Illinois Appellate Court Rules That Assignment of Guaranty Unenforceable Where the Guarantor is Not Aware of the Risks

An Illinois Appellate Court has affirmed a decision by a Cook County Circuit Court judge relating to a guaranty. In 2001, Paul Steiner and Ricky Nelson, representatives from Superior Wine Selections, submitted a credit application to a wine distributor, Morand. With the application, Steiner and Nelson each tendered a personal guaranty. The guaranty required Steiner and Nelson to pay fully and promptly for any amount due the wine distributor. The agreement stated that “the guaranty shall be continuing, absolute and unconditional and shall remain in full force and effect until written notice of its discontinuance shall be actually received . . . and also until any and all indebtedness existing before receipt of such a notice shall be fully paid.”

In addition, Steiner and Nelson waived notice and stated that the guaranty “shall be binding on the undersigned jointly and severally, and upon their legal heirs, legal representatives, successors and assigns of the undersigned and each of them.”

In 2002, Southern Wine and Spirits of Illinois purchased Morand — the wine distributor that received Steiner’s and Nelson’s personal guaranties. In May 2003, Superior began using Southern as a wholesale distributor — unaware that it had purchased Morand.

Between Dec. 3 and Dec. 17, 2010, Superior purchased $19,080.40 from Southern but did not make the required payments. Steiner and Nelson refused to pay under the personal guaranty and Southern filed a breach of contract against each of them.

Southern claimed that the guaranty was an asset of Morand, which Southern had purchased, and that Southern was owed a debt by Superior and that, by the terms of the guaranty, Steiner and Nelson were liable for the amount due.

Arguing against the debt, Steiner said he sold 100% of his shares in Superior to Nelson and others in 2001. Steiner said under an agreement he would be defended and indemnified from any action against Superior.

Nelson moved to dismiss the case arguing that the personal guaranty had never been executed in favor of Southern and that Superior had never knowingly bought supplies under the guaranty as it had never purchased any supplies from Morand after accepting that guaranty.

Because nothing had been purchased from Morand, the guaranty “incurred no risk” but when they began to purchase from Southern, the risk from using the guaranty increased dramatically. Nelson argued the change rendered the guaranty unenforceable.

Southern replied that the guaranty was never canceled and that there were some purchases between Superior and Morand, which included an affidavit from a credit manager from Southern. Nelson moved to have the affidavit stricken as hearsay. The trial court granted Nelson’s motion and granted his motion to dismiss the suit with prejudice leaving the plaintiff Southern, the option to file an amended complaint against Superior. Southern appealed the dismissal.

On appeal, Southern argued that the guaranty was never cancelled. Nelson argued that the language of the guaranty did not permit an assignment of the guaranty. The guaranty did not expressly forbid such a transfer, but the general rule in Illinois is that guaranties are not assignable.

The appellate court looked further into the details of the contract and found that because Superior was unaware that Southern had acquired Morand, Superior was unaware that they incurred this risk when they purchased from Southern. This constituted a “material change in the terms of the agreement.” The appellate court further noted that whether or not Superior purchased goods from Morand was irrelevant since the fundamental difference was whether Superior had knowledge that it incurred the risk from the guaranty, not whether any risk was incurred.

In addition, the Illinois Appellate Court affirmed the trial judge’s decision in striking sections of the credit manager’s affidavit for Southern, affirming the trial court’s decision granting Nelson’s motion to dismiss.

Southern Wine and Spirits of Illinois v. Paul Steiner and Ricky Nelson, 2014 IL App (1st) 123435 (March 31, 2014).

Kreisman Law Offices has been handling commercial litigation, business litigation and breach of contract disputes for individuals and businesses for more than 38 years in and around Chicago, Cook County and its surrounding areas, including Chicago (Albany Park, Jefferson Park, Beverly, Back of the Yards, Bridgeport, Canaryville, Chinatown, Greektown, Little Italy, Lincoln Square, Lithuanian Plaza), Round Lake Beach, Skokie, St. Charles, Western Springs, Hinsdale, Fox River Grove, Evergreen Park, Des Plaines, Deerfield and Oak Lawn, Ill.

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