inventory and collected Plesco's accounts receivable -- the assets of Plesco in which MLBFS held a security interest -- in a negligent, careless, unreasonable, and improper manner. (See Mantzaridis' Counterclaim PP 6, 9; Plessas defendants' Counterclaim PP 6, 9.) According to the Guarantors, had MLBFS properly disposed of those assets rather than dissipating them, it would have collected an amount in excess of Plesco's indebtedness, thereby relieving the Guarantors of any liability. (Id.)
MLBFS's response to the Guarantors' counterclaims is quite simple: By the terms of the Guaranties, the Guarantors expressly waived the right to assert such counterclaims. The Guarantors dispute this contention, and instead argue that Illinois law
imposed upon MLBFS a non-waivable obligation to dispose of Plesco's collateral in good faith. Accordingly, they contend that because they have alleged that MLBFS breached this duty by acting in bad faith in the disposition of Plesco's collateral,
their counterclaims are not barred by the Guaranties' waiver provisions.
Under Illinois law, guaranties are contracts that are legally enforceable in accordance with their express provisions. FIMSA, Inc. v. Unicorp Financial Corp., 759 F. Supp. 1297, 1300 (N.D. Ill. 1991). As such, "the rules of construction applicable to contracts generally also apply to contracts of guaranty, and if such a contract is unambiguous, it must be enforced as written." Bank of Benton v. LaBuwi, 194 Ill. App. 3d 489, 551 N.E.2d 749, 753-54, 141 Ill. Dec. 562 (Ill. App. 1990) (citations omitted).
"That principle applies with full vigor to waivers in a guaranty: When they are clear and unambiguous, Illinois courts consistently enforce them." BA Mortg. & Intern. Realty Corp. v. American Nat. Bank and Trust Co. of Chicago, 706 F. Supp. 1364, 1376 (N.D. Ill. 1989), citing Morris v. Columbia Nat. Bank of Chicago, 79 Bankr. 777, 782 (N.D. Ill. 1987); see also FIMSA, supra, 759 F. Supp. at 1301. Nevertheless, Illinois law does imply a covenant of good faith and fair dealing into every contract absent express disavowal. BA Mortg., supra, 706 F. Supp. at 1373. Moreover, "under Illinois law, a waiver of defense clause does not 'expressly disavow' the covenant of good faith implied into all contracts." Chemical Bank v. Paul, 244 Ill. App. 3d 772, 614 N.E.2d 436, 442 (Ill. App. 1993) (citations omitted).
Here, the Guarantors waived both "any right of setoff, recoupment or counterclaim against MLBFS with respect to any claim or demand [they] may at any time have against [Plesco], or against any other person or concern liable for [Plesco's] Obligations . . . .," (compl. Exs. E-H), as well as "any failure or delay by MLBFS in protection or perfection of MLBFS's rights . . . in or to any collateral securing any of [Plesco's] Obligations, . . . and any other circumstances which might constitute a defense to enforcement of [the Guaranties]." (Id.) The Guaranties' waiver provisions do not, however, expressly disavow the covenant of good faith and fair dealing. Therefore, it follows that the Guarantors did not waive MLBFS's duty to act in good faith.
MLBFS disputes this conclusion, however, contending that "while courts may be reluctant to find a waiver of good faith before default occurs, such as in the inducement to sign the guaranties, the courts have shown no reluctance when the issue concerns impairment of collateral." (MLBFS's Reply Mem. at 6.) In support of this theory, MLBFS relies mainly upon Continental Bank N.A. v. Everett, 760 F. Supp. 713, 724 (N.D. Ill. 1991), aff'd, 964 F.2d 701 (7th Cir.), cert. denied, 121 L. Ed. 2d 688, 113 S. Ct. 816 (1992).
In Continental Bank, an action brought by a lender against three guarantors, the court held that the waiver provisions of the guaranties in question precluded the guarantors from asserting an impairment of collateral defense based upon the failure of the lender to perfect its security interest in one of the principal debtor's assets. MLBFS seizes upon this holding in an attempt to convince the court that the Guarantors have waived their right to assert counterclaims (as well as affirmative defenses) based upon a breach of the duty of good faith. The court in Continental Bank, however, drew a distinction between an impairment of collateral defense and a bad faith defense, and clearly held that the latter had not been waived and indeed was not waivable. See Continental Bank, 760 F. Supp. at 721 ("Defendants' objection to Continental's failure to perfect a security interest, unlike good faith conduct, is waivable") (citation omitted). Thus, the court is convinced that the Guarantors waived neither the defense of bad faith nor a counterclaim based upon MLBFS's alleged bad faith in disposing of Plesco's collateral.
