Northern Trust Co. v. ET CLANCY EXPORT, 85 C 6.

• Decision Date: 19 June 1985
• Docket Number: No. 85 C 6.,85 C 6.
• Court: U.S. District Court — Northern District of Illinois
• Parties: The NORTHERN TRUST COMPANY, Plaintiff and Counterdefendant, v. E.T. CLANCY EXPORT CORPORATION, Defendant and Counterplaintiff, and E.T. Clancy, Defendant.

612 F. Supp. 712

The NORTHERN TRUST COMPANY, Plaintiff and Counterdefendant, v. E.T. CLANCY EXPORT CORPORATION, Defendant and Counterplaintiff and E.T. Clancy, Defendant.

No. 85 C 6.

United States District Court, N.D. Illinois, E.D.

June 19, 1985.

Paul W. Schroeder and Edward R. Gower, Isham, Lincoln & Beale, Chicago, Ill., for plaintiff and counterdefendant.

John P. Ryan, Jr., Geoffrey G. Gilbert and Steven B. Varick, McBride, Baker & Coles, Chicago, Ill., for defendant and counterplaintiff.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Northern Trust Company ("Bank")¹ has sued E.T. Clancy Export Corporation ("Exporter") and its president E.T. Clancy ("Clancy") to recover amounts outstanding on two notes Bank purchased from Exporter. Now Bank moves under Fed.R.Civ.P. ("Rule") 12(c) for a judgment on the pleadings on the issue of liability under Counts II through IV of its four-count Amended Complaint (the "Complaint"). For the reasons stated in this memorandum opinion and order, Bank's motion is granted as to Counts II and III and denied without prejudice as to Count IV.

Facts²

In January 1982 Bank agreed with Exporter to finance sales of equipment to certain Mexican corporations ("Buyers"). Under that agreement Bank was to purchase from Exporter notes issued by Buyers in a total principal amount not to exceed $1,239,257.50, with interest computed at ½% per annum over Bank's floating prime rate. To guarantee payment on the notes Exporter was to obtain insurance against Buyer's default from the Foreign Credit Insurance Association ("FCIA") and Export-Import Bank of the United States (collectively "Insurers"), and to assign the proceeds of the insurance policy to Bank. Under the terms of the policy Insurers were to pay the notes to the extent of (1) 100% of any unpaid principal amount, plus interest at 6%, if the cause of the default was "political" and (2) 90% of any unpaid principal, plus interest at 6%, if the cause of the default was "commercial."

On January 22, 1982 Buyers issued a note payable to Exporter in the principal amount of $618,757.50, with interest at the prime-linked rate (the "First Note"). Payments were to be made in twelve approximately equal quarterly installments. Three days later Exporter and Bank entered into a Promissory Note Purchase Agreement (the "Agreement"), which included the following paragraph (the emphasized portion indicates language typed in with a different type face and juxtaposed to the handwritten initials "ETC"³):

4. All Notes acquired by the Bank will be purchased with full recourse to the Exporter for the uninsured amount or any amount not recovered under the FCIA policy, including any interest rate differential or unrecovered past due interest.

By its terms the Agreement covered only the First Note, which was endorsed over to Bank by means of an unrestricted endorsement: "Pay to the Order of The Northern Trust Co." Bank purchased the first note from Exporter as endorsed.

At the same time the Agreement was executed, Clancy signed an undertaking (the "Guaranty") guaranteeing personally the prompt payment of any amount due Bank from Exporter.⁴ Under the Guaranty Clancy also agreed to pay any expenses incurred by Bank in collecting amounts owing from Exporter or in enforcing the Guaranty. But the Guaranty expressly provided:

The right of recovery against the undersigned is, however, limited to the amount of $61,875.75 plus the interest on such amount and plus all expenses hereinbefore mentioned.

Less than two months later (on March 15) Buyers issued another note payable to Exporter (the "Second Note"), with terms matching those of the First Note except for its principal amount: this time, $306,446.25. Several days later Exporter endorsed the Second Note:

Pay to the Order of Northern Trust Co. 90% without recourse, 10% with recourse.

With that endorsement, Bank purchased the Second Note from Exporter without the parties having executed any amendment to the Agreement or a separate note purchase agreement.

Buyers defaulted on both the First and Second Notes, and Bank then filed a claim with Insurers. Characterizing the default as resulting from "political" causes, Insurers paid 100% of the principal amount outstanding on both Notes plus interest at 6%. But because the notes by their terms had accrued interest at the substantially higher rate of ½% over Bank's floating prime rate, large amounts remained due on the notes: $181,935.21 on the First Note and at least $38,998.40 on the Second Note.⁵ Bank made demand on Exporter for both amounts, but Exporter refused payment, contending it was not liable for the deficiencies. Bank then filed this action.

