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Colonial Funding, L.L.C. v. American Empire Surplus Lines

September 30, 1999

COLONIAL FUNDING, L.L.C., AN ILLINOIS LIMITED LIABILITY COMPANY, PLAINTIFF-APPELLANT,
V.
AMERICAN EMPIRE SURPLUS LINES INSURANCE COMPANY, A DELAWARE CORPORATION, DEFENDANT-APPELLEE



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY No. 97 L 11962 HONORABLE LEE PRESTON, JUDGE PRESIDING.

The opinion of the court was delivered by: Justice Hall

Plaintiff, Colonial Funding, L.L.C. (Colonial), appeals from the dismissal with prejudice of its verified complaint for conversion of insurance proceeds. For the reasons that follow, we affirm.

The following facts are relevant to this appeal.

On June 6, 1994, Colonial entered into a factoring agreement with Chemicals Trading, Inc. (Chemicals Trading). Pursuant to the agreement, Colonial held a first priority security interest in all of Chemicals Trading's inventory and equipment, including any proceeds or products thereof. Colonial filed the necessary Uniform Commercial Code (810 ILCS 5/1-101 et seq. (West 1996)) forms and properly recorded the security interest with the Illinois Secretary of State on July 6, 1994.

On February 25, 1995, a fire occurred at Chemicals Trading's warehouse, resulting in the loss of equipment and inventory. At the time of the fire, Chemicals Trading had an insurance policy with American Empire Surplus Lines Insurance Company (American), insuring the equipment and inventory covered by Colonial's perfected security interest against fire loss. Colonial was not named as an additional insured or a loss payee on the policy. In May or June 1995, American issued a $100,000 check to its insured, Chemicals Trading, as partial payment of the insurance proceeds due as a result of the fire loss claim.

After the $100,000 partial payment was made to Chemicals Trading, Colonial learned of the existence of the American insurance policy. On September 22, 1997, Colonial made a demand upon American for $97,245.29, the amount remaining due and owing to it out of the $100,000 in insurance proceeds paid to Chemicals Trading. American refused this demand.

Colonial filed a complaint for conversion alleging that, as a secured creditor with a perfected security interest in Chemicals Trading's equipment and inventory and the proceeds thereof, Colonial had an automatic right to receive all insurance settlements paid on losses to Chemicals Trading's inventory and equipment. American filed a motion to dismiss pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1996)). On May 11, 1998, the circuit court entered an order striking the complaint but granting Colonial leave to file an amended complaint. Colonial elected to stand on its original complaint. On July 22, 1998, the circuit court entered an order dismissing Colonial's complaint with prejudice.

On appeal plaintiff contends that the circuit court erred in dismissing its complaint for failure to state a cause of action for conversion.

A section 2-615 motion attacks the sufficiency of a complaint and raises the question whether the complaint states a cause of action upon which relief may be granted. Grund v. Donegan, 298 Ill. App. 3d 1034, 700 N.E.2d 157 (1998). When ruling on a section 2-615 motion to dismiss, the court must accept as true all well-pleaded facts and must construe all reasonable inferences therefrom in the light most favorable to the plaintiff. Bryson v. News American Publications, Inc., 174 Ill. 2d 77, 672 N.E.2d 1207 (1996). A complaint should not be dismissed unless it is clear that the plaintiff can prove no set of facts that would entitle him to recovery. Roderick Development Investment Co. v. Community Bank, 282 Ill. App. 3d 1052, 668 N.E.2d 1129 (1996). This court will review a dismissal of a complaint pursuant to section 2-615 de novo. Brown Leasing, Inc. v. Stone, 284 Ill. App. 3d 1035, 673 N.E.2d 430 (1996).

A conversion is any unauthorized act that deprives a person of his or her property permanently or for an indefinite time. In re Thebus, 108 Ill. 2d 255, 483 N.E.2d 1258 (1985). The essence of conversion is the wrongful deprivation of one who has a right to immediate possession of the object unlawfully held. Roderick Development Investment, 282 Ill. App. 3d at 1057. To state a cause of action for conversion, a plaintiff must allege: (1) an unauthorized and wrongful assumption of control, dominion, or ownership by a defendant over plaintiff's personalty; (2) plaintiff's right in the property; (3) plaintiff's right to the immediate possession of the property, absolutely and unconditionally; and (4) a demand for possession of the property. Roderick Development Investment, 282 Ill. App. 3d at 1057; Fonda v. General Casualty Co., 279 Ill. App. 3d 894, 665 N.E.2d 439 (1996).

Colonial contends that it has pled facts sufficient to fulfill each of these pleading requirements. Specifically, Colonial contends that, as a secured party with a perfected security interest, it had an automatic right to direct payment of the insurance proceeds from American, pursuant to section 9-306(1) of the Uniform Commercial Code (the UCC)(810 ILCS 5/9-306(1)(West 1996)). Section 9-306(1) provides in pertinent part:

"'Proceeds' includes whatever is received upon the sale, exchange, collection or other Disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement." 810 ILCS 5/9- 306(1)(West 1996).

This case is controlled by Fonda v. General Casualty Co., 279 Ill. App. 3d 894, 665 N.E.2d 439 (1996), where the first district found that a secured party was entitled to direct payment of insurance proceeds from an insurer where the insurer had actual notice of the security interest prior to paying out the proceeds.

In Fonda, the plaintiff held a perfected security interest in the contents of a grocery store. On December 2, 1983, the grocery store was destroyed by fire. On March 16, 1984, the plaintiff's attorney sent a letter to the insurance carrier advising it of plaintiff's security interest. On March 17, 1984, the defendant added the plaintiff as a loss payee on the policy. On May 1, 1984, the defendant paid $27,100.67 in insurance proceeds as a result of the fire loss directly to its insured (the plaintiff's debtor). On September 22, 1987, the ...


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