National Acceptance Co. of America v. Exchange Nat. Bank of Chicago

• Decision Date: 24 October 1968
• Docket Number: No. 15795,Gen. No. 52483,15795
• Parties: NATIONAL ACCEPTANCE COMPANY OF AMERICA, a corporation, Plaintiff-Appellee, v. The EXCHANGE NATIONAL BANK OF CHICAGO, as Trustee under Trust, the Hardwood Door Corporation, Sol Auerbach, Fred C. Wright, Pet Wright, National Can Corporation, J. S. Bathalter and Nancy Nosowski, Defendants-Appellants.
• Court: United States Appellate Court of Illinois

Page 264

243 N.E.2d 264

101 Ill.App.2d 396

NATIONAL ACCEPTANCE COMPANY OF AMERICA, a corporation Plaintiff-Appellee, v. The EXCHANGE NATIONAL BANK OF CHICAGO, as Trustee under Trust No. 15795, the Hardwood Door Corporation, Sol Auerbach, Fred C. Wright, Pet Wright, National Can Corporation, J. S. Bathalter and Nancy Nosowski Defendants-Appellants.

Gen. No. 52483.

Appellate Court of Illinois, First District, Third Division.

Oct. 24, 1968.

Ordower & Ordower, Robert A. Sprecher and Edward W. Barrett, Chicago, for appellants.

Archie Schimberg, Sidney C. Kleinman, Chicago, for appellee.

DEMPSEY, Presiding Justice.

This action was commenced by the National Acceptance Company of America (National) to foreclose two trust deeds, each securing the same parcel of realty, which had been executed by the Hardwood Door Corporation (Hardwood). Hardwood, the principal defendant, contested the action and asserted in its answer that its indebtedness to National had been paid or released; it also counterclaimed, praying that the deeds be cancelled and the recorded liens removed as a cloud upon the title of the property. The cause was referred to a master who found the equities in National's favor and recommended that a decree of foreclosure be entered. The chancellor adopted the master's findings, held Hardwood to be indebted in the sum of $95,731.91 and ordered a foreclosure sale to satisfy the indebtedness. The defendants appeal from this decree.

National is engaged in the business of commercial financing. In February 1961 it agreed to finance Hardwood on a day-to-day basis for an indefinite period and received a bulk assignment of Hardwood's accounts receivable as security. Under this arrangement National agreed to advance Hardwood a sum not in excess of 80% Of these accounts. As additional security National was given a lien on Hardwood's entire inventory and it received, from time to time, demand notes executed by Hardwood. Hardwood gave National one such note for $50,000.00 in June 1961 and another for $1,000.00 in March 1962. These notes were secured by all of Hardwood's accounts receivable and the two trust deeds on its real property which constitute the subject matter of the present litigation. Both deeds contained a provision securing National for all future advances up to $200,000.00.

In January of 1963 Chi-Way Millwork Corporation (Chi-Way) purchased Hardwood's assets and assumed its liabilities, including the indebtedness due National which at that time totaled $325,839.28. Of this amount $255,839.28 had arisen from money advanced on Hardwood's accounts receivable while the remainder, $70,000.00, was evidenced by its notes. The total indebtedness was secured by accounts receivable of $381,871.10, inventory of $339,180.01 and the two trust deeds.

Early in January 1963 Ashley Wright, the president of Hardwood, met with Nathan Paset, National's president, and informed the latter of Chi-Way's impending acquisition. He also inquired into the possibility of Chi-Way continuing with the financial arrangement then in existence between Hardwood and National. Paset told Wright that the Chi-Way acquisition and the continuation of similar financing arrangement with Chi-Way were amenable to him, but stated that Hardwood would have to stand behind Chi-Way. Paset desired a guaranty and also requested another trust deed as further protection. The guaranty was executed but the proposed trust deed was not. Although the guaranty contained a statement that it was secured by a trust deed of even date, Wright declined to execute the deed because he was of the opinion that National already had sufficient security. By the terms of the instrument signed by Wright, Hardwood guaranteed any and all indebtedness, not in excess of $200,000.00, which Chi-Way would thereafter owe National.

The same day that Wright executed Hardwood's guaranty, National and Chi-Way entered into a financial agreement similar to the one previously existing between National and Hardwood. This arrangement continued until March of 1965 when Chi-Way was placed in involuntary bankruptcy. The present action followed when National was unable to recover the entire amount owed in the subsequent liquidation proceedings. Of the $95,731.91 found due by the master, slightly less than half ($47,643.05) represents Chi-Way's own indebtedness to National and the balance is attributable to unpaid Hardwood notes ($40,000.00) and accrued interest thereon ($8,088.86).

Hardwood's position is that it is not liable for Chi-Way's indebtedness and that its notes were paid in full.

We will first consider the notes. Hardwood admits that on May 8, 1963, there was an unpaid balance of $70,000.00 in its notes payable account but asserts that the indebtedness was subsequently paid in full. According to National's books, the May 8th balance was reduced by $30,000.00 between that date and December 1963; no further reduction is noted therein and the $40,000.00 balance remains unpaid. No entry appears in this account from December of 1963 Until 1966 when interest was charged. This latter entry was made after the present litigation was under way. The account bears the handwritten notation 'Account expired See Chi-Way Millwork,' but there is no indication, and there was no testimony, as to when this was added or who was responsible for doing it. Hardwood argues that the notation is significant because certain accounts receivable payments made by Chi-Way after May 8th should have been credited to Hardwood, and these more than made up for the unpaid balance in its notes payable account.

From the date of its acquisition of Hardwood, Chi-Way sent daily reports to National concerning the status of both its own and Hardwood's accounts receivable. By Way 8, 1963, the Hardwood account had been reduced to $54,231.90. On or about this date, Chi-Way borrowed $250,000.00 from National. National deducted $54,231.90 from the loan and credited it to Hardwood's account before remitting the balance to Chi-Way. Hardwood's account was thus closed out on National's books. Thereafter Chi-Way submitted the receivable reports under its own name, irrespective of further collections that may have been made from Hardwood's outstanding debtors. National credited the payments to Chi-Way's account. There are no entries in this account which in any was substantiate Hardwood's claim that some of these payments were or should have been made in its behalf and, since its accounts receivable indebtedness had been cancelled, should have applied on its notes payable balance.

Payment is an affirmative defense which must be pleaded by the party maintaining it (Economy Truck Sales & Service, Inc., v. Granger, 61 Ill.App.2d 111, 209 N.E.2d 1 (1965)) and proven by a preponderance of the evidence. Hish v. Shelby County, 317 Ill.App. 540, 47 N.E.2d 107 (1943). Without going into detail, we may state that we have subjected the record to careful examination and have inspected each exhibit and find proof of payment of Hardwood's notes payable indebtedness (other than the $30,000.00 previously mentioned) completely lacking. The master's finding and the court's decree that a balance of $40,000.00 is due on Hardwood's notes is fully in accord with the evidence.

Hardwood next maintains that it is not liable for Chi-Way's debts because the guaranty became inoperative on May 8, 1963, by reason of National's own...