Mich. Assocs., 657 N.E.2d 1095, 1104 (Ill. App. Ct. Ist Dist. 1995). This covenant comes into
play when the terms of the agreement are susceptible to two conflicting constructions and it is
necessary to determine the intent of the parties. Id. “Problems involving the obligation of good
faith and fair dealing generally arise where one party to a contract is given broad discretion in

performance.” Id. (citing Resolution Trust Corp. v. Holtzman, 618 N.E.2d 418, 424 (Il. App. Ct.

1st Dist. 1993). Such discretion must be exercised “reasonably, not arbitrarily, capriciously, or in
a manner inconsistent with the reasonable expectation of the parties.” Northern Trust Co., 657

N.E.2d at 1104 (citing Continental Mobile Tel. Co. v. Chicago S M S A Ltd. Partnership, 587

N.E.2d 1169 (Ill. App. Ct. Ist Dist. 1992)). Likewise, where such discretion is unfettered, it may

not be exercised in bad faith. See Chemical Bank, 614 N.E.2d at 441.

The problem with defendants’ reliance on the covenant of good faith and fair dealing,
however, is that they do not allege facts that support their assertion that plaintiff used its
discretion improperly under Illinois law. Defendants assert in their response brief that it was
plaintiffs act of “proposing the Forbearance Agreement and the assignment of assets,” that
violated the covenant of good faith and fair dealing. This argument is without merit, however,
because proposing an agreement, without more, cannot be said to be unreasonable, arbitrary, or
capricious. Similarly, plaintiffs proposals did not appear to result from some unfettered
discretion allocated to plaintiff via the agreements and, even if they did, it remains unclear how
making a proposal alone can be found to be a bad faith exercise of one’s discretion. Further, if
defendants’ allegations refer back to the complaint raised in their second affirmative
defense—that plaintiff caused Borrower to default by extending the over-advance—again

defendants fail to explain how such an action can be found to be unreasonable, arbitrary,

13


and performance of all of Borrower’s Indebtedness and obligations to [plaintiff] with interest.”
Similarly, the letter agreements executed by defendants state that defendants, “reaffirm[],
acknowledge[] and consent[] to the continuation of [their] obligations under the Guaranty . . .
[and] consent[] to the terms of the Forbearance Agreement,” and further that they “confirm[] that
there are no defenses relating to the enforcement of the Guaranty existing in [their] favor as of
the date hereof,” and that they “waive[] any defenses, setoffs and counterclaims relating to the
enforcement of the Guaranty which may now or anytime hereafter be available to [them].”
Plaintiff argues that the terms of the guaranty and letter agreements, which are clear and
unambiguous, constitute a waiver by defendants of any defenses they might have to plaintiff's
enforcement of the agreements following Borrower’s default. See Kolson v. Vembu, 869
F.Supp. 1315, 1320-21 (N.D. Ill. 1994). “Guaranty agreements containing waivers of all
defenses .. . have been upheld as validly binding.” Chemical Bank v. Paul, 614 N.E.2d 436,

441-42 (Ill. App. Ct. ist Dist. 1993) (citing Lincoln Park Federal Sav. & Loan Asso. v. Carrane,

548 N.E.2d 636 (Ill. App. Ct. Ist Dist. 1989)). Still, as explained in Chemical Bank, public

policy concerns must be taken into account by courts when determining the effect and extent of

such waivers. See 614 N.E.2d at 442-43 (declining to find that the guarantor waived its right to
assert an affirmative defense under the covenant of good faith and fair dealing despite clear and

ambiguous waiver of all defenses in guaranty agreement). The court need not address the public
policy concerns that arise with respect to each of defendants’ affirmative defenses, however,

because as explained below, those defenses do not withstand Rule 12(b)(6) scrutiny.


performance can protect some oral agreements from operation of a statute of frauds, Illinois
courts have made it clear that oral agreements falling within the ICAA are not subject to that
exception.

