Farns Associates, Inc. v. South Side Bank

• Decision Date: 23 February 1981
• Docket Number: No. 80-1001,80-1001
• Citation: 49 Ill.Dec. 128,417 N.E.2d 818,93 Ill.App.3d 766
• Parties: , 49 Ill.Dec. 128, 30 UCC Rep.Serv. 1729 FARNS ASSOCIATES, INC., Plaintiff-Appellant, v. SOUTH SIDE BANK, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 818

417 N.E.2d 818

93 Ill.App.3d 766, 49 Ill.Dec. 128,

30 UCC Rep.Serv. 1729

FARNS ASSOCIATES, INC., Plaintiff-Appellant, v. SOUTH SIDE BANK, Defendant-Appellee.

No. 80-1001.

Appellate Court of Illinois, First District, First Division.

Feb. 23, 1981.

Rehearing Denied March 23, 1981.

Zissman & Hillsberg, Chicago (Richard W. Hillsberg, Chicago, of counsel), for plaintiff-appellant.

Block, Levy & Becker, Chtd., Chicago (Alvin R. Becker, Chicago, of counsel), for defendant-appellee.

GOLDBERG, Presiding Justice:

Farns Associates, Inc. (Farns) brought this action against South Side Bank (Bank) for an alleged conversion of $35,484.40. Both parties moved for summary judgment. The trial court granted summary judgment in favor of the Bank and denied Farns' motion. Farns appeals.

On February 8, 1973, Farns and Patrick Brakie, doing business as Dependable Ambulance Company (Dependable), executed a loan and security agreement. Farns was given a security interest in Dependable's accounts receivable and all proceeds thereof as collateral for loans made by Farns to Dependable. The agreement specifically gave Farns a security interest by way of assignment of all account proceeds owed Dependable by the Illinois Department of Public Aid, Dependable's principal account debtor. The agreement also granted Farns a power of attorney with regard to these accounts. Farns filed a financing statement concerning this transaction with the Secretary of State of Illinois on February 21, 1973.

On May 23, 1973, the Bank and Dependable executed a security agreement, later augmented, which granted the Bank a security interest in Dependable's accounts receivable and a power of attorney. The Bank filed its financing statement on May 23, 1973. Between May 23, 1973 and October 16, 1973, the Bank made loans totaling $47,181 to Dependable. The Bank conducted a credit investigation of both Patrick Brakie and Dependable but failed to discover Farns' previously filed financing statement.

Commencing September 24, 1973 and until August 15, 1974, the Bank received checks payable to Dependable directly from the Illinois Department of Public Aid. Subsequent to August 15, 1974, all additional checks were sent directly to Dependable and delivered in turn to the Bank. Pursuant to its security agreement, all such checks were endorsed by the Bank with the legend "credited to the account of the within named payee * * *." These checks were collected by the Bank and the loan balance of Dependable reduced by the amount of each collection.

In July 1976, Farns obtained a judgment against Dependable and Patrick Brakie for outstanding loans including but not limited to the security agreement at issue. The judgment remains unsatisfied in excess of $60,000.

In this court, Farns contends: the trial court erred in denying its motion for summary judgment because the rights of the Bank in the funds were inferior to its own; the Bank could not be a holder in due course of the checks; and the trial court erred by refusing to allow Farns to take additional discovery and in not certifying a report of proceedings. The Bank urges Farns failed to perfect its security interest; the Bank was a holder in due course of the cash proceeds received from Dependable, free and clear of any security interest of Farns; and the trial court properly declined to allow additional discovery and to certify a report of proceedings.

Summary judgment may be entered if no genuine issue as to any material fact exists and if the moving party is entitled to a summary judgment as a matter of law. (Ill.Rev.Stat.1979, ch. 110, par. 57(3).) "(W)hile summary judgment is to be encouraged, it is a remedy to be awarded with due caution in view of its drastic nature." (Rivan Die Mold Corp. v. Stewart Warner Corp. (1975), 26 Ill.App.3d 637, 640-41, 325 N.E.2d 357.) Summary judgment should be granted only when the party's right thereto is clear and free from doubt. Kitsos v. Terry's Chrysler-Plymouth, Inc. (1979), 70 Ill.App.3d 728, 731, 27 Ill.Dec. 91, 388 N.E.2d 1054.

Farns contends it had a prior perfected security interest in Dependable's public aid accounts receivable and all proceeds thereof. Secured transactions are governed by Article 9 of the Uniform Commercial Code. (Ill.Rev.Stat.1979, ch. 26, par. 9-101 et seq.) Section 9-102(1)(a) of the Code (Ill.Rev.Stat.1979, ch. 26, par. 9-102(1)(a)) provides in part:

"Except as otherwise provided in Section 9-104 on excluded transactions, this Article applies

"(a) to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts; * * *." (Emphasis added.)

