CCP Limited Partnership v. First Source Financial

SIXTH DIVISION
September 22, 2006
No. 1-05-3235
CCP LIMITED PARTNERSHIP, the Estate of ) Appeal from the
MERRILL KIRSCH, ANTHONY KIRSCH, PATRICK ) Circuit Court of
KIRSCH and CATHERINE KIRSCH, ) Cook County
)
Plaintiffs-Appellees, )
)
v. )
)
FIRST SOURCE FINANCIAL, INC., )
)
Defendant-Appellant, )
________________________________________)
)
FIRST SOURCE FINANCIAL, INC., a Delaware)
corporation, and SPECIAL SITUATIONS )
OPPORTUNITY FUND I, LLC, a Delaware )
limited liability company, )
)
Plaintiffs-Appellants, )
)
v. )
)
CCP LIMITED PARTNERSHIP, a Wisconsin )
limited partnership, and CEDAR CREEK )
PARTNERS, LLC, its General Partner, )
)
Defendants-Appellees, )
________________________________________)
)
FIRST SOURCE FINANCIAL, INC., a Delaware)
corporation, and SPECIAL SITUATIONS )
OPPORTUNITY FUND I, LLC, a Delaware )
limited liability company, )
)
Plaintiffs-Appellants, )
)
v. )
)
ESTATE OF MERRILL KIRSCH, ANTHONY )
KIRSCH, PATRICK KIRSCH and CATHERINE )
KIRSCH, ) Honorable
) David Donnersberger,
Defendants-Appellees. ) Judge Presiding
JUSTICE McNULTY delivered the opinion of the court:
This case involves the proper characterization of a contract
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between a bank and several individuals who owned a corporation
that took a series of loans from the bank. The bank claims that
the owners in the contract purchased parts of the loans the bank
made to the corporation, effectively using the bank as a vehicle
to loan their corporation their money. When the corporation
defaulted on some of the loans, the owners, as participating
lenders, lost their investments in the loans. The bank sought to
recover from the owners the amounts they agreed to lend their
corporation.
The trial court held that the contract created a continuing
guaranty of the series of loans, and the owners validly revoked
the guaranty in 2003. Because the corporation did not default on
loans made prior to the revocation date, the owners did not owe
the bank anything on the guaranty. The trial court awarded the
owners summary judgment against the bank. We agree with the
trial court's characterization of the transaction and the finding
of a valid revocation. Therefore, we affirm the trial court's
judgment.
BACKGROUND
Catherine, Patrick, Anthony and Merrill Kirsch owned shares
of Capatony, Inc. Capatony owned 45% of Dart Distributing, LLC,
while CCP Limited Partnership owned the remaining 55%. Anthony
and Merrill also served on Dart's board of directors. In
November 1997, First Source Financial (FSFP) agreed to loan Dart
some funds. The following year, Dart sought additional loans to
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fund its ongoing operations. Dart agreed to secure the revolving
loans by giving FSFP an interest in most of its property. The
loan agreement included a formula for computing the total amount
of outstanding revolving loans Dart could accumulate. The
parties referred to the prescribed maximum loan total as the
"Borrowing Base."
Dart's needs soon exceeded the Borrowing Base. FSFP agreed
to loan Dart further funds, but it sought to protect itself by
spreading the risk from the loans. In September 2000 Dart and
FSFP signed a "Second Amendment" to the revolving loan agreement,
increasing the amount of revolving loans FSFP would allow Dart to
accumulate. The parties agreed that the increased loans depended
upon a "Last-Out Participation Agreement" (the LOPA) between CCP,
the Kirsches, and FSFP.
