranties. In defendants’ view.

the default rate should have taken effect on March 14, 1990, when

Continental made a demand for payment. This argument, like

defendants’ other arguments, lacks merit. Defendants initially went into

default (and the default rate was therefore applicable) on the date they

stopped making payment, not when Continental made a demand. Be-

side, defendants expressly waived their right to demand or notice of

dishonor from Continental. Guaranty Agreements, § 6(c).

24a

amount of $561,913.68. Robinson and Kathrine Everett are

also liable for interest accruing at a rate of $435.59 per

day, and J.H. Froelich must pay interest at a rate of

$159.36 per day.°

Finally, defendants cannot dispute that Continental is

entitled to attorneys’ fees and expenses incurred in con-

nection with the enforcement of the guaranties. See id.

§1. The only question in this regard is whether or not

the amount of recoverable fees and costs must be deter-

mined prior to the entry of final judgment. Continental,

over defendants’ objection, has requested that fees and

costs be assessed after judgment is entered. The court

does not find this request unreasonable. The finality of

the judgment is not impaired simply because the total

amount of fees and costs has not yet been determined.

Barrington Press, Inc. v. Morey, 816 F.2d 341, 342 (7th

Cir.), cert. denied, 484 U.S. 906 (1987). The determination

of the total fees and costs may be properly resolved in a

postjudgment proceeding. See id. at 344 (Ripple, J., con-

curring). Any objection defendants may have to Continen-

tal’s petition for fees and costs shall be made at that time.

IT IS SO ORDERED.

/s/ Nicholas J. Bua

Nicholas J. Bua

Judge, United States District Court

Dated: July 22, 1991

‘This rate of interest is effective as of April 10, 1991. Of course,

the rate may change as Continental's prime rate periodically changes.

25a

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

No. 90 C 1476

Honorable Nicholas J. Bua, Presiding

CONTINENTAL BANK N.A..

Plaintiff,

ROBINSON EVERETT, KATHRINE EVERETT,

and J.H. FROELICH.

Defendants.

MEMORANDUM ORDER

In 1984, plaintiff Continental Bank N.A. (“‘Continental’’)

loaned a substantial sum of money to a North Carolina

corporation. After that corporation filed for bankruptcy,

Continental demanded repayment from eight individuals

who guaranteed the loan. Having been paid by five of the

guarantors, Continental seeks payment from the remaining

three: Robinson Everett, Kathrine Everett, and J.H. Froe-

lich. Continental contends that there is no factual dispute

on the issue of liability and, therefore, its claim against

these three guarantors may be resolved on summary judg-

ment. This court agrees, and grants Continental’s motion

for summary judgment.

I. FACTS

The following facts are not in dispute. In 1983, an agent

of Guilford Telecasters, Inc. (‘Guilford’) contacted Con-

tinental for purposes of obtaining a loan. Guilford, a North

Carolina corporation, needed financing to operate a tele-

vision station in North Carolina.

26a

Several months of negotiations culminated in a loan

agreement dated January 1, 1984. Pursuant to this agree-

ment, Continental loaned $4,200,000 to Guilford. In con-

nection with the loan, defendants Robinson Everett,

Kathrine Everett, and J.H. Froelich agreed to guarantee

repayment of the loan. The guaranty agreements were also

executed on January 1, 1984. On December 31, 1985, Guil-

ford executed and delivered a term note to Continental in

evidence of the $4,200,000 loan.

To secure repayment of the loan, Continental obtained

a security interest in Guilford’s assets.’ For the most part,

Continental perfected its security interest in this collateral

by filing the requisite financing statements with the ap-

propriate governmental entities. Continental, however, did

‘The collateral for the loan is specified in section 6.1 of the loan

agreement:

6.1 Collateral. Payment of [Guilford’s] obligations her-

eunder and under the Notes shall be secured by the follow-

ing:

(a) a first lien and security interest in favor of [Con-

tinental] in [Guilford’s] accounts, chattel paper, general in-

tangibles (including, but not limited to, any and all

Franchises and FCC licenses), inventory, equipment (includ-

ing, but not limited to, all cable, wires, appliances, towers,

antennae, poles, studio equipment, converters, tools, vehicles

and fixtures) and instruments, as those terms are defined

in the Illinois Commercial Code, and the proceeds thereof,

whether now owned or hereafter acquired, which lien and

security interest shall be created by the Security Agreement;

and

(b) an assignment of each of the Leases pursuant to

the Assignments of Lease; and

stock of the Company (the ‘‘Pledged Shares’’) pursuant to

the Pledge Agreements.

Loan Agreement, § 6.1. As further evidence of Continental's security

interest in Guilford’s assets, the parties executed a security agreement

dated January 1, 1984.

27a

not perfect its security interest with respect to three of

Guilford’s most valuable assets: 1) Guilford’s operating li-

cense from the Federal Communications Commission

(““FCC’’); 2) Guilford’s broadcast tower lease; and 3) Guil-

ford’s studio lease.

