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Monsanto Co. v. Walter E. Heller & Co.





Appeal from the Circuit Court of Cook County; the Hon. Joseph M. Wosik, Judge, presiding. JUSTICE O'CONNOR DELIVERED THE OPINION OF THE COURT:

Monsanto Company (Monsanto) is a Delaware corporation with its principal place of business in Missouri. During the period relevant to this litigation, Ilikon Corporation (Ilikon) was an Illinois corporation engaged in the business of manufacturing plastic tubs and cups from raw plastic resin materials. Monsanto was Ilikon's principal or exclusive supplier of raw plastic resins. Walter E. Heller & Company, Inc. (Heller), is a national financing company based in Chicago. At the time the instant cause of action arose, Heller had several loans to Ilikon outstanding, all of which were secured by a perfected security interest under article 9 of the Uniform Commercial Code (Ill. Rev. Stat. 1981, ch. 26, par. 9-101 et seq.) (the Code) in all of Ilikon's machinery, equipment, real estate, inventory including raw materials, and all existing and after-acquired accounts receivable.

Monsanto brought this action against Heller to reclaim certain goods that Monsanto had sold to Ilikon in January of 1979. Monsanto sought to reclaim the goods under four alternative theories: (1) the "cash sale" provisions of section 2-507(2) of the Code; (2) the "credit sale" provisions of section 2-702(2); (3) conversion; and (4) unjust enrichment. In addition, Monsanto sued Heller for nonpayment under a written guaranty. The trial court entered judgment for Monsanto on all counts. The guaranty was subsequently satisfied by Heller, and this appeal is taken from only that portion of the judgment relating to the goods. The crux of Heller's argument on appeal is that Monsanto failed to satisfy the narrow statutory exceptions for reclaiming cash or credit sellers under the Code and that, in any event, Monsanto's rights as a reclaiming seller are subordinate to Heller's rights as a "good faith purchaser for value" by virtue of its perfected security interest in the goods. (Ill. Rev. Stat. 1981, ch. 26, par. 2-403(1).) Heller also contends that Monsanto should not be able to circumvent the specific statutory provisions of the Code by invoking the common law remedies of conversion and unjust enrichment.

We affirm the trial court, based on our finding that Heller, by its conduct, failed to come within the definition of "good faith purchaser" as contemplated by the Code and thus did not acquire rights superior to those of Monsanto, a reclaiming seller under either the cash or credit sale provisions of the Code. Our review of the record reveals the following relationship and course of dealings between the parties:

A. The Heller/Ilikon Relationship.

In 1973, Ilikon purchased a plant from Monsanto in Bridgeview, Illinois, which manufactured plastic containers from certain raw plastic resins. Ilikon obtained financing from Heller in connection with the purchase and operation of the plant. Ilikon sustained financial losses from that time forward, however, and in June of 1977 came under new management. As a result of this change there was a substantial restructuring of the parties' previous loan arrangements, and by June 30, 1977, Heller had four loans outstanding to Ilikon: $1.2 million secured by all of Ilikon's machinery, equipment and real estate; $1.22 million secured by Ilikon's inventory; $1 million secured by Ilikon's inventory; and a revolving loan secured by Ilikon's accounts receivable. All four of the loans provided that the collateral for each would secure any and all indebtedness of Ilikon to Heller. Heller advanced no new funds to Ilikon against its inventory, machinery or equipment loans after June 30, 1977, and Ilikon's only source of funds after that time was its revolving accounts receivable loan from Heller. Under the loan agreement, Ilikon's customers remitted all funds directly to Heller at a lockbox at the La Salle National Bank (the Bank) in Chicago. From June 30, 1977, through January 26, 1979, Heller advanced sums to Ilikon pursuant to an established procedure which involved daily telephone conversations between a Heller vice-president, Michael Forte, and Thomas Detrick, treasurer of Ilikon. During these conversations, Detrick would inform Forte of the following: Ilikon's sales of the prior day; the amount collected in Heller's lockbox and the prior day's balances in Ilikon's accounts at the Bank; the amount of checks previously written by Ilikon that had not yet cleared the Bank and the amount of cash required to cover checks previously written that were to clear the Bank that day, as well as general business information concerning Ilikon and Monsanto. Forte would advise Detrick of the funds which were available to Ilikon under the formula contained in the parties' loan agreements and the funds that Heller would agree to transmit at that time. Heller would then by wire transfer the funds to Ilikon's accounts.

Heller monitored its loans to Ilikon by auditing Ilikon's books and records and examining its assets and facilities from time to time. Heller also required regular written financial reports from Ilikon, including daily reports of bank balances, sales collections and accounts receivable, raw materials received and monthly inventory reports.

