You Say Tomato, I Say Tomahto: Court Holds Illinois Sureties Act Applicable to Guarantors
By Kenneth J. Ashman & Bardia Fard
The distinction between a “surety” and a “guarantor” is one which may be lost upon many practitioners. According to Black’s Law Dictionary, a “surety” is defined as “[a] person who is primarily liable for the payment of another’s debt or the performance of another’s obligation.” BLACK’S LAW DICTIONARY 1482 (8th ed. 2004) (emphasis added). In contrast, “[w]hile a surety’s liability begins with that of the principal, a guarantor’s liability does not begin until the principal debtor is in default.” Id. at 724. The distinction may be summarized as follows: a surety is primarily liable on the underlying obligation, while a guarantor is secondarily liable.
In the strictest sense, then, a surety is a wholly different creature than a guarantor—right? Not according to a recent Illinois Appellate Court decision in JP Morgan Chase Bank, N.A. v. Earth Foods, Inc., 386 Ill.App.3d 316, 898 N.E.2d 718 (2nd Dist. 2008), appeal allowed, 231 Ill.2d 632 (Ill. Jan. 28, 2009), which held that the term “surety,” as used in the Illinois Sureties Act, 745 ILCS 155/1, also encompasses a guarantor. The holding in Earth Foods makes available to a guarantor those defenses previously only available to a surety under the Sureties Act, and the decision may have repercussions for similar statutes across the United States.
In Earth Foods, the defendant Earth Foods, Inc. (Earth Foods) was the primary debtor on a line of credit issued by JP Morgan Chase Bank, N.A. (JP Morgan), which was personally guaranteed by Earth Foods’ three co-owners, which included defendant Leonard S. DeFranco (DeFranco). Earth Foods, 898 N.E.2d at 720. Before JP Morgan sent Earth Foods a notice of default, DeFranco sent JP Morgan a letter alerting it that Earth Foods was dissipating its inventory, which served as collateral to the line of credit, and further demanded that JP Morgan institute an action against Earth Foods. Id. After Earth Foods’ continued failure to make payment on the line of credit, JP Morgan filed suit against Earth Foods and its three co-owners/guarantors, including DeFranco. Id.
DeFranco invoked Section 1 of the Sureties Act, arguing that his notification to JP Morgan of Earth Foods’ near-insolvency discharged his obligation as a guarantor. Id. at 721. Section 1 of the Sureties Act provides as follows:
When any person is bound, in writing, as surety for another for the payment of money, or the performance of any other contract, apprehends that his principal is likely to become insolvent or to remove himself from the state, without discharging the contract, if a right of action has accrued on the contract, he may, in writing, require the creditor to sue forthwith upon the same; and unless such creditor, within a reasonable time and with due diligence, commences an action thereon, and prosecutes the same to final judgment and proceeds with the enforcement thereof, the surety shall be discharged; but such discharge shall not in any case affect the rights of the creditor against the principal debtor. 740 ILCS 155/1.1 The trial court rejected DeFranco’s argument, and entered summary judgment in favor of JP Morgan. Earth Foods, 898 N.E.2d at 721.
On appeal, DeFranco argued that the even though the contract identified him as a “guarantor,” rather than a “surety,” the trial court erred when it rejected the application of the Sureties Act and entered summary judgment in favor of JP Morgan. Id. The crux of DeFranco’s argument was that the term “surety” should be construed to include guarantors. Id. JP Morgan countered that the plain text of the Sureties Act made clear that its provisions were unavailable to DeFranco, as a guarantor. Id.
In holding that guarantors were included in the term “surety,” the appellate court undertook an analysis of the “popularly understood” meaning of the terms “suretyship” and “guaranty.” Id. Relying on Illinois jurisprudence, sister states’ jurisprudence, and several secondary sources, including the Restatement (Third) of Suretyship and Guaranty, the court noted that
the term “surety” has more than one popularly understood meaning: the word is sometimes used to refer to any situation in which a person agrees to be held 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.
Id. at 723. The court further opined that the terms “guarantor” and “surety” are “unusually intertwined in legal parlance and that the distinctions between them are arcane and often ignored.” Id. at 724. Given the interchangeable use of the terms, coupled with the remedial purposes behind the Sureties Act—“to compel diligence by a creditor to make certain a surety is protected against loss”—the court held that the statute applied with equal force to guarantors as it did to sureties. Id. (citation omitted). Accordingly, the court found that the trial court erred in granting JP Morgan’s motion for summary judgment on the basis that DeFranco could not invoke a defense provided by the Sureties Act. Id. at 726.
The holding in Earth Foods is the first of its kind in Illinois, and it departs dramatically from the strict definitions ascribed to “surety” and “guarantor.” Since the appellate court’s decision relied in part on interpretations from sister jurisdictions, the decision has potential implications nationally. Because of the importance of the precedent set by Earth Foods, on January 28, 2009, the Illinois Supreme Court accepted an appeal by JP Morgan, which is still pending adjudication. Assuming the high court affirms the appellate court’s holding, guarantors will have a new defense to creditors’ collection efforts, where the strictures of the Sureties Act are met. Stay tuned for updates as the Illinois Supreme Court weighs in with its definitive ruling on the question.
Kenneth J. Ashman is a principal of Ashman Law Offices, LLC (ALO), a business law and litigation boutique with offices in Chicago, Lincolnshire (Illinois), and New York. He attended both Boston University School of Law and New York University School of Law, and prior to founding his own firm in 1997, served as an associate with New York’s Weil, Gotshal & Manges, LLP and LeBoeuf, Lamb, Greene & MacRae, LLP (now Dewey & LeBoeuf, LLP). He served as a judicial law clerk to the Honorable Frederic Block, United States District Judge for the Eastern District of New York, who he now proudly calls a client. Mr. Ashman is a frequent publisher and speaker on a variety of areas of business law, and is not only active in the ABA, but also holds leadership positions in a number of state and local bar associations. Bardia Fard was formerly associated with ALO. Mr. Ashman’s firm prides itself on competing with and providing the same quality representation as the largest law firms, but, through lean staffing, the latest in law office technology, and flexible billing approaches, at greater efficiency and reduced cost. For reprints of other publications authored or coauthored by Mr. Ashman, please visit http://www.AshmanLawOffices.com or the firm’s blog at http://www.Ashman-Law.com.
1. Section 3 of the Sureties Act provides another defense 1 for a surety, stating as follows: Whenever the principal maker of any note, bond, bill or other written instrument dies, if the creditor does not, within 6 months after the entry of the original order directing issuance of letters of office, present the same to the representative or the proper court for allowance, the sureties thereon shall be released from the payment thereof to the extent that the same might have been collected of such estate if presented in proper time; but this Section shall not be construed to prevent the holder of any such instrument from proceeding against the sureties within such 6 months. 740 ILCS 155/3.
© Copyright 2009, American Bar Association.