Court Opinion

ID: 8377508
Source: CourtListenerOpinion
Date Created: 2022-10-24 18:00:25.880556+00
Date Added: 2024-06-11T16:46:36.414731
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 21-2894
ERIC D. HOVDE and STEVEN D. HOVDE,
                                               Plaintiffs-Appellants,
                                 v.

ISLA DEVELOPMENT LLC and JEFFREY T. RIEGEL,
                                     Defendants-Appellees.
                     ____________________

         Appeal from the United States District Court for the
            Northern District of Illinois, Eastern Division.
         No. 1:18-cv-07323 — Franklin U. Valderrama, Judge.
                     ____________________

    ARGUED APRIL 13, 2022 — DECIDED OCTOBER 24, 2022
                 ____________________

   Before ROVNER, WOOD, and ST. EVE, Circuit Judges.
    ROVNER, Circuit Judge. Jeffrey Riegel sought to build a con-
dominium development in Isla Mujeres, and toward that end
he formed ISLA Development LLC (“ISLA”) and secured a
loan of millions of dollars from Steve and Eric Hovde. That
project, however, ultimately failed, and more than ten years
later, the Hovdes filed suit seeking to recover their funds from
ISLA and Riegel.
2                                                   No. 21-2894

    Riegel formed ISLA in 2004 and acted as its manager and
sole member. In exchange for the loan from the Hovdes, ISLA
promised to pay the Hovdes a 25% interest rate, and Riegel
agreed to act as a guarantor. Financial problems eventually
shut down the project and the Hovdes sued ISLA and Riegel.
The district court granted summary judgment to the defend-
ants as to the claim based on the Mortgage Note (“Note”),
holding that the claim was brought beyond the expiration of
the ten-year statute of limitations period. That left the claim
against Riegel based on his status as a guarantor. The district
court initially held that the case could proceed as to Riegel,
but a different district court judge who subsequently took
over the case determined that the statute of limitations could
be asserted in the action against the guarantor as well, hold-
ing that a waiver did not operate to block that defense and the
claim against Riegel was therefore untimely. The Hovdes now
appeal those grants of summary judgment.
   We turn first to the claim based on the obligations under
the Note. By its terms, the Note provided that the principal
and interest on the loans would be due in June 2007, but the
Note’s event-of-default acceleration clause provided that if an
Event of Default occurred, “the outstanding unpaid principal
balance of the Note, the accrued interest thereon and all other
obligations of the Borrower to the Bank under the Loan Doc-
uments shall automatically become immediately due and
payable,” thus triggering the ten-year statute of limitations.
    One such “Event of Default” specified in the contract was
if an “Act of Bankruptcy shall occur,” and “Act of Bank-
ruptcy” is defined in the contract to include if ISLA or Riegel
“admit in writing its inability to pay its debts as they mature.”
The district court properly held that two emails sent by Riegel
No. 21-2894                                                    3

to the Hovdes constituted an admission in writing of an ina-
bility to pay the debts and therefore an event of default. In an
email on August 7, 2008, to Steven Hovde, Riegel revealed
that a tax bill of $137,000 had to be paid by August 18, that he
had been buying time with the tax officials most of the spring
and summer but that it was now absolute and non-negotiable,
and that he needed an advance of $250,000 just to make it until
an anticipated closing in mid-September. Steven Hovde re-
sponded on August 11 that he had no more money to give
and that the last time he lent money he had told Riegel to shut
the project down and that they would not lend any additional
amounts. On September 2, Riegel sent another email, stating
that he had pursued financing options but that “[a]t this point
in time, my resources are exhausted.” In that email he detailed
the financial challenges, including stating that as of two
weeks prior all construction workers were suspended and
that the management team was kept on but was not paid that
past Friday, and that if all construction workers and manage-
ment staff were terminated that day then outstanding sever-
ance and federal taxes would total another $200–250,000. He
further stated that funds of $75,000 were needed by Wednes-
day morning “to avoid having Social Security persons in Mex-
ico shut down the entire operation immediately.” He contin-
ued that he was told that trucks would be coming to confis-
cate all computer equipment from the offices and other assets
and materials at the construction site to pay the social security
bill owed, and that “[s]uch an action would be the instant
death of the project.” He concluded by stating that he was “a
very ‘stand up’ guy but at this point, with no resources of my
own, I would not be able to attempt re-assembling a team on
the ground.”
4                                                   No. 21-2894

