Watseka First National Bank (Watseka Bank) filed suit on January 5, 1984, against Ken L. Ward as principal debtor and Patti Ward, Frank Ruda and Virginia Ruda, guarantors, seeking to recover the balance on two notes. The Wards were dismissed from this action after they were adjudicated bankrupt. The trial court awarded judgment on the notes in the amount of $186,322.97 with interest and costs. The
This lawsuit involves two promissory notes, both dated May 2, 1983. These notes evidenced Ward’s indebtedness to Watseka Bank arising out of the bank’s funding of Ward’s farming operations. The first was termed a “renewal of capital note” that renewed loans, the proceeds of which Ward used to purchase farm equipment.
The execution of these notes was not the first transaction involving these parties. According to Ken Ward’s testimony, the bank first began loaning money to him in 1973, two years after he began to farm. Throughout the years leading up to this litigation, Watseka Bank financed Ward’s farming operation. Ward repaid the bank, with varying degrees of success, out of the proceeds of his farming operation.
Ward did not own the land that he farmed but, rather, he leased it. He began farming land owned by the Rudas; his parents-in-law, in 1981. Ward paid the Rudas rent, both in cash and on a crop-share basis, at different points during the time he farmed their land. Ward also had a partner named Robert Taylor with whom he apparently shared the proceeds of his operations. The Iroquois First State Bank had also loaned Ward money and it too held a security interest in Ward’s crops.
In July of 1981, with his total line of credit at $145,005.90 and the prospect of a loan from the Farmers Home Administration questionable, Ken Ward and Watseka Bank discussed the possibility of obtaining a guarantee from the Rudas, in order for the bank to be able to continue financing Ward’s operation. The bank
During the next two years Ken Ward continued to borrow money and pay back portions out of the proceeds of his farming operation. His financial condition did not improve during this time, however, and it in fact worsened. The bank concluded, in February of 1983, that “[i]f it were not for Frank and Virginia Ruda’s guarantee, we would probably not be loaning Ward any money.”
In April of 1983, Frank Ruda submitted then current financial statements reflecting a net worth of over $2 million. According to the bank’s memoranda, it suspected that this figure was overstated but felt that the Rudas’ net worth was approximately $1V2 million. Based on the Rudas’ net worth, and despite previous cash-flow problems with both Frank Ruda and Ken Ward, the bank restructured and extended Ward’s debt, culminating in the notes that are the subject of this lawsuit. These notes contained the following language: “If the holder deems itself insecure then at its option, without demand or notice of any kind, it may declare this note to be immediately due.”
The ensuing summer of 1983, unfortunately, was not a kind one for Illinois farmers. A severe drought greatly affected the crops, and as a result, Ken Ward realized yields far below that which he projected. In October of that year, a meeting was held between Ken Ward, Frank Ruda, officers and attorneys of Watseka Bank and representatives
Frank Ruda evidently was not pleased with these arrangements and actively avoided any contact with Watseka Bank for the following two months. In early December of that year, attorneys for Watseka Bank sent Frank Ruda a letter informing him that the bank would take legal action if he did not sell the farms and apply the proceeds to the debt. The bank’s memoranda indicate that, having received no response, it exercised the confession of judgment clause on the notes in late December. The bank actually filed its complaint against all four defendants on January 5, 1984, approximately three months prior to the stated maturity date, alleging that the notes were due pursuant to the insecurity clauses.
Watseka Bank alleged that Ward was liable as debtor under the promissory notes, and alleged that the Rudas and Patti Ward were liable pursuant to the unlimited guarantees that they signed in 1981. The defendants set forth several affirmative defenses with their answer, including want of consideration and fraud in inducing the Rudas to sign the unlimited guarantees for the Ward indebtedness, failure by the bank to provide adequate notice of the sale of collateral pursuant to section 9 — 504(3) of the Uniform Commercial Code (111. Rev. Stat. 1987, ch. 26, par. 9 — 504(3)) (U.C.C. or Code), and breach of a fiduciary duty. The issue of plaintiff’s failure to act in good faith in accelerating the debt appears to have first
The trial judge ruled in favor of the plaintiffs as to all matters, except for the defendants’ allegation regarding plaintiff’s failure to accelerate in good faith. The trial judge, nevertheless, awarded to plaintiff judgment on the notes, but ordered counsel to recalculate the amount owing on the notes because the court determined that the bank inappropriately applied the proceeds from the sale of the collateral to the indebtedness before the maturity date stated on the notes.
