Case Information
*1 I LLINOIS O FFICIAL R EPORTS Appellate Court
State Bank of Cherry v. CGB Enterprises, Inc.
,
Docket No. 3-10-0495
Filed January 4, 2012
Held The trial court properly entered summary judgment for defendant in plaintiff bank’s action alleging that defendant failed to protect plaintiff’s ( Note: This syllabus security interest in the crops defendant purchased from a producer, constitutes no part of the opinion of the court notwithstanding the fact that the bank gave defendant notices of its but has been prepared security interest pursuant to section 1631 of the Federal Food Security by the Reporter of Act by providing documents titled “Notice of Security Interest,” since the Decisions for the notices required by section 1631 must strictly comply with the statute and convenience of the the notices failed to comply with the requirement that the county where reader. ) the crops were located be named, and therefore, defendant purchased the
crops free of defendant’s security interest as a matter of law. Decision Under Appeal from the Circuit Court of La Salle County, No. 08-L-29; the Hon. Joseph P. Hettel, Judge, presiding. Review
Judgment Reversed.
Counsel on Jeffrey Alan Ryva (argued), of Husch Blackwell LLP, of Peoria, for appellant. Appeal
Bradley P. Popurella (argued), of Anthony C. Raccuglia & Associates, of Peru, and Robert B. Steele, of Aplington, Kaufman, McClintock, Steele & Barry, of La Salle, for appellee.
Panel
JUSTICE McDADE delivered the judgment of the court, with opinion.
Justice Lytton concurred in the judgment and opinion.
Justice Holdridge dissented, with opinion.
OPINION Plaintiff, the State Bank of Cherry, an Illinois banking corporation, filed a complaint against defendant, CGB Enterprises, Inc., to recover for failing to protect plaintiff’s security interest in crops defendant purchased from Lawrence Rogowski. Defendant filed a motion to dismiss plaintiff’s complaint on the grounds plaintiff’s notices failed to strictly comply with section 1631(e) of the Food Security Act of 1985 (7 U.S.C. § 1631(e) (2006)). Plaintiff filed a motion for summary judgment and defendant filed a cross-motion for judgment on the pleadings. The motions agreed that the dispositive question was whether section 1631(e) required strict compliance or substantial compliance. The circuit court of La Salle County entered a judgment granting plaintiff’s motion for summary judgment and denying defendant’s motion for judgment on the pleadings. For the reasons that follow, we reverse. BACKGROUND Rogowski is not a party to these proceedings. Rogowski executed a note in plaintiff’s favor using the crops as security. Rogowski later sold those crops to defendant. Plaintiff’s complaint alleges that it gave defendant notice of its security interest in the crops, pursuant to section 1631(e) of the Food Security Act of 1985 (Food Security Act or Act) (7 U.S.C. § 1631(e) (2006)), by providing defendant documents titled “Notice of Security Interest.” Section 1631(e) reads, in pertinent part, as follows:
“Purchases subject to 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 organized according to farm products that–
* * *
(ii) contains,
* * * (IV) 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) (2006). Plaintiff’s complaint alleges that defendant failed to protect plaintiff’s security interest
by making payment on the crops directly to Rogowski without naming plaintiff on the check
in one crop year, and by permitting Rogowski to negotiate a check for the crops without
plaintiff’s endorsement through defendant’s bank in the following crop year. Defendant filed
a motion to dismiss, relying on
Farm Credit Midsouth, PCA v. Farm Fresh Catfish Co.
, 371
F.3d 450 (8th Cir. 2004), which held that strict compliance with the section 1631(e) notice
provision is required for a party to recover for failing to protect a security interest in crops.
See
Farm Fresh Catfish Co.
,
products described above are or may be located on (describe property and county or parish where farm products are or may be located) ***.” Each form then provides a blank space for the information, but on both forms, the information was never filled in. Neither notice names the county where the farm products are or may be located. Below the blank space on both forms is a check box that is marked with an “X.” Next to the check box, the notices read: “The security interest also covers the described farm products wherever located and is not limited to those located on the above property.” The notices also state that any check issued to the debtor must be (1) made payable both to the debtor (in this case Rogowski) and to the secured party (in this case plaintiff); (2) delivered to or received by the secured party; and (3) paid. Plaintiff’s response to defendant’s motion to dismiss argued that its notices are sufficient
under sections 9-320(f) and 9-320.1 of the Uniform Commercial Code (UCC) (810 ILCS
5/9-320(f), 9-320.1 (West 2006)), as interpreted in the Fourth District’s decision in
First
National Bank v. Effingham-Clay Service Co.