    The district court did not err in holding that the language
of the emails met the contract language of an admission in
writing of an inability to pay his debts as they mature. Alt-
hough the Hovdes argue that Riegel was continuing to seek
alternative funding sources, and that the property itself and
other assets still had some value, that does not alter the con-
clusion that the emails constituted an admission of an inabil-
ity to pay the debts. The language does not require actual in-
solvency; it merely requires an admission of an inability to
pay the debts as they mature—whether or not true—and the
court properly held that the language in the emails consti-
tuted that admission. Accordingly, the statute of limitations
began to run as of September 2, 2008.
    The Hovdes next argue that a Forbearance Agreement of
November 5, 2008, constituted a “new promise to pay” that
restarted the ten-year limitations period, thus making the No-
vember 2, 2018, lawsuit timely. Riegel argues that this claim
was never presented to the district court and therefore is
waived. In response to that contention, the Hovdes did not
identify any part of the record raising the legal theory that the
Forbearance Agreement constituted a new promise to pay. In-
stead, they argued that the court was presented with the rele-
vant facts, including the existence of the Forbearance Agree-
ment, and that the applicable statute was before the court as
well, “even if the precise ‘new promise to pay’ phrase was not
used by the parties.” Appellant’s Reply Brief at 1. But those
facts were raised only with respect to a distinctly different ar-
gument, which was that the Forbearance Agreement tempo-
rarily tolled the running of the statute of limitations thus ex-
tending the ten-year limit. The district court rejected that ar-
gument because even if the period was tolled during the
forty-two days that the Forbearance Agreement was in effect,
No. 21-2894                                                    5

the Hovdes would have had to bring the claim by October 18,
2018, and the claim filed on November 2, 2018, therefore was
still untimely. The argument that the Hovdes assert here, that
the Forbearance Agreement was a new promise to pay that
triggered a new 10-year limitations period, was never as-
serted below, and is inconsistent with the argument actually
made below. To the extent that the Hovdes are arguing that
the court could have put together the Forbearance Agreement
and the limitations period and fashioned such an argument,
that is not the court’s role. The argument that the Forbearance
Agreement constituted a new promise to pay was never ar-
gued to the district court at all and therefore is not properly
raised on appeal. Compare Rozumalski v. W.F. Baird & Assocs.,
Ltd., 937 F.3d 919, 925–26 (7th Cir. 2019) (holding that an issue
cannot be raised on appeal if the party failed to make the spe-
cific argument below even if the issue may have been before
the district court in more general terms), and Domka v. Portage
Cty., Wis., 523 F.3d 776, 783 (7th Cir. 2008) (holding that an
argument was waived where the specific argument was never
presented to the district court but a different one arising out
of the same facts was argued), with United States v. Billups, 536
F.3d 574, 578 (7th Cir. 2008) (argument not forfeited on appeal
where the argument was presented in the district court but a
new twist in support of that argument is presented on ap-
peal). Accordingly, the court properly granted summary
judgment on that claim as untimely.
   Finally, the Hovdes argue that the district court erred in
determining that the claim against Riegel with respect to the
guaranty was also untimely. The district court initially held
that the guaranty by its language waived all defenses, and
therefore that Riegel’s reliance on the defense of the statute of
limitations was waived as well. The court later revisited the
6                                                  No. 21-2894

issue, and held that the waiver in the guaranty did not operate
to preclude reliance on the statute of limitations, and that the
claim against Riegel based on the guaranty was untimely.
    The Hovdes now argue that the court erred in holding that
the statute of limitations defense was not waived in the guar-
anty agreement. There are two provisions in the guaranty that
are relied upon for this issue. First, the language in the guar-
anty provides: “[t]his guaranty shall in all respects be contin-
uing, absolute and unconditional, and shall remain in full
force and effect with respect to any Guarantor until satisfac-
tion in full of the Borrower’s Liabilities.” The second provi-
sion sets forth the waiver of defenses, and although the par-
ties consider only the last part of the provision (bolded in the
text below), examination of the whole provision is helpful to
provide context:
       Guarantor hereby agrees that, except as
       hereinafter provided, its obligations under
       this Guaranty shall be unconditional,
       irrespective of (i) the validity or enforceability
       of Borrower's Liabilities or any part thereof, or
       of any promissory note or other document
       evidencing all or any part of Borrower's
       Liabilities, (ii) the absence of any attempt to
       collect Borrower's Liabilities from Borrower or
       any other guarantor or other action to enforce
       the same, (iii) the waiver or consent by Lenders
       with respect to any provision of any instrument
       evidencing Borrower's Liabilities, or any part
       thereof, or any other agreement heretofore, now
       or hereafter executed by Borrower and
       delivered to Lenders, (iv) failure by Lenders to
No. 21-2894                                                     7

