MB Fin. Bank v. Clayton D. Jacobs & Dwyer Prods. Corp.

• Decision Date: 23 August 2018
• Docket Number: No. 1-17-1939,1-17-1939
• Citation: 2018 IL App (1st) 171939 -U
• Parties: MB FINANCIAL BANK, as successor in interest to AMERICAN CHARTERED BANK, Plaintiff-Appellee, v. CLAYTON D. JACOBS and DWYER PRODUCTS CORP., Defendants, (Clayton D. Jacobs, Defendant-Appellant).
• Court: United States Appellate Court of Illinois

2018 IL App (1st) 171939-U

MB FINANCIAL BANK, as successor in interest to AMERICAN CHARTERED BANK, Plaintiff-Appellee, v. CLAYTON D. JACOBS and DWYER PRODUCTS CORP., Defendants,(Clayton D. Jacobs, Defendant-Appellant).

No. 1-17-1939

APPELLATE COURT OF ILLINOIS FIRST JUDICIAL DISTRICT FOURTH DIVISION

August 23, 2018

NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1).

Appeal from the Circuit Court of Cook County.

No. 14 L 2769

Honorable Lorna E. Propes, Judge Presiding.

JUSTICE McBRIDE delivered the judgment of the court.

Presiding Justice Burke and Justice Gordon concurred in the judgment.

ORDER

¶ 1 Held: (1) The trial court did not misapply the legal standard of commercial reasonableness because Bank, as the secured creditor, did not sell Dwyer's assets and, accordingly, was not required to prove commercial reasonableness; (2) the commercial reasonableness of the sale was clearly established; and (3) the trial court did not miscalculate the damages due by Jacobs for the deficiency judgment.

¶ 2 Defendant Clayton D. Jacobs appeals from the trial court's judgment following a bench trial in favor of plaintiff, MB Financial Bank, as successor in interest to American Chartered Bank (the Bank), on a breach of guaranty claim. Jacobs had executed a guaranty of a commercial loan made to Dwyer Products Corp. (Dwyer) by the Bank. Following a default on the loan, the Bank sought a deficiency judgment against Jacobs. The trial court awarded $369,004.33 in damages plus $190,325 in interest and $68,577.81 in attorney fees and costs, for a total of $627,907.14.

¶ 3 Jacobs appeals, arguing that (1) the trial court improperly applied the law regarding the commercial reasonableness of the disposition of Dwyer's assets at an auction and because the disposition was not commercially reasonable, Jacobs does not owe a deficiency, and (2) in the alternative, the trial court erred in calculating the amount owed in the deficiency judgment. The Bank responds by pointing out that it has no duty to show the sale was commercially reasonable because it did not market or sell Dwyer's assets, Howard Samuels as assignee under an assignment for the benefit of creditors, and his company Rally Capital Services LLC (Rally) handled the liquidation of Dwyer, including the sale of assets. The Bank asserts in the alternative that even if it had to establish the question of commercial reasonableness, the evidence in the record established that the sale was commercially reasonable. The Bank also maintains that the trial court did not err in calculating the deficiency judgment. In his reply brief, Jacobs contends for the first time on appeal that the Bank was acting as a principal with Howard Samuels and Rally acting as its agents.

¶ 4 Dwyer was a business engaged in the design, production and installation of cabinets, casework, modular kitchens and other products in medical facilities. Jacobs was the president of Dwyer and had executed a personal guaranty for a commercial loan for Dwyer. Following adefault on a loan with the Bank, Dwyer operated under an assignment for the benefit of creditors for a short time until an auction was conducted for Dwyer's assets. The Bank filed its initial complaint in March 2014. The second amended complaint was subsequently filed in November 2015, alleging two counts against Jacobs (1) a breach of the guaranty and seeking a deficiency judgment against Jacobs for the remaining balance on the loan and (2) fraud. Following discovery a bench trial was conducted over several dates in the fall of 2016. After the Bank presented its case, Jacobs moved for a directed verdict on the fraud count, which the trial court granted and noted that it was "concerning" that the Bank had destroyed emails between Jacobs and his banker William Deeds during the relevant time period. No issue has been raised regarding the fraud claim and we discuss the allegations of the fraud claim only to the extent necessary to issues on appeal.

¶ 5 In 2004, Jacobs became president of Dwyer. In November 2006, the Bank entered into a line of credit with Dwyer for $500,000. The loan was amended and increased multiple times, and eventually increased to $1,500,000. William Deeds handled the Dwyer account at the Bank from the initial line of credit. At times, Jacobs or members of his family would personally contribute funds to pay the loan.

