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In re Creative Buildings Inc.

decided: June 24, 1974.


Appeal from the United States District Court for the Eastern District of Illinois. No. B-72-31-D HENRY S. WISE, Judge.

Swygert, Chief Judge, Kiley, Senior Circuit Judge, and Cummings, Circuit Judge.

Author: Kiley

KILEY, Senior Circuit Judge.

This appeal is from a district court judgment refusing to set aside the denial by a Referee in Bankruptcy of Meyer Furnace Company's (Meyer's) petition for reclamation of goods it had shipped to Creative Buildings, Inc. before Creative filed its Chapter XI petition for an arrangement under the Bankruptcy Act, 11 U.S.C. ยง 701. We affirm.

Meyer had transacted business with Creative since June of 1969, with a sixty-day credit line and was doing so when Creative filed its petition for arrangement on January 28, 1972. Creative had given Meyer two checks for goods, one for $47,859.23, dated November 18, 1971, and the other for $9,900.76, dated December 1, 1971. Both checks were returned for insufficient funds (NSF). The first check was paid when re-presented. Meyer redeposited the second check and requested its bank to hold it for collection. Meyer's bank account had not been debited with the amount of the second check when on January 5, 1972, it shipped the goods in controversy to Creative. No debit for the $9,900.76 amount appearing on its December 31, 1971 bank statement, Meyer assumed that the check had cleared, and when the goods were shipped to Creative on January 5, 1972 Meyer was unaware that its bank was still holding the check. Its account was not debited for the check until January 31, 1972.

Meyer filed this petition on March 9, 1972 for reclamation. The Referee denied the petition and denied rehearing. The district court denied Meyer's petition for review after a hearing. Meyer's appeal followed.


Meyer contends that when Creative gave it the NSF checks in November and December 1971 it had "ceased to pay its debts in the ordinary course of business" and had demonstrated that it could not "pay its debts as they became due" or was then "insolvent" under the Federal Bankruptcy Act; and was therefore insolvent by definition under Section 1-201 of the Illinois Uniform Commercial Code.*fn1

There is no proof that the "fair value" of Creative's assets were less (when the checks were given) than its total liabilities and accordingly it was not insolvent under the Bankruptcy Act. Meyer's argument that Creative's NSF checks as a matter of law rendered it insolvent attributes an absolutely literal meaning to the Code's "definition" of insolvency. We reject an application of an absolutely literal meaning to the words of the Code. There are a variety of business transactions in which for one reason or another NSF checks issue either through mistake, or miscalculation, or good faith reliance by the drawer on anticipated income, or other more or less innocent circumstances. See Hamm Brewing Co. v. First Trust & Savings Bank, 103 Ill. App. 2d 190, 242 N.E. 2d 911, 914 (1968). We think that the drawer cannot reasonably be held to have ceased paying bills in ordinary course, or to be unable to pay its debts when due, in every case in the variety of transactions regardless of circumstances.

In our view decision must rest on the facts of each transaction. The issuance of the NSF checks may indicate an impecunious status and be notice that the drawer may be insolvent. But in context of the testimony here, Meyer does not argue and we cannot hold that the district court's decision -- that Creative was not insolvent when the checks were issued -- is clearly erroneous.


Meyer's principal contention is that the two checks given Meyer in November and December 1971 amounted to misrepresentations of solvency. There is no transcript reference supporting Meyer's comptroller's testimony that he relied upon five NSF checks given Meyer between October 1971 and December 1971, in releasing the shipment. He said at trial that he relied upon telephone assurances as well as upon NSF checks. On appeal, Meyer relies only upon two NSF checks. The parties agree that if Meyer is to have a remedy in this case, it must derive from the proper interpretation of Chapter 26, Section 2-702, Illinois Revised Statute (Illinois Uniform Commercial Code).*fn2

Meyer argues that the two NSF checks were a misrepresentation of solvency "in writing" within three months of Creative's receipt of the shipment, entitling Meyer to reclaim the goods.*fn3 Creative argues that Meyer had the burden of proving Creative's insolvency and its alleged misrepresentation of solvency in November and December 1971; and that Meyer offered no proof of insolvency, except the two checks, and did not prove by the checks that Creative misrepresented its solvency.

Meyer's demand was not made within ten days of the January 5, 1972 delivery to invoke the remedy in first clause of Section 2-702. Accordingly, the remedy provided in the second clause of the paragraph is the basis of Meyer's complaint. In order to successfully reclaim the goods, therefore, Meyer had the burden to prove, prima facie, that Meyer discovered that Creative was insolvent when the latter received the goods on January 5, 1972 and that Creative misrepresented its solvency in writing to Meyer within three months prior to that ...

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