B. The Monsanto/Ilikon Relationship.

Monsanto was Ilikon's principal supplier of raw plastic resins until November of 1978, when it became Ilikon's exclusive supplier. In June of 1977, Monsanto agreed to extend Ilikon a $200,000 line of credit which was expressly induced by Heller's $100,000 guaranty. By agreement of the parties, this credit limit had been increased to $400,000 and Heller's guaranty to $200,000 by January of 1979. The trial court found that it was the intent of the parties that as long as Monsanto managed its credit limit of $400,000, it would at no time be exposed to a loss of more than $200,000 in connection with its sale of goods to Ilikon.

In order to insure that Ilikon was at or near its credit limit at all times, Monsanto followed a regular procedure (the Procedure) whereby its salesman, Bruce Kleinert, would regularly visit the Ilikon facility to receive orders and demand payment. The parties were unable to determine the precise dollar value of the intended shipments prior to actual shipment because the materials were charged for by the pound and the shipments were not weighed until they left Monsanto's docks. Therefore, Ilikon would pay for the goods by tendering a check for the approximate value of the shipment ordered, which amount would be slightly more or less than the actual value of the shipment, depending on its weight. For accounting purposes, the amount was credited to and always equaled the oldest outstanding invoice for the same approximate dollar amount ordered. After receiving a check from Ilikon, Kleinert would telephone Monsanto's home office, causing a shipment to be released to Ilikon that same day. Kleinert would then send the checks by regular mail to Monsanto's corporate headquarters in St. Louis for eventual presentment at Ilikon's bank in Chicago. Monsanto does not deny its knowledge that Ilikon "played the float" with its checks and that when it received the checks from Ilikon the latter did not have the funds on hand to cover them, the payment of those checks being dependent upon Ilikon's obtaining loans from Heller. Heller, with full knowledge of Ilikon's practice, continued furnishing funds to cover the checks when they reached the bank.

The above Procedure was followed by the parties from June 30, 1977, until January 15, 1979, during which time no check tendered by Ilikon was returned for insufficient funds. The trial court found that Monsanto regularly changed its position during this time by shipping additional goods to Ilikon in reliance on Kleinert's receipt of checks which, Monsanto believed, would maintain the $400,000 credit limit. Heller was made aware of the Procedure through the daily telephone conversations between Detrick and Forte.

The specific transactions giving rise to Monsanto's cause of action occurred from January 8, 1979, through January 16, 1979, during which time Monsanto caused to be delivered 10 shipments of raw resins to Ilikon in the aggregate amount of $146,410.55. All of the sales were made pursuant to the Procedure: Ilikon tendered seven checks to Monsanto during this period in reliance upon which Monsanto released the goods; on January 12 Detrick informed Heller that Ilikon had written over $200,000 in checks to its suppliers which were about to be presented for payment and requested that Heller make an additional loan to cover the checks. Heller informed Ilikon of its refusal to cover the checks on January 16, knowing that they would be dishonored and returned by the Bank for insufficient funds. Heller also informed Monsanto and the Bank of its decision not to supply any additional funds to Ilikon. Five of Ilikon's checks written to Monsanto were subsequently dishonored. The remaining checks were never presented by Monsanto for payment, but the trial court found that they would have been dishonored and returned by the Bank if they had been presented.

On January 16 Detrick also informed Monsanto's credit manager that the checks given to Monsanto in exchange for the delivered goods would be returned, in response to which Monsanto demanded return of the delivered goods pursuant to its rights as a reclaiming seller under the Code. Monsanto also advised Heller that it was stopping all shipments to Ilikon because Ilikon's checks were being returned by the Bank. The shipments in exchange for the bad checks had already been delivered, however.

Kleinert and other Monsanto employees repeatedly contacted Ilikon between January 17 and January 26 to demand that Ilikon not use the delivered goods and that the goods be returned, in response to which Detrick represented that the goods would be available for retrieval but that an excess accumulation of snow on January 17 at the Ilikon facility would make such retrieval physically impossible at that time. In fact, record accumulations of snow in the area would have severely hindered the return of the goods between January 16 and January 26. During that period Ilikon, with Heller's knowledge, continued manufacturing operations, converting the delivered goods into finished plastic tubs and cups.

On January 18, executives of Heller, Ilikon and the Bank met to discuss the financial future of Ilikon. The following day, contrary to its previous representations, Heller advanced $11,000 to Ilikon for the purchase of color concentrate needed for its continuing manufacturing operations. The funds were transferred to a previously dormant bank account in New York rather than to Ilikon's bank in Chicago, which would have used the funds to cover checks previously written to other suppliers, including Monsanto. On January 22 and 26 Heller also advanced ...

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