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Justifiable or Reasonable Reliance Under Section 523 of the Bankruptcy Code

Justifiable or Reasonable Reliance Under Section 523 of the Bankruptcy Code

Exception to Discharge Section 523 of the Bankruptcy Code

Reasonable Reliance Section 523 Bankruptcy

Sometimes a debtor is less than honest, that’s when you bring an adversary action in bankruptcy

Was your reliance justifiable  or reasonable when lending money to a dishonest debtor that. later ends up in bankruptcy. Collateral Base Attorney Tom Howard recently helped our client win a $1.8 million dollar verdict in a bankruptcy case out of the Central District of Illinois. The case, liura v. Brady (In re Brady), concerned several novel issues of law, including the standard for “justifiable” or “reasonable” reliance under §523(a)(2) of the Bankruptcy Code.

Exceptions to Bankruptcy Discharge under Section 523 –

Bankruptcy discharge is the value most debtors that petition for relief under the Bankruptcy Code are after.  The discharge of their debts can wipe away thousands or millions of dollars of debt holding down a debtor in order to give him or her a fresh start.  But not all debtors are honest but unlucky – some are lying about their debts, which is why you can file an action to except certain debts, usually obtained fraudulently, from discharge. Section § 523(a)(2) of the Code is the authority for such adversary proceedings, which provides, in relevant part:

  • (a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—
  • (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
  • (A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
  • (B) use of a statement in writing—
  • (i) that is materially false;
  • (ii) respecting the debtor’s or an insider’s financial condition;
  • (iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
  • (iv) that the debtor caused to be made or published with intent to deceive[.]
  • 11 U.S.C. § 523(a)(2)(A), (B).

Pliura v. Brady – Justifiable or Reasonable Reliance under Section 523

The case concerns the Chapter 7 Bankruptcy of Bob Brady (Debtor), a prominent home builder in Central Illinois. After earning his MBA and spending several years in banking, Bob Brady joined Brady Homes, the family business. Brady Homes has built over 1,500 homes in the Bloomington/Normal area, and has also built and managed apartments and condominiums. The Debtor also participated in several other real estate businesses, including Pinehurst Development (Pinehurst) and Brew of Illinois, LLC (Brew). In other words, the Debtor was a very experienced and sophisticated real estate professional, and knew all about holding and transferring title of property.

As our Central Illinois readers might know, the Debtor is the brother of State Senator Bill Brady. At the time of the loan, Senator Brady was running for Governor of Illinois as the Republican Party nominee (he went on to narrowly lose the race to incumbent Governor Pat Quinn). Bob Brady needed the loan to pay subcontractors, who were threatening to file liens and go public with the Bradys’ ongoing financial woes. Naturally, this would have been embarrassing for Senator Brady’s campaign.

In 2010, Dr. Thomas Pliura (a lawyer and a physician) and his wife loaned Brady and his brother $1,000,000 at an interest rate of 6%. The note was accompanied by a Security Agreement, giving the Creditors security in several properties own by Brady and identifying each property, including the address and tax identification number. The Security Agreement stated that the Bradys were the “sole, legal and equitable owners” of the properties. In the interest of Brady’s political ambitions, Dr. Pliura agreed not to record a mortgage against the properties which secured the $1,000,000 Note. He simply relied on the promises and written representations of the Brady Brothers, whom he had known for twenty years.

In fact, all of the properties were owned by Pinehurst and Brew, not by Brady and his brother. Additionally, all of the properties were encumbered by mortgages to Busey Bank. The properties had actually been cross-collateralized to other loans, and the Bradys were underwater on their various loans by approximately $3 million dollars.

The Bradys made one payment to Dr. Pliura- a check that bounced. They never tendered any additional payments. Dr. Pliura retained an attorney to look into collecting on the Note, and discovered that the Properties were not owned by Brady, and were further encumbered to Busey Bank. Soon, Brady filed for bankruptcy, and Dr. Pliura filed his lawsuit.

