Frank Novak & Sons, Inc. v. Sommer & Maca Industries, Inc.

• Decision Date: 25 April 1989
• Docket Number: No. 88-1953,88-1953
• Citation: 131 Ill.Dec. 325,538 N.E.2d 700,182 Ill.App.3d 781
• Court: United States Appellate Court of Illinois
• Parties: , 131 Ill.Dec. 325, 9 UCC Rep.Serv.2d 53 FRANK NOVAK & SONS, INC., an Illinois corporation, Plaintiff-Appellee-Cross-Appellant, v. SOMMER & MACA INDUSTRIES, INC., an Illinois corporation, Defendant-Appellant-Cross-Appellee.

Page 700

538 N.E.2d 700

182 Ill.App.3d 781, 131 Ill.Dec. 325,

9 UCC Rep.Serv.2d 53

FRANK NOVAK & SONS, INC., an Illinois corporation Plaintiff-Appellee-Cross-Appellant, v. SOMMER & MACA INDUSTRIES, INC., an Illinois corporation Defendant-Appellant-Cross-Appellee.

No. 88-1953.

Appellate Court of Illinois First District, Second Division.

April 25, 1989.

Rehearing Denied May 25, 1989.

Winston & Strawn, Chicago (James J. White, of counsel), for defendant-appellant-cross-appellee.

Richter & Jaros, Chicago (Thomas C. Dudgeon and Arthur G. Jaros, Jr., of counsel), for plaintiff-appellee-cross-appellant.

Justice HARTMAN delivered the opinion of the court:

This suit was filed by plaintiff/appellee/cross-appellant Frank Novak & Sons (Novak) to obtain payment based on numerous invoices submitted over a period of years to defendant/appellant/cross-appellee Sommer & Maca Industries (Somaca), representing goods shipped to and accepted by Somaca over that period. In a bench trial, judgment was entered for Novak in the amount of $353,898.78.

The issue raised in the appeal is when Novak's cause of action accrued for purposes of the applicable limitations period. The issue raised in the cross-appeal is whether Novak is entitled to prejudgment interest.

Somaca assembles, manufactures, and markets glass cutting and polishing machinery. Novak is operated by brothers Frank and Laddie Novak, and fabricates sheet metal parts for use in various machines. Both are closely held Illinois corporations, which began doing business with each other in 1953.

The evidence reveals that, typically, Somaca submitted a written purchase order to Novak accompanied by drawings, blueprints, and specifications, which Novak would then fabricate accordingly. Somaca later integrated the parts into the machines it assembled. Novak's work was priced on a "time and material" basis. For every purchase order submitted by Somaca, Novak completed the work and the fabricated products were accepted by Somaca without objection. This business relationship continued until late 1976. The exact nature of this relationship is subject to contradictory testimony and conflicting, incomplete business records presented by both parties.

Sometime in the 1960s, Somaca began objecting to Novak's slow billing methods. In 1966, counsel for Somaca wrote three letters ("the 1966 letters") to Novak strongly requesting that it send bills in a regular and timely fashion, and outlining a new policy for payment when invoices were not sent within thirty days of delivery of the goods. These letters were personally shown to Frank and Laddie Novak in 1966 by Somaca employee Paul Proska. Frank read the letters and agreed with their contents. Proska kept possession of the letters; Frank had no copies. Thereafter, Novak sent some bills to Somaca.

Despite continued billing problems in subsequent years, business continued between the parties. In accordance with the August 15, 1966 letter from Somaca's counsel, when Novak did not submit an invoice within thirty days for work completed, Somaca's cost accounting department estimated the probable charges for Novak's products so that Somaca could price its own machines, which incorporated Novak's fabrications, for later sale to its customers. When Somaca received invoices more than thirty days after the goods were delivered, it paid Novak only the estimated amount, a compensation policy which also had been outlined in the August 15, 1966 letter. Novak accepted two such payments in 1968. Around 1969, Novak stopped sending invoices to Somaca, and Somaca stopped requesting them. Somaca continued to submit purchase orders to Novak, however, and Novak continued to deliver the fabricated products as ordered.

This somewhat unique business relationship between the parties persisted until October, 1976. According to Somaca, Novak did not bill it from 1969 through 1976. Novak's former accountant, however, testified to billings of Somaca for about $30,000 in 1975 or 1976. Despite Frank Novak's concern about the uncompensated work, he explained he "just didn't have the time" to bill Somaca due to the amount of work and the small size of his business. In 1971 or 1972, Frank requested and received "advances"" from Somaca totalling $7,840 and $9,800.

