Koenig & Strey GMAC Real Estate v. Renaissant 100 South Michigan I ( 2016 )

2016 IL App (1st) 161783
SIXTH DIVISION
Opinion filed: November 23, 2016
Nos. 1-16-1783 & 1-16-0771 (cons.)
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
FIRST DISTRICT
KOENIG & STREY GMAC REAL ESTATE, a ) Appeal from the
limited liability company, ) Circuit Court of
) Cook County
Plaintiff, )
)
v. ) No. 07 CH 27475
)
RENAISSANT 1000 SOUTH MICHIGAN I, LP, an )
Illinois limited partnership; RENAISSANT 1000 )
SOUTH MICHIGAN, LLC, an Illinois limited liability )
company; FIRST AMERICAN BANK; DESTEFANO )
AND PARTNERS, LTD., an Illinois corporation; )
TRAINOR GLASS COMPANY, an Illinois )
corporation; CURTAIN WALL AND DESIGN )
CONSULTING INCORPORATED, a Texas )
corporation; and UNKNOWN OWNERS, HEIRS, )
LEGATEES and NON-RECORD CLAIMANTS, )
)
Defendants. )
FIRST AMERICAN BANK, an Illinois banking ) Appeal from the
corporation, ) Circuit Court of
) Cook County
Plaintiff and Defendant-Appellee, )
)
v. ) No. 08 CH 16304
)
RENAISSANT 1000 SOUTH MICHIGAN LLC, an )
Illinois limited liability company; RENAISSANT 1000 )
SOUTH MICHIGAN I, L.P., an Illinois limited )
partnership; WARREN BARR; JAMES CARROLL; )
JOHN BORKOWSKI; EDWARD BORKOWSKI; )
Nos. 1-16-1783 & 1-16-0771 (cons.)
RICHARD BORKOWSKI; CONTRACTORS LIEN )
SERVICES, INC.; DESTAFANO AND PARTNERS )
LTD.; TRAINOR GLASS COMPANY; CURTAIN )
WALL & DESIGN CONSULTING )
INCORPORATED; KOENIG AND STREY GMAC )
REAL ESTATE; TISHMAN CONSTRUCTION )
CORPORATION OF ILLINOIS; CHICAGO TITLE )
LAND AND TRUST COMPANY, as trustee under )
trust number 1106328; 1000 SOUTH MICHIGAN )
AVENUE, LLC; UNKNOWN OWNERS; and NON- )
RECORD CLAIMANTS, )
)
Defendants, ) Honorable
) Robert J. Quinn and
(John Borkowski; Edward Borkowski; and Richard ) Anthony Kyriakopoulos,
Borkowski, Defendants-Appellants). ) Judges, Presiding.
______________________________________________________________________________
PRESIDING JUSTICE HOFFMAN delivered the judgment of the court, with opinion.
Justices Rochford and Delort concurred in the judgment and opinion.
OPINION
¶1 The defendants, John Borkowski, Edward Borkowski and Richard Borkowski
(collectively referred to as the Borkowskis), appeal from a $18,421,241.04 judgment entered
against them on a guaranty agreement which they executed in favor of the plaintiff, the First
American Bank (Bank). They argue that the circuit court erred in: (1) including post-judgment
interest on the judgment entered against the underlying borrowers in the computation of the sums
owed on their guaranty; (2) failing to require the Bank to apply the amount of its credit bid on
the foreclosure sale of the borrowers' property to expenses and accrued interest before crediting
principal; and (3) failing to grant a credit against their liability for the proceeds of a $4 million
letter of credit drawn upon by the Bank on April 3, 2008. For the reasons which follow, we
vacate the circuit court's judgment and remand this matter back to the circuit court with
directions to recalculate the amounts due by the Borkowskis on their guaranty agreement
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Nos. 1-16-1783 & 1-16-0771 (cons.)
consistent with the opinions expressed herein and enter judgment in favor of the Bank in that
sum.
