text:
    FIRST NATIONAL BANK OF THOMASBORO, Plaintiff-Appellee, v. RUSSELL L. LACHENMYER, Defendant-Appellant.
    Fourth District
    No. 4—83—0667
    Opinion filed March 27, 1985.

      Frank H. Byers, of Byers, Byers & Greenleaf, of Decatur, for appellant.
    Francis J. Davis, of Maloney & Davis, of Urbana, for appellee.
   JUSTICE TRAPP

delivered the opinion of the court:

On May 4, 1982, plaintiff First National Bank of Thomasboro (bank) filed suit seeking judgment against defendant Lachenmyer based on a defaulted $40,000 promissory note in relation to which there was a security agreement on defendant’s Beech K-35 airplane and a mortgage of vessel on his 58-foot boat. On May 7, 1982, defendant had the plane moved from Champaign to Decatur, from there to be removed to the State of Florida. On May 8, 1982, the bank secured possession of defendant’s plane in Decatur as subject to the security agreement. The bank also set off funds from defendant’s accounts Nos. 133 — 019 and 130 — 389, allegedly escrow accounts. On May 11, 1982, defendant was served with plaintiff’s complaint. On August 6, 1982, defendant filed a two-count countercomplaint seeking relief for the bank’s acts involving his plane and the setoff from the alleged escrow accounts. The defendant did not deny execution of the note.

A bench trial was had with hearings conducted on February 4, 1983, and May 31, 1983. At the February hearing, following evidence on the complaint, the testimony of Florida witnesses Charles Myer, Federal Aviation Agency (FAA)-certified flight-and-ground instructor, and Patrick Grasch, aircraft broker, was taken on the countercomplaint. Between the hearings, the bank had the plane taken from storage in Decatur, flown to Champaign, and examined; it had been damaged. On June 21, 1983, defendant moved for leave to amend the countercomplaint to add count III, seeking relief under the Uniform Commercial Code (Code) (Ill. Rev. Stat. 1981, ch. 26, par. 1 — 101 et seq.) for the bank’s actions involving his airplane. On August 9, 1983, the trial court filed its opinion. On August 22, 1983, the court entered judgment in favor of the plaintiff on the complaint for $38,917.98, plus costs; in favor of plaintiff on count I of the counterclaim; in favor of defendant on count II of the counterclaim as to account No. 133— 019 for $412.30, but against defendant as to account No. 130 — 389; and in favor of plaintiff on count III of the counterclaim, finding the bank had not disposed of the collateral and concluding that count III failed for want of proof.

On appeal, defendant challenges the trial court’s judgment in favor of the bank on its note and, insofar as adverse to him, on each count of his counterclaim. No cross-appeal has been filed. Issues are treated in the following order. First, the issues relating to count II of his counterclaim, seeking recovery for the bank’s setoff of funds from account No. 130 — 389: (1) whether the account was an escrow account; and if so, (2) whether he is entitled to actual damages for wrongful dishonor of certain checks and related charges under section 4 — 402 of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 4 — 402); (3) or to punitive damages under Allabastro v. Cummins (1980), 90 Ill. App. 3d 394, 413 N.E.2d 86. Second, the issues relating to count I of defendant’s counterclaim, seeking recovery under a theory of conversion for the bank’s acts in relation to his plane: (4) whether the bank committed an act of conversion in taking the plane, or in subsequent acts in relation thereto; and (5) whether he is entitled to recover the market value of the plane at the time and place of conversion, legal interest and punitive damages under Kelsay v. Motorola, Inc. (1978), 74 Ill. 2d 172, 384 N.E.2d 353. Third, issues relating to count III of the counterclaim seeking recovery under the Code for the bank’s acts involving his plane: (6) whether the bank’s conduct amounted to a “sale or other disposition,” not “commercially reasonable” in “every aspect of the disposition” under section 9 — 504(3) of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 504(3); (7) whether the bank’s failure to give him notice prior to this “other disposition” bars recovery on its note under section 9 — 504 of the Code; and (8) whether the plane was “consumer goods” under section 9 — 109(1) of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 109(1)) so that upon disposal in violation of article 9, he is entitled to recover damages under section 9 — 507(1) of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 507(1)).

We begin with issues raised by the defendant on count II of the counterclaim. The first is whether account No. 130 — 389 was an escrow account, so that the bank as escrowee was prohibited by its fiduciary duty from setting off moneys in the account to its benefit. The trial court found the account was a personal checking account and a proper source of setoff. We agree. Generally, questions involving the proper operation of escrow may be resolved by resort to consideration of the escrow agreement in conjunction with the underlying contract. (Estate of Reinhold, v. Mansfield (1980), 90 Ill. App. 3d 224, 412 N.E.2d 1146.) Where the agreement is ambiguous because of a material omission, it is the duty of the trial court to construe the escrow, which construction will be upheld unless against the manifest weight of the evidence. (McBride v. Commercial Bank (1981), 101 Ill. App. 3d 760, 428 N.E.2d 739.) Here, it appears there was no written agreement between the bank and defendant. According to the evidence, the bank’s escrow accounts are unnumbered. The bank disburses moneys paid toward escrow arrangements by cashier’s checks immediately after recording payment by the purchaser upon escrow documents, routing-them according to the direction of the individual payee on the escrow arrangement, e.g., into a savings or checking account. In this case the cashier’s checks were channeled by defendant’s direction into account No. 130 — 389, identified by its number as a demand deposit or personal checking account, and on which defendant wrote checks. No error.

We next consider issues raised by the defendant on count I of the counterclaim, the first being whether the bank committed an act of conversion in taking the plane, or in its subsequent acts. In order to make a case for conversion, the plaintiff must establish each of four elements: (1) unauthorized and wrongful assumption of control, dominion, or ownership over the personal property of another; (2) plaintiff’s right to the property; (3) his absolute and unconditional right to immediate possession thereof; and (4) a demand for possession. (Kunde v. Biddle (1976), 41 Ill. App. 3d 223, 353 N.E.2d 410.) The trial court found that the defendant was in default on the loan and had made the plane collateral under the security agreement, and that he had no absolute and unconditional right to immediate possession of the plane. We agree. Section 9 — 503 of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 503) provides in pertinent part:

“Unless otherwise agreed a secured party has on default the right to take possession of the collateral. In taking possession a secured party may proceed without judicial process if this can be done without breach of the peace or may proceed by action.”

Jensen v. Chicago & Western Indiana R.R. Co. (1981), 94 Ill. App. 3d 915, 419 N.E.2d 578, cited by defendant, is inapposite. Therein, the court stated that the fourth element of conversion, a demand for possession, was unnecessary when some other independent act of conversion could be shown. The absence of a demand for possession cannot be equated to a defendant’s failure to show his absolute and unconditional right to immediate possession of the collateral. No error.

We next consider the more nettlesome issues raised by defendant on count III of the counterclaim, which requires discussion of the evidence. Myer testified he last flew defendant’s plane in October 1981, when it was in better than average condition, and opined that its May 1982 value was about $24,000. Myer said failure to maintain a plane in storage could reduce its market value, as could allowing its FAA certificate of airworthiness to lapse, and further testified that deterioration is more rapid in aircraft than in other transportation equipment. He thought there would be some damage to defendant’s plane in view of the length of the storage.

Grasch opined that assuming the equipment and condition of defendant’s plane was as Myer described, the value of defendant’s plane was about $24,000 (retail) or $17,000 (wholesale, buying as a broker). Without having inspected the plane, he said that allowing its FAA certificate of airworthiness to lapse and leaving the plane unattended in storage would have a tremendous negative effect on its value. If a plane was not FAA-airworthy, he would not put a high value on it as he would not know its internal condition. He said that in May 1982, with the plane approaching the due date for annual inspection, he would have bid $14,000 wholesale. As of the February hearing, he would only buy the plane to sell it for parts and would bid $7,500.

