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State Bank of Cherry, Appellant v. Cgb Enterprises

February 22, 2013

STATE BANK OF CHERRY, APPELLANT,
v.
CGB ENTERPRISES, INC., APPELLEE.



The opinion of the court was delivered by: Justice Garman

JUSTICE GARMAN delivered the judgment of the court, with opinion.

Chief Justice Kilbride and Justices Thomas, Karmeier, and Theis concurred in the judgment and opinion.

Justice Freeman specially concurred, with opinion, joined by Justice Burke.

OPINION

¶ 1 Plaintiff, State Bank of Cherry (the secured party), filed suit against defendant, CGB Enterprises, Inc. (the buyer), claiming that defendant failed to protect plaintiff's security interest in crops defendant purchased from a third-party debtor. Defendant filed a motion to dismiss plaintiff's complaint, arguing that plaintiff's notices of security interest to defendant were insufficient and failed to strictly comply with section 1631(e) of the Food Security Act of 1985 (the Act) (7 U.S.C. § 1631(e) (2006)). The circuit court of La Salle County denied the motion to dismiss. Plaintiff then filed a motion for summary judgment and defendant filed a cross-motion for judgment on the pleadings. The circuit court granted plaintiff's motion for summary judgment and denied defendant's motion for judgment on the pleadings. The appellate court reversed the circuit court, holding that plaintiff failed to strictly comply with the requirements for direct notice of security interest under the Act. 2012 IL App (3d) 100495. This court granted leave to appeal. Ill. S. Ct. R. 315 (eff. Feb. 26, 2010). For the following reasons, we affirm the judgment of the appellate court.

¶ 2 BACKGROUND

¶ 3 Plaintiff is an Illinois banking corporation with its principal place of business in Cherry, Bureau County, Illinois. Defendant is a corporation with a local office located in Princeton, Bureau County, Illinois. Defendant also maintains a grain elevator in La Salle County, Illinois. Plaintiff obtained a lien upon the crop proceeds of debtor Lawrence Rogowski, pursuant to a promissory note executed by Rogowski in favor of plaintiff.*fn1 Plaintiff had a security interest in Rogowski's crops and any proceeds from the sale of said crops. Plaintiff, in its complaint filed February 26, 2008, alleged that it gave defendant direct notice of its security interest in Rogowski's crops via letters sent to defendant on April 5, 2005, and June 15, 2006. Defendant sold Rogowski's crops and thereafter delivered to Rogowski proceeds from the sale of the crops in the amount of $35,617.87 by checks payable directly to Rogowski.

¶ 4 In its complaint, plaintiff alleged that the sale of Rogowski's crops occurred during the period covered by plaintiff's lien, and thus any proceeds for the sale of the crops were subject to plaintiff's security interest. Plaintiff alleged that defendant failed to protect plaintiff's security interest by making payments directly to Rogowski without recognition of plaintiff's security interest in Rogowski's crops. Plaintiff noted that in January 2008 it obtained a deficiency judgment against Rogowski in the amount of $53,557, which remained unsatisfied. Plaintiff demanded payment from defendant.

¶ 5 Attached to plaintiff's complaint were the two notices of its security interest in Rogowski's crops that plaintiff delivered to defendant. The documents are identical, except that one document is dated April 4, 2005, and relates to the crop years "2004 & 2005" and the other document is dated June 14, 2006, and relates to the crop years "2005 & 2006." The notice is directed to "Consolidated Grain and Barge" (defendant) and defendant's address is included at the top of the notice. The notice states that it is in regard to debtor "Lawrence Rogowski" and contains Rogowski's social security number and address. The notice contains the name of the secured party, "State Bank of Cherry" (plaintiff), as well as plaintiff's address. Underneath the names and addresses of the relevant parties the notice states the following:

"The Debtor has named you as a potential buyer, commission merchant, or selling agent of farm products. You are hereby given notice pursuant to the Food Security Act of 1985 that the Debtor has given a security interest to the Secured Party in (1) the farm products described below and (2) any proceeds from the sale of such farm products. This notice is effective for 1 year from the date you receive it."