The judge’s specific finding was that Watseka Bank “had no basis for accelerating the maturity date on the notes,” but he refused to discharge the Rudas’ liability as sureties because, at the time of trial, the stated maturity date on the notes had come and gone. It is not clear what standard the judge used for either of these decisions and the attorneys’ memoranda of points and authorities shed little light on the question.
On appeal, the Rudas argued that the bank failed to act in good faith pursuant to section 1 — 208 of the Code (111. Rev. Stat. 1987, ch. 26, par. 1 — 208), and that the bank failed to provide proper notice of the sales of the collateral pursuant to section 9 — 504 of the Code (111. Rev. Stat. 1987, ch. 26, par. 9 — 504). Addressing only the first issue, the appellate court concluded that “the trial court’s failure to find an absence of good faith in the acceleration of the due date of Ward’s debt was contrary to the manifest weight of the evidence.” (175 111. App. 3d 753, 757.) The appellate court also concluded that the bank’s improper acceleration of the debt materially altered the Rudas’ principal obligation, thereby releasing
In this appeal Watseka Bank argues that the appellate court (1) incorrectly termed the test under section 1 — 208 as objective, (2) erred, in any event, in finding a lack of good faith, (3) erred in finding that the bank’s acceleration of the notes served to release the Rudas from their guarantee liability, and (4) failed to properly find that the language of the Rudas’ guarantees indicated a waiver of any defense based on wrongful acceleration. Because we find in favor of Watseka Bank as to the first two issues, we need not address the final two. We will discuss the Rudas’ contention on cross-appeal later in this opinion.
The insecurity clauses, which provided the basis for the bank’s acceleration of these notes, are specifically addressed in the Uniform Commercial Code (U.C.C.). Section 1 — 208 states as follows:
“A term providing that one party or his successor in interest may accelerate payment or performance or require collateral or additional collateral ‘at will’ or ‘when he deems himself insecure’ or in words of similar import shall be construed to mean that he shall have power to do so only if he in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against whom the power has been exercised.” (111. Rev. Stat. 1987, ch. 26, par. 1 — 208.)
This Code section specifically permits the use of insecurity clauses, but allows creditors to exercise them only if they do so in good faith. There has been considerable debate, however, concerning what the term “good faith”
The term “good faith” appears repeatedly in the U.C.C. Section 1 — 203 states that every contract or duty within the scope of the Code has an obligation of good faith. (111. Rev. Stat. 1987, ch. 26, par. 1 — 203.) Other Code sections, such as 1 — 208, and several within articles 2 and 3, specifically identify the obligation of the parties to act in good faith. Just what the term means, however, remains somewhat of a mystery. Its meaning, moreover, may change, depending upon the context in which it is used.
The concept of “good faith,” under the Code, has been the subject of continued debate among the commentators. One has argued that the term “good faith” has no independent meaning, and can only be determined by excluding that which can be identified as “bad faith.” (Summers, “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195 (1968).) Another author criticizes this approach and concludes that, in order to learn what “good faith” means, “we need to consider the purposes that the concept serves in legal discourse.” (Patterson, Wittgenstein and the Code: A Theory Of Good Faith Performance and Enforcement Under Article Nine, 137 U. Pa. L. Rev. 335, 371 (1988).) Another commentator traces the origin of the term as it became codified in the Code and identifies a distinction between “good faith purchase” and “good faith performance.” Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. Chi. L. Rev. 666 (1963).