       take any steps to perfect and maintain its
       security interest in, or to preserve its rights to,
       any security or collateral for Borrower's
       Liabilities, (v) the institution of any proceeding
       under Chapter 11 of Title 11 of the United States
       Code (11 U.S.C. §101 et seq.), as amended (the
       "Bankruptcy Code"), or any similar proceeding,
       by or against Borrower, or Lender[s’] election in
       any such proceeding of the application of
       Section 1111(b)(2) of the Bankruptcy Code, (vi)
       any borrowing or grant of a security interest by
       Borrower as debtor-in-possession, under
       Section 364 of the Bankruptcy Code, (vii) the
       disallowance, under Section 502 of the
       Bankruptcy Code, of all or any portion of
       Lender[s’] claim(s) for repayment of Borrower's
       Liabilities, or (viii) any other circumstance
       which might otherwise constitute a legal or
       equitable discharge or defense of a guarantor.
(emphasis added). The issue here is whether those provisions
waive the statute of limitations defense, or whether more ex-
plicit language referencing the statute of limitations is needed
in order to waive it.
   A guaranty is a contract and therefore is analyzed under
standards governing contract interpretation in general. Black-
hawk Hotel Assocs. v Kaufman, 421 N.E.2d 166, 168 (Ill. 1981);
T.C.T. Bldg. P’ship v. Tandy Corp., 751 N.E.2d 135, 139 (Ill. App.
2001). “A guarantor is given the benefit of any doubt which
may arise from the language of the contract; his understand-
ing is strictly construed; his liability may not be varied or ex-
tended beyond its precise terms by construction or
8                                                     No. 21-2894

implication; and he is bound only to the extent and in the mat-
ter and under the circumstances pointed out in his obliga-
tion.“ Exch. Nat. Bank of Chi. v. Bergman, 505 N.E.2d 1236, 1238
(Ill. App. 1987); T.C.T. Bldg. P’ship, 751 N.E.2d at 139–40 (hold-
ing that “a guaranty is to be strictly construed in favor of the
guarantor such that the guarantor is accorded the benefit of
any doubt that arises from the contract language.”) If the
terms of a contract present no ambiguity, they will be given
effect as written. Id.
    The parties rely on different lines of reasoning in Illinois
cases. The Hovdes point to cases holding that guaranties, like
any other contract, should be given their plain meaning, and
that waivers in guaranties should therefore be enforced where
they are clear and unambiguous. See Chrysler Credit Corp. v.
Marino, 63 F.3d 574, 577 (7th Cir. 1995); BA Mortg. & Int'l Re-
alty Corp. v. Am. Nat. Bank & Tr. Co. of Chi., 706 F. Supp. 1364,
1376 (N.D. Ill. 1989). They argue that the language in the guar-
anty encompasses legal or equitable defenses, and therefore
includes the statutes of limitations defense.
    Riegel, in contrast, points to cases refusing to enforce gen-
eral waivers where an important statutory right is at issue and
finding a waiver for such circumstances only where it is ex-
plicit. See Gallagher v. Lenart, 874 N.E.2d 43, 62 (Ill. 2007). Un-
der that reasoning, only a waiver that explicitly includes
“statutes of limitations” would be effective to waive it. That
requirement of explicit language, which was applied to “im-
portant statutory rights,” has never been applied in the con-
text of statutes of limitations, but Riegel asserts that the rea-
soning would extend to that context.
   We need not determine whether a waiver of the statute of
limitations must be explicit to that defense, because even if
No. 21-2894                                                    9

more general waiver language can be sufficient, the language
here does not suffice. Any review of a contract begins with the
plain language, and the language of the alleged waiver here
by its terms does not encompass the statute of limitations de-
fense. The language relied upon by the Hovdes provides that
the “guaranty shall in all respects be continuing, absolute and
unconditional, and shall remain in full force and effect with
respect to any Guarantor until satisfaction in full of the Bor-
rower's Liabilities” and that a guarantor’s “obligations under
this Guaranty shall be unconditional, irrespective of … any
other circumstance which might otherwise constitute a legal
or equitable discharge or defense of a guarantor.”
     In guaranty agreements the terms “unconditional” and
“absolute” are terms of art. Unlike a conditional guaranty,
“[a]n unconditional guaranty does not require a creditor to
attempt collection from the principal debtor before looking to
the guarantor.” N. Tr. Co. v. VIII S. Mich. Assocs., 657 N.E.2d
1095, 1105 (Ill. App. 1995), citing United States v. Shirman, 41
F.R.D. 368, 372 (N.D. Ill. 1966); 38 Am. Jur. 2d Absolute or con-
ditional guaranty § 13 (2022) (“A guaranty that is absolute and
unconditional is one that requires no condition precedent to
its enforcement against the guarantor other than mere default
by the principal debtor; such a guaranty is also called a guar-
anty of payment”); In re Clore, 547 B.R. 915, 922 (Bankr. C.D.
Ill. 2016) (stating that “as used in guaranty agreements, the
terms ‘absolute’ and ‘unconditional’ are recognized terms of
art designed to exclude any and all contractual conditions.”)
Therefore, the above provisions make clear that the obliga-
tions of the guarantor are one of payment not collection and
are not conditioned upon the failure of efforts to collect the
payment from the principal debtor.
10                                                    No. 21-2894

