State Bank of Cherry v. CGB Enters., Inc.

• Decision Date: 04 January 2012
• Docket Number: No. 3–10–0495.,3–10–0495.
• Citation: 357 Ill.Dec. 925,964 N.E.2d 604,76 UCC Rep.Serv.2d 468,2012 IL App (3d) 100495
• Parties: STATE BANK OF CHERRY, an Illinois Banking Corporation, Plaintiff–Appellee, v. CGB ENTERPRISES, INC., Defendant–Appellant.
• Court: United States Appellate Court of Illinois

2012 IL App (3d) 100495

357 Ill.Dec. 925

76 UCC Rep.Serv.2d 468

964 N.E.2d 604

STATE BANK OF CHERRY, an Illinois Banking Corporation, Plaintiff–Appellee,

v.CGB ENTERPRISES, INC., Defendant–Appellant.

No. 3–10–0495.

Appellate Court of Illinois, Third District.

Jan. 4, 2012.

Jeffrey Alan Ryva (argued), Husch Blackwell LLP, Peoria, for CGB Enterprises, Inc.

Bradley P. Popurella (argued), Anthony C. Raccuglia & Associates, Peru, Robert B. Steele, Aplington, Kaufman, McClintock, Steele & Barry, La Salle, for State Bank of Cherry.

OPINION

Justice McDADE delivered the judgment of the court, with opinion.

¶ 1 Plaintiff, the State Bank of Cherry, an Illinois banking corporation, filed a complaint against defendant, CGB Enterprises, Inc., to recover for failing to protect plaintiff's security interest in crops defendant purchased from Lawrence Rogowski. Defendant filed a motion to dismiss plaintiff's complaint on the grounds plaintiff's notices failed to strictly comply with section 1631(e) of the Food Security Act of 1985 (7 U.S.C. § 1631(e) (2006)). Plaintiff filed a motion for summary judgment and defendant filed a cross-motion for judgment on the pleadings. The motions agreed that the dispositive question was whether section 1631(e) required strict compliance or substantial compliance. The circuit court of La Salle County entered a judgment granting plaintiff's motion for summary judgment and denying defendant's motion for judgment on the pleadings. For the reasons that follow, we reverse.

¶ 2 BACKGROUND

¶ 3 Rogowski is not a party to these proceedings. Rogowski executed a note in plaintiff's favor using the crops as security. Rogowski later sold those crops to defendant. Plaintiff's complaint alleges that it gave defendant notice of its security interest in the crops, pursuant to section 1631(e) of the Food Security Act of 1985 (Food Security Act or Act) (7 U.S.C. § 1631(e) (2006)), by providing defendant documents titled “Notice of Security Interest.” Section 1631(e) reads, in pertinent part, as follows:

“Purchases subject to security interest. A buyer of farm products takes subject to a security interest created by the seller if—

(1) (A) within 1 year before the sale of the farm products, the buyer has received from the secured party or the seller written notice of the security interest organized according to farm products that—

* * *

(ii) contains,

* * *

(IV) a description of the farm products subject to the security interest created by the debtor, including * * * the name of each county or parish in which the farm products are produced or located[.]” 7 U.S.C. § 1631(e) (2006).

¶ 4 Plaintiff's complaint alleges that defendant failed to protect plaintiff's security interest by making payment on the crops directly to Rogowski without naming plaintiff on the check in one crop year, and by permitting Rogowski to negotiate a check for the crops without plaintiff's endorsement through defendant's bank in the following crop year. Defendant filed a motion to dismiss, relying on Farm Credit Midsouth, PCA v. Farm Fresh Catfish Co., 371 F.3d 450 (8th Cir.2004), which held that strict compliance with the section 1631(e) notice provision is required for a party to recover for failing to protect a security interest in crops. See Farm Fresh Catfish Co., 371 F.3d at 453. The Farm Fresh Catfish court held that “the Act[ ] * * * does not contain language indicating the required contents of the written notice are merely permissive or can be satisfied through substantial compliance.” Farm Fresh Catfish, 371 F.3d at 453.

¶ 5 The notices at issue in the instant case both contain the following language: “The farm products described above are or may be located on (describe property and county or parish where farm products are or may be located) * * *.” Each form then provides a blank space for the information, but on both forms, the information was never filled in. Neither notice names the county where the farm products are or may be located. Below the blank space on both forms is a check box that is marked with an “X.” Next to the check box, the notices read: “The security interest also covers the described farm products wherever located and is not limited to those located on the above property.” The notices also state that any check issued to the debtor must be (1) made payable both to the debtor (in this case Rogowski) and to the secured party (in this case plaintiff); (2) delivered to or received by the secured party; and (3) paid.