During the interim between the hearings, the bank contracted with Midstate to perform an annual inspection on the plane prior to the May hearing. On April 20, 1983, Midstate’s president, William Giannetti, and mechanic Ralph Cuchenbrod went to Decatur to get the plane. When they arrived, Decatur Aviation had moved the plane from storage to a maintenance and servicing area, and was servicing the plane for flight. Giannetti testified that the plane appeared generally as it had in May 1982 but was dirty from storage. He aired the cockpit for mildew and noticed corrosion on the brake discs. In checking the oil as to quantity, he noted it was black and needed to be changed at some time. During the flight to Champaign, the plane experienced an electrical power failure which prevented receiving radio messages.

Around May 12 or 13, 1983, Midstate’s FAA-approved mechanic, Wayne VanEgmond, began the annual inspection. On draining the oil and pulling the oil screen from the engine, he discovered the screen was so full of metal shavings that the oil pump had collapsed it. He tore down the engine to determine the cause and found one of the main bearings on the crankshaft had spun in the crankcase and “basically destroyed itself.” The shavings were carried in the oil through the other bearings, oil pump, and engine, scraping additional metal and causing further damage. There was damage to the engine, crankcase, and crankshaft. VanEgmond obtained an estimate of $10,000 to overhaul the engine, with an additional $1,500 for repairs to the crankcase and crankshaft, if repairable. VanEgmond said the normal number of flight hours between major overhauls on an engine of this type was around 1,800, whereas this engine had about 900 flight hours on it. He had inspected the plane 45 flight hours earlier and the main bearing was not in a damaged condition. He did not believe the engine damage could have occurred entirely during the flight from Decatur to Champaign in April 1983, but was unable to approximate the number of flight hours required to cause the damage. He said the preflight inspection in Decatur was not detailed enough to discover any metal shavings then in the oil. VanEgmond discontinued his inspection after finding the damage to the engine. As of the May hearing, the engine remained disassembled in Midstate’s maintenance department, while the aircraft frame was outside in a “tie-down spot.”

Jim Barnes, overhauler of airplane engines, testified he had examined the engine from defendant’s plane and opined that it was “either junk or needs to be overhauled badly.” He estimated the overhaul cost at $10,750 minimum, assuming the crankshaft and crankcase could be repaired. He said the maker of the engine in defendant’s plane was “famous for bearings spinning” and that bearings start to move in an engine with 300 hours on it. Barnes opined that the damage to this engine had taken more than one hour to occur.

Midstate’s president Giannetti opined that the plane in its present condition could be sold for between $15,840 (retail) and $8,462 (wholesale), and concluded that $12,000 would be a good value for defendant’s plane given its condition. He opined that if the engine were overhauled, the value of the plane would be increased to about $20,000.

Count III basically alleges that (1) as a result of the April 20, 1983, flight from Decatur to Champaign at the bank’s direction and the lack of proper maintenance during the bank’s possession, the plane was damaged; (2) the bank’s acts in taking possession, failing to maintain the plane, flying it to Champaign in April 1983, and removing its engine constituted conversion to the bank’s exclusive use and benefit; (3) the bank failed to give him notice of the sale or conversion of the collateral as required under section 9 — 504(3) of the Code; (4) as a result of the failure to give proper notice, plaintiff is barred from a deficiency judgment; (5) the plane constitutes “consumer goods” under section 9 — 109(1) of the Code and the bank’s failure to comply with the requirements of section 9 — 507(1) of the Code entitles him to recovery; and (6) his remedies are cumulative. Upon count III, defendant argues the bank’s acts amounted to an “other disposition” within the meaning of section 9 — 504(3) of the Code, but was not “commercially reasonable” in “every aspect of the disposition” as required by that section.

Section 9 — 504 states in part:

“Secured Party’s Right to Dispose of Collateral After Default; Effect of Disposition. (1) A secured party after default may sell; lease or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation or processing. *** The proceeds of disposition shall be applied in the order following to
(a) the reasonable expenses of retaking, holding, preparing for sale or lease, selling, leasing and the like and, to the extent provided for in the agreement and not prohibited by law, the reasonable attorneys’ fees and legal expenses incurred by the secured party;
(b) the satisfaction of indebtedness secured by the security
interest under which the disposition is made;
* * *
(2) If the security interest secures an indebtedness, the secured party must account to the debtor for any surplus, and,
unless otherwise agreed, the debtor is liable for any deficiency. * * *
(3) Disposition of the collateral may be by public or private proceedings and may be made by way of one or more contracts. Sale or other disposition may be *** at any time and place and on any terms but every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable. Unless collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made shall be sent by the secured party to the debtor.” (Emphasis added.) (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 504.)

Defendant contends that the bank’s acts have essentially destroyed his airplane and amount to an “other disposition.”

The parties cite no Illinois authority on the meaning of “other disposition” in the context of article 9 of the Code. Our own research has disclosed several decisions of other States involving article 9 claims. In Mechanics National Bank v. Gaucher (1979), 7 Mass. App. 143, 386 N.E.2d 1052, construing section 9 — 306 of the Code (“sold *** or otherwise disposed of”), the court held that the collateral, a mobile home, had not been “disposed of” where it had remained on the mobile home dealer’s lot, as disposition implies a permanent transfer of possession. In Cordova v. Lee Galles Oldsmobile, Inc. (N.M. App. 1983), 100 N.M. 204, 668 P.2d 320, construing the concept of disposition under section 9 — 504(1) of the Code, the plaintiff voluntarily returned a car to the dealer and did not redeem it, an employee of the dealer inadvertently allowed the police department to borrow the car, and the car sustained damages. The dealer absorbed the repair costs and the car was subsequently sold. The court pointed out that the plaintiff had no loss by the loan of the car. The reviewing court did not believe that the term “otherwise dispose of” contemplated the loan of collateral.

We also note with interest the decision in Harris v. Bower (1972), 266 Md. 579, 295 A.2d 870. In that case, the creditor reduced to judgment the note on a boating craft in October 1969, and “repossessed” the boat in March 1970, reporting to the governmental unit on boating that he repossessed it for nonpayment. A certificate of title was issued to him in April 1970. The boat was not sold for credit toward the judgment, which was in excess of $19,000, and the debtor’s widow brought the action for an accounting, damages and other relief. There was testimony at hearing that in its condition in February 1970, the boat would have brought $13,900 in the open market. There was little evidence of any effort on the part of the secured party to sell the boat after obtaining title and possession, and the boat was allowed to depreciate ruinously. The widow argued that under section 9 — 505(2) of the Code, the secured party accepted and retained possession of the boat in satisfaction of the obligation. Although the court was unwilling to hold that the secured party’s actions had extinguished the entire debt, the court found that the secured party had not acted in a commercially reasonable manner, citing (1) section 1 — 102(1) of the Code requiring that it be “liberally construed and applied to promote its underlying purposes and policies”; (2) section 1 — 203, imposing an obligation of good faith in the performance and enforcement of every contract or duty within the Code; (3) section 9 — 504(3), requiring that “every aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable”; and (4) section 9— 507(2), setting forth the standard for sales and other types of disposition as basically in conformity with reasonable commercial practices among dealers in the type of property sold or otherwise disposed of.

The court in Harris stated that while most chattels depreciate at a fairly constant rate, it is well known that yachts, if not carefully and constantly maintained, depreciate at a ruinously progressive rate. That the secured party permitted this to happen seemed to the court not commercially reasonable and utterly lacking in common sense. In support of its approach, the Harris court noted a case involving a Super-Constellation aircraft as collateral, wherein the court concluded that the secured party did not sell the aircraft in a commercially reasonable manner and was not entitled to a deficiency judgment against the debtor in view of section 9 — 504 of the Code. The Harris court indicated that the shrinkage in the fair market value of the boat below its value when he took title and possession was attributable to his conduct and remanded for consideration of whether the plaintiff was entitled to credit for the fair market value of the boat.

Although the note here was not reduced to judgment when the bank took possession of defendant’s plane, as in Harris, that case is otherwise similar in that the secured party, having seen fit to take possession of the collateral, has allegedly not treated it in a commercially reasonable manner.

