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12/31/87 Cullen Distributing, Inc., v. Duane Petty

December 31, 1987

CULLEN DISTRIBUTING, INC., PLAINTIFF-APPELLEE

v.

DUANE PETTY, DEFENDANT-APPELLANT

AT A BENCH TRIAL ON MARCH 24, 1987, THE COURT FOUND FOR PLAINTIFF ON COUNTS I THROUGH IV AND DISMISSED COUNT

v.

ON PLAINTIFF'S MOTION, DAVENPORT WAS DISMISSED AS A PARTY DEFENDANT WITH PREJUDICE.



APPELLATE COURT OF ILLINOIS, FOURTH DISTRICT

517 N.E.2d 733, 164 Ill. App. 3d 313, 115 Ill. Dec. 322 1987.IL.2003

Appeal from the Circuit Court of Livingston County; the Hon. Charles H. Frank, Judge, presiding.

APPELLATE Judges:

JUSTICE KNECHT delivered the opinion of the court. JUSTICE LUND, specially Concurring. PRESIDING JUSTICE GREEN, Concurring in part and Dissenting in part.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE KNECHT

Plaintiff Cullen Distributing, Inc., brought an action against defendant Duane Petty for damages caused by assurances defendant included in a bulk transfer notice. After a bench trial, the Livingston County circuit court entered judgment for plaintiff in the amount of $8,030.07. Defendant appeals.

For several months in 1985, defendant negotiated with Walter and Anne Davenport (Davenport) to buy their grocery store, the Pontiac Eisner Agency Food Store. In anticipation of that transaction, defendant's attorney mailed a "short form" bulk transfer notice dated September 21, 1985, to all the creditors of the store. The notice stated: "All debts of Walter E. Davenport, doing business as Pontiac Eisner Food Store will be paid in full as they fall due as a result of this transaction, and all future bills should be sent to him at 424 West Reynolds Street, Pontiac, Illinois, 61764."

On a weekly basis, plaintiff supplied cigarettes, cigars, tobaccos and candy to Davenport's grocery store. On September 19, 1985, plaintiff received Davenport's check for merchandise. The check was returned because of insufficient funds. Subsequently, plaintiff received the bulk transfer notice and in reliance thereon supplied Davenport with additional merchandise worth $1,056.81 on September 26, 1985. Prior to this shipment, Davenport's account balance was $8,030.07.

On October 7, 1985, defendant purchased the grocery store from Davenport. At that time, Eisner Food Store, Inc. (Eisner, Inc.), and Pontiac National Bank held liens against the store's assets for $24,000 and $70,000, respectively. The purchase price of $40,000 for equipment and $36,718 for inventory was paid directly to the secured creditors.

Davenport filed for bankruptcy soon after the sale and the account balance with plaintiff remained unsatisfied. Plaintiff retained counsel, and in a correspondence to the latter, defendant's attorney denied the bulk transfer notice promised Davenport's account would be paid from the sale proceeds. His letter stated:

"We knew from the beginning of our negotiations with Mr. Davenport that there would not be sufficient funds available to even satisfy the secured creditors Pontiac National and Eisners. Mr. Davenport, however, assured us that he would pay his delinquent accounts from other funds which is why the notice was so worded."

On January 14, 1986, plaintiff filed suit against defendant and Davenport. After several amendments, plaintiff settled on a five-count complaint. Count I alleged the sale was void as to plaintiff under the Illinois Uniform Commercial Code-Bulk Transfer (Code) in article 6. (Ill. Rev. Stat. 1985, ch. 26, pars. 6-101 through 6-110.) Count II alleged fraud, count III, promissory estoppel, and count IV sought damages as a third-party beneficiary. Count V asserted a cause of action for breach of the implied contract between plaintiff and defendant arising out of representations made in the bulk transfer notice.

In its affirmative defense, defendant asserted plaintiff was not damaged by the representations made in the bulk transfer notice. All of the store's assets were subject to liens by Eisner, Inc., and Pontiac National Bank. There simply was not enough money to pay off plaintiff.

The bulk transfer notice provisions in the Uniform Commercial Code, article 6, were designed to avoid manipulative transactions denying payment to the transferor's creditors. The Code drafters created an optional provision to insure creditors are paid out of the consideration for the bulk transfer. However, about two-thirds of the States, including Illinois, rejected optional section 6 -- 106. That section reads as follows:

"[§ 6 -- 106. APPLICATION OF THE PROCEEDS

In addition to the requirements of the two preceding sections:

(1) Upon every bulk transfer subject to this Article for which new consideration becomes payable except those made by sale at auction it is the duty of the transferee to assure that such consideration is applied so far as necessary to pay those debts of the transferor which are either shown on the list furnished by the transferor (Section 6 -- 104) or filed in writing in the place stated in the notice (Section 6 -- 107) within thirty days after the mailing of such notice. This duty of the transferee runs to all the holders of such debts, and may be enforced by any of them for the benefit of all.

(2) If any of said debts are in dispute the necessary sum may be withheld from distribution until the dispute is settled or adjudicated.

(3) If the consideration payable is not enough to pay all of the said debts in full distribution shall be made pro rata.]

Note: This section is bracketed to indicate division of opinion as to whether or not it is a wise provision, and to suggest that this is a point on which State enactments may differ without serious damage to the principle of uniformity." 2A U.L.A. 311-12 (1977).

"[The] effect of choosing not to adopt [official section 6 -- 106] is to enact a creditor-notice statute rather than a creditor-protection statute." (Bjork v. United States (7th Cir. 1973), 486 F.2d 934, 935 n.1.) The Illinois Code Comment to section 6 -- 104 discusses various remedies available to creditors for noncompliance with article 6. However, the comment specifically states that "creditors may not proceed against the transferee upon the theory that by reason of the transfer he has personally assumed the obligations of the transferor." (Ill. Ann. Stat., ch. 26, par. 6 -- 104, Ill. Code Comment, at 641 (Smith-Hurd 1963). Similarly, in Continental Casualty Co. v. Burlington Truck Lines, Inc. (1966), 70 Ill. App. 2d 405, 408, 217 N.E.2d 293, 295, the court held "that a failure to comply with the provisions of the Bulk Sales Act gives no direct remedy by a vendor's creditors against the vendee, and does not make the vendee a debtor of the vendor's creditors." Noncompliance with the act merely means the transfer is ineffective against the transferor's creditors. (Ill. Ann. Stat., ch. 26, par. 6 -- 104, Uniform Commercial Code Comment at 642 (Smith-Hurd 1963).) Neither the Code nor its comments provide a remedy for improper compliance with notice provisions of article 6.

The article 6 notice provisions as adopted by Illinois are contained in sections 6-105 and 6-106. Section 6-106 contains two alternative forms of notice commonly referred to as the short and long forms. The transferee is to use the short form if he knows "all the debts of the transferor are to be paid in full as they fall due as a result of the transaction." ...


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