As explained in Whirlpool Fin. Corp. v. Sevaux, 96 F.3d 216, 226 (7thCir. 1996),
“{linois courts have considered--and rejected—[the] assertion that the Illinois legislature did not
intend to foreclose the traditional common law exceptions to the Statute of Frauds.” Rather, the
Whirlpool court explained, “Illinois courts have given effect to the broad language of the
[ICAA],; the traditional exceptions to the Illinois Frauds Act--including part performance,
estoppel, and claims sounding in tort--may not be raised to counter an action that falls within the
scope of the [I[CAA].” Id. Thus, it is clear that defendants’ performance of their end of the
alleged oral agreement that they made with plaintiff cannot protect them from the operation of

§§2 and 3 of the ICAA. As explained in Whirlpool:

“[llinois courts have interpreted [§2 of the ICAA] to proscribe all actions which
depend for their existence upon an oral credit agreement. Indeed, there is no
limitation as to the type of actions by a debtor which are barred by the Act, so
long as the action is in any way related to a credit agreement. Under this
interpretation, all claims on or in any way related to an oral credit agreement--
whether sounding in contract or in tort--are barred by the Act.

96 F.3d at 225. Thus, defendants cannot rely on oral agreement that they claim they

entered into with plaintiff.
B. Defendants’ “Estoppel” Affirmative Defense

Defendants’ second affirmative defense is presented in two parts. First defendants allege
that Borrower’s default referenced in plaintiff’s May 4, 2001, letter “was caused by the conduct

of Plaintiff.” According to defendants, “The alleged default related to an alleged over-advance


writing.? To support this argument, plaintiff cites to the Illinois Credit Agreements Act, 815
ILCS 160/1 et seq. (the “ICAA”), and argues that it bars defendants from using any oral
agreement as a defense in the instant case. According to plaintiff, because the guaranty
agreements in the instant case fit within the definition of “credit agreements” in the ICAA, any
assertion by defendants that the credit agreement was altered or that a new credit agreement was
entered into can only be substantiated by a document that fits within the requirements of §§2 and
3 of the ICAA.

The court agrees with plaintiff that the guaranty agreements signed by defendants are
“credit agreements” as defined by the ICAA. See ICAA §1 (defining “credit agreement” as “an

agreement or commitment by a creditor to lend money or extend credit or delay or forbear

> Plaintiff also argues that the express terms of the guaranty agreement forbid defendants’
reliance on an oral agreement. As plaintiff points out, §2 of the guaranty agreements, titled

“Continuation of Terms” provides:

This Continuing Guaranty shall not be affected or impaired by any modifications,

supplements, extensions, or amendments of any contract or agreement to which

the parties thereto may hereafter agree, nor by any modifications, releases or other

alterations of any of the Indebtedness hereby guarantied or of any security

therefore, nor by any agreements or arrangements whatever with Borrower or

anyone else.

Additionally, §10 of the guaranty agreements, titled “Amendments in Writing,” requires
modifications or amendments thereto to be in writing. Section 10 reads: “No termination or
modification of this Continuing Guaranty shall be effective for any purpose unless it is in writing
and executed by an officer of [plaintiff] authorized to do so.”

Apparently conceding the point, defendants did not respond to this argument in their
response brief to plaintiff's motion. Thus, the court concludes that the above language provides

an alternative ground to granting plaintiffs motion to strike defendants’ first affirmative defense.

6


Il. Plaintiffs Merits Arguments

A. Defendants’ “Accord and Satisfaction/Waiver” Affirmative Defense

Defendants’ first affirmative defense asserts that defendants are not responsible for the
amounts owed under the guaranty or letter agreements because, “In late May or early June, 2001,
Plaintiff offered to release Defendants from all guarantees if they agreed, as officers of
[Borrower] to assign all of the assets of [Borrower] to a receiver of Plaintiff's choosing, i.e.,
High Ridge Partners.” According to defendants, they “accepted [plaintiff's] offer and, in fact,
executed an assignment for the benefit of creditors designating High Ridge Partners as its
assignee,” but then “Plaintiff purported to withdraw the offer after it was accepted.” Even so,
defendants allege, “the parties reached a valid accord and satisfaction prior to such withdrawal
and, accordingly, Plaintiff has waived the claims which it asserts herein.”

