138 B.R. 557 (Bkrtcy.N.D.Ill. 1992), 91 B 10487, In re Shattuc Cable Corp.

Docket Nº:Bankruptcy No. 91 B 10487.
Citation:138 B.R. 557
Case Date:April 16, 1992
Court:United States Bankruptcy Courts, Seventh Circuit

Page 557

138 B.R. 557 (Bkrtcy.N.D.Ill. 1992)


Bankruptcy No. 91 B 10487.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

April 16, 1992

Scott W. Wilton, Williams, Rutstein, Goldfarb, Sibrava & Midura, Chicago, Ill., for petitioner.

Robert D. Nachman, Schwartz, Cooper, Kolb & Gaynor, Chicago, Ill., for respondent.


ERWIN I. KATZ, Bankruptcy Judge.

This matter comes before the Court on the Motion of North American Plastics, Inc., for an order awarding it a lien or, alternatively, an administrative claim in lieu of reclamation of goods delivered to the Debtor prior to the filing of these bankruptcy proceedings, pursuant to § 546(c) of the Bankruptcy Code. Responses to the Motion were filed by the Debtor and by American National Bank, a secured creditor holding a prior perfected security interest in all of the Debtor's assets. The Movant filed a Reply and this matter was taken under advisement. The Court has jurisdiction over this matter pursuant to title 28 U.S.C. § 157(b)(2)(B) and (K); 28 U.S.C. § 1334 and 11 U.S.C. § 546 (1990).

Having fully considered the arguments of the parties, the Court hereby finds that North American Plastics is not entitled to either a lien against the Debtor's assets or administrative claim treatment since any right of reclamation it held was subject to and extinguished by the prior security interest of American National Bank. To the extent that the district court decision in Bosler Supply Group, 74 B.R. 250 (N.D.Ill.1987)

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, holds differently, this Court finds that it is not bound by the decision of the district court under the principle of stare decisis. The following shall constitute the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.


An involuntary Chapter 7 petition was filed against the Debtor on May 15, 1991, by the following four petitioning creditors: Group Dekko International, Inc., d/b/a Albion Wire, Inc.; Global Products Corp.; Vanessa Calabrese; and North American Plastics, Inc. The Debtor converted the involuntary Chapter 7 case to a voluntary Chapter 11 proceeding and an order for relief was entered on May 24, 1991.

Prior to the filing of the involuntary petition, North American Plastics, Inc., (hereinafter referred to as "NAP"), one of the petitioning creditors, sold goods to the Debtor on an open account for which it never received payment. NAP asserts that goods with a value of $22,647.10 were delivered to the Debtor on March 29, 1991, pursuant to an invoice and bill of lading attached to its Motion. According to NAP, it received a check from the Debtor shortly after March 29, 1991, in the amount of $24,818.56 as payment for goods previously delivered on January 30, 1991, to the Debtor on its open account. 1 This check, however, was not honored by the Debtor's bank and it was returned to NAP on or about April 3, 1991, marked "Not Sufficient Funds." NAP did not thereafter receive any funds for this NSF check, or any other form of payment for the outstanding balance on the open account. Specifically, NAP never received any form of payment for the goods shipped on March 29, 1991.

On April 4, 1991, NAP made a written demand upon the Debtor for reclamation of the March 29th shipment of goods pursuant to § 2-702 of the Uniform Commercial Code. The Debtor has stipulated that (1) it received the written reclamation demand on April 4, 1991; (2) all of the goods delivered by NAP on March 29, 1991, were in its possession at the time it received the reclamation demand; and (3) for purposes of this proceeding, the Debtor was insolvent as of March 29, 1991.

The Debtor refused to surrender the goods to NAP pursuant to the reclamation demand on the grounds that American National Bank held a prior, perfected security interest in all of the Debtor's inventory which prevented it from returning the goods to NAP. NAP and the other petitioning creditors then initiated the involuntary bankruptcy proceedings against the Debtor on May 15, 1991, and the Debtor converted those proceedings to a voluntary Chapter 11 proceeding on May 24, 1991.

