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Promissory Note Holders May Sue Estate to Collect on Debts Due After Death, Appeals Court Rules

 

Our Illinois partnership dispute attorneys noted with interest a recent case addressing the obligations of deceased partners’ estates to honor a debt not yet due before the death. In In re Estate of Gallagher, No. 1-07-1744 (Ill. 1st Dist. June 30, 2008), the First District Court of Appeal ruled that a trial court should not have dismissed the creditors’ claim against the estate of Robert E. Gallagher. Gallagher was managing partner for several companies — referred to collectively as G&H Entities in the opinion — and the petitioners are former partners, shareholders and members of G&H Entities.

Gallagher issued promissory notes to the petitioners are part of a settlement of underlying litigation, in which he agreed to buy out their share of the companies. As part of this settlement, petitioners released Gallagher from all liability except “any claims arising out of or related to the rights and obligations reflected in this Agreement or documents created in connection with it.” Gallagher died May 13, 2005, before the promissory notes were fully paid. His estate continued to make payments, which the petitioners accepted. However, they also filed suit against the estate to get the balance of the payments owed. The trial court dismissed their claim, believing it was barred by Sec. 2-619 of the Illinois Code of Civil Procedure.

On appeal, Gallagher’s estate argued that the promissory notes were not yet due and thus, the estate had not yet defaulted on them. That makes the claims contingent, it said, which violates the rule of law that claims not yet due cannot be contingent. However, the First District quickly dismissed that argument. It pointed out that In re Estate of Mackey, 139 Ill. App. 3d 126, 128, 487 N.E.2d 81 (1985) held that a contingent claim depends on “the uncertain occurrence of a future event… which is not under the control of either party” That was not the case here, the court said — liability on the notes was not contingent on a future event.

The court moved on to considering whether Gallagher’s estate can be held liable on the claims. The petitioners argued that Illinois law makes Gallagher jointly liable for the companies’ debts as a partner in G&H Entities, which makes the estate liable. To address that, the court turned to the Illinois Supreme Court’s ruling in Sternberg Dredging Co. v. Estate of Sternberg, 10 Ill. 2d 328, 140 N.E.2d 125 (1957), a similar case except that the promissory notes were already due. In Sternberg, the state Supreme Court held that creditors may make their claims against deceased partners for debts owed by the partnership. This makes it clear, the First District said, that Gallagher’s estate can be held liable for the promissory notes. Furthermore, it said, Illinois partnership law backs it up by holding that the death of a partner dissolves the partnership, that dissolution does not discharge partners’ liability, and that a deceased partner’s individual property is liable for partnership obligations.

The appeals court then dismissed the estate’s claim that the release Gallagher and the petitioners signed took away Gallagher’s individual liability. As already noted, the court said, Illinois partnership law holds partners jointly liable for debts taken on by the partnership — so claims that Gallagher cannot be held individually liable are not valid. Furthermore, the court said, the release plainly carves out an exception for claims arising out of the promissory note agreement. It is undisputed that the instant claim arises out of that agreement, the court wrote, and thus Gallagher must be liable.

Finally, the court dismissed the estate’s argument that the petitioners impliedly discharged the debt when they accepted partial payment from the estate. It cited a 115-year-old case, Hayward v. Burke, 151 Ill. 121 (1894), in which a partner in a bank died before debts on a certificate of deposit came due. As in this case, the creditor accepted partial payments from the living partners’ new firm. The estate of the deceased partner argued that this impliedly agreed that the new firm was liable for the debt. The court disagreed, holding that the mere fact that a creditor accepted payments was not enough to absolve the deceased partner from his responsibilities.

The First District took its cue from Hayward in the instant case, holding that Gallagher’s estate was not released from liability just because the petitioners accepted partial payment. Thus, the court reversed the dismissal of the case and remanded it back to trial court for consideration of the reinstated claims.


DiTommaso Lubin Austermuehle represents both plaintiffs and defendants in complicated Illinois partnership dispute lawsuits like this. We have more than two decades of experience fighting for our partnership clients and unraveling the complex relationships between the Uniform Partnership Act, contract law and other applicable legal constraints. Our Chicago business litigation lawyers represent businesses of all sizes, from closely held family businesses to large public companies. Based in Chicago and Oak Brook, with offices near Naperville and Wheaton and Chicago’s Northshore, we serve businesses throughout the state of Illinois and the Midwest.

If your business is embroiled in a legal dispute and you’d like to discuss how our law firm can help, please contact us through our Web site or call 1-877-990-4990 today.