NO. 4-96-0211
IN THE APPELLATE COURT
OF ILLINOIS
FOURTH DISTRICT
HADDAD'S OF ILLINOIS, INC., an Illinois ) Appeal from
Corporation, ) Circuit Court of
Plaintiff-Appellant, ) Sangamon County
v. ) No. 93L323
CREDIT UNION 1 CREDIT UNION, an Illinois )
Chartered Financial Institution, ) Honorable
Defendant-Appellee. ) Jeanne E. Scott,
) Judge Presiding.
_________________________________________________________________
JUSTICE KNECHT delivered the opinion of the court:
Plaintiff, Haddad's of Illinois, Inc., filed a conver-
sion action against defendant, Credit Union 1 Credit Union, al-
leging, Raja Raychouni, an employee of plaintiff forged endorse-
ments on checks payable to plaintiff and defendant deposited them
into the account Raychouni opened with defendant. Defendant
filed a motion for summary judgment, alleging plaintiff's cause
of action was barred by the applicable statute of limitations and
plaintiff did not have standing to sue defendant because it had
no interest in the allegedly converted checks. The trial court
granted defendant's motion, finding plaintiff's action barred by
the statute of limitations. Plaintiff appeals. We affirm.
Plaintiff is a wholly owned subsidiary of the CATS Com-
pany (CATS), a Michigan corporation. CATS supplies computer
equipment and supplies to its customers. In 1987, CATS contract-
ed with the State of Illinois (State) to supply computer equip-
ment and services to various state agencies. At that time CATS
opened an office in Springfield in order to service the various
state agencies.
Plaintiff incorporated in Illinois in 1989. On Decem-
ber 6, 1989, the board of directors of CATS executed a "Consent
Resolution" making plaintiff a "joint owner" of any check payable
to CATS regarding business operations in the State. Pursuant to
the resolution, CATS gave plaintiff the right to "accept, en-
dorse, deposit, and otherwise make use of" any check tendered for
services performed by either plaintiff or CATS in connection with
business in the State.
Under the terms of the State's contract with CATS, all
payments were to be sent to CATS' office in Michigan. In addi-
tion, the invoices sent by CATS to the State gave the same in-
structions. Neither CATS nor plaintiff conducted any banking in
Illinois and neither opened an account at any bank or credit
union within the State.
On March 7, 1988, CATS hired Raychouni as branch man-
ager of its Springfield office. Raychouni served in that capaci-
ty until July 2, 1990. Raychouni received purchase orders from
the State and forwarded them to CATS in Michigan. CATS would
then ship the products to its Springfield office for delivery.
During the period of time between March 1988, and May
1990, the State mailed checks in payment for its orders from CATS
to its Springfield office instead of sending the payments to
Michigan. Raychouni failed to forward the checks to CATS' home
office and apparently forged the endorsement of CATS on the
checks and deposited them into his personal account with defen-
dant.
Jacques Haddad, president of CATS, was aware of every
purchase made by the State. Albert Haddad, vice president of
CATS, was in charge of making sure CATS got paid for products it
sold. He checked to make sure invoices were paid and he knew if
they were not paid. As early as October 1988, he knew there were
invoices to the State for which CATS had not received payment.
Raychouni maintained banking accounts with defendant.
Plaintiff contends on July 3, 1990, Raychouni admitted to Jacques
he had deposited a $14,000 check issued by the State and payable
to CATS into an account with defendant. Plaintiff's complaint
alleges this happened a number of times during Raychouni's em-
ployment.
Plaintiff contends Raychouni continued to deposit
checks into his account with defendant until May 1991, based upon
the transaction stamp on the back of three of the checks. The
checks were issued by the State in April and May 1990, but the
stamp on the back of each is blurry and could read either 1990 or
1991. Albert stated in discovery, however, he believed Raychouni
left the United States in 1990.
The three checks show they were deposited into account
No. 425671. Defendant's records for that account show deposits
in the same amounts as the subject checks were made in May 1990.
Further, account No. 425671 was closed in August 1990 due to a
negative balance and was cleared from defendant's books in Decem-
ber 1990, with no activity of any kind after that date.
On June 24, 1993, plaintiff sued defendant for conver-
sion of the checks it paid over the endorsements allegedly forged
by Raychouni. Defendant moved for summary judgment on alterna-
tive grounds. First, defendant argued plaintiff cannot sue for
conversion because it was not the payee on the checks and had no
standing to sue for conversion. Second, defendant argued plain-
tiff's action is barred by the three-year statute of limitations
for conversion actions set forth in section 3-118(g) of the Uni-
form Commercial Code--Negotiable Instruments (Code) (810 ILCS
5/3-118(g) (West 1994)). The trial court granted summary judg-
ment on the basis the three-year statute of limitations was ap-
plicable and the discovery rule does not apply to toll the stat-
ute.
Plaintiff argues, first, the trial court applied the
incorrect statute of limitations. Section 3-420(a) of the Code
provides the law applicable to conversion of personal property
applies to conversion of negotiable instruments. 810 ILCS 5/3-
420(a) (West 1994). The law applicable to personal property
provides causes of action for conversion shall be commenced with-
in five years after the cause of action accrued. 735 ILCS 5/13-
205 (West 1994). Therefore, plaintiff argues five years is the
proper statute of limitations for actions for conversion of nego-
tiable instruments.
