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Illinois App. Court (1st Dist) Holds ‘Continuing’ Guaranty Applied to Later Issued Note Obligation

promissory noteThe Illinois Court of Appeals, First District, recently affirmed a trial court’s order granting summary judgment in favor of a creditor against a guarantor, finding that the guaranty was continuing and therefore applied to a later note obligation, even though the note was issued some two years after the guaranty.

A copy of the opinion in Amos Financial LLC v. Szydlowski is available at:  Link to Opinion.

The case arose from a note issued by a corporate borrower in 2010 (“Note”) that was subsequently assigned.  In May 2008, prior to the issuance of the Note, several individual guarantors executed a “continuing” commercial guaranty (“Guaranty”) as a security on a prior 2008 note by the same borrower to the same lender.  

Plaintiff, the current assignee of the Note and Guaranty (“Assignee”), filed a complaint against one of the guarantors (“Guarantor”) alleging breach of the guaranty.  Assignee alleged that because the borrower defaulted on the Note, Guarantor owed Assignee money under the guaranty. 

The trial court granted summary judgment in favor of Assignee and Guarantor appealed.

On appeal, the Appellate Court noted that, as a guaranty is a contractual obligation, a claim for breach of guaranty is governed by the same principles as a breach of contract claim. See Riley Acquisitions, Inc. v. Drexler, 408 Ill. App. 3d 397, 402-03 (2011). Thus, to recover on the guaranty, Assignee had to establish (1) that a valid and enforceable contract existed; (2) that there was performance by the plaintiff; (3) that the defendant breached the contract; and (4) that there was a resultant injury to the plaintiff. Zirp-Burnham, L.L.C. v. E. Terrell Associates, 356 Ill. App. 3d 590, 600 (2005). ¶ 34 

Guarantor argued that summary judgment was improper as Assignee failed to establish that it was the current assignee of the guaranty, and thus failed to establish that there was a valid and enforceable contract between the parties. Guarantor further argued that even had Assignee been the current assignee of the guaranty, there were still genuine issues of material fact as to the scope of Guarantor’s liability.

To support his arguments, Guarantor argued that neither the Note nor the two allonges which indorsed it reference or expressly assigned the Guaranty to Assignee, so as to establish that Assignee was the current owner of the guaranty. Guarantor further argued, that at the very least, in viewing the evidence in the light most favorable to Guarantor, the trial court should have ruled that there remained a genuine issue of material fact as to the scope of his liability under the guaranty.

Assignee responded that Guarantor’s arguments were irrelevant as the trial court properly found that the plain language of the Guaranty established that it was a “continuing” guaranty, which obligated Guarantor to all future debts arising from the previous relationship established in the 2008 note.

The Appellate Court agreed with Assignee and found that the guaranty was “continuing,” and that the trial court correctly held summary judgment was proper. 

A “continuing guaranty is a contract pursuant to which a person agrees to be a secondary obligor for all future obligations of the principal obligor to the obligee.” TH Davidson & Co. v. Eidola Concrete, L.L.C., 2012 IL App (3d) 110641, ¶ 11 (quoting Restatement (Third) of Suretyship and Guaranty § 16 (1996)). As guaranties are construed according to general contract principles, “[w]hether a guaranty is a continuing one will depend on the language of the contract, interpreted according to the intention of the parties as manifested by their writings.” 20 Ill. L. and Prac., Guaranty § 15, at 369-70 (2010); see also McLean County Bank v. Brokaw, 119 Ill. 2d 405, 412 (1988); Blackhawk Hotel Associates v. Kaufman, 85 Ill.2d 59, 64 (1981). 

Generally, “[w]here, by the terms of written guaranty it appears that the parties look to a future course of dealing or a succession of credits,” it is considered a continuing guaranty. Scovill Manufacturing Co. v. Cassidy, 275 Ill. 462, 467 (1916); Weger v. Robinson Nash Motor Co., 340 Ill. 81, 92 (1930); see also C.C.P. Ltd. Partnership v. First Source Financial, Inc., 368 Ill. App. 3d 476, 483 (2006). ¶ 40. 

The Appellate Court ruled that a review of the guaranty in the instant matter unequivocally established that a future course of dealing was contemplated by the parties. The Court pointed to a section of the guaranty which contained a heading “CONTINUING GUARANTY” which explicitly provided the Guarantor would remain responsible for his share of the borrower’s indebtedness “now existing or hereinafter arising or acquired, on a continuing basis.” The provision further stated that any payments made on the indebtedness would not discharge nor diminish Guarantor’s obligations for any “remaining and succeeding indebtedness.”

The Appellate Court further noted the Guaranty provided no limitation on the duration of the guaranty. Further, Guarantor expressly authorized the original lender, “without notice or demand” and “without lessening” the liability under the guaranty, to “make one or more additional secured or unsecured loans *** or otherwise to extend additional credit” to the corporate borrower.

Thus, the Appellate Court found there was no doubt that a future course of dealing was contemplated by the parties and that the 2008 contract was for a continuing guaranty. See e.g., Harris Bank Argo v. Midpack Corp., 151 Ill. App. 3d 293, 295-296 (1986).

The Appellate Court further found that Assignee’s failure to attach the 2008 note to the complaint was irrelevant and the 2010 Note was proof of the borrower’s indebtedness and an obligation “hereinafter arising” under the Guaranty. Additionally, the Appellate Court found that the 2010 Note was a future obligation between the original parties referenced in the guaranty for which Guarantor was liable.

Guarantor further argued that Assignee should not be allowed to enforce the Guaranty as it only claimed to be the holder of the guaranty by way of assignment and that there was no assignment of the guaranty.

The Appellate Court disagreed, finding this was essentially an argument for lack of standing. The Appellate Court found Guarantor failed to offer any evidence to show Assignee was not the holder of the guaranty and thus failed to meet his burden of pleading and proving the affirmative defense of lack of standing.

The Appellate Court also held that no explicit assignment of the guaranty was needed for Assignee to enforce the Note, as it was sufficient for Assignee to show it was the holder of the Note. 

The Appellate Court found Comment f to section 13 of the Restatement Third of law, Suretyship and Guaranty, relied on by the trial court, to be instructive here. Section 13 provides that “…It can usually be assumed that the person assigning an underlying obligation intends to assign along with it any secondary obligation supporting it. Thus, unless there is agreement to the contrary or assignment is prohibited, *** assignment of the underlying obligation also assigns the secondary obligation.”  Restatement (Third) of Suretyship and Guaranty § 13, Comment f. (1996).

The Appellate Court ruled that the Guaranty here explicitly authorized the original lender to “assign or transfer” the Guaranty from time to time.  In addition, the Guaranty stated it “shall be binding upon and inure to the benefit of the parties, their successors and assigns.” Accordingly, the Appellate Court found when the Note was assigned to Assignee, the Guaranty was assigned as well, and thus summary judgment was proper in favor of Assignee.

Therefore, the Appellate Court affirmed the judgment of the trial court.

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Jenna Tersteegen is an Associate in Maurice Wutscher's New York City office, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Prior to joining the firm, Jenna was an associate attorney at a litigation law firm in New York City. Her practice covered New York state labor and employment laws, premises liability and property damage cases. She conducted all pre-trial aspects of litigation, including preparing case strategy and evaluation reports, taking and defending depositions, and drafting dispositive pre- and post-trial motions. She is admitted to practice law in Illinois and New York, and the U.S. District Court for the Eastern District of New York.

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