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Klubeck v. Division Medical X-ray





Appeal from the Circuit Court of Cook County; the Hon. Warren D. Wolfson, Judge, presiding.


Plaintiff appeals from a judgment in a bench trial finding that the agreement upon which he based his breach of contract action (the Agreement) violated section 11-3 of the Illinois Public Aid Code (Ill. Rev. Stat. 1979, ch. 23, par. 11-3) (the Code) and was therefore void. On appeal, he contends that there was no such violation because the agreement (1) created a security interest, (2) contained an assignment, and (3) had portions which were severable and enforceable.

Only count I of the amended complaint is involved in this appeal, and in it plaintiff alleged in substance that defendants agreed to jointly factor their financial paper and accounts receivable to plaintiff; that under the terms of the Agreement, plaintiff was to pay defendants 79% of the face value of such receivables which were derived from welfare reimbursements for medical services rendered; that such receivables were thereafter to be assigned to plaintiff by defendants; that defendant Greenview Medical Laboratory, Inc. (Greenview), executed a written contract as evidence of the Agreement, but defendant Division Medical X-Ray, Incorporated (Division), failed to deliver to plaintiff the contract which it allegedly executed; that defendants represented to plaintiff that they were and would remain authorized to receive welfare payments from the State of Illinois during the course of their dealings with plaintiff; that in consideration of the parties' mutual promises, plaintiff advanced to defendants $129,353.70 based on the welfare receivables due defendants but was unable to obtain payment on the receivables from the State; that defendants were obligated under the contract but refused to pay to plaintiff the difference between the amount loaned to defendants and the amount paid plaintiff by the State; and that as a result of defendants' alleged breach of contract, plaintiff incurred damages amounting to $129,353.70, which represented the total receivables factored to plaintiff.

In their separate answers to the complaint, both defendants in substance denied entering into the Agreement with plaintiff and further alleged that any such Agreement would be illegal and void under section 11-3 of the Code. Defendant Greenview further alleged that while plaintiff advanced it such funds, he recovered the full amount from the State "pursuant to void assignment of benefits," and that it had no duty under the Agreement to pay plaintiff. In its answer, Division generally denied all other allegations of count I.

As presented in the record, the Agreement names "Greenview Clinical Lab. & X Ray" as the "debtor" and plaintiff as the "secured party." It is undisputed, however, that the party referred to in the Agreement is defendant Greenview and that defendant Division, although not mentioned therein, entered into the same Agreement which purported to grant plaintiff "a security interest in certain medical welfare and/or public assistance accounts receivable now due him or which may hereafter become due to him from account debtors and all proceeds thereof." Among the designated account debtors were the Illinois Department of Public Aid, the Illinois Department of Welfare, county departments of public aid, and various insurance carriers.

Paragraph 1 of the Agreement provided that plaintiff would lend Greenview a sum equal to 89% of amounts which in plaintiff's opinion represented disbursements made by the account debtors on each "Statement of Services Rendered" submitted to such account debtors for payment. Paragraph 2 required plaintiff, in addition to making loans, to provide "all necessary bookkeeping, billing and administrative services" in the processing of Greenview's accounts receivable. In return therefor, Greenview agreed to pay plaintiff 100% "of the amount upon which the loan was based within 120 days after each loan was made" and thereafter to pay interest on any unpaid balance thereof.

Paragraph 3 granted plaintiff the power of attorney to establish a mailing address in Greenview's name "for the receipt of payments and other correspondence from account debtors" and further granted plaintiff "the authority to receive, sign, endorse, execute, and deposit any checks or drafts payable to [Greenview] and to apply said payments against amounts due" plaintiff from Greenview. The power of attorney was coupled with an interest and was irrevocable while any money was owed by Greenview to plaintiff. Paragraph 4 provided in part that all correspondence in the form of payments and accompanying vouchers received by Greenview which pertained to statements and accounts in which plaintiff had a "security interest" were to be delivered to plaintiff within 72 hours of receipt by Greenview.

Paragraph 5 provided that if the account debtors paid less than 100% of the amount upon which the loan was based or refused to honor statements of services rendered within 120 days of the date of submission to them by plaintiff, then the difference between the amount paid by the account debtor and 100% of the amount upon which the loan was based was to be paid by Greenview. Paragraph 9 authorized plaintiff to deal directly with account debtors on behalf of Greenview by notifying them to make payments directly to plaintiff on statements and accounts in which plaintiff had a "security interest." It further authorized plaintiff to collect and control such proceeds, to settle and compromise disputed claims, and to collect such accounts. Finally, paragraph 11 provided that plaintiff was to retain 10% of all outstanding receivables to be collected under the Agreement in order to cover any amounts which account debtors refused or failed to pay.

In its judgment order, the trial court found that the Agreement upon which count I of the amended complaint was predicated was "a subterfuge to avoid the prohibition found in" section 11-3 of the Code and thus was void. Accordingly, judgment was entered for defendants, and this appeal followed.


Section 11-3 of the Code provides that "[a]ll financial aid given under Articles III, IV, V, VI and VII shall be absolutely inalienable by assignment, sale, attachment, garnishment, or otherwise." (Ill. Rev. Stat. 1979, ch. 23, par. 11-3.) "Financial aid" is defined, in relevant part, in section 2-6 of the Code as "a money or vendor payment to or in behalf of a recipient for basic maintenance support or medical assistance * * *." (Ill. Rev. Stat. 1979, ch. 23, par. 2-6.) "Vendor payment" is defined in section 2-5 as "a payment made directly to the person, firm, corporation, association, agency, institution or other legal entity supplying goods or services to a recipient." (Ill. Rev. Stat. 1979, ch. 23, par. 2-5.) The legislative purpose underlying those cited provisions of the Code was stated in First National Bank v. Coleman (1979), 68 Ill. App.3d 256, 258, 385 N.E.2d 879, 881:

"[T]he class of individuals which the legislature sought to protect by this legislation are the public aid recipients and not the vendors of medical services. Although the language of sections 11-3, 2-5 and 2-6 is phrased in absolute terms that all vendor payments are exempt from garnishment, it must be reasonably construed so that absurd and unjust consequences will be avoided."

We think it unnecessary to determine whether the Agreement creates a security interest or an assignment, since it is apparent from the record that the enforcement of the Agreement, irrespective of its formalities, would produce absurd or unfair results. Although the Code seeks to protect public aid recipients rather than vendors of medical services, it is apparent that the Agreement would involve State agencies too heavily in private contractual arrangements and, by diverting such agencies from the primary tasks of alleviating and preventing poverty (Ill. Rev. Stat. 1979, ch. 23, par. 1-1) and providing "essential medical care and rehabilitative services" (Ill. Rev. Stat. 1979, ch. 23, par. 5-1), their energies would be needlessly dissipated. Such, in our view, was not the legislative intent behind section 11-3.

In Coleman, which plaintiff cites in support of his position, a physician's judgment creditor sought to garnish funds which were due to be paid from the Illinois Department of Public Aid (the Department) to the physician for medical services rendered to public aid recipients. The issue before the court was thus whether such monies payable by the Department were subject to garnishment by the physician's judgment creditor despite the prohibition on inalienability of section 11-3 of the Code. Holding that such reimbursement funds were not exempt from garnishment, the court rejected the contentions that permitting such garnishment would discourage ...

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