However, the Code provides specifically in section 3-
118(g) three years is the statute of limitations for actions for
conversion of a negotiable instrument. Where two statutes of
limitation arguably apply to the same cause of action, the one
which more specifically relates to the action must be applied.
Calumet Country Club v. Roberts Environmental Control Corp., 136
Ill. App. 3d 610, 612, 483 N.E.2d 613, 615 (1985). The proper
statute of limitations for actions for conversion of negotiable
instruments is three years as specifically set forth in the Code.
Plaintiff argues even if the three-year statute of
limitations is correct, defendant's motion for summary judgment
should not have been granted because a question of fact exists
regarding whether its suit was filed in a timely manner. It
contends either the cashing of the checks were part of an ongoing
plan constituting a single transaction for purposes of the com-
mencement of the statute of limitations or the discovery rule
should be applied to its action for conversion of a negotiable
instrument.
When a series of checks is cashed as part of an ongoing
scheme or plan, the plan constitutes a single transaction for
purposes of the commencement of the statute of limitations. See
Field v. First National Bank, 249 Ill. App. 3d 822, 825-26, 619
N.E.2d 1296, 1298-99 (1993). Thus, if plaintiff alleged facts
sufficient to show a plan for Raychouni's conversion of checks
payable to CATS, the date on which the last check was deposited
would govern as the date for all the checks for purposes of the
statute of limitations.
However, in this case, contrary to plaintiff's asser-
tions, there is no question of fact as to the date on which the
last check was deposited with defendant by Raychouni. Plaintiff
relies on the smudged stamp of the back of the last checks which
could be interpreted either as 1990 or 1991 and contends if they
were deposited in 1991, its cause of action was timely filed even
using the three-year statute of limitations, as the complaint was
filed on June 24, 1993. The transaction stamp actually proves
nothing, however, as "a fact cannot be inferred when a contrary
fact could be inferred with equal certainty from the same evi-
dence." Leavitt v. Farwell Tower Ltd. Partnership, 252 Ill. App.
3d 260, 268, 625 N.E.2d 48, 54 (1993). Defendant's records indi-
cate the account into which the checks were deposited was closed
in December 1990, which would show the checks could not have been
deposited in May 1991. Further, the checks were issued by the
State in April and May 1990. These records are unrebutted by
plaintiff and show the date on which the checks were deposited.
The smudged transaction stamps are not sufficient to raise a
question of fact for the trial court to determine.
Plaintiff argues, alternatively, the discovery rule
should have been applied to postpone the accrual of its cause of
action. Under common law, a cause of action for conversion ac-
crued when a defendant exercised unauthorized control over the
plaintiff's property. O'Connell v. Chicago Park District, 376
Ill. 550, 554, 34 N.E.2d 836, 839 (1941). "The discovery rule
delays the commencement of the relevant statute of limitations
until the plaintiff knows or reasonably should know that he has
been injured and that his injury was wrongfully caused." Jackson
Jordan, Inc. v. Leydig, Voit & Mayer, 158 Ill. 2d 240, 249, 633
N.E.2d 627, 630-31 (1994). The effect of the rule is to make the
accrual of a plaintiff's cause of action the date on which he or
she reasonably should know of his or her injury.
The discovery rule has been applied to a number of
different tort causes of action in Illinois (see Jackson Jordan,
158 Ill. 2d 240, 633 N.E.2d 627 (legal malpractice); Witherell v.
Weimer, 85 Ill. 2d 146, 421 N.E.2d 869 (1981) (negligence and
product liability); Knox College v. Celotex Corp., 88 Ill. 2d
407, 430 N.E.2d 976 (1981) (fraud and tortious misrepresenta-
tion); Lipsey v. Michael Reese Hospital, 46 Ill. 2d 32, 262
N.E.2d 450 (1970) (medical malpractice)) but there appears to be
no authority on whether the discovery rule applies to a cause of
action for conversion of a negotiable instrument. Consequently,
we must look to the decisions of those jurisdictions that have
addressed application of the discovery rule to actions for con-
version of negotiable instruments.
A few courts in other jurisdictions have applied the
discovery rule to actions for conversion of negotiable instru-
ments. See DeHart v. First Fidelity Bank, N.A./South Jersey, 67
B.R. 740, 745 (D.N.J. 1986); Stjernholm v. Life Insurance Co. of
North America, 782 P.2d 810, 811-12 (Colo. App. 1989); Branford
State Bank v. Hackney Tractor Co., 455 So. 2d 541, 542 (Fla. App.