During this period, Somaca did not send Novak written requests for invoices, but Jack Hynes, Somaca's comptroller, testified that prior to 1971, he orally solicited prompt billing three times, which Laddie Novak laughed off. Somaca's independent auditor also averred he sent annual requests to Novak, which went unanswered, in an effort to determine the amount of the indebtedness. Somaca's records did not reveal any payments to Novak after 1972. According to one of Novak's outside accountants, however, Novak's records show it received $10,500 and $10,574.39 payments from Somaca in late 1974 or 1975.

During the 1969-77 period, Somaca recorded its estimates of the amount owed Novak as an account payable in its ledgers and as part of the accounts payable balance in its financial statements. The estimated costs of the goods were deducted from Somaca's corporate income. These estimations, kept on a running basis, eventually reached $353,898.78.

For the same period, Novak reflected the sales to Somaca as a running account in its own books. Somaca's work was such a major part of Novak's business that it maintained a separate Somaca general ledger accounts receivable line. The Somaca general ledger receivables ranged from $27,793 to $62,692 between 1971 to 1977. In 1977, the ledger amount owed by Somaca to Novak was $58,079. Novak later suggested that its ledger was not properly maintained and did not reflect the actual amount receivable from Somaca.

Novak's billing of Somaca was "speeded up" when the United States Internal Revenue Service began inquiring about the outstanding Somaca accounts receivable. In July 1977, Novak delivered a "batch" of invoices to Somaca for work completed in 1969 and following years. A second group was delivered in December 1977 or January 1978; in all, over 1100 invoices reflected an amount owed to Novak, as stipulated by the parties, of $491,683.15. ¹ After full payment was refused, Novak filed a verified complaint in August, 1978, praying for $474,570.65. ²

Novak's complaint is based upon three theories: (1) an account stated; (2) breach of contract; and, (3) quantum meruit. Somaca admits that Novak completed all work satisfactorily and in a timely fashion, but denies any obligation to pay for goods delivered prior to September, 1974. It raised several affirmative defenses, including the Uniform Commercial Code (UCC) statute of limitations in contracts for sale (Ill.Rev.Stat.1977, ch. 26, sec. 2-725), waiver, and laches. Somaca further admitted owing $74,431.03 for invoices representing goods delivered to it within four years of the 1977 billing.

Following extensive pre-trial proceedings, the case went to bench trial on April 7, 1988. After considering testimony, other evidence, briefs, and arguments of counsel, the circuit court, in a written order dated May 23, 1988, found as follows:

(1) palpable laches and failure to follow reasonable business practices was attributable to both parties;

(2) the 1977 invoices delivered by Novak were stale and self-serving estimates;

(3) there was no cause of action for an account stated;

(4) the equitable remedies of quantum meruit and quantum valebant were inappropriate; and,

(5) Novak's cause of action accrued at the time Somaca first refused to make payment.

Resorting to "equitable principles to effect substantial justice," the court entered judgment in Novak's favor and against Somaca for $353,898.78, plus court costs, and without interest or penalty. Somaca thereafter filed its notice of appeal, seeking complete reversal of the judgment and, seven days later, Novak filed a cross-appeal, contesting the circuit court's denial of prejudgment interest.

For the purposes of this appeal, we consider certain portions of the circuit court's order as critical:

"The Court finds that the lack of seasonable invoicing or timely demand for payment, and the failure of [Somaca] to remit or offer any payment, puts the alleged breach beyond the strictures of the 'tender of delivery' date as the date of accrual of the cause of action, and the applicability of the Uniform Commercial Code at Chapter 26, 2-725 [citation omitted]. The action accrued at the time the buyer refused to make payment.

"Under the circumstances and the findings of the court, the court, relying on the provisions of the Uniform Commercial Code at Chapter 26, sections 1-102(3), 1-203, 1-204, and 1-205 has resorted to equitable principles to effect substantial justice."

These cited provisions of the UCC refer to sections providing: variation of the UCC provisions by alternative agreement (section 1-102(3)); the obligation of good faith (section 1-203); the explanation of "reasonable time" and "seasonably" (section 1-204); and, the definition of course of dealing (section 1-205).

I.

The only issue Somaca raises on appeal is whether the circuit court erred in deciding that the cause of action did not accrue until Somaca refused to make payment. It initially contends that no agreement existed between the parties as to when payment was due and, therefore, the gap-filling provisions of the UCC establish that payment was due at the time of delivery of the goods. (Ill.Rev.Stat.1977, ch. 26, sec. 2-310.) Somaca then suggests that its failure to pay Novak at the time of delivery constituted a breach of contract under the UCC, and any cause of action accrued at that point. Under the statute of limitations provided in the UCC, Somaca continues, an action for breach of any contract for sale of goods must be commenced within four years after the cause of action has accrued. (Ill.Rev.Stat.1977, ch. 26, sec. 2-725(1).) Somaca concludes that section 2-725 cuts off any claims...