Bank One v. Loeber Motors, Inc.

FIRST DIVISION
November
10, 1997

Nos. 1-95-3550 & 1-96-1499; Cons.

BANK ONE, MILWAUKEE, N.A.,

Plaintiff-Appellant,

v.

LOEBER MOTORS, INC., LIBERTY BUICK
COMPANY, INC. d/b/a/ LIBERTY JEEP-EAGLE,
BOB KRUMPHOLZ CHEVROLET-BUICK, INC.
d/b/a CROSSROADS CHEVROLET BUICK,
MCHENRY JEEP-EAGLE, INC., PERILLO BMW,
INC., PERILLO LINCOLN-MERCURY, INC. and
HIGHLAND PARK LINCOLN MERCURY, INC.,

Defendants-Appellees.)
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)Appeal from the
Circuit Court of
Cook County

No. 95-CH-3816

Honorable
Ellis E. Reid,
Judge Presiding.

JUSTICE GALLAGHER delivered the opinion of the court:

Plaintiff, Bank One, Milwaukee, N.A. (Bank One), filed a
complaint in chancery against several automobile dealerships,
namely, Loeber Motors, Liberty Buick, Bob Krumpholz Chevrolet-
Buick, McHenry Jeep-Eagle, Perillo BMW, Perillo Lincoln-Mercury,
and Highland Park Lincoln-Mercury (hereinafter the dealers or
defendants). By filing its complaint, Bank One sought to enjoin
the dealers from repossessing ten vehicles and a declaratory
judgment establishing Bank One as the rightful owner of said
vehicles. The trial court issued a temporary restraining order
against the defendants in order to preserve the status quo.
After the parties exchanged documents and deposed witnesses, both
Bank One and the defendant dealers filed cross-motions for
summary judgment. The trial court denied Bank One's motion for
summary judgment, but granted summary judgment in favor of the
dealers and awarded them damages. Bank One then filed this
appeal.
The material facts are not in dispute. Bank One's business
activities include the purchasing of motor vehicles and the
leasing of said vehicles to consumers. To this end, Bank One
enters into "dealer agreements" with new car dealers. Pursuant
to these agreements, the dealers undertake to arrange lease
financing through Bank One for their customers. Essentially, the
dealers find the lessee, order the car to be leased (or locate it
in their auto lot), set up the lease terms and then present the
entire package to Bank One. Once the dealer presents the proper
documentation and Bank One approves of the lessee and the terms,
Bank One signs the lease and purchases the car from the dealer.
Bank One also enters into dealer agreements with automobile
leasing companies; the leasing companies perform the same task as
the new car dealers, but instead of ordering the desired car from
the manufacturer, a leasing company simply locates the car at a
new car dealership and purchases it. Bank One then buys the car
from the leasing company. Bank One has entered into dealer
agreements with some 2,000 new car dealers (or originating
dealers) and with roughly 35 leasing companies (or private
lessors).[fn1]
On July 7, 1992, Bank One entered into a dealer
agreement
with Valet Automobile Leasing, Inc. (Valet), an entity Bank
One
recognized as a leasing company/private lessor. Among other
things, the agreement obliged Valet to "assist [a lessee] in
the
preparation of the application, individual lease, security
agreement and other documents." Valet also made several
warranties in the agreement, particularly as to the
genuineness
of a given lessee's signature and the truth of the facts
contained in all documents submitted to Bank One.
Valet, in turn, had an oral arrangement with Leased Car
Sales (Leased Car). Although Leased Car was not a licensed
new
car dealer, it was licensed as a used car dealer and engaged
in
the purchase and resale of automobiles. It also arranged
automobile leases. Pursuant to their oral arrangement,
Leased
Car agreed to find lessees, locate automobiles and arrange
lease
transactions; Valet agreed to submit the proposed leases to
Bank
One according to its dealer agreement. If Bank One
approved, it
would pay Valet and purchase the auto that was the subject
of the
lease. Valet then paid Leased Car. In short, Leased Car
performed Valet's duties under the Valet-Bank One dealer
agreement, and Valet presented the lease package to Bank One
as
if Valet had organized it. The record demonstrates that no
relationship ever existed between Bank One and Leased Car.
Furthermore, according to the definition used by Bank One
employees, Leased Car was merely another private lessor or
leasing company and not an originating dealer.
Before Bank One approved a lease and purchased a car,
the
signatory to the dealer agreement had to provide Bank One
with
several documents outlined on Bank One's "Freedom Lease
Checklist." These documents included: the invoice or MSRP
(manufacturer's suggested retail price) for the vehicle; the
lease agreement signed by the customer; title/registration
to the
vehicle indicating Bank One as owner; and the certificate of