Following the commencement of these bankruptcy proceedings, American National Bank (hereinafter referred to as "Bank"), asserted a secured claim against the Debtor and sought to enforce a security interest in all of the Debtor's assets, including the goods delivered on March 29th by NAP. The secured claim of the Bank is based on an installment note dated August 9, 1990, in the original principal sum of $278,350.17, and a demand note dated February 7, 1989, in the original principal sum of $800,000. These notes were secured by a blanket first-lien and security interest in all the assets of the Debtor,

whether now or hereafter existing or acquired, including all accounts, accounts receivable, notes, conditional sales contracts, furniture, fixtures, contract rights, inventory, goods, insurance policies covering such collateral, deposits, leases, intangibles, instruments, documents, chattel paper, various specifically identified items of equipment, and all proceeds from any of these assets.

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Several security agreements were executed covering these assets, and the security interests granted therein were properly perfected through the filing of financing statements, the latest of which is dated February 1, 1991.

In addition to these pre-existing claims asserted by the Bank in the Debtor's bankruptcy proceeding, the Bank extended post-petition financing to the Debtor in the amount of $38,925.91, pursuant to Order of this Court, and was granted a super-priority lien and security interest in the Debtor's assets pursuant to § 364 of the Bankruptcy Code to secure the post-petition financing. 2

Although the Debtor voluntarily converted the involuntary Chapter 7 proceeding to a Chapter 11 case, it did not attempt to reorganize its business. Rather, the Debtor sought an order from the Court authorizing it to sell substantially all of its assets pursuant to § 363 of the Bankruptcy Code. The order authorizing the sale recognized the pre-existing secured claims of the Bank (although it expressly did not adjudicate the priority or amount of the claims) 3 and found that it was in the best interests of the estate and its creditors to allow the Debtor to sell its machinery, equipment and inventory since the Debtor was unable to obtain additional secured or unsecured financing from the Bank or any other entity and was unable to maintain the operation of its business without such financing. The Order further provided that all proceeds of the sale would be paid directly to the Bank to be applied to the outstanding indebtedness on a provisional basis which would not "prejudice either the rights of any party in interest from asserting any claim or lien against the proceeds, or the right of [the Bank] to assert defenses to any alleged claims or liens."

The auction sale was held on June 10, 1991, and the Debtor received a total of $442,500 for its assets. Among the assets sold were all of the goods listed on the bill of lading and invoice from NAP, except for two groups of clear pvc which were used in the ordinary course of the debtor's business prior to the auction sale. Thus, upon completion of the auction sale, the Debtor no longer held any of the goods at issue in this proceeding. The auction sale, as ultimately consummated, was approved by this Court on June 20, 1991, and the proceeds were paid to the Bank on a provisional basis as authorized by the Court.

In October, 1991, the Bank and the Debtor came before the Court seeking allowance of the secured claims of the Bank and approval for the payment of the final amounts owed to the Bank. The Bank had been partially paid through the sale proceeds and through the collection of certain accounts receivable subject to its security interest. The remaining balance due, therefore, was $45,118.35. After notice and hearing, the Court entered an Agreed Order on October 28, 1991, which approved the secured claims of the Bank for a total allowed secured claim of $756,162.33; approved the earlier provisional payments pursuant to the sale of the Debtor's assets as being free and clear of the claims of any third parties; and authorized the Debtor to remit the remaining balance due of $45,185.35, in full satisfaction of the allowed secured claims of the Bank. The Service List and Certificate of Service filed with the Motion to allow the Bank's claims and seeking entry of the agreed order reflects that notice was given to NAP and to all other creditors in this proceeding. The court docket further reflects that no objection to the Motion or Order was filed by NAP.

NAP thereafter filed the instant Motion for a Lien or for Payment as an Administrative Claim on December 26, 1991. The

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Motion asserts that pursuant to § 546(c) of the Bankruptcy Code, NAP is entitled to either a lien on the Debtor's assets or to status as an administrative claim in lieu of reclamation of the goods sold by the Debtor.


NAP relies upon § 546(c) of the Bankruptcy Code [hereinafter "Code"] which allows a seller to reclaim goods from the debtor pursuant to any statutory or common-law right of reclamation it may have as long as (1) the debtor received such goods while it was insolvent and (2) the seller made a written demand for reclamation within 10 days of receipt of the goods by the debtor. Specifically, § 546(c) provides that:

the [avoidance] powers of the trustee ... are subject to any statutory or common-law right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller's business, to reclaim such goods if the debtor has received such goods while insolvent, but--

(1) such a...

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