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April 22, 1996



As Corrected July 12, 1996.

Presiding Justice Campbell delivered the opinion of the court: Buckley, J., and Wolfson, J., concur.

The opinion of the court was delivered by: Campbell

PRESIDING JUSTICE CAMPBELL delivered the opinion of the court:

Plaintiff, Richard B. Fonda, appeals from an order of the circuit court of Cook County granting judgment in favor of defendant, General Casualty Company of Illinois, on plaintiff's action for conversion of property. On appeal, plaintiff contends that the trial court erred in determining that plaintiff failed to prove a conversion. For the following reasons, we reverse the judgment of the trial court.

The record reveals the following relevant facts. *fn1 Vecente Nededog owned a convenience grocery store called "Ma & Pa's II," located in Waukegan, Lake County, Illinois. On August 26, 1983, Nededog, as debtor, executed a Secured Installment Note (Note) in the amount of $28,700, plus 10% annual interest, to HBH, Inc. (HBH), as creditor. The Note provided that principal and interest were payable in consecutive monthly installments. The Note also afforded HBH a security interest (Security Agreement) in certain equipment, fixtures, goodwill, etc. and "proceeds therefrom." Copies of the Security Agreement and a Uniform Commercial Code (UCC) financing statement were recorded in the Office of the Illinois Secretary of State (Secretary of State) on August 30, 1983.

On August 28, 1983, defendant issued a business owners insurance policy to Nededog, d/b/a "Ma & Pa's II." The policy did not identify HBH as a loss payee or entity insured or as an entity having an interest in the business.

On December 2, 1983, Ma & Pa's II was destroyed by fire. Nededog's business personal property was rendered totally damaged.

On February 5, 1984, HBH assigned the Security Agreement and Note to plaintiff. Plaintiff filed a UCC-3 form recording the assignment of the rights under the UCC financing statement with the Secretary of State on March 21, 1984.

Meanwhile, an adjusting firm evaluated the fire loss of December 2, 1983. During this period, defendant received a letter from plaintiff's counsel, Michael R. Esposito, dated March 16, 1984. Esposito's letter advised defendant that plaintiff had been assigned all of HBH's rights in "equipment, fixtures, goodwill, inventory, trademarks, trade names, leasehold rights and proceeds therefrom in the business known as Ma & Pa II [sic]," and requested that defendant "make note of this Assignment and the interests of the Assignee in any insurance proceeds or coverage."

Defendant added plaintiff to Nededog's policy as a "loss payee" effective March 17, 1984.

On May 1, 1984, defendant paid Nededog $27,100.67 in insurance proceeds as a result of the fire loss. This sum represented the actual cash value of Nededog's damaged personal business property less a $100 policy deductible. Nededog kept the insurance proceeds and continued to make 32 monthly installment payments to plaintiff on the Note until December 26, 1986, at which time the balance was reduced to $20,091.70. Subsequently, Nededog defaulted on the Note, and in July 1987, was adjudged bankrupt.

On September 22, 1987, plaintiff made a demand on defendant by letter for the insurance proceeds for the loss that occurred on December 2, 1983. Defendant refused plaintiff's demand, and plaintiff filed a cause of action for conversion in March 1988. Plaintiff filed his first amended complaint on August 3, 1993, alleging: (I) conversion; (II) wilful and wanton conversion; (III) breach of contract; and (IV) violation of section 155 of the Illinois Insurance code. The trial court dismissed counts III and IV with prejudice on October 5, 1993, and these counts are not the subject of this appeal.

On October 26, 1993, the parties submitted to the trial court a "Statement of Agreed Facts." That same day, the trial court entered an agreed order as follows: (1) there are no genuine issues of material fact in dispute; and (2) the matter should be properly resolved on summary judgment pursuant to the statement of agreed facts submitted by the parties. The trial court took the matter under advisement.

On November 8, 1993, the trial court issued its order along with a detailed memorandum of opinion. The trial court found that while plaintiff was an assignee of a perfected security interest in the proceeds within the meaning of section 9-306 of the UCC, plaintiff's action for conversion could not lie under existing Illinois law. The trial court relied on General Motors Corp. v. Douglass, 206 Ill. App. 3d 881, 565 N.E.2d 93, 151 Ill. Dec. 822 (1990), for the proposition that a cause of action for conversion can only be maintained under limited circumstances, and that the facts of this case did not mandate an expansion of the cause of action for conversion. The trial court found that there was no segregated or specific identifiable fund in the hands of defendant, and that plaintiff did not have the right to absolute immediate possession of a specific fund. The trial court further found that the letter from Esposito to defendant did not constitute a "demand" for proceeds, but rather a "notice." The trial court entered judgment in favor of defendant.

On December 3, 1993, plaintiff filed a motion for rehearing, retrial, or modification, or to vacate the judgment order of November 8, 1993. Plaintiff argued that the trial court improperly relied on facts not set forth in the statement of agreed facts, i.e., that Nededog cancelled the insurance policy on February 1, 1984, after the loss of December 2, 1982, and requested return of some of the premium. Plaintiff argued that the trial court improperly made note of this fact both in the body of its memorandum of opinion and in a footnote. Plaintiff argued that consideration of this not-agreed-to fact was improper in that Nededog's policy was actually cancelled on May 8, 1994, after defendant received attorney Esposito's letter, but backdated to February 1, 1984. Therefore, plaintiff argued, the trial court could not have believed that defendant issued the insurance proceeds to Nededog prior to learning that plaintiff was a secured party.

Plaintiff further argued that Esposito's notification of assignment constituted a demand for the proceeds, and that the trial court improperly relied on General Motors in reaching its conclusion because the case was factually distinguishable. Defendant filed a response to plaintiff's post-trial motion on January 20, 1994.

On February 8, 1994, the trial court entered an order vacating and supplanting its order of November 8, 1993. The trial court stated that its reason for supplanting the prior judgment order was that the order made reference by footnote and in the body of the opinion to a matter not among the stipulated facts. The trial court reconsidered the case, but maintained its stated belief that this case is controlled by General Motors, entering judgment in ...

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