Section 523: Two Ways to Recover

Normally in bankruptcy, a debtor’s outstanding debts are discharged, and creditors have their rights to collect curtailed or outright eliminated. Under Section 523 of the Bankruptcy Code, there are a few ways to prevent this, or have a debt declared “non-dischargeable.” Section 523(a)(2) again provides:

(a) A discharge under section 727, 1141, 1192, 1228(a), 1228(b), or

1328(b) of this title does not discharge an individual debtor from any

debt—

. . .

(2) for money, property, services, or an extension, renewal, or

refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud,

other than a statement respecting the debtor’s or an insider’s

financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial

condition;

(iii) on which the creditor to whom the debtor is liable for

such money, property, services, or credit reasonably

relied; and

(iv) that the debtor caused to be made or published with

intent to deceive[.]

  • Under 523(a)(2)(A), the Pliuras had to show “(1) the Debtor made a false representation or omission; (2) the Debtor knew the misrepresentation was false or made the representation with reckless disregard for the truth; (3) the Debtor made the misrepresentation with intent to deceive; and (4) they justifiably relied on the misrepresentation in making the loan.”
  • In contrast, under 523(a)(2)(B) the Pliuras were required to prove that the Debtor submitted to them, as part of their loan transaction, a written statement “(1) that was materially false; (2) that included information respecting the Debtor’s financial condition; (3) that they reasonably relied on in extending the loan; and (4) that the Debtor made or published with intent to deceive.”

The two sections have previously been held to be mutually exclusive. Under the recent Supreme Court case of Lamar, Archer & Cofrin, LLP v. Appling, the reasonable reliance bankruptcyCourt found that “a statement about a single asset” could be a “statement respecting a debtor’s financial condition.” That is, if the Bradys made a statement about a single one of their assets, the Pliuras would be in Section 523(a)(2)(B) and the “reasonable reliance” standard. The Court briefly addressed this issue, and found that Brady had made written representations about his financial condition, so the Pliuras would have to recover under 523(a)(2)(B).

Was There Reasonable Reliance?

There was no real dispute that Brady knowingly made materially false statements about his ownership of the Properties, and that the money was, in fact, owed to the Pliuras. There was a mountain of evidence that Brady knowingly and intentionally deceived Pliura to induce him to make the loan. But the bigger question was: did Dr. Pliura reasonably rely on Brady’s representations?

The Court began its analysis by noting that usually, reasonable reliance is determined based on the lender’s lending standards. However, “[h]ere, of course, the Pliuras are not traditional lenders and have no standard practices or any relation to the lending industry; it would be unfair and inappropriate to evaluate their reliance as though they were commercial bankers.” As the court further explained, while “reasonable reliance does not generally require creditors to conduct an investigation prior to entering into agreements with prospective debtors[.]” In re Morris, 223 F.3d 548, 554 (7th Cir. 2000). But, at the same time, creditors cannot ignore “obvious red flags.” Harris N.A. v. Gunsteen (In re Gunsteen), 487 B.R. 887, 902 (Bankr. N.D. Ill. 2013).

The Court looked at the various statements made by parties to the Note. However, at the end of the day, it was not just that the parties has discussed ownership of the properties, but that “Dr. Pliura put the information they were relying on in writing, and the Debtor signed that writing.” It was unrebutted that Brady read the representations in the Note at closing, and did not raise any objections at the time. The court also relied on Dr. Pliura’s personal relationship with the Bradys in assessing his reliance. “He knew that William Brady was a state senator and a candidate for governor and, apparently, he held Sen. Brady in high regard. He knew the Bradys as successful businessmen in the community, and, despite also knowing of their current financial distress and urgent need to borrow money, he had no reason to think that any of the Bradys, including the Debtor, would look him in the eye and lie.”

This case provides significant guidance for creditors who are proceeding under 523(a)(2)(B). Even sophisticated individuals can be misled and lied to by people they know and trust. This case clarifies that for debtors who are betrayed by people close to them, the law is still on their side.

The full opinion of the Court is available here.

David Silvers

David Silvers

Regulatory Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

LLC Operating Agreements

LLC Operating Agreements

What to Put Your Illinois Company's Operating Agreement An Operating Agreement is the contract of your Illinois company’s life – which it really does not have. However, your company is a legal fiction of a person that has a beginning, called articles of organization...

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How Do You Perfect a Security Interest in Agriculture?

