Hovde v. Isla Dev. LLC

ERIC D. HOVDE, and STEVEN D. HOVDE, Plaintiffs, v. ISLA DEVELOPMENT LLC, and JEFFREY T. RIEGEL, Defendants.

18 C 7323

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

July 31, 2020

Judge John Z. Lee

MEMORANDUM OPINION AND ORDER

Surrounded by the serene waters of the Caribbean Sea, Isla Mujeres sits just seven miles off the coast of Cancun, Mexico. Sensing the island's promise as a vacation destination, Jeffrey Riegel formed ISLA Development LLC ("ISLA") with plans to build a condominium development. To fund the venture, Riegel secured millions of dollars in loans from Steve and Eric Hovde. Just as Riegel's team broke ground, however, the 2007 financial crisis began. Within a year, Riegel's resources ran out, funding dried up, and construction ceased.

About a decade later, the Hovdes sued ISLA and Riegel to collect on the loans, which had never been repaid. At this stage, the parties have submitted competing motions for summary judgment as to whether the statute of limitations bars the Hovdes's suit. For the reasons below, the Court grants summary judgment in Defendants' favor as to ISLA's Note and grants summary judgment in the Hovdes's favor as to Riegel's Guaranty. I. Background¹

A. The Loan Agreement

Riegel formed ISLA in 2004 and acted as its manager and sole member. Defs.' Stmt. Additional Facts ("Defs.' SOAF") ¶ 1, ECF No. 85. Then as now, ISLA's main asset was its 99.7% interest in ISLA Mexico, a Mexican corporation Riegel organized.² Id. ¶¶ 3-5. From the outset, ISLA's mission was to purchase and develop land on Isla Mujeres. Id. ¶ 7.

To fund that project, ISLA secured a series of loans from Steve and Eric Hovde. Id. ¶ 12; Pls.' Ex. 2, Loan Agreement § 3, ECF No. 78-1. In exchange, ISLA promised to pay the Hovdes a 25% interest rate, id. at ¶ 15; Pls.' Stmt. Material Facts ("Pls.' SOF") ¶ 10, ECF No. 80; Pls.' Ex. 3, Mortgage Note and Guaranty ("Note") at 1, ECF No. 78-1, and Riegel agreed to act as a guarantor, see Pls.' Ex. 5, Continuing Unconditional Guaranty ("Guaranty") at 1, ECF No. 78-1.

Although the Note specified that the principal and interest on the loans would be due in June 2007, it also empowered the Hovdes to seek immediate repayment if certain "Events of Default" occurred. Note at 1, 9-10. For instance, if Riegel, ISLA, or ISLA Mexico ever "bec[a]me insolvent" or "admit[ted] in writing [their] inability to pay [their] debts as they mature," id. at 9 § d(1),(5), the Note dictated that "the accrued interest thereon and all other obligations of the Borrower . . . shall automatically become immediately due and payable," id. at 10.

B. The Debtors' Difficulties

Buffeted by the economic downturn that began in 2007, the parties repeatedly renegotiated the Note. In the third such revision, they updated the clause that had required "Payment of Principal and Interest" that June. Pls.' Ex. 4, 3d Amend. Note § 2, ECF No. 78-1. As amended, the provision postponed ISLA's duty to make payments until February 28, 2009. Id.

By the summer of 2008, Riegel feared that the project was in dire financial straits. Desperate to save ISLA, Riegel emailed Steve Hovde to ask for more money. Defs.' SOAF ¶ 23; Defs.' Ex. 1, 8/7/09 Email from J. Riegel to S. Hovde, ECF No. 89-1. A lack of funding had "paralyz[ed] the project," Riegel complained. Defs.' SOAF ¶¶ 23, 26. "Selling the property," Riegel added, "is an option that puts all of us woefully upside down."³ Id. ¶ 27. In response, Steve Hovde advised Riegel to either "shut the project down" or "rely upon other [funding] sources." Id. ¶¶ 28-31. A few days later, Riegel halted construction on the condos. Id. ¶ 31.

That September, Riegel again warned Steve Hovde about the debtors' perilous financial situation. Id. ¶¶ 34-35; Defs.' Ex. 3, 9/2/08 Email from J. Riegel to S. Hovde at 4, ECF No. 81-4. Convinced that the project needed an infusion of cash, Riegel revealed that his own "resources [were] exhausted."⁴ Id. ¶ 36. He went on to estimate that the liquidation value of the project was between $6 and $7 million, which was less than the amount owed to the Hovdes.⁵ Id. ¶ 40.

Soon after, the parties negotiated a Forbearance Agreement, id. ¶ 44. Under that Agreement, which became effective on November 5, 2008, the Hovdes promised to refrain "from exercising [any of the] remedies" outlined in the loan documents. Pls.' Ex. 12, Forbearance Agreement § 4, ECF No. 78-2. Although the Agreement expired in mid-December 2008, see Pls.' Mem. Supp. Mot. Summ. J. at 9, ECF No. 77, Defendants never repaid the loans, see Pls.' SOF ¶ 17.

