Adventist Living Centers, Inc., Matter of

• Decision Date: 11 April 1995
• Docket Number: No. 94-3120,94-3120
• Citation: 52 F.3d 159
• Parties: , Bankr. L. Rep. P 76,464, 26 UCC Rep.Serv.2d 133 In the Matter of ADVENTIST LIVING CENTERS, INCORPORATED, Debtor-Appellee. Appeal of REINHART INSTITUTIONAL FOODS, INCORPORATED.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 159

52 F.3d 159

27 Bankr.Ct.Dec. 105, Bankr. L. Rep. P 76,464,

26 UCC Rep.Serv.2d 133

In the Matter of ADVENTIST LIVING CENTERS, INCORPORATED Debtor-Appellee Appeal of REINHART INSTITUTIONAL FOODS, INCORPORATED.

No. 94-3120.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 12, 1995.

Decided April 11, 1995.

Jerome R. Kerkman (argued), Quarles & Brady, Milwaukee, WI, Gregory N. Kazarian, Pedersen & Houpt, Chicago, IL, for appellant Reinhart Institutional Foods, Inc.

Robert M. Fishman, Leonora L. Shaw, Ross & Hardies, Mark Leipold (argued), Oppenheimer, Wolff & Donnelly, Chicago, IL, for debtor-appellee Adventist Living Centers, Inc.

Before CUDAHY, ESCHBACH and RIPPLE, Circuit Judges.

CUDAHY, Circuit Judge.

Adventist Living Centers (Adventist) is a bankrupt owner and manager of nursing home facilities. Reinhart International Foods, Inc. (Reinhart) was one of its food suppliers. Reinhart is now attempting to obtain an administrative priority based on a reclamation demand for food delivered in the 10 days before Adventist's bankruptcy filing. The bankruptcy court determined that Reinhart could not adequately prove the amount of food it was entitled to reclaim and that Adventist's failure to keep a promise to perform an inventory did not excuse Reinhart from this failure of proof. The district court affirmed the bankruptcy court and Reinhart now appeals. We affirm.

I. Facts

Adventist filed for bankruptcy under Chapter 11 on November 14, 1990. On November 15, 1990, Reinhart made a written reclamation demand on Adventist for food delivered within the last 10 days. Four days later, on November 19, 1990, Reinhart's attorney Jerome Kerkman had a telephone conversation with Adventist's attorney Louis Levit. During that conversation, Kerkman told Levit that Reinhart did not actually want the food products returned, but instead wanted an administrative priority claim for the value of the food. Kerkman asserts that Levit told him in response that Adventist would take or had taken an inventory which would determine the amount to which Reinhart would be entitled. Levit does not remember making this promise, but does not deny having done so. Kerkman also attempted to document this conversation by sending a letter to Levit, but the letter was apparently sent to the wrong address and was never received. Kerkman did, however, provide a copy of the letter for the record.

No further relevant action was taken by either party until January 24, 1991. At that time, Adventist filed its Schedule of Assets and Liabilities with the bankruptcy court. Attached to the Schedule was an inventory which detailed the dollar value of food supplies at each of Adventist's facilities but did not break down that figure by individual food supplier. This inventory page was dated November 14, 1990, although it was attached to and filed with the Schedule in January 1991.

Reinhart continued to take no action on this claim until November of 1991, when it filed its proof of claim with the bankruptcy court, indicating that it was asserting a priority administrative claim of $38,915 for the food. It finally filed a motion to allow this administrative priority expense on July 2, 1992.

The bankruptcy court denied the motion, concluding that Reinhart had not presented enough evidence regarding the amount of the reclamation, that Reinhart's assertion that Levit promised an inventory was not credible and that, even if it were, it was unreasonable for Reinhart to have relied on Adventist without taking any follow-up action. The district court also denied the motion for an administrative priority, although it accepted Reinhart's claim that Levit had promised an inventory. Instead, the district court based its denial of the motion on the belief that Reinhart should have acted sooner to ensure that an inventory was being taken, and that Reinhart's continued reliance on Levit after the Schedule was filed and it was obvious that no inventory had been taken was unreasonable. Reinhart now appeals, arguing that it justifiably relied on Levit's promise to make an inventory and that Adventist is now therefore estopped from arguing that Reinhart does not have sufficient evidence of the inventory in Adventist's possession to establish a claim for administrative priority. We disagree and affirm.

