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08/17/95 COUNTY MACON v. JIM O. EDGCOMB

August 17, 1995

THE COUNTY OF MACON, ILLINOIS, PLAINTIFF-APPELLANT,
v.
JIM O. EDGCOMB, DEBORAH K. SMITH (F/K/A DEBORAH K. EDGCOMB), MAGNA BANK OF ILLINOIS A/K/A MAGNA MILLIKIN BANK (F/K/A MILLIKIN NATIONAL BANK) AND FIRST OF AMERICA BANK-ILLINOIS, N.A. (F/K/A FIRST OF AMERICA BANK-DECATUR, N.A., AND CITIZENS NATIONAL BANK), DEFENDANTS-APPELLEES.



Appeal from Circuit Court of Macon County No. 93L165. Honorable John L. Davis, Judge Presiding.

As Corrected December 12, 1995.

Honorable Robert W. Cook, J., Honorable James A. Knecht, P.j., Honorable Frederick S. Green, J., Concurring

The opinion of the court was delivered by: Cook

JUSTICE COOK delivered the opinion of the court:

Plaintiff, the County of Macon (County), brought this action against Jim Edgcomb, Deborah Smith (f/k/a Deborah Edgcomb), Magna Bank of Illinois (Magna), and First of America Bank-Decatur, N.A. (FOA), to recover over $400,000 Edgcomb embezzled from the County. The trial court dismissed the counts against FOA and Magna and made a finding under Rule 304(a) (Official Reports Advance Sheet No. 26 (Dec. 22, 1993), R. 304(a), eff. Feb. 1, 1994) that there was no just reason for delaying appeal. Plaintiff appeals. We affirm in part, reverse in part, and remand.

According to the County's second-amended complaint, Edgcomb, who served as Macon County treasurer between 1986 and November 30, 1990, falsified various official financial records and documents and embezzled $419,749 in public funds from various official county bank accounts. During the time period in question, the County maintained the Macon County collector's account, the Macon County treasurer's drainage account, and the Macon County treasurer's late funds due account at the First National Bank of Decatur, a former party to the lawsuit. In addition, the County maintained two Macon County tax protest accounts, one at FOA and one at Magna. Edgcomb and Deborah maintained a personal account, "Jim O. or Deborah K. Edgcomb," No. 177-2562, at Citizens National Bank (now FOA).

I. STATUTORY BACKGROUND

The Uniform Negotiable Instruments Law, drafted in 1896 and adopted in every State by 1924 (Ill. Ann. Stat., ch. 26, art. III, Introductory Comment, at 4 (Smith-Hurd 1963)), was enacted in Illinois in 1907 as the Negotiable Instrument Law (1907 Ill. Laws 403 (eff. July 1, 1907)). The Uniform Negotiable Instruments Law required actual knowledge or bad faith before the taker of any instrument was put on notice of any infirmity or defect, but where it appeared on the face of the instrument that the instrument was drawn or indorsed by a fiduciary, "the courts have usually ignored the [Uniform] Negotiable Instruments Law, and have simply said that the payee or indorsee is bound to make inquiry." Uniform Fiduciaries Act § 6, Comment, 7A U.L.A. 410 (1985).

The Uniform Fiduciaries Act, approved by the National Conference of Commissioners on Uniform State Laws (Commissioners) and the American Bar Association in 1922 (Uniform Fiduciaries Act, Historical Note, 7A U.L.A. 391 (1985)), was designed to overturn those cases and reapply the Uniform Negotiable Instruments Law. (Uniform Fiduciaries Act § 6, Comment, 7A U.L.A. 410 (1985); see also 810 ILCS Ann. 5/3-307 & Uniform Commercial Code Comment, at 163-64 (Smith-Hurd 1993) (reapplying actual knowledge requirement from Uniform Negotiable Instruments Law).) The Uniform Fiduciaries Act was enacted in Illinois in 1931 as "An Act concerning liability for participation in breaches of fiduciary obligations" (Act) (1931 Ill. Laws 676 (eff. July 7, 1931)); first appearing in chapter 98 (Ill. Rev. Stat. 1931, ch. 98, pars. 234 through 245), and later transferred to chapter 17 (Ill. Rev. Stat. 1981, ch. 17, pars. 2001 through 2012 (now titled Fiduciary Obligations Act (760 ILCS 65/0.01 through 12 (West 1992)))).

In 1961, Illinois enacted its Uniform Commercial Code (UCC), a variant on the 1958 Official Text of the Uniform Commercial Code promulgated by the Commissioners, and repealed the Negotiable Instrument Law. 1961 Ill. Laws 2101, 2270 (eff. July 1, 1962).

II. STATUTORY APPLICATION

There are many legitimate reasons why an agent and principal might engage in odd checking practices. The purpose of the Act is to facilitate banking and financial transactions and place on the principal the burden of employing honest fiduciaries. ( Johnson v. Citizens National Bank (1975), 30 Ill. App. 3d 1066, 1072, 334 N.E.2d 295, 300.) The Act provides protection where a person deals honestly with another knowing him to be a fiduciary. Hosselton v. First American Bank (1993), 240 Ill. App. 3d 903, 907, 608 N.E.2d 630, 633-34, 181 Ill. Dec. 557.

The Act covers all sorts of situations where fiduciaries (which include "agents" and "public officers") deal with the funds of their principals. The Act applies where a fiduciary endorses instruments made payable to the principal or to the fiduciary in his fiduciary capacity (section 4), or where the fiduciary draws checks in his fiduciary capacity (section 5). (760 ILCS 65/4, 5 (West 1992).) The Act addresses the liability of those to whom the fiduciary endorses an instrument(section 4), or makes an instrument (section 5), or the bank upon which the instruments are drawn, whether the account is in the name of the fiduciary as such (section 7), or in the name of the principal (section 8). (760 ILCS 65/4, 5, 7, 8 (West 1992).) In all these cases, those who deal with the fiduciary are not liable unless they have actual knowledge the conduct constitutes a breach of fiduciary obligation or there is bad faith. Notice of the existence of the fiduciary relationship is not enough to raise a duty of inquiry. An example of bad faith is where the taker suspects that the fiduciary is acting improperly and deliberately refrains from investigating in order that he may avoid knowledge that the fiduciary, is acting improperly. Uniform Fiduciaries Act § 6, Comment, 7A U.L.A. 410-11 (1985).

There is liability, however, where an instrument is taken "in payment of or as a security for a personal debt of the fiduciary to the actual knowledge of the creditor, or is transferred in any transaction known by the transferee to be for the personal benefit of the fiduciary." (760 ILCS 65/4 (West 1992).) In those cases, the creditor (sections 4, 5), or the payor bank (if payment is made to it on a debt (sections 7, 8)), is liable, without more, to the principal if the fiduciary has breached his obligation. One further responsibility on the part of a payor bank (also referred to as a drawee bank) should be noted. The payor bank is protected under section 7 when it pays checks on the account only if the fiduciary's check is "signed with the name in which such deposit is entered." (760 ILCS 65/7 (West 1992).) The rule ...


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