How Do You Perfect a Security Interest in Agriculture?

agricultural security interests

A “security agreement” is defined by the Uniform Commercial Code (UCC) as “an agreement that creates or provides for a security interest.” 810 ILCS 5/9-102(a)(74). A security agreement is “effective according to its terms between the parties, against purchasers of the collateral, and against creditors.” 810 ILCS 5/9-201(a). Or, put simply, a security agreement gives a creditor some form of legal right over the property of a creditor. To have an enforceable security agreement, creditors need to meet a series of strict requirements.

Problem Ag Loan

How Do You Perfect A Security Interest in Agriculture?

A “security agreement” is defined by the Uniform Commercial Code (UCC) as “an agreement that creates or provides for a security interest.” 810 ILCS 5/9-102(a)(74). A security agreement is “effective according to its terms between the parties, against purchasers of the collateral, and against creditors.” 810 ILCS 5/9-201(a). Or, put simply, a security agreement gives a creditor some form of legal right over the property of a creditor. To have an enforceable security agreement, creditors need to meet a series of strict requirements.

The Basics

For a security interest against collateral to be enforceable against the debtor and third parties, 810 ILCS 5/9-203(b) requires that the following three conditions be met:

1. Value has been given.

2. The debtor has rights in the collateral or the power to transfer rights in the collateral to the secured party.

3. One of the following conditions has been met:

a. The debtor has authenticated (signed or otherwise executed) a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned.

b. The collateral is not a certificated security and is in the possession of the secured party under 810 ILCS 5/9-313 pursuant to the debtor’s security agreement.

c. The collateral is a certificated security in registered form, and the security’s certificate has been delivered to the secured party under 810 ILCS 5/8-301 pursuant to the debtor’s security agreement.

d. The collateral is deposit accounts, electronic chattel paper, investment paper, or letter-of-credit rights, and the secured party has control pursuant to the debtor’s security agreement.

These are the minimum requirements that must be satisfied to enforce a security interest. In re Duckworth, 776 F.3d 453, 462 (7th Cir. 2014).

Common Pitfalls: Mistaken Identification

Lenders must properly identify the debt to be secured, because §9-203 does not provide a mechanism for rescuing a lender from mistakenly identifying the debt to be secured. In Duckworth, the court held that the mistaken identification of the debt cannot be corrected against the bankruptcy trustee by using parol evidence to show the intent of the parties to the original loan. Id.

In Duckworth, the bank brought an action against the bankruptcy trustee and others asking the court to determine that the bank had a first priority security interest in proceeds from the sale of certain farm products, equipment, and crop insurance. After the farmer filed a Chapter 7 petition, the trustee was holding $22,284.27 in post-petition sales of farm equipment and $586,740.38 in crop proceeds.

The debtor obtained a loan from the bank by a promissory note dated December 15, 2008, in the amount of $1.1 million. On page 2 of the 2008 note, in a paragraph labeled “collateral,” it stated that the borrower acknowledged that the note was secured by a security agreement dated December 13, 2008. The debtor did sign an agriculture security agreement dated December 13, 2008, that described the collateral as all inventory, farm products, farm equipment, and crop insurance, among other property. However, in the definition of “note,” the principal amount was left blank and the note was referenced as being dated December 13, 2008; there was no cross-collateralization clause.

The trustee and another creditor argued that the security interest was invalid because the security agreement provided that its security debt was evidenced by a note dated December 13, 2008, even though that note did not exist. The bank provided the declaration of the loan officer who prepared the loan documents and personally closed the loan. The loan officer explained that the discrepancy was a “clerical error.” The bank further maintained that the error was correctible by means of parol evidence, because Illinois adheres to the principle that documents executed as part of a single transaction are interpreted as one contractual agreement. The bankruptcy court agreed. So did the district court on appeal. However, the Seventh Circuit Court of Appeals reversed, declaring that bankruptcy trustees “are entitled to treat an unambiguously security agreement as meaning what it says, even if the original parties have made a mistake in expressing their intentions.” 776 F.3d at 463.

