Roels v. Drew Industries, Inc.

• Decision Date: 30 December 1992
• Docket Number: No. 1-91-3258,1-91-3258
• Citation: 181 Ill.Dec. 338,608 N.E.2d 411,240 Ill.App.3d 578
• Parties: , 181 Ill.Dec. 338 Robert J. ROELS, Plaintiff-Appellant, v. DREW INDUSTRIES, INCORPORATED, a Delaware corporation, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 411

608 N.E.2d 411

240 Ill.App.3d 578, 181 Ill.Dec. 338

Robert J. ROELS, Plaintiff-Appellant, v. DREW INDUSTRIES, INCORPORATED, a Delaware corporation Defendant-Appellee.

No. 1-91-3258.

Appellate Court of Illinois First District, Third Division.

Dec. 30, 1992.

Robert F. Fuchs, Steven M. Ruffalo, Fuchs & Rosalli, Ltd., Chicago, for plaintiff-appellant.

Marc P. Seidler, Fredric A. Cohen, Rudnick & Wolfe, Chicago, for defendant-appellee.

Presiding Justice GREIMAN delivered the opinion of the court:

Plaintiff Robert Roels appeals the trial court's dismissal of his action to recover damages resulting from defendant Drew Industries' breach of the terms of a written instrument guaranteeing plaintiff's rights under an employment contract entered into with defendant's wholly owned subsidiary. The trial court granted defendant's motion to dismiss pursuant to section 2-619 of the Illinois Code of Civil Procedure and denied plaintiff's subsequent motion to reconsider.

The trial court believed that the subsidiary's merger with another corporation released defendant from performance under the guaranty. Plaintiff argues on appeal that a change in the corporate structure of his employer did not discharge the defendant guarantor where the defendant's risk of exposure was not materially altered, and (2) the trial court erred when it granted defendant's 2-619 motion to dismiss where defendant failed to provide an affidavit or testimony supporting its affirmative defenses where such defenses were founded on certain disputed facts.

On December 12, 1984, plaintiff sold defendant his 50% of the shares in Sandberg Manufacturing Company (Sandberg Corporation I), making defendant the sole shareholder of Sandberg Corporation I. On January 9, 1985, plaintiff entered into a written employment agreement with Sandberg Corporation I in which he agreed, inter alia, to serve as president and director of Sandberg Corporation I for five years, through January 31, 1990, in exchange for: $80,000 per year, a limited cost-of-living increase, a 5% override of pre-tax profits, four weeks' vacation, an automobile; and health and life insurance. The agreement also contained a provision prohibiting plaintiff from competing with the employer for five years after termination of the agreement.

On the final signature page of the employment agreement, this guarantee executed by the defendant is set out:

"Guarantee

For valuable consideration, the receipt and adequacy of which is hereby acknowledged, Drew National Corporation, a Delaware corporation, parent of the Company, does hereby guarantee the full and prompt payment and performance of all obligations of the Company contained in the foregoing Employment Agreement for the term thereof."

Plaintiff asserts that defendant's attorneys drafted and prepared the employment agreement and guarantee, but defendant does not admit this fact, and the authorship of the provision is immaterial since we are not called upon to construe any ambiguities.

On April 7, 1987, Drew sold all of its shares in Sandberg Corporation I, its wholly owned subsidiary, to JAF Enterprises (JAF). On that same day, Sandberg was merged into JAF, the surviving corporation, and JAF filed an amendment to its articles of incorporation changing its name to "Sandberg Manufacturing Company," the same name as Sandberg Corporation I. (We refer to the merged Sandberg/JAF company as "Sandberg Corporation II.") While defendant retained no interest in Sandberg Corporation II, plaintiff remained as president of the merged company until March 29, 1989.

On or about April 1, 1989, all of Sandberg Corporation II's assets were sold to Strombecker Corporation, and plaintiff worked for that company until January 31, 1990. Plaintiff's duties under Strombecker were to consolidate Sandberg Corporation II's assets and operation into the Strombecker facilities. Sandberg Corporation II remained a corporate shell until it was dissolved on October 26, 1989.

Plaintiff contends that between October 1988 and January 31, 1990, under the terms of the employment agreement, plaintiff was due $30,319 which Sandberg Corporation II refused to pay. When plaintiff demanded this sum of defendant, both orally and in writing, pursuant to the guaranty in the 1985 employment agreement, defendant rejected his request. Plaintiff then filed this action alleging that when he was employed by Sandberg Corporation II and Strombecker, he did not receive the amounts promised in salary and perquisites under the 1985 employment agreement, which obligation defendant guaranteed.

Defendant filed a 2-619 motion to dismiss plaintiff's complaint, presumably pursuant to subsection (a)(9) (Ill.Rev.Stat.1989, ch. 110, par. 2-619(a)(9)), which primarily alleged that because defendant's sale of the stock of Sandberg Corporation I to JAF, the merger of Sandberg Corporation I into JAF "materially altered the nature of Drew's [defendant's] guarantee and substantially increased the risk and burden thereof without Drew's consent and thereby discharged Drew's guarantee," and which the trial court granted.