¶2 The Bank made two loans to Renaissant 1000 South Michigan LLC (Renaissant) totaling
$22,450,000 which were memorialized by a $16 million Term Land Note and a $6,450,000 Term
Mezzanine Note (collectively, the Notes). The Notes were secured by a mortgage on the
property commonly known as 1000 South Michigan Avenue in Chicago (Mortgage), an
Assignment of Rents and Leases, and a Security Agreement and Financing Statement. The
Borkowskis, along with Warren Barr and John Carroll (collectively, the guarantors), jointly and
severally, guaranteed the payment of certain specified sums owed to the Bank by Renaissant.
The Guaranty Agreement provides, in relevant part, as follows:
"Notwithstanding anything to the contrary contained in the foregoing, or in this
Guaranty, the joint and several liability of Guarantors under this Agreement shall not
exceed (a) for the principal portion of the Guaranteed Liabilities the sum of Seven
Million and No/100 Dollars ($7,000,000.00) (The 'Guaranteed Principal Amount'), one
hundred percent (100%) of the accrued and unpaid interest under the Notes, as well as
one hundred percent (100%) of the late fees due under the Notes, (c) [sic] all
Enforcement Costs, and (d) [sic] any Extraordinary Claim. The Guaranteed Principal
Amount, all accrued and unpaid interest under the Note, all late fees, the Enforcement
Costs, any Extraordinary Claim and any and all costs, losses, damages and reasonable
attorney's fees incurred by the Lender in connection with or arising out of any
Extraordinary Claim are collectively referred to as the 'Guaranteed Obligations'."
The Notes were renewed from time to time. With the third extension of the Notes, the Bank
required Renaissant to post, as additional collateral, a $4 million irrevocable letter of credit
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naming the Bank as the beneficiary. With the sixth extension, the Renaissant 1000 South
Michigan I, L.P. was added as a borrower (Renaissant and Renaissant 1000 South Michigan I,
L.P. are collectively referred to as the Borrowers). The guarantors reaffirmed the Guaranty
Agreement in writing with each extension of the Notes.
¶3 Pursuant to the final extensions, the maturity date of the Notes was March 31, 2008.
When the Borrowers defaulted, the Bank filed the instant action. In count I of its complaint, the
Bank sought to foreclose upon the Mortgage. In count II, the Bank sought a judgment against
the guarantors.
¶4 On the Bank's motion for summary judgment on count I of its complaint, the circuit court
entered a Judgment Order of Foreclosure and Sale on January 26, 2009. In that order, the circuit
court found that, as of April 21, 2008, there was due and owing to the bank:
"• $22,443,427.61, representing the principal amount due on the Notes;
plus
• $285,371.84, representing interest accrued on the Notes from March 31,
2008, to April 21, 2008;
• Less $4,000,000.00 representing the proceeds of a letter of credit drawn
by [the Bank], which will be applied as of the date of entry of [the] order;
• for a total of $18,728,799.45."
The court also found that per diem interest under the Notes would accrue after April 21, 2008, at
the rate of $13,878.58.
¶5 On April 23, 2009, pursuant to the Bank's motion, the circuit court entered an order
finding that the guarantors are liable to the Bank on the Guaranty Agreement, "the amount of
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which shall be determined by the Court after confirmation of the sale of the Mortgaged
Premises."
¶6 The initial judicial sale of the mortgaged property took place on March 17, 2009. The
Bank was the successful bidder at that sale with a credit bid of $12 million. However, the circuit
court declined to approve the sale, sustaining the objection of the Borkowskis who argued that
the Bank's bid was unconscionably low. On July 27, 2010, a second judicial sale of the property
was held, and the Bank was again the highest bidder with a credit bid of $11.3 million. On
August 26, 2010, the matter came before the circuit court on the Bank's motion to confirm the
July 27, 2010 sale. The Bank advised the court that it would stand on its original bid of $12
million. Nevertheless, the Borkowskis again objected to confirmation of the sale on
unconscionability grounds. The circuit court sustained the objection and declined to confirm the
sale. The Bank appealed, and this court reversed the circuit court's order and remanded the
matter back with directions to approve the sale. Koenig & Strey GMAC Real Estate v.
