Carve-out Provision In A Guaranty That Triggers Full Repayment Liability If The Borrower Contests Or Delays The Lender’s Action To Enforce The Loan Or Appoint A Receiver Is Valid

The borrowers in Bank of America v. Freed, 110749 (Ill. App. Ct. Dec. 28, 2012), took out a construction loan with a maximum limit of $205 million. Among other things, the loan was secured by a guaranty, pursuant to which the guarantors’ liability was limited to $50 million. The limited guaranty was subject to four carve-outs, however. One of them provided that the guaranty would become a full repayment guaranty if the borrower contested or delayed any action taken by the lender to appoint a receiver for the property or to foreclose the security interests. The borrower defaulted and the lender filed a foreclosure and sought judgment against the guarantors for $50 million. When the borrower and guarantors contested the appointment of the receiver, the lender amended its complaint to seek the full repayment liability against the guarantors. The circuit court entered summary judgment against borrower and the guarantors for full repayment in the amount of $206 million. In affirming the circuit court’s judgment, the Illinois appellate court rejected the guarantors’ defense that the carve-out provision was ambiguous, finding the terms of the provision clearly provided that contesting the appointment of receiver triggered the carve-out. The appellate court also rejected the guarantors’ argument that the provision was an unenforceable penalty because the damages sought were unrelated to any injury the lender may have suffered by their challenge to the receiver. The appellate court found that unlike a penalty clause, the carve-out operated to define the extent of personal liability, not to affix probable damages. Recourse liability was fixed by the terms of the loan; it was calculable, actual and not speculative. It also found that contesting the appointment of the receiver resulted in a delay of almost a year during which the lender incurred substantial additional legal fees. Lastly, the guarantors’ assertion that the carve-out provision precluded them from exercising their due process right to defend themselves in the foreclosure was deemed misguided. The provision did not preclude them from defending themselves; it only resulted in a forfeit of the full repayment liability exemption under the loan. Accordingly, the carve-out provision was valid and enforceable and the appellate court affirmed the circuit court judgment.

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