Plaintiff urges the court to strike this affirmative defense arguing that, even if defendants’
allegations are true, the oral agreement to which defendants refer cannot be enforced because

Illinois law precludes such defenses premised upon agreements that have not been committed to


new credit agreement is created unless the agreement satisfies the Section 2.” Based on all of the
above, plaintiff argues that defendants cannot rely on the alleged oral agreement that they had
with plaintiff.

Defendants assert two alternative theories in response to plaintiffs arguments. First,
defendants point to the “Trust Agreement and Assignment for the Benefit of Creditors” that
Borrower signed designating High Ridge Partners, Inc. as its Trustee-Assignee, as the written
agreement to which plaintiff agreed. According to defendants, that agreement “changed the
security position of the guarantors based on the agreement [with plaintiff] that they would be
released [under the guaranty agreements].” Unfortunately for defendants, however, while the
trust and assignment agreement is written, it was not executed by an authorized officer of
plaintiff, and therefore under §§2 and 10 of the guaranty agreements it cannot terminate or
modify the guarantees made therein. Likewise, because the trust and assignment agreement is
not signed by the creditor (in this case plaintiff), as well as the debtors, §§2 and 3 of the ICAA
bar defendants from asserting a defense based on its content. Thus, defendants cannot use the
terms of the trust and assignment agreement as a basis for an affirmative defense against
plaintiff's claims.

Defendants alternatively assert that even if their agreement with plaintiff was oral, their
performance of their end of that bargain (assigning Borrower’s assets to a receiver of plaintiffs
choosing) trumps plaintiff's claims that the agreements had to be in writing. According to
defendants, “it is axiomatic that an offer can be accepted by the performance of a desired act”
and “here the desired act was relinquishing all rights to the accounts receivable and the

equipment which the facts will show [was] sold way under the fair market value.” Although


Minute Order Form (06/97)

United States District Court, Northern District of Hlinois

None af avieed tae | Robert W. Gettleman | Sint ads ote

CASE NUMBER 01 C 6244 DATE Feb. 21, 2002
CASE Finova Capital Corop, v Gregory J. Slyman, et al
TITLE

of the motion being presented.]

[ln the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

qi) i [For further detail see order attached to the original minute order.]

MOTION:
order striking affirmative defenses
DOCKET ENTRY:
(6) Qo Filed motion of [ use listing in “Motion” box above.]
(2) oO Brief in support of motion due
(3) oO Answer brief to motion due___. Reply to answer brief due___
(4) Qa Ruling/Hearingon___setfor__— at
(5) @ Status hearing set for 3/6/02, at 9:00 a.m.
(6) Oo Pretrial conference[held/continued to] [set for/re-set for] on setfor se at__
(7) Qa Trial[set for/re-set for] on___aat
(8) im [Bench/Jury trial] [Hearing] held/continued toa
(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) (O General Rule21 OFRCP41(a)(1) O FRCP41(a)(2).
(10) a [Other docket entry]

Memorandum opinion and order entered. Accordingly, plaintiffs’ motion to strike
affirmative defenses is granted and all three affirmative defenses are stricken.

No notices required, advised in open court.

No notices required.
rom umber of notices

X__ | Notices mailed by judge’s staff.

FEB 2 5 2002

date docketed,

ste Golo

Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form, iungo Lomesia’s'f
Copy to judge/magistrate judge. WMV ED
courtroom IZ tH) WY GZ Gad TP arenes
GDs deputy's
initials epee
Datertimascteiteein J WA

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Forbearance Agreement.”
Defendants respond to plaintiff's arguments by claiming that:

Under Illinois law, one of the elements of equitable estoppel is detrimental
reliance. If plaintiff had not lulled defendants into taking the over[-Jadvance, the
alleged default on the Forbearance Agreement would not have occurred. The
factual basis of estoppel must be determined by the trier of fact. This should not
be ruled on as a matter of law. Defendants’ reliance on plaintiffs conduct that
plaintiff would not purposely create a default was reasonable. Equitable estoppel
may arise even though there was no intention on the part of the party estopped to
relinquish any existing right. Defendants have a right to set forth their evidentiary
facts to show that the actions of the plaintiff created equitable estoppel. Under the
facts as taken as true, the trier of facts should determine whether or not as to the
guarantors a waiver by estoppel has been established.

