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First Midwest Bank v. IBP

May 23, 2000

FIRST MIDWEST BANK, N.A., PLAINTIFF-APPELLANT,
v.
IBP, INC., DEFENDANT-APPELLEE.



Appeal from the Circuit Court for the 9th Judicial Circuit, Knox County, Illinois No. 98--LM--206 Honorable James B. Stewart Judge, Presiding

The opinion of the court was delivered by: Justice Breslin

Plaintiff First Midwest Bank (Bank) sought a judgment against defendant IBP, Inc. (IBP), in the amount of $34,239.51 for failing to honor its security interest when IBP purchased hogs from Ronald and Rhonda Przybylski. The trial court granted IBP's motion for summary judgment based upon its determination that the Bank's notice of its security interest, pursuant to section 9-307 of the Illinois Uniform Commercial Code Secured Transactions (Illinois Code) (810 ILCS 5/9-307 (West 1998)), was valid for one year only. We affirm and hold that notice of a security interest pursuant to section 9-307 of the Illinois Code is valid for only one year against a purchaser of farm products that are subject to the security interest.

FACTS

On August 23, 1991, the Bank gave Ronald and Rhonda Przybylski a line of credit in the amount of $25,500 secured in part by livestock belonging to the Przybylskis. On April 8, 1992, the Bank gave the Przybylskis a $250,000 loan secured by the same livestock. On that same day, the Przybylskis signed a "Consent to Payment of Proceeds from Sale of Livestock" (Consent). They forwarded the Consent by certified mail to IBP, a recent purchaser of their hogs. A representative of IBP signed the Consent in May of 1992.

The Consent provided notice of the Bank's security interest in the Przybylskis' hogs and provided that IBP could extinguish that interest by issuing checks payable jointly to the Przybylskis and the Bank whenever a purchase of the Przybylskis' hogs was made. IBP complied with the Consent requirements for approximately three years. In 1995, however, IBP began writing checks for the hogs payable to Ronald Przybylski only. Ronald would, at times, write the name of the Bank on the check; however, many checks remained payable exclusively to Ronald Przybylski. The amount of those checks not written jointly to the Przybylskis and the Bank totaled $34,239.51.

When the Bank sued IBP for $34,239.51, the trial court determined that IBP had received a valid notice of the Bank's security interest in the hogs in compliance with section 1631(e) of the United States Code (7 U.S.C. §1631(e) (1994) (codified in Illinois as 810 ILCS 5/9-307 (West 1998))). The court found, however, that the Bank's notice was valid for one year only, until May of 1993. Having lost its suit due to its expired notice, the Bank appeals.

ANALYSIS

The single issue before us is whether the trial court erred when it determined that notice of a security interest in farm products pursuant to section 9-307(4) of the Illinois Code is valid for one year only. Statutory construction is a question of law subject to our de novo review. E & E Hauling, Inc. v. Ryan, 306 Ill. App. 3d 131, 713 N.E.2d 178 (1999).

To understand section 9-307(4) of the Illinois Code, we must first understand the history predating this provision. Under section 9-307(1) of the Uniform Commercial Code (UCC) (Uniform Commercial Code §9-307(1), 3A-U.L.A. 256 (1992)), a buyer in the ordinary course of business "takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence." This provision, however, excepts persons who buy farm products from one engaged in farming operations. U.C.C. § 9-307(1) (1998). Thus, under section 9-307(1) of the UCC, buyers of farm products are subject to the continuing interest of a secured lender.

During the late 1970s and the 1980s, numerous farm loan defaults resulted from large loan burdens, depressed land values, and low farm prices. D. Kershen & J. Hardin, Farm Products Financing and Filing Service Preface (1991). When farmers became unable to pay their loans, lenders began to seek payment from the purchasers of the farm products that had served as the collateral for the farm loans. Debate ensued regarding the justification for a lender's recovery against the purchaser of the secured farm products. Congress responded by enacting section 1631, commonly known as the "Food Security Act" (Act). 7 U.S.C. §1631(e) (1994). Section 1631 now prevails over the farm products exception of the UCC as it applied to farm products purchasers. D. Kershen & J. Hardin, Farm Products Financing and Filing Service Preface (1991).

Section 1631 provides in relevant part:

"(e) Purchases subject to a security interest

A buyer of farm products takes subject to a security interest created by the seller if --

(1)(A) within 1 year before the sale of the farm products, the buyer has received from the secured party or the seller written notice of the security interest ...


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