KEDZIE AND 103RD CURRENCY EXCHANGE, INC., Appellant, v. BEULAH M. HODGE, Appellee.
No. 73855
Supreme Court of Illinois
August 26, 1993
156 Ill. 2d 112
McMORROW, J., took no part. BILANDIC, J., dissenting.
Franklin P. Auwarter, Kathleen H. Gorr and Anne K. Lewis, of Mayer, Brown & Platt, of Chicago, for appellee.
JUSTICE FREEMAN delivered the opinion of the court:
We consider here whether a holder in due course of a check is precluded from payment as against the drawer where the check was given in exchange for contract services for which the provider was required to be, but was not, a licensed plumber. We conclude such a claim is not precluded.
BACKGROUND
Pursuant to a written “work order,” Fred Fentress agreed to install a “flood control system” at the home of Eric and Beulah Hodge of Chicago for $900. In partial payment for the work, Beulah Hodge drafted a personal check payable to “Fred Fentress—A-OK Plumbing” for $500 from the Hodges’ joint account at Citicorp Savings.
The system‘s components were not delivered to the Hodges’ home as scheduled. And, when Fentress failed to appear on the date set for installation, Eric Hodge telephoned him to announce the contract “cancelled.” Hodge also told Fentress that he would order Citicorp Savings not to pay the check Fentress had been given.
Nevertheless, Fentress presented the check at the Kedzie & 103rd Street Currency Exchange (Currency Exchange), endorsing it as “sole owner” of A-OK Plumbing, and obtained payment. However, when the Currency Exchange later presented the check for payment at Citicorp Savings, payment was refused in accordance with the stop-payment order.
The Currency Exchange, alleging it was a holder in due course (see
Hodge asserted a defense provided by section 3-305 of the Uniform Commercial Code (UCC) (
DISCUSSION
Section 2-619(a)(9)
Hodge moved for involuntary dismissal under section 2-619 of the Code of Civil Procedure. (
The phrase “affirmative matter” encompasses any defense other than a negation of the essential allegations of the plaintiff‘s cause of action. (See 4 R. Michael, Illinois Practice § 41.7 (1989).) For that reason, it is recognized that a section 2-619(a)(9) motion to dismiss admits the legal sufficiency of the plaintiff‘s cause of action much in the same way that a section 2-615 motion to dismiss admits a complaint‘s well-pleaded facts. Barber-Colman, 236 Ill. App. 3d at 1073.
The plaintiff must establish that the defense is unfounded or requires the resolution of an essential element of material fact before it is proven. The plaintiff may do so by “affidavit[] or other proof.” (
An appeal from such a dismissal is the same in nature as one following a grant of summary judgment and is likewise a matter given to de novo review (see Myers v. Health Specialists, S.C. (1992), 225 Ill. App. 3d 68, 72 (stating the standard as it relates to summary judgment)). The appellate court must consider whether the existence of a genuine issue of material
Hodge‘s Motion
The legal sufficiency of the Currency Exchange‘s action, including the allegation that it possesses the check as a holder in due course, is admitted by Hodge‘s motion. The reason asserted for dismissal—“illegality” grounded upon noncompliance with a statutory licensure requirement—was raised properly as affirmative matter and supported by affidavit.
The Illinois Plumbing License Law requires that all plumbing, including “installation *** or extension” of “drains,” be performed by plumbers licensed under the Act. (
Hodge therefore carried the burden of going forward.
No counteraffidavit was supplied. For purposes of the motion, the fact that Fentress was not a licensed plumber is deemed admitted. No other matter was presented to refute the defense.
No material fact remains to be resolved. The question is simply whether Hodge is entitled, as a matter of law, to a judgment of dismissal in view of the defense asserted under UCC section 3-305.
“Illegality” under Section 3-305
Section 3-305 provides, in relevant part:
“[A] holder in due course *** takes the instrument free from
***
(2) all defenses of any party to the instrument with whom the holder has not dealt except
***
(b) *** illegality of the transaction, as renders the obligation of the party a nullity.” (
Ill. Rev. Stat. 1989, ch. 26, par. 3-305 .)
