APPEAL from the Circuit Court of Kane County; the Hon. REX F.
MEILINGER, Judge, presiding.
MR. PRESIDING JUSTICE SEIDENFELD DELIVERED THE OPINION OF THE COURT:
Plaintiff appeals from the judgment below which vacated a prior judgment entered by confession under the terms of a promissory note. The trial court found that plaintiff failed to properly file a financing statement to perfect his security interest in inventory pledged as collateral for the loan, thereby unjustifiably impairing the collateral so as to discharge the parties to the instrument from liability under section 3-606 (1)(b) of the Uniform Commercial Code (hereinafter UCC). Ill. Rev. Stat. 1971, ch. 26, par. 3-606(1)(b).*fn1
The defendants Ivan L. Anderson and Stanley D. Lee were majority stockholders, directors and officers of the defendant corporation, St. Charles Lumber and Fuel Co. Anderson and Lee negotiated with the plaintiff for a $50,000 loan. Plaintiff made the loan, receiving a promissory note signed as follows:
"Ivan L. Anderson ST. CHARLES LUMBER AND FUEL CO.
Stanley D. Lee By: Ivan L. Anderson (Seal) Ann P. Lee President
Annette Anderson Attest: Stanley D. Lee (Seal) Secretary"
A security agreement (chattel mortgage) under which the corporation pledged its inventory as collateral secured the loan. The agreement provided that the inventory would be maintained in such an amount that the indebtedness owed by the debtor to the secured party at all times would not exceed 80% of the value of the security.
The note and security agreement were given to plaintiff on February 15, 1966, and he filed the security agreement in the office of the recorder of deeds in Kane County on February 17, 1966. He did not, however, file either a copy of the security agreement or a financing statement with the Illinois Secretary of State. No principal payments were made by the St. Charles Lumber and Fuel Co. during the time the Andersons and Lees owned the corporation, but the interest was paid as accrued.
In June of 1968, the Andersons and the Lees sold all of their stock in the St. Charles Lumber and Fuel Co. to Barrett Paper Co. and resigned as officers. At the time of the sale there was sufficient inventory on hand to satisfy the security agreement made with Wohlhuter. Wohlhuter was made aware of the disposition and sale of the lumber company, and the Barrett Paper Company was informed of the outstanding mortgage on the inventory. The Barrett Paper Company also made a $15,000 payment on the principal of the note to Wohlhuter at that time.
Subsequently, in November of 1969, the St. Charles Lumber and Fuel Co. found itself in financial trouble and sold all of its inventory of plywood and lumber supplies to another company in a bulk transfer. It appears that at the time of this transfer the inventory on hand was sufficient to satisfy the original security agreement. The purchaser was unaware, however, of the Wohlhuter security interest in the inventory, and during the 6 months following the sale the lumber and plywood were consumed.
On July 27, 1970, plaintiff put his note in judgment. The defendants, Ivan L. Anderson, Annette Anderson, Stanley D. Lee and Ann P. Lee filed their motion to open the judgment, and after a hearing the trial court entered the judgment from which this appeal is taken.
The plaintiff contends that his act of recording the security agreement in Kane County instead of filing a financing statement with the Secretary of State as provided by statute (UCC section 9-402) was not an impairment of the security pledged by St. Charles Lumber and Fuel Co. under the provisions of the UCC. Furthermore, he contends that the individual defendants accepted his requirement of personal liability as a condition for his loan and cannot now disclaim their personal liability after disposing of their interest in the corporation by making this a corporate obligation.
The defendants argue that because of the plaintiff's failure to file a financing statement in the office of the Secretary of State he failed to perfect the security interest which permitted the disposition of the collateral free and clear of any interest therein. Accordingly, they argue that the plaintiff's failure constituted an impairment of the collateral which operated to discharge the parties to the instrument under section 3-606 of the UCC.
• 1 We do not agree that the question of the impairment of the security is the dispositive issue in the case, however, for we conclude that the defenses enumerated in section 3-606 of the UCC, upon which the trial court ruled, are available only to known sureties. The particular defense that there has been an "unjustifiable impairment of collateral" is not available, in our view, to principals and co-makers. Peoples Bank v. Pied Piper ...