Section 11.5 of the Business Corporation Act governs the rights and obligations of a corporate merger. (Ill.Rev.Stat.1989, ch. 32, par. 11.50.) This section provides, inter alia, that a surviving or new corporation formed under a plan of merger or consolidation is "subject to all of the duties and liabilities of a corporation organized under this Act" and "shall henceforth be responsible and liable for all of the liabilities and obligations of each of the corporations so merged or consolidated * * * " Ill.Rev.Stat.1989, ch. 32, par. 11.50(3), (5).

Accordingly, after the April 7th sale, merger and name change, Sandberg Corporation II remained liable on the employment contract of January 9, 1985.

We consider now whether the merger and attendant transfer of the employment contract to the new corporation affects the liability of the defendant under the guaranty.

While Illinois recognizes the general principle of nonassignability of guaranties, that rule is not applied mechanically; rather, the facts of each case determine whether the policy underlying the rule applies. Second National Bank v. Diefendorf (1878), 90 Ill. 396, 407; Harris Trust and Savings Bank v. Stephans (1981), 97 Ill.App.3d 683, 686, 52 Ill.Dec. 927, 422 N.E.2d 1136; Claude Southern Corp. v. Henry's Drive-In Inc. (1964), 51 Ill.App.2d 289, 304, 201 N.E.2d 127; Essex International Inc. v. Clamage (7th Cir.1971), 440 F.2d 547, 550.

Thus, a guarantor is not released unless the essentials of the original contract have been changed and the performance required of the principal is materially different from that first contemplated. Alton Banking & Trust Co. v. Sweeney (1985), 135 Ill.App.3d 96, 101, 89 Ill.Dec. 926, 481 N.E.2d 769; Harris Trust, 97 Ill.App.3d at 687, 52 Ill.Dec. 927, 422 N.E.2d 1136; Claude Southern, 51 Ill.App.2d at 304, 201 N.E.2d 127; Bernardi Brothers, Inc. v. Great Lakes Distributing Inc. (7th Cir.1983), 712 F.2d 1205, 1207; Essex, 440 F.2d at 550.

It is clear that a mere change in the name of the debtor without a change in legal status does not release a guarantor from liability. (Scovill Manufacturing Co. v. Cassidy (1916), 275 Ill. 462, 114 N.E. 181; Alton, 135 Ill.App.3d at 102, 89 Ill.Dec. 926, 481 N.E.2d 769; Bernardi, 712 F.2d at 1207.) The 7th Circuit in Essex applied Illinois law to establish this standard:

"A merger or consolidation involving the creditor corporation does not necessarily discharge a guarantor any more than a mere change in corporate name does. Unless there is some material change in the business dealings between the debtor and the creditor-guarantee and some increase in the risk undertaken by the guarantor, the obligation of the guarantor is not discharged." Essex, 440 F.2d at 550.

Whether a guarantor is exposed to an increase in the risk it originally undertook is a key variable in determining whether there has been a material change in the guaranty agreement. (U.S. Shoe Corp. v. Hackett (7th Cir.1986), 793 F.2d 161, 162; Bernardi, 712 F.2d at 1207; Essex, 440 F.2d at 550; Firstsouth, F.A. v. La Salle National Bank (N.D.Ill.1988), 699 F.Supp. 1248, 1250.) A guarantor takes a risk in exchange for a benefit; when events beyond the guarantor's control dramatically increase the risk, and the assumptions upon which the contract was founded are undercut. (U.S. Shoe, 793 F.2d at 162.) The principle that a substantial increase in risk discharges the guaranty rests on the assumption that guarantors would not ordinarily tolerate a substituted increase in risk without seeking something in return. U.S. Shoe, 793 F.2d at 163.

Defendant cites International Paper Co. v. Grossman (N.D.Ill.1982), 541 F.Supp. 1236, for the proposition that a guarantor is discharged by the debtor's merger into another corporation and the resulting termination of the debtor's existence, and Teledyne Mid-America Corp. v. HOH Corp. (9th Cir.1973), 486 F.2d 987, for the proposition that a guaranty may not be extended to debts of entities other than the entity whose obligations were expressly guaranteed.

We reject defendant's rigid interpretation of these cases. In International Paper, the president and chief shareholder of the debtor executed a personal guaranty for trade payables. After the guarantor resigned as president of the debtor corporation and transferred the controlling interest of shares in that corporation, the corporation merged with another and the surviving corporation sought recovery of $200,000 in trade payables that it had amassed since the merger. Similarly in Teledyne, a husband and wife had executed personal guaranties for trade payables at a time when they were majority shareholders. In both International Paper, 541 F.Supp. at 1241 and Teledyne, 486 F.2d at 990, the court determined that the guarantors could not be...