PFA Farmers Market Ass'n, Matter of

• Decision Date: 19 September 1978
• Docket Number: No. 77-1908,77-1908
• Citation: 583 F.2d 992
• Parties: 24 UCC Rep.Serv. 1176 In the Matter of PFA FARMERS MARKET ASSOCIATION, Bankrupt. BASSETT FURNITURE INDUSTRIES, INC., Appellant, v. William A. WEAR, as Trustee in bankruptcy for the above named bankrupt, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 992

583 F.2d 992

24 UCC Rep.Serv. 1176

In the Matter of PFA FARMERS MARKET ASSOCIATION, Bankrupt.

BASSETT FURNITURE INDUSTRIES, INC., Appellant, v. William A. WEAR, as Trustee in bankruptcy for the above

named bankrupt, Appellee.

No. 77-1908.

United States Court of Appeals,

Eighth Circuit.

Submitted March 17, 1978.

Decided Aug. 29, 1978.

Rehearing and Rehearing En Banc Denied Sept. 19, 1978.

Turner White, III, of White, Dickey & Allemann, Springfield, Mo., for appellant; J. Bruce McCurry, Springfield, Mo., on brief.

William A. Wear of Wear & Wear, Springfield, Mo., for appellee.

Before ROSS and HENLEY, Circuit Judges, and LARSON, ^* Senior District Judge.

LARSON, Senior District Judge.

This appeal arises from the denial of a petition for reclamation in bankruptcy court. The district court affirmed. We reverse.

The facts of the case have been stipulated. In November and December, 1976, Bassett Furniture Industries, Inc. shipped furniture to PFA Farmers Market Association. PFA refused to accept the tendered goods and they were stored in a warehouse. On April 11, 1977, Bassett again shipped the goods to PFA, which this time accepted the goods. Bassett sold the goods to PFA on an open credit account. Bassett did not know that PFA was insolvent within the meaning of 11 U.S.C. § 1(19) (1970) at the time of delivery. On April 18, 1977, PFA filed a petition under Chapter XI of the Bankruptcy Act, 11 U.S.C. §§ 701-799 (1970). On April 20, Bassett learned of PFA's insolvency and immediately sent a telegram to PFA demanding rescission under Uniform Commercial Code § 2-702. ¹ After a receiver was appointed for PFA, Bassett filed its petition for reclamation. The bankruptcy judge denied the petition, holding that allowing reclamation would constitute an impermissible preference under § 60 of the Bankruptcy Act, 11 U.S.C. § 96 (1970), that § 2-702 of the Code conflicts with §§ 64 and 67(c)(1)(A) of the Bankruptcy Act, 11 U.S.C. §§ 104, 107(c)(1)(A) (1970), and that the trustee was entitled to the goods under § 70(c) of the Bankruptcy Act, 11 U.S.C. § 110(c). The district court rejected the first two grounds but affirmed on the basis of § 70 (c) and § 2-702.

The issue before us is whether a seller seeking to reclaim under § 2-702(2) is entitled to do so when the seller's demand follows the filing of a petition in bankruptcy. Under § 70(a) of the Bankruptcy Act, 11 U.S.C. § 110(a) (1970), the trustee acquires title to the bankrupt's property as of the filing of the petition. But the trustee's title is subject, generally speaking, to the contract defenses and equities to which the bankrupt's title was subject. Collier on Bankruptcy, P 70.41(1) (14th ed. 1976). Under § 70(c) of the Bankruptcy Act, the trustee also acquires the rights of a hypothetical lien creditor who "could have obtained a lien by legal or equitable proceedings at the date of bankruptcy." The rights of this hypothetical lien creditor are to be determined by state law. Collier on Bankruptcy, supra.

If § 70(a) were the only applicable bankruptcy statute, the seller could reclaim because that section confers on the trustee no more than the bankrupt's rights under state law. Section 2-702(2) determines the relative rights of the seller and the bankrupt buyer:

Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten days after the receipt . . . . ² The parties have stipulated that PFA, the bankrupt, was insolvent when it received the furniture from Bassett. Bassett discovered this and made demand for reclamation within ten days after PFA received the goods. Thus, as against PFA, Bassett would be entitled to reclamation. Similarly, under § 70(a), the trustee is also subject to Bassett's right of reclamation.

