Bank of America, N.A. v. Smith

Filing 51

MEMORANDUM Opinion Signed by the Honorable Samuel Der-Yeghiayan on 10/24/2012: Mailed notice (mw, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
BANK OF AMERICA, N.A.,

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Plaintiff,
v.
MARY ANN KENNY SMITH,
Defendant.

No. 11 C 5651

MEMORANDUM OPINION
SAMUEL DER-YEGHIAYAN, District Judge
This matter is before the court on Plaintiff Bank of America, N.A.’s (BOA)
motion for summary judgment. For the reasons stated below, the motion for
summary judgment is granted.

BACKGROUND
BOA contends that in August 2005, LaSalle Bank, National Association
(LaSalle) loaned Defendant Mary Ann Kenny Smith (Smith) $3.5 million (Smith
Loan) in connection with a development of a hotel in Chicago. Smith allegedly
signed a promissory note (Smith Note) in connection with the Smith Loan. After

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several extensions of the maturity date on the Smith Note, the maturity date was
allegedly set for February 28, 2011. After that deadline passed, Smith allegedly
failed to pay the amounts owed on the Smith Note. BOA claims that it is the
successor in interest of LaSalle and has included in its complaint a breach of contract
claim seeking to recover the amounts owed by Smith on the Smith Note, which BOA
contends totals $3,630,973.77. BOA now moves for summary judgment on its claim.

LEGAL STANDARD
Summary judgment is appropriate when the record, viewed in the light most
favorable to the non-moving party, reveals that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment as a matter of law.
Fed. R. Civ. P. 56(c); Smith v. Hope School, 560 F.3d 694, 699 (7th Cir. 2009). A
“genuine issue” of material fact in the context of a motion for summary judgment is
not simply a “metaphysical doubt as to the material facts.” Matsushita Elec. Indus.
Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Rather, a genuine issue
of material fact exists when “the evidence is such that a reasonable jury could return
a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248 (1986); Insolia v. Philip Morris, Inc., 216 F.3d 596, 599 (7th Cir. 2000). In
ruling on a motion for summary judgment, the court must consider the record as a

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whole, in the light most favorable to the non-moving party, and draw all reasonable
inferences in favor of the non-moving party. Anderson, 477 U.S. at 255; Bay v.
Cassens Transport Co., 212 F.3d 969, 972 (7th Cir. 2000).

DISCUSSION
BOA argues that it is not disputed by Smith that she defaulted on the Smith
Loan and owes money to BOA under the Smith Note. BOA also contends that there
are no genuinely disputed facts that could provide Smith with a meritorious defense
in this case or that show that Smith owes less money than asserted by BOA in this
case.

I. Liability of Smith Under the Smith Note
BOA argues that there are no genuinely disputed facts regarding whether
Smith defaulted on the Smith Loan or whether Smith owes BOA monies under the
Smith Note. Smith admits that BOA executed a loan for $3.5 million in coordination
with the Smith Note. (R SF Par. 5). Smith claims that she never personally received
or used the funds herself. (R SF Par. 6). However, Smith concedes that she
personally signed the signature page on the Smith Note, and the language in the
Smith Note indicates that the Smith Loan was being made to Smith. (R SF Par. 6).

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Smith contends that it is somehow unfair to hold her liable because the funds
from the Smith Loan were used by her brother, Gerard Kenny (Kenny). (Ans. SJ 1).
However, such facts, even if true, do not alter the undisputed fact that the Smith
Loan was made to Smith, not Kenny. What Smith chose to do with the funds from
the Smith Loan after she affixed her signature to the Smith Note does not alter the
parties to the Smith Note or Smith’s contractual obligation under the Smith Note. It
is undisputed that BOA executed a separate note and a separate loan with Kenny
(Kenny Note) and separately loaned $3.5 million to Kenny. (R SF Par. 8). Thus,
BOA loaned a total of $7 million to Smith and Kenny for the hotel project under two
separate loans and two separate notes. Smith has not produced any evidence
showing that Kenny affixed any signature to the Smith Note or evidence showing
that Kenny has any obligation under the Smith Note. Finally, it is undisputed that
upon the maturity date of the Smith Note, Smith failed to make the payment owed by
her personally under the terms of the Smith Note. (R SF Par. 29). Therefore, based
on the undisputed facts, Smith is liable as a matter of law for breaching her
obligations to BOA under the Smith Note.