    The Hovdes acknowledge that the terms “continuing, ab-
solute, and unconditional” are terms of art when used in
guaranties. They argue, however, that the language that the
guaranty is “in all respects … continuing, absolute and un-
conditional” and “shall remain in full force and effect” until
the satisfaction of the borrowers’ liabilities, indicates that Rie-
gel’s obligations remain ongoing regardless of the statute of
limitations. That language certainly makes clear that the guar-
anty requires no condition precedent to its enforcement
against the guarantor other than mere default by the principal
debtor, and that its obligation does not terminate until the
debt is paid. But it says nothing as to whether an action to
enforce that guaranty can be maintained outside the statute of
limitations.
    The Hovdes maintain that such language is sufficient to
waive the statute of limitations defense when combined with
the language waiving legal and equitable defenses. We turn,
then, to the precise language in that separate provision, which
states that “the Guarantor agrees that, except as hereinafter
provided, its obligations under this Guaranty shall be uncondi-
tional, irrespective of … (vii) any other circumstance which
might otherwise constitute a legal or equitable discharge or
defense of a guarantor.” (emphasis added) As the italicized
language makes clear, all of the subsections, including the
waiver of defenses, are relevant only insofar as they would
relate to the unconditional nature of the obligation. In other
words, the provision ensures that the guaranty shall be un-
conditional and that no legal or equitable defense can alter the
status of the obligations as unconditional. In keeping with
that focus on the nature of the guarantor’s obligations, the
specific examples that follow relate to the obligations of the
guarantor. In fact, all of the subsections that follow make clear
No. 21-2894                                                       11

that the obligations of the guarantor, Riegel, are uncondi-
tional regardless of the actions of the lender, the Hovdes, with
respect to the borrower, ISLA. Thus, those listed provisions
declare that Riegel’s obligations are not impacted by: (i) the
validity or enforceability of ISLA’s liabilities; (ii) the failure to
attempt to collect from ISLA; (iii) any waiver or consent by
the Hovdes with respect to ISLA’s liabilities; (iv) any failure
by the Hovdes to take any steps to perfect and maintain its
security interest in, or to preserve its rights to, any security or
collateral for ISLA’s liabilities; (v) any bankruptcy proceeding
by or against ISLA, or the Hovdes’ election in any such pro-
ceeding; (vi) any borrowing or grant of a security interest by
ISLA as debtor-in-possession under the Bankruptcy Code;
(vii) or the disallowance under the Bankruptcy Code of any
portion of the Hovdes’ claim for repayment of ISLA’s liabili-
ties. The listed provisions, in short, make clear that Riegel’s
obligation is independent of and unaffected by the obligations
of ISLA and any actions of the Hovdes with respect to ISLA.
   The “catch-all” provision in subsection (viii) concludes
that section, providing that Riegel’s obligations “shall be un-
conditional, irrespective of … (viii) any other circumstance
which might otherwise constitute a legal or equitable dis-
charge or defense of a guarantor.” As with the provision that
precedes it, that subsection makes clear that any other circum-
stances that a guarantor otherwise could assert as a legal de-
fense or a discharge cannot operate to alter the unconditional
nature of the guarantor’s obligation. In other words, the un-
conditional nature of the obligation cannot be impacted by
any such defenses.
  That language could operate to waive any defenses that
would otherwise render the guarantor’s obligation
12                                                    No. 21-2894