III. Legal Standard

Summary judgment is proper where "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The movant bears the initial burden of establishing that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once the movant has sufficiently demonstrated the absence of a genuine issue of material fact, the nonmovant must then set forth specific facts demonstrating that there are disputed material facts that must be decided at trial. Id. at 321-22. IV. Analysis

A. Motions to Strike

As a threshold matter, the Hovdes challenge the admissibility of an affidavit submitted by Riegel.⁶ See Defs.' Ex. A, Riegel Decl., ECF No. 81-1. In that declaration, Riegel describes messages he sent to Steve Hovde in 2008 detailing the project's assets, debts, and cash flow. See, e.g., id. ¶¶ 26, 39, 40. The Hovdes maintain that Federal Rule of Civil Procedure 56(c)(4), along with Federal Rules of Evidence 701 and 702, bars that testimony.⁷

To the extent that Defendants seek to use Riegel's opinions to establish the true value of the land on Isla Mujeres, the motion to strike is granted. According to Rule 56(c)(4), "[a]n affidavit or declaration . . . [must] show that the affiant or declarant is competent to testify on the matters stated." But nothing in the affidavit suggests that Riegel has any experience appraising real estate. Indeed, Defendants concede that Riegel cannot testify as to the likely sale price of the property. See Mem. Opp'n Mot. Strike at 3, ECF No. 88.

To the extent that Defendants offer Riegel's affidavit to demonstrate that they could not pay their debts in 2008, however, the motion to strike is denied. Although the briefing is not entirely clear, the Hovdes do not seem to question the admissibility of Riegel's testimony as to this issue. Nor can they. As ISLA's sole organizer and manager, see Defs.' SOAF ¶ 1, Riegel would necessarily retain personal knowledge about its cash flow. See, e.g., Uncommon, LLC v. Spigen, Inc., 305 F. Supp. 3d 825, 852 (N.D. Ill. 2018) ("[I]t may sometimes be inferred that the affiant had knowledge of certain events based upon his position within an organization.") (citation omitted).

At bottom, the motions to strike turn out to be much ado about nothing. Defendants admit that Riegel cannot opine about the actual value of the land, and Plaintiffs do not object to Riegel's testimony concerning ISLA's inability to pay its debts. Thus, the motions to strike are granted in part and denied in part.

B. Motions for Summary Judgment

The Hovdes seek repayment of their loans on two grounds. Their primary claim is that ISLA failed to make good on its debts as required by the Note. They also accuse Riegel of neglecting to honor the Guaranty. Defendants retort that the statute of limitations bars both claims.

1. The Note

To determine whether the statute of limitations prevents the Hovdes from recovering on the Note, the Court must answer three questions. First, would the occurrence of an Event of Default, as defined in the Note, have caused the Hovdes' claim to accrue? Second, did an Event of Default take place prior to November 2, 2008 (ten years before the Hovdes filed this lawsuit)? And finally, did the Loan Agreement, Third Amendment, or Foreclosure Agreement reset the limitations clock or waive the debtors' timeliness defense? The Court addresses each question in turn.

a. An "Event of Default" Triggers the Hovdes's Right To Bring Suit

Because a ten-year limitations period governs the Hovdes' claim, see 735 Ill. Comp. Stat. 5/13-206, and because they filed suit on November 2, 2018, their claim is untimely if it accrued before November 2, 2008. Under Illinois law, a claim accrues "when facts exist which authorize the bringing of an action."⁸ Armstrong v. Hedlund Corp., 738 N.E.2d 163, 169 (Ill. App. Ct. 2000) (citing Kozasa v. Guardian Elec. Mfg. Co., 425 N.E.2d 1137, 1142 (1981)). Thus, the question here is when the loan agreements permitted the Hovdes to "legally demand payment." Id.

In construing those agreements, the Court's task is "to determine and give effect to the intent of the parties." A.T.N., Inc. v. McAirlaid's Vliesstoffe GmbH & Co. KG, 557 F.3d 483, 485 (7th Cir. 2009) (applying Illinois law). To that end, the Court "look[s] to the contract as a whole . . . adopting an understanding of the language that is natural and reasonable." Land of Lincoln Goodwill Indus. Inc., v. PNC Fin. Servs. Grp., Inc., 762 F.3d 673, 679 (7th Cir. 2014). In doing so, the Court must "attempt to give meaning to every provision of the contract and avoid a construction that would render a provision superfluous." Id. (citation omitted).

These principles confirm that the Hovdes's claim accrued as soon as an "Event of Default," as defined in the Note, occurred. As relevant here, two different parts of the Note empower the Hovdes to sue. First, the "Payment of Principal and Interest" provision clarifies that "[t]his Note is payable on June 2, 2007, when the entire unpaid balance of principal and interest shall be due and payable in full." Note at 1. Due to construction delays and economic setbacks, the parties repeatedly amended that language to postpone the repayment date. See, e.g., 3d Amend. § 2, ECF No. 78-1.

Second, a separate "Events of Default" provision accelerates the payment...