¶ 6 In April 2012, Jacobs executed a commercial guaranty in which he guaranteed payment of all amounts owed to the Bank by Dwyer. Specifically, the guaranty provided that Jacobs as the Guarantor "absolutely and unconditionally guarantees full and punctual payment and satisfaction of the Indebtedness of Borrower [Dwyer] to Lender [the Bank], and the performance and discharge of all Borrower's obligations under the Note and the Related Documents." The guaranty defined "Indebtedness" as "all of the principal amount outstanding from time to timeand at any one or more times, accrued unpaid interest thereon and all collection costs and legal expenses relating thereto," including attorney fees.

¶ 7 In November 2012, Bryn Perna, a senior vice president with the Bank, had recently taken over the Dwyer account. Deeds testified at trial that the Dwyer loan was transferred to Perna because the loan had been downgraded and "anytime a loan is at risk of not being repaid in full, it's transferred to [Perna]." According to Deeds, it was a policy to take bankers off accounts when there is a risk management. At the request of the Bank, Rally Capital Services (Rally) had recently performed a financial evaluation of Dwyer. At a November 16, 2012 meeting between Jacobs and bank representatives, Perna informed Jacobs that the Bank was no longer supporting Dwyer and was calling the loan, which was set to mature on November 30, 2012. Deeds testified that Dwyer was "basically in default for being over-advanced and projections showing that things weren't going to get much better." The note was not paid in full by the maturity date and Dwyer defaulted on the loan. Mary Alberts, a senior vice president for the Bank, testified at trial that as of November 30, 2012, the principal balance owed was $1,175,987. At the time of trial, she stated that the principal balance owed was $587,828.93.

¶ 8 After the default, Dwyer opted to enter into an assignment for the benefit of creditors to wind down the business. Perna suggested Dwyer hire Howard Samuels (Samuels), who was employed by Rally. Deeds testified that the Bank referred businesses in trouble to Rally. In December 2012, the Dwyer board of directors and shareholders executed a trust agreement and assignment for the benefit of creditors agreement of Dwyer (the ABC), which named Howard Samuels of Rally as "trustee/assignee." The ABC transferred its property to Samuels as assignee "so that the property so transferred may be expeditiously sold or liquidated" with the proceeds distributed to creditors. Pursuant to the ABC, a trust was created, named Dwyer ProductsCreditors Trust, and "its object shall be the orderly liquidation of assets and property of [Dwyer] and the distribution of the proceeds of the liquidation to creditors of [Dwyer.]" Samuels's duties as assignee were to sell and dispose of secured creditors' collateral, pay the unsecured creditors of Dwyer with funds not subject to any valid liens, and "to do and perform any and all other acts necessary and proper for the orderly liquidation or other distribution *** and the distribution of the proceeds therefrom to the creditors of Dwyer."

¶ 9 In his capacity as assignee, Samuels hired Rally to run Dwyer's operations during the liquidation process. Howard Samuels's son, Jeffrey Samuels (Jeffrey Samuels) testified at the 2016 bench trial that he was a senior consultant at Rally and Rally was hired by the trustee to do the work. According to Jeffrey Samuels, Rally handles approximately 10 to 12 assignments for the benefit of creditors annually and it handles most assignments in the Chicago area. Rally and Howard Samuels have 25 years of experience in the field, and that experience was used to collect Dwyer's account receivables and market Dwyer for sale. In his testimony, he described an assignment for the benefit of creditors as "a nonstatutory common law device used to transition assets from a debtor to a fiduciary for the purposes of liquidation." Rally worked to keep Dwyer operating in order to help maximize Dwyer's assets, including collecting Dwyer's outstanding account receivables.

¶ 10 Jeffrey Samuels's role was working onsite with remaining Dwyer staff and communicating with vendors and customers on the status of orders and payments to Dwyer. Jeffrey Samuels worked with Paula Sund, a Dwyer employee who remained employed during the liquidation, to help maintain customer relationships during collection of accounts receivables. According to Jeffrey Samuels, this action helped to increase the amounts collected. Jeffrey Samuels testified at trial that all amounts received by Rally, including accounts receivable, wererecorded in the Dwyer assignment accounting. Rally would apply payment to operate Dwyer because Rally was operating Dwyer as a "going concern."¹ Then he would remit the rest of the funds to the Bank as payment on the default. Jeffrey Samuels explained Rally's process under an ABC.

"What Rally does, what we've established over the years is to operate a business through an assignment process as a going concern to maximize the value of those assets rather than take an assignment, close it down, liquidate, and sell the equipment. Operating a business pursuant to a budget with the secured creditor's consent over a 30 to 45-day period increases the value of those assets. We're allowed to complete jobs, work through a lot of situations much easier than not."

Jacobs cooperated with Rally during the liquidation process, and for his cooperation, he...