The concern is whether noncompliance by Fentress with the Illinois Plumbing License Law gives rise to “illegality of the transaction” with respect to the contract for plumbing services so as to bar the claim of the Currency Exchange, a holder in due course of the check initially given Fentress.
The issue of “illegality” arises “under a variety of statutes.” (Ill. Ann. Stat., ch. 26, par. 3-305, Uniform Commercial Code Comment, at 66 (Smith-Hurd Supp. 1992).) In view of the diverse constructions to which statutory enactments are given, “illegality” is, accordingly, a matter “left to the local law.” (Ill. Ann. Stat., ch. 26, par. 3-305, Uniform Commercial Code Comment, at 66 (Smith-Hurd Supp. 1992).) Even so, it is only when an obligation is made “entirely null and void” under “local law” that “illegality” exists as one of the “real defenses” under section 3-305 to defeat a claim of a holder in due course. (Ill. Ann. Stat., ch. 26, par. 3-305, Uniform Commercial Code Comment, at 66 (Smith-Hurd Supp. 1992).) In effect, the obligation must be no obligation at all. If it is “merely voidable” at the election of the obligor, the defense is unavailable. Ill. Ann. Stat., ch. 26, par. 3-305, Uniform Commercial Code Comment, at 66 (Smith-Hurd Supp. 1992).
Historically, this court has recognized “illegality” to arise only in view of legislative declaration affecting
Thus, “illegality” has been held to defeat the claims of holders in due course in cases involving contracts of a gaming nature or for retirement of gambling debts (see
That the existence or absence of legislative declaration controls the issue was recognized by our appellate
Lamont moved to vacate the judgment. Lamont asserted that the purchase of the shares of stock was void under the Illinois Securities Law because the Association had not complied with its requirements. Because the transaction was void, Lamont concluded, the note given in payment must also be void despite McGregor‘s status as a holder in due course.
The appellate court noted that the Illinois Securities Law did, indeed, make transactions for the sale of shares of stock void based on noncompliance with the Law‘s requirements. (McGregor, 225 Ill. App. at 453-54, 455.) But the court noted that only the “sale and contract of sale” of shares of stock were expressly made void, not instruments exchanged upon such contracts. (McGregor, 225 Ill. App. at 455.) Absent legislative declaration making such instruments void, the court declined to recognize a defense to McGregor‘s action for payment on the note. McGregor, 225 Ill. App. at 455.
The same rule obtains in New Jersey. In New Jersey Mortgage & Investment Corp. v. Berenyi (App. Div. 1976), 140 N.J. Super. 406, 356 A.2d 421, a holder in due course of a note was permitted to maintain a claim for its payment even though the note had been initially obtained by a corporation in a transaction which violated an injunctive order. No statute rendered the note void, and the holder in due course had no knowledge
Several other jurisdictions also find reason to draw a distinction between the voidness of a negotiable instrument and the underlying contract or transaction upon which it is exchanged. (See Annot., 80 A.L.R.2d 465, 472-76 (1961) (summarizing several State decisions in which holders in due course were permitted to claim payment of instruments executed in favor of foreign corporations doing business in States without complying with local licensing requirements).) Although recognition of that distinction is not universal (see Columbus Checkcashiers v. Stiles (1990), 56 Ohio App. 3d 159, 565 N.E.2d 883; Wilson v. Steele (1989), 211 Cal. App. 3d 1053, 259 Cal. Rptr. 851 (holding that “illegality” need only be present in the underlying contract between an unlicensed contractor and the drafter of a negotiable instrument to bar the claim of a holder in due course)), we are convinced it remains the better rule.
A plaintiff is precluded from recovering on a suit involving an illegal contract because the plaintiff is a wrongdoer. (See Bankers Trust Co. v. Litton Systems, Inc. (2d Cir. 1979), 599 F.2d 488, 492 (citing the Re-
But a holder in due course is an innocent third party. (Litton, 599 F.2d at 492-93.) Such a holder is without knowledge of the circumstances of the contract upon which the instrument was initially exchanged. (
The holder in due course concept is intended to facilitate commercial transactions by eliminating the need for “elaborate investigation” of the nature of the circumstances for which an instrument is initially exchanged or of its drafting. (Litton, 599 F.2d at 494Vedder v. Spellman (1971), 78 Wash. 2d 834, 839-40, 480 P.2d 207, 210 (Neill, J., concurring).
