Trial Necessary To Determine Whether Guarantor Was Surety.

The Illinois Supreme Court ruled on October 21, 2010 that a trial was necessary to determine whether the Vice President of Earth Foods was a “surety” entitled to the protection of the Illinois Sureties Act despite the fact that he signed a guaranty which identified him as a “guarantor.”  The case is JPMorgan Chase Bank, N.A. v. Earth Foods, Inc.

The case involved a line of credit loan by Chase to Earth Foods, that was personally guaranteed by three co-owners of Earth Foods, including Leonard DeFranco.   DeFranco notified Chase that Earth Foods was depleting its inventory which served as collateral for the loan and demanded that Chase take action to pursue Earth Foods.  Although Chase ultimately filed suit against Earth Foods, DeFranco asserted an affirmative defense under Section 1 of the Sureties Act, arguing that Chase was estopped from seeking payment against him because he notified the bank that Chase was operating at a financial loss, but Chase did nothing for months.

The Supreme Court rejected DeFranco’s argument that a “guarantor” fell within the meaning of the term “surety” under the Sureties Act.  In reaching this decision, the Court reviewed definitions of the terms surety and guarantor in legal dictionaries and treatises dating back to the early 1800s when the Illinois Sureties Act was first enacted.

Despite concluding that a guarantor was not entitled to the protections afforded to a surety under the Illinois Sureties Act, the Court held that it was improper for the trial court to grant summary judgment to Chase because the use of term “guarantee” or “surety” in a contract does not automatically determine whether the parties intended to create a guarantee or suretyship.   The Court therefore remanded the case for trial to evaluate the facts and circumstances surrounding the execution of the guarantee to determine whether the parties actually intended to create a suretyship despite the use of the word “guarantee” in the document.

DeBlasio Law Group, LLC has extensive experience in commercial litigation matters involving contracts and their interpretation under law.