For approximately two years, Guilford honored its ob-

ligations under the loan agreement. In 1986, Guilford’s

financial situation deteriorated. Guilford filed for Chapter

11 bankruptcy on December 31, 1986. Uncomfortable with

this situation, Continental accelerated the payment sched-

ule. On January 1, 1987, Continental sent a letter to Guil-

ford demanding immediate payment in full.

As a debtor-in-possession, Guilford was in critical need

of working capital to meet its daily operating expenses.

Guilford’s only source of funds was cash collateral.2 Be-

cause Continental had a security interest in Guilford’s cash

collateral, Guilford needed either Continental’s consent or

the authorization from the bankruptcy court to use the

collateral. On January 16, 1987, the United States Bank-

ruptcy Court for the Middle District of North Carolina

(the court presiding over Guilford’s bankruptcy) entered

an order authorizing Guilford to use the cash collateral on

a limited basis. Approximately three weeks later, the bank-

ruptcy entered a consent order which permitted Guilford

to continue using the cash collateral. See In re Guilford

Telecasters, Inc., No. B-86-02633C-1] (Bankr. M.D.N.C.

Feb. 5, 1987). The order was subject to several conditions

for the protection of Continental’s interests. One such con-

dition was that Guilford’s loan payments be made on a

weekly basis.

Guilford continued paying Continental until May 1987.

Unable to maintain its loan obligations, Guilford went into

default. At that point, the guarantors picked up the loan

* Cash collateral includes funds collected from Guilford’s accounts and

accounts receivable.

28a

payments. In 1989, however, the guarantors also stopped

paying Continental. To enforce the guaranties, Continental

filed this lawsuit in federal court (based on diversity ju-

risdiction).? Robinson Everett, Kathrine Everett, and J.H.

Froelich then moved to dismiss the case for lack of per-

sonal jurisdiction. That motion was denied. See Continental

Bank N.A. v. Everett, 742 F. Supp. 508 (N.D. Ill. 1990).

Continental now moves for summary judgment.

II. DISCUSSION

Continental may prevail on its motion for summary judg-

ment only if there is no genuine issue of material fact and

it is entitled to judgment as a matter of law. Fed. R. Civ.

P. 56(c). There is a genuine issue of material fact ‘“‘if the

evidence is such that a reasonable jury could return a

verdict for the nonmoving party.’’ Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 248 (1986). Conversely, “{w]here

the record taken as a whole could not lead a rational trier

of fact to find for the nonmoving party, there is no ‘gen-

uine issue for trial.’ ’’ Matsushita Elec. Indus. Co. v. Zenith

Radio Corp., 475 U.S. 574, 587 (1986) (citing First Nat’

Bank v. Cities Serv. Co., 391 U.S. 253, 289 (1968)).

Continental asserts that there is no genuine issue of

material fact with respect to defendants’ liability under

the guaranty agreements. In an action to enforce a guar-

anty under Illinois law,* a prima facie case is established

‘“‘when the plaintiff enters proof of the original indebt-

edness, the debtor’s default and the guarantee.”’ Mid-City

Indus. Supply Ce. v. Horwitz, 132 Ill. App. 3d 476, 483,

476 N.E.2d 1271, 1277 (1985). None of these elements are

in dispute. Continental is therefore entitled to judgment

on the guaranties unless defendants have a valid defense.

‘According to Continental, approximately $2,800,000 (excluding in-

terest and collection expenses) remains due and owing on the loan.

‘The parties do not dispute that Illinois law governs this loan trans-

action. See Loan Agreement, § 12.5; Guaranty, § &(e).

29a

Defendants have asserted four affirmative defenses and

three counterclaims in opposition to Continental’s claim.

Since the allegations in defendants’ counterclaims are par-

allel to those set forth in the affirmative defenses, the

defenses and counterclaims shall be treated together.

A. First Affirmative Defense/Counterclaim

In their first defense, defendants raise three separate

arguments regarding the collateral for the loan. First,

defendants allege that when they executed the guaranty

agreements, Continental failed to disclose a material fact—

.e., that it is legally impossible to obtain a security interest

in an FCC license. Second, defendants assert that their

guaranties were conditioned on Continental's ability to per-

fect a security interest in all of the collateral. Third.

defendants seek a discharge from the guaranties based on

an “unjustified impairment of collateral” theory. The court

will examine each theory separately.

1. Failure to Disclose a Material Fact

According to defendants. they entered into the guaranty

agreements with the understanding that the loan was se-

cured by more than enough collateral to protect them from

loss in the event of a default by Guilford. The loan agree-

ment stated that the loan would be secured by a first lien

and security interest in the assets listed as collateral. Loan

Agreement, § 6.1(a), supra note 1. Defendants apparently

relied on Continental to take the necessary steps to perfect

a security interest in the collateral put up by Guilford.

What defendants did not realize. however, was that a party

cannot obtain a security interest in an FCC broadcast li-

cense. See Stephens Indus., Inc. v. McClung, 789 F.2d 386.