In the article by Professor Patterson cited above, it is suggested that “good faith,” as used in article 1 of the Code, implies a subjective standard, whereas that term, as used in article 2, implies an objective standard. Section
This test, which at least one court has termed “the pure heart and empty head” test, appears potentially draconian “because of the great latitude it gives the creditor and the onerous burden of proof it imposes on the debtor.” (Black v. Peoples Bank & Trust Co. (Miss. 1983),
The severity of recognizing the subjective test contemplated by section 1 — 208 while at the same time placing the burden of proof on the debtor to establish the creditor’s subjective lack of good faith, as that section also requires, is tempered by other Code sections. For instance, section 1 — 103 allows courts to supplement the U.C.C. with common law principles and equity where the Code does not specifically displace them. (111. Rev. Stat. 1987, ch. 26, par. 1 — 103.) Additionally, the general obligation of good faith found in section 1 — 203 is “further implemented by [sjection 1 — 205 on course of dealing and usage of trade.” (111. Ann. Stat., ch. 26, par. 1 — 203, Uniform Commercial Code Comment, at 58-59 (Smith-Hurd 1963).) While these provisions do not go as far as measuring a creditor’s actions by a “reasonable accelerator” standard, they do insure that a creditor will not be permitted to accelerate in a manner that is contrary to an established course of performance or course of dealing between the parties, in violation of the clear intention of the parties, or in a manner that is inconsistent with the express practices of the industry.
The question of whether a particular creditor has in fact acted in good faith provides the focus of litigation involving section 1 — 208. Most courts that have addressed the issue have determined that the test of good faith is subjectively measured. These courts have determined that a creditor acts properly in exercising an insecurity clause so long as it does so honestly, irrespective of whether it acts reasonably. Quest v. Barnett Bank (Fla. App. 1981),
• Several other courts, however, have chosen to impart an objective element into the test of whether a creditor has acted in good faith in accelerating a debt. In Kupka
“In his excellent treatise on security interests, Professor Gilmore indicates that the language of UCC § 1 — 208 means in substance that ‘[t]he creditor has the right to accelerate if, under all the circumstances, a reasonable man, motivated by good faith, would have done so.’ ” (408 F.2d at 1371 n.2, quoting 2 G. Gilmore, Security Interests in Personal Property §43.4, at 1197 (1965).)
We must disagree with the professor’s conclusion on this question. There appears to have been some debate as to whether the standard of commercial reasonableness would become part of section 1 — 208. Professor Gilmore might even have been a proponent of such a standard when the Code was being drafted. The absence of such a standard in section 1 — 208, however, is conspicuous. We are not able to insert such a provision where the drafters chose to leave it out.
A Colorado court, in Richards Engineers, Inc. v. Spanel (Colo. App. 1987),
The defendants cite an Indiana appellate court case. (Universal C.I.T. Credit Corp. v. Shepler (1975),
“We note, however, that the absence of a similar burden of observing ‘reasonable commercial standards’ on a secured party reflects the Code drafters’ recognition that sales transactions are more amenable to establishment of ‘reasonable commercial standards’ than are the relations between secured parties and debtors.”
The Mississippi Supreme Court, citing Universal, Professor Gilmore’s treatise and its own pre-Code law, also concluded that a creditor’s belief that the prospect of payment has been impaired must be reasonable. (Black v. Peoples Bank & Trust Co. (Miss. 1983),
The author of a well-known general treatise on the U.C.C. has criticized this line of cases. (1 R. Anderson, Uniform Commercial Code §1 — 208:47 (3d ed. 1981).) This author states that the confusion stems from the fact that there is a pseudo-objective element to which courts look when determining the credibility of the creditor’s assertion that it felt that the security had become impaired:
“As a practical matter, it can be expected that there is a theoretical breaking point and that the trier of fact will reach the conclusion that the non-merchant did not honestly believe when the circumstances are such that the trier does not think that any reasonable person could have possibly believed as the non-merchant claims to have believed.” (1 R. Anderson, Uniform Commercial Code §1-208:47, at 463 (3d ed. 1981).)
