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October 10, 1997


Appeal from the Circuit Court of the 21st Judicial Circuit, Iroquois County, Illinois, No. 92--L--4. Honorable Gordon L. Lustfeldt, Judge, Presiding.

Released for Publication December 3, 1997. Rehearing Denied December 3, 1997.

Present - Honorable William E. Holdridge, Justice, Honorable Kent Slater, Justice, Honorable Thomas J. Homer, Justice. Justice Slater delivered the opinion of the court. Holdridge and Homer, J.j., concur.

The opinion of the court was delivered by: Slater

The Honorable Justice SLATER delivered the opinion of the court:

On January 16, 1992, Watseka First National Bank (Bank) was granted confession judgment on a note in the amount of $196,842.47 against Henry Horney (Horney) and William Walker (Walker). Horney and Walker were part owners of EZ Pickins, a retail grocery store in Watseka which declared bankruptcy in December 1991. Horney and Walker were co-signers on the promissory note. The court denied Horney's subsequent motion to open judgment, but allowed the filing of Horney's counterclaim and stayed the judgment pending disposition of the counterclaim. In his verified answer, Horney admitted execution of the note but claimed a set-off in an amount exceeding the Bank's claims. Horney claimed he sustained a $1.1 million loss as a result of the Bank's negligence and failure to use ordinary care. Horney alleged his right to sue the Bank for EZ Pickins' loss arises from an oral assignment.

On May 9, 1995, the court heard evidence on Horney's counterclaim and continued the case for disposition. Written post-trial arguments were filed by both parties. The Bank also filed a motion to file a first amended answer and affirmative defenses. Horney objected and argued that the new affirmative defenses should not be permitted because of surprise and prejudice to him, and they did not conform to the proof. In a written memorandum, the court allowed the Bank's motion to file its amended answer and new affirmative defenses, finding no prejudice to Horney. The court further found that the new filings conformed the pleadings to the evidence presented, and found the issues in favor of the Bank and against Horney, specifically ruling that Horney's claim was unavailable as a set-off against the Bank's judgment or as an independent claim.

Horney filed a motion to vacate judgment and for a new trial, based on assertions of judicial bias. Horney's motion was denied.

On appeal, Horney contends that the Bank breached its contract with EZ Pickins by paying checks to a fictitious payee in violation of explicit instructions requiring two signatures and in contradiction of its own policies and procedures. Specifically, he contends that the Bank's affirmative defenses do not excuse breach of contract or violation of its own policies and procedures.

We find that the lower court's ruling against Horney was not against the manifest weight of the evidence. We find that Horney's counterclaim was barred because it was not timely made. We affirm the decision of the trial court.


The pertinent facts on appeal are as follows: Horney developed a banking relationship with the Bank in connection with his various businesses and maintained several accounts with the Bank. In 1983, Horney hired a comptroller, Ray Cardinal (Cardinal), to handle significant financial matters and the internal audit work pertaining to Horney's various businesses, including EZ Pickins. Cardinal was entrusted with the duty of receiving canceled checks and reconciling monthly bank statements, but he did not have authority to sign checks. Horney claims he trusted Cardinal absolutely and gave him complete control of the bank statements. Horney did not examine the bank statements from 1983 to 1987, which allowed Cardinal free reign to engage in a scheme of fraud and forgery.

According to Horney, the signature cards on the EZ Pickins accounts required two signatures. In addition, EZ Pickins' corporate resolution filed with the Bank required that all checks or orders for withdrawal of funds should contain two signatures. Although Horney did not formally rescind these instructions to the Bank, evidence adduced at trial clearly showed that Horney and EZ Pickins did not follow their own instructions. The facts showed that Horney was aware that checks were being honored by the Bank bearing only one signature because he himself presented such checks to the Bank. In addition to checks bearing only Horney's signature, many other checks were honored bearing only one of the authorized signatures on file with the Bank or a facsimile of Horney's signature.

Horney discovered Cardinal's forgery scheme on Friday before the Labor Day weekend in 1987. The Bank called to notify him of an overdraft in the amount of approximately $39,000 made out to Charles Fuller. Neither Horney nor Walker recognized the name, but a subsequent search of Cardinal's desk and bank statements revealed many more checks made payable to the fictitious payee totalling approximately $1.1 million. Horney told Walker to advise the Bank of the forgeries, but the Bank has no record of the handwritten note purportedly written by Walker. Other than Walker's purported note to the Bank, Horney does not recall speaking to anyone at the Bank nor writing to them about the forgeries after that weekend. The evidence showed that the Bank was not asked to take any action to return the forged checks through normal banking channels.

After discovering the forgeries, Horney continued to do business with the Bank without protest or complaint as to the manner in which checks were handled. Horney renewed the note to the Bank six times and continued to do business as usual with the Bank for another four years. It was not until January 1992, after EZ Pickins filed for bankruptcy relief and the ...

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