390 (6th Cir. 1986). This is significant because the FCC

license was one of Guilford’s most valuable assets, a fact

which Continental does not dispute. Defendants insinuate

that Continental was aware that a security interest in the

————E

30a

license could not be obtained, yet chose not to inform

them. Defendants further assert that they would not have

executed the guaranties if Continental had disclosed the

fact that a security interest in the FCC license could not

be obtained. Based on Continental’s nondisclosure,

defendants seek a complete discharge from their obliga-

tions under the guaranties.

In response, Continental argues that defendants have

expressly waived any objections to Continental’s failure to

perfect a security interest in the collateral. Specifically,

Continental relies on section 6(c) of the guaranty agree-

ment. which contains the following waiver provision: “The

Guarantor hereby expressly waives ... all diligence in...

protection of or realization upon ... any security for [the

loan].” Guaranty, § 6(c). Continental also emphasizes that

under section 6(a), it has the discretion to release or sur-

render its security interest. Jd. § 6(a). These clauses are

unavailing. Contractual waiver provisions do not foreclose

defendants’ first argument because defendants have

brought Continental’s good faith into question. In Illinois,

a duty of good faith and fair dealing is implied in every

contract (including guaranties), Dayan v. McDonald’s Corp.,

125 Ill. App. 3d 972, 989-90, 466 N.E.2d 958, 971 (1984);

McHenry State Bank v. Y & A Trucking, Inc., 117 Ill.

App. 3d 629, 632-338, 454 N.E.2d 345, 348 (1983); see also

Jordan v. Duff and Phelps, Inc., 815 F.2d 429, 488 (7th

Cir. 1987), cert. dismissed, 485 U.S. 901 (1988); and the

obligation to perform in good faith may not be waived.

BA Mortgage and Int'l Realty Corp. v. American Nat'l

Bank and Trust Co., 706 F. Supp. 1364, 1376 (N.D. Ill.

1989); Morris v. Columbia Nat’l Bank, 79 Bankr. 777, 785

(N.D. Ill. 1987).

As a master of law, a creditor does not stand in a

fiduciary relationship with the guarantor. Farmer City

State Bank v. Guingrich, 139 Ill. App. 3d 416, 423, 487

N.E.2d 758, 763 (1985). In certain cases, however, the duty

of good faith may require the creditor “to inform [the

3la

guarantor] of circumstances which materially increase [the]

risk as guarantor.’’ McHenry State Bank, 117 Ill. App. 3d

at 634, 454 N.E.2d at 349. If the creditor takes any action

which “increases the guarantor’s risk or deprives the guar-

antor of the opportunity to protect himself,” the guarantor

should be released from the guaranty to the extent of his

injury. Jd. at 633, 454 N.E.2d at 348.

In this case, there is evidence in the record that Con-

tinental knew, at the time of contracting, that it could not

perfect a security interest in Guilford’s FCC license. Con-

tinental did not inform defendants of this fact, even hough

the license was a valuable asset. But this nondisclosure,

standing alone, does not demonstrate that Continental was

acting in bad faith. There is absolutely no evidence that

Continental actively concealed material facts from

defendants. The ability to obtain a security interest in a

license is a matter of law, and such information was avail-

able to defendants from sources other than Continental.

Notwithstanding Continental’s duty of good faith,

defendants have an obligation to make an inquiry into all

circumstances that are relevant to their risk as guarantors.

St. Charles Nat’l Bank v. Ford, 39 Ill. App. 3d 291, 295,

349 N.E.2d 430, 434 (1976). Defendants should have made

some inquiry into the facts affecting their risk; their failure

to do so precludes them from complaining of Continental’s

failure to disclose.

Defendants admit that as early as August 1987, they

learned that Continental did not have a security interest

in the FCC license. Rather than raising an objection to the

collateral at that time, they continued to make payments

under the guaranties for two more years. In light of the

fact that defendants continued to honor their guaranties

after discovering the truth, there is reason to question the

sincerity behind defendants’ declarations of bad faith. The

Illinois Supreme Court has suggested that the failure to

promptly object upon the discovery of fraud may, under

certain circumstances, amount to a waiver. Eisenberg v.

SR Oe Se eee

32a

Goldstein, 29 Ill. 2d 617, 195 N.E.2d 184 (1963), cert.

denied, 377 U.S. 964 (1964). In Eisenberg, the court stated:

A person who has been misled by fraud or misrepre-

sentation is required, as soon as he learns the truth,

to disaffirm or abandon the transaction with all rea-

sonable diligence, so as to afford both parties an op-

portunity to be restored to their original position. If,

after discovering the untruth of the representations,

he conducts himself with reference to the transaction

as though it were still subsisting and binding, he

thereby waives all benefit of relief from the misre-

presentations.

Id. at 622, 195 N.E.2d at 186-87. At any rate, it is un-

necessary to reach the waiver question because there is

insufficient evidence pointing to a lack of good faith on

the part of Continental.

Defendants have not cited any Illinois cases in which a

creditor was deemed to have acted in bad faith by failing

to disclose information relating to the risk of the guaranty.

