                             2017 IL App (2d) 160656 

                                  No. 2-16-0656

                            Opinion filed April 27, 2017 

______________________________________________________________________________

                                           IN THE


                            APPELLATE COURT OF ILLINOIS


                              SECOND DISTRICT

______________________________________________________________________________

BOWLING GREEN SPORTS CENTER,            ) Appeal from the Circuit Court
INC.,                                   ) of Du Page County.
                                        )
       Plaintiff-Appellant,             )
                                        )
v.                                      ) No. 15-L-302
                                        )
G.A.G. LLC, JAMES P. GOCHIS, and        )
PETER GOCHIS,                           )
                                        )
       Defendants-Appellees             ) Honorable
                                        ) Patrick J. O’Shea
(Gold Coast Bank, Intervenor-Appellee). ) Judge, Presiding.
______________________________________________________________________________

       JUSTICE SCHOSTOK delivered the judgment of the court, with opinion.
       Justices Jorgensen and Spence concurred in the judgment and opinion.

                                         OPINION


¶1     The instant controversy is a dispute between a senior lender and a junior lender. The


senior lender, Gold Coast Bank, loaned over $3.4 million to the defendants, G.A.G. LLC, James


P. Gochis, and Peter Gochis. The junior lender, Bowling Green Sports Center Inc. (Bowling

Green), loaned $405,000 to the defendants. Gold Coast Bank and Bowling Green executed an

intercreditor agreement that provided that Bowling Green would not sue to recover any money

from the defendants until the defendants had repaid Gold Coast Bank in full. The intercreditor

agreement also provided that Gold Coast Bank agreed not to increase its loan to the defendants
2017 IL App (2d) 160656


without first receiving Bowling Green’s consent. Despite that provision, Gold Coast Bank

subsequently increased its loan to the defendants by $51,000, without Bowling Green’s

knowledge or consent. After the defendants failed to timely repay Bowling Green, Bowling

Green filed a breach-of-contract claim against the defendants. Gold Coast Bank intervened in

the proceedings and sought to have Bowling Green’s complaint dismissed on the basis of the

intercreditor agreement. The circuit court of Du Page County found that, although Gold Coast

Bank had breached the intercreditor agreement, the agreement still required that Bowling

Green’s complaint be dismissed. Bowling Green appeals from that order. For the reasons that

follow, we affirm as modified.

¶2                                      BACKGROUND

¶3     In 2008, the defendants entered into an agreement with Bowling Green to purchase a

bowling alley in West Chicago. The defendants borrowed money from Gold Coast Bank and

Bowling Green to finance the purchase of the property. On January 14, 2008, Gold Coast Bank

and Bowling Green executed the intercreditor agreement. The agreement identified Gold Coast

Bank as the senior lender and Bowling Green as the junior, or subordinated, lender. The

agreement provided in pertinent part:

       “4. The Senior Lender agrees as follows:

                                            ***

              d. Senior Lender will not amend or otherwise modify the Notes or the Loan

       Agreement or otherwise permit the terms of the Notes or the Loan Agreement to be

       changed without the prior consent of [Bowling Green].

                                            ***




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               11. Obligation Hereunder Not Affected: All rights and interest of the Senior

       Lender hereunder, and all agreements and obligations of the Subordinated Lender under

       this Agreement, shall remain in full force and effect irrespective of:

                                               ***

               b. Any change in the time, manner or place of payment of, or in any other term

       of, all or any of the Senior Indebtedness, or any other amendment or waiver of or any

       consent to departure from the Senior Loan Documents[.]”

¶4     On January 15, 2008, G.A.G. executed promissory notes in favor of Gold Coast Bank for

a total of $3,412,750. That same day, G.A.G. executed a promissory note in favor of Bowling

Green for $405,000. James Gochis and Peter Gochis personally guaranteed all of the loans.

¶5     On April 30, 2008, G.A.G. and Gold Coast Bank executed a modification agreement that

increased Gold Coast Bank’s loan to G.A.G. by $51,000. Bowling Green was not notified of this

modification agreement, and it did not consent to it.

¶6     On March 27, 2015, Bowling Green filed a two-count complaint against the defendants,

sounding in breach of contract. On August 12, 2015, Gold Coast Bank filed a petition to

intervene. On October 6, 2015, the trial court granted Gold Coast Bank’s petition to intervene.

¶7     On October 13, 2015, Gold Coast Bank filed a motion to dismiss Bowling Green’s

complaint, pursuant to section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619 (West

2014)). Gold Coast Bank asserted that Bowling Green’s complaint was barred because, pursuant

to the intercreditor agreement, Bowling Green had agreed not to sue to recover its debt until

Gold Coast Bank’s senior indebtedness had been paid in full. As Gold Coast Bank’s loan had

not been paid in full, Gold Coast Bank insisted that Bowling Green could not pursue its lawsuit.