II. Defenses to Liability Asserted by Smith
BOA contends that Smith has not pointed to sufficient evidence relating to her

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defenses to liability to defeat BOA’s motion for summary judgment. In her answer
to the complaint, Smith asserts as affirmative defenses: (1) setoff, (2) failure to
mitigate, and (3) unclean hands. As to the failure to mitigate and set-off defenses,
they relate to the amount of damages owed rather than to underlying liability on the
part of Smith. See Leonel & Noel Corp. v. Cerveceria Centro Americana, S.A., 758
F.Supp.2d 596, 602-03 (N.D. Ill. 2010)(explaining that “‘failure to mitigate is not a
defense to liability; it concerns only the amount of recoverable damages, not the right
to recover damages’”)(quoting Ner Tamid Congregation of North Town v.
Krivoruchko, 638 F.Supp.2d 913 (N.D. Ill. 2009)). In regard to the unclean hands
defense, the defense is an equitable defense under which “equitable relief will be
refused if it would give the plaintiff a wrongful gain.” Scheiber v. Dolby
Laboratories, Inc., 293 F.3d 1014, 1021 (7th Cir. 2002). In the instant action, BOA
is not seeking to obtain equitable relief in its complaint or in its motion for summary
judgment. Thus, the defense of unclean hands is not applicable in this instance.
Finally, it is undisputed that in connection with an agreement between Smith and
BOA to extend the maturity date of the Smith Note, Smith signed a release (Release).
(R SF Par. 15-16, 20, 24-25). The Release provided that she released BOA from any
defenses or claims relating to the prior versions of the Smith Note that existed prior
to February 28, 2010. (SF Par. 15-16, 20, 24-25); (P Ex. 9). The release further

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expansively covers defenses “which relate to or may relate in any manner whatsoever
to any facts, known or unknown, in existence on or at any time prior to” February 28,
2010. (RSF Par. 15-16, 20, 24-25). Based on the above, Smith has failed to point to
sufficient evidence to show that her defenses to liability are sufficiently meritorious
such that a reasonable trier of fact could find that Smith is not liable under the Smith
Note.

III. Amounts Owed by Smith
BOA also argues that there are not disputed material facts in regard to the
amount owed by Smith under the Smith Note.

A. Set-Off and Failure to Mitigate Defenses - Payments by Kenny
Smith argues that her debt under the Smith Note should be setoff by proceeds
paid by Kenny to BOA, which should have been used by BOA to mitigate damages
sustained by BOA due to Smith’s default on the Smith Note. It is undisputed that
arbitration proceedings were commenced by the Trust of Gerard M. Kenny (Trust)
against Kenny Industries, and that in March 2009, an arbitration award (Arbitration
Award) was entered requiring Kenny to pay $6.9 million to the Trust. (R SF Par. 3638). It is also undisputed that in July 2011, the Trust delivered to BOA

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$3,136,309.18 as a result of the Arbitration Award and later delivered to BOA an
additional $384,006.02 in November 2011. (R SF Par. 41-42).
Smith contends that the Smith Note provides that “Liquidity Event Proceeds
received or deemed received by the Bank under the Gerard M. Kenny Note shall be
applied, on a 50-50 basis, to the obligations owing under the Note and under the
Gerard M. Kenny Note. . . .” (P Ex. 12 Sec. 6(a)); (R SF Par. 33). However, the
provision referenced by Smith is only applicable under the terms of the Smith Note
“[s]o long as no Event of Default [has] occurred. . . .” (R SF Par. 33). It is
undisputed that Smith’s failure to pay the monies owed in February 2011 was a
Default Event and that BOA did not receive any funds from Kenny until later, in July
2011. (R SF Par. 29, 31, 41). Thus, the provision relating to the division of
payments from Kenny between the Smith Note and the Kenny Note is not applicable.
It is further undisputed that as part of an agreement to extend the maturity date
of the Kenny Note for Kenny’s benefit, BOA and the Trust entered into a Security
Agreement (Security Agreement) that provided BOA a security interest in Kenny’s
rights under a Share Purchase Agreement. (R SF Par. 23). Smith argues that the
proceeds paid by Kenny pursuant to the Arbitration Award were collateral under the
Smith Note and that, pursuant to the Security Agreement, BOA was mandated to use
the proceeds to reduce the debt owed on the Smith Note. However, the undisputed

