Lender’s Release of One Co-Borrower Does Not Release All

A lender’s release of one co-borrower does not necessarily release all. That is the message sent by the Appellate Court of Illinois, First District, in a striking decision filed on May 27, 2015. In The Private Bank and Trust Company v. EMS Investors, LLC, et al., EMS Investors, LLC (“Investors”), Cheryl Bancroft and Herbert C. Emmerman were co-makers on a promissory note for $1.62 million, and agreed to be “jointly and severally” liable under the note. Defendants defaulted under the terms of the note and its amendments by failing to make payment due on the maturity date, and the lone guarantor, Equity Marketing Services, Inc. (“EMS”), defaulted by failing to make payments.finance attorney - chicago corporate law firms

A few months before the note came due, the Bank entered into a settlement agreement with Cheryl Bancroft (who had filed for bankruptcy under Chapter 11), Stephen Bancroft (her husband) and Bancroft Group LP (“BGLP”). The Bank held several mortgages on property owned by the Bancrofts and BGLP. The settlement agreement included a paragraph entitled “Parties in Interest,” stating “[n]othing herein shall be construed for the benefit of any third party, nor is it intended that any provision shall be [for] the benefit of any third party.” The settlement agreement also included a clause entitled “Release of Cheryl, Stephen and BGLP,” setting forth the Bank’s release of the Bancrofts and BGLP from all claims with the exception of claims asserted by the parties arising solely out of the settlement agreement. The settlement agreement did not specifically mention the note or amended note with Emmerman or Investors, nor did it mention Emmerman or Investors by name.

The Bank filed a two-count complaint in the Circuit Court of Cook County alleging breach of contract against Emmerman and Investors as obligors of the loan, and against EMS, the guarantor of the loan. The defendants filed an answer admitting the note was in default and raising an affirmative defense that the Bank’s unconditional release of Cheryl Bancroft’s liability under the note, without a reservation of rights, also released Emmerman and Investors from liability under the note and EMS from liability under the guaranty.

As evidence that it had no intent to release Emmerman, Investors, or EMS, the Bank presented the court with i) an affidavit from a Bank representative stating that the settlement agreement was not intended to apply to Emmerman, Investors, or EMS; ii) deposition testimony from Emmerman stating that he had no knowledge of the settlement agreement when it was executed and had not been requested to review it, and iii) Emmerman’s admission at deposition that the Bank communicated that it was interested in him paying on the note.

After cross-motions, the trial court struck the affirmative defense and entered judgment in the Bank’s favor. And on appeal, the Appellate Court affirmed, finding that the entry of one co-obligor into an unconditional release will not release all co-obligors when a contrary intent appears from the face of the release document.

What can lenders take from this case? First, though the “no third-party beneficiary” language present in the subject settlement agreement assisted in getting the Bank to its desired result, the settlement agreement may have had more bite had it contained a specific reservation of the Bank’s right to sue the co-obligors. In addition, not only the settlement agreement, but the circumstances surrounding the settlement agreement, will play an important role in the court’s determination. A lender should be certain that its actions are in line with its writings so that its intent is unambiguous. Here, the Bank’s written settlement agreement, an affidavit from the Bank’s representative, and the Bank’s interactions with Defendants went a long way to keeping the Defendants from succeeding on their claim of a release of their obligations.

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.