origin (CO) for the vehicle (referred to as the MSO or
manufacturer's statement of origin), among several other
documents. Where Bank One dealt with leasing companies
rather
than originating dealers, it required that the leasing
company
submit a copy of the certificate of origin showing an
assignment
of the CO to Bank One.
For the vehicles at issue in this litigation, a typical
transaction proceeded as follows. Leased Car would either
contact or be contacted by prospective lessees. After
determining what type of car the lessee desired, Leased Car
would
contact various originating or new car dealerships looking
for an
automobile matching that type. If Leased Car succeeded in
locating such an automobile, it would then request from the
relevant dealer reproductions of several documents required
under
Bank One's "Freedom Lease Checklist." In particular, the
dealer
would, via facsimile, send Leased Car copies of both sides
of a
particular vehicle's CO. Leased Car would then prepare a
counterfeit CO, which falsely showed a chain of assignments
from
the original new car dealer, to Leased Car, and then to Bank
One.
Employees of Leased Car would fraudulently sign the
counterfeit
COs on behalf of the new car dealer that originally owned
the
vehicle.
Next, Leased Car would prepare the necessary lease
documents
and then forward all of the documents Bank One required
under its
checklist--including the counterfeit COs--to Valet. Valet
would
then present the entire lease package to Bank One; upon Bank
One's approval of the lease package, Bank One would make out
a
check to Valet for the price of the car, plus an additional
amount to cover the state sales tax. Valet would then pay
Leased
Car.
Finally, after receiving payment from Valet, a
representative of Leased Car would return to the relevant
dealership, present a post-dated check, and then drive away
with
that particular automobile for which the Bank One lease had
been
prepared, delivering it to the lessee. As part of each of
these
transactions, the various dealers would complete an Illinois
Department of Revenue ST-556 sales tax transaction form for
each
vehicle. The completed form would indicate the reason why
the
original dealer was exempt from paying sales tax--because
the
vehicles were to be resold by Leased Car. Customarily, the
dealer would retain possession of the original CO until it
received full payment for the automobile in question (i.e.,
until
Leased Car's check cleared).
Significantly, in the documents submitted to Bank One
by
Valet, the selling price of each vehicle was always less
than the
amount Leased Car paid to the originating dealer. As
mentioned
above, in addition to the selling price, Bank One gave Valet
sufficient funds to pay the (diminished) state sales tax;
presumably, these funds were forwarded to Leased Car as
well.
However, the record reflects that, in all but two instances,
Valet did not forward Leased Car funds equivalent even to
the
original purchase price of the automobile. Moreover, after
accounting for the sales tax on each transaction, Bank One
never
tendered Leased Car (through Valet) funds sufficient to
cover
Leased Car's costs. In essence, then, Leased Car purchased
each
of the cars at issue here only to immediately resell them at
a
loss. The inexorable--if unsurprising--result of this
scheme was
that when the defendant dealers attempted to cash the checks
tendered by Leased Car, those checks bounced. The
defendants
moved to repossess the cars, and Bank One filed suit on
April 27,
1995, seeking, among other things, a declaration as to who
rightfully owned the vehicles.
Incidentally, deposition testimony indicated that back
in
October of 1994, Bank One became aware of titling problems
with
certain other vehicles it had purchased pursuant to its
dealer
agreement with Valet. To wit, the vehicle identification
numbers
(VINs) on the titles received by Bank One did not match the
VINs
shown on Bank One's lease documents.[fn2] As a result, Bank
One
set up special payment procedures unique to Valet.[fn3] Yet
the
transactions forming the basis for this litigation took
place in
January, February and March of 1995. Thus, Bank One
recognized
that its leasing business procedures were
suspect--particularly
with respect to Valet--well before it attempted to purchase
the
vehicles at issue here.
Before the trial court, Bank One premised its claim to
ownership of the vehicles on the entrustment doctrine as
laid out
in the Uniform Commercial Code, which states: "Any
entrusting of
possession of goods to a merchant who deals in goods of that
kind
gives him power to transfer all rights of the entruster to a
buyer in ordinary course of business." 810 ILCS 5/2-403(2)
(West