The LOPA lists CCP and the Kirsches as "Participants" in the
loans to Dart. It provides:
"WHEREAS, each of the Participants acknowledges
that (i) the effectiveness of the Second Amendment is
expressly conditioned upon, and FSFP has entered into
the Second Amendment in reliance upon, each
Participant's execution and delivery of this Agreement
and (ii) each Participant will derive substantial
benefit and advantage from the financial accommodations
made available to [Dart] in the Second Amendment; ***
***
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NOW, THEREFORE, in consideration of the premises
and of the mutual covenants contained herein, FSFP and
each of the Participants hereby agree as follows:
***
*** FSFP hereby sells to each Participant, and
each Participant hereby purchases from FSFP, *** a
subordinated secured participation interest *** in the
Loans. *** The Purchase Amount of each Participant
shall be due and payable by such Participant within 10
days after the date *** that such Participant receives
written notice from FSFP that (i) an Event of Default
under the Credit Agreement has occurred and is
continuing and (ii) the Revolving Loans have been
accelerated and are due and payable in full (the date
of such acceleration being referred to as the
'Determination Date').
* * *
*** [N]one of the Participants shall be entitled
to the payment in cash of accrued interest hereunder
until the indefeasible payment in full in cash to FSFP
of all Liabilities owing to FSFP under the Credit
Agreement, in accordance with Section 6 below.
6. Allocation of Payments. All payments received
by [FSFP] from time to time on account of the Loans
shall be applied in the following order: (a) first, to
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FSFP, for (i) all costs ***; (ii) all accrued interest
***; (iii) all principal *** and (iv) any other
Liabilities owing to FSFP ***; and (b) after all
amounts described in clause (a) above shall have been
indefeasibly paid in full in cash to FSFP, then, to
Participants ***. The Participants shall bear all
losses up to the amount of their *** Participations
that may be sustained before FSFP shall bear any loss."
(Emphasis in original.)
Catherine, Patrick, Anthony and Merrill each owned a
brokerage account with Lowry Hill. Each of the Kirsches signed a
"Pledge and Security Agreement" in favor of FSFP. In all four
agreements FSFP acquired a security interest in the pledgor's
brokerage account with Lowry Hill, payable if the pledgor failed
to fulfill his duties under the LOPA.
In January 2003 CCP and the Kirsches sent a letter to FSFP
in which they said:
"The current Purchase Amount for the *** Participation
of each Participant, calculated by reference to the
attached Borrowing Base Certificate, is $0.
Accordingly, each of the undersigned Participants
hereby revokes the Participation Agreement and all of
their respective debts, obligations and liabilities
thereunder. None of the undersigned Participants will
be liable for any loans, advances or any additional
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credit extended by [FSFP] under the Credit Agreement at
any time after the date hereof."
The Kirsches also notified Lowry Hill of their revocation of the
LOPA and the pledges and security agreements.
Merrill Kirsch died and the administrator of his estate took
over the management of his finances. In December 2003, two
members of the Kirsch family and Robert Cook, managing director
of CCP's general partner, asked FSFP to lend additional funds to
Dart. In April 2004 Catherine, Patrick and Anthony sent FSFP a
letter reminding FSFP that the Kirsches had revoked the LOPA.
Cook and some of the Kirsches returned to FSFP seeking more loans
for Dart in June 2004.
On January 26, 2005, FSFP notified the Participants in the
LOPA that Dart had defaulted and therefore FSFP declared the
"Determination Date" for the LOPA had arrived. According to
FSFP, the Participants owed it $1 million apportioned amongst the
Participants in the manner set forth in the LOPA. When the
Participants refused to pay, FSFP recovered $450,000 directly
from Lowry Hill under the pledges the Kirsches signed.
On April 8, 2005, the Kirsches and CCP sued FSFP, seeking a
judgment declaring that the Kirsches and CCP validly revoked the
LOPA in 2003 and that FSFP had no right to the money it took from
the Lowry Hill accounts. Also on April 8, 2005, FSFP sued CCP
for its portion of the $1 million FSFP sought to recover under
the LOPA. A few days later FSFP sued the Kirsches, seeking a
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judgment declaring that FSFP had the right to take the $450,000
it had already taken from the Lowry Hill accounts. The circuit
court granted the parties' motion to consolidate the three cases.