II. Discussion

In order to establish a valid claim for reclamation (and thus a viable administrative priority claim based on a reclamation right), Reinhart must establish each element of the right to reclaim goods by a "fair preponderance of the evidence." In re Video King of Illinois, Inc., 100 B.R. 1008, 1013 (Bankr.N.D.Ill.1989); In re Rawson Food Service, Inc., 846 F.2d 1343, 1349 (11th Cir.1988). These rather stringent requirements are:

1. That the seller sold goods on credit to the debtor in the ordinary course of business of both;

2. That the seller delivered the goods to the debtor at a time when the debtor was insolvent as defined by the Bankruptcy Code;

3. Within ten days after the goods were delivered to the debtor, the seller made a written demand for the return of the goods; and

4. That the debtor had possession of the goods at the time of the reclamation demand or the goods were not in the hands of a buyer in the ordinary course or a good faith purchaser at the time of demand.

In re Video King, 100 B.R. at 1013-14; In re Pester Refining Co., 964 F.2d 842, 845 (8th Cir.1992); Conoco, Inc., v. Braniff, Inc., 113 B.R. 745, 751 (Bankr.M.D.Fla.1990). ¹ The parties here have stipulated that Reinhart has met the first three requirements above, and thus only possession of the goods remains in dispute.

Reinhart admits that it is "unable to establish ... exactly how much of its product Adventist had on hand," but claims that this inability is a result of Adventist's misrepresentation regarding the performance of an inventory. Reinhart therefore argues that Adventist is estopped from now arguing that Reinhart must prove the exact amount of product in Adventist's possession.

"[E]stoppel occurs when one party knowingly misrepresents or conceals a material fact and the other party, not knowing the truth, reasonably relies on that misrepresentation ... to his detriment." Loyola University of Chicago v. Humana Insurance Co., 996 F.2d 895, 902 (7th Cir.1993). Further, the misled party must establish that it would not have acted as it did "but for the representations of the other party," and that it had "no knowledge or convenient means of ascertaining the true facts which would have prompted it to react otherwise." Id. (internal citations omitted).

Thus, in order to evaluate Reinhart's claim we must address two questions. The first is whether Adventist's attorney, Levit, made the representations alleged by Reinhart. Second, we must decide whether Reinhart was reasonable in relying on those representations. These issues involve questions of fact, and are therefore reviewed under a clearly erroneous standard. In re Kenneth Leventhal and Co., 19 F.3d 1174, 1177 (7th Cir.1994). Conclusions of law, in contrast, are subject to de novo review. In re Longardner and Associates, Inc., 855 F.2d 455, 459 (7th Cir.1988), cert. denied, 489 U.S. 1015, 109 S.Ct. 1130, 103 L.Ed.2d 191 (1989).

A. Promised Inventory

Kerkman contends that Levit promised that Adventist had taken or would soon take an inventory of the supplies in its possession. He presented his handwritten notes from the conversation, the letter that he sent confirming the conversation (admittedly never received by Adventist) and an affidavit in support of this claim. In response, Levit simply claims that he does not remember making this promise. However, Levit does not deny that he did so. The district court, given these facts, reversed the bankruptcy court and concluded that Kerkman's claim was believable and that Levit had promised an inventory. We agree with the district court that the bankruptcy court's decision was clearly erroneous, and we affirm the district court's decision.

B. Reasonable Reliance

The district court also concluded that Kerkman's initial reliance on Levit's statement was reasonable, and we too find that conclusion to be supportable. As the district court stated, "it is perfectly reasonable to assume that an attorney who says he will do something will do it." Mem.Op. at 7. However, Kerkman's long continued reliance on that statement gives us pause.

The seller in a reclamation case bears the burden of proving that the debtor possessed the goods when it received the reclamation demand. In re Rawson Food Service, 846 F.2d at 1348. This is a fairly stringent requirement because a seller's evidence "must indicate that this critical fact on which its recovery depends is true, and not merely that it is possible it is so." Id. (citing In re Flagstaff Foodservice Corp., 56 B.R. 899, 908 (Bankr.S.D.N.Y.1986)); See also In re Pester, 964 F.2d at 846 (the "mainstream of UCC cases hold[ ] that the seller may only reclaim goods in the buyer's possession");...