Renaissant, 2011 IL App (1st) 103036-U, ¶ 38.
¶7 On remand, the circuit court entered an order on August 30, 2012, confirming the sale to
the Bank. In that order, the circuit court reserved for determination at a later date the amount of
the deficiency judgment to be entered against the Borrowers and the amounts due under the
Guaranty Agreement.
¶8 On October 25, 2012, the Bank filed a motion seeking a determination of the amounts
due under the Notes following the foreclosure sale, the amount of the deficiency judgment, and
the amounts due under the Guaranty Agreement. The Bank alleged that it was entitled to a
deficiency judgment against the Borrowers in the amount of $17,412,934.60 and a judgment
against the guarantors in the same amount. Included in the amount claimed was $6,075,298.45
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in principal remaining due on the Notes, $10,158,844.84 in interest, and $1,178,791.30 for
expenses. Following discovery, a hearing on the Bank's motion was held on September 14,
2014, and the circuit court entered its Order and Memorandum Opinion on October 21, 2014. In
that order, the circuit court addressed three issues, namely: (1) whether the Bank correctly
applied the proceeds of the $4 million letter of credit on January 26, 2009; (2) whether the
proceeds of the letter of credit should be applied against the "Guaranteed Principal Amount" due
by the guarantors; and (3) whether the Bank had discretion in the application of its credit bid to
the principal remaining due under the Notes before first applying that sum to accrued interest and
expenses. The circuit court found that: the letter of credit was not delivered by the guarantors in
their individual capacity and, therefore, the Bank is not required to credit the proceeds against
the "Guaranteed Principal Amount" due by them under the Guaranty Agreement; the Bank
properly applied the proceeds of the letter of credit against the amounts due under the Notes on
January 26, 2009; and the Bank had discretion in the application of its credit bid and did not
breach any covenant of good faith and fair dealing by applying the bid sum to principal due
under the Notes before accrued interest. Based upon its findings, the circuit court ordered the
Bank to submit a "new computation" of the amounts due under the Guaranty Agreement.
¶9 The Bank submitted a revised calculation of $16,421,849.60, exclusive of attorney's fees,
as the amount due by the guarantors. The Borkowskis objected to the inclusion in the calculation
of post-judgment interest that accrued after January 26, 2009, the date of the entry of the
Judgment Order of Foreclosure and Sale. On December 11, 2014, the circuit court entered an
order, finding that the guarantors are not liable for post-judgment interest owed by the
Borrowers, accruing after January 26, 2009. Thereafter, the Bank filed a motion to reconsider
that order. On September 16, 2015, the circuit court entered an order which, in addition to other
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relief, granted the Bank's motion to reconsider, finding that the guarantors are liable for the
payment of post-judgment interest owed by the Borrowers.
¶ 10 On February 18, 2016, the circuit court found that the liability of the Borkowskis under
the Guaranty Agreement is $18,421,241.04, consisting of $7 million for principal,
$10,882,462.84 for accrued interest, and $538,778.18 for expenses. On March 17, 2016, the
Borkowskis filed a notice of appeal which was docketed in this court as No. 1-16-0771. On June
28, 2016, the circuit court entered an order pursuant to Illinois Supreme Court Rule 304(a) (eff.
Mar. 8, 2016), finding that there is just reason to delay either enforcement or appeal from the
judgment entered against the Borkowskis on February 18, 2016. In addition, the circuit court
amended its order of February 18, 2016, to provide that the joint and several liability of all of the
guarantors, including the Borkowskis, to the Bank under the Guaranty Agreement is
$18,421,241.04. On June 29, 2016, the Borkowskis filed a second notice of appeal which was
docketed in this court as No. 1-16-1783. Thereafter, this court consolidated the Borkowskis' two
appeals.
¶ 11 For their first assignment of error, the Borkowskis argue that the circuit court erred in
including post-judgment interest due by the Borrowers in the judgment entered against them on
the Guaranty Agreement. They assert that, although the Guaranty Agreement provides that they
are liable for the accrued and unpaid interest on the Notes, there is no provision within the
document which renders them liable for the statutory post-judgment interest on the foreclosure
judgment entered against the Borrowers. We agree.