The conclusion that the Guarantors did not waive the covenant of good faith and fair dealing does not, however, end the court's inquiry. One further issue remains -- namely, whether the Guarantors' counterclaims (and corresponding affirmative defenses) premised upon MLBFS's alleged bad faith in disposing of Plesco's collateral are precluded by the Guaranties' provision that "MLBFS shall not . . . be obligated to pursue or exhaust any rights or remedies against [Plesco] or others, or resort to any security, prepayments or collateral, as a prerequisite to enforcing [the Guaranties]." (Compl. Exs. E-H.)
In United States v. Shirman, 41 F.R.D. 368 (N.D. Ill. 1966), the court held that where a creditor has no duty to attempt collection from the principal debtor before looking to the guarantor, the guarantor cannot avail itself of "the defense that the creditor through negligence, or lack of due diligence, lost or dissipated the collateral furnished by the debtor." Id. at 371-373 (citations and internal quotation marks omitted). This holding is clearly logical, for it certainly stands to reason that if a creditor has no obligation to resort to a principal debtor's collateral prior to pursuing a guarantor, the guarantor should not be able to invoke a defense or counterclaim based upon the alleged mishandling of the collateral that the creditor had no obligation to pursue. Nevertheless, Shirman 's holding is supported almost exclusively by citation to non-Illinois case-law and does not consider the applicability of the covenant of good faith and fair dealing. The only Illinois case cited -- Barrett v. Shanks, 382 Ill. 434, 47 N.E.2d 481 (Ill. 1943) -- does offer some support for Shirman 's holding, see Barrett, 47 N.E.2d at 484, although it too simply does not addresses the applicability of the covenant of good faith and fair dealing.
In its various memoranda in support of its motion to dismiss the Guarantors' setoffs and counterclaims and to strike their affirmative defenses, MLBFS focuses much of its energy upon the argument that the Guarantors waived the duty of good faith. MLBFS cites only Shirman in support of the contention that because it had no obligation to either seek payment from Plesco or resort to Plesco's collateral prior to pursuing payment from the Guarantors, the Guarantors are therefore precluded from relying upon MLBFS's alleged bad faith in disposing of that collateral as the basis for either an affirmative defense or a setoff and counterclaim. While this contention is, as noted above, not without considerable logic, the court will not accept it on the basis of such scant authority.
MLBFS does, however, remain free to buttress this contention with greater authority and raise it anew in a motion for summary judgment.
Accordingly, MLBFS's motion to dismiss the Guarantors' setoffs and counterclaims and/or to strike their affirmative defenses will be denied insofar as it is predicated upon the theory that the Guarantors are precluded from asserting MLBFS's alleged bad faith in disposing of Plesco's collateral as either an affirmative defense or as the basis of a counterclaim.
(2) Commercial Reasonableness
Section 9-504 of the Illinois Uniform Commercial Code obligates a secured creditor who disposes of collateral after default to do so in a "commercially reasonable" manner. See Boender v. Chicago North Clubhouse Ass'n, Inc., 240 Ill. App. 3d 622, 608 N.E.2d 207, 211, 181 Ill. Dec. 134 (Ill. App. 1992), appeal denied, 151 Ill. 2d 561, 186 Ill. Dec. 379, 616 N.E.2d 332 (Ill. 1993). The Guarantors contend that MLBFS breached its obligation to dispose of Plesco's collateral in a commercially reasonable manner. MLBFS argues that the Guarantors waived their rights under § 9-504. For the reasons discussed below, the court agrees with MLBFS.
In Illinois, the obligation to act in a commercially reasonable manner imposed by § 9-504 can be waived by language in a guaranty. FIMSA, supra, 759 F. Supp. at 1301, citing Lincoln Park Federal Sav. & Loan Ass'n v. Carrane, 192 Ill. App. 3d 188, 548 N.E.2d 636, 639-40, 139 Ill. Dec. 251 (Ill. App. 1989).