In considering the defendant’s argument, article 9 of the Code generally establishes a framework allocating rights and remedies between the parties to a security agreement aimed at effecting an approach of balance based upon the standard of commercial reasonableness. With regard to the evidence presented below, sections 9 — 501, 9 — 505(2), 9 — 507(1), and 9 — 207 are illustrative. Section 9 — 501 (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 501) provides in part:

“(1) When a debtor is in default under a security agreement, a secured party has the rights and remedies provided in this Part and except as limited by subsection (3) those provided in the security agreement. He may reduce his claim to judgment, foreclose or otherwise enforce the security interest by any available judicial procedure. *** A secured party in possession has the rights, remedies and duties provided in Section 9 — 207. The rights and remedies referred to in this subsection are cumulative.
(2) After default, the debtor has the rights and remedies provided in this Part, those provided in the security agreement and those provided in Section 9 — 207.
(3) To the extent that they give rights to the debtor and impose duties on the secured party, the rules stated in the subsections referred to below may not be waived or varied except as provided with respect to compulsory disposition of collateral (subsection (3) of Section 9 — 504 and Section 9 — 505) ***:
* * *
(b) subsection (3) of Section 9 — 504 and subsection (1) of Section 9 — 505 which deal with disposition of collateral;
(c) subsection (2) of Section 9 — 505 which deals with acceptance of collateral as discharge of obligation;
* * *
(e) subsection (1) of Section 9 — 507 which deals with the secured party’s liability for failure to comply with this Part.”

Section 9 — 505(2) (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 505(2)) states in relevant part:

“In any other case involving consumer goods or any other collateral a secured party in possession may, after default, propose to retain the collateral in satisfaction of the obligation. Written notice of such proposal shall be sent to the debtor ***. *** If the secured party receives objection in writing from a person entitled to receive notification within twenty-one days after the notice was sent, the secured party must dispose of the collateral under Section 9-504. In the absence of such written objection the secured party may retain the collateral in satisfaction of the debtor’s obligation.”

Section 9 — 507(1) (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 507(1)) provides:

“If it is established that the secured party is not proceeding in accordance with the provisions of this Part disposition may be ordered or restrained on appropriate terms and conditions. If the disposition has occurred the debtor *** has a right to recover from the secured party any loss caused by a failure to comply with the provisions of this Part. If the collateral is consumer goods, the debtor has a right to recover in any event an amount not less than the credit service charge plus 10% of the principal amount of the debt or the time price differential plus 10% of the cash price.”

Section 9 — 207 (Ill. Rev. Stat. 1981, ch. 26, par. 9 — 207) sets forth the rights and duties of the parties when the collateral is in the secured party’s possession:

“(1) A secured party must use reasonable care in the custody and preservation of collateral in his possession. ***
(2) Unless otherwise agreed, when collateral is in the secured party’s possession
(a) reasonable expenses *** incurred in the custody, preservation, use or operation of the collateral are chargeable to the debtor and are secured by the collateral;
* * *
(c) the secured party may hold as additional security any increase or profits (except money) received from the collateral, but money so received, unless remitted to the debtor, shall be applied in reduction of the secured obligation;
* * *
(3) A secured party is liable for any loss caused by his failure to meet any obligation imposed by the preceding subsections but does not lose his security interest.
(4) A secured party may use or operate the collateral for the purpose of preserving the collateral or its value or pursuant to the order of a court of appropriate jurisdiction or, except in the case of consumer goods, in the manner and to the extent provided in the security agreement.” (Emphasis added.)

The word “preservation,” as used in section 9 — 207(1), has been held to include preservation of value. See Farmers State Bank v. Ballew (Okla. App. 1981), 626 P.2d 337, 340-41.

From the evidence here, several conclusions under article 9 appear. First, the bank’s taking possession of the plane as collateral was in the context of section 9 — 503 of the Code, and the bank proceeded to reduce its claim on the note to judgment within the context of section 9 — 501(1). Both actions were permissible, as remedies of the secured party are cumulative under section 9 — 501(1). Second, the bank did not propose to retain the collateral in satisfaction of the obligation within the context of section 9 — 505(2) of the Code. Third, the bank did not sell or lease the collateral within the context of section 9— 504. Fourth, as the trial court found, no maintenance was performed on the plane during the storage period after the bank’s possession. Fifth, any preexisting damage to the engine of defendant’s plane was at least exacerbated by the flight from Decatur to Champaign while in the bank’s possession and on its order. Indeed, there was evidence that damage caused by metal shavings in the oil would result not only from flight time, but also by all other time the engine was running. Here, there was no evidence, for example, as to the amount of time the plane’s engine was running in preparation for the flight from Decatur to Champaign, the flight time, the time the engine was running after the plane landed in Champaign. There was no evidence as to whether the plane’s engine was started and run for any purpose from the time of landing until the oil was drained by VanEgmond in May 1983. Moreover, there was evidence that the plane was moved from where it was left on the Decatur airport apron to storage at the bank’s direction, but no evidence of the time the engine was running for this purpose. These considerations detract from the trial court’s reference to Barnes’ testimony as supplying the inference that the condition necessitating overhaul of the engine of defendant’s plane preexisted its storage, and suggest a claim cognizable under section 9 — 207 of the Code, to be judged by the standard of reasonable care in the custody and preservation of collateral of this type.

In view of the language of count III of the counterclaim and its allegations, we decline to decide whether the bank’s conduct amounted to an “other disposition” within the meaning of section 9— 504, as we conclude that count III states a claim cognizable under section 9 — 207 of the Code. Dependent upon the proof, if meritorious, violation of section 9 — 207 by the secured party in possession would entitle defendant to a setoff against the debt.

In assessing the reasonableness of a secured party's treatment of collateral in its possession, we note several decisions of sister jurisdictions considering the statutory equivalents of section 9 — 207. In Michigan National Bank v. Marston (1970), 29 Mich. App. 99, 105-OS, 185 N.W.2d 47, 50-51, commenting on the cumulative rights and remedies of a secured party under article 9, the court referred to Olsen v. Valley National Bank (1968), 91 Ill. App. 2d 365, 371, 234 N.E.2d 547, 550, as stating the majority rule, including Illinois, being founded on the rationale that a creditor is able to pursue any one of a number of remedies against a debtor until the debt is satisfied. The Marston court stated that this did not mean, however, that the secured party owed no duties to a debtor with respect to collateral:

“It would be unfair to allow a creditor to deprive the debtor of the possession and use of the collateral for an unreasonable length of time and not apply the asset or the proceeds from its sale toward liquidation of the debt. Moreover, it would be equally unfair to allow a creditor to take possession at all, if the creditor never intended to dispose of the security. For during the period that the debtor is deprived of possession he may have been able to make profitable use of the asset or may have gone to far greater lengths than the creditor to sell. Once a creditor has possession he must act in a commercially reasonable manner toward sale, lease, proposed retention where permissible, or other disposition. [Citations.] If such disposition is not feasible, the asset must be returned, still subject, of course, to the creditor’s security interest. To the extent the creditor’s inaction results in injury to the debtor, the debtor has a right of recovery. [Citation.]” (29 Mich. App. 99, 108, 185 N.W.2d 47, 51.)