Contentions of Parties

Bank's Complaint alleges four theories of recovery:

1. Count I alleges Agreement ¶ 4 obligates Exporter to make up any difference between the total amount due and owing on the First Note and the insurance proceeds paid Bank by Insurers after Buyers' default.

2. Count II seeks recovery from Clancy on the Guaranty: its stated limit of $61,875.75 plus attorneys' fees, costs and expenses incurred in the enforcement of the Guaranty.

3. Count III alleges Exporter's endorsement of the Second Note makes Exporter liable to Bank for any deficiency resulting from Buyers' default, to the extent of 10% of the total amount (principal plus interest) payable on the Second Note.

4. Count IV seeks recovery of amounts due and owing on the First Note on Exporter's blank endorsement of the instrument.

Bank's motion for a Rule 12(c) judgment on Counts II through IV claims the First Note, Second Note and Guaranty unambiguously establish Exporter's and Clancy's respective liabilities for the claimed amounts. On the other hand, defendants argue the Agreement, First Note, Second Note and Guaranty, read together, are susceptible of more than one interpretation. As a consequence, defendants contend, a determination of the parties' obligations under the documents is impossible without reference to extrinsic evidence, foreclosing judgment on the pleadings alone.

Count IV

Because the parties have failed to address Illinois case law⁶ that appears to bear directly on Bank's Count IV claim, this Court declines at this juncture to chart a course through the parties' contract law arguments on that count. Section 3-414 of Illinois' version of the Uniform Commercial Code (Ill.Rev.Stat. ch. 26, ¶ 3-414⁷) provides a blank endorsement on a negotiable instrument constitutes the endorser's engagement:

that upon dishonor and any necessary notice of dishonor and protest he will pay the instrument according to its tenor at the time of his indorsement to the holder or to any subsequent indorser who takes it up....

But the First Note is not a negotiable instrument. Under Code § 3-104 a writing is not a negotiable instrument unless among other things it contains "an unconditional promise or order to pay a sum certain in money." Code § 3-106 goes on to list various contingencies in spite of which the sum payable on an instrument is a "sum certain." Code Comment 1 to Code § 3-106, which Illinois has adopted, describes the purpose of that section (emphasis added):

The section rejects decisions which have denied negotiability to a note with a term providing for a discount for early payment on the ground that at the time of issue the amount payable was not certain. It is sufficient that at any time of payment the holder is able to determine the amount then payable from the instrument itself with any necessary computation. Thus a demand note bearing interest at six per cent is negotiable. A stated discount or addition for early or late payment does not affect the certainty of the sum so long as the computation can be made, nor do different rates of interest before and after default or a specified date. The computation must be one which can be made from the instrument itself without reference to any outside source, and this section does not make negotiable a note payable with interest "at the current rate."

Interest payable on the First Note cannot be computed without reference to Bank's prime rate in effect from time to time. Under prevailing law that renders the sum payable uncertain and the instrument itself nonnegotiable. See F. Hart & W. Willier, Commercial Paper Under the Uniform Commercial Code § 2.111, at 2-98 to -99 (1985); 4 W. Hawkland & L. Lawrence, Uniform Commercial Code Series § 3-106:03, at 95 & n. 5 (1984). Accordingly the First Note is outside the purview of Article 3 in general and Code § 3-414 in particular.⁸ Resort must be had to the Illinois common law to determine the legal effect of Exporter's endorsement of the First Note.

Early Illinois cases raise serious doubt whether blank endorsement of a nonnegotiable instrument makes the endorser liable upon the obligor's default. Smith v. Myers, 207 Ill. 126, 127, 69 N.E. 858 (1904) considered the effect of blank endorsement of a note promising payment on a specified date of a fixed principal amount "with interest at six per cent per annum and taxes." Because the amount of taxes payable remained uncertain, Smith held the instrument was not by any general definition a promissory note (id. at 131, 69 N.E. 858):

In order to constitute a promissory note the instrument must be for a specified sum or certain sum of money.

Consequently Smith, id. at 130, 69 N.E. 858 said the instrument was not covered by the common-law rule (now embodied in the Code) that a blank endorsement on a promissory note constituted the endorser's warranty to pay the note if the principal obligor did not:

Upon a mere contract for the payment of money or the performance of any other covenant, where the instrument is not such as comes within the definition of a negotiable instrument, one by merely signing his name upon the back thereof does not become either a guarantor or an endorser, within the law merchant.

See also First National Bank of Cass Lake v. Lamoreaux, 255 Ill.App. 15, 19-20 (1st...