It is, therefore, not enough simply to conclude that the initial obligation to pay arising from a void contract or transaction is void. Negation of that obligation as between the contracting parties has little bearing on whether a holder in due course of an instrument arising from the contract or transaction should nevertheless be permitted to make a claim for payment.
We therefore reaffirm, today, the view this court has consistently recognized in cases predating the UCC. Unless the instrument arising from a contract or transaction is, itself, made void by statute, the “illegality” defense under section 3-305 is not available to bar the claim of a holder in due course.
Conclusion
To determine whether Hodge is entitled to a judgment of dismissal, we need not engage in an analysis aimed at characterizing the contract between Fentress and the Hodges. Whether the underlying contract should be considered void because Fentress was not licensed as required by the Illinois Plumbing License Law is not dis-
For the reasons stated, the judgments of the appellate and circuit courts are reversed, and the cause is remanded to the circuit court for further proceeding.
Judgments reversed; cause remanded.
JUSTICE McMORROW took no part in the consideration or decision of this case.
JUSTICE BILANDIC, dissenting:
I
Because the Currency Exchange‘s complaint fails to adequately allege a cause of action against Hodge, I would affirm the circuit court‘s dismissal of the Currency Exchange‘s action against Hodge. (See Falk v. Martel (1991), 210 Ill. App. 3d 557, 562 (“It is well established that dismissal of a complaint may be upheld upon any basis found in the record, including a failure to state a cause of action“); Munizza v. City of Chicago (1991), 222 Ill. App. 3d 50, 55; Midwest Bank & Trust Co. v. Village of Lakewood (1983), 113 Ill. App. 3d 962, 974; Bauscher v. City of Freeport (1968), 103 Ill. App. 2d 372, 375.) Accordingly, I respectfully dissent.
In its complaint, the Currency Exchange alleged, in pertinent part, as follows:
“1. That on or about March 8, 1990, for value received, the Defendant, Beulah M. Hodge, made and delivered to the Defendant, Fred Fentress, her certain check, a copy of which is hereto attached marked Exhibit ‘A’ and made a part hereof.
2. That thereafter, the Defendant, Fred Fentress, endorsed said check to the Plaintiff for value and who [sic] became a holder in due course under the Uniform Commercial Code.
***
3. That Plaintiff holds and owns said check and there is due and owing to the Plaintiff from the Defendants and each of them the sum of $500.00.”
On appeal to this court, the Currency Exchange contends that its status as a holder in due course entitles it to payment from Hodge no matter what Hodge‘s legal rights were with respect to Fentress. According to the Currency Exchange, it is entitled to recovery from Hodge even if Hodge could rightfully have refused to pay Fentress.
In Knox College v. Celotex Corp. (1981), 88 Ill. 2d 407, this court discussed pleading requirements in Illinois. The court stated:
“Notice pleading, as known in some jurisdictions, is not sufficient under our practice act. *** ‘This court has repeatedly held that a complaint which does not allege facts, the existence of which are necessary to enable a plaintiff to recover does not state a cause of action and that such deficiency may not be cured by liberal construction or argument.’ (Emphasis added.)” Knox College, 88 Ill. 2d at 426-27, quoting People ex rel. Kucharski v. Loop Mortgage Co. (1969), 43 Ill. 2d 150, 152.
See also Beckman v. Freeman United Coal Mining Co. (1988), 123 Ill. 2d 281, 287.
The UCC defines a holder in due course of a negotiable instrument as follows:
“(1) A holder in due course is a holder who takes the instrument
(a) for value; and
(b) in good faith; and
(c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on
the part of any person.”
Ill. Rev. Stat. 1989, ch. 26, par. 3-302 .