The court finds defendants’ arguments lacking, not only because they fail to address
plaintiffs arguments based on the text of the agreements signed by the parties, but also because
they fail to address all of the elements of equitable estoppel. To allege equitable estoppel under
Illinois law, defendants must aver that: (1) plaintiff misrepresented or concealed material facts;
(2) plaintiff knew at the time that it made its representations that the representations were untrue;
(3) defendants did not know that the representations were untrue when they were made and acted
upon; (4) plaintiff intended or reasonably expected the representations to be acted upon by
defendants or by the public generally; (5) defendants reasonably relied upon the representations
in good faith and to their detriment; and (6) defendants have been prejudiced by their reliance on
the representations. Parks v. Kownacki, 737 N.E.2d 287, 296 (Ill. 2000) (citing Vaughn v.

Speaker, 533 N.E.2d 885 (Ill. 1988)).

Rather than aver all of the above, defendants have essentially alleged that because

plaintiff caused Borrower’s default, defendants should not have to pay, and they also should not

11


that was expressly authorized and agreed to by Plaintiff.” In part two of this defense, defendants
argue that, “As set forth in the First Affirmative Defense, Plaintiff should be estopped from
enforcing the guarantees referenced in the Complaint because it offered to release Defendants
from all guarantees if they agreed to assign the assets of [Borrower] to a receiver of Plaintiff's

choosing.”

As with defendants’ first affirmative defense, plaintiff thoroughly addresses defendants’
equitable estoppel arguments. With respect to defendants’ claim that they are not liable for
Borrower’s default because plaintiff caused it by giving Borrower an over-advance, plaintiff
points out that such advances were contemplated by the loan agreement, which contained a
clause in §2.2, stating: “All Revolving Advances made hereunder shall be added to and deemed
part of the Obligations when made.” Further, plaintiff urges, the forbearance agreement
obligated the repayment of any over-advance by designating the failure to do so as an “Event of
Default.” Plaintiff also argues that defendants are liable for the over-advance because the
Borrower’s indebtedness is defined in the guaranty agreements as “any and all advances, debts,
obligations and liabilities of Borrower . . . heretofore, now or hereafter made,” and also because
§5 of the guaranty agreements provides that those agreements “shall not be affected or impaired”
by any of the following:

modifications, supplements, extensions or amendments of any contract or

agreement to which the parties thereto may hereafter agree, nor by any

modifications, releases or other alterations of any of the Indebtedness hereby

guarantied or of any security therefore, nor by any agreements or arrangements
whatever with Borrower or anyone else.

Finally, plaintiff argues, defendants are liable for the over-advance because the letter
agreements that they signed in March 2001, state: “The undersigned further reaffirms,
acknowledges and consents to the continuation of [his/its] obligations under the Guaranty,

notwithstanding any loans or advances made to the Borrower under the Loan Agreement or

10


repayment of money not primarily for personal, family or household purposes, and not in
connection with the issuance of credit cards”). Indeed, at least one Illinois court has held that a
guaranty agreement, when set forth as a “condition precedent” to a loan, is considered part of the
“comprehensive credit agreement” between the parties and are therefore governed by the ICAA.

Bank One, Springfield v. Roscetti, 723 N.E.2d 755, 763 (Ill. App. Ct. 4th Dist. 1999). Applying

Roscetti, it is evident that the guaranty agreements in the instant case were a condition precedent
to the loan plaintiff made to Borrower based on the fact that those agreements begin with this
language:

To induce [plaintiff] to grant credit to [Borrower], and in consideration thereof

and of any loans, advances or other financial accommodations heretofore or

hereafter granted by [plaintiff] to or for the account of Borrower, the undersigned .

. . unconditional guarantees the full and prompt payment and performance by

Borrower of all of Borrower’s Indebtedness and obligations whether now existing

or hereafter arising from time to time.

Thus, under the ICAA, the court finds the guaranty agreements to be part of the “credit
agreement” between the parties in the instant case.

