Banking Law Roundup

Sharp Thinking

No. 138   Perspectives on Developments in the Law from Sharp-Hundley, P.C.    December 2016

Three-Year Statute Applies To Misapplied Deposits

The three-year statute of limitations of Uniform Commercial Code § 4-111 (810 ILCS 5/4-111) applies to a lawsuit pleaded as a common-law breach-of-contract case if the claim is related to banking transactions involving negotiable instruments, a panel of the Appellate Court in Chicago has reiterated.

Relying on Continental Cas. Co. v. American Nat’l B.&T. Co., 329 Ill. App. 3d 686 (2002), the court rejected a plea that because the suit involved a breach of contract, Illinois’ 10-year statute for breaches of written contracts (735 ILCS 5/13-206) should apply.  It said that where two statutes of limitation arguably apply to the same cause of action, “the one which more specifically relates to the action must be applied.”  PSI Resources, LLC v. MB Fin. Bank, N.A., 2016 IL App (1st) 152204.

In PSI Resources, a bank allegedly applied a series of check deposits to the wrong corporate account holder among a series of related corporations.  The account holder to which deposits should have been credited claimed it had not known this because the bank’s monthly statements did not itemize the specific deposits credited on a given day and because the account holder’s inside financial officer had been embezzling money.  It contended the three-year statute of the UCC did not apply as its claim was pleaded as a simple breach of contract; alternatively, it claimed that the UCC statute did not begin to run until it actually discovered the misdeposits, which was within the three years.

Finding the UCC statute to be the more specific and hence the more applicable statute, the court moved to the issue of whether the plaintiff was saved under the “discovery rule.”  It said the discovery rule “protects a plaintiff only until he knows or reasonably should know of the injury, not until he has actual knowledge.”  See also CitiMortgage, Inc. v. Parille, 2016 IL App (2d) 150286 ¶¶ 41-42.

While the bank’s monthly statements did not specifically itemize the deposits they credited, they did list the total deposited each date, and “even a cursory review of some of the account statements would have caused a reasonable person to inquire further.”  (The allegedly misapplied deposits totaled hundreds of thousands of dollars.)

As to the controller’s embezzlement, the panel said it was unclear that it had any relation to the misdeposited checks, as all the money was accounted for, even if in the wrong corporation’s account.

Both Owners Must Sign Mortgage To Encumber Entireties Property

            A mortgage signed by only one of two entireties owners is a legally ineffective document, a panel of the Appellate Court’s Second District has ruled.

            In CitiMortgage, Inc. v. Parille, 2016 IL App (2d) 150286, a lender in a refi transaction permitted a mortgage signed by both spouses to be replaced by a mortgage signed by only one of them.  Because it violated the rule that both spouses must sign conveying interest in entireties property, the refi mortgage could not be foreclosed upon, the panel said.  The court left open the possibility that the defective mortgage could be reformed due to a “mutual mistake” in its preparation, however.

            Editor’s Note:  Parille is not inconsistent with OneWest Bank FSB v. Cielak, 2016 IL App (3d) 150224, discussed in Sharp Thinking No. 134 (October 2016).  In Cielak, both spouses had signed the subject mortgage of the entireties property.

Appellate Court Enforces Confession Clause

A confession-of-judgment clause in a promissory note is not made invalid just because the note contains a variable interest rate, a panel in the Illinois Appellate Court in Chicago has ruled. 

Acting on an interlocutory appeal of a certified question from the Circuit Court of Cook County, the panel held that the note in question did not run afoul of Illinois’ prohibition of use of such “cognovit” clauses for “uncertain and unliquidated” sums.  Cole v. Davis, 2016 IL App (1st) 152716.

Interpreting prior cases, the court said the certain-and-liquidated requirement addressed the principal of the loan at the time the note was signed.  If that was fixed, Illinois law permitted the note to have a variable interest rate without running afoul of the rule on uncertain and unliquidated sums, the court said.

Consideration Presumed For Negotiable Note

A plaintiff suing upon a negotiable note need not present any evidence of consideration to establish a prima facie case, a panel of the Appellate Court’s Second District has ruled.

Acting in Vician v. Vician, 2016 IL App (2d) 160022, the panel said consideration for a negotiable note is presumed and the burden is on the defendant to show its absence.  Thus the alleged failure of the plaintiffs to show in their case-in-chief that defendants had in fact received the consideration was not fatal, the court said. 

Guarantor Not Liable For Interest On Judgment

            A guarantor who has guaranteed payment of interest on a promissory note does not thereby guarantee payment of interest on a judgment on that note, a panel of the Appellate Court in Chicago has ruled. 

            “A guarantor is only liable for that which he has guaranteed,” the court said in Koenig & Strey GMAC Real Estate v. Renaissant 1000 South Michigan I, LP, 2016 IL App (1st) 161783.  “When . . . the terms of a guaranty contract are unambiguous, the liability of a guarantor cannot be extended by implication or construction beyond the terms of the guaranty contract.”

            The court reasoned that upon entry of judgment on the note, “the note ceases to exist.  Interest on a judgment is not part of the judgment; rather, it is purely statutory in origin.”


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