Gold Coast Bank further asserted that its alleged breach of the intercreditor agreement was




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2017 IL App (2d) 160656


immaterial because section 11(b) of the agreement explicitly stated that it was enforceable under

all circumstances.

¶8     In support of its motion, Gold Coast Bank submitted the affidavit of one of its credit

officers, John Gonzales. Gonzales stated that, as of August 11, 2015, the unpaid principal

balance on the loan was $1,941,592.61.

¶9     On January 4, 2016, following a hearing, the trial court dismissed Bowling Green’s

complaint with prejudice. The trial court held that Bowling Green’s lawsuit was premature until

it could show that the defendants’ obligations to Gold Coast Bank were paid in full. The trial

court found that, although Gold Coast Bank’s increasing its loan to the defendants without

Bowling Green’s consent constituted a “material breach” of section 4(d) of the intercreditor

agreement, section 11(b) of the intercreditor agreement nonetheless prevented Bowling Green

from pursuing its lawsuit.

¶ 10   On July 14, 2016, following a hearing, the trial court denied Bowling Green’s motion to

reconsider. Bowling Green thereafter filed a timely notice of appeal.

¶ 11                                      ANALYSIS

¶ 12   On appeal, Bowling Green argues that the intercreditor agreement is not enforceable, due

to Gold Coast Bank’s breach of that agreement. As such, Bowling Green insists that Gold Coast

Bank has forfeited the priority of its lien. Bowling Green thus asserts that it does not have to

wait until the defendants repay Gold Coast Bank before it can seek repayment of its loan. In

response, Gold Coast Bank argues that the trial court properly found that, due to the explicit

language of section 11(b) of the intercreditor agreement, nothing it did could alter its status as

senior lender as to the entire amount it loaned the defendants. We disagree with the arguments

of both Bowling Green and Gold Coast Bank.




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¶ 13   Although no Illinois court has yet addressed this issue, courts in other states have

uniformly held that, while a senior lender and a mortgagor can agree to modify the terms of the

underlying note or mortgage without first notifying or obtaining the consent of any junior

lenders, if the modification is such that it prejudices the rights or impairs the security of any

junior lenders, their consent is required. See Burney v. McLaughlin, 63 S.W.3d 223, 229-34

(Mo. Ct. App. 2001); Shultis v. Woodstock Land Development Associates, 594 N.Y.S.2d 890,

892 (N.Y. App. Div. 1993); Shane v. Winter Hill Federal Savings & Loan Ass’n, 492 N.E.2d 92,

95 (Mass. 1986). A senior lender’s failure to obtain a junior lender’s consent results in the

modification being ineffective as to the junior lender and the senior lender relinquishing to the

junior lender its priority with respect to the modified terms. Burney, 63 S.W.3d at 232. While

this sanction ordinarily creates only the partial loss of priority, in situations where the senior

lender’s actions in modifying the note or mortgage have substantially impaired the junior

lender’s security interest or effectively destroyed its equity, a court will wholly divest the senior

lender of its priority and elevate the junior lender to a position of superiority. Id.

¶ 14   We note that this authority is consistent with the Restatement (Third) of Prop.: Mortgages

§ 7.3 (1997). That section provides in pertinent part:

       “Replacement and Modification of Senior Mortgages: Effect on Intervening Interests.

               ***

               (b) If a senior mortgage or the obligation it secures is modified by the parties, the

       mortgage as modified retains priority as against junior interests in the real estate, except

       to the extent that the modification is materially prejudicial to the holders of such interests

       and is not within the scope of a reservation of right to modify as provided in Subsection

       (c).” Restatement (Third) of Prop.: Mortgages § 7.3(b) (1997).




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¶ 15   The Restatement further provides that an increase in the principal amount is “materially

prejudicial” because it obviously prejudices the holders of junior interests. Restatement (Third)

of Prop.: Mortgages § 7.3 cmt. b (1997).         Accordingly, where the modification entails an

increase in the interest rate or the principal amount of the senior mortgage, the Restatement

asserts that the junior lender should gain priority over the senior mortgage to the extent of the

modification. See Restatement (Third) of Prop.: Mortgages § 7.3 cmt. c (1997).