conditional. But its scope is limited to that context. It ad-
dresses only the preservation of the unconditional nature of
the obligation; it does not address defenses unrelated to that
issue.
    But the statute of limitations does not impact the uncondi-
tional nature of the obligation. In fact, it does not impact the
obligation itself—unconditional or otherwise—at all. Illinois,
like many states, recognizes that the statute of limitations is
not a defense that impacts a party’s obligation; it merely im-
pacts the enforceability in court of that obligation. See Fleming
v. Yeazel, 40 N.E.2d 507, 508 (Ill. 1942) (holding that statutes of
limitations “bar the right to sue to recover but do not extin-
guish the debt or the property right”); Midland Funding, LLC
v. Johnson, 137 S. Ct. 1407, 1411–12 (2017) (recognizing that un-
der the law of many states, the right to payment remains after
the limitations period expires, and distinguishing a claim or
obligation, which survives the limitations period, from an
“enforceable” claim or obligation); see also Pantoja v. Portfolio
Recovery Assocs., LLC, 852 F.3d 679, 684 (7th Cir. 2017) (hold-
ing that most states treat a debt as a legal obligation even after
the statute of limitations has run even though that limitations
period means it can no longer be legally enforced); Tinsley v.
Consumer Adjustment Co., Inc., 2020 WL 1558105, at *4 (C.D. Ill.
Apr. 1, 2020) (citing Pantoja, noting that “most states—includ-
ing Illinois—do not extinguish or invalidate debts even after
the statute of limitations has run, and creditors generally re-
tain the legal right ‘to appeal to the debtor to honor the debt
out of a sense of moral obligation even if the legal obliga-
tion can no longer be enforced in court’”); Stimpson v. Midland
Credit Mgmt, Inc., 944 F.3d 1190, 1199 (9th Cir. 2019) (noting
that “[i]n most states, a statute of limitations does not extin-
guish a party’s rights, but merely precludes a judicial
No. 21-2894                                                    13

remedy”); 54 C.J.S. Limitations of Actions § 20 (2022) (noting
that a statute of limitations bars only the remedy in an action
to collect on a debt but that a creditor retains the right to pay-
ment of debt even after the limitations period has expired).
The language of the waiver states that the guarantor’s obliga-
tion is unconditional irrespective of any legal defense of the
guarantor. That language is therefore exceedingly narrow,
keyed by its terms to prohibit only circumstances that would
render the guaranty obligation conditional. Nothing in the
statute of limitations defense renders the guarantor’s obliga-
tion conditional; it merely renders the unconditional obliga-
tion unenforceable in a court. Language in a guaranty contract
must be given effect as written, and any ambiguity must be
interpreted in a manner favoring the guarantor. T.C.T. Bldg.
P’ship, 751 N.E.2d at 139–40. Because the statute of limitations
does not address the obligation, it is not included in a waiver
limited to defenses or discharge that would impact the uncon-
ditional nature of the guaranty.
     The language at issue here stands in contrast to more ex-
pansive language that courts frequently encounter in waivers,
in which the language applies not only to defenses as to the
obligation itself but also to defenses to liability or enforce-
ment. See Intl. Supply Co. v. Campbell, 907 N.E.2d 478, 481–82
(Ill. App. 2009) (guaranty waived “all legal and equitable de-
fenses regarding enforcement of the personal guarantee”);
FIMSA, Inc. v. Unicorp Fin. Corp., 759 F. Supp. 1297, 1300 (N.D.
Ill. 1991) (“the undersigned … waives every defense, counter-
claim or setoff … to any action by FIMSA in enforcing this guar-
anty); WEC 98C-3 LLC v. Saks, Inc., 2022 WL 474204, *4 (N.D.
Ill. Feb. 16, 2022) (guaranty provided that “the liability and ob-
ligation of Guarantor … shall not be subject to any … defense);
Morris v. Columbia Nat. Bank of Chi., 79 B.R. 777, 781 (N.D. Ill.
14                                                   No. 21-2894

1987) (guaranty provided that “[e]ach of the undersigned
waives every defense, counterclaim, or setoff which any of
them may now have or hereafter may have to any action by the
holder in enforcing this guaranty.”); BA Mortg. & Intl. Realty,
706 F. Supp. at 1376 (guaranty waived “[a]ny defense … that
the Guarantors … may or might have to its respective under-
takings, liabilities and obligations hereunder, each and every
such defense being hereby waived by the undersigned Guar-
antors.”); RBS Citizens, Nat. Assn. v. RTG-Oak Lawn, LLC, 943
N.E.2d 198, 203 (Ill. App. 2011) (forbearance agreement pro-
vided that the borrower has “no claims or defenses to the en-
forcement of the right and remedies of Lender thereunder”) (em-
phasis added in all parentheticals). The language in this case
does not waive all defenses to enforcement or to the legal ac-
tion or to liability; it provides only that the obligation remains
unconditional irrespective of any circumstances that would
otherwise constitute a defense or discharge. Because the stat-
ute of limitations defense does not operate to absolve a person
in a contract from the obligation but merely renders that obli-
gation unenforceable in court because not timely brought, the
language does not preclude the assertion of that defense by
its plain language. Accordingly, the district court did not err
in determining that the claims were barred by the statute of
limitations.
     The decision of the district court is AFFIRMED.