In Lincoln Park, the defendant guarantor's waiver of "demand, protest, notice of protest or notice of default, presentment of payment and diligence in the collection of [the principal's debt] or in the preservation and/or enforcement of [the principal's] security" was held to be sufficient to waive the obligation of commercial reasonableness. Id. at 639. Here, the Guarantors waived "all diligence in collection and any failure or delay by MLBFS in protection or perfection of MLBFS's rights under the Guaranteed Documents or in or to any collateral securing any of [PLesco's] Obligations, . . . presentment, demand for payment, protest and notice of protest, default, notice of intent to accelerate maturity, notice of acceleration of maturity, nonpayment or partial payment by [Plesco], . . . and . . . any other circumstances which might constitute a defense to enforcement of [the Guaranties]." (See Compl. Exs. E-H.)
The Guarantors concede that the language of the waivers in Lincoln Park is similar to that of the waivers in the Guaranties, but nevertheless contend that Lincoln Park is inapposite because it involved a waiver of commercial reasonableness in the context of the collection of the underlying debt rather than the disposition of collateral. (See Plessas defendants' Opp'n to MLBFS's Mot. to Dismiss at 10.) As MLBFS points out, however, the court in Lincoln Park made no such distinction, but rather found a waiver "of any obligation to act with commercial reasonableness." Lincoln Park, 548 N.E.2d at 639 (emphasis added).
The Guarantors also rely heavily upon Walter E. Heller & Co., Inc. v. Wilkerson, 627 P.2d 773 (Colo. Ct. App. 1980). There, the Colorado Court of Appeals, interpreting Illinois law, held that the defendant guarantors had not waived their rights under § 9-504 despite a provision in the relevant guaranty that allowed the creditor to pursue the guarantors directly in the event of the principal debtor's default without first proceeding against the collateral.
Id. at 775. Instead, the court noted that nothing in the guaranty expressly provided for the waiver of the guarantors' rights under § 9-504 and held that although the guarantors could not compel the creditor to proceed against the collateral before seeking payment from them, once the creditor elected to do so, it was required to dispose of the collateral in a commercially reasonable manner. Id.
Wilkerson does not, however, compel a conclusion that the Guarantors did not waive their rights under § 9-504. The court is not convinced that Wilkerson represents an accurate statement of Illinois law regarding whether a guarantor's unconditional obligation to pay upon default irrespective of the creditor's resort to collateral waives the creditor's obligation to dispose of that collateral in a commercially reasonable manner. In Ford Motor Credit Co. v. Devalk Lincoln-Mercury, Inc., 600 F. Supp. 1547 (N.D. Ill. 1985), an action by a creditor to, inter alia, enforce certain guaranties, the court reached the opposite result, holding that the guarantors had waived their rights under § 9-504 because the creditor was not required to proceed against the collateral before seeking payment from the guarantors. Id. at 1551-53; see also Shirman, supra, 41 F.R.D. at 371-73.
Additionally, one of the two cases upon which Wilkerson relied, United States v. Willis, 593 F.2d 247 (6th Cir. 1979), involved an interpretation of federal rather than Illinois law, see id. at 255 n. 11, and is arguably distinguishable because the creditor in that instance was the United States. See National Acceptance Co. of America v. Wechsler, 489 F. Supp. 642, 648 n.7 (N.D. Ill. 1980) (noting that when the government is a secured creditor it should perhaps be held to "a high standard of conduct with respect to the manner in which it disposes of collateral," but declining to follow Willis where private creditors were involved); see also Morris, supra, 79 Bankr. at 781-82. The other case, Commercial Discount Corp. v. Bayer, 57 Ill. App. 3d 295, 372 N.E.2d 926, 14 Ill. Dec. 647 (Ill. App. 1978), is also of limited value. There, an Illinois appellate court affirmed a directed verdict for the defendant guarantors because the secured creditor's notice to the guarantors of the default sale of the collateral -- required by § 9-504(3) -- was not commercially reasonable. Although the court did note that "nothing in the record [indicated] that [the guarantors] waived or modified the notice requirement," id. at 929, the issue of waiver was apparently neither raised by the secured creditor nor thoroughly considered by the court. See Wechsler, supra, 489 F. Supp. at 648 ("Although the court in Bayer was not presented with a question of waiver . . . . [it] might have considered a waiver effective as to the rights of a guarantor under section 9-504(3)").
Finally, even assuming that Wilkerson is correct and that a guarantor's unconditional obligation to pay upon default irrespective of the creditor's resort to collateral does not waive the creditor's obligation to dispose of that collateral in a commercially reasonable manner, the court would still conclude that the Guarantors waived their rights under § 9-504. For, as noted above, in Lincoln Park an Illinois court analyzed waiver provisions similar to the ones at issue here and concluded that they constituted a waiver "of any obligation to act with commercial reasonableness." Id., 548 N.E.2d at 639. Accordingly, the Guarantors are therefore precluded from raising MLBFS's alleged failure to dispose of Plesco's collateral in a commercially unreasonable manner as the basis of either an affirmative defense or a counterclaim.