The lesson from Duckworth is that special care must be taken to ensure that the security agreement contain a provision for securing future debts. Future advances or dragnet clauses are expressly permitted by the UCC. 810 ILCS 5/9-204(c). A future advances clause must be set forth in writing as part of the security agreement for the security interest to cover debts not expressly identified therein.

See the sample form of an agricultural security agreement in §7.20 below. In the sample form of security agreement, the term “obligations” broadly encompasses all debts existing at the time of execution of the agreement and arising thereafter.

Defining the Collateral

Most security agreements define the “collateral,” but a mistake in the definition can be costly.  Creditors should always use language covering after-acquired property for collateral. There is no protection for creditors who mistakenly assume some kind of “common sense” inclusion applying to things like inventory.

It is important to understand the meaning of terms defined in the Uniform Commercial Code. Some secured lenders define “accounts,” “inventory,” etc. The UCC defines many of these terms, so there isn’t necessarily a need to define them separately in the security agreement. However, it’s important to keep up-to-date on the UUC definitions. For example, some UCC terms changed dramatically when Article 9 was amended in 2001.  Therefore, a provision that incorporates UCC terms can affect the entire agreement.

810 ILCS 5/9-102(a)(34) defines “farm products” to mean “goods, other than standing timber, with respect to which the debtor is engaged in a farming operation” and that are

(A) crops grown, growing, or to be grown, including:

(i) crops produced on trees, vines, and bushes; and

(ii) aquatic goods produced in aquacultural operations;

(B) livestock, born or unborn, including aquatic goods produced in aquacultural operations;

(C) supplies used or produced in a farming operation; or

(D) products of crops or livestock in their unmanufactured states.

“Farming operation” is defined to mean “raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation.” 810 ILCS 5/9-102(a)(35).

The term “proceeds” is broadly defined to include whatever property or goods are received upon the sale, exchange, collection, or disposition of the collateral. 810 ILCS 5/9-102(a)(64). A security interest attaches to any identifiable proceeds of collateral. 810 ILCS 5/9-315(a)(2). Determining readily identifiable cash proceeds is a difficult endeavor. See C.O. Funk & Sons, Inc. v. Sullivan Equipment, Inc., 89 Ill.2d 27, 431 N.E.2d 370, 59 Ill.Dec. 85 (1982). The secured party has the burden of identifying its proceeds. Assumptions and speculation are insufficient to meet this burden. See Van Diest Supply Co. v. Shelby County State Bank, 425 F.3d 437 (7th Cir. 2005).

The Grant

According to Article 9 of the UCC, the grant must describe the property and what it secures. 810 ILCS 5/9-203(b)(3). This is a mandatory requirement; the failure to have a document explicitly granting a security interest is fatal. Covey v. Morton Community Bank (In re Sabol), 337 B.R. 195 (Bankr. C.D.Ill. 2006). There are no specific “magic words” required to be included in the security agreement to create a security interest, however no security interest will be recognized without a description of the collateral in a signed or authenticated document or in a separate document incorporated by reference into a signed or authenticated document. 377 B.R. at 202.

Due Diligence and Proper Searches

Before making a loan, a lender must make the following searches to determine whether it has priority:

1. the debtor’s form of organization;

2. the debtor’s principal place of business;

3. the debtor’s predecessors;

4. all names utilized by the debtor; and

5. all locations used for goods.

After the lender relies representations regarding these issues, it still must perform its own due diligence to verify the representations. This includes reviewing an entity’s articles of incorporation, articles of organization, or other organizational agreement and any other reports available to the lender to verify the locations of the collateral.

The lender can confirm whether the borrower is a corporation or a limited liability company and in good standing at the website of the Illinois Secretary of State’s Department of Business Services at www.cyberdriveillinois.com/departments/business_services.

The lender also must conduct a UCC lien search using the precise name of the entity or person. Failure to use the correct name can be fatal. See, e.g., Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc., 143 Cal.App.4th 319, 48 Cal.Rptr.3d 868, 870 (2006) (financing statement that listed debtor’s name as “Armando Munoz” instead of his correct name of “Armando Munoz Juarez” was seriously misleading and thus invalid). For perfection by filing a financial statement for an individual, the use of a name on a driver’s license and social security card is sufficient. In re Miller, No. 12-CV-02052, 2012 WL 3589426 (C.D.Ill. Aug. 17, 2012); see also 810 ILCS 5/9-503(a)(4).