In Ballew, a bank sued to recover on notes and foreclose on security agreements on collateral securing them. A few days later, the creditor bank used self-help to repossess the collateral, used cars, part of the inventory of the debtor’s business. The bank held the collateral for the 17 months, through the entry of summary judgment. The reviewing court remanded to determine whether the bank’s actions as to the collateral had been reasonable, adopting the above language of Mansion and stating:

“The secured party is not required to elect one remedy to the exclusion of all others. He may pursue one, then another. It is even possible that he could pursue more than one at the same time, if all his actions could be considered reasonable and not violative of Part 5 and Article 9 or other applicable law. But if Ms actions result in impairment of the collateral, he will be liable to the debtor for the damages incurred. Once he has possession of the collateral his actions with regard to it must be reasonable in all respects. ***
We find further support for our decision in other jurisdictions. In Moran v. Holman, 514 P.2d 817, 819-20 (Alaska 1973), the secured party used self-help to repossess collateral and used it for four months. He then brought suit against the debtor on the full amount of the debt. The suit was not tried for 25 months during which the secured party retained the collateral without offering to return it or to dispose of it. The court held that under proper circumstances a secured party may retain possession of collateral and still sue on the obligation. When, however, he retains collateral which depreciates in value, the debtor may validly claim his obligation as satisfied, even without written notice, under section 9 — 505(2). In Schultz v. Delaware Trust Co., 360 A.2d 576, 578 (Del. Super. Ct. 1976), the court found that whether retention of collateral for a period of five years without disposition or return to the debtor is reasonable was a question of fact precluding summary judgment on that issue. In Mack Financial Corp. v. Scott, 100 Idaho 889, 606 P.2d 993, 997 (1980), the Idaho Supreme Court affirmed the decision of the trial court, which held that an unexplained delay of two years between repossession of the collateral and its sale at public auction constituted an unreasonable disposition of the collateral in violation of section 9 — 504(3). In Haufler v. Ardinger, 28 U.C.C. Rep. Ser. 893, 896 (Mass. App. 979), the court found that a secured party, who took possession of collateral upon the debtor’s default, used it in his own business for 38 months, then sold it, had unequivocally elected to retain the collateral in satisfaction of the debt.” (Emphasis added.) (626 P.2d 337, 340-41.)

In Henderson Few & Co. v. Rollins Communications, Inc. (1978), 148 Ga. App. 139, 141-42, 250 S.E.2d 830, 832, the court stated:

“In the present case, [the seller, secured party] did not act in a commercially reasonable manner when it repossessed the collateral more than one year after suit was filed, never disposed of it or returned it to the [debtor], and apparently did not intend to apply the value of the asset toward liquidation of the alleged debt although a creditor can only recover the amount of the debt.”

See generally Murray, Secured Transactions-Defenses of Impairment and Improper Care of Collateral, 79 Com. L.J. 265 (1974).

Section 9 — 207 does not impose liability on the bank for damages to or deterioration of the collateral which occurs prior to its possession. The damage to the engine of defendant’s plane may be attributable solely to the period of the bank’s possession, or may be allocable between that occurring while in the debtor’s possession and that occurring after the bank took possession. Further evidence is required to determine if damages are to be allocated between the parties; an estimated cost of repairing preexisting damages and those which followed the bank’s taking possession may provide a formula for allocating these damages.

However, once a secured party has possession of the collateral, its actions with regard to collateral must be reasonable in all respects through the date of disposition. Here, the evidence was that the annual inspection of defendant’s plane by VanEgmond was never completed. Further, as of May 1983 the engine remained disassembled in Midstate’s maintenance area and the aircraft shell was outside. The secured party may, therefore, be liable for any additional damages to the collateral violative of section 9 — 207’s standard of reasonable care in the custody and preservation of collateral.

Myriad complications are introduced to a case when a secured party taking possession does not have the collateral examined and evaluated as of that date. Wé are unable to determine and give meaning from the record on appeal to the standard of reasonable care in the custody and preservation of collateral of the type involved, and the nature and duties this standard entails in the examination and evaluation of such collateral when the secured party takes possession. We find, however, that count III of the counterclaim sufficiently alleges the bank’s violation of the Code so as to raise a question of fact on the damage to the collateral attributable to its period of possession, and entitling him to a setoff in the amount of the loss caused by the bank’s failure to meet Code obligations. We therefore reverse the judgment as to count III of the counterclaim and remand for further proceedings consistent with this opinion.

Defendant next argues that the bank’s failure to give him notice of the “other disposition” of his plane bars recovery on the note under section 9 — 504, citing Stensel v. Stensel (1978), 63 Ill. App. 3d 639, 380 N.E.2d 526, which held that failure to give a debtor notice of sale as required by the Code barred the secured party’s recovery of any deficiency judgment. There is as yet no deficiency judgment. Further, the “absolute bar” view expressed in Stensel has been rejected by the Illinois Supreme Court. First Galesburg National Bank & Trust Co. v. Joannides (1984), 103 Ill. 2d 294, 469 N.E.2d 180.

Finally, defendant claims his plane is “consumer goods” under section 9 — 109(1) of the Code, so that on disposal in violation of article 9 he is entitled to recover damages under section 9 — 507(1). The trial court made no finding on this issue, and the question is better addressed on remand.

Judgment on the complaint affirmed subject to any setoff due defendant on the countercomplaint; judgment affirmed as to counts I and II of the countercomplaint; judgment reversed as to count III of the countercomplaint and remanded for proceedings consistent with this opinion.

Affirmed in part, reversed in part, and cause remanded.

WEBBER and MILLS, JJ., concur.


source: Caselaw Access Project

author: JUSTICE REINHARD

license: Public Domain

text:
    CHARLES SPOONER et al., Plaintiffs-Appellants, v. ARMOUR-DIAL et al., Defendants-Appellees.
    Second District
    No. 84—253
    Opinion filed March 26, 1985.
    Kenneth L. Kaergard, of Neri & Hochberg, Ltd., of St. Charles, for appellants.

      Alan E. Lapidus and Gwenda M. Burkhardt, both of Vedder, Price, Kaufman & Kammholz, of Chicago, for appellees.
   JUSTICE REINHARD

delivered the opinion of the court:

Plaintiffs, Charles and Clara Spooner, filed a five-count complaint, later amended and supplemented, against defendants, Armour-Dial, Inc., and four of its supervisory employees, seeking damages for intentional infliction of emotional distress, count I, tortious interference with occupation, count II, libel and slander, count III, bailment, count IV, and loss of consortium, count V, arising out of Charles Spooner’s employment by defendant, Armour-Dial. This appeal is from an order granting defendants’ motion for summary judgment on all counts.

Plaintiffs raise two issues on appeal: (1) whether the trial court, relying on Suddreth v. Caterpillar Tractor Co. (1983), 114 Ill. App. 3d 396, 449 N.E.2d 203, improperly concluded that because all of plaintiffs’ claims were covered under the grievance' procedures of a collective-bargaining agreement between Armour-Dial and plaintiff Charles Spooner’s union, plaintiffs could not bring these actions in circuit court independent of any contract remedy based upon the collective-bargaining agreement; and (2) assuming an independent action exists, whether genuine issues of material fact are present which prevent the granting of summary judgment.

Plaintiff Charles Spooner was employed as a welder-fitter by Armour-Dial, Inc., at its Montgomery, Illinois, facility. Since 1964, plaintiff has been a member of either Amalgamated Meat Cutters and Butcher Workmen of North America, AFL-CIO, Local P-100, or its successor union, United Food and Commercial Workers International Union, AFL-CIO & CLC, Local P-500. During plaintiff’s period of employment with Armour-Dial, there were in effect certain collective bargaining agreements between Armour-Dial and the two labor unions which governed the terms and conditions of employment of Armour-Dial employees. Particularly relevant to the instant appeal are the collective bargaining agreement provisions which provide certain procedures to be utilized in resolving employee grievances and disputes.

Collective-bargaining agreement article XXI, entitled “Adjustment of Grievances,” section 21.2, provides in relevant part:

“21.2 Grievance Steps.
Should differences arise between the Company and the Union, or between the Company and employees, or between employees of the Company because of Union or non-Union affiliation, or should trouble of any kind arise in the plant, there shall be no strike, stoppage, slowdown, suspension of work or boycott on the part of the Union or its members or the employees, or lockout on the part of the Company, on account of such dispute, until such matters have been processed through the grievance procedure ***.”

Subsections (a) through (d) of section 21.2 set forth a three-step procedure for the filing of employee grievances, followed by a final step pursuant to which the matter is submitted to binding arbitration. The first step provides that an employee may initiate these procedures by filing a grievance which can later be appealed by the grievance committee under steps two, three and the final step if no settlement is reached under the preceding steps. The final step allows arbitration by an impartial arbitrator pursuant to section 21.4, which provides in relevant part:

“21.4 Arbitration.
(a) Arbitration shall be the final step with respect to the classes of grievances referred to in this Section and shall be
provided through an Arbitrator chosen by the parties.
* * *
(f) There shall be no appeal from the Arbitrator’s decision, which shall be final and binding on the Union and its members, the employees or employee involved, and the Company.”

