Christinson v. Venturi Const. Co.

• Decision Date: 23 August 1982
• Docket Number: No. 81-581,81-581
• Citation: 64 Ill.Dec. 674,440 N.E.2d 226,109 Ill.App.3d 34
• Parties: , 64 Ill.Dec. 674, 34 UCC Rep.Serv. 1604 William H. CHRISTINSON, Trustee in Bankruptcy in re: Illinois Valley Acceptance Corporation, a Corporation, Plaintiff-Appellee, v. VENTURI CONSTRUCTION COMPANY and Robert W. Venturi, Defendants-Appellants.
• Court: United States Appellate Court of Illinois

Page 226

440 N.E.2d 226

109 Ill.App.3d 34, 64 Ill.Dec. 674,

34 UCC Rep.Serv. 1604

William H. CHRISTINSON, Trustee in Bankruptcy in re Illinois Valley Acceptance Corporation, a Corporation, Plaintiff-Appellee, v. VENTURI CONSTRUCTION COMPANY and Robert W. Venturi Defendants-Appellants.

No. 81-581.

Appellate Court of Illinois Fifth District.

Aug. 23, 1982.

John J. Flood, Musick & Mitchell, Professional Corporation, Mount Vernon, for defendants-appellants.

Alice M. Jordan, Richard C. Cochran Law Office, Fairfield, for plaintiff-appellee.

HARRISON, Justice:

The defendants, Venturi Construction Company and Robert W. Venturi (hereinafter both defendants are referred to collectively as "Venturi"), appeal from a final judgment of the circuit court of Wayne County for $33,725.57 plus costs of suit, in favor of the plaintiff, William H. Christinson as trustee in bankruptcy in re Illinois Valley Acceptance Corporation (hereinafter referred to as "IVAC"). The plaintiff sued on two negotiable instruments which had been executed by Venturi. This appeal raises two issues. First, Venturi contends that the plaintiff is not a holder in due course because IVAC and the seller of the instruments in question, the Moody Manufacturing Company (hereinafter referred to as "Moody"), were so closely connected with one another that Moody's lack of good faith and its notice of Venturi's personal defenses should legally be imputed to the plaintiff. Second, Venturi asserts that the evidence at trial sufficiently established the defense of fraud in the factum under Ill.Rev.Stat.1979, ch. 26, par. 3-305(2)(c). For the reasons which follow, we affirm the judgment of the circuit court.

Venturi first purchased products from Moody in 1968. In May of that year, Venturi signed a trade acceptance for the first time, after being assured that the document was of no legal effect and would only be used to obtain financing for Moody. A Moody salesman provided Venturi with the names of two persons whom Venturi could contact to confirm the representations. Venturi did telephone these people and was assured that the statements were true. On this basis, Venturi signed the trade acceptance. About a year later, Venturi signed two more trade acceptances after the Moody salesman told him that the previous trade acceptance had been torn up. Venturi testified that he believed that he was not ordering goods, but rather was merely indicating his potential requirements for the coming year in order to facilitate bank loans for Moody and to insure better delivery of possible future orders to Venturi. Venturi testified on cross-examination that, although he had an opportunity to telephone his bank to determine the nature of the instrument which he was signing, he did not do so.

Robert W. Martin, Jr. testified for the plaintiff that he was an officer of IVAC and that he had received the two trade acceptances from Moody, paying for them by check. Martin further testified that each trade acceptance was acquired before its maturity date, that at the time of purchase he lacked notice of any defenses to the instruments, and that Venturi had not paid the trade acceptances. On cross-examination, Martin testified that Moody assigned all of its accounts receivable to IVAC pursuant to a written financing agreement and that some trade acceptances were accompanied by invoices and some were not.

The plaintiff brought suit on two instruments which were denominated as "trade acceptances."

"A trade acceptance is a draft or bill of exchange drawn by a seller on the purchaser of goods sold, and accepted by the purchaser. Its purpose is to make the book account liquid and permit the seller to raise money on it before it is due under the terms of the sale. [Citations]. When properly drawn, it is negotiable paper and its use results in advantages to both the purchaser and the seller. Properly used, it represents current merchandise transactions only, and in this respect, it is different from an ordinary promissory note which may be given for a past due account, borrowed money or for any other consideration. The principal function of a trade acceptance is to take the place of selling goods on an open account." (Gilliland & Echols Farm Supply & Hatchery v. Credit Equipment Corporation (1959), 269 Ala. 190, 112 So.2d 331, 332-333.)

