JP Morgan Chase Bank v. Earth Foods

SUPREME COURT CASES

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State: Illinois

Docket No: 107682 Rel

Case Date: 10/21/2010

Preview:Docket No. 107682.

IN THE SUPREME COURT OF THE STATE OF ILLINOIS

JPMORGAN CHASE BANK, N.A., Appellant, v. EARTH FOODS, INC., et al. (Leonard S. DeFranco, Appellee). Opinion filed October 21, 2010.

JUSTICE KILBRIDE delivered the judgment of the court, with opinion. Chief Justice Fitzgerald and Justices Freeman, Thomas, Garman, Karmeier, and Burke concurred in the judgment and opinion.

OPINION In this appeal, we address whether section 1 of the Sureties Act (740 ILCS 155/1 (West 2000)) is applicable to guarantors. JPMorgan Chase Bank (Bank) filed suit against Earth Foods, Inc., for breach of contract, and against Michael Jarvis, Theodore L. Petrovich, and Leonard S. DeFranco as guarantors of a defaulted loan. DeFranco sought protection under section 1 of the Sureties Act. The circuit court of Kane County granted summary judgment in favor of the Bank on the ground that DeFranco was a guarantor, not a surety, concluding that the Sureties Act was inapplicable. The appellate court affirmed in part, reversed in part, and remanded, finding that the term "surety," as used in the Sureties Act, encompasses both a surety and a guarantor. 386 Ill. App. 3d 316.

We allowed the Bank's petition for leave to appeal. 210 Ill. 2d R. 315. We now affirm in part and reverse in part the judgment of the appellate court and remand the cause to the trial court for further proceedings. I. BACKGROUND In 2001, the Bank extended a line of credit to Earth Foods, Inc. The three co-owners of Earth Foods, Michael Jarvis, Theodore Petrowich, and Leonard DeFranco, all personally guaranteed the loan. DeFranco was then vice president of Earth Foods. On April 3, 2003, DeFranco sent the Bank a letter warning that Earth Foods was depleting the inventory that was to serve as collateral for the loan and demanding the Bank take action. Earth Foods stopped making payments to the Bank in February 2004. On April 23, 2004, the Bank sent a notice of default and demand for payment. On June 9, 2004, the Bank filed suit against Earth Foods and the three co-owners who guaranteed the note. DeFranco moved to dismiss the claim against him but did not dispute that he had agreed, as "guarantor," to pay all amounts owed by Earth Foods in the event of Earth Foods' default. Nonetheless, DeFranco's answer claimed an affirmative defense on the ground he was protected under section 1 of the Sureties Act (740 ILCS 155/1 (West 2000)). DeFranco claimed his guaranty obligation was discharged under the Sureties Act because the Sureties Act "applies to guarantors as well as sureties" and "[t]he law places no distinction" between guarantors and sureties. DeFranco maintained that the Bank was estopped from seeking payment from him because he notified the Bank that Earth Foods was operating at a financial loss. On May 4, 2006, the Bank filed a motion for summary judgment against DeFranco. In his response to the Bank's motion for summary judgment, DeFranco stated, "The issue is not whether or not Mr. DeFranco understood the guaranty at the time that he signed it. The real issue is whether the bank is precluded from collecting on the guarantee." (Emphasis omitted.) The circuit court granted the Bank's motion for summary judgment, holding that the Sureties Act does not extend to guarantors. The appellate court reversed, holding that guarantors may seek -2-

protection under the Sureties Act. 386 Ill. App. 3d 316. The appellate court recognized that the relevant question here is the meaning of the word "surety" in section 1 of the Sureties Act. The appellate court acknowledged that the term "surety" has two meanings. The court explained that "surety" "is sometimes used to refer to any situation in which a person agrees to be liable for the debt of another, whether the liability is primary as a surety or secondary as a guaranty, and it is sometimes used to refer strictly to a surety who is primarily liable." 386 Ill. App. 3d at 321. The court further acknowledged that the terms "surety" and "guarantor" have distinct meanings but found, however, that the distinction appears largely academic. 386 Ill. App. 3d at 321-22. The court also relied on the policy it discerned as underlying the Act

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