(3) The Plessas-Plesco Note
In addition to the setoff and counterclaim collectively asserted by all the Plessas defendants, James Plessas has individually asserted a setoff and counterclaim seeking damages from MLBFS in the amount allegedly due him under the Plessas-Plesco Note. He contends that because the Plessas-Plesco Note was secured by liens on Plesco's assets, MLBFS's allegedly improper liquidation of Plesco's inventory and collection of Plesco's accounts receivable completely destroyed his secured interest in Plesco's assets. He claims that, as a junior secured creditor, he has a statutory right pursuant to U.C.C. § 9-507 to assert a setoff and counterclaim against MLBFS based upon MLBFS's commercially unreasonable disposition of Plesco's collateral. (See Plessas defendants' Opp'n to MLBFS's Mot. to Dismiss at 15.) MLBFS offers the court two reasons why Plessas cannot maintain a counterclaim against MLBFS on the Plessas-Plesco Note. Both have considerable merit.
First, by the terms of the guaranty he executed, Plessas assigned his security interest in Plesco's collateral to MLBFS. Specifically, his guaranty provides:
As further security to MLBFS any and all debts or liabilities now or hereafter owing to [Plessas] by [Plesco] and/or by such other person or concern, and any lien, security or collateral given to [Plessas] in connection therewith, are hereby subordinated to the claims and liens of, and assigned to, MLBFS.
(See Compl. Ex. G) (emphasis added). Plessas offers the court no guidance as to why this assignment should not preclude his counterclaim based on the Plessas-Plesco Note.
And second, even if Plessas' assignment of his security interest in Plesco's collateral were somehow invalid or perhaps immaterial, his theory of recovery under U.C.C. § 9-507 (assuming it applies) is, by Plessas' own admission, grounded upon MLBFS's commercially unreasonable disposition of Plesco's collateral. (See Plessas defendants' Opp'n to MLBFS's Mot. to Dismiss at 15.) The court has, however, already concluded that Plessas waived MLBFS's obligation to dispose of Plesco's collateral in a commercially reasonable manner. Accordingly, his counterclaim on the Plessas-Plesco Note must fail and will be dismissed.
For the reasons discussed above the court will: (1) grant MLBFS leave to file its amended complaint; (2) dismiss James Plessas' individual counterclaim on the Plessas-Plesco Note; (3) grant MLBFS's motions to dismiss or strike the Guarantors' affirmative defenses and setoffs and counterclaims insofar as MLBFS seeks to preclude the Guarantors from asserting MLBFS's allegedly commercially unreasonable disposition of Plesco's collateral; and (4) deny MLBFS's motions to dismiss or strike the Guarantors' affirmative defenses and setoffs and counterclaims insofar as MLBFS seeks to preclude the Guarantors from asserting MLBFS's alleged bad faith in the disposition of Plesco's collateral. An appropriate order follows.
AND NOW, this 1st day of August, 1994, upon consideration of plaintiff's motion for leave to file an amended complaint (document #22), plaintiff's motion to dismiss or strike or, in the alternative, for summary judgment on, the affirmative defenses and the setoffs and counterclaims asserted by defendant Demetrios C. Mantzaridis (document #11), and plaintiff's motion to dismiss or strike or, in the alternative, for summary judgment on, the affirmative defenses and the setoffs and counterclaims asserted by defendants James Plessas, Assos, Inc., and Vlema Inc. (document #10), and the briefs thereto, and for the reasons stated in the accompanying memorandum, it is ORDERED as follows:
(1) Plaintiff's motion for leave to file an amended complaint (document #22) is GRANTED. Plaintiff shall file the amended complaint within ten (10) days from entry of this order.
(2) Plaintiff's motion to dismiss or strike or, in the alternative, for summary judgment on, the affirmative defenses and the setoffs and counterclaims asserted by defendant Demetrios C. Mantzaridis (document #11) is DENIED.
(3) Plaintiff's motion to dismiss or strike or, in the alternative, for summary judgment on, the affirmative defenses and the setoffs and counterclaims asserted by defendants James Plessas, Assos, Inc., and Vlema Inc. (document #10) is GRANTED only as to James Plessas' individual counterclaim and said counterclaim is DISMISSED. In all other respects, said motion is DENIED.
William H. Yohn, Jr., Judge