¶ 6 Underneath this paragraph are the categories of property in which the secured party has a security interest. The three categories are "Agricultural Commodities," "Livestock," and "Products of Crops or Livestock." For "Agricultural Commodities" and "Products of Crops or Livestock," there are three columns entitled "Description," "Crop Year(s)," and "Amount." For the "Livestock" category, there are only two columns, "Description" and "Amount." Only the "Agricultural Commodities" category contained listed property. Under the "Description" column was typed "ALL GRAIN ON HAND. ALL GROWING CROPS." Under the "Crop Year(s)" column was typed "2004 and 2005" for the first notice and "2005 and 2006" for the second notice. The "Amount" column was left blank. No property was listed or described in the "Livestock" or "Products of Crops or Livestock" categories.

¶ 7 Under the categories of secured property, the notice states the following:

"If no amount is specified for the above described farm products, the security interest covers all such farm products without limitation as to amount.

The farm products described above are or may be located on (describe property and county or parish where farm products are or may be located): ***[.]"

¶ 8 The space underneath that section was left blank. However directly underneath the blank space was written: "The security interest also covers the described farm products wherever located and is not limited to those located on the above property." A box immediately to the left of that sentence was checked with a typed "X."

¶ 9 Finally, at the very bottom of the notice, is a section entitled "Payment Obligations." The section states:

"You will be subject to the security interest of the Secured Party in the farm products unless the following payment obligations are satisfied:

Any check or draft issued to Debtor as full or partial payment for any sale of such farm products must be made payable to both the Debtor and the Secured Party, delivered to or received by the Secured Party, and finally paid. [A box next to this sentence is checked with a typed 'X.']

If property other than checks or drafts is given as full or partial payment for the sale of such farm products, you must deliver a written notice describing the property in detail to the undersigned at the address stated above within three days after such sale. [A box next to this sentence is checked with a typed 'X.']"

¶ 10 The notice concludes with a sentence stating: "Satisfaction of the payment obligations will not affect the security interest of the Secured Party in proceeds of the sale of such farm products."

¶ 11 Defendant filed a motion to dismiss plaintiff's complaint pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 2008)) on April 29, 2008. Defendant argued the notices provided to defendant by plaintiff were insufficient to put defendant on notice of plaintiff's security interest in Rogowski's crops. Defendant noted that the notices themselves were specifically made pursuant to section 1631(e) of the federal act, which required a description of the farm products subject to the security interest created by the debtor, including "the name of each county or parish in which the farm products are produced or located." 7 U.S.C. § 1631(e)(1)(A)(ii)(IV) (2006). Citing to the federal appellate court case Farm Credit Midsouth, PCA v. Farm Fresh Catfish Co., 371 F.3d 450 (8th Cir. 2004), which interpreted the notice provision of the Act, defendant argued that Congress intended strict compliance with the direct notice provision. Defendant argued that under strict compliance, plaintiff's notices were deficient because they did not mention the county where the farm products were located.

¶ 12 Plaintiff filed its response to the motion to dismiss on June 17, 2008. Plaintiff argued that its direct notice of security interest in Rogowski's crops gave defendant adequate notice of an obligation on defendant's part to protect plaintiff's security interest. In its response, plaintiff stated that Illinois is a direct notice state, as opposed to a central filing state (direct notice being written notice sent directly to the buyer by the secured party and central filing notice being a central location where an effective financing statement is kept on file that apprises potential buyers of a security interest in property). Plaintiff argued that, after the federal act was adopted in 1985, Illinois adopted its own version based on article 9 of the Uniform Commercial Code so as not to conflict with the federal act. Plaintiff claimed defendant was aware of plaintiff's lien on Rogowski's crops. Plaintiff argued that, under Illinois case law, substantial compliance was all that was required to give satisfactory notice of a secured party's interest to a buyer. Plaintiff, recognizing the conflict between federal and Illinois case law on strict compliance versus substantial compliance, argued that Illinois courts are not bound by the decisions of lower federal courts, only the United States Supreme Court and, thus, under Illinois precedent, substantial compliance was all that was required.

