The Changing Landscape of Lending Relationships:
Guarantors Receive Expanded Rights in Illinois
By Kurt M. Carlson
One of my Much Shelist partners, Tony Valiulis, recently sent an internal e-mail describing a case related to guarantors and sureties, which was decided in late 2008. I have to admit, reading a case about sureties did not sound exciting. So, I put the e-mail aside for a night when I thought I might have trouble sleeping. The topic, however, kept nagging at me. Tony referenced the idea that if guarantors are treated as sureties, then a creditor might have to enforce its rights against the principal first, before pursuing the guarantor, or risk discharging the guarantee. Historically, sureties and guarantors have been separated not only by name, but also by their legal rights and treatment under the law.
In this economy, it will come as a shock to no one that creditors are finding that their principal borrower's assets are insufficient to repay the obligations owed to the creditor. Consequently, creditors look to guarantors to make up the difference. That is, after all, a very good reason for obtaining a guarantee as part of a lending relationship. In fact, in real estate-related transactions, particularly those within Cook County where the Circuit Court has implemented a procedure to slow down the mortgage foreclosure process, it makes a great deal of sense to pursue the guarantor first in order to a) assert pressure to get the collateral sold expeditiously, and b) obtain what available cash the guarantor might have.
However, we now run into this recent surety case—J.P. Morgan Chase Bank v. Earth Foods, Inc. In its holding, the Illinois Appeals Court reasoned that the distinctions between a guarantor and a surety are arcane, largely academic, and in a blow to academia, ignored. The decision, which has binding precedent in Illinois, effectively dissolves the distinction between guarantors and sureties.
The Upshot for Lending Relationships
Why is it important to note that guarantors now have the same rights as sureties? There exists in Illinois a Sureties Act (740 ILCS 155), which provides a surety with additional rights that have not previously applied to guarantors in the enforcement of a lending relationship. Simply put, the Sureties Act allows a surety (and now, a guarantor) to require that the creditor immediately demand and sue on contracts that the insolvent principal has failed to perform. If the creditor fails to bring legal action upon that demand, the surety/guarantor is discharged.
The Sureties Act must be strictly adhered to in order to be enforced. For instance, it requires the surety/guarantor to make its demand in writing. That requirement is consistent with the Illinois Credit Agreements Act, which requires that financial institutions and parties to a contract with those institutions reduce all agreements to a signed document in order for the contract to be binding.
Therefore, should you, as a creditor, be in receipt of a written notice from a guarantor that demands immediate action against the principal borrower, you should contact counsel immediately to formulate a timely response. If you have questions about the impact that J.P. Morgan Chase Bank v. Earth Foods, Inc. may have on your contractual relationships with sureties or guarantors, please contact Tony Valiulis or me.
Kurt M. Carlson, Chair of the firm’s Creditors’ Rights, Insolvency & Bankruptcy group and a leader of the Financial Crisis Response Team, concentrates his practice on representing creditors, assignees and financially distressed businesses of all sizes in complex business litigation, workouts, insolvency proceedings, bankruptcy reorganization cases and bankruptcy liquidations. He has extensive experience in a broad range of financial distress issues and bankruptcy-related matters, including contract disputes, receiverships, assignments for the benefit of creditors, commercial real estate foreclosures, Uniform Commercial Code sales, lender liability and commercial contract claims, fraudulent conveyance, nondischargeability claims and preference actions. Kurt can be reached at 312.521.2099 or kcarlson@muchshelist.com.
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