The parties do not dispute that the "Loan and Security Agreement" between Farns and Dependable is covered by this portion of the Code. The agreement specifically grants Farns a security interest in all of Dependable's public aid accounts "whether in existence as of the date hereof or created or acquired hereafter and in all proceeds thereof" as collateral for Farns' loans. It is also undisputed Farns' security interest in this collateral attached when Dependable obtained rights in these accounts. Ill.Rev.Stat.1979, ch. 26, par. 9-203.

It is Farns' position the proper filing of its financing statement perfected its security interest in the collateral pursuant to section 9-302(1) of the Code (Ill.Rev.Stat.1979, ch. 26, par. 9-302(1)). Therefore, Farns maintains, the payments made to Dependable by the account debtor constituted "identifiable cash proceeds" of Farns' secured collateral in which Farns maintained a continuing security interest pursuant to section 9-306 of the Code (Ill.Rev.Stat.1979, ch. 26, par. 9-306). This section reads in pertinent part:

"(1) 'Proceeds' includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. * * *. Money, checks, deposit accounts, and the like are 'cash proceeds'. All other proceeds are 'noncash proceeds'.

"(2) Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.

"(3) The security interest in proceeds is a continuously perfected security interest if the interest in the original collateral was perfected but it ceases to be a perfected security interest and becomes unperfected 20 days after receipt of the proceeds by the debtor unless

"(a) a filed financing statement covers the original collateral and the proceeds are collateral in which a security interest may be perfected by filing in the office or offices where the financing statement has been filed and, if the proceeds are acquired with cash proceeds, the description of collateral in the financing statement indicates the types of property constituting the proceeds; or

"(b) a filed financing statement covers the original collateral and the proceeds are identifiable cash proceeds; or * * *." (Emphasis added.)

In our opinion, section 9-306(1) clearly contemplates that funds resulting from accounts receivable in the form of money or checks are to be considered "cash proceeds" for the purposes of determining whether a creditor holds a perfected security interest in the funds. See Commercial Discount Corp. v. Milwaukee Western Bank (1974), 61 Wis.2d 671, 683-84, 214 N.W.2d 33; Cissell v. First Nat. Bank of Cincinnati (S.D. Ohio 1979), 476 F.Supp. 474, 489.

The Bank urges Farns' security interest could not be continually perfected by filing a financing statement because the proceeds had taken the form of negotiable instruments (checks) payable to Dependable. Therefore, the Bank claims, the only means of perfection would be by taking possession of the instruments pursuant to sections 9-304(1) and 9-306(3) of the Code (Ill.Rev.Stat.1979, ch. 26, par. 9-304(1), par. 9-306(3)). We disagree. This very argument has been expressly rejected by the Wisconsin Supreme Court in Commercial Discount Corp., 61 Wis.2d 671, 683-84, 214 N.W.2d 33.

The Bank cites several cases in support of the above proposition, but we find them inapplicable to the facts at bar. In Feldman v. Philadelphia Nat. Bank (E.D.Pa.1976), 408 F.Supp. 24, the issues raised in the instant case were never reached as the party with the perfected security interest in chattel paper took actual possession of the proceeds thereof. In Security Savings Bank of Marshalltown, Iowa v. U.S. (S.D.Iowa 1977), 440 F.Supp. 444, the court held a filed security interest in collateral did not continue past ten days when the collateral proceeds were converted to noncash proceeds. The case In Re Atlanta Times, Inc. (N.D.Ga.1966), 259 F.Supp. 820, is also not pertinent here. It deals with a security interest in money obtained through the negotiation of a negotiable instrument held as collateral.

The Bank also maintains the proceeds are no longer "identifiable" pursuant to section 9-306(2) of the Code (Ill.Rev.Stat.1979, ch. 26, par. 9-306(2)), and therefore cannot be traced. We disagree. It is undisputed the Bank directly obtained the unendorsed checks representing the proceeds in question from Dependable's account debtor. The Bank admits it endorsed those checks, collected the funds, and credited Dependable's loan balance accordingly. We see no question as to the identification of these proceeds as covered by Farns' perfected security interest and therefore no need for further tracing. To hold otherwise would clearly provide an inequitable windfall for the Bank. See Citizens Nat. Bank of Whitley County v. Mid-States Development Co., Inc. (1978), Ind.App., 380 N.E.2d 1243.

The authorities cited by the Bank on this issue do not support its contention. The Bank cites Comment 2(...