Plaintiffs’ amended and supplemented complaint, bill of particulars and supplemental bill of particulars specifically set forth the alleged conduct of defendants underlying the five theories of recovery advanced by plaintiffs in counts I through V.

Count I alleges that plaintiff Charles Spooner suffered severe emotional distress as a result of defendants’ extreme and outrageous conduct. Plaintiff delineated approximately 16 specific instances of alleged harassment by defendants, within the context of the employment relationship, which resulted in his suffering severe emotional distress. Generally, these allegations of harassment included accusations by one of Armour-Dial’s supervisory employees that plaintiff had been drinking on the job and had been abusive to his supervisory employees, which resulted in his termination from employment; a conspiracy by defendants to keep plaintiff from being reinstated at his former job; Armour-Dial’s failure to reimburse plaintiff for medical expenses and back pay; various and repeated warnings given to plaintiff by Armour-Dial’s supervisory employees concerning his conduct in the workplace; a statement made by one of plaintiff’s superiors that plaintiff had requested several female employees to go out drinking with him at lunch; Armour-Dial’s wrongful termination of plaintiff’s employment for theft of company product; and allegations by plaintiff that Armour-Dial employees had removed certain items of his personal property from his employee locker which were never returned to him.

Plaintiff filed grievances pursuant to the provisions of his collective-bargaining agreement on approximately 13 of his specific allegations of misconduct by defendants. Two of these grievances were ultimately submitted to arbitration and settlements were reached. The remaining grievances were denied by the grievance committee and not appealed through the grievance process by plaintiff. Of the remaining three allegations of misconduct, one was the subject of a charge with, and denied by, the National Labor Relations Board; and no action was taken by plaintiff in response to the final two alleged acts of misconduct by defendants.

Count II of the complaint alleges that Armour-Dial’s supervisory employees tortiously interfered with plaintiff’s occupation. In support of this count, plaintiff alleges the same instances of misconduct underlying his intentional infliction of emotional distress claim.

Count III, which asserted libel and slander as a theory of recovery, related to testimony given by one of Armour-Dial’s employees at an arbitration hearing regarding the reasons for the termination of plaintiff’s employment, to a memorandum received in evidence at the arbitration hearing which repeated the same reasons, and to a comment made by one of the individual defendants to a union steward on April 23, 1979, that if plaintiff was trying to take some of the female employees out drinking at noon, he should stop because he would get in trouble.

Count IV alleged that Armour-Dial was liable for certain items of plaintiff’s personal property valued at $850 which had been removed from his employee locker sometime after his employment was terminated in June 1977 and. which were never returned to him when he was later reinstated, following arbitration, in November 1978.

Count V, brought by plaintiff Clara Spooner alleged loss of consortium as a result of defendants’ conduct directed against her husband, as asserted in counts I through IV. Plaintiffs agree below and on appeal that Clara Spooner’s action for loss of consortium is contingent on whether Charles Spooner may maintain his actions.

Defendants’ original motion for summary judgment was denied. A motion to reconsider was later filed by defendants in which they relied on the newly filed appellate court decision of Suddreth v. Caterpillar Tractor Co. (1983), 114 Ill. App. 3d 396, 449 N.E.2d 203, not previously considered by the trial court.

The trial court granted defendants’ motion for summary judgment relying principally on this court’s decision in Suddreth v. Caterpillar Tractor Co. (1983), 114 Ill. App. 3d 396, 449 N.E.2d 203. In Suddreth, we followed the holding in Cook v. Caterpillar Tractor Co. (1980), 85 Ill. App. 3d 402, 407 N.E.2d 95, that an action for retaliatory discharge brought by an employee protected by a collective-bargaining agreement which provides specific grievance procedures to ensure discharge from employment only for just cause could not be brought where the employee failed to exhaust his remedies under the collective-bargaining agreement. Plaintiffs, in the trial court, had argued that the Suddreth holding was limited to the tort of retaliatory discharge, and the case was not precedent to bar their distinctly different tort and property loss claims involved here.

By the time this case was before us on oral argument, our supreme court had rendered its decision in Midgett v. Sackett-Chicago, Inc. (1984), 105 Ill. 2d 143. In Midgett, the court held that in order to provide a complete remedy it was necessary that the victim of a retaliatory discharge be given an action in tort, independent of any contract remedy the employee may have based on the collective-bargaining agreement. (105 Ill. 2d 143, 149-52.) Thus, our holding in Suddreth was incorrect. Now the parties’ arguments are transposed, with the plaintiffs embracing the rationale of Midgett, arguing it extends to the claims asserted in this case, while defendants seek to limit the applicability of Midgett to the tort of retaliatory discharge.

The issue before us is whether the plaintiffs may bring the tort actions of intentional infliction of emotional distress, tortious interference with occupation, and libel and slander; a bailment action; and a loss of consortium action based upon the tort claims, independent of the collective-bargaining agreement between Armour-Dial and plaintiff’s (Charles Spooner) union, which contains grievance procedures for the subject matter of these actions. Plaintiffs have not argued that the underlying acts on which their causes of action are premised do not come within the provisions of the collective-bargaining agreement pertaining to adjustment of grievances. Rather, plaintiffs contend that separate actions, as alleged, can arise in a setting which normally is subject to the law governing labor relations, because here, the remedy for the torts and bailment alleged is not compensable in a labor contract proceeding.

Initially, we must determine whether the holding in Midgett v. Sackett-Chicago, Inc. (1984), 105 Ill. 2d 143, controls our decision in this case. We hold it does not. In Midgett, our supreme court stated: “Applying this reasoning here, there is no reason to afford a tort remedy to at-will employees but to limit union members to contractual remedies under their collective-bargaining agreements. (Wyatt v. Jewel Cos. (1982), 108 Ill. App. 3d 840, 841-42.) Generally, if a union employee’s grievance goes to arbitration and the arbitrator does not find just cause for the employee’s discharge, the remedy will be simply job reinstatement and full back pay. (See Silzer, Workers’ Compensation: Retaliatory Discharge of Employees Covered by a Collective Bargaining Agreement (1981), 70 Ill. B.J. 164, 166.) If there is no possibility that an employer can be liable in punitive damages, not only has the employee been afforded an incomplete remedy, but there is no available sanction against a violator of an important public policy of this State. It would be unreasonable to immunize from punitive damages an employer who unjustly discharges a union employee, while allowing the imposition of punitive damages against an employer who unfairly terminates a nonunion employee. The public policy against retaliatory discharges applies with equal force in both situations. (That Illinois has a strong public policy to insure the protection of workers covered by the Workers’ Compensation Act is clear. Section 6 of the Act (Ill. Rev. Stat. 1981, ch. 48, par. 138.6) requires employers to post printed notices containing information concerning the Act which is necessary to aid employees to safeguard their rights under the Act in the event of injury. Employers are required to file reports of injuries and other matters with the Commission, and the failure to do so constitutes a petty offense. Section 26 (Ill. Rev. Stat. 1981, ch. 48, par. 138.26) provides that in the event of any violation of the Act, which is declared to be a petty offense, the Attorney General and the State’s Attorney of each county, upon the request of the Industrial Commission, shall enforce the penalties prescribed in the Act.)” (Emphasis added.) (105 Ill. 2d 143, 150-51.)

It is apparent from the above-quoted language that the court was concerned with the important public policy in Illinois against retaliatory discharges. There is no indication, however, that matters other than retaliatory discharge, which may be the subject matter of a grievance procedure and which also may be pleaded as a tort or bailment action, may be proceeded on independent of the contractual remedy provided in the collective-bargaining agreement. Although a similarity exists in the tort actions pleaded here and the tort of retaliatory discharge in that punitive damages are sought and normally would not be available under the collective-bargaining agreement (105 Ill. 2d 143, 150), we believe that the court in Midgett considered the possible punitive damage award as a necessary remedy only in conjunction with the strong public policy embraced against retaliatory discharges. In short, Midgett did not address the issue presented here, nor do we conclude the language of that opinion supports plaintiffs’ position.