,
was insufficient because it did not set forth the ‘county’ where the crops were grown *** as
required by section 9-307.1(a)(ii)(IV) of the Uniform Commercial Code–Secured
Transactions (Code) (810 ILCS 5/9-307.1(a)(ii)(IV) (West 1992)).”
First National Bank
, 261
Ill. App. 3d at 891. The
First National Bank
court held that “the notice received was
*4
adequate to place Effingham-Clay Service on notice of the Bank’s security agreement on
grain delivered by Jerry Sherwood.”
First National Bank
,
Act. The trial court in this case held that it was bound to follow First National Bank rather than the Eighth Circuit decision. Based on the First National Bank court’s decision, the trial court denied defendant’s motion to dismiss. The court denied defendant’s motion to reconsider. Defendant answered plaintiff’s complaint and raised an affirmative defense that plaintiff was not entitled to recover because its notice did not strictly comply with section 1631(e).
¶ 9 The circuit court of La Salle County entered a judgment granting plaintiff’s motion for
summary judgment and denying defendant’s motion for judgment on the pleadings. This appeal followed. ANALYSIS The parties disagree as to whether the Food Security Act or the UCC governs this case
and, therefore, whether or First National Bank controls our disposition. Plaintiff argues that because the Eighth Circuit decision is not binding on this court, we should follow “current Illinois law” as reflected in First National Bank and apply a substantial compliance test. Plaintiff argues that under First National Bank , Illinois is a substantial compliance state. Plaintiff argues that this case is factually identical to First National Bank , that its decision is the only Illinois decision to address the question of whether substantial or strict compliance with either the federal or state notice provision is required, and that, therefore, First National Bank was binding on the trial court and should be binding on this court. We find that the Food Security Act governs plaintiff’s notice of its security interest in the
farm products at issue, but that neither Farm Fresh Catfish nor First National Bank is controlling on this court. The Food Security Act states:
“Congress finds that–
(1) certain State laws permit a secured lender to enforce liens against a purchaser of farm products even if the purchaser does not know that the sale of the products violates the lender’s security interest in the products, lacks any practical method for discovering the existence of the security interest, and has no reasonable means to ensure that the seller uses the sales proceeds to repay the lender; * * *
(4) this exposure constitutes a burden on and an obstruction to interstate commerce in farm products.
(b) Declaration of purpose.
The purpose of this section is to remove such burden on and obstruction to interstate commerce in farm products.” 7 U.S.C. § 1631. Our court recognizes:
“The key inquiry in all preemption cases is the objective or purpose of Congress in
*5
enacting the particular statute. The doctrine requires courts to examine the Federal statute
in question to determine whether Congress intended it to supplant State laws on the same
subject.”
Kellerman v. MCI Telecommunications Corp.
,
¶ 14 Further, the federal statute controls under the express terms of the state statute and under
the supremacy clause of the United States Constitution. First, section 9-109 of the Uniform Commercial Code reads, in pertinent part, as follows:
“This Article does not apply to the extent that:
(1) a statute, regulation, or treaty of the United States preempts this Article[.]” 810 ILCS 5/9-109 (West 2006).
Second, this court has recognized:
“The supremacy clause of the United States Constitution provides that ‘*** the Laws of the United States *** shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.’ U.S. Const., art. VI, cl. 2. ‘ “State law is preempted under the supremacy clause in three circumstances: (1) when the express language of a federal statute indicates an intent to preempt state law; ***.” ’ [Citation.]” Better Government Ass’n v. Blagojevich ,386 Ill. App. 3d 808 , 813 (2008). Here, the Food Security Act states:
“Except as provided in subsection (e) of this section and notwithstanding any other provision of Federal, State, or local law , a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest.” (Emphasis added.) 7 U.S.C. § 1631 (2006). Section 1631(d) is a clear expression of an intent to preempt state law. Accordingly,
under both the supremacy clause and section 9-109 of the UCC, the federal statute controls. Moreover, the notice of security interest on which plaintiff based its complaint clearly states that it purported to “give[ ] notice pursuant to the Food Security Act of 1985.” The filings in this case were expressly made pursuant to the federal statute, and the federal statute should control. Because the Food Security Act controls, and because plaintiff’s complaint did not invoke
the UCC,
First National Bank
is inapplicable. Regardless, that decision is not binding on this
court.