1984) (per curiam). However, the vast majority of authority runs
strongly against applying the discovery rule to an action for
conversion of negotiable instruments in the absence of fraudulent
concealment on the part of the defendant asserting the defense of
the statute of limitations. See Menichini v. Grant, 995 F.2d
1224, 1231 (3d Cir. 1993); Kuwait Airways Corp. v. American Secu-
rity Bank, N.A., 890 F.2d 456, 461 (D.C. Cir. 1989); First Inves-
tors Corp. v. Citizens Bank, Inc., 757 F. Supp. 687, 690-92
(W.D.N.C. 1991); Husker News Co. v. Mahaska State Bank, 460
N.W.2d 476, 477-78 (Iowa 1990); Wang v. Farmers State Bank, 447
N.W.2d 516, 518-19 (S.D. 1989); Fuscellaro v. Industrial National
Corp., 117 R.I. 558, 562-64, 368 A.2d 1227, 1231 (1977); Palmer
Manufacturing & Supply, Inc. v. BancOhio National Bank, 93 Ohio
App. 3d 17, 22, 637 N.E.2d 386, 391 (1994); Lyco Acquisition 1984
Ltd. Partnership v. First National Bank, 860 S.W.2d 117, 119
(Tex. Ct. App. 1993); Insurance Co. of North America v. Manufac-
turers Bank, 127 Mich. App. 278, 283-84, 338 N.W.2d 214, 216
(1983); Continental Casualty Co. v. Huron Valley National Bank,
85 Mich. App. 319, 325, 271 N.W.2d 218, 221 (1978); Southwest
Bank & Trust Co. v. Bankers Commercial Life Ins. Co., 563 S.W.2d
329, 331-32 (Tex. Ct. App. 1978); Gerber v. Manufacturers Hanover
Trust Co., 64 Misc. 2d 687, 688-89, 315 N.Y.S.2d 601, 603 (1970);
4 W. Hawkland & L. Lawrence, Uniform Commercial Code Series §3-
419:10, at 983 (1994) (the cause of action should accrue when the
act of conversion occurred).
Some of those courts which have applied the discovery
rule have done so on the basis of their state's policy of consis-
tently resolving conflicts between the rights of individuals to
obtain redress and interests involving the flow of commercial
transactions by favoring the rights of the individual.
Stjernholm, 782 P.2d at 811. Other courts have noted the reason
for the equitable discovery rule is to temper the harsh results
that sometimes occur under the policy of requiring disputes be
resolved within a reasonable time in order to allow a fair oppor-
tunity to defend. DeHart, 67 B.R. at 743.
Those courts declining to apply the discovery rule in
actions for conversion of negotiable instruments have considered
the rights of the individual, particularly the rights of unsus-
pecting victims of forgery, in comparison with the broader inter-
ests of the commercial world.
"As tempting a choice as that may be in an
individual case, however, we think the public
would be poorly served by a rule that effec-
tively shifts the responsibility for careful
bookkeeping away from those in the best position
to monitor accounts and employees. Strict ap-
plication of the limitation period, while pre-
dictably harsh in some cases, best serves the twin
goals of swift resolution of controversies and
'certainty of liability' advanced by the [Code]."
Husker News Co., 460 N.W.2d at 479.
Those courts declining to apply the discovery rule have
done so based on two grounds. First, the commercial policies
underlying the Code require liability on negotiable instruments
not be open-ended.
"[T]he utility of negotiable instruments lies
in their ability to be readily accepted by
creditors as payment for indebtedness. Checks
must be transferable. Consequently, 'in
structuring the law of checks we ... seek to
enhance the negotiability of commercial paper
so that it may play its role as a money substi-
tute.' Robert Hillman, et al., Common Law and
Equity Under the Uniform Commercial Code, [par.]
14.01[1] (1985). Negotiability requires pre-
dictable and rapid collection through payment
channels.
Closely related to negotiability are commer-
cial finality and certainty. 'The finality of
transactions promoted by an ascertainable defi-
nite period of liability is essential to the
free negotiability of instruments on which
commercial welfare so heavily depends.'
Fuscellaro v. Industrial Nat'l Corp., 117
R.I. 558, 563, 368 A.2d 1227, 1231 (1977);
[citation].
***
The Code drafters sought quick and inexpen-
sive resolution of commercial disputes. This
overarching goal is particularly important with
negotiable instruments where the exigencies of
commerce require inexpensive, quick, and reliable
transfer of funds." Menichini, 995 F.2d at 1230-
31.
Second, as noted by the court in Husker News Co., the victim of
the conversion is in the best position to easily and quickly
detect the loss and take appropriate action. Husker News Co.,
460 N.W.2d at 479.
While not applying the discovery rule may be harsh in
certain cases, we find the reasoning of the majority of other ju-
risdictions considering the issue to be most persuasive. The use
of negotiable instruments was intended to facilitate the rapid
flow of commerce. This policy is best served by finding the
accrual of a cause of action for conversion of negotiable instru-
ments occurs when the instrument is negotiated. The damage to
the plaintiff occurs at that moment and the applicable statute of
limitations then allows three years from that date to discover
the conversion in the ordinary course of bookkeeping. Absent
fraudulent concealment on the part of the defendant, this should
allow ample time for a plaintiff to discover any injury. There-
fore, we find the discovery rule does not apply to causes of
action for conversion of negotiable instruments.
The judgment of the trial court is affirmed.
Affirmed.
McCULLOUGH and GARMAN, JJ., concur.