Newcastle Properties, Inc. v. Shalowitz

CourtUnited States Appellate Court of Illinois
Citation164 Ill.Dec. 221,582 N.E.2d 1165,221 Ill.App.3d 716
Docket NumberNo. 1-90-1248,1-90-1248
Parties, 164 Ill.Dec. 221 NEWCASTLE PROPERTIES, INC., Plaintiff-Appellee, v. Sidney SHALOWITZ and Phyllis Shalowitz, Defendants-Appellants.
Decision Date26 September 1991

Page 1165

582 N.E.2d 1165
221 Ill.App.3d 716, 164 Ill.Dec. 221
Sidney SHALOWITZ and Phyllis Shalowitz, Defendants-Appellants.
No. 1-90-1248.
Appellate Court of Illinois,
First District, Fourth Division.
Sept. 26, 1991.
Rehearing Denied Nov. 20, 1991.

Page 1166

[164 Ill.Dec. 222] [221 Ill.App.3d 718] Torshen, Schoenfield & Spreyer, Ltd., Chicago (Jerome H. Torshen and Steven P. Garmisa, of counsel), for defendants-appellants.

Schiff Hardin & Waite, Chicago (James A. Clark, Barbara E. Hermansen, and Darren Van Puymbrouck, of counsel), for plaintiff-appellee.

Justice JOHNSON delivered the opinion of the court:

Defendants, Sidney and Phyllis Shalowitz, appeal the trial court's order granting plaintiff, Newcastle Properties, Inc. (hereinafter Newcastle), its motions for summary judgment (Ill.Rev.Stat.1983, ch. 110, par. 2-1005), and prejudgment interest, and denying defendants' motions for summary judgment and rehearing.

The following issues are before this court for review: (1) Whether the seller's recovery pursuant to a real estate contract that allows for the payment of earnest money by letter of credit, and contains a provision that the buyer shall forfeit "all sums theretofore paid to the Seller," is [221 Ill.App.3d 719] limited to the amount paid by the buyer on the date of default, where the contract permits the seller to draw upon the letter of credit in order to recover the amount as liquidated damages, and the seller failed to do so; (2) whether the liquidated damages provision of the real estate contract is ambiguous and should be construed against the drafter to limit the seller's remedy for the buyer's breach of contract; and (3) whether the "avoidable consequences" rule precludes the seller from suing for recovery of $109,500 in liquidated damages, and $33,135 in prejudgment interest pursuant to a provision which limits the amount of liquidated damages to "all sums theretofore paid to Seller," because the seller failed to mitigate its damages by presenting and drawing upon the letter of credit before it expired.

We reverse.


Defendants agreed to purchase condominium unit 36D (hereinafter purchase agreement) in the building known as "One Magnificent Mile," located at 950 North Michigan Avenue in Chicago, Illinois. The seller was the LaSalle National Bank and Trust Company, as Trustee under Trust No. 100049. During the time when the events occurred that gave rise to this lawsuit, the Levy Organization Development Company, Inc. (hereinafter the Levy Organization) was the agent of the beneficiaries of LaSalle National Bank Trust No. 100049, who were the owners of One Magnificent Mile.

On November 1, 1983, the ownership interest of the residential portion of One Magnificent Mile was transferred to LaSalle National Bank Trust No. 103785. On December 31, 1985, Newcastle became the sole beneficiary of Trust No. 103785, and the successor-in-interest to the original owner of the property.

The Levy Organization prepared the purchase agreement. The Levy Organization and defendants executed the purchase agreement on May 10, 1982. Paragraph 12 of the purchase agreement states the following relevant provision:

"Performance. Time is of the essence of this Purchase Agreement. If Purchaser defaults on any of Purchaser's covenants or obligations hereunder, then, * * * all sums theretofore paid to Seller (including without limitation earnest money and payments for Extras) by Purchaser shall be forfeited as liquidated damages and shall be retained by Seller."

Under the terms of paragraph 2(a)(3) of the purchase agreement, defendants had the option to pay their earnest money in cash, or in the form of an unconditional and irrevocable letter of credit for the benefit [221 Ill.App.3d 720] of the Levy Organization, which would expire no earlier than 21 days after the estimated date of completion of the unit. Paragraph 2(a)(3) also provided that in the event the letter of credit expired prior to the closing date, defendants were obligated to either "[p]ay to Seller the amount of the Letter of Credit by cashier's or certified check," or deliver a replacement letter of credit 30 days prior to the expiration date of the original letter of credit. In addition, paragraph 2(a)(3) of the purchase agreement

Page 1167

[164 Ill.Dec. 223] also specified that "[f]ailure by Purchaser to deliver such replacement Letter of Credit when required to do so shall entitle Seller to draw upon the Letter of Credit and hold and disburse the funds as earnest money hereunder."

Defendants posted an irrevocable standby letter of credit in the amount of $109,500 as an earnest money deposit. Defendants obtained the letter of credit from the Continental Illinois National Bank and Trust Company of Chicago (hereinafter Continental Bank) in December 1980.

