Riley Acquisitions Inc. v. Drexler

• Decision Date: 05 April 2011
• Docket Number: Nos. 1–10–0880,1–10–1707.,s. 1–10–0880
• Citation: 408 Ill.App.3d 397,946 N.E.2d 957,349 Ill.Dec. 461
• Parties: RILEY ACQUISITIONS, INC., Plaintiff–Appellant and Cross–Appellee,v.Mary Ellen DREXLER, f/k/a Mary Ellen Brown, Defendant–Appellee, Cross–Appellant, and Third–Party Plaintiff–Appellant (C.C.S. Chicago Recreation, Inc., Third–Party Defendant–Appellee).
• Court: United States Appellate Court of Illinois

408 Ill.App.3d 397

946 N.E.2d 957

349 Ill.Dec. 461

RILEY ACQUISITIONS, INC., Plaintiff–Appellant and Cross–Appellee,

v.Mary Ellen DREXLER, f/k/a Mary Ellen Brown, Defendant–Appellee, Cross–Appellant, and Third–Party Plaintiff–Appellant (C.C.S. Chicago Recreation, Inc., Third–Party Defendant–Appellee).

Nos. 1–10–0880

1–10–1707.

Appellate Court of Illinois, First District, Second Division.

March 8, 2011.As Modified Upon Denial of Rehearing April 5, 2011.

Stephen Scallan, Staes & Scallan, Chicago, for Plaintiff–Appellant.Richard Sorman, Sorman & Frankel, Ltd., Chicago, for Defendant–Appellee.Russell C. Green, Chicago, for Third–Party Defendant–Appellee.

[349 Ill.Dec. 465 , 408 Ill.App.3d 397] OPINION

Justice CONNORS delivered the judgment of the court, with opinion.

This appeal follows a jury trial on claims related to breach of a guaranty contract. Plaintiff Riley Acquisitions, Inc., appeals the trial court's order directing a verdict in favor of defendant Mary Ellen Drexler after the close of evidence. Defendant cross-appeals orders of the trial court denying her motion for sanctions against plaintiff under Illinois Supreme Court Rule 137 (eff.Feb.1, 1994), denying in part her petition for costs, and dismissing her third-party complaint against third-party defendant C.C.S. Chicago Recreation, Inc. We affirm.

I. BACKGROUND

During the early 1990s, defendant Mary Ellen Drexler and her then-husband, Steven Brown, owned and operated two companies, C.C.S. Chicago Recreation, Inc. (CCS), and Custom Frame & Poster Manufacturing, Inc. (Custom Frame). In February 1990, defendant and Brown jointly entered into a guaranty contract with Devon Bank. Under the contract, Devon agreed to extend credit to CCS and Custom Frame in exchange for defendant's and Brown's personal guaranty of the underlying promissory notes. Pursuant to this agreement, over the next several years Devon loaned money to CCS and Custom Frame through a series of promissory notes.

By 1993, however, defendant's marriage with Brown unraveled, and they initiated divorce proceedings and began disentangling their business relationships. In August 1993, defendant sent a letter to Devon that purported to revoke her personal guaranty on CCS and Custom Frame's debt to Devon. About that time, CCS and Custom Frame began to have trouble meeting their payments on the loan and defaulted. However, in September 1993, CCS and Custom Frame signed a new promissory note with Devon. The account was later made current, but by early 1994, CCS and Custom Frame had again fallen behind on payments and Devon accelerated the loan.

During this same time, defendant had taken all control of Custom Frame while Brown had assumed complete control of CCS. Custom Frame dissolved at some point in 1994, but CCS remained in existence under the control of Brown. Although Devon had moved to accelerate the loan, it did not file suit to collect on the debt from CCS, Custom Frame, Brown, or defendant. Instead, in 1994, Devon foreclosed on property that had been put up as collateral in order to secure the note. The foreclosure sale did not completely cover the outstanding debt, leaving a deficiency of several thousand dollars.

Brown's obligation as guarantor was later terminated during bankruptcy proceedings

[349 Ill.Dec. 466 , 946 N.E.2d 962]

With the dissolution of Custom Frame in 1994, this left CCS as the only principal on the note and defendant as the sole guarantor. In 2001, CCS initiated a declaratory judgment suit against Devon regarding liability for property taxes on the foreclosed property. This suit was settled sometime in 2003. As part of the settlement agreement, Devon released CCS from its obligations under the note.

It is around this time that plaintiff became involved. Larry Starkman, who owns and operates plaintiff, was a long-time friend and business partner of Brown. At some point around the time of CCS' settlement agreement with Devon, Brown mentioned to Starkman that Devon still held the guaranty contract that defendant was party to. Brown told Starkman that Devon had recently suffered a reduction in its income and might be interested in selling its interest in the guaranty at a bargain price. Starkman looked into the matter and, through plaintiff, purchased Devon's interest in the guaranty contract. Devon duly assigned all of its rights in the guaranty contract to plaintiff.