 

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

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Why Do You Need a Buy Sell Agreement Lawyer

Why Do You Need a Buy Sell Agreement Lawyer

Buy Sell Agreements

Buy Sell Agreement Lawyer

Why Do You Need a Buy Sell Agreement Lawyer?

If you are building a business while you form a partnership, you will need help from a  buy sell agreement lawyer. Signing a buy sell agreement with the partner will protect you from unexpected situations and legal issues. That is why a buy sell agreement lawyer can make an agreement that will protect both parties.

A buy sell agreement claims your rights when it comes to difficult situations. Your partner can fall ill or become unable to operate the business the right way. In that case, a buy sell agreement lowers your financial risks of bankrupt or debt. You can protect yourself by signing an agreement that will keep your business intact.

Comparing a buy sell agreement with a prenuptial agreement is the most accurate comparison. In a prenuptial agreement, you can get out of the marriage under certain conditions. At the same time, you can protect your financial operations. A buy sell agreement offers the same rights, just with one small difference. In a buy sell agreement, you can cover all the financial transactions between the business partners. This makes a buy sell agreement more reliable and more effective in terms of financial stability.

Speaking about two common forms of agreements, we can separate the contracts into:

  • Cross-purchase agreement, and
  • Redemption agreement
A cross-purchase agreement happens when the remaining owners decide to purchase the shares of the business that is for sale. In this matter, it is important to know that the mechanism relies on a life insurance policy.

A redemption agreement is another form of a buy sell agreement. Here, we have a situation when the business entity buys the shares of the business. With a redemption agreement, the contract limits the ability of business owners to sell or transfer their ownership stakes in the business.

Both the cross-purchase agreement and redemption agreement are part of the possible contacts between the business owners, and they can mix the two in their business buy sell agreement. The importance of a buy sell agreement covers most of the financial risks that may occur in the business.

How to Know If a Buy Sell Agreement Is Right for Me

If you plan to start a business with a partner, a buy sell agreement can offer many protective points that can change your business perspective. Many life situations are inevitable and we can rely on this kind of contract when the official regulations are necessary for business operations. Your business partner may go ill or die, and that is when a buy sell agreement comes into effect. Your business capital will be protected and you can continue all the future business operations.

Cross-purchase buy and sell agreements contribute to the rights of the business owners. As a remaining business owner, you can buy the interests of the selling owner. This applies when a selling owner is no longer capable of maintaining their business obligations. Buy and sell agreements are also important in the method of determining the overall business value at the beginning of the business as well as when one of the business owners remains the only owner.

Careful drafting of a buy sell agreement can also eliminate or lower any potential estate taxes that apply at your death. In the situation when you want to pass your ownership interest to one of your family members at your death, avoiding the estate tax is one of the possible outcomes.

Do I Need a Buy Sell Agreement Lawyer?

A buy sell agreement lawyer is necessary if you want to avoid state taxes and protect your business capital and operations. With a buy sell agreement, you will be able to buy shares of the business and prolong your business perspective.

A good buy sell agreement lawyer can help you draft the buy sell agreement that protects both your business partner’s interests and your interests. You will have the right to continue the business operations even in the case of illness or death of your partner. It is possible to stay protected and define a new business strategy with a buy sell agreement. A good buy and sell lawyer can help you craft and improve the right contract that protects you in the case of inevitable circumstances.

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

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What to Know about Good Faith or Bad Faith – an illustrated easy guide

What to Know about Good Faith or Bad Faith – an illustrated easy guide

Good Faith Is Business

What Does Good Faith Mean?

good faith

good faith

The implied covenant of good faith and fair dealing is implied in every contract.  The implied covenant of good faith and fair dealing is what makes business work.  It requires people to deal with one another fairly.  Businesses and people can trust each other to enter into contracts because good faith requires them to help them get the benefit of their bargain.

Attorney Thomas Howard has helped clients for years enforce their rights under contracts.  And each and everyone of those contracts had something in common – but it was not a term written into any of the contracts.  Our business attorney have helped countless clients with their contracts, below he explains good faith in an easy to understand and Illustrated way.   You can call him at (309) 740-4033.