All parties moved for summary judgment. FSFP admitted that
in January 2003, when the Kirsches and CCP sent the revocation
letter, the total revolving loans outstanding to Dart did not
exceed the Borrowing Base. Under the formula in the LOPA, if
FSFP had then declared the Determination Date, the Kirsches and
CCP would owe nothing. FSFP could not declare a Determination
Date at that time, however, because no default had occurred.
After FSFP received the revocation letter, it continued lending
Dart funds in excess of the Borrowing Base.
Both CCP and FSFP supported their summary judgment motions
with documents purporting to reflect e-mails sent between FSFP
and Dart. For FSFP, Robert Palmer swore in an affidavit:
"The e-mails attached *** have been maintained in
the ordinary course of business in [FSFP's] computer
system, and I assisted in retrieving them for use in
this matter."
Cook similarly swore that the e-mails attached to CCP's motions
for summary judgment were "maintained in the ordinary course of
business in CCP[']s *** computer system." Neither affiant said
anything about his participation in the correspondence or the
occasion for receipt of the e-mail.
The trial court held that the LOPA was, in effect, a
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continuing guaranty, revocable on due notice. The notice the
Kirsches and CCP provided in January 2003 effectively revoked the
continuing guaranty. The court entered summary judgment against
FSFP and its affiliated parties on all three complaints. FSFP
now appeals.
ANALYSIS
We review de novo the grant of summary judgment. Delaney v.
McDonald's Corp., 158 Ill. 2d 465, 467 (1994).
FSFP contends the LOPA is a participation agreement that
gave the Participants no right to revoke prior to the
Determination Date FSFP chose. CCP and the Kirsches answer that
the LOPA is a continuing guaranty, and Illinois common law gives
guarantors the right to revoke such a continuing guaranty at any
time.
"[T]he trial court, in the exercise of its equitable powers,
*** will look through the forms to the substance of a transaction
in order to ascertain the relationship of the parties." Tilley
v. Shippee, 12 Ill. 2d 616, 623 (1958). Illinois courts have
exercised this power in cases involving loans (Andrews v. Cramer,
256 Ill. App. 3d 766, 770 (1993)), securities (Boatmen's Bank of
Benton v. Durham, 203 Ill. App. 3d 921, 927 (1990)), and secured
transactions presented in the form of sales (Turk v. Wright &
Babcock, Ltd., 174 Ill. App. 3d 139, 142 (1988)). We apply the
same principles to determine whether the LOPA has the effect of a
loan participation or a continuing guaranty.
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"A participation agreement is a shared loan where a lead
financial institution divides and sells to other banks portions
of a loan it has made." Bank of Chicago v. Park National Bank,
266 Ill. App. 3d 890, 897 (1994). A participant in a loan, like
any lender, accepts the risk of loss in exchange for the promise
of the payment of interest. See D. Threedy, Loan Participations
-- Sales or Loans? Or Is That the Question?, 68 Or. L. Rev. 649,
649-50 (1989). An Illinois court has defined a guaranty as "'a
promise to answer for the payment of some debt or the performance
of some obligation, on default of such payment or performance, by
a third person who is liable or expected to become liable
therefor in the first instance.'" Commonwealth Trust & Savings
Bank v. Hart, 268 Ill. App. 322, 327 (1932), quoting 12 Ruling
Case Law 1053. A guaranty reduces the lender's risk by shifting
the risk to a party who "has a comparative advantage in
monitoring or enforcement" of the debtor's duties, while the
"lender has a comparative advantage in liquidity." A. Katz, An
Economic Analysis of the Guaranty Contract, 66 U. Chi. L. Rev.
47, 113 (1999).
Here, the terms of the LOPA clarify that the Participants do
not seek to profit from the payment of interest. The agreement
expressly provides that the Participants expect to benefit from
the financial accommodation made to Dart, as all of the
Participants have ownership interests in Dart. The Participants,
by virtue of their ownership of Dart and their positions as
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officers of Dart, had considerable advantage over FSFP in the
monitoring and enforcement of the contractual duty to repay the
revolving loans. FSFP had a comparative advantage in liquidity.
