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Financial Services FLASHPOINTS March 2024

Michael L. Weissman, Levin Ginsburg, Chicago
312-368-0100 | E-mail Michael L. Weissman

Guarantor Loses Challenge to Commercial Reasonableness of Collateral Liquidation

A guarantor sought to defeat his liability on a debt he guaranteed by arguing that the secured party’s liquidation of the collateral was not commercially reasonable. He lost. MB Financial Bank v. Jacobs, 2018 IL App (1st) 171939-U.

In this case, a commercial loan was made to Dwyer Products Corp. by American Chartered Bank (the predecessor to MB Financial Bank, the plaintiff). Clayton D. Jacobs supported the facility with a personal guaranty. The loan fell into default, and MB sued Jacobs. He appealed, arguing that the liquidation of the collateral for the loan was not done in a commercially reasonable way. MB responded that it had no duty to show the disposition was commercially reasonable because it did not conduct the disposition and even if it did have such a duty, the disposition was commercially reasonable.

Jacobs executed his unconditional guaranty in April 2012. The Dwyer loan was declared in default on November 30, 2012, with an unpaid principal balance of $1,175,987. 2018 IL App (1st) 171939-U at ¶7. Dwyer elected to make an assignment for the benefit of creditors to Howard Samuels as trustee. Samuels created the Dwyer Products Creditors Trust, the objective of which was “the orderly liquidation of assets and property of [Dwyer] and the distribution of the proceeds of the liquidation to creditors of [Dwyer].” 2018 IL App (1st) 171939-U at ¶8. Samuels designated Rally Capital Services to actually conduct the liquidation of Dwyer’s assets.

Rally Capital was reported to handle 10 to 12 such liquidations each year with 25 years of experience. At trial, officers of Rally testified how the liquidation was conducted. Rally was told by Samuels to keep Dwyer operating in order to maximize the recovery on Dwyer’s assets.

In that vein, a management services agreement was executed in December 2012 among Samuels, the bank, Dwyer, DP Acquisition Group, and Millenia Products Group, under which Samuels would sell certain of Dwyer’s assets to DP Acquisition Group. Until the deal was closed, Millenia would act as Manager of Dwyer’s business.

Samuels elected to liquidate Dwyer via an auction. The auction was advertised on two occasions in the Chicago Tribune. A stalking horse bid was made by DP Acquisition Group that the bank approved. It was withdrawn prior to the commencement of the auction. At the sale held on January 3, 2013, there were bids by DP and a company named Elite Manufacturing with DP as the winner. At trial, Jacobs testified he asked for a few hours delay so that he could further educate Elite’s officers, but the request was denied.

When the case went up on appeal, Jacobs argued that it was incumbent on the bank to establish the sale was commercially reasonable. The bank responded that it wasn’t because the bank had not conducted the sale. The court concurred with the bank, saying, “Howard Samuels and Rally sold Dwyer’s assets under the ABC.” 2018 IL App 171939-U at ¶32. Having lost on that point, Jacobs then argued that Samuels and Rally were acting as agents of the bank when the sale was made. But the court said, “No evidence was presented to establish that Samuels and Rally were acting as either actual or apparent agents for the Bank.” 2018 IL App (1st) 171939-U at ¶38.

Finally, the court said even if the bank was required to establish commercial reasonableness, the record definitively reflects commercial reasonableness. Pursuant to §9-627(c)(4) of the Uniform Commercial Code, 810 ILCS 5/1-101, et seq., the disposition of Dwyer’s assets by Samuels and Rally was commercially reasonable as a matter of law. That subsection states that a sale by an assignee for the benefit of creditors automatically qualifies as commercially reasonable. Judgment for the bank.

Unambiguous Signature in Guaranty Leads to Defendant’s Dismissal

In Schneider Finance, Inc. v. Mid South Carbon Corp., No. 2018CV001311 (Wis.Cir. July 12, 2019), a purported guarantor moved for his dismissal from a lawsuit seeking to hold him liable on a guaranty. He prevailed.

Between June 13, 2014, and September 14, 2015, Schneider and Mid South Carbon Corporation entered into a series of leases for 70 tractors and trailers. At the same time, a series of unlimited guaranties were signed by William Douglas Brown. Because of payment defaults, Schneider terminated the leases on June 7, 2018, and sued Brown on the guaranties he signed for amounts due.

Brown defended the lawsuit, asserting that he had signed the guaranties solely in his capacity as a representative of Mid South. As to the guaranties, directly above the signature line was “Guarantor: Mid South Carbon Corporation” and the term “By” appeared before a line on which there was space for a signature. From this, Brown contended that Mid South was the guarantor and that he signed on the line simply as a representative of Mid South. Schneider claimed that such an interpretation made no sense and that Brown was personally liable.

Rejecting Schneider’s assertion that the guaranty was ambiguous, the court said Schneider was trying to read ambiguity into a document in which there was none. It said that above the signature block Mid South was defined as the guarantor and the word “by” appeared before the signature line. The court went on to say that even if there were ambiguities, they were to be resolved against the drafter of the guaranties and that was Schneider.

While admitting that, “from a commercial standpoint, it makes little sense for a guarantor to guarantee their own debt, there is nothing to indicate that such an interpretation renders the guaranties unfair or unreasonable.” Judgment for Brown.

For more information about financial services, see COMMERCIAL AND INDUSTRIAL LOAN DOCUMENTATION (IICLE®, 2018). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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