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Wohlhuter v. St. Charles Lumber & Fuel Co.

OPINION FILED NOVEMBER 17, 1975.

CHARLES F. WOHLHUTER, APPELLEE,

v.

ST. CHARLES LUMBER & FUEL CO. ET AL. — (IVAN L. ANDERSON ET AL., APPELLANTS.)



Appeal from the Appellate Court for the Second District; heard in that court on appeal from the Circuit Court of Kane County; the Hon. Rex F. Meilinger, Judge, presiding.

MR. JUSTICE GOLDENHERSH DELIVERED THE OPINION OF THE COURT:

Plaintiff, Charles F. Wohlhuter, appealed from the judgment of the circuit court of Kane County entered in favor of defendants, Ivan L. Anderson, Annette Anderson, Stanley D. Lee and Anne P. Lee, in plaintiff's action to recover on a promissory note. The appellate court reversed (25 Ill. App.3d 812) and we allowed defendants' petition for leave to appeal. The opinion of the appellate court sets forth the facts and they are restated here only to the extent necessary to discuss the issues.

Defendants were the owners of all of the outstanding shares of the capital stock of St. Charles Lumber & Fuel Co., an Illinois corporation. Defendants Ivan L. Anderson and Stanley D. Lee, who were also directors and officers of the corporation, negotiated with plaintiff for a loan in the amount of $50,000. The promissory note given plaintiff was executed in the following manner:

"Ivan L. Anderson ST. CHARLES LUMBER AND FUEL CO. Stanley D. Lee By: Ivan L. Anderson (Seal) President

Ann P. Lee Attest: Stanley D. Lee (Seal) Annette Anderson Secretary"

The note, inter alia, provided "All signers of this note are principals." The corporation also executed a security agreement which granted plaintiff a security interest in its inventory and provided that the inventory would be maintained so that the indebtedness owed plaintiff "at all times should not exceed 80% of the value of the security."

Plaintiff filed the security agreement in the office of the recorder of deeds of Kane County but did not file either a copy of the security agreement or a financing statement in the office of the Secretary of State. See Ill. Rev. Stat. 1971, ch. 26, par. 9-401.

Defendants Ivan L. Anderson and Stanley D. Lee entered into a written agreement with The Barrett Paper Corporation, Ltd., for the sale to it of all the capital stock of St. Charles Lumber & Fuel Co. Barrett agreed to "indemnify and hold harmless Ivan L. Anderson and Stanley Lee from * * * any personal obligations and liability which they might have on a certain note secured by a chattel mortgage in which the payee is one Charles Wohlhuter * * *." Plaintiff was advised of the transaction and received from Barrett a payment on the principal indebtedness evidenced by the note. Subsequently, St. Charles Lumber & Fuel Co., having encountered financial difficulties, sold its inventory to another company. At that time the inventory was of value sufficient to satisfy plaintiff's security interest. The purchaser was unaware of plaintiff's security interest and the inventory was "consumed."

The promissory note given plaintiff contained a cognovit clause and plaintiff obtained judgment by confession for the balance due, interest, attorney fees and costs. Defendants' motion to open up the judgment was allowed. Following a bench trial the circuit court found that plaintiff had failed to properly file a financing statement to perfect his security interest in the inventory, that he had unjustifiably impaired the collateral and that under section 3-606(1)(b) of the Uniform Commercial Code (Ill. Rev. Stat. 1971, ch. 26, par. 3-606(1)(b)) the defendants were discharged from liability.

In reversing the judgment the appellate court held that the defense of unjustifiable impairment of collateral under section 3-606 is available only to known sureties and did not serve to discharge principals or co-makers.

Section 3-606 of the Uniform Comercial Code, in pertinent part, provided:

"(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder

(b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse."

Defendants contend that the "intent and literal meaning" of section 3-606 of the Uniform Commercial Code is that the unjustifiable impairment of collateral serves to discharge any party to the instrument from liability and that in limiting its application to "known sureties" the appellate court erred. They argue further that the evidence shows that defendants were accommodation makers, in the position of sureties with a right of recourse against the ...


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