¶ 12 The liability of a guarantor is determined by the terms of the guaranty contract which is
interpreted by the application of general contract principles. Ringgold Capital IV, LLC v. Finley,
2013 IL App (1st) 121702, ¶ 16. In construing a contract, the primary objective is to give effect
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to the intentions of the parties at the time that the contract was made. Owens v. McDermott, Will
& Emery, 316 Ill. App. 3d 340, 344 (2000). When the parties dispute the meaning of a contract,
the initial question is whether the contract is ambiguous. Ringgold, 2013 IL App (1st) 121702,
¶ 19. Whether a contract is ambiguous is a question of law. Owens, 316 Ill. App. 3d at 348. If
the contract is clear and unambiguous, the intent of the parties is determined solely from the
plain language of the contract. Id. at 344.
¶ 13 Guided by these principles, we have examined the Guaranty Agreement and find that the
provisions fixing the liability of the guarantors are not ambiguous. As noted earlier, the liability
of the guarantors shall not exceed the sum of $7 million for principal owed on the Notes, 100%
of the accrued and unpaid interest on the Notes, 100% of the late fees under the Notes,
enforcement costs, and any extraordinary claim. As guarantors, the liability of the Borkowskis
under the Guaranty Agreement for the payment of interest is limited to 100% of the "accrued and
unpaid interest under the Notes."
¶ 14 In support of the interest component in the circuit court's judgment against the
Borkowskis, the Bank contends that "post-judgment interest is in fact interest on the amounts due
under the Notes." We disagree.
¶ 15 Interest accruing on a note prior to the entry of a judgment is incident to the debt itself.
Upon the entry of a judgment on a note, the debt is merged into the judgment, and the note
ceases to exist. Doerr v. Schmitt, 375 Ill. 470, 471-72 (1941). Interest on a judgment is not part
of the judgment; rather, it is purely statutory in origin. Blakeslee's Storage Warehouse v. City of
Chicago, 369 Ill. 480, 482-83 (1938); see also 735 ILCS 5/2-1303 (West 2008) ("Judgments
recovered in any court shall draw interest at the rate of 9% per annum from the date of the
judgment until satisfied ***.").
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¶ 16 "A guarantor is only liable for that which he has guaranteed." Ringgold, 2013 IL App
(1st) 121702, ¶ 16. When, as in this case, the terms of a guaranty contract are unambiguous, the
liability of a guarantor cannot be extended by implication or construction beyond the terms of the
guaranty contract. Id. The Borkowskis' liability for interest under the terms of the Guaranty
Agreement is limited to accrued and unpaid interest under the Notes. As post-judgment interest
is purely statutory in origin and does not arise under the Notes, the Borkowskis are not liable for
the post-judgment interest owed by the Borrowers accruing after the entry of the Judgment Order
of Foreclosure and Sale entered on January 26, 2009.
¶ 17 The Borkowskis next argue that the proceeds of the $4 million letter of credit should have
been applied to reduce their "Guaranteed Principal Amount" of $7 million under the Guaranty
Agreement, rather than to the amounts due from the Borrowers under the Notes. Their argument
in this regard appears to be based on the assertion that they were the source of the letter of credit.
The Bank argues that the plain language of the letter of credit belies the argument that the
Borkowskis were the applicants or that the letter of credit was delivered by them as collateral for
the Guaranty Agreement. We agree with the Bank.
¶ 18 There are several contracts involved in a letter-of-credit transaction, including: the
contract between the issuer and its customer whereby the issuer agrees to issue the letter of credit
to the beneficiary; the contract between the customer and the beneficiary which is the agreement
underlying the letter of credit; and the contract obligating the issuer to pay the beneficiary upon
demand if the beneficiary complies with the conditions specified in the letter. Mount Prospect
State Bank v. Marine Midland Bank, 121 Ill. App. 3d 295, 299 (1983). As a contract, a letter of
credit is construed by applying the same general principles used in construing other written
contracts. Molter Corp. v. Amwest Surety Insurance Co., 267 Ill. App. 3d 718, 721 (1994).
