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First National Bank v. Lachenmyer





Appeal from the Circuit Court of Champaign County; the Hon. George S. Miller, Judge, presiding.


On May 4, 1982, plaintiff First National Bank of Thomasboro (bank) filed suit seeking judgment against defendant Lachenmyer based on a defaulted $40,000 promissory note in relation to which there was a security agreement on defendant's Beech K-35 airplane and a mortgage of vessel on his 58-foot boat. On May 7, 1982, defendant had the plane moved from Champaign to Decatur, from there to be removed to the State of Florida. On May 8, 1982, the bank secured possession of defendant's plane in Decatur as subject to the security agreement. The bank also set off funds from defendant's accounts Nos. 133-019 and 130-389, allegedly escrow accounts. On May 11, 1982, defendant was served with plaintiff's complaint. On August 6, 1982, defendant filed a two-count countercomplaint seeking relief for the bank's acts involving his plane and the setoff from the alleged escrow accounts. The defendant did not deny execution of the note.

A bench trial was had with hearings conducted on February 4, 1983, and May 31, 1983. At the February hearing, following evidence on the complaint, the testimony of Florida witnesses Charles Myer, Federal Aviation Agency (FAA)-certified flight-and-ground instructor, and Patrick Grasch, aircraft broker, was taken on the countercomplaint. Between the hearings, the bank had the plane taken from storage in Decatur, flown to Champaign, and examined; it had been damaged. On June 21, 1983, defendant moved for leave to amend the countercomplaint to add count III, seeking relief under the Uniform Commercial Code (Code) (Ill. Rev. Stat. 1981, ch. 26, par. 1-101 et seq.) for the bank's actions involving his airplane. On August 9, 1983, the trial court filed its opinion. On August 22, 1983, the court entered judgment in favor of the plaintiff on the complaint for $38,917.98, plus costs; in favor of plaintiff on count I of the counterclaim; in favor of defendant on count II of the counterclaim as to account No. 133-019 for $412.30, but against defendant as to account No. 130-389; and in favor of plaintiff on count III of the counterclaim, finding the bank had not disposed of the collateral and concluding that count III failed for want of proof.

On appeal, defendant challenges the trial court's judgment in favor of the bank on its note and, insofar as adverse to him, on each count of his counterclaim. No cross-appeal has been filed. Issues are treated in the following order. First, the issues relating to count II of his counterclaim, seeking recovery for the bank's setoff of funds from account No. 130-389: (1) whether the account was an escrow account; and if so, (2) whether he is entitled to actual damages for wrongful dishonor of certain checks and related charges under section 4-402 of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 4-402); (3) or to punitive damages under Allabastro v. Cummins (1980), 90 Ill. App.3d 394, 413 N.E.2d 86. Second, the issues relating to count I of defendant's counterclaim, seeking recovery under a theory of conversion for the bank's acts in relation to his plane: (4) whether the bank committed an act of conversion in taking the plane, or in subsequent acts in relation thereto; and (5) whether he is entitled to recover the market value of the plane at the time and place of conversion, legal interest and punitive damages under Kelsay v. Motorola, Inc. (1978), 74 Ill.2d 172, 384 N.E.2d 353. Third, issues relating to count III of the counterclaim seeking recovery under the Code for the bank's acts involving his plane: (6) whether the bank's conduct amounted to a "sale or other disposition," not "commercially reasonable" in "every aspect of the disposition" under section 9-504(3) of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 9-504(3); (7) whether the bank's failure to give him notice prior to this "other disposition" bars recovery on its note under section 9-504 of the Code; and (8) whether the plane was "consumer goods" under section 9-109(1) of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 9-109(1)) so that upon disposal in violation of article 9, he is entitled to recover damages under section 9-507(1) of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 9-507(1)).

