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Ehlers v. Frey

OPINION FILED OCTOBER 19, 1982.

GAYLON H. EHLERS, TRUSTEE, ET AL., PLAINTIFFS-APPELLEES,

v.

ANDREW G. FREY, DEFENDANT-APPELLANT.



Appeal from the Circuit Court of La Salle County; the Hon. Thomas R. Flood, Judge, presiding.

JUSTICE HEIPLE DELIVERED THE OPINION OF THE COURT:

Rehearing denied November 22, 1982.

In the original action on this cause, Gaylon H. Ehlers, trustee, for the use and benefit of Chief Industries, Inc., and Chief Industries, Inc., filed to foreclose a trust deed and note. A deficiency judgment was also sought. The defendant, Andrew G. Frey, then counterclaimed for usury. Both parties sought summary judgment on the usury counterclaim. After hearing oral arguments on the issue, the trial court granted the plaintiffs' motion for summary judgment and denied Frey's similar motion. Frey appeals from the entry of judgment in favor of the plaintiffs and against him on the usury counterclaim.

The background of this case follows. On December 14, 1976, a $400,000 note was executed by the A.G. Frey & Sons, Inc., a corporation and Andrew G. Frey, individually, payable to plaintiff Chief Industries, Inc., a corporation. The terms thereof provided for an interest rate of nine percent per annum. The note was secured by a chattel mortgage of all the tools, equipment, inventory, and vehicles which constituted the major assets of A.G. Frey & Sons, Inc. Andrew Frey signed this chattel mortgage wherein he warranted he was the owner free and clear of all the chattels itemized. At the same time a corresponding trust deed dated December 14, 1976, was signed by defendant Andrew G. Frey and his then wife Patsy Ann Frey, making certain Illinois real estate, then owned by them jointly, security for the $400,000 note. It is this Illinois real estate that plaintiffs seek to foreclose on, and in defense of which defendant has filed this counterclaim for usury now on appeal. Frey contends that the interest rate of nine percent per annum is usurious in violation of the then maximum rate of eight percent per annum. Ill. Rev. Stat. 1975, ch. 74, par. 4.

A brief corporate history of A.G. Frey & Sons, Inc., is necessary. Prior to July 1976, the defendant, Andrew G. Frey, conducted a construction business as sole proprietor under the name of A.G. Frey & Sons Building Service. This business engaged in the erection of grain storage bins. In July 1976, the defendant organized the Illinois corporation, A.G. Frey & Sons, Inc. (hereafter Frey, Inc.), for the same purposes his sole proprietorship operated: erection, construction, and repair of grain storage bins. Thereafter, the defendant became president and general manager of Frey, Inc.

The grain storage bins which were constructed by defendant before July 1976 and by the corporation Frey, Inc., after July 1976 were purchased primarily from the plaintiff Chief who manufactured such items. The defendant notified Chief by letter that his business was thereafter to be conducted by the corporation Frey, Inc., and invited Chief to terminate their business relationship if it had any objection to such change. Chief continued to do business with Frey, Inc. A formal dealership agreement was signed by Chief and Frey, Inc., in December 1976.

Sometime around the latter part of November 1976 or early December 1976, Paul Elsbernd, one of Chief's officers, discussed the financial conditions of Frey, Inc., with the defendant Andrew G. Frey. The fruit of this discussion was a loan and a $400,000 note by defendant Frey and the corporation Frey, Inc., payable to Chief. This note, dated December 14, 1976, provided for interest at the rate of nine percent per annum. This note was secured by a chattel mortgage by defendant Frey, individually, listing all the corporate assets of which he was the owner. Defendant Frey and his then wife, Patsy Ann Frey, signed a trust deed making certain Illinois real estate owned jointly by the Freys security for the note.

The corporate business offices of Frey, Inc., were located on the real estate in question. The real estate was zoned M-1 for light manufacturing. The property includes at least six offices plus other space devoted entirely to the business operations of Frey, Inc. There is no evidence that the property was ever used as a residence or for any residential purpose other than one room of the office building used by Andrew Frey to sleep in overnight occasionally during the pendency of his divorce action. There was no eating, cooking, or laundry facilities on the property. During daylight hours the entire property was used full time to conduct the grain bin and construction business.

The entire proceeds of the loan from Chief were used for business purposes, partially to retire debts incurred by Frey when he operated the business as a sole proprietor before incorporation and partially to pay creditors of Frey, Inc. According to Chief's credit manager, the loan proceeds were specifically distributed as follows: $109,276.69 was credited to Frey's account balance with Chief; $200,000 was paid to Frey, Inc.; $67,092.30 was paid to Frey; $23,631.01 was paid to Parsons Manufacturing, Inc., a creditor of Frey.

On or about May 30, 1978, Chief entered the premises of Frey, Inc., and seized its entire assets. On October 25, 1979, Chief filed its amended complaint for foreclosure, claiming no payment on the note since March 1978 and a sum of more than $350,000 due and owing Chief on the note. Defendant Frey filed a counterclaim on January 29, 1981. Therein Frey alleged that nine percent per annum interest charged on his note to Chief was unlawful and usurious because on the date the note was executed, December 14, 1976, the maximum that could be charged was eight percent per annum. (Ill. Rev. Stat. 1975, ch. 74, par. 4.) Frey sought to recover the statutorily provided remedy from Chief: an amount equal to twice the total of all interest discount and charges determined by the loan contract or paid by the obligor, whichever is greater, plus reasonable attorney fees and court costs.

Both parties filed motions for summary judgment on the usury counterclaim. The court heard oral arguments and entered an order on December 22, 1981, in favor of the plaintiffs and against the defendant Andrew Frey on their respective motions for summary judgment.

• 1 On appeal Frey asserts that the nine percent per annum interest rate provided for by the note was in violation of the Illinois Interest Act. While Chief argues that Nebraska law should control the resolution of this issue, we agree with Frey that Illinois law is applicable. A trust deed on Illinois real estate secured the note to Chief. Where real estate is involved, the law of the State where the real estate is located controls. Harrison v. Weatherby (1899), 180 Ill. 418.

It is undisputed that at the time the note in the instant case was executed, the Illinois Interest Act provided for a maximum lawful interest rate of eight percent per annum. The note in this case specified an interest rate of nine percent per annum. The Interest Act, however, does provide for exceptions to the general limitation on interest rates. Section 4 of the Interest Act provides in part:

"It is lawful to charge, contract for, and receive any rate or amount of interest or compensation with respect ...


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