Here, the Currency Exchange‘s status as a holder in due course is an essential element of the Currency Exchange‘s action. The complaint alleges that “the Defendant *** endorsed said check to the Plaintiff for value” and that the plaintiff thereby “became a holder in due course under the UCC.” The Currency Exchange‘s complaint, however, does not contain sufficient allegations of fact to support its claim that it is a holder in due course. The complaint fails to allege any relevant facts to establish the claim that the Currency Exchange took the check “for value,” “in good faith” and “without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.” (
The record in this case suggests that the Currency Exchange is not a holder in due course. Initially, I note that the check in this case was an uncertified personal check. It was not a payroll check or a government check. It can hardly be doubted that any currency exchange would question whether it would be able to collect on an uncertified personal check. Further, the check in this case was made payable to “Fred Fentress—A-OK Plumbing.” It was endorsed “Fred Fentress A-OK Plumbing,” underneath which was the notation “Sole Owner.” Any currency exchange presented with such a check would have to question whether the named individual was indeed the sole owner of the named business and entitled to the proceeds of the check. (See, e.g., Owens v. Nagel (1929), 334 Ill. 96 (where payee of note was an individual whose name on note was followed by the word “trustee,” alleged holder in due course who purchased note from payee in settlement of personal debt of the
The majority here states that “[t]he legal sufficiency of the Currency Exchange‘s action, including the allegation that it possesses the check as a holder in due course, is admitted by Hodge‘s motion [to dismiss].” (156 Ill. 2d at 117.) I do not disagree with the fundamental notion that “[a] motion to dismiss admits all facts well pleaded together with all reasonable inferences which could be drawn from those facts.” (Horwath v. Parker (1979), 72 Ill. App. 3d 128, 134; Debolt v. Mutual of Omaha (1978), 56 Ill. App. 3d 111, 113.) However, it is also well established that a motion to dismiss “does not admit conclusions of law or conclusions of fact unsupported by allegations of specific facts upon which such conclusions rest.” (Emphasis added.) (Horwath, 72 Ill. App. 3d at 134; Debolt, 56 Ill. App. 3d at 113.) In this case, the Currency Exchange‘s complaint did not allege facts in support of the conclusion that it was a holder in
II
Even if the conclusion that the Currency Exchange is a holder in due course were deemed admitted by Hodge‘s motion to dismiss, I would affirm the trial court‘s dismissal of the Currency Exchange‘s complaint. The majority here incorporates into section 3-305 of the UCC an additional requirement that must be met before the defense of illegality can be raised to defeat the claim of an alleged holder in due course. That additional requirement is not found anywhere in the plain language of section 3-305, however. Section 3-305 provides, in pertinent part:
“[A] holder in due course *** takes the instrument free from
***
(2) all defenses of any party to the instrument with whom the holder has not dealt except
***
(b) *** incapacity, or duress, or illegality of the transaction, as renders the obligation of the party a nullity.” (Emphasis added.) (
Ill. Rev. Stat. 1989, ch. 26, par. 3-305 .)
With respect to the defenses of duress and illegality, the comments to section 3-305 of the UCC state, in pertinent part, that “[t]hey are primarily a matter of local concern and local policy. All such matters are therefore left to the local law. If under that law the effect of the duress or the illegality is to make the obligation entirely null and void, the defense may be asserted against a holder in due course.” (Emphasis added.) Ill. Ann. Stat., ch. 26, par. 3-305, Uniform Commercial Code Comment, at 66 (Smith-Hurd Supp. 1992).
The only inquiry necessary to resolve the issue presented in this case, then, is whether the contract between Hodge and Fentress is void on the grounds of illegality. The comments to the UCC instruct that one must look to Illinois statutory and case law to determine whether the underlying contract was illegal and, as a result of that illegality, void. (Ill. Ann. Stat., ch. 26, par. 3-305, Uniform Commercial Code Comment, at 66 (Smith-Hurd Supp. 1992).) An examination of the statute providing for the licensing of plumbers, the public policy behind that statute, and Illinois case law concerning the illegality of contracts made in contravention of professional licensing laws establishes that the contract between Hodge and Fentress is illegal and void.