Instead, defendants rely primarily on a not-so-recent New

York case, First Citizens Bank & Trust Co. v. Sherman’s

Estate, 250 A.D. 339, 294 N.Y.S. 131 (19387). In that case,

the guarantor (Sherman) guaranteed a bank loan to his

son-in-law (Hatfield). The guaranty agreement purported

to fully detail the collateral securing the loan. At the top

of the list of collateral was Hatfield’s interest in the estate

of his father, which Hatfield had assigned to the bank.

The bulk of this estate consisted of a farm. Prior to the

execution of the guaranty, the bank released its interest

in the farm back to Hatfield. When Sherman signed the

guaranty, he did not know that the loan was no longer

secured by the farm, and the bank failed to inform him.

The court concluded that the bank’s nondisclosure

amounted to fraud:

While in many instances mere silence cannot be made

the basis of fraud, yet, where the circumstances are

33a

of such a nature as to impose a duty upon one to

speak, and where he deliberately fails to do so, his

neglect will be deemed a deliberate suppression of the

truth, and will amount to constructive, if not actual,

fraud.

294 N.Y.S. at 139. Having determined that Sherman was

misled by the bank’s description of the collateral, the court

disallowed the bank’s claim for enforcement of the guar-

anty. Jd. at 142.

Defendants also look to Chemical Bank v. Layne, 423

F. Supp. 869 (S.D.N.Y. 1976) for support. In Chemical

Bank, the guarantor sought a discharge from his guaranty

on the ground that the bank failed to disclose that certain

stock held as collateral contained restrictions (which re-

duced the value of the stock as collateral). When the guar-

antor inquired into the value of the stock, the bank did

not inform him that it was restricted. The guarantor stated

that he would not have executed a guaranty if he had

been fully informed by the bank. Because the bank failed

to disclose a material fact upon the guarantor’s inquiry

into the underlying collateral, the court found the guaranty

to be unenforceable. Jd. at 882.

In stark contrast to the banks involved in those two

cases, Continental did not deliberately suppress pertinent

information that was not readily available to the guar-

antors. While recognizing the bank’s duty of disclosure as

described in Sherman’s Estate, the court in Chemical Bank

emphasized that ‘‘duties of inquiry and awareness fall upon

the guarantor.” Jd. at 871. ‘‘To ensure the enforceability

of guaranties, banks need do no more than make full and

fair disclosure in response to the inquiry of a potential

guarantor.” Jd. at 881. Far from supporting defendants’

position, Chemical Bank made it clear that guarantors have

an obligation to seek important information and inform

themselves—an obligation which, as stated earlier, was not

satisfied in this case.

34a

It is not entirely clear why defendants chose to guaranty

such a large loan without first inquiring into the status

of the collateral. Defendants’ nescience in this case is par-

ticularly inexcusable: as principals and shareholders of

Guilford, defendants were intimately familiar with the com-

pany and the value of its assets as collateral. Having failed

to make any inquiry whatsoever, defendants now cannot

seek to void the guaranties based on Continental’s silence.

2. Collateral as a Condition Precedent

Defendants’ second argument is that Continental's abil-

ity to perfect a security interest in the collateral was a

condition precedent to their performance under the guar-

anties. Since Continental did not perfect a security interest

in the FCC license, Guilford’s tower lease, or Guilford’s

studio lease, defendants contend that they should be ex-

cused from their guaranties. This court disagrees.

None of the guaranty agreements or corresponding loan

documents confirm defendants’ assertion that obtaining a

security interest in all of the collateral was a condition

precedent to the guaranties. There is no reference to such

a condition precedent in the contracts. Nor is there any

evidence of an unwritten mutual understanding between

Continental and the guarantors. Continental never made

any oral representations which validate the existence of

the alleged condition. And, while defendants contend that

they believed that the guaranties were conditional, they

did not communicate this belief to Continental.

* Defendants claim that the condition precedent can be found in sec-

tion 10 of the loan agreement. Defendants’ reliance on that section is

misplaced. Section 10 merely specifies the conditions that had to be

met by Guilford before Continental would issue the initial revolving

loan. It simply does not speak to the issue of whether defendants’

guaranties were conditioned on Continental's ability to obtain a security

interest.

35a

Although the loan was to be secured by Guilford’s as-

sets, it does not necessarily follow that the guaranties were

conditioned on Continental’s ability to perfect a security

interest in those assets. The guaranty agreements certainly

do not provide any support for defendants’ argument: those

agreements expressly provide that repayment is “uncon-

ditionally” guaranteed. See Guaranty, § 1. The agreements

also vested Continental with discretion to release or sur-

render its security interest without notice to the guaran-

tors. Id. § 6(a). Given the fact that Continental could

release its security interest without altering its rights un-

der the guaranties, it seems implausible that the guaranties

were conditioned on perfecting the security interests.°*

Even if the guaranties were conditional, defendants stil]

cannot justify their nonperformance. The security agree-

ment, which granted Continental a security interest in

Guilford’s assets, was for the benefit of Continental, not

the guarantors. Security Agreement, 4 2. Continental was

* Defendants contend that this case is controlled by State Bank v.

