The bank sold the collateral cheap, and the personal guarantees evaporated

What happened

Matthew Christopher, Inc. designed and manufactured wedding dresses. In 2017 and 2018 Centrust Bank extended it two Small Business Administration loans and a line of credit, eventually more than $1.5 million, secured by the company's equipment, inventory, accounts, and intangibles. David Marchi and Robert Goodrich, minority owners and directors, signed personal guarantees.

The company hit cash flow trouble, hired a restructuring consultant, and by June 2018 missed its payments. Centrust declared default, accelerated, and wrote to the company's customers directing them to pay the bank instead.

Centrust then set out to sell the collateral under article 9 of the Uniform Commercial Code. Appraisals of the business ranged wildly, from roughly $3.8 million down to $275,000 depending on what was counted. Offers came in between $50,000 and about $400,000. After roughly a year, Centrust sold the assets privately for $775,000, and financed the entire purchase price for the buyer.

It then sued Marchi and Goodrich on their guarantees for the shortfall.

Why the guarantors walked

They did not argue they had not signed. They raised an affirmative defense that the sale was not commercially reasonable, and the trial court agreed after a bench trial.

What follows from that finding is the part worth knowing. Under the UCC, a secured party disposing of collateral must show that every aspect of the disposition, its method, manner, time, place, and terms, was commercially reasonable, and the burden is the lender's, not the borrower's. When the lender cannot carry it, section 9-626 supplies a presumption that a commercially reasonable sale would have produced enough to cover the whole debt, expenses, and fees. The lender then has to prove it would have realized less.

Centrust did not attempt to rebut that presumption on appeal. The deficiency therefore came to nothing, and two personal guarantees on a seven-figure debt produced no liability at all.

The evidence the trial court weighed is instructive. Limited marketing of the collateral. The decision to redirect customer payments immediately. The bank financing the buyer's entire purchase price. And a very large gap between the early appraisal and the one prepared years later that excluded significant assets. Price alone is not the test, but the court was entitled to weigh all of it.

What this means if you have signed a guarantee

Owners of closely held businesses sign personal guarantees routinely, often treating them as a formality required to get the loan. When the company fails, the assumption is that the guarantee is absolute and the only question is how much.

That assumption is wrong often enough to be worth testing. A guarantee is a contract, and the lender's own conduct after default can reduce or eliminate what it can collect. The questions to ask are concrete. How was the collateral marketed, and to whom? How long was it exposed to the market? Were there other offers? Did the lender obtain an appraisal, and when? And did the lender have any relationship with the buyer or finance the purchase?

Raise it as an affirmative defense or it is waived. Both guarantors here pleaded improper disposition of collateral from the outset.

Two other things the court decided

The bank's fraud and civil conspiracy claims failed. The court found the evidence showed owners negotiating over distressed assets rather than agreeing to an unlawful scheme, and acting as officers trying to preserve a failing company rather than tortiously interfering with its loans.

The guarantors, however, recovered nothing on their own cross-claim for improper disposition, because they never proved damages with reasonable certainty. Winning the defense and winning affirmative relief are different projects, and the second requires proof of what a proper sale would have produced.

A note on precedential status

This is an order under Illinois Supreme Court Rule 23 and is not precedent. Entered after January 1, 2021, it may be cited for its persuasive value under Rule 23(e)(1).