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language of the Security Agreement referenced by Smith expressly permitted BOA
to credit the proceeds from Kenny towards the debt owed on the Kenny Note. The
Security Agreement provides that in the event of a default, collateral shall be applied
by BOA “in such order of application as the Bank may from time to time elect. . . .”
(P Ex. 8 Sec. 7); (R SF Par. 31). The Smith Note and the Kenny Note also
specifically state that the remedies in regard to collateral or security “may be pursued
singularly, successively or together, at the sole discretion of” BOA. (P Ex. 1 Sec.
16); (P Ex. 12 Sec. 16). Thus, BOA was free to credit the proceeds from Kenny
toward the debt owed on the Kenny Note and proceed in legal action against Smith to
recover the debt owed on the Smith Note if BOA chose to do so.
Smith also contends that BOA did not bring a legal action against Kenny and
chose not to name him as a defendant in this case. (Ans. SJ 18 n.11). However, in
declining to sue Kenny, BOA was acting within the clear terms of the agreement
Smith entered into with BOA. Thus, the undisputed facts show that BOA did not
breach any agreement with Smith in deciding not to apply the proceeds provided by
Kenny towards the debt owed on the Smith Note. It is also undisputed that Smith’s
obligation was not limited by Kenny’s inability to honor his obligations on the
Kenny Note. (P Ex. 12). Under the undisputed facts, BOA had the right to credit
the payments from Kenny towards the debt owed on the Kenny Note. In addition, to

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the extent that Smith argues that BOA could have mitigated the damages incurred
due to the default on the Smith Note by crediting the payments from Kenny, BOA
correctly points out that such action would have exposed BOA to a potential lawsuit
from Kenny and would have increased the risk that Kenny would not make any
further payments towards the debt owed on the Kenny Note. BOA was not obligated
under the law to create such potential risks. See Ner Tamid, 638 F.Supp.2d at 920
(explaining that the duty to mitigate damages does not require a lender to undertake
“undue risk or burden”). Thus, to the extent that the set-off defense and failure to
mitigate defense are premised on any payment from Kenny not being credited
towards the debt owed on the Smith Note, such defenses cannot succeed based on the
undisputed facts in this case.

B. Set-Off and Failure to Mitigate Defenses - Additional Bases
Smith also presents additional bases for her set-off and failure to mitigate
defense. Smith argues that any proceeds that might have been collected by Kenny
should be set-off against Smith’s debt on the Smith Note. In her answer to the
complaint, Smith states that in addition to sums received by BOA from Kenny, Smith
“is entitled to set off any sums that might have been collected by [Kenny] during the
term of the Second Amended Note. . . .” (Ans. Compl. Add Def. Par. 19). In the

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first instance, Smith fails to clearly identify the “sums” that she is referring to.
Secondly, such undefined sums cannot support a set-off defense since they constitute
unliquidated debt and would require the court to estimate the amounts at issue. See
Bank of Chicago-Garfield Ridge v. Park Nat. Bank, 606 N.E.2d 72, 76 (Ill. App. Ct.
1992)(explaining that the set-off defense it is only applicable “where the debts are
mutual, mature, and of such a certain and ascertainable character as to be capable of
being applied in compensation of each other without the intervention of the court to
estimate them”).
In regard to the failure to mitigate defense, Smith argues that BOA should
have mitigated damages by seeking additional proceeds from Kenny prior to the
default by Kenny. However, BOA had no duty to mitigate damages at all since
Smith unconditionally promised to repay the amounts owed on the Smith Note. MB
Financial Bank, N.A. v. Planet Airways, Inc., 2005 WL 1189597, at *3 (N.D. Ill.
2005)(stating that “under Illinois law, a lender does not have a duty to mitigate
“where the party has unconditionally guaranteed payment on the note”). Further,
even if BOA had a duty to mitigate damages, such duty would not have arisen prior
to the date that BOA sustained legal injuries through the defaults by Kenny and
Smith. Ner Tamid, 638 F.Supp.2d at 920-21 (indicating that there is no obligation to
mitigate damages prior to a breach of a contractual obligation to pay). Thus, based

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on the undisputed facts, Smith has not pointed to any basis to prevail on the set-off or
failure to mitigate defenses.