1994). The doctrine applies only where the following
elements
are met: (1) an actual entrustment of the goods by the
delivery
of possession to a merchant; (2) the party that receives the
goods must be a merchant who deals in goods of that kind;
(3) the
merchant must sell the entrusted goods; and (4) the
purchaser
must be a buyer in the ordinary course of business. Kahr v.
Markland, 187 Ill. App. 3d 603, 607, 543 N.E.2d 579, 582
(1989).
In its summary judgment motion, Bank One argued that
the
defendant dealers entrusted the automobiles to Leased Car by
giving Leased Car possession of the vehicles, that Leased
Car was
a merchant dealing in goods of that kind, that Leased Car
sold
the automobiles to Bank One, and that Bank One bought the
automobiles in the ordinary course of its business. The
dealers
moved for summary judgment as well, asserting that Leased
Car was
not a merchant dealing in goods of the kind at issue here,
because Leased Car was a used car dealer and not a new car
dealer; the dealers also argued that Bank One was not a
buyer in
the ordinary course.
The trial court granted summary judgment in favor of
the
defendant dealers. It appeared to premise its holding on
the
fact that Leased Car was not a merchant that dealt in the
sale of
new cars, as Leased Car did not hold a state license to sell
new
cars. However, Bank One later filed a motion to reconsider,
and
in ruling on that motion the court stated that it had not
buttressed its decision solely upon the licensing question.
Instead, the trial court suggested that it had also found
Bank
One not to be a buyer of the vehicles in the ordinary course
of
business.
On appeal, Bank One contends that it was entitled to
summary
judgment because the trial court erred when it held that the
entrustment doctrine did not apply to make Bank One the
rightful
owner of the 10 vehicles at issue in this litigation. We
confine
our review to the issues of (1) whether Leased Car Sales was
a
merchant dealing in goods of the kind at issue in these
transactions, and (2) whether Bank One purchased the subject
vehicles from Leased Car (through Valet) in the ordinary
course
of business.
Appellate review of an order granting summary judgment
is de
novo; the appellate court must consider anew the facts and
law
related to the case and determine whether the trial court
was
correct. Soderlund Brothers, Inc. v. Carrier Corp., 278
Ill.
App. 3d 606, 614, 663 N.E.2d 1, 7 (1995). Of course,
normally
the determination of whether one is a buyer in the ordinary
course of business is a question of fact, and a court's
findings
on that issue will not be overturned unless they run
contrary to
the manifest weight of the evidence. Bank of Illinois v.
Dye,
163 Ill. App. 3d 1018, 1021, 517 N.E.2d 38, 40 (1987).
However,
this case comes before us after the trial court ruled on
cross-
motions for summary judgment. Where the facts are basically
uncontroverted and the real issue is the trial court's
application of the law to such facts, a question of law is
presented and the manifest weight of the evidence standard
does
not apply. South Suburban Safeway Lines, Inc. v. Regional
Transportation Authority, 166 Ill. App. 3d 361, 365, 519 N.E.2d 1005, 1008 (1988); Jacobson v. General Finance Corp., 227
Ill.
App. 3d 1089, 1093, 592 N.E.2d 1121, 1124 (1992).
Therefore,
this court may proceed with its de novo review and need not
defer
to the findings of the trial court.
Bank One first contends that the trial court erred when
it
held that Leased Car was not a merchant "who deals in goods
of
that kind" for purposes of the entrustment statute. 810
ILCS
5/2-403(2) (West 1994). In support of its contention, Bank
One
directs this court to an opinion of the United States Court
of
Appeals for the Seventh Circuit, Shacket v. Philko Aviation,
Inc., 681 F.2d 506 (7th Cir. 1982), rev'd on other grounds,
462 U.S. 406, 76 L. Ed. 2d 678, 103 S. Ct. 2476 (1983). In that
case, Smith Aircraft, a dealer in used aircraft, sold a new,
custom-built aircraft to Mr. and Mrs. Shacket. Shacket, 681 F.2d
at 508. Smith then attempted to sell the same aircraft to
Philko
Aviation, even though the Shackets had already taken
possession
of the plane. 681 F.2d at 508. The court held that, under
Illinois law, all of the elements to entrustment were
present and
that the Shackets had acquired good title to the aircraft.
681 F.2d at 512. In holding that the used/new distinction did
not
defeat entrustment, the court stated:
"The term 'goods of that kind' is not limited to the
same goods but encompasses goods of the same
fundamental nature. That Smith Aircraft was in the
business of selling aircraft on a commercial basis is
sufficient to permit Smith Aircraft to pass good title
to a buyer in the ordinary course." 681 F.2d at 511.