Cirivello, 74 Ill. 2d 426, 386 N.E.2d 43 (1978), a case in which twelve

limited partners guaranteed a loan to the partnership. When the guar-

anty was executed in Cirivello, the bank represented that the loan

would not be made unless al] thirteen of the limited partners in the

partnership personally guaranteed repayment. Yet the bank disbursed

the loan even though only twelve of the thirteen limited partners signed

the guaranty. The partnership defaulted, prompting the bank to file

Suit against the guarantors. The court held that the guaranty was

unenforceable because the loan was conditioned on all thirteen limited

partners becoming guarantors. Jd. at 433, 386 N.E.2d at 46. Despite

defendants’ heavy reliance on Cirivello, this court agrees with Conti-

nental that Cirivello is distinguishable from the case at bar. Continental.

unlike the bank in Cirivello, never made any representation or oth-

erwise led the guarantors to believe that the guaranties were subject

to a condition precedent: The remaining cases cited by defendants, see

United States v. Hub City Volkswagen, Inc., 625 F.2d 213 (9th Cir.

1980); Mount Prospect State Bank v. Forestry Recycling Sawmill. 93

Ill. App. 3d 448, 417 N.E.2d 621 (1980); Federal Nat'l Bank & Trust

Co. v. Shanon Drilling, Ine., 762 P.2d 928 (Okla. 1988), which involved

evidence of a condition precedent, are equally distinguishable.

36a

therefore free to waive its right to perfect a security in-

terest in each and every unit of collateral. See FDIC v.

Nanula, 898 F.2d 545, 550 (7th Cir. 1990).’

This court will not allow defendants to use the security

agreement, an agreement executed for the benefit and

protection of Continental, as a basis for nonperformance

under the guaranties. See Marine Midland Bank v. Smith,

482 F. Supp. 1279, 1291 (S.D.N.Y. 1979), aff'd, 636 F.2d

1202 (2d Cir. 1980). The governing contracts were ham-

mered out after several months of negotiations. Absent

any solid evidence of a condition precedent, whether cre-

ated by written or oral agreement, the contracts as written

will be presumed to reflect the full intent of the parties.

The court declines defendants’ invitation to set aside the

guaranties based on some unsubstantiated nference. Ac-

cordingly, the court rejects defendants’ second argument.

3. Unjustified Impairment of Collateral

The final argument raised in defendants’ first affirma-

tive defense also rests on Continental’s failure to perfect

4 security interest in the FCC license, the tower lease,

and the studio lease. Defendants characterize this omission

as a breach of Continental’s duty of good faith, which

“result{ed] in an unjustified impairment of collateral, dis-

charg{ing] the obligations of the defendants under the

guaranties by operation of law.” Joint Amended Answer

to Complaint, ¢ 47. Insofar as this argument is premised

on Continental’s failure to perfect a security interest in

"A strong argument could also be made that defendants waived the

condition, if one indeed existed. In 1987, defendants first discovered

that Continental had not perfected its security interest in certain col-

lateral. Defendants nonetheless continued to make payment in accord

with the guaranties until 1989. After complying with the guaranties

for over two years, defendants now contend that the guaranties are

unenforceable. In this court’s view, defendants’ actions speak louder

than their words.

37a

the FCC license, the court has already addressed this issue

and resolved it in favor of Continental. Setting aside the

FCC license, the court must still address defendants’ ar-

gument regarding the_tower and studio leases.

As an initial matter, the court notes that there is noth-

ing in the record which Supports defendants’ argument.

Defendants have come forward with no facts upon which

to infer that Continental acted in bad faith by failing to

perfect a security interest in the leases. While Continental

should have taken better care to protect its own security

interests, defendants cannot attribute an improper motive

to Continental based on that proposition alone. Defendants

allege that they were relying solely on Continental’s efforts

in handling the collateral; but there is no indication that

Continental was aware of this fact. Defendants never put

Continental on notice that they were depending on Con-

tinental to file all the necessary documentation to perfect

a security interest in the leases. Without showing that

Continental was aware of defendants’ reliance, defendants

can hardly prove that Continental’s omissions rose to level

of bad faith. Considering the fact that defendants made

no effort to stay informed as to the status of the collateral,

they are in no position to complain of Continental’s in-

action or question its underlying motives.

In any event, to prevail on their unjustified impairment

of collateral defense, defendants do not have to establish

that Continental acted in bad faith. Unfortunately for

defendants, the waiver clauses set forth in the guaranties,

which do not come into play with respect to defendants’

bad faith argument, do affect defendants’ impairment of

collateral defense. Defendants’ objection to Continental’s

failure to perfect a security interest, unlike good faith

conduct, is waivable. See Morris, 79 Bankr. at 781-82.

In determining whether defendants waived their rights,

the court looks to the language of the guaranties. ‘‘Where

a contract of guaranty is unequivocal in its terms it must

38a

be interpreted according to the language used, for it is

presumed that the parties meant what their language

clearly imports.”’ National Acceptance Co. v. Exchange Nat'l

Bank, 101 Ill. App. 2d 396, 402, 243 N.E.2d 264, 267

(1968). The guaranty agreements in this case contain the

following waiver clause:

of the acceptance by the Bank of this Guaranty, (ii)

notice of the existence or creation or non-payment of

all or any of the Liabilities, (iii) presentment, demand,

notice of dishonor, protest and all other notices what-

soever, and (iv) all diligence in collection or protection

of or realization upon the Liabilities or any thereof,

any obligation hereunder, or any security for or quar-

anty of any of the foregoing.