Most significantly, the Participants have no right to
receive any interest, and no duty to put up funds for the loan,
unless Dart defaulted on the revolving loans. At that point, the
Participants' prospects for recovering their investments would be
slim enough, and their chances for receiving any interest on
their loan participations would be, at best, very remote. If
Dart paid all its debts, the Determination Date would never
arrive. Thus, the Participants would not have any duty to pay
their shares of the loan, and they would have no right to receipt
of any interest.
We find the transaction in this case comparable to the
transaction at issue in Grojean v. Commissioner of Internal
Revenue, 248 F.3d 572 (7th Cir. 2001). In that case Grojean
formed a corporation and sought a loan from a bank to fund the
corporation's activities. The bank loaned $10 million to the
corporation on condition that Grojean purchase a $1.2 million
participation in the loan. Grojean, 248 F.3d at 572-73. Grojean
took a personal loan from the same bank to purchase the loan
participation. If the corporation paid all its debts, Grojean
would reap no gain from the loan participation, because the
interest he paid on the personal loan would exactly offset the
interest he would receive as a loan participant. If the
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corporation defaulted, the bank retained the right to the return
of its entire loan to the corporation and all interest and costs
before Grojean could recoup any part of his $1.2 million
participation in the loan. The court recharacterized the
contract, ostensibly a loan participation agreement, as a
guaranty of $1.2 million of the total amount loaned to the
corporation. Grojean, 248 F.3d at 574.
The LOPA here similarly has the effect of a guaranty. As
long as Dart makes all necessary payments on the loan, the
Participants receive no interest and they pay nothing for their
nominal participation in the loan. If Dart defaults, the
Participants will lose the entire price set by the LOPA for the
nominal participation before FSFP loses any part of its principal
or interest earned on the revolving loans to Dart. Because the
LOPA covered an indefinite series of revolving loans, the trial
court correctly characterized the LOPA as a continuing guaranty.
See Merrill Lynch Interfunding, Inc. v. Argenti, 155 F.3d 113,
117 (2d Cir. 1998); Commonwealth Trust, 268 Ill. App. at 328-29.
Under English common law, long ago adopted in Illinois, a
guarantor of a continuing guaranty has the right to revoke the
guaranty at any time, as long as he provides proper notice to the
lender. Mamerow v. National Lead Co., 206 Ill. 626, 634-35
(1903); National Eagle Bank v. Hunt, 16 R.I. 148, 150, 13 A. 115,
116 (1888). Unless the contract for a continuing guaranty
expressly limits the right to revocation, the guaranty remains
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subject to the right to revoke. See City National Bank of
Murphysboro v. Reiman, 236 Ill. App. 3d 1080, 1088-89 (1992)
(contract for continuing guaranty had no provision concerning
revocation; court found guarantor retained right to revoke).
"When a guaranty is revoked, a guarantor's liability extends only
to transactions occurring pursuant to the guaranty before notice
of revocation." Reiman, 236 Ill. App. 3d at 1090.
Here, the contract did not include any express limitation on
the right of revocation. FSFP received proper notice of the
exercise of the right to revoke the guaranty in January 2003. At
that time it had no loans outstanding to Dart in excess of the
Borrowing Base. Thereafter it extended new loans to Dart in
excess of the Borrowing Base. Under the general rule of
revocability, FSFP has no right to recover from the Participants
for the default on the loans made after the Participants
exercised their right to revoke.
FSFP claims that its affirmative defenses of estoppel and
unclean hands should have precluded summary judgment. First FSFP
notes that in December 2003 and June 2004, long after the
revocation, officers of Dart, including some of the Participants,
specifically requested new loans to Dart. FSFP presented no
evidence that at the time of the request the Participants
guaranteed repayment of the loans Dart sought. We do not see how
Dart's request for new loans affects the prior revocation of the
continuing guaranty.