The defendant dealers attempt to distinguish Shacket on
the
ground that no evidence appears in the record to support the
contention that Leased Car actually ever sold used automobiles to
entities such as Bank One. We reject this argument, inasmuch as
it overlooks the fact that Leased Car was licensed as a used car
dealer.
On a different tack, defendants argue that Leased Car could
not legally sell the vehicles at issue in this litigation because
it was not licensed as a new car dealer, as required under the
Illinois Vehicle Code (625 ILCS 5/5-101 (West 1994)). As
defendants correctly point out, that statute is a comprehensive
and detailed statement of the public policy of Illinois. See
generally 625 ILCS 5/5-101(a) (West 1994). According to
defendants, a finding that Leased Car was a merchant dealing in
"goods of that kind" for entrustment purposes would contradict
the expressed public policy of this State.
In our opinion, even though Leased Car may have violated
state law by selling new cars without a license to do so, it was
licensed to sell "goods of the same fundamental nature."
Shacket, 681 F.2d at 511. Furthermore, the entrustment statute
provides that entrusting "includes any delivery and any
acquiescence in retention of possession *** regardless of whether
the procurement of the entrusting or possessor's disposition of
the goods ha[s] been such as to be larcenous under the criminal
law." 810 ILCS 5/2-403(3) (West 1994). Because larceny, an
equal if not greater transgression against the public policy of
Illinois, does not operate to defeat entrustment, we hold that
Leased Car's lack of a license to sell new cars likewise fails to
defeat application of the entrustment doctrine in this case.
Accordingly, we disagree with the trial court's holding that the
entrustment provision of the Uniform Commercial Code did not
apply here simply because Leased Car was not a licensed new car
dealer.
This court must now determine whether Bank One qualified as
a buyer in the ordinary course of business when it purchased
these vehicles through Valet from Leased Car. As discussed
above, although this determination is one of fact that normally
will not be overturned unless it contradicts the manifest weight
of the evidence, we consider it here de novo because all parties
concede that the material facts are undisputed. Section 1-201(9)
of the Uniform Commercial Code defines a "buyer in the ordinary
course of business" as follows:
"[A] person who in good faith and without knowledge
that the sale to him is in violation of the ownership
rights or security interest of a third party in the
goods buys in [the] ordinary course from a person in
the business of selling goods of that kind ***." 810
ILCS 5/1-201(9) (West 1994).