General Duty of Good Faith and Fair Dealing

A duty of good faith and fair dealing is a tenant of contract law, which often comes up in insurance. Insurance is basically the business of selling contracts that protect against risk. Here’s some relevant case law regarding good faith insurance contract, a well litigated issue:

  • Therefore, an insurer has a duty to act in good faith and fairness to its insured, which requires that it not elevate its own self-interest above the interest of the insured. Monical v. State Farm Insurance Co., 211 Ill.App.3d 215, 569 N.E.2d 1230, 155 Ill.Dec. 619 (4th Dist. 1991).
  • “The insurer’s duty to deal fairly with the insured arises out of the contractual relationship, and thus an insured may sue his insurer for breach of that duty.” Garcia v. Lovellette, 265 Ill.App.3d 724, 639 N.E.2d 935, 937, 203 Ill.Dec. 376 (2d Dist. 1994).
  • While a fiduciary relationship exists between an insured and a broker who acts as the agent for the insured, Illinois law does not classify an insurer as a fiduciary of its insured. Robacki v. Allstate Insurance Co., 127 Ill.App.3d 294, 468 N.E.2d 1251, 1253, 82 Ill.Dec. 471 (1st Dist. 1984); Nielsen v. United Services Automobile Ass’n, 244 Ill.App.3d 658, 612 N.E.2d 526, 531, 183 Ill.Dec. 874 (2d Dist. 1993).
  • Thus, it is not the duty of the insurer to inform the insured of his or her duties. Foamcraft, Inc. v. First State Insurance Co., 238 Ill.App.3d 791, 606 N.E.2d 537, 539, 179 Ill.Dec. 705 (1st Dist. 1992).
  • Likewise, the law has not imposed on an insurer the duty of reviewing the adequacy of an insured’s coverage. Connelly v. Robert J. Riordan & Co., 246 Ill.App.3d 898, 617 N.E.2d 76, 79, 186 Ill.Dec. 837 (1st Dist. 1993).
  • A property insurer similarly has no duty to sell its insured full coverage. Nielsen, supra, 612 N.E.2d at 529.
Thomas Howard

Thomas Howard

Distressed Assets Lawyer

Whether you’re a bank or distressed asset purchaser, Thomas Howard can help you quickly recover on your loans.

Peoria Office Address

A commercial loan workout attorney with over ten years experence – Thomas Howard answers your questions in the video below.

The Duty of Good Faith & Fair Dealings

Any party to a contract has an unwritten duty to help the other party obtain the benefit of their end of the bargain.  A benefit of the bargain is what you get out of the deal.  Let’s take a quick second to explain the very basics of what forms a contract.

A contract had 3 basic elements

Contract Basics Offer Consideration Acceptance

  • Offer & Acceptance: This is what you buy. Pizza, coffee, plumbing, Netflix, or even legal services.  The offer is what the seller in the contract brings to the table.  It brings the buyer in the door.  The Buyer is accepting the offer.
  • Consideration: This is often money.  In the picture, the coffee is $3.50.  The consideration is two-way, however.  The offer is a consideration as well.  The pizza is half the deal, so is the NetFlix subscription.  Very often the consideration is goods or services in exchange for payment of money.
  • Meeting of the Minds: This is the most complex of the three basic contract elements, and where Good Faith resides.  The intent of the parties to the contact is important. Both intended to get what is called the “benefit of their bargain.” This means you do not get tricked into the deal. You are not making a mistake regarding the terms of the contract.

Meeting of the Minds and Good Faith

Would you enter into a deal to buy a house if you knew every time it rains the basement floods with 3 feet of water?  Perhaps you would if you negotiate a discount for installing a dewatering system.

But would you buy the house with the leaky basement if you did not know about it?  That’s where people get into trouble because they feel as if they are tricked. 

They lacked the requisite meeting of the minds on the deal because if the buyer knew about the basement flooding, he never would have purchased the house.  That is a lack of meeting of the minds that gets to the heart of contract formation.

