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07/14/88 Nutri-Pro, Inc., v. Jerry Phelps

July 14, 1988

NUTRI-PRO, INC., PLAINTIFF-APPELLANT

v.

JERRY PHELPS, DEFENDANT-APPELLEE



APPELLATE COURT OF ILLINOIS, FOURTH DISTRICT

526 N.E.2d 891, 172 Ill. App. 3d 505, 122 Ill. Dec. 498 1988.IL.1103

Appeal from the Circuit Court of Mason County; the Hon. Thomas L. Brownfield, Judge, presiding.

APPELLATE Judges:

JUSTICE McCULLOUGH delivered the opinion of the court. GREEN, P.J., and SPITZ, J., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE MCCULLOUGH

This case arose from an action for the enforcement of a promissory note. The trial court decided the defense of illegality was available to defendant and refused to enforce the plaintiff's claim or the defendant's counterclaim. Plaintiff filed timely notice of appeal and presents two issues. They are (1) was the balance due and owing by Phelps to Nutri-Pro correctly computed by the trial court, and (2) was the agreement between Nutri-Pro and Phelps illegal and unenforceable because Nutri-Pro failed to register its feed with the Illinois Department of Agriculture. We disagree that the defense of illegality was available and reverse as to plaintiff's claim but affirm as to defendant's counterclaim and the trial court's calculation of the award.

On July 7, 1982, the plaintiff, Nutri-Pro, Inc., entered into a written agreement with the defendant, Jerry Phelps, and Gerald Gordon doing business as Nutri-Pro of Illinois. The plaintiff Nutri-Pro, as the supplier, provided defendant Phelps and Gordon with feed which they bought for resale to their customers. On October 28, 1982, defendant Phelps and Gordon signed a promissory note of $52,000 payable to Nutri-Pro, Inc. The parties disagree as to whether the interest rate was written on the note at the time of signing. After several months Phelps and Gordon ceased to do business together and defendant Phelps continued the business as Nutri-Pro of Illinois.

Defendant claims the promissory note was not intended to evidence debt but was collateral for products provided by Nutri-Pro. Defendant testified that part of the inducement offered by plaintiff to carry its feed products was that plaintiff would absorb the shipping and interest costs involved in their transactions. Plaintiff's former president, Daniel Brandt, testified the interest was marked on the note at the time of signing by defendant and defendant was responsible for freight and interest. Due to poor bookkeeping on the part of both parties it is unclear as to what defendant was paying for in the way of interest and freight, though he admitted paying an interest invoice as an accommodation to the defendant.

On December 26, 1985, plaintiff filed its complaint to collect on the promissory note. On February 14, 1986, defendant filed a countersuit alleging he had overpaid his account with Nutri-Pro and claiming the overpayment. On the first day of trial, September 22, 1987, the defendant raised the defense of illegality of the contract.

After hearing testimony and closing arguments the trial court issued its final order on December 18, 1987. The court found plaintiff had failed to show that defendant had been obligated to pay for freight and interest. The court then totaled the amount of merchandise received and subtracted payments made by defendant and found that $2,149.35 was still due on defendant's account. However, it accepted defendant's illegality defense and therefore declined to enforce the claims of either party. We reverse as to plaintiff's claim and affirm as to defendant's counterclaim and calculation of the award to the plaintiff of $2,149.35.

The parties by stipulation agree that the plaintiff failed to register the product as required by statute. The trial court in this case found the contract between the plaintiff-seller and defendant-buyer was unenforceable because of the failure of the plaintiff to register under the provisions of the Illinois Commercial Feed Act of 1961. (Ill. Rev. Stat. 1985, ch. 56 1/2, par. 66.1 et seq.) The statute requires commercial feed offered for sale in Illinois be registered with the Department of Agriculture. Section 12 of the statute provides for penalties and injunctions against anyone violating this requirement or interfering with the enforcement of the statute. Ill. Rev. Stat. 1985, ch. 56 1/2, par. 66.12.

It is an old and established doctrine in Illinois that contracts for an illegal purpose will not be enforced by the courts and the courts will leave the parties as it found them. The Illinois Supreme Court has held such contracts were unenforceable even when the underlying statute merely imposed a penalty for the illegal act and did not expressly declare any related contracts void. (Douthart v. Congdon (1902), 197 Ill. 349, 64 N.E. 348; Union National Bank v. Louisville, New Albany & Chicago Ry. Co. (1893), 145 Ill. 208, 34 N.E. 135.) More recently, it has been held no recovery can be had by either party to a contract where the performance would involve the violation of an existing law. (Broverman v. City of Taylorville (1978), 64 Ill. App. 3d 522, 381 N.E.2d 373.) The law of Illinois provides a defense to the enforcement of a contract if that contract is illegal either as a matter of Illinois or Federal law. The relevant statute need not declare the contract void or unenforceable to render it available to the defendant as a ground for the defense of illegality. American Buyers Club of Mt. Vernon, Illinois, Inc. v. Grayling (1977), 53 Ill. App. 3d 611, 368 N.E.2d 1057.

As pointed out by plaintiff, Grody v. Scalone (1950), 408 Ill. 61 96 N.E.2d 97, holds that in a case where the contract is illegal because of a statute and the statute contains specific penalties, the court will assume these listed penalties are exclusive. Since the supreme court held that refusal to enforce a contract can be a penalty, it found it inappropriate for the court to impose additional sanctions where the legislature had provided specific penalties. The court also based its decision on the equitable argument that one party should not be unjustly enriched where the other party has breached a statute unrelated to the activity which was the subject of the contract. In Grody the plaintiff had failed to register under an assumed name statute and the defendant had raised the defense of illegality to the plaintiff's contract claim. While the defendant here would like to distinguish Grody on its facts and dicta, the holding in the opinion is very broad and cannot be easily distinguished. Regrettably the supreme court did not cite or discuss its earlier decisions in the Grody case. The two lines of cases converge briefly in White v. Chicago Title & Trust Co. (1981), 99 Ill. App. 3d 323, 425 N.E.2d 1017, but the statute underlying that decision specifically provided brokers who violated its provisions could not bring suit to recover their fees and there was no need to resolve any conflict.

In the case before this court, the underlying statute does contain specific penalties, but section ...


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