The parties do not challenge this definition of a "buyer in
the
ordinary course." However, the parties offer competing
definitions of "good faith" under the Code. Bank One asserts
that "'Good Faith' means honesty in fact in the conduct or
transaction concerned." 810 ILCS 5/1-201(19) (West 1994). By
contrast, the dealers urge that Bank One--itself a merchant--must
be subject to the higher standard set forth in the sales article
of the Uniform Commercial Code: "'Good Faith' in the case of a
merchant means honesty in fact and the observance of reasonable
commercial standards of fair dealing in the trade." (Emphasis
added.) 810 ILCS 5/2-103(b)(West 1994). As an initial matter,
then, we shall decide which "good faith" standard applies to the
present case.
The Uniform Commercial Code offers the following definition
of "merchant":
"a person who deals in goods of the kind or otherwise
by his occupation holds himself out as having knowledge
or skill peculiar to the practices or goods involved in
the transaction or to whom such knowledge or skill may
be attributed by his employment of an agent or broker
or other intermediary who by his occupation holds
himself out as having such knowledge or skill." 810
ILCS 5/2-104(1) (West 1994).

Bank One insists that it cannot be considered a merchant in
this
case because it never held itself out as a "dealer" of cars or as
one "having knowledge or skill peculiar" to vehicles. We reject
Bank One's position. The record unequivocally demonstrates that
Bank One indeed had "knowledge or skill peculiar to the practices
*** involved in the transaction[s]" that form the basis of this
litigation. By its own admission, Bank One has been engaged in
the business of leasing automobiles for several years. Bank One
has entered into dealer agreements with some 2,000 originating
car dealers and 35 private lessors. Through these agreements,
Bank One essentially has solicited its affiliated dealers and
private lessors to organize automobile lease packages and then
sell them to Bank One. Bank One's knowledge and skill regarding
the practices involved in automobile lease financing is further
evidenced by its elaborate checklist and procedures for approving
such transactions. Clearly, Bank One qualifies as a "merchant"
with respect to the transactions at issue here.
Having determined that Bank One acted as a "merchant" with
respect to these transactions, we find instructive the Official
Code Comment to section 1-201(19), which states:
"'Good Faith' whenever it is used in the Code, means at
least what is here stated. In certain Articles, by
specific provision, additional requirements are made
applicable. See, e.g., Secs. 2-103(1)(b), 7-404. To
illustrate, in the Article on Sales, Section 2-103,
good faith is expressly defined as including in the
case of a merchant observance of reasonable commercial
standards of fair dealing in the trade, so that
throughout that Article wherever a merchant appears in
the case an inquiry into his observance of such
standards is necessary to determine his good faith."
(Emphasis added.) 810 ILCS Ann. 5/1-201(19), Uniform
Commercial Code Comment, at 27 (Smith-Hurd 1993).