What if the seller knows about the water in the basement, and lies on the disclosures and says that to the best of his knowledge there is no water in the basement? 

That is fraud, a/k/a bad faith.  The Seller lying about the leaky basement injured the Buyer.  The Buyer can sue the seller for fraud and recover the damages.  The damages would be the cost of repairing the leaky basement.

Interference in the Contract – Bad Faith

The “duty of good faith and fair dealing requires the party vested with contractual discretion not to injure other parties to the contract by action or omission and not to act inconsistently with other parties’ rights.” Id, citing Brzozowski v. Northern Trust Co., 248 Ill.App.3d 95 (1993).

Sometimes contracts have certain rights that may spring into effect.  These are called contingencies. For example, take your employer’s stock price.

Imagine your job has a contract to that will pay you a bonus if you do a great job and the stock price rises above $100.  If that happens, your employer will pay you one-million dollars.

one million dollars

You have 3 months to get the stock price above $100, and you’re doing amazing!  But your company does not want to pay you. They notice that your contract requires their help. 

Instead of helping you maximize profits, the company sits back and waits and takes no action. If the company does not do their part, you will fail and not get your bonus.

The duty of good faith and fair dealing requires the company to help you hit your target when they must cooperate to do so. The company cannot interfere, not help, and put you in a position to fail, then say you did not earn your bonus. 

That is performing the contract opportunistically to deprive you of your one million dollars.

Good Faith Case Law Round up

  1. A party cannot take advantage of a condition precedent the performance of which he has helped render impossible. Barrows v. Maco, Inc., 94 Ill.App.3d 959, 966 (1st 1981).
  2. Bad faith, or opportunistic advantage-taking, is the lack of cooperation depriving the other contracting party of his reasonable expectation. Hentze v. Unverfehrt, 237 Ill. App.3d 606,(1992).
  3. A party that participated in the hinderance of the condition, and they may not now claim the benefit of the failure of the required event. Yale Development Co. v. Oak Park Trust & Savings Bank, 26 Ill.App.3d 1015 (2nd 1975).

Good Faith Means You Do What You Promised

To conclude, good faith helps our economy have trust in the trillions of dollars of contracts that we depend on in our daily lives. 

As the American Bar Association said in their blog,

The theory behind this principle is that a party cannot interfere with or fail to cooperate with your performance and then complain about it.

From the pension funds, to pizza orders, and everything in between, all depend on good faith and fair dealing in their contracts.

So if you ever get the advice to take a dive, or to not perform your end of the bargain – you may have to explain to the person that you have a duty of good faith and fair dealing to live up to your end of the bargain.

You may also want to avoid doing business with them. 

If you have a contract dispute, call our offices at (309) 740-4033.

 

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.

R. Martindale

What does Good Faith mean?| Good faith is for business| Tom Howard

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Commercial Mortgages

Commercial Mortgages

Commercial Mortgages & Foreclosure

commercial mortgage foreclosure

commercial mortgage foreclosure

  • Commercial Mortgage Foreclosure

The main collateral for many people and businesses is the real estate it owns.

A commercial mortgage is a grant of a security interest on a parcel of the business’ real estate.

Commercial mortgages allow for greater rights for the bank as compared to residential mortgages, which have greater consumer protections at both state and federal levels.

Drafting best practices for your commercial mortgages are discussed in the video below: be advised – the terms must be in the mortgage BEFORE the foreclosure begins to maximize recovery and control costs.

“A conspicuous Cross-Collateralization clause is only one part of it.”.

A buy sell agreement claims your rights when it comes to difficult situations. Your partner can fall ill or become unable to operate the business the right way. In that case, a buy sell agreement lowers your financial risks of bankrupt or debt. You can protect yourself by signing an agreement that will keep your business intact.

Comparing a buy sell agreement with a prenuptial agreement is the most accurate comparison. In a prenuptial agreement, you can get out of the marriage under certain conditions. At the same time, you can protect your financial operations. A buy sell agreement offers the same rights, just with one small difference. In a buy sell agreement, you can cover all the financial transactions between the business partners. This makes a buy sell agreement more reliable and more effective in terms of financial stability.

Picture of Collateral with foreclosure risk

Here’s the bullet point take aways from the video above.