Indeed, the question of whether a witness is credible is always an issue to be determined by the trier of fact. The proper inquiry, however, is whether the secured party acted honestly, not whether the secured party acted reasonably.
“Since 1 — 208 requires only that the secured party act in ‘good faith’ (‘honesty in fact’), the Code standard seems to lie somewhere between a strict objective test (reasonable prudent man) and a thoroughly subjective one (whim). The draftsmen apparently intended an objective standard.” (J. White & R. Summers, Hornbook on the Uniform Commercial Code §25 — 3, at 1192 (3d ed. 1988).)
These authors also conclude, interestingly, through analyzing several of the cases in this area, that it makes little difference which test prevails because the question whether the creditor acted in good faith in accelerating a debt is answered the same way regardless of whether the test is termed subjective or objective.
We conclude that a purely objective test of reasonableness was not intended to be applied to the question of whether a secured party has a good-faith belief that the prospect of payment or performance has become impaired. We likewise conclude that a moderating influence brought to bear on section 1 — 208 by sections 1 — 103 and 1 — 203, and the incorporation into the definition of good faith of the honesty in fact in the conduct or transaction concept of section 1 — 201, prevents an arbitrary or capricious exercise of the power to accelerate the maturity of an instrument. Although we adhere generally to the belief that section 1 — 208 incorporates a subjective rather than an objective test, we find that because of the effect of the other sections mentioned, the test is not purely subjective. A certain amount of objectivity is involved in ascertaining the honesty in fact concept of good faith. This requirement insists that the desire to accelerate be based on more than the mere whim of the obligee.
Officers of Watseka Bank stated, at trial, that the reason it accelerated these notes was because it became obvious that Ward would have an insufficient cash flow,
We are cognizant of the fact that the rule set forth in this case, that a creditor acts in good faith when exercising an acceleration clause so long as it acts honestly, irrespective of whether the “reasonable creditor” would have accelerated under the same circumstances, has a potential for abuse. We assume, however, that the Code drafters were also aware of this potential when they excluded from section 1 — 208 the duty to act in a commercially reasonable manner. While several courts in other jurisdictions have found unique ways to incorporate an objective element into the test of good faith (see Blaine
In light of this debate, there is no question that the Code drafters could have done a better job composing section 1 — 208. In fact, the entire concept of good faith as it appears in the U.C.C. is in need of clarification. The fact that courts and commentators have strikingly divergent views of what the term “good faith” means in section 1 — 208, and in other parts of the Code, is “antithetical to the idea of a uniform commercial code.” (Emphasis in original.) (13 U. Mich. J.L. Ref. at 644.) Inconsistency and lack of clarity may unfortunately be the inevitable consequence of a statute that was subject to extreme lobbying efforts and was the result of political compromise. Reform, however, will have to come from the legislature, not this court.
Because there is no evidence in the record in this case that Watseka Bank did not actually possess the information it claims caused it to accelerate, or that Watseka Bank actually possessed the information it asserts caused it to accelerate at the time it made the loans, the inevitable conclusion is that the Rudas have failed to establish a lack of good faith. As such, we must reverse the appellate court as to this issue. The findings of the circuit court are unclear, however, and, in any event, it must determine the proper judgment amount in light of this opinion. We therefore remand this cause to the circuit court for further proceedings consistent with this opinion.
Defendants argue on cross-appeal that they were entitled to notice of the sale of the collateral pursuant to section 9 — 504(3) of the Code (Ill. Rev. Stat. 1987, ch. 26, par. 9 — 504(3)). This section requires that the secured party provide notice to the debtor, which includes a guarantor (Commercial Discount Corp. v. Bayer (1978),
For the reasons stated, the judgment of the appellate court is reversed, the judgment of the circuit court is affirmed in part and reversed in part, and the cause is remanded to the circuit court of Iroquois County.
Appellate court reversed; circuit court affirmed in part and reversed in part; cause remanded.