Koenig & Strey GMAC Real Estate v. Renaissant 100 South Michigan I
2016 IL App (1st) 161783
| Ill. App. Ct. | 2017Background
- First American Bank (Bank) made $22,450,000 in loans to Renaissant entities secured by a mortgage and related instruments; several guarantors (including the Borkowski brothers) executed a guaranty limiting their liability to $7,000,000 principal plus 100% of accrued and unpaid interest, late fees, enforcement costs, and extraordinary claims.
- Borrowers defaulted; the court entered a foreclosure judgment on January 26, 2009, finding net amounts due after applying a $4,000,000 letter of credit, and reserved determination of any deficiency and guaranty liability.
- Bank purchased the property at judicial sale with a credit bid (initially $12 million, later confirmed on remand) and sought a deficiency and guaranty judgment reflecting principal, accrued interest, and expenses.
- Circuit court ultimately entered judgment against the guarantors for $18,421,241.04; guarantors appealed, challenging (1) inclusion of postjudgment interest in guaranty liability, (2) application/timing of the $4 million letter-of-credit proceeds, and (3) Bank’s application of its credit bid (whether interest/expenses should have been paid before principal).
- Appellate court vacated the judgment and remanded, holding postjudgment interest (statutory interest on the foreclosure judgment after entry) was not covered by the guaranty’s promise to pay “accrued and unpaid interest under the Notes,” but upheld the Bank’s application of the letter-of-credit proceeds and the manner of applying its credit bid per mortgage terms.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether guarantors are liable for postjudgment interest accruing after foreclosure judgment | Postjudgment interest is interest on amounts due under the notes and thus within guaranty | Guaranty covers only accrued and unpaid interest under the notes (pre-judgment); statutory postjudgment interest is separate | Guarantors not liable for postjudgment interest; guaranty limited to accrued/unpaid note interest (pre-judgment) |
| Whether $4M letter-of-credit proceeds should reduce guarantors’ $7M guaranteed principal | Bank: LOC was posted by borrowers as collateral; proceeds properly applied to borrowers’ obligations | Guarantors: LOC was sourced by them and should credit their Guaranteed Principal Amount | LOC was issued on borrowers’ order; proceeds applied to borrowers’ debt properly and need not reduce guarantors’ $7M principal |
| Whether LOC proceeds should be applied as of drawing date (April 3, 2008) or foreclosure-judgment date (Jan 26, 2009) | Bank: Judgment fixed application date; Borkowskis failed to appeal that order | Guarantors: LOC should have been credited at drawing date | Application date fixed by Jan 26, 2009 judgment; guarantors failed to timely appeal that order and cannot relitigate it here |
| Whether Bank breached implied covenant of good faith by applying its credit bid to principal before interest | Bank: Mortgage governs application; it applied proceeds first to foreclosure expenses then as mortgage discretion allowed (applied to principal) | Guarantors: Guaranty ambiguity should be construed for them; credit bid application maximized guarantor liability unfairly | Mortgage governed distribution; Bank properly applied bid first to costs then, in its discretion per mortgage, to principal; no breach of implied covenant |
Key Cases Cited
- Owens v. McDermott, Will & Emery, 316 Ill. App. 3d 340 (interpretation of unambiguous contract is from plain language)
- Doerr v. Schmitt, 375 Ill. 470 (debt merges into judgment; note ceases to exist on judgment)
- Blakeslee's Storage Warehouses, Inc. v. City of Chicago, 369 Ill. 480 (postjudgment interest is statutory in origin)
- Mount Prospect State Bank v. Marine Midland Bank, 121 Ill. App. 3d 295 (letters of credit involve distinct contracts; treat as contracts for interpretation)
- Molter Corp. v. Amwest Surety Insurance Co., 267 Ill. App. 3d 718 (letter-of-credit construction follows general contract principles)
- American Nat'l Bank & Trust Co. of Chicago v. Mack, 311 Ill. App. 3d 583 (mortgage terms control application of foreclosure proceeds)
- Bank One, Springfield v. Roscetti, 309 Ill. App. 3d 1048 (implied covenant of good faith cannot override express contract terms)
- JP Morgan Chase Bank v. Fankhauser, 383 Ill. App. 3d 254 (orders with certain language are immediately appealable under Rule 304(a))
- Battaglia v. Battaglia, 231 Ill. App. 3d 607 (failure to timely appeal an order bars relitigation of matters affected by that order)