Continental Bank, NA v. Modansky, No. 90 C 1696.
| Citation | 129 BR 159 |
| Decision Date | 09 July 1991 |
| Docket Number | No. 90 C 1696. |
| Parties | CONTINENTAL BANK, N.A., Plaintiff, v. Sheldon MODANSKY, Aaron Modansky, Ajayem Investors Corp., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Nathan P. Eimer, David M. Schiffman, John M. Czarnetzky, Sidley & Austin, Chicago, Ill., for plaintiff.
Leonard Zack, M. Scott Vayer, New York City, Sarah R. Wolff, Sachnoff & Weaver, Ltd., Chicago, Ill., for defendants.
This is a case of guaranty agreements. Continental Bank, N.A. ("Continental") seeks to enforce these agreements against defendants Sheldon Modansky, Aaron Modansky, and Ajayem Investors Corporation ("Modanskys") in order to recover approximately $9,765,575, together with costs.
The facts alleged by the parties follow the usual pattern: Continental extended loans, in the form of lines of credit, to four lumber companies ("borrowers"). The Modanskys secured the loans. They signed agreements allegedly guaranteeing payment of all amounts owed to Continental by the borrowers, including interest and the costs of collection. Borrowers became insolvent. Continental demanded immediate payment from the Modanskys. Because no payment was forthcoming, Continental filed suit. In response to Continental's claims, the Modanskys have asserted numerous counterclaims and affirmative defenses. Continental moves to dismiss the counterclaims and defenses in toto. The court grants Continental's motion in part and denies it in part.
Continental argues that the Modanskys lack standing to bring these counterclaims. It seizes on the fact that each of these claims is based on an injury that was done to the borrowers, not to the Modanskys as guarantors. The rules of standing require that a party suffer a direct injury in order to bring suit. "Even when the plaintiff has alleged injury . . ., the plaintiff . . . must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975). Here, although the Modanskys assert in their brief in opposition that they have suffered a direct injury, they fail to identify it. They may very well have suffered an injury if Continental committed the alleged acts since the Modanskys were also officers and shareholders of the borrowers. But, in their capacity as guarantors, they would only have suffered an indirect injury.2
Looking to surety3 law, in general, "the surety may not plead the principal's independent cause of action as a defense against a creditor. . . ." 10 S. Williston on Contracts § 1214 at 716 (3d ed.1967); Continental Group, Inc. v. Justice, 536 F.Supp. 658, 661 (D.Del.1982). It is the Modanskys' claim, that an exception should be made where borrowers are insolvent, as in this case.4 They rely on Schenley Affiliated Brands Corp. v. MarSalle, Inc., 703 F.Supp. 744 (N.D.Ill.1989) for support. In Schenley, the court did allow a guarantor to bring the claims of an insolvent debtor as setoffs against a creditor. In reaching its decision, however, the court conceded that "there is no clear statement from the Illinois courts as to whether a guarantor may raise the claims of an insolvent principal debtor." Id. at 746. The court seems to have been swayed by the fact that an exception for an insolvent debtor has not yet been rejected.
Allowing the guarantor to bring such a claim, though, flies in the face of federal bankruptcy law. Under 11 U.S.C. § 541(a)(1), whatever legal or equitable interests the debtor has in property at the commencement of a bankruptcy case is considered property of the bankruptcy estate. The interests become property of the estate notwithstanding any applicable nonbankruptcy law. 11 U.S.C. § 541(c)(1) "It is . . . intended that all interests of the debtor in rights of action be included as property of the estate under section 541(a)." 4 Collier on Bankruptcy ¶ 541.10 at 541-66 (15th ed.1991); In Re Interpictures, Inc., 86 B.R. 24, 28 (Bkrtcy. E.D.N.Y.1988) (). To allow guarantors like the Modanskys, who are only some of borrowers' creditors, to assert causes of action which could accrue to the benefit of all creditors is to promote inequity. The borrowers' causes of action should more properly be brought by the debtor-in-possession or the trustee on behalf of the estate, so the benefits can be shared by all. Indeed, the Seventh Circuit has frowned on efforts to divert "the assets" of a debtor "to pay off one set of creditors . . . while keeping the proceeds out of the hands of the firm's other creditors." Mid-State Fertilizer Co. v. Exch. Nat'l Bank of Chicago, 877 F.2d 1333, 1336 (7th Cir.1989). See, e.g., Koch Refining v. Farmers Union Central Exch., Inc., 831 F.2d 1339, 1343 (7th Cir.1987) (), cert. denied, 485 U.S. 906, 108 S.Ct. 1077, 99 L.Ed.2d 237 (1988).
Further, the laws of bankruptcy address the concerns expressed in Schenley. The guarantor will still have recourse against the principal debtor even without the setoffs. When the guarantor pays the creditor, the guarantor steps into the shoes of the creditor to pursue the creditor's claim against the debtor. The right to bring causes of action on behalf of all creditors, then, should rest with the bankruptcy estate.
Nor are these personal claims which should more properly be brought by the Modanskys. "A cause of action is `personal' if the claimant himself is harmed and no other claimant or creditor has an interest in the cause." Koch Refining, 831 F.2d at 1348. If Continental engaged in the alleged actions, all the creditors would have been hurt by the diminution of the borrowers' assets. Moreover, the Modanskys have not personalized the claims by contending that Continental engaged in actions which injured their guaranty agreements. In their counterclaims, the Modanskys are not alleging that Continental breached any fiduciary duty towards them, subjected them to duress5 or negligently gave them advice.
Additionally, the Modanskys rely on Royal Palm Savings Ass'n v. Pine Trace Corp., 716 F.Supp. 1416 (M.D.Fla.1989) to support their position. In Royal Palm Savings Ass'n, the court permitted a guarantor to bring independent causes of action presumably based on wrongs to the debtor, finding that "nothing in the Guaranty could serve as a waiver of guarantor's rights to pursue his independent causes of action. . . ." Id. at 1419. The Modanskys' case, though, is different in that their guaranty agreements contain something which might serve as a waiver of these rights. The guaranty agreements provide that:
For the purposes of this guaranty, Liabilities shall include all obligations of the Debtor to the Bank, notwithstanding any right or power of the Debtor or anyone else to assert any claim or defense as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall affect or impair the obligations of the guarantor.
For these reasons, the court declines to adopt the reasoning of the Modanskys and dismisses counterclaims I-III and V-VII.
The remaining counterclaim, counterclaim IV, avoids the pitfall of being based on an indirect injury by also claiming that the Modanskys were injured by Continental's breach of the U.C.C. duty of good faith. The court assumes that the Modanskys are referring to the U.C.C. as applied to their guaranties. The question is whether the U.C.C. applies to guaranty agreements. Hornbook law states that "a guaranty made by a separate writing and not appearing on commercial paper is governed by the non-code law relating to suretyship. 1 Anderson, Uniform Commercial Code § 1:1-103:64 at 105 (1981). The guaranty agreements in this case are separate contracts between the Modanskys and Continental. Therefore, the obligations imposed by the U.C.C. are not applicable. See Ishak v. Elgin Nat'l Bank, 48 Ill. App.3d 614, 6 Ill.Dec. 630, 632, 363 N.E.2d 159, 161 (1977) (). This counterclaim, then, is also dismissed.
The court finds merit in two of these defenses. In the first defense, the Modanskys broadly allege a failure to mitigate damages. Continental tries to characterize this defense narrowly, as an impairment of...
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