Guaranty, § 6(c) (emphasis added). In addition, the guar-

anties permit Continental to release, surrender, or sub-

stitute any of its security interests:

(a) The Bank may, from time to time, whether before

or after any discontinuance of this Guaranty, at its

sole discretion and without notice to the Guarantor,

take any or all of the following actions: . . . (iv) release

its security interest in, or surrender, release or permit

any substitution or exhange for, all or any part of

any property securing any of the Liabilities or any

obligation hereunder, or extend or renew for one or

more periods (whether or not longer than the origina!

period) or release, compromise, alter or exchange any

obligations of any nature of any obligor with respect

to any such property, and (v) resort to the Guarantor

for payment of any of the Liabilities, whether or not

the Bank shall have resorted to any property securing

any of the Liabilities or any obligation hereunder or

shall have proceeded against any other obligor pri-

marily or secondarily obligated with respect to any of

the Liabilities.

39a

| Id. § 6(a) (emphasis added). Based on the express language

in the guaranties, the court concludes that defendants have

waived their right to complain of Continental’s failure to

perfect a security interest. Other courts have found similar

contractual provisions to constitute a waiver of the guar-

antor’s rights. See FDIC v. Hardt, 646 F. Supp. 209, 212-

13 (C.D. Ill. 1986); Exchange Nat'l Bank v. Brown, 41

U.C.C. Rep. Serv. (Callaghan) 895, 897-98 (N.D. Ill. 1985);

National Acceptance Co. v. Wechsler, 489 F. Supp. 642,

646-47 (N.D. Ill. 1980); National Acceptance Co. v. Demes,

446 F. Supp. 388, 390-91 (N.D. Ill. 1977); Ishak v. Elgin

Nat'l Bank, 48 Ill. App. 3d 614, 617, 363 N.E.2d 159, 161-

62 (1977). The agreements executed by defendants disclaim

“all diligence” in the “protection of or realization upon”’

“any security” for the loan. Guaranty, § 6(c).8 Even if, as

defendants argue, section 6(c) is not explicit enough to

constitute a valid waiver, section 6(a) provides ample sup-

port to conclude that defendants have waived their im-

pairment of collateral defense. Section 6(a) unambiguously

states that Continental may release its security interest

* Pointing to Ill. Rev. Stat. ch. 26, para. 1-102(3) (1989), defendants

contend that obligations of diligence may not be waived. That statutory

provision states as follows:

The effect of provisions of this Act may be varied by agree-

ment, except as otherwise provided in this Act and except

that the obligations of good faith, diligence, reasonableness

and care prescribed by this Act may not be disclaimed by

agreement but the parties may by agreement determine the

standards by which the performance of such obligations is

to be measured if such standards are not manifestly unrea-

sonable.

Id. (emphasis added). Contrary to defendants’ contention, paragraph 1-

102(3) is inapplicable. The statute does not prevent disclaimers of dil-

igence in all circumstances; it only prevents parties from disclaiming

provisions of the Uniform Commercial Code which prescribe obligations

of diligence. See Ill. Ann. Stat. ch. 26, para. 1-102 (Smith-Hurd) (Uni-

form Commercial Code Comment). Unable to identify any provisions in

the Code that prescribe Continental's diligence in perfecting its security

interests in this case, defendants cannot inveke paragraph 1-102(3).

40a

without any notice to the guarantors. ‘‘To say that the

creditor can completely dispose of collateral but would re-

tain liability to perfect on the very same collateral does

not make sense.” Hardt, 646 F. Supp. at 213. By con-

senting to the release or surrender of the collateral,

defendants cannot protest Continental’s failure to perfect

a security interest.’

The terms of the guaranties were freely negotiated by

sophisticated parties, and defendants have not proffered

a viable basis for avoiding the effect of these terms. Thus,

defendants have waived their right to complain of Conti-

nental’s failure to perfect its security interest.

In sum, the court concludes that none of the arguments

asserted in defendants’ first affirmative defense and coun-

terclaim can withstand Continental’s motion for summary

judgment.

-_ « B. Second Affirmative Defense/Counterclaim

Defendants’ second defense and counterclaim stem from

a payment schedule agreement allegedly breached by Con-

tinental. Defendants assert that sometime after Guilford

filed for bankrupty, the parties entered into a payment

agreement that modified the original terms of repayment.

The original loan agreement provided for a reduction of

principal on a quarterly basis. For the first two years, the

quarterly payments were to be made at a rate of 1.5% of

the outstanding principal balance. The following year, the

rate of repayment increased to 3.5% of the principal. The

quarterly payments were to increase to 5.0%, 6.0%, and

* The security agreement provides additional support for Continental's

waiver argument. Paragraph 6.3 of the agreement states that Conti-

nental has no affirmative duty with respect to perfecting its own se-

curity interests: ‘‘[t]he Bank shall have no duty as to the collection or

protection of the Collateral or any part thereof or any income thereon,

or as to the preservation of any rights pertaining thereto, beyond the

safe custody of any Collateral] actually in the Bank's possession.’’ Se-

5 curmty Agreement, 46.3 (emphasis added).