Stein v. Krislov
,
of the Act. For the reasons that follow, we are not bound by the Eighth Circuit’s interpretation of section 1631(e), but find it to be the better-reasoned decision, and highly persuasive. Our supreme court has reasserted the practice in Illinois that “ ‘[i]n construing ***
Federal statutes, we *** look to the Federal decisions for [their] interpretation.’ [Citation.]”
U.S. Bank National Ass’n v. Clark
,
“[W]e reject plaintiff’s claim that we are bound by federal court decisions on this issue. While in Wilson v. Norfolk & Western Ry. Co. ,187 Ill. 2d 369 , 383 (1999), this court stated ‘federal decisions are considered controlling on Illinois state courts interpreting a federal statute’ because federal statutes must be given uniform application, six months later, in Weiland v. Telectronics Pacing Systems, Inc. ,188 Ill. 2d 415 , 423 (1999), this court held that it need not follow Seventh Circuit precedent for three reasons–the United States Supreme Court had not ruled on the issue, there was a split of authority among the federal circuit courts of appeals, and this court believed that the Seventh Circuit case was wrongly decided. Later, in Sprietsma v. Mercury Marine ,191 Ill. 2d 112 (2011), reversed on other grounds ,537 U.S. 51 *** (2002), this court attempted to reconcile the Wilson and Weiland decisions, stating:
‘[A]s we have repeatedly recognized, uniformity of decision is an important consideration when state courts interpret federal statutes. [Citations.] *** In the absence of a decision of the United States Supreme Court, which would definitively answer the question presented by this case, we elect to give considerable weight to the decisions of federal courts of appeals and federal district courts that have addressed this issue.’ Sprietsma ,197 Ill. 2d at 120 .
Accordingly, while a decision of the United States Supreme Court is binding on this court, federal circuit and district court decisions were recognized in Sprietsma as merely being persuasive. [Citation.]” Bowman v. American River Transportation Co. , 217 Ill. 2d 75, 91 (2005). The United States Supreme Court has not ruled on the issue of whether section 1631(e)
requires strict or substantial compliance, plaintiff has not provided persuasive grounds to find
that is itself wrongly decided, and there is no split of authority among
the federal circuit courts of appeal on the issue. In fact,
Peoples Bank v. Bryan Brothers
Cattle Co.
,
of security interest to contain “(d) a description of the farm products subject to the security
interest created by the debtor, including *** county.” 810 ILCS 5/9-320(f)(1)(A)(ii)(d) (West
2006); 7 U.S.C. § 1631(e)(1)(A)(ii)(IV) (requiring “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”). Plaintiff asserts that it is not likely that
the Illinois supreme court would adopt
Farm Fresh Catfish
’s strict compliance test, favoring
instead the Kansas Supreme Court’s adoption of a substantial compliance test.
The
Farm Fresh Catfish
court stated that it “reject[ed] the Kansas Supreme Court’s
application of a substantial compliance factor to the Act’s direct notice exception. [Citation.]
We consider the decision unpersuasive and contrary to established rules of statutory
interpretation.”
Farm Fresh Catfish
,
“By including substantial compliance language in defining an effective financing statement for the central filing exception and excluding such language from the direct notice exception, Congress presumptively and logically intended that a secured creditor must strictly comply with the direct notice exception. [Citation.] Congress probably has its reasons for the disparate treatment, such as the desire to encourage central filings and a goal to simplify the interstate and foreign agricultural markets for farm products purchasers, and, ultimately, the farmer and the consumer. Congress is the appropriate forum to consider and, if it wishes, to legislate substantial compliance language in the Act’s direct notice exception.” Farm Fresh Catfish ,371 F.3d at 453-54 . Thus, while substantial compliance may be acceptable for a notice given under the central
filing system notice exception, the Congress intended strict compliance with the Act for a
notice given under the direct notice exception. Perhaps the Food Security Act, in giving that
distinction a true difference, raises form over function, but it was the province of the
Congress to do so.
Farm Fresh Catfish
,
the correct construction of the statute as written in accordance with well-established rules of
statutory construction.