Nevertheless, plaintiffs also maintain that the language of the collective-bargaining agreement “does not mandate utilization of the grievance procedure as to matters not involving labor action (strike, work stoppage or slowdown, suspension of work), nor does it restrict the employee to the grievance procedure as an exclusive remedy when no strike related action is being taken.”

The entire collective-bargaining agreement, labeled the “Master Agreement,” has not been made a part of the record. However, the parties agree that article XXI, “Adjustment of Grievances,” providing for the grievance procedures, is controlling and is contained, in pertinent part, in the record. Article XXI, 21.2, “Grievance Steps,” states, inter alia, that:

“21.2 Grievance Steps.
Should differences arise between the Company and the Union, or between the Company and employees, or between employees of the Company because of Union or non-Union affiliation, or should trouble of any kind arise in the plant, there shall be no strike, stoppage, slowdown, suspension of work or boycott on the part of the Union or its members or the employees, or lockout on the part of the Company, on account of such dispute, until such matters have been processed through the grievance procedure provided below ***.”

The grievance provision then further specifies a three-step procedure culminating in a final step of binding arbitration, with no appeal if the parties fail to reach a settlement.

The extremely broad grievance provision of the collective-bargaining agreement, referred to above, provides, relevant to the parties here, that “[sjhould differences arise *** between the Company and employees *** there shall be no strike, stoppage *** until such matters have been processed through the grievance procedure provided ***.” First, the subject matter which forms the basis of all of plaintiffs’ tort and bailment actions against the defendants falls within the broad language of the collective-bargaining agreement, which includes “differences *** between the Company and employees.” Plaintiffs have not contended otherwise. However, plaintiffs do maintain that the agreement does not “represent itself to be the exclusive remedy of the parties.” We reject this argument, as the courts have consistently held that where, as in the present case, a collective-bargaining agreement establishes a grievance and arbitration procedure, the agreement must be construed to establish these procedures as the exclusive mode of redress for the enforcement of the terms of the employment contract, unless the parties, through the agreement, expressly agree otherwise. Meeks v. South Bend Freight Lines, Inc. (1980), 85 Ill. App. 3d 755, 758, 407 N.E.2d 228.

Plaintiffs also contend that the grievance procedure must be followed “prior to the commencement of any work action,” and the grievance and arbitration procedure is implemented “only as a condition precedent to such work action.” In essence, plaintiffs appear to argue that the grievance procedure of the collective-bargaining agreement does not require that all disputes be resolved according to the contract grievance procedure, but only requires that before work action can be taken there must be compliance with the contractual grievance procedure. As Charles Spooner did not undertake work-related action, plaintiffs contend he was not required to submit the tort and bailment actions to the grievance procedure. This argument is meritless.

Such an interpretation of the grievance procedure provision of the collective-bargaining agreement would render the grievance provisions inapplicable in all situations except where work action is contemplated. Not only does plaintiffs’ interpretation run counter to the laudable purpose of collective-bargaining agreements in settling employee grievances in a uniform and exclusive method, but also it is not supported by a full reading of the applicable parts of the collective-bargaining agreement contained in the record. The provision against work action does not narrow the grievance procedure, but instead prevents any such work action until the matter has been processed through the grievance procedure provided. In fact, Charles Spooner did utilize the grievance procedure for most of the grievances which he has now included as the basis for the actions in his complaint. His own past actions belie the thrust of this present argument.

Having concluded that the holding in Midgett is authority only for allowing an action in tort for a retaliatory discharge independent of any contract remedy an employee may have based on a collective-bargaining agreement, and that the subject matter of plaintiffs’ tort and bailment actions fall within the exclusive grievance provisions of the agreement here, we must further determine whether these tort and bailment claims are thereby barred in this suit by Charles Spooner’s failure to exhaust the grievance and arbitration remedies provided in the collective-bargaining agreement.

Generally, where a collective-bargaining agreement establishes a grievance and arbitration procedure, the employee wishing to assert grievances which are the subject matter of the grievance procedure must use the contract grievance procedure agreed upon by employer and union. (Republic Steel Corp. v. Maddox (1965), 379 U.S. 650, 13 L. Ed. 2d 580, 85 S. Ct. 614; Meeks v. South Bend Freight Lines, Inc. (1980), 85 Ill. App. 3d 755, 407 N.E.2d 228.) As noted by the United States Supreme Court in expressing Federal policy in Republic Steel Corp. v. Maddox (1965), 379 U.S. 650, 13 L. Ed. 2d 580, 85 S. Ct. 614:

“A contrary rule which would permit an individual employee to completely sidestep available grievance procedures in favor of a lawsuit has little to commend it. In addition to cutting across the interests already mentioned, it would deprive employer and union of the ability to establish a uniform and exclusive method for orderly settlement of employee grievances. If a grievance procedure cannot be made exclusive, it loses much of its desirability as a method of settlement. A rule creating such a situation ‘would inevitably exert a disruptive influence upon both the negotiation and administration of collective agreements.’ (Citation.)” 379 U.S. 650, 653, 13 L. Ed. 2d 580, 583-84, 85 S. Ct. 614, 616-17.

There is authority from other jurisdictions that an employee’s failure to exhaust his grievance and arbitration remedies bars a claim in court framed in terms of tort, where the acts complained of constitute potential grievances under the collective-bargaining agreement. (Dinger v. Anchor Motor Freight, Inc. (S.D.N.Y. 1980), 501 F. Supp. 64 (complaint for intentional infliction of emotional distress dismissed); Johnson v. Hydraulic Research & Manufacturing Co. (1977), 70 Cal. App. 3d 675, 139 Cal. Rptr. 136 (complaint for conspiracy, wrongful interference with contractual relations, and defamation dismissed); see also Morris v. Owens-Illinois, Inc. (S.D. W. Va. 1982), 544 F. Supp. 752).) To the contrary, one court has held, without analysis, that an employee covered by a collective-bargaining agreement providing for a grievance procedure could bring certain tort actions without exhaustion of contract remedies because the remedies sought were not available under the union grievance procedure. Gretencord v. Ford Motor Co. (D. Kan. 1982), 538 F. Supp. 331.

We hold that the better-reasoned authority is that the tort and bailment actions pleaded here are barred by plaintiff Charles Spooner’s failure to exhaust the grievance and arbitration remedies provided in the collective-bargaining agreement covering the subject matter forming the basis of these actions. Requiring union members to exhaust their contract remedies is part of the trade-off such employees accept in exchange for the many rights that they will benefit from, and rights which the employer gives up. No overriding public policy is involved here, as in the case of a retaliatory discharge, which would allow an action in tort, independent of the contract remedy the employee has based upon the collective-bargaining agreement. For example, where claims against employers are founded upon violations of Federal statutory rights, the United States Supreme Court has allowed actions to be brought independent of the collective-bargaining agreements. (See Midgett v. Sackett-Chicago, Inc. (1984), 105 Ill. 2d 143, 151-52.) Plaintiffs have not shown violations of Federal or State statutory rights reflecting important public policy which would support an independent action. Although plaintiffs have relied on Farmer v. United Brotherhood of Carpenters & Joiners of American, Local 25 (1977), 430 U.S. 290, 51 L. Ed. 2d 338, 97 S. Ct. 1056, contending that the Supreme Court recognized that “labor claims and tort claims are independent actions which can be resolved in different forums as to remedies sought,” Farmer was decided on preemption grounds and did not involve a union employee suing his employer in tort for conduct covered by the grievance procedure of a collective-bargaining agreement. The Farmer decision is inapposite.