¶ 16   Here, Gold Coast Bank originally loaned $3,412,750 to the defendants. Bowling Green

was aware of the size of the loan and agreed to subordinate its loan to Gold Coast Bank’s. Gold

Coast Bank, however, subsequently increased its loan to the defendants by $51,000 without

informing Bowling Green. As the increase of the loan was materially prejudicial to Bowling

Green’s security interest, the result is that Bowling Green will have a superior lien as to the

additional $51,000 that Gold Coast Bank loaned to the defendants. See Burney, 63 S.W.3d at

233-34; Restatement (Third) of Prop.: Mortgages § 7.3(b) (1997).

¶ 17   In so ruling, we reject Bowling Green’s argument that Gold Coast Bank’s breach of

section 4(d) of the intercreditor agreement should cause it to forfeit the entire priority of its lien.

As the Burney court observed, only in “rare” cases will a court find that the senior lender has so

substantially impaired the security interest of the junior lender that the priorities will be

rearranged. Burney, 63 S.W.3d at 231. For example, in Koloff v. Reston Corp., No. Civ. A.

12281, 1993 WL 106062 (Del. Ch. Mar. 26, 1993), the chancery court rearranged the priorities

because the senior lender had increased its loan to the borrowers from $2.2 million to $20

million. In Gluskin v. Atlantic Savings & Loan Ass’n, 108 Cal. Rptr. 318, 321-25 (Cal. App.

1973), the reviewing court held that the senior lender had substantially impaired the security

interest of the junior lender when it modified the $1.14 million note by reducing the face amount




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2017 IL App (2d) 160656


to $712,530; raising the interest rate from 6¼% to 10%; and shortening the maturity of the note

from 30 years to 10 months, with a balloon payment at the end.

¶ 18   Here, Gold Coast Bank increased its loan by less than 1.5%. This amount ($51,000) was

not materially significant in the defendants’ inability to repay Bowling Green, because the

defendants still owed Gold Coast Bank over $1.9 million when Bowling Green filed its

complaint. Unlike in Koloff and Guskin, Gold Coast Bank’s modification of its loan did not

substantially impair Bowling Green’s security interest and rights as a junior lienholder. As the

minimal impairment to Bowling Green’s rights can be remedied by denying priority to the

$51,000 that Gold Coast Bank loaned to the defendants in the modification agreement, we do not

believe that it would be equitable to subordinate Gold Coast Bank’s entire lien to Bowling

Green’s. See Burney, 63 S.W.3d at 234. Indeed, denying priority to only the $51,000 restores

Bowling Green to the position it bargained for by agreeing to accept a second lien on the

property as security for its loan. Id.

¶ 19   Turning to Gold Coast Bank’s argument, we reject its contention that section 11(b)

should be interpreted as meaning that it can modify any terms of its loan without Bowling

Green’s consent and still retain its senior status as to its entire loan, including the modified terms.

Gold Coast Bank’s argument is not tenable, because it renders section 4(d) of the intercreditor

agreement meaningless. See Thompson v. Gordon, 241 Ill. 2d 428, 442 (2011) (a court will not

interpret a contract in a manner that would nullify or render provisions meaningless, or in a way

that is contrary to the plain and obvious meaning of the language used). Further, as discussed

above, both the Restatement and courts that have considered the issue have also rejected Gold

Coast Bank’s position.




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¶ 20      We also reject Gold Coast Bank’s assertion that Bowling Green has forfeited its right to

challenge the applicability of section 11(b) of the intercreditor agreement by not raising that

argument until its motion to reconsider. The record reveals that Bowling Green challenged the

applicability of the intercreditor agreement when it contested Gold Coast Bank’s petition to

intervene. Accordingly, we find that Bowling Green sufficiently preserved its arguments for our

review.

¶ 21      Finally, we note that the trial court found that Bowling Green’s complaint was premature

until the entire amount of Gold Coast Bank’s loan was satisfied. We modify the trial court’s

judgment to reflect that Bowling Green’s complaint is premature until the outstanding principal

on Gold Coast Bank’s loan to the defendants is reduced to $51,000. At that point, Gold Coast

Bank shall not be permitted to collect the remaining amount due on its loan until Bowling

Green’s loan to the defendants is paid in full. In other words, with respect to the $51,000 that

Gold Coast Bank loaned the defendants in violation of the intercreditor agreement, Gold Coast

Bank’s lien is junior to Bowling Green’s because Gold Coast Bank’s actions warrant a

rearrangement of the priorities. See Burney, 63 S.W.3d at 234.

¶ 22                                      CONCLUSION

¶ 23      For the foregoing reasons, the judgment of the circuit court of Du Page County is

affirmed but modified to reflect that Bowling Green’s complaint against the defendants is

premature until the outstanding principal on Gold Coast Bank’s loan to the defendants is reduced

to $51,000.

¶ 24      Affirmed as modified.




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