7th Cir. Rules The claims of the lenders against the borrower and the guarantor were prescribed

The United States Court of Appeals for the Seventh Circuit recently upheld a trial court’s ruling that the claims of two lenders against a borrower were barred by the applicable statute of limitations.

In that decision, the Seventh Circuit held:

1) Under the debt securities at issue, the limitation period began to run when an event of default occurred under the mortgage note and not under a subsequent forbearance agreement; and

2) Under Illinois law, the statute of limitations does not operate to extinguish a debt or absolve a person in contract from the obligation, but merely renders that obligation unenforceable in court .

A copy of the notice in Hovde v ISLA Development LLC is available on: Link to Reviews.

The defendant borrower was seeking investment funds for the purpose of constructing a condominium development off the coast of Cancun, Mexico. The borrower formed a limited liability company and obtained lenders secured by a mortgage and evidenced by a note with the limited liability company and a personal guarantee from the individual borrower.

The borrower’s business ultimately failed. More than 10 years later, the lenders sued the LLC and individual borrower under the note and security to recover the funds they lent to the borrower and LLC.

The trial court granted summary judgment to the borrower because any alleged breach of the mortgage, note and warranty was carried beyond the expiration of the 10-year statute of limitations applicable in under Illinois law. The lenders appealed.

CLAIMS OF LENDERS UNDER THE NOTE

According to the terms of the note, principal and interest on the loans were due in June 2007. However, the note also contained an acceleration clause “in the event of default” which stated: “the outstanding principal balance of the note , the interest thereon and all other obligations of the Borrower to the Bank under the Loan Documents shall automatically become due and payable. If the borrower has admitted in writing its inability to pay its debts as they come due, then an event of default has occurred.

The Seventh Circuit agreed with the trial court that two separate emails from the borrower to the lenders, not a subsequent forbearance agreement, constituted an event of default and an acceleration of unpaid principal and interest. The first email was a request from the borrower for an additional loan from lenders to meet a tax liability. The following email referred to additional financial issues, including notification that all construction on the project was on hold. Following the fault and acceleration event, the Seventh Circuit ruled that the statute of limitations was triggered in September 2008.

The lenders argued that a November 2008 forbearance agreement constituted a new promise to pay and that the 10-year statute of limitations should run in November 2008. However, the Seventh Circuit did not consider this argument because it was not properly raised in the trial court. Accordingly, the Court of Appeals upheld the trial court’s decision that the claims brought under the note were barred by Illinois’ 10-year statute of limitations.

CLAIMS OF LENDERS UNDER THE GUARANTEE

On appeal, the lenders also argued that the trial court erred in finding that the limitation period defense had not been waived in the security. In support of this argument, the lenders relied on two provisions of the guarantee. First, the lenders argued that the wording of the guarantee provided that the guarantee was “continuing, absolute and unconditional, and shall remain in full force and effect with respect to the satisfaction of any unit of guarantor in the entirety of the borrowers’ debts. Second, the lenders argued that the wording of the guarantee provided that the guarantor waived certain defenses, including its defense of limitation.

The guarantor argued that blanket disclaimers of material statutory rights should only constitute a waiver where the wording of the warranty is explicit. Because the warranty here did not explicitly refer to a waiver of the statute of limitations, the warrantor argued that the court should not decide that it waived any statute of limitations defense.

The Court noted that the Guarantee stated: “the Guarantor agrees that, except as provided below, its obligations under this Guarantee shall be unconditional, regardless of… (vii) any other circumstances which might otherwise constitute a release or a legal or equitable defense of a surety.”

The Seventh Circuit held that this provision of the warranty guarantees that the warranty shall be unconditional and that no legal or equitable defense can alter the status of the bonds as unconditional. However, the Court held that the statute of limitations did not affect the unconditional nature of the obligation, as Illinois courts recognize that the statute of limitations is not a defense that has affects the obligation of a party and does not operate to release a person in the contract from the obligation obligation. Instead, a limitation period only affects a party’s ability to enforce the obligation in court.

Thus, the Court held, under the language of warranty, the defense’s statute of limitations was not waived.

Accordingly, the Seventh Circuit upheld the trial court’s ruling that the lenders’ claims were statute-barred.

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