4la

7.0% in the fourth, fifth, and sixth years respectively.

Under the modified repayment schedule, the loan would

continue to be amortized at a rate of 1.5% per quarter,

with no yearly increase. In consideration for maintaining

the rate of repayment at 1.5%, defendants agreed to ac-

celerate payment of principal and interest from a quarterly

basis to a monthly basis. Defendants claim that this new

repayment schedule was to be in effect until the bank-

ruptcy proceeding was finally resolved—that is, pending a

successful reorganization of Guilford or the liquidation of

its assets. In 1989, while the bankruptcy was still pending,

Continental allegedly breached the payment agreement by

demanding payment in accord with the original terms of

the loan agreement.

At the outset, Continental has denied the very existence

of the alleged repayment scheme. Although defendants

have detailed the terms of the agreement in their joint

amended answer, they cannot merely rest on their plead-

ing. Defendants bear the burden of proof on their affirm-

ative defenses and counterclaims, and they ‘must

affirmatively demonstrate, by specific factual allegations,

that there is a genwine issue of material fact which requires

trial.’ Beard v. Whitley County REMC, 840 F.2d 405, 410

(7th Cir. 1988) (emphasis in original). After reviewing all

of the briefs, affidavits, and exhibits submitted in this case.

the court is unable to conclude that defendants have come

forward with enough facts to create a genuine issue as to

whether the parties entered into a binding agreement.

The guaranties expressly provide that Continental is not

bound by any proposed modification of the terms of the

guaranties unless such modification is in writing and signed

by Continental. See Guaranty, § 8(a) (‘nor shall any mod-

ification or waiver of any of the provisions of this Guaranty

be binding upon the Bank except as expressly set forth

in a writing duly signed and delivered on behalf of the

Bank”). Since the terms of the alleged payment agreement

42a

were not outlined in a writing signed by Continental, the

payment agreement is not binding on Continental.

Assuming that Continental could be bound by an oral

modification of the guaranties, there is insufficient evi-

dence in the record that Continental actually sat down and

agreed to modify.the repayment terms of the existing loan

and guaranty agreements. Defendants maintain that the

payment agreement arose from the consent order entered

by the bankruptcy court in early 1987, and that they made

their monthly payments pursuant to that order. See

Defendants’ Joint Response to Continental Bank’s Memo-

randum in Support of its Motion for Summary Judgment,

at 23, 26, 28. But even the consent order states that any

payments made pursuant to the order did not relieve

defendants of their primary obligations to Continental:

“The terms of this Order ... shall not affect in any way

the liability of any guarantors of any obligations of [Guil-

ford] to (Continental].”” Jn re Guilford Telecasters, Inc.,

No. B-86-02633C-11, at 8 (Bankr. M.D.N.C. Feb. 5, 1987).

In support of their position that Continental amended

the terms of repayment, defendants rely primarily on sev-

eral letters that Continental’s local counsel sent to the

guarantors on a monthly basis between 1987 and 1989.

These letters set forth the pro rata share of the loan

payments which were attributable to each guarantor for

the particular monthly period. Defendants insist that the

letters reflected Continental’s intent to maintain a pay-

ment schedule at a steady 1.5% rate of amortization.

There is nothing to suggest that by sending these let-

ters, Continental bound itself to continue accepting re-

duced payments indefinitely. Perhaps Continental accepted

smaller monthly payments to accommodate defendants’ fi-

nancial difficulties. Nonetheless, by accepting the monthly

payments, Continental did not expressly surrender its

rights to enforce the plain terms of the guaranties. See

United States v. Bachman, 601 F. Supp. 1537, 1541-42

43a

(E.D. Wis. 1985). Continental, moreover, never made any

representation or otherwise gave any indication that the

guarantors would be released if the payments were ac-

celerated. To the contrary, the guaranties specifically state

that the guarantors are not relieved of their obligation if

the payments are accelerated: ‘‘The Guarantor hereby un-

conditionally guarantees the full and prompt payment when

due, whether by acceleration or otherwise ... .” Guaranty,

§ 1 (emphasis added). Any acceleration of payment, in the

absence of bad faith, does not excuse the guarantors from

their primary obligations under the guaranty agreements.

Defendants, however, have attempted to excuse their

nonperformance on the ground that Continental committed

a breach of the duty of good faith. This implied duty serves

to protect the reasonable expectations of the parties.

Dayan, 125 Ill. App. 3d at 991, 466 N.E.2d at 972. Stated

differently, the parties to a contract may not take oppor-

tunistic advantage of one another. Jordan, 815 F.2d at

438. The court is not convinced that under the circum-

stances of this case, Continental was opportunistic in its

enforcement of the guaranties. Guilford’s financial demise

certainly provided reasonable grounds for uncertainty on

the part of Continental. There is no evidence that Con-

tinental acted arbitrarily when seeking prompt payment

from the guarantors. Defendants essentially maintained a

unilateral expectation that the loan payments would re-

main constant for an indefinite period of time. But

defendants cannot avoid the force of the guaranty agree-

ments based on this largely unsubstantiated expectation.

