Page 11 - John Hundley 2013

Banking Law Roundup

Sharp Thinking

No. 85 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. March 2013

Guaranty Triggered by Resistance to

Foreclosure Is Enforceable, Court Says

By John T. Hundley, Jhundley@lotsharp.com, 618-242-0246

A provision making obligors personally liable if they resist foreclosure on an otherwise non-recourse
obligation is enforceable, a panel of the Illinois Appellate Court in Chicago has held.

The decision, Bank of Am., N.A. v. Freed, 2012 IL App (1st) 110749, was another in a series of
opinions arising from the ill-fated attempt to redevelop “Block 37” in downtown Chicago. See also Sharp
Thinking No. 36 (Aug. 2010); No. 68 (July 2012). As discussed in the previous issues of this newsletter,
the obligors contested and appealed from the mortgagee’s attempt to have a receiver appointed (No. 36)
and failed to comply with citations to discover assets (No. 68).

At issue in the third appeal was a “carve out” provision of a guaranty that required guarantors
to pay the full amount due, plus costs and interest, if they “contest[ed], delay[ed] or otherwise
hinder[ed] any action” by the bank for appointment of a receiver or foreclosure of the lien.
Guarantors argued that the provision was vague, ambiguous, overly broad, and unenforceable as a
penalty.

The panel summarily rejected the guarantors’ vagueness and ambiguity argu-
ments, stating that “[i]f a court can ascertain its meaning from the plain language of
the contract, there is no ambiguity” and the appeal of the receivership order “clearly
qualifies as contesting the Bank’s actions in connection with the appointment of a
receiver”.

Guarantors’ penalty arguments were more problematic. Citing Telenois, Inc. v. Village of Schaum-
burg, 256 Ill.App.3d 897 (1993), they argued that damages under the clause bore no
relation to their opposition to the receivership and hence the clause was unenforce-
able as a penalty designed merely to secure their performance. Noting the matter
apparently was one of first impression in Illinois and surveying the law of other juris-
dictions, the court sided with cases holding such clauses enforceable. The court
appeared to accept the mortgagees’ argument that guarantors were not denied the
right to contest the receivership and foreclosure but “consequences would be
enforced if they did”.

Similarly, the panel rejected arguments that the clause was unenforceable as a restraint on their legal
rights. “[D]efendants were not precluded from contesting the appointment of a receiver or filing
defenses to the foreclosure action, but by taking those actions they forfeited their exemption from
liability for full repayment of the loan,” the court said.

●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●●
Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
Thinking shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein
constitute educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal
advice on your particular situation, contact a Sharp lawyer at the phone number or one of the addresses provided on page 2 of this newsletter.