  • waiver of the right of redemption – very often lenders that do not get deep in the weeds of commercial lending for get this – looking at you credit unions –  While redemption cannot be waived by consumer mortgages (residential mortgages) commercial mortgages – but if it is just business – you get what you negotiate.
  • cross-collateralization languages why – to stave off a 2nd mortgage coming in and having its hand out when other debts secure your mortgage for more on this on our case law update series – PNB v. Banterra Bank. But we stress the 2 points any good cross-collateralization clause requires.  
    • conspicuous cross-collateral clause on the first page of the document that refers to all debt then or thereafter arising, related or unrelated to the mortgage debt;
    • Define indebtedness to include the note amount and all amounts that may be indirectly secured by the cross-collateralization provision.
  • Define maximum indebtedness of the mortgage to be twice the mortgage debt to add more strength to cross-collateralization clause.
  • Acceleration and deceleration clauses.  Our Section council was discussing this last meeting and some were of the opinion that if the bank permits the borrower to reinstate – bring the loan entirely current – it can do so, but there should be some modification that provides for such – in addition to any judicial finding that permits the reinstatement as a borrower only gets one – for 5 years from the date of the dismissal.
  • Link to the quoted material regarding recession risk related to rise in credit spread of investment grad bonds from Bloomberg.
Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

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Uniform Fraudulent Transfer Act

Uniform Fraudulent Transfer Act

Uniform Fraudulent Transfer Act

Illinois Uniform Fraudulent Transfers Act Info

Effective January 1, 1990, Illinois adopted the Uniform Fraudulent Transfer Act. “The purpose of the Uniform Fraudulent Transfer Act is to prevent fraudulent transfers of property by a debtor who intends to defraud creditors by placing assets beyond their reach.” Zurich American Insurance Co. v. Personnel Staffing Group, LLC, 2018 IL App (1st) 172281, ¶18, 105 N.E.3d 979, 423 Ill.Dec. 571. See also Harris Bank St. Charles v. Weber, 298 Ill.App.3d 1072, 700 N.E.2d 722, 727, 233 Ill.Dec. 194 (2d Dist. 1998) (“[T]he purpose of the Uniform Fraudulent Transfer Act is to ‘invalidate otherwise sanctioned transactions made with a fraudulent intent.’ ”), quoting In re Marriage of Del Giudice, 287 Ill.App.3d 215, 678 N.E.2d 47, 49, 222 Ill.Dec. 640 (1st Dist. 1997).

Uniform Fraudulent Transfer Act

Uniform Fraudulent Transfer Act – stops lies

A new Uniform Fraudulent Transfer Act Third District Appellate case that is of interest to secured lenders.

The case of Pluciennik v. Vandenberg provided the first time that Illinois applied the Uniform Fraudulent Transfer Act (UFTA) and its definition of “asset” on an encumbered piece of real estate.

Plaintiffs filed a UFTA action seeking to avoid transfers of three parcels of real estate from companies owned and managed by Defendant to companies held in irrevocable trusts for the benefit of his minor daughters. Valid mortgages encumbered all the real estate transferred.

The Trial Court erred in determining, as a matter of law, that the real estate were not assets under the UFTA because they were fully encumbered because no evidence of the fair market value of the real estate was considered in granting a motion to dismiss the UFTA complaint.

“That the fair market value of encumbered property that exceeds the value of a valid lien qualifies as an asset under Illinois’s Uniform Fraudulent Transfer Act. “

Uniform Fraudulent Transfer Act (UFTA) Case Law

The trial court made a mistake by not taking evidence on the fair market value of the real estate transferred.

As a result, there continued to be a material issue of fact as to the reasonable value of the properties and whether, in light of the fair market value, the properties were fully encumbered.

Therefore, Illinois law recognizes the value of the asset over and above the encumbrance upon it to be subject to the UFTA.

How to Know if you Have a Uniform Fraudulent Transfer Act (UFTA) Claim?

  1. Look at the both the fair market value of the asset,
  2. and check the payoff of the debt encumbering the asset
  3. If there is extra money beyond the collateral’s fair market value, then there is a UFTA claim.
Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

REACH US BY EMAIL