Court Opinion

ID: 3146112
Source: CourtListenerOpinion
Date Created: 2015-10-22 18:13:18.41789+00
Date Added: 2024-06-11T12:09:55.266200
License: Public Domain

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
1-05-3235

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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