C. Covenant of Good Faith and Fair Dealing
Smith also argues that BOA was obligated to credit the proceeds from Kenny
under the covenant of good faith and fair dealing. BOA correctly points out that the
covenant of good faith and fair dealing is applied when interpreting ambiguous
contractual terms. It does not provide a party independently with a contractual
obligation or remedy. See In re Kmart Corp., 434 F.3d 536, 542 (7th Cir.
2006)(stating that the covenant of good faith and fair dealing “is a rule of
construction, not a stand-alone obligation”); see also Kham & Nate’s Shoes No. 2,
Inc. v. First Bank of Whiting, 908 F.2d 1351, 1357 (7th Cir. 1990)(explaining that
“‘Good faith’ is a compact reference to an implied undertaking not to take
opportunistic advantage in a way that could not have been contemplated at the time
of drafting, and which therefore was not resolved explicitly by the parties,” and that
“[w]hen the contract is silent, principles of good faith . . . fill the gap”). Further,
even if Smith could show that the covenant is applicable in this case, Smith has
failed to point to sufficient evidence to show that BOA failed to act in good faith in
regard to the Smith Note. Although Smith accuses Kenny of being the one
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responsible for the loss of the funds, it was Smith who chose to sign the Smith Note.
In loaning the $3.5 million to Smith, LaSalle was relying on Smith’s promise to
repay the debt. Smith admits that LaSalle would not have agreed to lend Kenny the
whole $7 million that made up the two separate loans. (R SF Par. 9). There is
nothing inequitable in holding Smith to the agreement she entered into with BOA.
The undisputed facts show that BOA used the proceeds from Kenny in a manner
specifically authorized under the terms of the Smith Note and the Kenny Note. If
Smith believes that Kenny acted unlawfully in his use of the funds given to him by
Smith, Smith’s remedy would lie with Kenny, not with BOA. Smith, in fact,
acknowledges that she is currently pursuing a legal action against Kenny in state
court. (Ans. SJ 18 n.11). The court also notes that it is undisputed that Smith did not
simply give away the money to her brother without any expected return. Smith
admits that, at least in part, she “agreed to participate in the borrowing because she
expected to share in the future profits of the hotel and to receive tax benefits from the
project.” (R SF Par. 10). The fact that Smith’s investment did not turn out as
expected does not mean that she does not have to repay the loan she used to fund her
investment. Smith also acknowledges that she does “not blame” BOA for the failure
of the hotel project. (R SF Par. 12). Thus, the undisputed facts in this case show that
the covenant of good faith and fair dealing does not provide a meritorious defense to
Smith.
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D. Inducement of Breach of Fiduciary Duty
BOA also contends that there is not sufficient evidence to support a defense
based upon an inducement of a breach of a fiduciary duty owed by Kenny to Smith.
This defense is deficient at the outset since it was raised by Smith for the first time in
response to the instant motion and was not listed as a defense in her answer to the
complaint. Fed. R. Civ. P. 12. However, even if Smith had properly raised this
defense in her pleading, Smith has failed to point to sufficient evidence to support the
defense. Smith argues that BOA knew when it lent the funds to Smith that Kenny
was going to use the funds to develop a hotel and that Kenny held Smith’s funds as
her agent. Smith argues that Kenny had a fiduciary duty to her and that BOA’s
acceptance of funds from Kenny as credit towards the debt owed on the Kenny Note
induced Kenny to breach his fiduciary duty to Smith. Smith also speculates
regarding an alleged inducement by BOA to get Kenny to breach a fiduciary duty,
but Smith fails to point to sufficient evidence that would enable a reasonable trier of
fact to agree with that position. Smith also makes a conclusory reference to collusion
between BOA and Kenny, but Smith fails to point to sufficient evidence to support
such a conclusion. (Ans. SJ 14).
As discussed above, Smith’s intended use of the funds, whether to give them
to her brother, allow her brother to use the funds, or for other purposes, would not

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excuse her from liability on the Smith Note. BOA loaned funds pursuant to the
Smith Note to Smith, not Kenny, based upon Smith’s promise under the Smith Note
to repay the monies, not based upon any promises made by Kenny to repay the loan.
Therefore, based on the undisputed facts, Smith cannot prevail on the inducement of
a breach of fiduciary duty claim. Based on the above, BOA’s motion for summary
judgment is granted.

CONCLUSION
Based on the foregoing analysis, BOA’s motion for summary judgment is
granted. Judgment is entered in favor of BOA, and against Smith in the amount of
$3,630,973.77, plus additional prejudgment interest and attorneys’ fees. As to
attorneys’ fees and prejudgment interest, BOA is given until November 28, 2012, to
provide the court BOA’s requested amounts and documentary support for such
amounts. Smith is given until December 6, 2012 to respond.

___________________________________
Samuel Der-Yeghiayan
United States District Court Judge
Dated: October 24, 2012
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