John, Alexandria, Mary, Martin, and Yvette, formed the Jammy Sleepwear Company over thirty-five (35) years ago. They were equal partners and formed a corporation. On the advice of their attorneys, the entered into a shareholders’ agreement that contained buy-sell provisions. This type of agreement is sometimes referred to as a “buy-sell agreement”.
Their buy-sell agreement contained various provisions, including under what circumstances a departing shareholder’s shares would be purchased, what the purchase price of those shares would be, and the terms of payment. Since the business was in its infancy, they agreed it would be valued at its “book value”, meaning that the value of the assets on its financial statements, less all obligations, would be the business’s value. There was no adjustment for good will or other intangible assets. Also, the increase in value of any assets would not be taken into consideration. The purchase price to a departing shareholder was to be paid in twelve (12) months, in equal monthly payments. The business was required to purchase a departing shareholders shares.
Since they formed the business in 1980, they acquired other businesses and purchased real estate through a separate LLC. They did not think to have a buy-sell for the LLC.
John has announced he would like to retire, but he has objected to the purchase price as being “unfairly” low. He has advised the other owners that he will keep his interest in the real estate, since it will provide him with a “good stipend” during his retirement. Shortly thereafter, Mary announced her retirement.
The remaining owners are concerned that the business will not be able to support payments to John and to Mary. Also, the remaining owners would prefer that John and Mary also sell their interests in the LLC.
Unfortunately, the shareholders (and LLC members) did not regularly review their buy-sell agreement. As the value of the business grew, the amount of the payments increased and would put a strain on the cash flow of the business. If more than one owner were to retire, it would cause a bigger strain. Either the business would have to borrow money, the owners would have to make capital infusions, new investors would be needed, or the business would need to be sold.
Some buy-sell agreements address these types of situations, by limiting the amounts that must be paid out to departing owners on an annual basis. For example, the payments cannot exceed a specific dollar amount or a percentage of gross profits. Also, when the owners buy real estate to be used by the business, they might consider including the real estate as a part of the buy-sell process.
Buy-sell agreements should be reviewed periodically to ensure they continue to meet the needs of the business and its owners. Levin Ginsburg has been advising business owners regarding legal aspects of their businesses, including buy-sell agreements for almost forty years.
Please contact us with any questions you have regarding your business (including any buy-sell issues) at 312-368-0100 or Morris Saunders at email@example.com.
Answer: In a consumer transaction, no.¹ In a commercial transaction, it depends.
A typical “confession of judgment” provision in a commercial contract (e.g., a promissory note) authorizes the creditor upon a default under the agreement to obtain a judgment for the amount owed without notice to the debtor(s) or guarantor(s), and allows the creditor to immediately execute on the judgment. The clause will most likely contain a “warrant of attorney” authorizing the appointment of an attorney to appear for the debtor, to waive personal jurisdiction and service, and to consent to an amount due and owing by the creditor. Thus, a party in default under an agreement containing a confession of judgment provision often first learns about the lawsuit against him after collection efforts have begun, when his bank accounts have been frozen or a lien has been recorded against his property. Courts will permit this judicial “shortcut” only if (a) the contractual provision is enforceable in the first place, and (b) the creditor takes the right steps to obtain the judgment after a default.
On the first point, a judgment by confession is void where it requires extrinsic evidence to prove the underlying debt. The Illinois Supreme Court in Grundy County Nat. Bank v. Westfall, 49 Ill.2d 498, 500–01 (1971) has held: “Judgments by confession are circumspectly viewed. … ‘The power to confess a judgment must be clearly given and strictly pursued, and a departure from the authority conferred will render the confessed judgment void.’ The extent of the liability undertaken must be ascertainable from the face of the instrument in which the warrant is granted. … ‘A judgment by confession must be for a fixed and definite sum, and not in confession of a fact that can only be established by testimony outside of the written documents, required by the statute to be filed in order to enter up a judgment by confession.” See also Ninow v. Loughnane, 103 Ill.App.3d 833, 836 (1st Dist. 1981); State National Bank v. Epsteen, 59 Ill.App.3d 233 (1st Dist. 1978). Numerous other courts have likewise held that a guaranty or underlying instrument purporting to grant power to confession judgment that is all-encompassing—for example, one that refers to “any and all debts, liabilities and obligations of every nature or form of the debtor,” including future debts, is so broad as to be void. Thus, if your confession of judgment clause is broad-sweeping or does not clearly describe the extent of the debtor’s liability, or if proving the amount owed requires reference to other documents extraneous to the instrument itself, the confession of judgment clause – and any judgment later obtained thereon – is void. While it is certainly advisable for clients finding themselves on the defensive end of this situation to act quickly, Illinois law permits a void judgment to be attacked at any time.
As to the second point, because the confession of judgment remedy is a creature of an Illinois statute, it must be strictly construed. See 735 ILCS 5/2-1301(c). Voidness issues aside, that section requires the creditor to file a confession judgment suit only in the county in which (1) the note or obligation containing the confession of judgment clause was executed, (2) one or more of the defendants reside, or (3) in which any real or personal property owned by any of the defendants is located.
Because Illinois courts view judgments by confession with some skepticism, the law affords various remedies and means of challenging them not covered by this article. For further information on how to defend a judgment by confession case or to use such a provision offensively, contact:
(312) 368-0100 or firstname.lastname@example.org.
¹ A “consumer transaction” is defined as the “sale, lease, assignment, loan, or other disposition of an item of goods, a consumer service, or an intangible to an individual for purposes that are primarily personal, family, or household.” 735 ILCS 5/2-1301(c). If the instrument authorizing the judgment by confession in a consumer transactions was executed prior to September 24, 1979, however, it is still enforceable. Id.