• 1 We begin with issues raised by the defendant on count II of the counterclaim. The first is whether account No. 130-389 was an escrow account, so that the bank as escrowee was prohibited by its fiduciary duty from setting off moneys in the account to its benefit. The trial court found the account was a personal checking account and a proper source of setoff. We agree. Generally, questions involving the proper operation of escrow may be resolved by resort to consideration of the escrow agreement in conjunction with the underlying contract. (Estate of Reinhold v. Mansfield (1980), 90 Ill. App.3d 224, 412 N.E.2d 1146.) Where the agreement is ambiguous because of a material omission, it is the duty of the trial court to construe the escrow, which construction will be upheld unless against the manifest weight of the evidence. (McBride v. Commercial Bank (1981), 101 Ill. App.3d 760, 428 N.E.2d 739.) Here, it appears there was no written agreement between the bank and defendant. According to the evidence, the bank's escrow accounts are unnumbered. The bank disburses moneys paid toward escrow arrangements by cashier's checks immediately after recording payment by the purchaser upon escrow documents, routing them according to the direction of the individual payee on the escrow arrangement, e.g., into a savings or checking account. In this case the cashier's checks were channeled by defendant's direction into account No. 130-389, identified by its number as a demand deposit or personal checking account, and on which defendant wrote checks. No error.

• 2 We next consider issues raised by the defendant on count I of the counterclaim, the first being whether the bank committed an act of conversion in taking the plane, or in its subsequent acts. In order to make a case for conversion, the plaintiff must establish each of four elements: (1) unauthorized and wrongful assumption of control, dominion, or ownership over the personal property of another; (2) plaintiff's right to the property; (3) his absolute and unconditional right to immediate possession thereof; and (4) a demand for possession. (Kunde v. Biddle (1976), 41 Ill. App.3d 223, 353 N.E.2d 410.) The trial court found that the defendant was in default on the loan and had made the plane collateral under the security agreement, and that he had no absolute and unconditional right to immediate possession of the plane. We agree. Section 9-503 of the Code (Ill. Rev. Stat. 1981, ch. 26, par. 9-503) provides in pertinent part:

"Unless otherwise agreed a secured party has on default the right to take possession of the collateral. In taking possession a secured party may proceed without judicial process if this can be done without breach of the peace or may proceed by action."

Jensen v. Chicago & Western Indiana R.R. Co. (1981), 94 Ill. App.3d 915, 419 N.E.2d 578, cited by defendant, is inapposite. Therein, the court stated that the fourth element of conversion, a demand for possession, was unnecessary when some other independent act of conversion could be shown. The absence of a demand for possession cannot be equated to a defendant's failure to show his absolute and unconditional right to immediate possession of the collateral. No error.

• 3 We next consider the more nettlesome issues raised by defendant on count III of the counterclaim, which requires discussion of the evidence. Myer testified he last flew defendant's plane in October 1981, when it was in better than average condition, and opined that its May 1982 value was about $24,000. Myer said failure to maintain a plane in storage could reduce its market value, as could allowing its FAA certificate of airworthiness to lapse, and further testified that deterioration is more rapid in aircraft than in other transportation equipment. He thought there would be some damage to defendant's plane in view of the length of the storage.

Grasch opined that assuming the equipment and condition of defendant's plane was as Myer described, the value of defendant's plane was about $24,000 (retail) or $17,000 (wholesale, buying as a broker). Without having inspected the plane, he said that allowing its FAA certificate of airworthiness to lapse and leaving the plane unattended in storage would have a tremendous negative effect on its value. If a plane was not FAA-airworthy, he would not put a high value on it as he would not know its internal condition. He said that in May 1982, with the plane approaching the due date for annual inspection, he would have bid $14,000 wholesale. As of the February hearing, he would only buy the plane to sell it for parts and would bid $7,500.