Venturi does not question the formal negotiability of the instant trade acceptances, nor plaintiff's status as a holder, and he has admitted his signature to both instruments. "When signatures [on commercial paper] are admitted or established, production of the instrument entitles a holder to recover on it unless the defendant establishes a defense." (Ill.Rev.Stat.1979, ch. 26, par. 3-307(2); Leopold v. Halleck (1982), 106 Ill.App.3d 386, 62 Ill.Dec. 447, 449, 436 N.E.2d 29, 31.) Venturi seeks to raise several defenses. First, he contends that the plaintiff is not a holder in due course (see Ill.Rev.Stat.1979, ch. 26, par. 3-302), which status would preclude Venturi from asserting most of his defenses (Ill.Rev.Stat.1979, ch. 26, par. 3-305), because IVAC and Moody were so closely connected with one another, that Moody's lack of good faith and its knowledge of Venturi's personal defenses may legally be imputed to the plaintiff.

Under the close connection doctrine, a purchaser of negotiable paper cannot be a holder in due course if his relationship with the transferor of such paper is too intimate. (See Unico v. Owen (1967), 50 N.J. 101, 232 A.2d 405, 417; J. White and R. Summers, Uniform Commercial Code § 14-8, at 479 (1972).) Unico treated a close connection between business entities as a separate bar to establishing holder in due course status, apparently distinct from the Uniform Commercial Code requirements of good faith (Ill.Rev.Stat.1979, ch. 26, par. 3-302(1)(b)), and lack of notice of claims or defenses (Ill.Rev.Stat.1979, ch. 26, par. 3-302(1)(c)). Although the doctrine has been discussed by the appellate court (Schranz v. I. L. Grossman, Inc. (1980), 90 Ill.App.3d 507, 520, 45 Ill.Dec. 654, 412 N.E.2d 1378; Personal Finance Co. v. Meredith (1976), 39 Ill.App.3d 695, 700, 350 N.E.2d 781), Meredith, like Unico, arose from consumer financing transactions and was decided under section 17 of the Retail Installment Sales Act (Ill.Rev.Stat.1975, ch. 121 1/2, par. 517) and Schranz, in language which we find significant, discussed closely connected entities in terms of a "more stringent analysis of the good faith element conducted by courts when examining consumer financing transactions." (90 Ill.App.3d 507, 520, 45 Ill.Dec. 654, 412 N.E.2d 1378.) (Emphasis added.) "A consumer who executes a note often has no way of investigating the honesty of the person with whom he deals and his only realistic remedy in the event of breach is to withhold payment." (Bowling Green, Inc. v. State Street Bank and Trust Co. (1st Cir. 1970), 425 F.2d 81, 85.) The close connection doctrine was apparently fashioned to preserve this remedy for the consumer: where two entities are interrelated, and one of the entities breaches an executory contract with a consumer, allowing the consumer to raise the seller's default as a defense against the financing entity provides realistic protection for the consumer. However, a commercial obligor typically does not share the defenselessness which characterizes the consumer debtor. Therefore, where a transaction does not involve a consumer as a party, this need for protection is absent, and in such a case, the bald conclusion that two entities are closely connected, without more, provides no reason for denying the holder of an instrument the favored status of the holder in due course.

The statutory concepts of good faith and notice, however, provide an adequate analytical framework for judicial scrutiny of the facts underlying the alleged close connection. Therefore, we, like the court in Schranz, will not analyze the evidence of the Moody-IVAC interrelationship under the rubric of "close connection," but rather will consider such evidence as a factor in determining the existence of good faith and the absence of notice.

Section 1-201(19) defines good faith subjectively as "honesty in fact in the conduct or transaction concerned." (Ill.Rev.Stat.1979, ch. 26, par. 1-201(19).) The issue of good faith "is a question of fact to be left to the trier of fact." (Schranz v. I. L. Grossman, Inc., 90 Ill.App.3d 507, 520, 45 Ill.Dec. 654, 412 N.E.2d 1378.) Although Venturi argues that many facts point to IVAC's lack of good faith, most of...