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Hatton v. Money Lenders & Assoc.





Appeal from the Circuit Court of Cook County; the Hon. Myron Gomberg, Judge, presiding.


Rehearing denied October 26, 1984.

This action challenges the propriety of an order of summary judgment in which the trial court found that the defendant, Associates Finance, Inc. (Associates), was the holder in due course of a promissory note. The note was initially executed by the plaintiffs, Kenneth and Barbara Hatton, and Money Lenders & Associates, Ltd. (Money Lenders), on December 24, 1979. The terms of the note provided that the plaintiffs would repay a total of $78,000 in 120 monthly payments of $650 each to Money Lenders. This sum included $30,000 in principal and annual interest in excess of 24%. The note was secured by a trust deed on a rental apartment owned by the plaintiffs. At the time the note was executed, the plaintiffs also completed two affidavits in which they swore under oath that the money would be used solely for business purposes.

Associates purchased the promissory note from Money Lenders on January 12, 1980. After making 14 monthly payments to Associates, the plaintiffs filed suit against both Money Lenders and Associates, alleging that the note was usurious and that it had been procured by misrepresentation and fraud. A default judgment was entered against Money Lenders. Money Lenders is not a party to this appeal. The trial court granted Associates' motion for summary judgment, finding that Associates was a holder in due course and took the note free from all of the claims and defenses of the plaintiffs. The plaintiffs now appeal from this order of summary judgment.

The plaintiffs maintain on appeal that there were sufficient facts of record to indicate that Associates had notice of the plaintiffs' alleged defense of usury at the time Associates purchased the note from Money Lenders. Consequently, the plaintiffs argue that a genuine issue of material fact was before the trial court and that the court therefore improperly entered summary judgment in favor of Associates. The plaintiffs further contend that holder-in-due-course status is a question of fact which in any event would foreclose the trial court from entering an order of summary judgment on that issue.

Before reaching the merits of the parties' legal arguments, we believe a more detailed recitation of the facts of the case is in order. When Associates purchased the note from Money Lenders, it received copies of the plaintiffs' 1977 and 1978 tax returns and the two affidavits which had been completed by the plaintiffs. The tax returns disclosed that the plaintiffs were engaged in both a snow removal business and a security alarm partnership at certain times over the course of the two years in question. The plaintiff Kenneth Hatton was also employed full-time as a movie projectionist, an occupation which provided approximately 95% of the plaintiffs' income in 1977 and 1978. In the first of the two affidavits sworn to by the plaintiffs, there is a provision that the loan would be used for the "snow removal" business and "that the purpose of the loan applied for by me is solely for the purposes of carrying on such business and proceeds will be used for such purpose and for no other." The second affidavit states that the loan would be used for the "security business" and also contains the above-quoted language.

The plaintiffs and Associates discussed the loan in the course of eight different telephone conversations between January 21, 1980, when Associates verified the loan balance with the plaintiffs following Associates' purchase of the note, and January 9, 1981. At no time during these telephone conversations did the plaintiffs ever inform Associates of any purported claim or defense in connection with the loan. Associates first learned of the plaintiffs' alleged defense when it was served with the plaintiffs' complaint in this action.

In the trial court, the plaintiffs argued that they had borrowed the money to invest in the commodities market and that they had advised Money Lenders that the money would be used for that purpose. At their depositions, the plaintiffs stated that they knew the affidavits were false when they signed them but that they were told by Money Lenders that the signing of the affidavits was a "mere formality." The plaintiffs thus contended that the note was usurious because it was intended for personal rather than business purposes and consequently did not fall under the business loan exception to the Illinois usury statute. See Ill. Rev. Stat. 1979, ch. 74, par. 4(1)(c).

Both at trial and now on appeal, the plaintiffs have maintained that Associates had notice of the plaintiffs' alleged usury defense and therefore could not obtain the status of a holder in due course. In support of this contention, the plaintiffs argue that there was no stated interest rate on the note; that there is a discrepancy on the face of the note as to the dollar amount due from the plaintiffs; that the affidavits contradict each other on their face; that the plaintiffs' tax returns indicate that only 5% of their income was received from the snow removal and security businesses; that the note was secured by real estate owned by the plaintiffs; and that the note was purportedly purchased from Money Lenders by Associates at a large discount. Because of these alleged discrepancies, the plaintiffs now maintain that Associates had notice that the loan would be used for nonbusiness purposes and that therefore, Associates had notice that the plaintiffs possessed a defense to the note under the usury statute. The plaintiffs do not maintain that Associates had actual notice of this alleged defense but that, rather, the note and other documents received by Associates from Money Lenders were irregular on their face, thus providing Associates with constructive notice of the alleged defense.

The Uniform Commercial Code requires that in order for one to be a holder in due course, he must take the instrument for value, in good faith, and without notice that it is overdue, or has been dishonored, or of any defense against or claimed to it on the part of any person. (Ill. Rev. Stat. 1983, ch. 26, par. 3-302.) Section 1-201 (25) of the Code defines "notice" and provides:

"(25) A person has `notice' of a fact when

(a) he has actual knowledge of it; or

(b) he has received a notice or notification of it; or

(c) from all the facts and circumstances known to him at the time in question he has reason ...

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