Farm Fresh Catfish
,
¶ 26 The court’s interpretation of the statute is not contradicted in the federal circuit courts of
appeal. Rather, its holding is actually supported by a decision from another circuit. See
Bryan
Brothers Cattle Co.
,
compliance is adequate, because defendant is a grain elevator, and Rogowski delivered the farm product (grain) covered by the security interest, to defendant for resale. Thus in this case it is irrelevant where and on what land the farm product was grown, since the product was delivered to the purchaser with notice of the lien. We must reject plaintiff’s arguments in support of applying a substantial compliance test
in this case
, and uniformly apply the strict compliance test to plaintiff’s notices. The
First
National Bank
court based its decision on an exception that does not exist. The court wrote
that “[w]hile the technicality of description is critical when dealing with other creditors, we
agree with the trial court that Effingham-Clay Service was given adequate notice of an
obligation to protect the Bank’s security interest.”
First National Bank
,
actually delivered to the purchaser appears in the statute. Nor does the statute make provision for constructive or actual notice when the formal direct notice does not comply with the statute’s requirements for direct notice. Plaintiff’s notices failed to comply with section 1631(e) of the Food Security Act. Therefore, under section 1631(d), defendant took free of the security interest created by the seller, even though defendant knew of its existence. 7 U.S.C. § 1631(d) (2006). Defendant purchased the products free of defendant’s security interest as a matter of law.
Plaintiff’s complaint is premised entirely on defendant’s alleged failure to protect plaintiff’s security interest. Accordingly, the trial court’s orders granting summary judgment in *9 plaintiff’s favor and denying defendant’s motion for judgment on the pleadings are reversed. See First Midwest Bank, N.A. v. IBP, Inc. , 314 Ill. App. 3d 255, 261 (2000) (affirming summary judgment in plaintiff’s favor where plaintiff sought judgment against defendant for defendant’s alleged failure to honor plaintiff’s security interest in farm products but court determined that notice of security interest had expired under the UCC).
¶ 31 CONCLUSION
¶ 32 The judgment of the circuit court of La Salle County is reversed. Reversed. JUSTICE HOLDRIDGE, dissenting: I respectfully dissent. While I agree with the majority’s conclusion that we are not bound
by the holding in
Farm Credit Midsouth, PCA v. Farm Fresh Catfish Co.
,
products takes those products subject to a security interest created by the seller if the buyer
has received from the secured party written notice of the security interest that includes,
inter
alia
, “the name of each county or parish in which the farm products are produced or located.”
7 U.S.C. § 1631(e) (2006). As the majority has noted, the Eighth Circuit has held that strict
compliance with section 1631(e) is required and, more specifically, failure of the secured
party to include the name of the county in which the farm products were produced or located
allows the purchaser to take the products free of the security interest. ,
notification of a security interest in farm products which are referred to as central filing and
direct notification. The heart of the majority’s argument in the instant matter, adopting the
Eighth Circuit’s rationale in
Farm Fresh Catfish
, is that the presence of substantial
compliance language in the central filing provision and the lack of such language in the
direct notification provision is unassailable proof that “Congress presumptively and logically
intended that a secured creditor must strictly comply with the direct notice exception.”
Farm
Fresh Catfish
,
adopted herein by the majority, a notice filed with a central filing system, of which the buyer
may only have constructive notice (
First National Bank & Trust
, 897 P.2d at 147), can
contain errors in identification of the secured party, the debtor, or the farm products subject
to the creditor’s security interest, while the notice actually served upon the purchaser of the
secured products cannot contain a single minor error, such as the omission of the name of
the county in which those products were produced or located, even when there can be no
question that the products in question come into the possession of the buyer prior to the sale.
[2]
There is no logical basis for concluding that Congress intended that a secured creditor could
substantially comply with constructive notice provisions, but would have to strictly comply
with actual notice provisions.
First National Bank & Trust
,
Notes
[1] The Fourth District recently decided
Cornerstone Bank & Trust, N.A. v. Consolidated Grain
& Barge Co.
,
[2] In the instant matter, Rogowski delivered the grain covered by State Bank’s security interest to CGB (the operator of a grain elevator) for storage prior to the sale and after State Bank had served notice on CGB of its security interest in “all grain on hand” and “all growing crops” belonging to Rogowski “wherever located.” There can be no question that CGB was on notice regarding the grain it subsequently purchased from Rogowski, and it paid Rogowski the proceeds of the sale with full knowledge of State Bank’s lien on that grain.