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¶ 19 The undisputed facts of this case establish that the issuance of the letter of credit was a
requirement imposed upon Renaissant pursuant to the Third Amendment to the Loan Documents
as consideration for the Bank's agreement to extend the maturity dates of the Notes. The letter of
credit states that it was issued by Fifth Third Bank by order of its clients, Renaissant 1000 South
Michigan LLC, Midwest Warehouse & Distribution Systems, Inc., Bedford Motor Services, Inc.,
and Logistic Resources, Inc. The Borkowskis are not mentioned in the letter of credit.
¶ 20 We find nothing ambiguous about the terms on the letter of credit. Fifth Third Bank
issued the letter of credit on the order of its named clients, not the Borkowskis. It was posted
with the Bank as a requirement placed upon the Borrowers, not as a requirement placed upon the
guarantors. We conclude, therefore, that when drawn upon, the $4 million in proceeds of the
letter of credit were properly applied to the sums due by the Borrowers under the Notes.
¶ 21 Next, the Borkowskis argue that the circuit court erred in ordering the proceeds of the
letter of credit be applied to the amounts due to the Bank as of January 26, 2009, the date of the
entry of the Judgment Order of Foreclosure and Sale. They contend that the proceeds of the
letter of credit should have been applied by the Bank on April 3, 2008, the date that it drew on
the letter of credit. In response, the Bank argues that the date upon which the proceeds of the
letter of credit were to be applied to the amount due to it from the Borrowers was fixed in the
Judgment Order of Foreclosure and Sale that was entered on January 26, 2009. It contends that,
by reason of their failure to timely appeal from that order, the Borkowskis cannot seek review of
that order in the context of this appeal. Again, we agree with the Bank.
¶ 22 The order of January 26, 2009, which provides that the proceeds of the letter of credit
were to be applied to the sums owed to the Bank upon its entry, also contains the requisite
language under Illinois Supreme Court Rule 304(a) (eff. Mar. 8, 2016) making the order
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immediately appealable. JP Morgan Chase Bank v. Fankhauser, 383 Ill. App. 3d 254, 260
(2008). The Borkowskis did not file a notice of appeal from that order within 30 days of its
entry. Nevertheless, they argue that, because the order of January 26, 2009, did not address how
the proceeds of the letter of credit were to be applied in calculating the sums due under the
Guaranty Agreement, they are at liberty in this appeal to contest the propriety of fixing January
26, 2009, as the date that the proceeds were to be credited.
¶ 23 Under the Guaranty Agreement, the Borkowskis are liable for specified sums due by the
Borrowers to the Bank under the terms of the Notes and the mortgage. As we found earlier, the
letter of credit was posted with the Bank as collateral for the obligations of the Borrowers under
the Notes, and as a consequence, the proceeds of that letter were properly applied to the
Borrowers' outstanding liabilities. Therefore, the order which determined the date upon which
the proceeds were to be applied to the sums due to the Bank by the Borrowers also affected the
liability of the guarantors. As the order of January 26, 2009, affected their liability as guarantors,
the Borkowskis could have appealed from that order. Having failed to do so, they may not seek
a review of that order in this appeal from a subsequent order entered in the same case. Battaglia
v. Battaglia, 231 Ill. App. 3d 607, 615 (1992).
¶ 24 Finally, the Borkowskis argue that the Bank's credit bid should have been applied first to
accrued interest due on the Notes and enforcement costs before being applied to unpaid
principal. The Guaranty Agreement is silent as to the manner in which the proceeds of a
foreclosure sale are to be applied. As a consequence, the Borkowskis argue that the agreement is
ambiguous and must be construed in their favor. They contend that, by applying the credit bid
first to unpaid principal, the Bank maximized their liability as guarantors and, thereby, violated
the covenant of good faith and fair dealing implied in the Guaranty Agreement.
