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Ritz v. Karstenson





APPEAL from the Circuit Court of Kane County; the Hon. JOHN S. PETERSEN, Judge, presiding.


Rehearing denied August 5, 1976.

Carole A. Karstenson, the defendant, appeals from an order which denied her petition to open a judgment confessed by the plaintiff, Kenneth F. Ritz, on her promissory note. She contends that the plaintiff as a transferee of the note which was given as part consideration for the purchase of horses, cannot claim as a holder in due course free from the alleged fraud of the seller and that therefore she has shown, prima facie, a meritorious defense to the complaint to confess judgment.

The defendant executed and delivered a promissory note payable to bearer in the amount of $35,000 on February 19, 1974, to Robert L. Brown. The note was due on August 19, 1974. The note and check in the amount of $78,000 were delivered to Brown to purchase 13 brood mares for defendant for a total price of $113,000. She alleges, however, that Brown paid only $25,000 for the horses and that she has sued Brown in the Circuit Court of Cook County alleging fraud and deception. Brown transferred the note to Frank M. Jayne, Jr., who was also made a defendant in the Cook County case and who transferred the note to his father, Frank Jayne, Sr. Frank Jayne, Sr., in turn transferred the note to Kenneth F. Ritz, the plaintiff, on or about June 28, 1974. All of the transfers were without endorsement.

It further appears that in exchange for the negotiable bearer note plaintiff transferred to Frank Jayne, Sr., all rights of ownership in Horse City Products Co., an Illinois Corporation, which manufactured horse care products. Plaintiff also agreed to turn over to Jayne, Sr., the formulas for the line of products manufactured and sold by the corporation, together with the secret formulas which are alleged to have a substantial value. Plaintiff further alleged that he had been negotiating unsuccessfully with Minnesota Mining and Manufacturing Company (3-M) for the sale of the formulas and had been asking $50,000; and that the best offer he was able to get for his corporation was the $35,000 bearer note of the defendant. Plaintiff also furnished a letter agreement relative to the sale and purchase which included a matter of additional compensation which the plaintiff was to receive from Jayne, Sr., if a licensing deal was made with the 3-M Company.

It also appears from the record that Jayne, Sr., was concerned that the plaintiff not disclose to the defendant that he had purchased the negotiable bearer note because Jayne, Sr., expected to do further business with the defendant and felt she would be embarrassed if it were known she was engaged in purchase money financing of her horses, but Jayne, Sr., agreed that any sums paid by defendant on the note were to be turned over immediately to plaintiff. Plaintiff also reserved the right to take appropriate action to collect any sums still owed on the note if defendant defaulted. The letter agreement concluded with an understanding that under any conditions plaintiff was to get at least $20,000 in exchange for disclosing the secret formulas for his corporation products.

Pursuant to the confession of judgment clause judgment was entered on January 30, 1975, for the total sum of $42,887.32 representing the principal amount of $35,000, $787.32 in interest and $7,100 in attorney's fees. On February 18, 1975, defendant moved to vacate the judgment alleging lack of jurisdiction. The court denied defendant's motion. On May 19, 1975, defendant filed a petition to open up the judgment. The hearing on the petition was denied on May 23, 1975, and a written order to this effect was entered on June 3, 1975.

• 1 The first issue which we consider is whether defendant's petition to open the judgment and her affidavits in support are in compliance with Supreme Court Rule 276 (Ill. Rev. Stat. 1973, ch. 110A, par. 276) inasmuch as the petition was not accompanied by a verified answer which defendant proposed to file as required by the rule.

We conclude that although the defendant did not file a verified answer she has substantially complied with the procedural aspects of Rule 276. See Turner v. Smiley, 8 Ill. App.3d 388, 390 (1972).

We then reach the question whether the allegations of fact set forth in the petition and accompanying affidavits constitute a meritorious defense to the claim which would entitle defendant to reopen the confessed judgment.

In determining whether the allegations constitute a meritorious defense the court must accept as true all of the statements of fact in defendant's affidavits and may not consider allegations contained in the counteraffidavits filed by the plaintiff. Kuh v. Williams 13 Ill. App.3d 588, 592-93 (1973). See also First National Bank v. Achilli, 14 Ill. App.3d 1, 4 (1973).

Defendant's petition and the exhibits attached thereto allege fraud as her defense to the note. She also alleges that plaintiff is not a holder in due course because he did not take the note for value and because he had knowledge of the fraud in the initial transaction for the note.

A holder in due course is one who takes the instrument for value, in good faith, without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person. See Ill. Rev. Stat. 1973, ch. 26, par. 3-302.

• 2 Defendant's contention that the note was not transferred for value appears to be based on the affidavit of her attorney which states that the company transferred to Frank Jayne, Sr., by plaintiff had never made a profit. The conclusion, however, does not necessarily follow from the premise. The fact that a company has never made a profit does not necessarily render it worthless. The agreement which was attached to defendant's petition as an exhibit includes a statement that certain formulas for horse care products were transferred to ...

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