Having reached that conclusion, plaintiff urges the court to conclude that §§2 and 3 of the
ICAA bar defendants’ first affirmative defense due to the fact that the allegations therein rely on
an alleged oral agreement between the parties that supposedly modified the existing credit
agreement. Section 2 of the ICAA provides:

A debtor may not maintain an action on or in any way relating to a credit

agreement unless the credit agreement is in writing, expresses an agreement or

commitment to lend money or extend credit or delay or forbear repayment of

money, sets forth the relevant terms and conditions, and is signed by the creditor
and the debtor. .

Section 3 of the ICAA further bars any “claim, counterclaim, or defense by a debtor that a


(N.D. Ill. June 22, 2000) (citing Heller, 883 F.2d at 1295), In deciding whether to strike

affirmative defenses, the court employs this three-part test: (1) the matter must be properly
pleaded as an affirmative defense; (2) the matter must be adequately pleaded under the
requirements of Federal Rules of Civil Procedure 8 and 9; and (3) the matter must withstand a
Rule 12(b)(6) challenge -- in other words, if it is impossible for defendants to prove a set of facts
in support of the affirmative defense that would defeat the complaint, the matter must be stricken
as legally insufficient.” Renalds v. S.R.G. Restaurant Group, 119 F. Supp. 2d 800, 802 (N.D.IL.
2000); Heller, 883 F.2d at 1294.
DISCUSSION

Plaintiff's motion to strike defendants’ affirmative defenses raises two main arguments.
First, plaintiff argues that defendants waived any and all defenses they had when they signed the
guaranty and letter agreements. Second, plaintiff argues that even if defendants did not waive
their right to bring affirmative defenses, the individual affirmative defenses defendants allege do
not withstand challenge under Federal Rule of Civil Procedure 12(b)(6).
I. Plaintiff's Waiver Argument

Beginning with the guaranty agreements each defendant signed, plaintiff points out that
those agreements state that they are “continuing, unlimited, absolute, and unconditional,” and
that they guarantee “full and prompt payment and performance by Borrower.” The guaranty
agreements also state that, “Guarantor waives all rights and defenses arising out of an election of
remedies by [plaintiff],” that “Guarantor waives any defense arising by reason of any disability or
other defense of Borrower,” and further makes clear that “Guarantor agrees that nothing shall

discharge or satisfy the liability of Guarantor hereunder except the full and indefeasible payment


capricious, or, assuming it was made within plaintiff's unfettered discretion, in bad faith. And,
finally, if the action by plaintiff about which defendants complain involved an attempt to enforce
of the terms of the guaranty or letter agreements, then defendants’ argument is also likely to fail.
“Parties to a contract . . . are entitled to enforce the terms of the contract to the letter and an
implied covenant of good faith cannot overrule or modify the express terms of a contract.”

Northern Trust Co., 657 N.E.2d at 1104 (citing Resolution Trust, 618 N.E.2d at 424).

For these reasons, the court grants plaintiff’s motion to strike defendants’ third

affirmative defense.
CONCLUSION

The court concludes that, regardless of whether defendants waived the right to raise
affirmative defenses via the agreements they entered into with plaintiff, defendants’ affirmative
defenses do not stand up to scrutiny under Rule 12(b)(6) of the Federal Rules of Civil Procedure.
Accordingly, all three affirmative defenses are hereby stricken. This matter is set for a report on

status March 6, 2002, at 9:00 a.m.

ENTER: February 21, 2002 —
an [ ty
J
A Uw at,

Robert W. Gettleman
United States District Judge

14


in the event of Borrower’s default. Similarly, the Partnership signed a continuing guaranty
agreement that unconditionally promised to pay the full amount of the loan in the event of
Borrower’s default. According to plaintiff, Borrower defaulted on the loan and was notified of
that default on December 5, 2000. Thereafter, on March 16, 2001, Borrower and plaintiff entered
into a forbearance agreement (which amended some of the terms of the loan agreement) wherein
plaintiff agreed to forbear temporarily from exercising its rights with respect to the default,
provided that Borrower comply with the term s of the loan and forbearance agreements, under
which defendants executed letter agreements reaffirming their obligations under the guaranty
agreements.