The Illinois Plumbing License Law (
“It has been established by scientific evidence that improper plumbing can adversely affect the health of the public. *** Faulty plumbing is potentially lethal and can cause wide spread disease and an epidemic of disastrous consequences.
To protect the health of the public it is essential that plumbing be installed by persons who have proven their knowledge of the sciences of pneumatics and hydraulics and their skill in installing plumbing.
Consistent with its duty to safeguard the health of the people of this State, the General Assembly therefore declares that individuals who plan, inspect, install, alter, extend, repair and maintain plumbing systems shall be individuals of proven skill. *** [T]his Act is therefore declared to be essential to the public interest.”
Ill. Rev. Stat. 1989, ch. 111, par. 1101 .
Here, the contract between Hodge and Fentress presents the kinds of dangers the Illinois Plumbing License Law was intended to guard against. Affidavits attached to Hodge‘s section 2-619 motion to dismiss, which were not contradicted by the plaintiff, establish that Fentress was not a licensed plumber. The affidavits also establish that Hodge and her husband, Eric, believed that Fentress was a licensed plumber at the time they contracted with him for plumbing services. Had Fentress performed the work required of him pursuant to the contract with Hodge, it is likely that his work would not have conformed to acceptable plumbing standards and would have posed the kinds of dangers which the Plumbing License Law was intended to prevent.
Illinois courts have recognized that “generally a ‘statute which declares an act illegal and which imposes a
Like the contract in Wright, the contract made between Hodge and Fentress in this case must be considered illegal and void. Performance of plumbing services under the contract expressly contravenes the current Plumbing License Law. The Law provides for criminal sanctions against unlicensed plumbers. The Law further contains a strong public policy statement concerning the relationship between licensing plumbers and the need to protect the public health. Clearly, the contract for the services of an unlicensed plumber in the instant case is the type of contract which Illinois courts have consist-
Courts in other States have ruled that the defense of illegality of the contract may be asserted against a holder in due course without requiring that the negotiable instrument in question be expressly declared void by statute. In Wilson v. Steele (1989), 211 Cal. App. 3d 1053, 259 Cal. Rptr. 851, the court held that a contract made by an unlicensed home contractor was void and illegal and that this defense could be asserted against a holder in due course. The court noted that the contractor, being unlicensed, had violated the applicable licensing statute. Applying California‘s version of section 3-305, the court then determined that this defense could be asserted against a holder in due course. In Columbus Checkcashiers, Inc. v. Stiles (1990), 56 Ohio App. 3d 159, 565 N.E.2d 883, the court likewise held that a check given as consideration for a contract between a homeowner and an unlicensed home contractor was illegal and void and that the defense of illegality could be asserted against the holder in due course. Like the court in Wil-
In Columbus Checkcashiers and Wilson, as in the instant case, the subject matter of the contract, performance by an unlicensed individual, was prohibited by law. Accordingly the courts held that the contract was illegal and void. Moreover, the courts held that this defense could be asserted against a holder in due course. Most importantly, the courts in Columbus Checkcashiers and Wilson did not require that a statute expressly declare the note in question void in order for the defense of illegality to be available. Such a requirement is likewise not a part of Illinois’ version of section 3-305. In contrast, under New Jersey law, which the majority here purports to follow, the comments to that State‘s version of section 3-305 expressly state that, ”[i]n New Jersey, a holder in due course takes free and clear of the defense of illegality, unless the statute which declares the act illegal also indicates that payment thereunder is void.” (Emphasis added.) (
The majority asserts that to bar recovery by the Currency Exchange in this case would be unfair because the Currency Exchange is an innocent third party which had no knowledge of the circumstances of the contract between Hodge and Fentress. However, section 3-305 clearly provides that the general policy favoring free negotiability is not absolute. There is a competing policy disfavoring certain transactions, such as those involving infancy, duress, illegality or misrepresentation as to the true nature of an instrument (i.e., fraud in the factum). (
For the above reasons, I dissent. I would affirm the judgment of the appellate court which affirmed the circuit court‘s dismissal of the Currency Exchange‘s action against Hodge.