A standby letter of credit requires the issuer (Continental Bank) to pay the beneficiary (plaintiff) a sum certain prior to the expiration of the note upon the presentation of documents specified in the purchase agreement which demonstrate that the parties who procured the letter's issuance (defendants) have defaulted. Pastor v. National Republic Bank of Chicago (1979), 76 Ill.2d 139, 147, 28 Ill.Dec. 535, 390 N.E.2d 894; Jupiter Orrington Corp. v. Zweifel (1984), 127 Ill.App.3d 559, 562, 82 Ill.Dec. 946, 469 N.E.2d 590; Stringer Construction Co. v. American Insurance Co. (1981), 102 Ill.App.3d 919, 922, 58 Ill.Dec. 59, 430 N.E.2d 1; First Arlington National Bank v. Stathis (1980), 90 Ill.App.3d 802, 807, 46 Ill.Dec. 175, 413 N.E.2d 1288; see also Byrne, An Examination of UCC Article 5 (Letters of Credit), 45 The Business Lawyer 1531 (1990); Givray, Letters of Credit, 45 The Business Lawyer 2387 (1990); Symons & White, Banking Law 204-06 (1984); Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 Banking L.J. 816 (1977).

The standby letter of credit obtained by defendants in the instant case was drafted to expire on May 22, 1983. The estimated date of completion of defendants' condominium unit was October 10, 1983. Defendants extended the letter of credit to June 22, 1983. Defendants obtained this amended letter of credit in recognition of their obligation under the purchase agreement.

Thereafter, construction of defendants' unit was delayed beyond the original closing date. The Levy Organization notified defendants of this change. In a letter dated February 14, 1983, the Levy Organization reminded defendants that since their amended letter of credit would expire on June 22, 1983, it would either have to be extended at least 21 days beyond the estimated date of completion of their unit, or defendants would have to replace the original letter of credit with a substitute [221 Ill.App.3d 721] letter of credit 30 days prior to the expiration date of the original letter of credit, pursuant to the purchase agreement. The letter also stated that the Levy Organization would be "entitled to draw on the Letter of Credit" if defendants breached the contract.

Defendants responded by seeking to extend their amended standby letter of credit. Defendants executed a "Request For Amendment To Commercial Letter of Credit" at Continental Bank on June 20, 1983. Four days later, the Levy Organization contacted Sidney Shalowitz and informed him that it had not received written confirmation extending the expiration date of the amended letter of credit.

After defendant learned that the letter of credit had not been extended, he directed Continental Bank not to extend or renew the letter of credit. Defendant instructed Continental Bank in this manner on June 27, 1983. In July 1983, defendants informed the Levy Organization that they would not close on the unit or pay any of the money required by the purchase agreement.

The Levy Organization failed to present the $109,500 amended standby letter of credit prior to its expiration on June 23, 1983. At the time defendants' breached the purchase agreement, they had only paid the Levy Organization $3,122 for "extras" under the contract. Defendants refused to pay any additional funds because they maintained that no further payment was required pursuant to the liquidated damages provision of the purchase agreement.

The Levy Organization retained the $3,122 and sued defendants for an additional $109,500 and $33,135 in prejudgment interest. The Levy Organization and defendants filed motions for summary judgment.

Page 1168

[164 Ill.Dec. 224] (Ill.Rev.Stat.1983, ch. 110, par. 2-1005.) Plaintiff's motion was granted, and defendants' counter-motion was denied. The court awarded plaintiff $109,500, in addition to $33,135 in prejudgment interest. Defendants then filed this appeal.

First, defendants contend that under the terms of the purchase agreement, $3,122 was properly forfeited as liquidated damages because that amount was "theretofore paid" on the date of the breach. Defendants maintain that they are not liable for $109,500, because that sum was payable only under the letter of credit prior to its expiration. Defendants rely upon Schek v. Chicago Transit Authority (1969), 42 Ill.2d 362, 247 N.E.2d 886, Abingdon Bank & Trust Co. v. Bulkeley (1945), 390 Ill. 582, 62 N.E.2d 447, Moscov v. Mutual Life Insurance Co. (1944), 387 Ill. 378, 56 N.E.2d 399, Joseph v. [221 Ill.App.3d 722] Carter (1943), 382 Ill. 461, 47 N.E.2d 471, Jones v. Seiwert (1987), 164 Ill.App.3d 954, 115 Ill.Dec. 869, 518 N.E.2d 394, National Tea Co. v. American National Bank & Trust Co. of Chicago (1981), 100 Ill.App.3d 1046, 56 Ill.Dec. 474, 427 N.E.2d 806, Rhoads v. Clifton, Gunderson & Co. (1980), 89 Ill.App.3d 751, 44 Ill.Dec. 914, 411 N.E.2d 1380, Epstein v. Yoder (1979), 72 Ill.App.3d 966, 29 Ill.Dec. 169, 391 N.E.2d 432, Walgreen Co. v. American National Bank & Trust Co. of Chicago (1972), 4 Ill.App.3d 549, 281 N.E.2d 462, Devco Development Corp. v. Hooker Homes, Inc. (Fla.App.1987), 518...

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