Because this case falls under the sales article of the
Uniform
Commercial Code, we hold that for Bank One to qualify as a buyer
in the ordinary course, it must meet the heightened "good faith"
standard of a merchant required under that article. Cf. Massey-
Ferguson, Inc. v. Helland, 105 Ill. App. 3d 648, 653, 434 N.E.2d 295, 298 (1982)("good faith" definition from sales article did
not apply where the case arose out of a secured transaction).
Assuming Bank One purchased these 10 vehicles with honesty
in fact, we next consider whether Bank One observed reasonable
commercial standards of fair dealing in the trade. One aspect of
these transactions that this court finds intriguing is that Bank
One never paid the full price for the automobiles in question.
As discussed previously, Bank One forwarded Leased Car funds
(through Valet) to cover the price of the automobile and the
sales tax due. However, Bank One always purchased the vehicles
for less than Leased Car had paid to the original dealers; Leased
Car, therefore, was forced to sell each automobile at issue here
for a loss. Furthermore, Bank One must have known it received
(often substantial) discounts because its "Freedom Lease
Checklist" required that the invoice or MSRP be submitted. As
aptly stated in a case frequently cited by Bank One, "[t]he
amount of consideration given is significant as evidence of good
faith." Heinrich v. Titus-Will Sales, Inc., 73 Wash. App. 147,
156, 868 P.2d 169, 174 (1994) (where ultimate consumer paid
merchant more than merchant agreed to pay entrusting original
owner, merchant's fraudulent conduct did not taint purchaser's
title under entrustment statute). See also Bank of Illinois v.
Dye, 163 Ill. App. at 1021-22, 517 N.E.2d at 40-41 (fact that the
seller sold vehicle for the same price for which he had purchased
it contributed to a finding that the sale was not "in the
ordinary course of business"). Moreover, the record indicates
that every time Bank One purchased one of these automobiles at a
discount, it deprived the state of substantial revenue. The fact
that Bank One continuously purchased vehicles from an entity that
lost money on each transaction, while also depriving the state of
its rightful revenue, suggests to us that Bank One did not
observe reasonable commercial standards of fair dealing in the
trade.
Our conclusion is bolstered by Bank One's awareness, as of
October 1994, of the titling problems with some of the
automobiles it had purchased through its agreement with Valet.
Bank One responds by asserting that its relationship to Valet has
no bearing on its status as a buyer in the ordinary course. We
disagree. So far as the record reflects, Valet is the only
entity in these transactions with which Bank One actually had any
dealings or agreements. In October 1994, Bank One learned that
several of the vehicles its lessees were driving were not the
vehicles reflected in the lease papers. This discovery alarmed
Bank One to the point that it altered its payment procedures
toward Valet. Yet Bank One took no further action and continued
to do business through Valet; in fact, Bank One's altered payment
procedures did not even preclude the same titling problems from
recurring. We believe this commercially unreasonable decision--
the continuation of business with Valet, or at least the failure
to better inspect the verity of documents received from Valet--
directly led to the transactions that form the basis of this
litigation.
Finally, the fact that "[a]ll the documentary evidence
(e.g., bills of sale, tax documents, etc.) in this case
conclusively demonstrates," in Bank One's language, that Leased
Car sold these automobiles to Bank One does not strengthen
plaintiff's position. This documentary evidence merely begs the
question of why Bank One never signed a dealer agreement with
Leased Car Sales. If the documents submitted to Bank One showed
that it was purchasing these automobiles from Leased Car, why did
Bank One persist in paying Leased Car through an unnecessary
intermediary? According to Bank One's own definition, Leased Car
was a private lessor, identical to Valet. Normally, this extra
layer of middleman should have increased Bank One's costs, as one
would expect each intermediary to make some profit. However,
Bank One knew it was purchasing automobiles at a discount--
despite the fact that, according to Bank One, the documentary
evidence clearly demonstrated this extra intermediary. We find
that, under these facts, by engaging in these transactions Bank
One did not observe reasonable commercial standards of fair
dealing in the trade.
We agree, then, with the trial court's finding that Bank One
did not qualify as a buyer in the ordinary course of business for
the transactions at issue here. As a result, Bank One may not
claim the protection of the entrustment provision of the Uniform
Commercial Code. We therefore affirm the judgment of the trial
court.
Affirmed.
CAMPBELL, P.J., and O'BRIEN, J., concur.
[fn1]Jay Loop, a sales manager of Bank One who oversees its
leasing operation, testified in his deposition as to the
distinction between originating dealers and private lessors:

"What I call a 'private lessor.' [sic] Somebody who's not an
originating dealer is my term on that; that doesn't have cars
sitting out on their lot and CO's [certificates of origin] in
their file [sic]."
[fn2]Apparently, this problem persisted. Two of the
vehicles disputed here, delivered from Loeber Motors to Leased
Car, do not bear the same VINs as the lease documents submitted
by Leased Car to Valet (and ultimately to Bank One).
[fn3]Previously, Valet had been permitted to draw on a
"dealer's account" set up by Bank One to expedite the payment
process. Under this scheme, Bank One permitted its dealers to
issue their own drafts for payment on approved leases. After
October 1994, Bank One terminated Valet's drafting privileges and
made subsequent payments with cashier's checks.