¶ 6 Plaintiff's response to defendant's motion to dismiss argued that its notices are sufficient under sections 9–320(f) and 9–320.1 of the Uniform Commercial Code (UCC) (810 ILCS 5/9–320(f); 9–320.1 (West 2006)), as interpreted in the Fourth District's decision in First National Bank v. Effingham–Clay Service Co., 261 Ill.App.3d 890, 198 Ill.Dec. 605, 633 N.E.2d 67 (1994). Section 9–320(f) is essentially identical to section 1631(e). The First National Bank court held that substantial compliance with the notice requirement is all that is necessary to provide effective notice of a security interest in crops. See First National Bank, 261 Ill.App.3d at 893, 198 Ill.Dec. 605, 633 N.E.2d 67 (“Effingham–Clay Service was given adequate notice of an obligation to protect the Bank's security interest”).

¶ 7 The defendant in First National Bank argued that “the notice it received from the Bank was insufficient because it did not set forth the ‘county’ where the crops were grown * * * as required by section 9–307.1(a)(ii)(IV) of the Uniform Commercial Code—Secured Transactions (Code) ( 810 ILCS 5/9–307.1(a)(ii)(IV) (West 1992)).” First National Bank, 261 Ill.App.3d at 891, 198 Ill.Dec. 605, 633 N.E.2d 67. The First National Bank court held that “the notice received was adequate to place Effingham–Clay Service on notice of the Bank's security agreement on grain delivered by Jerry Sherwood.” First National Bank, 261 Ill.App.3d at 893, 198 Ill.Dec. 605, 633 N.E.2d 67.

¶ 8 The First National Bank court, and the trial court below, never cited section 1631 or the Act. The trial court in this case held that it was bound to follow First National Bank rather than the Eighth Circuit decision. Based on the First National Bank in Toledo court's decision, the trial court denied defendant's motion to dismiss. The court denied defendant's motion to reconsider. Defendant answered plaintiff's complaint and raised an affirmative defense that plaintiff was not entitled to recover because its notice did not strictly comply with section 1631(e).

¶ 9 The circuit court of La Salle County entered a judgment granting plaintiff's motion for summary judgment and denying defendant's motion for judgment on the pleadings. This appeal followed.

¶ 10 ANALYSIS

¶ 11 The parties disagree as to whether the Food Security Act or the UCC governs this case and, therefore, whether Farm Fresh Catfish or First National Bank controls our disposition. Plaintiff argues that because the Eighth Circuit decision is not binding on this court, we should follow “current Illinois law” as reflected in First National Bank and apply a substantial compliance test. Plaintiff argues that under First National Bank, Illinois is a substantial compliance state. Plaintiff argues that this case is factually identical to First National Bank, that its decision is the only Illinois decision to address the question of whether substantial or strict compliance with either the federal or state notice provision is required, and that, therefore, First National Bank was binding on the trial court and should be binding on this court.

¶ 12 We find that the Food Security Act governs plaintiff's notice of its security interest in the farm products at issue, but that neither Farm Fresh Catfish nor First National Bank is controlling on this court. The Food Security Act states:

“Congress finds that—

(1) certain State laws permit a secured lender to enforce liens against a purchaser of farm products even if the purchaser does not know that the sale of the products violates the lender's security interest in the products, lacks any practical method for discovering the existence of the security interest, and has no reasonable means to ensure that the seller uses the sales proceeds to repay the lender;

* * *

(4) this exposure constitutes a burden on and an obstruction to interstate commerce in farm products.

(b) Declaration of purpose.

The purpose of this section is to remove such burden on and obstruction to interstate commerce in farm products.” 7 U.S.C. § 1631.

¶ 13 Our court recognizes:

“The key inquiry in all preemption cases is the objective or purpose of Congress in enacting the particular statute. The doctrine requires courts to examine the Federal statute in question to determine whether Congress intended it to supplant State laws on the same subject.” Kellerman v. MCI Telecommunications Corp., 112 Ill.2d 428, 438 [98 Ill.Dec. 24, 493 N.E.2d 1045] (1986).

The stated purpose of the Food Security Act was to “remove [the] burden on and obstruction to interstate commerce” occasioned by “certain State laws.” Thus the clear purpose of the Food Security Act is to supplant state law on the same subject.

¶ 14 Further, the federal statute controls under the express terms of the state statute and under the supremacy clause of the United States Constitution. First, section 9–109 of the Uniform Commercial Code reads, in pertinent part, as follows:

“This Article does not apply to the extent that:

(1) a statute, regulation, or treaty of the United States preempts this Article[.]” 810 ILCS 5/9–109 (West 2006).

Second, this court has recognized:

“The supremacy clause of the United States Constitution provides that ‘ * * * the Laws of the United States * * * shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.’ U.S. Const., art. VI, cl. 2. ‘ “State law is...