Charles Spooner did not submit to the grievance procedure the claims underlying the actions for libel and slander, bailment, and certain of the allegations in the tort claims for intentional infliction of emotional distress and interference with occupation, and is barred from bringing these actions for failure to exhaust the remedies provided in the collective-bargaining agreement. Moreover, the collective-bargaining agreement contains provisions expressly providing for a three-step grievance procedure culminating in a final step of arbitration from which there shall be no appeal. Thus, even for those claims which Spooner did submit to the grievance procedure, some of which he ultimately did not pursue to completion and others which he settled or was given an award by the arbitrator, the collective-bargaining agreement expressly provides that any settlement or arbitrator’s decision shall be final and binding without appeal.

Where a binding grievance and arbitration procedure is established by a collective-bargaining contract, a decision rendered pursuant to such procedure may not be reviewed by the courts (Fredman Brothers Furniture Co. v. Retail Store Employees Union, Local 575 (1979), 70 Ill. App. 3d 518, 521, 388 N.E.2d 849; Turner v. Steffke Freight Co. (1964), 49 Ill. App. 2d 76, 82-83, 198 N.E.2d 696), unless a party attacking the decision can demonstrate fraud, partiality, or misconduct on the part of the arbitrator (Board of Trustees v. Cook County College Teachers Union, Local 1600 (1981), 96 Ill. App. 3d 913, 917, 422 N.E.2d 115; Fredman Brothers Furniture Co. v. Retail Store Employees Union, Local 575 (1979), 70 Ill. App. 3d 518, 388 N.E.2d 849). No allegations are made here attacking the settlements or arbitrators’ decisions, and those matters are therefore not reviewable in the courts.

For the foregoing reasons, we conclude that judgment was properly entered for defendants even though the trial court relied on an incorrect reason. If legally correct, the judgment of the trial court may be sustained on any ground justified in the record. Material Service Corp. v. Department of Revenue (1983), 98 Ill. 2d 382, 387, 457 N.E.2d 9; Gust v. Village of Skokie (1984), 125 Ill. App. 3d 102, 108, 465 N.E.2d 696.

Affirmed.

NASH, P.J., and STROUSE, J., concur.


author: JUSTICE SCHNAKE

text:
      In re APPLICATION OF BOONE COUNTY COLLECTOR (Candlewick Lake Association, Inc., Petitioner-Appellant, v. Continental Illinois National Bank, Respondent-Appellee).
    Second District
    Nos. 84—362, 84—363 cons.
    Opinion filed April 2, 1985.

      Edwin D. Muderlak, of Rockford, for appellant.
    C. Ronald Cook, of Sandwich, for appellee.
   JUSTICE SCHNAKE

delivered the opinion of the court:

This matter was instituted by petitioner, Candlewick Lake Association, Inc. (Candlewick), when it filed 29 petitions for tax deed for the tax year 1980 pursuant to section 266 of the Revenue Act of 1939 (Ill. Rev. Stat. 1983, ch. 120, par. 747). Twelve of these petitions are not before this court. Appeal No. 84 — 362 involves 12 of the remaining petitions, with the record on appeal limited to case No. 81 — TX—3(2), which the trial court found to be substantially identical to the 11 other cases. Appeal No. 84 — 363 involves the five remaining petitions, with the record on appeal limited to case No. 81 — TX—3(11), which the trial court found to be substantially identical to the four other cases. Both appeals present the question of whether a lienholder, because of its interest in the property, is precluded from obtaining a tax deed to the property. The circuit court of Boone County held in the affirmative, and we affirm.

Candlewick is a homeowner’s association formed pursuant to the covenants, conditions and restrictions of Candlewick Lake Subdivision (CCR’s) recorded in Boone County. Each lot owner is a member by virtue of lot ownership. The CCR’s require that each lot owner pay dues for the support of Candlewick, which owns and manages the common areas and enforces the CCR’s. Candlewick is authorized by the CCR’s to. record an assessment lien with the Boone County recorder of deeds against any lot for which dues are in default.

On November 30, 1981, the Boone County clerk held a tax sale as provided for by section 235a of the Revenue Act of 1939 (Ill. Rev. Stat. 1981, ch. 120, par. 716a). Candlewick purchased tax certificate No. 1 — 222, involved in case No. 81 — TX—3(2), for $134.65 and tax certificate No. 1 — 259, involved in case No. 81 — TX—3(11), for $238.16. On September 7, 1983, Candlewick filed its petitions for tax deed as the holder of the tax purchase certificates on the two lots. No redemption took place in case No. 81 — TX—3(2) (appeal No. 84 — 362), while in case No. 81 — TX—3(11) (appeal No. 84 — 363), Continental Illinois National Bank (Continental), which held a mortgage on the property, redeemed under protest pursuant to section 253 of the Revenue Act of 1939 (Ill. Rev. Stat. 1983, ch. 120, par. 734). The trial court denied both petitions for tax deed because Candlewick was a lien holder of record on the date of the tax sale. Additionally, in case No. 81 — TX—3(11) (appeal No. 84 — 363), the trial court upheld Continental’s redemption under protest and ordered its redemption money refunded, while holding that Candlewick’s tax purchases were actually tax payments. Candlewick appeals both the denial of its 17 tax petitions and the trial court’s treatment of its tax purchase as a tax payment.

Several Illinois cases have held that an owner or mortgagee, because of its interest in the property and its obligation to pay the taxes on it, may not purchase the property at a tax sale and thereby cut off the interest in the property of the other party. (Lewis v. Ward (1881), 99 Ill. 525; Oswald v. Wolf (1889), 129 Ill. 200; McChesney v. White (1892), 140 Ill. 330; Stinson v. Connecticut Mutual Life Insurance Co. (1898), 174 Ill. 125; Ragor v. Lomax (1887), 22 Ill. App. 628.) While no Illinois case has yet decided whether a lienor is precluded from purchasing at a tax sale, thereby cutting off the interests in the property of a fellow lienor or mortgagee, the great weight of authority in the United States is that it may not do so. Annot., 140 A.L.R. 294, 319-31 (1942).

The rationale for this rule is that equity regards the land as a common fund for the payment of all liens and mortgages, and it would be inequitable and a fraud for one lienor to acquire title to the land by a tax sale and use it to destroy the claim of another lienor or mortgagee. The lienor is authorized to redeem from the tax sale, and equity will not allow him to acquire the title for an inconsiderable sum when he was authorized to remove the trifling incumbrance by redemption. Equity will relieve against such oppression and teach the grasping creditor moderation in his demands, and that he cannot destroy others to build up his own fortunes. Koch v. Kiron State Bank (1941), 230 Iowa 206, 297 N.W. 450.

Support for this rule is found in several Illinois cases. Specifically, in Ragor v. Lomax (1887), 22 Ill. App. 628, where the court held that a mortgagee could not purchase at a tax sale and thereby cut off the mortgagor’s interest in the property, the court stated:

“But while it may not be the duty of the mortgagee to pay the taxes it is clearly his right to do so, for he has a manifest interest in the protection of his mortgage title. In the land both the mortgagor and the mortgagee have an interest. It is a fund, the protection of which is for the benefit of both, but the lien of the State for taxes is superior to the right of each, and if one or the other does not discharge it, the land will be sold and the interest will be extinguished.” (Emphasis added.) 22 Ill. App. 628, 632.

Our supreme court then addressed the mortgagee-mortgagor situation in Stinson v. Connecticut Mutual Life Insurance Co. (1898), 174 Ill. 125, where it stated:

“In Woodbury v. Swan, 59 N.H. 22, in the discussion of the question, the court said: ‘Mortgagor and mortgagee have a unity of legal interest in the protection of their title against a sale for non-payment of taxes, and against outstanding tax titles, and it is not equitable that either of them should act adversely to the other in the acquisition and use of such titles. ***’ In Ragor v. Lomax, 22 Ill. App. 628, the question is thoroughly discussed and the authorities cited, and the conclusion reached that a mortgagee cannot, whether in or out of possession of the mortgaged premises, acquire a tax title and set it up against the mortgagor.” 174 Ill. 125, 129-30.