¶ 13 Following in-court argument, the circuit court denied defendant's motion to dismiss on July 29, 2008. In denying the motion, the circuit court stated that it believed the crucial issue was whether direct notice required strict or substantial compliance. The circuit court stated that, if Farm Fresh were binding on Illinois courts, "there is no question where the ruling of this court would be," as it found the factual situation in Farm Fresh identical to the instant case and the Eighth Circuit's reasoning on statutory construction to be "dead on." However, if the Illinois appellate court case advocated by plaintiff, First National Bank in Toledo v. Effingham-Clay Service Co., 261 Ill. App. 3d 890 (1994), applied, then only substantial compliance would be required and the court would be bound to deny the motion.

¶ 14 In determining which case to follow, the circuit court discussed Illinois Supreme Court jurisprudence on the authority of lower federal court opinions, stating:

"But ultimately, the Illinois Supreme Court at this point in time has basically stated that this precedent of the Federal Courts-and this is surprising to me-is not binding-it is persuasive, but not binding-which frankly is a bit confusing when we are interpreting a Federal statute that Federal precedents would be persuasive and not binding."

¶ 15 Ultimately, the circuit court determined it was bound to follow the decision of the Illinois appellate court, concluding:

"But I think the ultimate conclusion here is that I am first bound by the opinions of the Third District Appellate Court if they are in conflict with other Appellate Districts and then go to the other Appellate Districts and obviously to our own Supreme Court. And while I agree that the 8th District-8th Circuit opinion is very well-reasoned, I think that I am bound to follow the Effingham-Clay Service case out of the Fourth District, 1994, even though as a-and counsel, I understand your argument and in fact it makes complete sense-there is not much you have said that I can dispute frankly. I am just trying to find out where or what court decision I need to follow.

I am relying on the case of First National Bank v. Effingham-Clay. I think that case states that when this particular question is asked, the answer to the question is substantial compliance and not strict compliance. And based on that, counsel, I am going to deny your motion to dismiss."

¶ 16 The circuit court denied defendant's motion to reconsider on October 21, 2008. Defendant filed its answer and affirmative defenses to plaintiff's complaint on January 29, 2009, again arguing insufficient notice under the Act. On April 29, 2009, plaintiff filed its motion for summary judgment pursuant to section 2-1005 of the Code of Civil Procedure (735 ILCS 5/2-1005 (West 2008)). Plaintiff argued that defendant admitted to all the allegations in plaintiff's complaint and that defendant's only defense was that it was not served with sufficient notice of plaintiff's security interest. Plaintiff noted that the circuit court rejected defendant's argument in denying the motion to dismiss. Further, defendant failed to respond to certain Requests to Admit concerning the factual allegations of plaintiff's complaint. Plaintiff concluded that it was entitled to summary judgment because no genuine issue of material fact existed.

¶ 17 Defendant filed a motion for judgment on the pleadings pursuant to section 2-615(e) of the Code of Civil Procedure (735 ILCS 5/2-615(e) (West 2008)) on May 18, 2009. Defendant reiterated its argument that the case was governed by federal law, specifically the Act. Defendant argued that the Act requires strict compliance in serving direct notice upon a buyer and that plaintiff, in this instance, did not strictly comply with the Act. Defendant argued the court erred in its earlier determination that Illinois cases controlled over the federal case, and that it was entitled to judgment on the pleadings since plaintiff's notice to defendant of its security interest was insufficient. On September 18, 2009, the circuit court granted plaintiff's motion for summary judgment and denied defendant's motion for judgment on the pleadings. Defendant's motion to reconsider was denied June 8, 2010.

¶ 18 The appellate court reversed the judgment of the circuit court.

First, the appellate court found that "the federal statute controls under the express terms of the state statute and under the supremacy clause of the United States Constitution." 2012 IL App (3d) 100495, ¶ 14. The court then wrote that while it was not bound by the Eighth Circuit's interpretation of the Act in Farm Fresh, it did find that case "to be the better-reasoned decision, and highly persuasive." 2012 IL App (3d) 100495, ¶ 18. Applying Farm Fresh, the appellate court held:

"Under the Eighth Circuit's construction of the statute, strict compliance is required. Plaintiff's notice to defendant had to list the county in which the farm products were or may be located to give effective notice to defendant of its security interest in the crops." 2012 IL App (3d) 100495, ¶ 26.

ΒΆ 19 The appellate court concluded that plaintiff's notices failed to comply with section 1631(e) of the Act and, therefore, defendant took free of the security interest created by the seller, even though defendant ...


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