Firm Wins Appellate Case on Bank Rights

In a case that will benefit banks throughout Illinois, we are pleased to announce that our firm successfully argued a case in the Illinois Appellate Court that has given further practical force and effect to the Illinois Credit Agreements Act (“Act”). Van Pelt Construction Co. v. BMO Harris Bank, N.A., 2014 IL App (1st) 121661, 380 Ill.Dec. 384, 8 N.E. 3d 554.

The Act requires that all agreements between a financial institution and a commercial borrower be in writing and signed by both parties to the agreement in order to be binding. That is nothing new. What has now been clarified is that the Act applies to communications among the bank’s counsel and borrower’s counsel during the course of settlement negotiations. This is extremely important to the ongoing ability of the parties, through counsel, to have open and continuous dialogue, even during the course of the litigation process, that may lead to an out of court resolution of the dispute involving the underlying loan documents that serve as the basis for the lawsuit pending between the parties.

The case, which the Illinois Supreme Court refused to here when Defendant’s filed an appeal to the high court, was initially brought by the bank in an effort to foreclose on commercial real estate and enforce several personal guarantees. During the course of the litigation, counsel for the parties engaged in several email exchanges discussing how the matter might be resolved, with bank’s counsel consistently reminding borrower’s counsel that anything they discussed would remain subject to the bank’s review and approval. Borrower suggested a deed in lieu proposition, with a relatively small deficiency being paid by the participating guarantors; and not all guarantors were to be parties to the initial overtures. Bank’s counsel suggested that it would require all guarantors to be on board and that any proposal would be subject to the bank’s review and approval of their personal financial statements. In this way, if a guarantor had far more wherewithal than suggested by their counsel, the bank reserved for itself the ability to reject the proposal in favor of one that better captured the guarantor’s ability to satisfy a greater deficiency. The exchanges among both counsels for the bank and borrower occurred over several weeks, with the guarantor parties falling in and out of the settlement discussions, among other changes and variations that arose along the way.

Eventually, it became clear that the parties would not be able to come to terms and the bank filed its motion for summary judgment. A briefing schedule was ordered. However, instead of responding to the motion for summary judgment, many months after settlement discussions broke down, counsel for the borrower and guarantors filed a motion to enforce what it alleged was an agreement to settle. Counsel for the bank argued that the Act precluded just the type of shenanigans the defendants were attempting by this tactic. Yet, the trial court bit on the defendant’s bait and held an evidentiary hearing on whether there existed a settlement agreement.

Despite the fact that not even a single communication could be pointed to that embodied the claimed settlement, the trial court found that a settlement agreement existed among a patchwork of emails. This patchwork of emails did not, even in the aggregate, contain the names of the parties, the terms of the transaction, the date of closing, the persons with authority to bind the Bank, among other key elements of basic contract formation that were noticeably absent from the multitude of emails that were exchanged over the span of months.

On appeal, the Illinois Appellate Court correctly noted that there existed no agreement that satisfied the Act. The court first found that the settlement of a lawsuit involving a commercial loan, by a bank/lender, is covered by the Act. The court also made clear that the numerous emails, even if strung together, would not and could not satisfy basic contract formation principles – stating that “under any standard of review, however, we would find the [Act] barred the enforcement of the alleged settlement agreement.” For this reason, the Appellate Court reversed the trial court and remanded it to the trial court with instructions for the trial court to take up the motion for summary judgment the bank had filed. If you believe that no court could have decided this case differently than the appellate court, you might be interested to read a non-binding, federal district court opinion that held to the contrary. Fidelity Mutual Life Insurance Co. v. American National Bank, 1994 WL 14635 (N.D. Ill. Jan. 20, 1994).

This case is a good reminder that when communications with the borrower occur through counsel, it provides the bank with the buffer and additional assurances it needs to successfully fend off a claim that the bank somehow agreed to a settlement agreement over a strung-together assembly of emails. Now, if the bank had sent these emails, rather than its counsel, it could have been argued that the electronic signatures of the bank’s emails satisfied the “in writing and signed by the bank” element of the Act. In this case, the bank still may have prevailed because many of the necessary elements required to form a basic contract were missing. However, the lesson of this case should be heeded: involve counsel, make clear that counsel does not have authority to settle the case without the bank’s express written authority and allow communications regarding settlement to filter through counsel. Negotiating through counsel serves as a valuable buffer and as additional insurance against a party’s trumped up claim that a banker’s email has somehow bound the bank to a financial accommodation that the bank might have never intended.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

Kurt M CarlsonKurt M. Carlson | Creditors’ Rights, Insolvency & Bankruptcy Litigation & Resolution

Kurt’s practice concentrates on representing creditors, assignees and businesses of all sizes in a variety of ways, including complex business litigation, workouts, insolvency proceedings, bankruptcy reorganization cases and complex settlement negotiations. Kurt has extensive experience in a broad range of quasi-business and legal issues companies must address. If you need assistance with a related matter, contact Kurt.