In late 2003, plaintiff, in its capacity as assignee of Devon, brought suit against defendant for breach of the guaranty contract in order to collect the remaining deficiency on the note. In her answer to the complaint, defendant raised several affirmative defenses, including the statute of limitations and discharge. Defendant argued that her August 1993 letter to Devon that purported to revoke her personal guaranty started the running of the 10–year statute of limitations for the written guaranty contract or, alternatively, that the maturation of the note at the beginning of September 1993 began the limitations period. Either way, defendant argued that plaintiff's lawsuit was untimely because it was filed after the limitations period had run. Defendant's discharge defense was based on the theory that she was not liable on the guaranty contract because Custom Frame had been dissolved and CCS had been released.

In 2004, defendant filed a third-party complaint against CCS, which she later amended after trial. Defendant claimed that CCS, as principal on the note, was liable to her for any and all attorney fees and costs that she incurred while defending against the breach of guaranty contract action.

The case proceeded to a jury trial in late 2009. After the close of evidence, the trial court directed a verdict in favor of defendant on the basis of both her statute of limitations defense and her discharge defense. Defendant immediately filed a motion for sanctions against plaintiff under Illinois Supreme Court Rule 137 (eff.Feb.1, 1994), asserting that plaintiff knew or should have known that its claims were barred at the time it filed its complaint against defendant.

After plaintiff filed a motion to reconsider, the trial court affirmed the directed verdict in favor of defendant but sua sponte modified its order to reflect only the ground of the statute of limitations defense. The trial court later slightly modified this order again when defendant filed a motion to reconsider the sua sponte modification of the original order, but the trial court changed only the reasoning underlying its judgment based on the statute of limitations defense. That same day, the trial court denied defendant's motion for sanctions.

Defendant filed a petition for costs under section 5–109 of the Code of Civil Procedure (735 ILCS 5/5–109 (West 2008)), seeking to recoup expenditures on filing fees, subpoena fees, courier fees, photocopying, court reporters, and legal research costs. The trial court granted defendant's petition as to the filing and

[349 Ill.Dec. 467 , 946 N.E.2d 963]

subpoena fees, but denied it as to the remaining costs.

Finally, in response to a motion by CCS, the trial court dismissed defendant's third-party complaint under section 2–615 of the Code of Civil Procedure (735 ILCS 5/2–615 (West 2008)). With all issues in the case now resolved, plaintiff timely filed a notice of appeal on the directed verdict issue, and defendant timely filed a notice of cross appeal on the sanctions, costs, and third-party complaint issues. This case is now before us.

II. ANALYSIS

This appeal presents four issues that we will consider in turn: (1) whether defendant was entitled to a directed verdict, (2) whether plaintiff should be sanctioned under Supreme Court Rule 137, (3) whether plaintiff is entitled to costs, and (4) whether defendant's third-party complaint against CCS should have been dismissed.

A. Directed Verdict

The primary issue before us on appeal is whether defendant was entitled to a directed verdict following the close of evidence in the jury trial. “A motion for [a] directed verdict will not be granted unless all of the evidence so overwhelmingly favors the movant that no contrary verdict based on that evidence could ever stand. [Citation.] On review, all of the evidence must be construed in the light most favorable to the nonmoving party.” Krywin v. Chicago Transit Authority, 238 Ill.2d 215, 225, 345 Ill.Dec. 1, 938 N.E.2d 440 (2010). We review an order granting a directed verdict de novo. See id.

The trial court's initial basis for the directed verdict was both defendant's statute of limitations defense and her defense of discharge. However, the trial court sua sponte modified its order to reflect only the statute of limitations ground because it believed that the evidence showed that only CCS had been discharged from its obligations on the note, rather than both CCS and Custom. As we will explain, the trial court was correct in its initial ruling on the discharge issue.

Under Illinois law, “the liability of a guarantor is limited by and is no greater than that of the principal debtor and * * * if no recovery could be had against the principal debtor, the guarantor would also be absolved of liability.” (Internal quotation marks omitted.) Edens Plaza Bank v. Demos, 277 Ill.App.3d 201, 209, 213 Ill.Dec. 744, 660 N.E.2d 1 (1995) (quoting Hensler v. Busey Bank, 231 Ill.App.3d 920, 927, 173 Ill.Dec. 390, 596 N.E.2d 1269 (1992)). “Although the language of a guaranty agreement ultimately determines a specific guarantor's liability, the general rule is that discharge, satisfaction, or extinction of the principal obligation also ends the liability of the guarantor.” (Internal quotation marks omitted.) Id. (quoting Palen v. Cullom Capital Woodworking, Inc., 154 Ill.App.3d 685, 687, 107 Ill.Dec. 171, 506 N.E.2d 1062 (1987)). Accordingly, determining whether defendant has been absolved of her obligations as guarantor requires a two-step analysis. We first must determine whether the underlying obligations...