Kedzie and 103rd Currency Exchange, Inc. v. Hodge
156 Ill. 2d 112, 189 Ill. Dec. 31, 619 N.E.2d 732 (1993)
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Rule of Law:
Under UCC Section 3-305, the defense of "illegality of the transaction" against a holder in due course is available only when the local law explicitly renders the negotiable instrument itself entirely null and void, not merely when the underlying contract from which the instrument arose is deemed illegal or voidable between the original parties.
Facts:
- Fred Fentress agreed to install a "flood control system" at the home of Eric and Beulah Hodge in Chicago for $900.
- In partial payment, 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 Fentress failed to appear on the installation date.
- Eric Hodge telephoned Fentress to announce the contract "cancelled" and informed Fentress he would order Citicorp Savings not to pay the check.
- Fentress presented the check at the Kedzie & 103rd Street Currency Exchange, endorsing it as "sole owner" of A-OK Plumbing, and obtained payment.
- Fred Fentress was not a licensed plumber, a requirement under the Illinois Plumbing License Law.
Procedural Posture:
- The Currency Exchange presented the check for payment at Citicorp Savings, but payment was refused in accordance with the stop-payment order.
- The Currency Exchange sued Beulah Hodge, as the drawer of the check, and Fred Fentress for the amount stated.
- Hodge filed a counterclaim against Fentress.
- Hodge moved to dismiss the Currency Exchange's action against her, asserting a defense of "illegality of the transaction" under UCC Section 3-305, contending Fentress was not a licensed plumber.
- The circuit court (trial court) granted Hodge's motion and dismissed the Currency Exchange’s action against her.
- The appellate court, with one justice dissenting, affirmed the circuit court's dismissal.
- Pursuant to Supreme Court Rule 315(a), the Currency Exchange's petition for leave to appeal to the Illinois Supreme Court was allowed.
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Issue:
Does the illegality of an underlying contract, due to a party's non-compliance with a licensing statute that does not explicitly declare negotiable instruments arising from such contracts void, constitute a "real defense" of "illegality of the transaction" against a holder in due course under UCC Section 3-305?
Opinions:
Majority - Justice Freeman
No, a holder in due course of a check is not 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, unless the instrument itself is made void by statute. The court explained that under UCC Section 3-305(2)(b), "illegality of the transaction" serves as a "real defense" against a holder in due course only if the "local law" makes the obligation "entirely null and void." This historical interpretation in Illinois jurisprudence requires a legislative declaration that the instrument itself is void, not merely that the underlying contract is void or voidable between the original parties. The Illinois Plumbing License Law makes it illegal to perform plumbing without a license and punishes violations as a misdemeanor, but it does not expressly declare negotiable instruments arising from such unlicensed transactions to be void. The court emphasized that the holder in due course doctrine facilitates commercial transactions by protecting innocent third parties from undisclosed defenses, eliminating the need for extensive investigation into the original transaction. To allow this defense without a specific statutory declaration making the instrument void would undermine the protective purpose of holder in due course status and reduce a "real" defense to a "personal" one. Therefore, the illegality of Fentress's unlicensed status, while making the underlying contract potentially voidable between Fentress and the Hodges, did not void the check itself in the hands of the Currency Exchange, which was a holder in due course. The judgments of the appellate and circuit courts were reversed, and the cause remanded for further proceedings.
Dissenting - Justice Bilandic
Yes, the circuit court's dismissal of the Currency Exchange’s action against Hodge should be affirmed. Justice Bilandic dissented on two grounds. First, the Currency Exchange’s complaint failed to adequately allege facts establishing its status as a holder in due course, merely stating a conclusion without supporting factual allegations regarding taking the check "for value," "in good faith," and "without notice." A motion to dismiss admits well-pleaded facts, but not legal conclusions unsupported by facts. Second, even assuming holder in due course status, the plain language of UCC Section 3-305 and its comments indicate that if the illegality of a transaction renders the obligation a nullity under local law, it is a valid defense against a holder in due course, without requiring the legislature to expressly declare the instrument itself void. Illinois case law, such as Wright v. Baird, consistently holds that contracts made in violation of professional licensing laws, especially those protecting public health like the Plumbing License Law, are illegal and void. The public policy behind the Plumbing License Law is to protect public health, and an unlicensed plumber's contract contravenes this policy, rendering the obligation a nullity. Other states, like California and Ohio, interpret their UCC provisions similarly. The majority’s imposition of a requirement that the instrument itself be declared void by statute is an additional condition not found in the UCC or its comments, nor in comparable Illinois directives, unlike New Jersey law. The innocence of a holder in due course does not defeat the specific "real defenses" listed in Section 3-305, including illegality.
Analysis:
This case significantly narrows the scope of the "illegality of the transaction" defense against a holder in due course under UCC Section 3-305 in Illinois. By requiring an explicit statutory declaration that the negotiable instrument itself is void, rather than just the underlying contract, the Illinois Supreme Court prioritizes the certainty and negotiability of commercial paper over state public policy embedded in licensing statutes. This ruling establishes a high bar for parties seeking to avoid payment to innocent third-party holders, shifting the burden to the legislature to clearly specify if negotiable instruments arising from certain illegal transactions should be nullified for all purposes. It clarifies that merely rendering a contract voidable or illegal between the original parties is insufficient to trigger the real defense of illegality against a holder in due course, thus strengthening the protections afforded to such holders and facilitating the free flow of commerce.