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¶ 25 The Bank asserts that, contrary to the Borkowskis' contention, it did not apply its credit
bid first to the unpaid principal on the Notes. Relying upon the provisions of section 4.11 of the
Mortgage, the Bank argues that its credit bid was properly applied first to enforcement costs and
then applied to any unpaid principal. We agree.
¶ 26 Pursuant to the terms of the Guaranty Agreement, the Borkowskis guaranteed any and all
indebtedness, obligations and liabilities of Renaissant arising out of or in connection with the
Notes as evidenced by, among other documents, the Notes and the Mortgage. The Notes and the
Mortgage determine the manner of calculating Renaissant's obligations to the Bank. The liability
of the Borkowskis for those obligations is determined by the provisions of the Guaranty
Agreement. The Guaranty Agreement does not establish Renaissant's obligations, nor does it
provide for the manner in which those obligations are calculated. The Mortgage is the source of
the Bank's right to foreclose, and it is also the instrument which provides for the manner in
which the proceeds of a foreclosure sale are to be distributed and applied.
¶ 27 The Bank's credit bid constitutes the proceeds of the foreclosure sale of the mortgaged
property. Section 4.11 of the Mortgage provides that the proceeds of a foreclosure sale shall be
distributed and applied as follows:
"(a) on account of all costs and expenses incident to the foreclosure proceedings
***; (b) all other items that, under the terms of this Mortgage, constitute secured
indebtedness additional to that evidenced by the Notes, with interest thereon at the
applicable Default Interest Rate; (c) all principal and interest, together with any
prepayment charge, remaining unpaid under the Notes, in the order of priority
specified by the [Bank] in its sole and absolute discretion ***."
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¶ 28 We need look no further than the terms of the Mortgage to ascertain the agreed upon
manner in which the Bank's credit bid was to be applied. See American National Bank & Trust
Co. of Chicago v. Mack, 311 Ill. App. 3d 583, 588 (2000). The Bank was required, as it did, to
apply its credit bid first to the cost and expenses incident to the foreclosure proceedings. The
order of priority for the application of the remaining $10,968,065.10 to unpaid principal and
interest was a matter left to the sole discretion of the Bank. The Bank's election to apply the
excess sale proceeds to unpaid principal was a matter between the Bank and the Borrowers
pursuant to the terms of the mortgage. Any effect upon the guarantors would be governed by the
terms of the Guaranty Agreement. Section 5(b) of the Guaranty Agreement provides that
nothing contained in the document would prevent the Bank from suing on the Notes or
foreclosing upon the Mortgage "or from exercising any other right thereunder." Consequently,
the guarantors undertook the risk that, in the event of a foreclosure sale of the mortgaged
property, the Bank would exercise its discretion under the Mortgage and apply any excess
proceeds of a foreclosure sale to unpaid principal after the payment of expenses. By its
expressed terms, the Guaranty Agreement did not prevent the Bank from exercising its rights
under the mortgage, and the implied covenant of good faith and fair dealing cannot modify those
express terms. Bank One, Springfield v. Roscetti, 309 Ill. App. 3d 1048, 1059-60 (1999). For
these reasons we, like the circuit court, find no breach of the implied covenant of good faith and
fair dealing of the Guaranty Agreement by reason of the Bank's application of the proceeds of its
credit bid first to expenses incident to the foreclosure proceeding and the remainder to unpaid
principal under the Notes.
¶ 29 In summary, we find that the circuit court erred in including post-judgment interest owed
by the Borrowers accruing after January 26, 2009, in calculating the amounts due by the
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guarantors, including the Borkowskis, under the terms of the Guaranty Agreement. We find no
error in the circuit court's conclusion that the proceeds of the letter of credit and the Bank's credit
bid were properly applied. As a consequence, we vacate the judgment entered against the
Borkowskis and the other guarantors, and remand this matter back to the circuit court with
directions to recalculate the amount due by the Borkowskis and the other guarantors consistent
with the opinions expressed herein and to enter judgment against them, jointly and severally, for
that sum.
¶ 30 Vacated and remanded with directions.
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