Lastly, in Vulcan Materials Co. v. Bee Construction Co. (1981), 101 Ill. App. 3d 30, rev’d on other grounds (1983), 96 Ill. 2d 159, the Appellate Court for the First District held that a mortgagee could not purchase title at the tax sale and cut off the interest of the other lienors, stating:

“Though Illinois courts have not specifically ruled that a mortgagee, whose interest in property arose before a tax sale, is prohibited from becoming a tax purchaser for the purpose of eliminating other liens on the property, other jurisdictions have specifically ruled that mortgagees are prohibited from doing so. [Citations.] The reasoning underlying these decisions is, we believe, applicable here. The mortgagee has a right to redeem the property from a tax sale. In equity, the mortgagee should not be allowed to waive this right and instead become a tax purchaser, and cause injury to the other lienholders, for the minimal cost it would have taken to redeem the property from the tax sale. The property is a common fund in which all the parties have an interest. One should not be allowed to use the law of tax sales to destroy this fund to benefit oneself to the prejudice of all others. It is manifestly unfair to allow a mortgagee to use the law of tax sales for the specific purpose of working an injustice. [Citation.] The law of tax sales is designed to give strangers to the property a speedy method of acquiring merchantable title to the property so the property can get back into the stream of commerce so that future taxes can be collected. [Citation.] It is not designed to be a method by which a party with a pretax sale interest in the property can forego the payment of the taxes, allow the property to be sold for taxes, and then acquire it for a minimal cost so that party can raise its previous interest above all other previous interests.” (Emphasis added.) Vulcan Materials Co. v. Bee Construction Co. (1981), 101 Ill. App. 3d 30, 38.

We hold, therefore, that a lienor may not obtain a tax deed and thereby cut off the interest of other lienors or mortgagees. This rule has been adopted by a majority of the States that have addressed the issue and it is consistent with the prior Illinois cases dealing with the related situation involving a mortgagee-mortgagor.

The petitioner argues that this rule is contrary to sections 235a and 27a of the Revenue Act of 1939 (Ill. Rev. Stat. 1983, ch. 120, pars. 716a, 508a), which prohibit only the owner of the property from purchasing at a tax sale. We believe that the petitioner misinterprets the Revenue Act.

Section 235a states in part:

“No certificate of purchase shall be issued to any person who has not executed and delivered an affidavit to the County Clerk that such person has not bid upon any lot or tract of land at such sale who is the party or the agent of the party who is responsible for the payment of the delinquent taxes.”

Section 27a states in part:

“The owner of real property on January 1 in any year shall be liable for the taxes of that year.”

These sections do not, as the petitioner argues, show a clear legislative intent that only the owner of the property be precluded from purchasing at a tax sale. Under section 27a, the owner of the property on January 1 is personally liable for that year’s taxes (Griffin v. Gould (1979), 72 Ill. App. 3d 747, 748), and thus the owner is clearly one party “responsible for the payment of the delinquent taxes” (Ill. Rev. Stat. 1983, ch. 120, par. 716a). The petitioner reads the statute too narrowly, however, when it assumes that the owner is the only party “responsible for the payment of the delinquent taxes” (Ill. Rev. Stat. 1983, ch. 120, par. 716a).

Had the legislature intended to exclude only owners as potential tax deed purchasers, it could have simply said so. The legislature, however, did not use the term “owner”; instead, it used the phrase “party * * * responsible for the payment of the delinquent taxes.” (Ill. Rev. Stat. 1983, ch. 120, par. 716a). In Cone v. Wood (1899), 108 Iowa 260, 79 N.W. 86, the court stated:

“Sometimes the word ‘obligation’ is used to denote an agreement or undertaking to pay taxes; at others, it is used in the sense of an obligation to do so to protect an interest or title, as, in one sense, the owner of land is not under obligation to pay the taxes thereon, for he may forfeit it, and yet in another sense he is under such an obligation in order to preserve his title. The same is to be said of a mortgagee whose interest requires such a payment for its protection. He must forfeit his lien or pay the taxes.” 108 Iowa 260, 266, 79 N.W. 86, 87-88.

This idea has also been expressed by the courts of this State. In Ragor, the court stated:

“Judge Cooley, in his work on Taxation, 347, says: ‘It can not be said in such case that either mortgagor or mortgagee is under no obligations to the government to pay the tax. On the contrary, the tax being one that purposely is made to override the lien of the one as well as the title of the other, it might well, as it seems to us, be held that neither mortgagor nor mortgagee was at liberty to neglect the payment, ***.” (Ragor v. Lomax (1887), 22 Ill. App. 628, 632-33.)

Again, m Stinson, our supreme court stated:

“It was primarily the duty of the mortgagor to pay the taxes on the mortgaged property, but when he failed to so do and the property was sold for the taxes, the duty then devolved upon the mortgagee to relieve the property from the burden, and, under the provision of the mortgage, charge the amount, with interest, to the mortgage indebtedness.” Stinson v. Connecticut Mutual Life Insurance Co. (1898), 174 Ill. 125, 130.

Thus, it cannot be said that the owner is the only party “responsible” for the delinquent taxes. Since the State’s tax lien overrides other liens and mortgages on the property, and since the lienor or mortgagee is given the right to pay or redeem the taxes, a lienor or mortgagee is also “responsible” for the payment of the delinquent taxes if it wishes to protect its interest in the property. This is, in essence, the same reason the owner pays the taxes.

This interpretation of section 235a is further supported by the presumption that the legislature did not intend to enact a statute with unjust consequences. (People ex rel. Cason v. Ring (1968), 41 Ill. 2d 305, 312-13; People ex rel. Community High School District No. 231 v. Hupe (1954), 2 Ill. 2d 434, 448.) To interpret section 235a as prohibiting only the owner from purchasing at a tax sale would allow a lienor or mortgagee to commit what the great majority of States, including Illinois under Stinson, consider to be a fraud upon the mortgagor, mortgagee or other lienor.

The trial court was also correct in returning Continental’s redemption money in case No. 81 — TX— 3(11) (appeal No. 84 — 363). Section 253 of the Illinois Revenue Code (Ill. Rev. Stat. 1983, ch. 120, par. 734) states in part:

“Upon a finding sustaining the protest in whole or in part, the court may declare the sale to be a sale in error under Section 260 or Section 266, and shall direct the county clerk to return all or a part of the redemption money or deposit to the party redeeming.”

In interpreting section 253, this court in In re Application of County Collector (1973), 12 Ill. App. 3d 12, stated:

“Under the statute the redemption money can be ordered paid to the purchaser only if he would have been entitled to a tax deed in the absence of the redemption under protest. If such is not the case, as here, the redemption money must be returned to the party redeeming. The court can then determine whether a seal [sic] in error should be declared, but it does not have the authority to award the redemption money to the purchaser if the grounds of the protest have been sustained.” (12 Ill. App. 3d 12, 17.)

Therefore, having correctly sustained Continental’s protest, the trial court was also correct in returning the redemption money to Continental.

The petitioner argues in the alternative that if it was precluded from obtaining a tax deed, then the trial court erred in failing to grant it a refund of its tax purchase money. The petitioner makes much of the fact that the trial court found that it had made a good-faith effort to follow the statutory procedures. While section 266 of the Revenue Act of 1939 (Ill. Rev. Stat. 1983, ch. 120, par. 747) allows the court to grant a tax purchaser a refund if the purchaser fails to meet, after a good-faith attempt, any of that section’s petition and notice requirements, the petitioner was not denied the tax deed because it failed to meet any of those requirements. The petitioner was denied a tax deed because its interest in the property precluded it from being a purchaser at a tax sale. The law in Illinois is well settled that when a person who is otherwise precluded from purchasing at a tax sale due to his interest in the property attempts to purchase it, that purchase will be treated as a payment of the taxes-. Lewis v. Ward (1881), 99 Ill. 525; Oswald v. Wolf (1889), 129 Ill. 200; Stinson v. Connecticut Mutual Life Insurance Co. (1898), 174 Ill. 125; Ragor v. Lomax (1887), 22 Ill. App. 628.

For the reasons set forth above, the judgment of the circuit court of Boone County is affirmed.

Affirmed.

UNVERZAGT and LINDBERG, JJ., concur.