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FSFP primarily relies on several pieces of paper it attached
to its motion for summary judgment. FSFP claims that the
documents reflect e-mails one of the Participants sent to FSFP.
On a motion for summary judgment the court must not consider
any evidence that would be inadmissible at trial. Watkins v.
Schmitt, 172 Ill. 2d 193, 203-04 (1996). Without proper
authentication no document is admissible. See Olaf v. Christie
Clinic Ass'n, 200 Ill. App. 3d 191, 195 (1990). An affidavit may
provide the authentication needed to make a document admissible.
North American Old Roman Catholic Church v. Bernadette, 253 Ill.
App. 3d 278, 286 (1992). To make documents admissible, the
proponent must present evidence "to demonstrate that the document
is what its proponent claims it to be." Anderson v. Human Rights
Comm'n, 314 Ill. App. 3d 35, 42 (2000). Either direct or
circumstantial evidence can authenticate a document. People v.
Downin, 357 Ill. App. 3d 193, 203 (2005). Usually the proponent
establishes the identity of the document "through the testimony
of a witness who has sufficient personal knowledge to satisfy the
trial court that a particular item is, in fact, what its
proponent claims it to be." Kimble v. Earle M. Jorgenson Co.,
358 Ill. App. 3d 400, 415 (2005).
Palmer swore in an affidavit that the papers attached to the
summary judgment motion "have been maintained in the ordinary
course of business in [FSFP's] computer system." At most, the
evidence could show that FSFP kept copies of the documents in the
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regular course of its business. FSFP did not present any direct
evidence of authentication, as it had no affidavit or deposition
of the putative author of the alleged e-mail. See Kimble, 358
Ill. App. 3d at 416. Palmer's affidavit includes no evidence
that Palmer had any personal knowledge regarding FSFP's receipt
of the e-mail. He knew only that at some time before he helped
retrieve the message, someone somewhere entered into FSFP's
computers a message that listed an officer of Dart on the line
for the sender. No evidence limits the time of the creation of
the message. Nor does the evidence limit the possible authors.
Palmer's affidavit includes no evidence of an ongoing
correspondence that might provide circumstantial evidence of the
authorship of the message. See Downin, 357 Ill. App. 3d at 203-
04. In the absence of proper authentication, this court must
ignore the papers purporting to represent e-mails FSFP received
from Dart. See Cincinnati Insurance Co. v. Argubright, 151 Ill.
App. 3d 324, 328-29 (1986). We note that e-mails similarly
appended to the Participants' motion for summary judgment seem to
suffer from the same lack of authentication.
Because FSFP did not present any authentication evidence
needed to make the purported e-mails admissible, it has no
evidence to support its affirmative defenses of estoppel and
unclean hands. The affirmative defenses do not defeat the
Participants' right to summary judgment.
Finally, FSFP in its reply brief introduces a new argument,
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that the Participants waived their right to revoke the LOPA.
Under Supreme Court Rule 341(g), we should ignore any new issues
raised in the reply brief but not mentioned in the opening brief.
188 Ill. 2d R. 341(g); Tivoli Enterprises, Inc. v. Brunswick
Bowling & Billiards Corp., 269 Ill. App. 3d 638, 642 (1995).
Accordingly, we do not address the argument that the Participants
waived the right to revoke the LOPA.
The trial court correctly identified the LOPA as a
continuing guaranty. Because the LOPA included no explicit limit
on the right to revoke, the Participants retained the right to
revoke at any time, with due notice to FSFP. They validly
exercised that right in January 2003, thereby saving themselves
from liability as guarantors for any subsequent loans to Dart.
For its affirmative defenses of estoppel and unclean hands, FSFP
relied on papers it attached to its motion for summary judgment.
But the affidavits FSFP presented failed to authenticate the
documents. The court must ignore the inadmissible documents for
this summary judgment motion. The trial court correctly rejected
the affirmative defenses. Therefore, we affirm the summary
judgment granted against FSFP in all three cases.
Affirmed.
FITZGERALD SMITH, P.J., and O'MALLEY, J., concur.
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