Big Week for Enforcement of Continuing Guaranties

Guaranties – a promise to perform the obligation of a borrower by a third-party – are documents that are often litigated but there is seemingly a dearth of Illinois case law on the topic. This week, the Second District and the Fourth District Appellate Courts of Illinois weighed in reinforcing Illinois’ courts long-standing history of enforcing commercial guaranties as written.

Picture this: you are a large commercial lender originating a new loan transaction with an established real-estate company. The potential borrower needs financing for properties in multiple counties. As security for the loan, the borrower will execute mortgages for the real estate and the principals of the borrower agreed to execute continuing guaranties covering the entire borrowing relationship. The borrower succumbed to the financial crisis of 2008 and you need to begin foreclosure proceedings.

Per the Illinois Mortgage Foreclosure Law, your counsel files suit in each county in which the real property is located. In your complaints, your counsel seeks to obtain a judgment for breach of the commercial guaranty. After years of litigation, you secure judgment in the first county. Thereafter, you secure judgment in the second county. At that point, the guarantors argue – for the first time – that the judgment in the second county is barred by the doctrine of res judicata.

This is the issue that was addressed by the Appellate Court for the Second District of Illinois in BMO Harris Bank, N.A., v. K & K Holdings, LLC, 2016 IL App (2d) 150923. In that case, the Court affirmed the trial court’s decision rejecting the guarantor’s argument that the claims brought against them in DuPage County relating to a single commercial guaranty are barred by the doctrine of res judicata because of a judgment entered against them on the same commercial guaranty in Kane County. The Court agreed with the Bank’s argument that while the claims against the guarantors in each county were based on the same commercial guaranty, the claims were not based on the same underlying transaction.

In its reasoning, the Court focused on the specific language in the guaranty and the underlying purpose of the guaranty. Specifically, the Court honed in on the language of the guaranty establishing “that the parties contemplated that there would be multiple loan transactions, each of which would trigger potential liability under the guaranty.” See ¶ 14. The Court specifically rejected the guarantors’ attempt to narrow the transactional test by focusing on the continuing-obligation language of the guaranty. The Court explained that “[r]ather than having [the guarantors] enter into a new guaranty for each loan, they opted for a continuing guaranty that would create a new obligation for [the guarantors] for each new loan.” See ¶ 15. In the end, the Court affirmed the trial court’s ruling leaving the Bank’s judgment intact.

Similar to the Second District, the Appellate Court for the Fourth District of Illinois also enforced the plain language of a continuing guaranty. In Navistar Financial Corp. v. Capitol Ready-Mix, Inc., 2016 IL App (4th) 150419, the court affirmed the trial court’s judgment. In that case, the appellant executed an “interlocking guaranty” whereby the appellant agreed to be liable for any then-existing or future debt owed to the appellee. The appellant’s chief argument was that there was no meeting of the minds relating to a debt obligation incurred at a future date.

The Court explained that when a future course of dealing is woven into the terms of a guaranty, it is a continuing guaranty. See ¶ 29. “Continuing guaranties of future obligations are valid, binding, and have a long history in Illinois.” Id. Relying on the specific language of the continuing guaranty, the Court rejected the appellant’s argument.

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