On May 4, 2001, plaintiff notified Borrower that it had defaulted again under §8 of the
loan agreement, and that plaintiff was exercising its right under §9.1(b) of that agreement to
cease advancing money or extending credit to or for the benefit of Borrower. Plaintiff told
Borrower that it would consider funding requests by Borrower pursuant to an acceptable wind-
down budget to be provided by Borrower. As of July 31, 2001, Borrower still owed
approximately $1,546,241.73, exclusive of interest, fees, costs and expenses thereafter accrued
by plaintiff.

Plaintiff filed the instant suit against defendants on August 14, 2001.

STANDARD OF REVIEW
While generally disfavored in this circuit, it is appropriate for courts to grant motions to

strike affirmative defenses that add unnecessary clutter to a case. See Heller Fin., Inc. v.

Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989); Household Fin. Serv., Inc. v.

Northeastern Mortgage Inv. Corp., 2000 U.S. Dist. LEXIS 8975, at *3, 2000 WL 816795, at *1



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS surene
EASTERN DIVISION DOR: PTER

e 4
Pov A Bal

FINOVA CAPITAL CORPORATION, a FEB < ozuz
Delaware corporation,

Plaintiff,
No. 01C 6244
v.
Judge Robert W. Gettleman
GREGORY J. SLYMAN, PETER J. SLYMAN,
and SLYMAN FAMILY INVESTMENT
PARTNERSHIP,

Oe

Defendants.

MEMORANDUM OPINION AND ORDER

Plaintiff, Finova Capital Corporation, has filed a three-count complaint, alleging breach
of guaranty agreement against each of defendants Gregory J. Slyman, Peter J. Slyman, and the
Slyman Family Investment Partnership (“Partnership”). In their answer to plaintiff's complaint,
defendants assert three affirmative defenses: “Accord and Satisfaction/Waiver,” “Estoppel” and
“Breach of the Covenant of Good Faith and Fair Dealing.” Plaintiff has filed a motion to strike
those affirmative defenses. For the reasons explained below, plaintiff's motion is granted.

FACTS

Plaintiff is the successor in interest by merger to Fremont Financial Corporation
(“Freemont”), which loaned money to the Richard O. Schulz Company (“Borrower”) and secured
guarantees for that loan from defendants.' Defendants Gregory and Peter Slyman each signed a

limited continuing guaranty agreement that unconditionally promised payment of up to $500,000

' Based on the documents filed by the parties, it appears that defendants Gregory and
Peter Slyman are shareholders and members of the Board of Directors of Borrower. \


have to pay because plaintiff did not follow through on its oral promise to forgive defendants’
debt if Borrower signed a trust and assignment agreement. The former argument fails because it
does not set forth or even suggest the elements of a claim for equitable estoppel, as explained
above. The latter argument relies on defendants’ claim that plaintiff breached its alleged oral
agreement with them and therefore fails for the same reasons that defendants’ first affirmative
defense was stricken. Thus, the court grants plaintiff's motion to strike defendants’ equitable

estoppel affirmative defense.

C. Defendants’ “Breach of the Covenant of Good Faith and Fair Dealing”
Affirmative Defense

Defendants’ third affirmative defense alleges that plaintiff breached the covenant of good
faith and fair dealing “when it created purported events of default through its own conduct, and
then sought to declare a default and obtain concessions from Defendants and the Borrower in.

order to forestall or avoid the effects of its own wrongful conduct. “

To this argument, plaintiff responds: “Defendants mischaracterize the nature of the
defaults in a vain attempt to avoid their contractual liability.” Instead, plaintiff asserts, the
default resulted from Borrower’s failure to pay back money plaintiff was authorized to and did
loan under the terms of the loan and forbearance agreements. Further, plaintiff argues, its
attempt to collect the amount due from defendants was proper given the terms of the guaranty
agreements. Thus, plaintiff concludes, “the covenant of good faith and fair dealing cannot be

used to frustrate [plaintiff’s] rights to enforce the terms of these agreements.”

Defendants are correct that the agreements signed by the parties in the instant case all
include an implied covenant of good faith and fair dealing. See Northern Trust Co. v. VIILS.

12