Continental Bank, N.A. v. Everett

• Decision Date: 12 August 1992
• Docket Number: No. 91-2979,91-2979
• Citation: 964 F.2d 701
• Parties: CONTINENTAL BANK, N.A., Plaintiff-Appellee, v. Robinson O. EVERETT, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 701

964 F.2d 701

CONTINENTAL BANK, N.A., Plaintiff-Appellee, v. Robinson O. EVERETT, et al., Defendants-Appellants.

No. 91-2979.

United States Court of Appeals Seventh Circuit.

Argued April 13, 1992.

Decided May 21, 1992.

Rehearing Denied Aug. 12, 1992.

Lynn D. Thesing, Howard J. Roin (argued), Andrew S. Marovitz, Mayer, Brown & Platt, Chicago, Ill., for plaintiff-appellee.

Jeffrey C. Blumenthal, Todd R. Mendel, James R. Figliulo, Robert E. Wiss, Patrick R. Gabrione, Foran & Schultz, Chicago, Ill., Robinson Oscar Everett (argued), Everett, Gaskins, Hancock & Stevens, Durham, N.C., for defendant-appellant Robinson Everett.

Jeffrey C. Blumenthal, James R. Figliulo, Robert E. Wiss, Patrick R. Gabrione, Foran & Schultz, Michael J. Kralovec, William H. Hrabak, Jr., Ronald J. Guild, Feiwell, Galper

& Lasky, Chicago, Ill., for defendant-appellant J.H. Froelich.

Before CUDAHY, EASTERBROOK and KANNE, Circuit Judges.

EASTERBROOK, Circuit Judge.

Guilford Telecasters, Inc., which operates WGGT-TV in Greensboro, North Carolina, borrowed $4.2 million from Continental Bank in 1984. Continental obtained guarantees from the firm's stockholders, each of whom is jointly and severally liable up to a limit based on his proportional ownership of the stock. Robinson Everett and the estate of Kathrine Everett, his mother, own 65% of the stock between them. Each guaranteed roughly $1.6 million of Guilford's debt. J.H. Froelich, who owns a smaller bloc, guaranteed about $545,000 of the debt. Other investors assumed proportional obligations.

Guilford encountered cash flow problems and in 1986 filed a bankruptcy petition. Continental, which had a security interest in Guilford's receivables, consented to their use in operating the business, if Guilford remained current on the loan--which it did, until May 1987. Then the guarantors took over, in order to fulfill the condition on which Guilford had access to cash. During 1989 the guarantors and Continental reached a pass over two topics. First, Continental insisted that the guarantors pay according to the schedule negotiated before the bankruptcy, under which the payments increase with time to retire additional principal. The guarantors insisted that they had to pay only the amount due each month when the bankruptcy began. Second, Continental as creditor voted against the plan of reorganization proposed by the debtor and supported by the guarantors in their roles as its investors and managers. (Robinson Everett, a professor of law who was at the time the Chief Judge of the United States Court of Military Appeals, was not a manager of the TV station but took an active role as an investor.) At the beginning of 1990 the guarantors stopped paying. Continental responded with this diversity action. All guarantors except Froelich and the two Everetts paid up. From now on, we refer to these three collectively as "the guarantors."

Initially the guarantors attempted to persuade the district judge that the court lacked personal jurisdiction over them. The judge disagreed, holding that by guaranteeing a loan with a Chicago bank, promising to pay in Illinois, agreeing that any dispute would be resolved under the law of Illinois, and so on, the defendants were doing business in Illinois for purposes of Ill.Rev.Stat. ch. 110 p 2-209(a)(1). 742 F.Supp. 508 (N.D.Ill.1990). Next the court granted summary judgment for the Bank, 760 F.Supp. 713 (1991), and finally determined the sums remaining to be paid on the guarantees, 768 F.Supp. 246 (1991). Meanwhile the bankruptcy judge confirmed Guilford's plan of reorganization, cramming the plan down an objecting Continental's throat after finding that the Bank would be paid in full. In re Guilford Telecasters, Inc., 128 B.R. 622 (Bankr.M.D.N.C.1991). Guilford has since paid principal and interest--but not in full. It did not pay the penalty interest that the Bank has claimed from the guarantors on account of the default in January 1990. This sum of approximately $75,000, plus the legal fees the Bank has incurred pursuing the guarantors, are the remaining stakes.

