Legal Updates for Banks

Recent decisions from courts in Illinois offer guidance in lending transactions and handling of bank accounts.

Amos Financial LLC. v. Szydlowski

The Illinois Court of Appeals in the First District recently created precedent with implications for lenders dealing with guarantors and assignees. In Amos Financial LLC. v. Szydlowski, 2022 IL App (1st) 210046-U, the court affirmed the lower court’s decision to hold the guarantor of a note liable to the assignee of a separate note created two years later.

This case arose from a promissory note executed by a borrower in 2008 to the lender bank. The defendant (“guarantor”) executed a commercial guaranty to secure the 2008 note. Subsequently, the borrower executed a promissory note in 2010 to the lender bank. The lender bank then assigned the 2010 note to a third party, who later assigned the note to the plaintiff (“assignee”). Each assignment was accompanied by allonges which failed to reference the 2008 guaranty. When the borrower defaulted, the assignee claimed that the guarantor owed the assignee money under the 2008 guaranty.

The lower court granted summary judgment in favor of the assignee for breach of guaranty contract. On appeal, the guarantor argued that summary judgment was improper because the assignee never actually acquired the guaranty. The guarantor further argued that even if the assignee was the owner of the guaranty, there were still genuine issues of material fact as to the scope of the guarantor’s liability.

First, the appellate court found that the guaranty was a contract and should be analyzed under contractual principles for breach of contract. Thus, the assignee had to prove the existence of a valid, enforceable contract.

The guarantor argued that there was no valid contract because neither the 2010 Note nor the allonges referenced or expressly assigned the 2008 guaranty to the assignee. Further, the guarantor pointed out that the 2008 guaranty defined the guaranteed note as the 2008 Note and the assignee only received the 2010 Note.

The appellate court found that the plain language of the 2008 guaranty established a “continuing” guaranty which obligated the guarantor to all future debts arising from the original 2008 Note. The court provided some guidelines to determine whether a guaranty is “continuing.” First, the guaranty is to be interpreted according to the intentions of the parties as manifested by their writings. “Where, by the terms of written guaranty, it appears that the parties look to a future course of dealing or a succession of credits,” it is generally considered a continuing guaranty.

Here, the guaranty contained a section titled “continuing guaranty” and provided that the guarantor would remain responsible for the indebtedness “now existing or hereinafter arising or acquired, on a continuing basis.” Additionally, the guaranty provided no limitation on the duration of the guaranty. This language was sufficient to evidence that the parties contemplated a future course of dealing. Accordingly, the court found that the guarantor was liable to the assignee under a “continuing” guaranty.

The court also addressed the guarantor’s argument that the assignee lacked standing to enforce the guaranty as the allonges fail to mention or expressly assign the guaranty to the assignee. The court rejected this argument, finding instead that the guarantor must prove the assignee was not the holder of the guaranty. The guarantor could not meet this burden as a debtor is unable to contest the assignment of debt unless the debtor is a party to the transfer document. Moreover, the court applied section 13 of the Restatement Third of Law, Suretyship and Guaranty to find it sufficient for the assignee to show that it was the holder of the 2010 Note because a secondary obligation follows the underlying obligation.

Amos Financial LLC is instructive to lenders when involved with loan sales. Although the court found the guaranty applied to a subsequent note here, lenders can protect their interests and improve potential marketability by expressly defining a guaranty as “continuing” and referencing the continuing guaranty in any notes and allonges.

Trivedi v. Bank of America, et al.

A recent decision from the Northern District of Illinois shielded banks from claims of negligence, breach of fiduciary duty and violations of the Illinois Consumer Fraud and Business Practices Act (“ICFA”) following a wire fraud scheme.

In Trivedi v. Wells Fargo Bank, N.A. and Bank of America, N.A., No. 20 C 5720, 2022 WL 2340875, (N.D. Ill. June 29, 2022), the court was presented with the increasingly prevalent issue of wire fraud. The plaintiff initiated a transfer of funds from the sending bank to what he believed was his wealth manager’s account at the receiving bank. Instead, the funds were credited to an account of an unknown account holder at the receiving bank. Once the plaintiff realized his error, he contacted the sending bank to request a fraud recall. The sending bank was unable to recall the money, but the receiving bank froze the fraudulent account shortly thereafter.

The plaintiff subsequently brought common law claims of negligence and breach of fiduciary duty, violation of the ICFA and violation of federal regulation 12 CFR § 205.11 against the banks. The banks moved to dismiss all claims.

First, the plaintiff claimed that the banks were negligent by failing to exercise reasonable care in the transfer and receipt of funds. The plaintiff also claimed that the sending bank breached its fiduciary duty to the plaintiff. The court found that both common law claims were preempted by the Illinois Uniform Commercial Code (“UCC”). UCC Article 4A sets forth a bank’s rights and responsibilities related to electronic payment and therefore governs over similar common law claims. Under UCC Article 4A, the banks had a duty to follow any written instructions from the plaintiff in issuing and accepting payment orders. Further, a payment order may not be cancelled after it is accepted by the receiving bank. Accordingly, the court found that the banks had not violated UCC Article 4A, and the plaintiff’s preempted common law claims of negligence and breach of fiduciary duty must be dismissed.

Next, the plaintiff claimed that the banks violated the ICFA by committing a fraudulent act or practice. The court emphasized that claims of fraud have a heightened pleading requirement that requires the plaintiff to allege the “who, what, when, where and how” of the fraud with particularity. Since the plaintiff merely stated that an unknown beneficiary misled the plaintiff and failed to allege that either bank participated in the deception, the court dismissed the claim.

Finally, the plaintiff claimed that the banks violated federal regulation 12 CFR § 205.11 by failing to investigate the wire transfer after the plaintiff alerted the banks to the fraud. While 12 CFR § 205.11 requires banks to investigate allegations of error, the court found that wire transfers are excluded from these requirements and UCC Article 4A instead governs. Accordingly, the court dismissed the plaintiff’s final claim.

The takeaway from Trivedi is that courts appreciate the difficult situation presented by wire transfer fraud and are willing to protect banks that wind up as unwilling participants. Banks looking for guidance should turn to UCC Article 4A, the governing law for electronic wire transfers.