During the interim between the hearings, the bank contracted with Midstate to perform an annual inspection on the plane prior to the May hearing. On April 20, 1983, Midstate's president, William Giannetti, and mechanic Ralph Cuchenbrod went to Decatur to get the plane. When they arrived, Decatur Aviation had moved the plane from storage to a maintenance and servicing area, and was servicing the plane for flight. Giannetti testified that the plane appeared generally as it had in May 1982 but was dirty from storage. He aired the cockpit for mildew and noticed corrosion on the brake discs. In checking the oil as to quantity, he noted it was black and needed to be changed at some time. During the flight to Champaign, the plane experienced an electrical power failure which prevented receiving radio messages.

Around May 12 or 13, 1983, Midstate's FAA-approved mechanic, Wayne VanEgmond, began the annual inspection. On draining the oil and pulling the oil screen from the engine, he discovered the screen was so full of metal shavings that the oil pump had collapsed it. He tore down the engine to determine the cause and found one of the main bearings on the crankshaft had spun in the crankcase and "basically destroyed itself." The shavings were carried in the oil through the other bearings, oil pump, and engine, scraping additional metal and causing further damage. There was damage to the engine, crankcase, and crankshaft. VanEgmond obtained an estimate of $10,000 to overhaul the engine, with an additional $1,500 for repairs to the crankcase and crankshaft, if repairable. VanEgmond said the normal number of flight hours between major overhauls on an engine of this type was around 1,800, whereas this engine had about 900 flight hours on it. He had inspected the plane 45 flight hours earlier and the main bearing was not in a damaged condition. He did not believe the engine damage could have occurred entirely during the flight from Decatur to Champaign in April 1983, but was unable to approximate the number of flight hours required to cause the damage. He said the preflight inspection in Decatur was not detailed enough to discover any metal shavings then in the oil. VanEgmond discontinued his inspection after finding the damage to the engine. As of the May hearing, the engine remained disassembled in Midstate's maintenance department, while the aircraft frame was outside in a "tie-down spot."

Jim Barnes, overhauler of airplane engines, testified he had examined the engine from defendant's plane and opined that it was "either junk or needs to be overhauled badly." He estimated the overhaul cost at $10,750 minimum, assuming the crankshaft and crankcase could be repaired. He said the maker of the engine in defendant's plane was "famous for bearings spinning" and that bearings start to move in an engine with 300 hours on it. Barnes opined that the damage to this engine had taken more than one hour to occur.

Midstate's president Giannetti opined that the plane in its present condition could be sold for between $15,840 (retail) and $8,462 (wholesale), and concluded that $12,000 would be a good value for defendant's plane given its condition. He opined that if the engine were overhauled, the value of the plane would be increased to about $20,000.

Count III basically alleges that (1) as a result of the April 20, 1983, flight from Decatur to Champaign at the bank's direction and the lack of proper maintenance during the bank's possession, the plane was damaged; (2) the bank's acts in taking possession, failing to maintain the plane, flying it to Champaign in April 1983, and removing its engine constituted conversion to the bank's exclusive use and benefit; (3) the bank failed to give him notice of the sale or conversion of the collateral as required under section 9-504(3) of the Code; (4) as a result of the failure to give proper notice, plaintiff is barred from a deficiency judgment; (5) the plane constitutes "consumer goods" under section 9-109(1) of the Code and the bank's failure to comply with the requirements of section 9-507(1) of the Code entitles him to recovery; and (6) his remedies are cumulative. Upon count III, defendant argues the bank's acts amounted to an "other disposition" within the meaning of section 9-504(3) of the Code, but was not "commercially reasonable" in "every aspect of the disposition" as required by that section.

Section 9-504 states in part:

"Secured Party's Right to Dispose of Collateral After Default; Effect of Disposition. (1) A secured party after default may sell, lease or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation or processing. * * * The proceeds of disposition shall be applied in the order following to

(a) the reasonable expenses of retaking, holding, preparing for sale or lease, selling, leasing and the like and, to the extent provided for in the agreement and not prohibited by law, the reasonable attorneys' ...

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