Appellate jurisdiction is the first topic. The guarantees entitle the Bank to recover the attorneys' fees incurred in the course of collection. The fees are substantial, exceeding $400,000, as the guarantors have fired off a fusillade of defenses. The district court entered judgment on the guarantees but put off determining the precise amount payable as fees. An open issue about legal fees, contractual or otherwise, does not affect our jurisdiction to resolve the appeal on the guarantees of the principal and interest. Budinich v. Becton Dickinson & Co., 486 U.S. 196, 108 S.Ct. 1717, 100 L.Ed.2d 178 (1988) (merits and fees appealable separately); Buggs v. Elgin, Joliet & Eastern Ry., 852 F.2d 318, 321 n. 3 (7th Cir.1988) (failure to quantify award of fees does not prevent appeal on the merits); Exchange National Bank v. Daniels, 763 F.2d 286 (7th Cir.1985) (fees due under contract and those required by law are treated the same for purposes of appellate jurisdiction). Contra, Justine Realty Co. v. American National Can Co., 945 F.2d 1044 (8th Cir.1991) (when fees are provided by contract, judgment on the merits is not appealable until fees have been quantified).

Next comes personal jurisdiction. The district court concluded that the entire course of dealings amounted to "transaction of any business within" Illinois. Ill.Rev.Stat. ch. 110 p 2-209(a)(1). Whether the court's understanding of "business" is correct does not matter. Late in 1989, before the Bank commenced this suit, Illinois amended its long-arm statute to assert personal jurisdiction over those who participate in "[t]he making or performance of any contract or promise substantially connected with this State", p 2-209(a)(7). The loan and guarantees are "substantially connected with" Illinois--the documents recite that they were delivered and executed in Illinois, the loan was to be repaid in Illinois, and the guarantors agreed that Illinois law would govern. These same considerations show that personal jurisdiction is consistent with the due process clause of the fourteenth amendment. Heritage House Restaurants, Inc. v. Continental Funding Group, Inc., 906 F.2d 276, 283-84 (7th Cir.1990); Madison Consulting Group v. South Carolina, 752 F.2d 1193 (7th Cir.1985); O'Hare International Bank v. Hampton, 437 F.2d 1173 (7th Cir.1971).

On to the merits. All of the guarantors' defenses (and mirror-image counterclaims) are variations on the theme that the Bank left the loan undersecured, exposing the guarantors to more risk than they anticipated. Continental's obligation to Guilford was contingent on Guilford's providing the Bank with security interests in, among other things, its broadcasting license and its leased broadcasting facilities. Continental funded the loan without obtaining a security interest in the license, having concluded that such an interest is legally impossible. And although Guilford took the steps necessary to grant a security interest in its leaseholds, the Bank failed to perfect that interest. The Bank obtained an interest in Guilford's receivables and other assets, but the guarantors say this is insufficient, that the Bank's taking the full security was essential for their protection. They add that the Bank defrauded them by not revealing what it knew and they did not: that because a broadcast license is not property, 47 U.S.C. § 301, and may not be assigned or transferred without the FCC's permission, 47 U.S.C. § 310(d), the license itself is not a store of value on which the Bank could levy. Stephens Industries, Inc. v. McClung, 789 F.2d 386, 390-91 (6th Cir.1986); In re Merkley, 94 F.C.C.2d 829 (1983). Cf. R.H. Coase, The Federal Communications Commission, 2 J.L. & Econ. 1, 25-40 (1959).

Although the guarantors argue that the Bank defrauded them, that effective security was a condition precedent to the effectiveness of the loan and guarantees, and that the Bank impaired the value of the collateral, these amount to the same thing, and we treat the position as one argument. Professor Everett, arguing on behalf of all three guarantors, conceded that he had not found a case in Illinois (or any other jurisdiction) requiring a lender to reveal to a guarantor the value of the borrower's assets as collateral. No surprise. It amounts to saying that a potential debt investor in a firm (which a bank is) owes a duty of care, perhaps even a duty of loyalty, to the existing equity investors (which Guilford's guarantors are) or contingent debt investors (which all guarantors are, given the possibility of subrogation, see Levit v. Ingersoll Rand Financial Corp., 874 F.2d 1186, 1194-97 (7th Cir.1989)). That is unheard-of in either corporate or banking law. A bank making a commercial loan depends largely on the success of the business for repayment. The firm has the best information about its business and prospects and accordingly may be obliged to disclose some details to the bank and the guarantors. Even that duty is attenuated, for persons negotiating for a contract usually may keep valuable information to themselves. They may not lie, but they need not volunteer. The ability to capitalize on private information is an important goad to create that knowledge, which may be important in matching assets with their most productive use. See generally E. Allan Farnsworth, 1 Contracts § 4.11 at 406-10 (1990), and Anthony T. Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J. Legal Stud. 1 (1978), both of whom collect and analyze the cases. Banks' self-interest leads them to nose out the value of collateral; if they do not, they are apt to suffer loss. Borrowers and guarantors have their own reasons to know the value of the assets. None acts as fiduciary of another. Farmer City State Bank v. Guingrich, 139 Ill.App.3d 416, 423, 94 Ill.Dec. 1, 6, 487 N.E.2d 758, 763 (4th Dist.1985).

The general principle...