Defendants’ second affirmative defense and counterclaim

do not preclude the entry of summary judgment in favor

of Continental.

C. Third Affirmative Defense/Counterclaim

In their third defense and counterclaim, defendants again

accuse Continental of committing a breach of the duty of

44a

good faith and fair dealing. In support of this accusation,

defendants contend that Continental was uncooperative in

Guilford’s efforts at reorganization. When Guilford’s stock-

holders decided to replace the general manager (ostensibly

for the good of the company), they requested Continental’s

cooperation in the matter. Before implementing a change

in management, however, defendants had to obtain the

approval of the bankruptcy court. Defendants now assert

that Continental did not provide any assistance in obtain-

ing the court’s approval. As further evidence of a lack of

good faith, defendants point to the fact that Continental

voted against the reorganization plan submitted by Guil-

ford in the bankruptcy proceeding—a plan supported by a

majority of the stockholders and guarantors. By voting

against the proposed plan, Continental allegedly ‘‘pro-

tracted the Chapter 11 proceeding and prevented

defendants from obtaining approval of a plan of reorgan-

ization whereunder their loss on guaranties would be sub-

stantially reduced without preventing plaintiff from

receiving full payment.’’ Joint Amended Answer to Com-

plaint, 4 65. Defendants contend that Continental also

breached its good faith duty by ‘“‘precipitously”’ filing this

lawsuit while the parties were still negotiating an accept-

able plan of reorganization.

From a factual standpoint, it is apparent that Conti-

nental did not take any position during the bankruptcy

proceedings with respect to Guilford’s proposed change in

management. If defendants are suggesting that in order

to discharge its duty of good faith, Continental had to

take affirmative steps in support of the managerial change,

then defendants’ argument may be summarily rejected.

Defendants have cited no authority which places such an

affirmative duty on creditors to actively promote the de-

cisions of the debtor, irrespective of that creditor’s inter-

ests. Similarly, there is no reason why Continental should

have voted in favor of a proposed plan of reorganization

if that plan was against its interests in collecting on the

45a

loan. See Kham & Nate’s Shoes No. 2, Inc. v. First Bank

of Whiting, 908 F.2d 1351, 1358 (7th Cir. 1990) (‘‘The

Bank was entitled to advance its own interests, and it did

not need to put the interests of Debtor and Debtor’s other

creditors first.’’).

The implied duty of good faith provides a check against

dis.retionary actions that are arbitrary or capricious,

Dayan, 125 Ill. App. 3d at 991, 466 N.E.2d at 972. not

those that are arguably justified under the contract and

surrounding circumstances. When the guarantors stopped

making the loan payments altogether, Continental had

every reason to enforce its rights under the loan and guar-

anty agreements. The filing of this lawsuit was indeed

justified. As for defendants’ assertion that the lawsuit was

filed without adequate notice, the court directs defendants’

attention to section 6(c) of the guaranties, wherein

defendants unambiguously waived their right to notice.

Defendants’ third defense and counterclaim cannot de-

feat Continental’s motion for summary judgment.

D. Fourth Affirmative Defense

Neither Continental (in its motion for summary judg-

ment) nor defendants (in their response thereto) have even

mentioned the fourth affirmative defense. Defendants’

fourth defense consists of the following sentence:

Upon information and belief, Continental has been

paid in excess of $2.5 million dollars by these

defendants and others and accordingly the plaintiff

has received payments which have not been properly

credited in computing whatever amount might be owed

to plaintiff under their guaranties, assuming any li-

ability exists under those documents.

Joint Amended Answer to Complaint, ¢ 68. In regard to

the issue of liability, there is nothing in the record which

illuminates the significance of this defense. The amount

silica

46a

already paid by defendants may serve to reduce the amount

of damages recoverable by Continental (which is not at

issue here), but is will not support a wholesale dismissal

of Continental’s claim. This defense does not preclude sum-

mary judgment on the issue of liability.

Finally, the court will briefly address a jurisdictional

matter. When this court previously denied defendants’ mo-

tion to dismiss for lack of personal jurisdiction, the court

stated that ‘Continental must nonetheless adduce suffi-

cient facts at trial demonstrating the existence of personal

jurisdiction.” Everett, 724 F. Supp. at 512 n.7. After re-

viewing the statement of facts and exhibits submitted by

the parties, the court finds that the facts supporting the

finding of jurisdiction under the Illinois long-arm statute

are not in dispute. Consequently, there are no jurisdictional

barriers to the entry of summary judgment in this case.

III. CONCLUSION

The court finds that Continental has established all of

the elements of its claim and that defendants have no valid

affirmative defenses or counterclaims. Therefore, Conti-

nental’s motion for summary judgment is granted.

IT IS SO ORDERED.

/s/ Nicholas J. Bua

Nicholas J. Bua

Judge, United States District Court

Dated: March 28, 1991

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.