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ATHEY PRODS. CORP. v. ROSELLE

September 29, 1995

ATHEY PRODUCTS CORPORATION, Plaintiff,
v.
HARRIS BANK ROSELLE, Defendant.



The opinion of the court was delivered by: BUCKLO

 A creditor who did not get paid for goods sold by it when the buyer's bank discontinued a line of credit to the buyer sued the bank for fraud. Jurisdiction is based on diversity of citizenship. The bank, Harris Bank Roselle ("Harris" or "the Bank"), has moved for summary judgment against Athey Products Corporation ("Athey"). For the reasons discussed below, the Bank's motion is granted.

 The parties, as required, have submitted statements of undisputed facts and supporting evidentiary materials. The undisputed facts (or facts that if disputed are stated in Athey's version) are as follows.

 Athey, a Delaware corporation with its principal place of business in Raleigh, North Carolina, manufactures street sweepers and other road maintenance equipment. Harris is an Illinois banking corporation and has its principal place of business in Roselle, Illinois. In March, 1991, Harris extended an $ 800,000 line of credit to Schuster Equipment Company ("Schuster"), a seller and distributor of road maintenance equipment. The line of credit was evidenced by a note providing for repayment on demand and a security agreement granting Harris a security interest in all of Schuster's accounts receivable, inventory, equipment, furniture, fixtures, goods and chattel. The line of credit operated as a revolving loan pursuant to which Harris advanced funds to Schuster based on a lending formula. Under the loan arrangement, Schuster directed its customers to send payments to a lockbox maintained by Harris in Schuster's name. The funds received in the lockbox were collected by the Bank, deposited in a cash collateral account and applied to reduce the outstanding balance on the line of credit.

 In a letter dated February 24, 1992, Harris notified Schuster that "due to the continuing decline in the financial health of [Schuster]," Harris would not extend the company's $ 800,000 line of credit past March 20, 1992, the date the loan was up for renewal. The letter requested Schuster to contact Harris to arrange to pay off the loan. Between February 24, 1992 and March 5, 1992, Schuster submitted purchase orders to Athey for one sweeper for the City of Austin, Minnesota at a price of $ 79,185.40, one sweeper for the City of Rochester, Minnesota at a price of $ 79,264.00 and three sweepers for Ramsey County, Minnesota at a price of $ 273,525.60. Athey approved Schuster's credit for the purchases and manufactured the sweepers for shipment. Athey eventually shipped all the sweepers to Schuster, but Schuster paid only for the sweeper sold to Rochester. Athey says it received this payment only because Rochester insisted on its certificate of origin and Athey would not provide it until it was paid. Athey also refused to ship the remaining sweepers until it was paid for the one sold to Rochester.

 Count I: Fraud

 Harris claims that there is no evidence that Schuster ordered the five sweepers from Athey knowing that it would not compensate Athey for them. There is evidence that without the line of credit, Schuster could not pay Athey for the equipment ordered. Schuster used the credit line to fund all its operating expenses in the normal course of business. Schuster typically borrowed the maximum amount of money available under the line of credit, requesting advances on a weekly or bi-weekly basis. Even so, prior to February 24, 1992, most weeks the amounts from invoices past due were greater than the total amount of money available under the line of credit. In those situations, Schuster was obligated to decide which vendors' invoices to pay and which to defer.

 Schuster's final income statement for the fiscal year ending August 31, 1991 showed a loss of $ 257,000. Schuster experienced operating losses each month from October, 1991 through January, 1992. Athey's experts state that Schuster's profits were insufficient to pay back the Harris loan and as of the end of February or March, 1992, Schuster was insolvent, though Harris disputes this conclusion.

 Nevertheless there is no evidence in the record that in early, 1992, Schuster filed for bankruptcy or completely failed to pay its creditors. Schuster's balance sheets for January-April, 1992 indicate that its assets exceeded its liabilities. Athey's expert agreed that these balance sheets implied solvency.

 The Illinois Uniform Commercial Code provides that a business is insolvent if it has "ceased to pay [its] debts in the ordinary course of business, cannot pay [its] debts as they become due, or is insolvent within the meaning of Federal Bankruptcy Law." Id. (quoting Ill. Rev. Stat. Ch. 26, 1-201(23) (recodified as 810 ILCS 5/1-201(23))). Under Federal Bankruptcy Law, if "the sum of [a company's] debts [are] greater than all such entity's property, at a fair valuation," the company is insolvent. Id. (quoting 11 U.S.C. § 101(32)(A)). Where there is conflicting evidence on the issue of insolvency, as in this case, the insolvency question is for the jury to decide. Europlast, Ltd. v. Oak Switch Systems, Inc., 10 F.3d 1266, 1271 (7th Cir. 1993). *fn1"

 In resolving a summary judgment motion, all inferences are to be drawn in favor of the non-movant. Although the question is close, I will assume for purposes of this analysis that there are sufficient credibility issues and inferences raised by the conflicting record that a trier of fact could decide from the evidence of Schuster's financial condition at the end of February, 1992 (when Harris advised that it would not renew Schuster's loan) and the fact that Schuster had been told that its line of credit was in jeopardy, that at the time Schuster submitted purchase orders to Athey, it knew that it would be unable to pay for the equipment ordered. *fn2" See Price v. Highland Community Bank, 722 F. Supp. 454, 460 (N.D. Ill. 1989); Allstate Fin. Corp. v. Utility Trailer of Illinois, Inc., No. 92 C 3477, 1992 U.S. Dist. LEXIS 19640, *5 (N.D. Ill. Dec. 22, 1992).

 Harris argues that even if Schuster's purchase orders were deceitful, Athey did not rely on the purchase orders as representations of Schuster's ability or intent to pay for the sweepers in light of the fact that Athey retained the vehicles' certificates of origin until after receiving payment. Ninety-nine percent of the equipment that Athey manufactures is built to a user's specifications so that the equipment sports the color and parts, e.g., certain lights, an air conditioner, requested by that user. Athey's policy of keeping the certificate of origin was explained as follows:

 
The dealer (Schuster) makes the sale. The unit is passed from us (Athey) to the dealer and is delivered to the end user, who has a contract or purchase order with the dealer. That unit is delivered, and most governmental entities are not allowed to pay for the piece of equipment until they have clear title. So we hold the certificate of origin. This encumbers the dealer to go to his bank or lending authority to pay us before he gets paid from the end users.

 Akkerman Dep. 126. Thus, Athey apparently thought that retaining the certificate of origin would guarantee that it would receive payment from the dealer before the user paid the dealer. (Regarding most states, Athey's belief that the certificates were sufficient protection may have been true. Unfortunately for Athey, that is not true in Minnesota, where the sweepers were sent.) Thus, there is a question of fact as to whether Athey ...


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