When the issue is analyzed under § 70(c), however, the result is far less clear. As noted above, we must look to state law for the rights of the trustee as hypothetical lien creditor. Subsection 3 of the Code § 2-702 provides:

The seller's right to reclaim under subsection (2) Is subject to the rights of a buyer in ordinary course or other good faith purchaser or Lien creditor under this Article (Section 2-403). (emphasis added).

Interpretation of this subsection has confounded courts and commentators the only consensus to be found is that there are numerous respectable, if somewhat unsatisfactory, readings of the quoted language.

In re Kravitz, 278 F.2d 820 (3d Cir. 1960), was the first case to touch on the relative rights of the reclaiming seller and the trustee in a state that had adopted § 2-702. The court stated that § 70(c) confers on the trustee the rights of the most favored creditor under state law. Looking to the relevant state law, the court continued:

We think that the Pennsylvania law gives certain lien creditors ( those having levied on a debt contracted subsequent to the voidable sale ) a higher claim than that of a defrauded seller and that such precedent governs this case even assuming the seller to have been defrauded in fact. 278 F.2d at 822.

This conclusion was drawn from pre-Code cases. Though an early version of the Code had been adopted by Pennsylvania, the court concluded that it did not displace pre-Code law giving lien creditors priority over reclaiming sellers.

In In re Mel Golde Shoes, Inc., 403 F.2d 658 (6th Cir. 1968), the court ruled that § 2-702 also does not "displace" state law giving sellers priority over levying creditors. In that case creditors who had extended credit before the seller delivered goods to the insolvent buyer levied attachments on the buyer's inventory the day after delivery. They opposed the seller's subsequent timely demand under § 2-702(2). The court rejected the creditors' argument that § 9-301(b) governs the rights of lien creditors against reclaiming sellers and relied on § 1-103 for the idea that the state common law governed. ³ The court reviewed relevant Kentucky cases and determined that the seller's right to reclaim was superior to the rights of attaching creditors.

The Sixth Circuit reaffirmed the Mel Golde analysis in In Re Federal's Inc., 553 F.2d 509 (1977). See also In re Royalty Homes, 8 U.C.C.Rep.Ser. 61 (Ref.D., E.D.Tenn.1970). In Federal's, a seller sought to recover merchandise delivered to an insolvent buyer on credit from a bankruptcy trustee. The Sixth Circuit again looked to pre-existing state law for the rights of the seller against the trustee as lien creditor. The district court had found no Michigan cases involving the competing claims of a buyer's judicial lien creditor and a reclaiming seller, but some Michigan cases permitted lien creditors who had advanced their consideration after the seller had delivered the goods to the insolvent buyer to prevail. On the basis of these cases, the district court reached the same result as the Third Circuit had in Kravitz. The Court of Appeals reversed, disagreeing with the district court analysis on two grounds. First, the Sixth Circuit expressed its view that a trustee does not assume the rights of an ideal lien creditor as Kravitz had suggested; rather, the trustee becomes "about the lowest form of creditor." 553 F.2d at 514. See Braucher, Reclamation of Goods from a Fraudulent Buyer, 65 Mich.L.Rev. 1281, 1293-94 (1967); Kennedy, The Interest of a Reclaiming Seller Under Article 2 of the Code, 30 Bus.Law. 833, 840-41 (1975). Second, the Michigan cases the district court relied on involved consensual liens granted by the bankrupt, not judicial liens. Section 70(c) grants to the trustee only the rights of creditors who could obtain liens by legal proceedings. In short, the trustee did not stand in the shoes of those creditors allowed to cut off a seller's right of reclamation.

We have discovered a number of pre-Code Missouri cases dealing with the rights of sellers as against creditors. One case, Steinwender v. Creath, 44 Mo.App. 356 (1891), suggested that any attaching creditor may cut off a defrauded seller's right to rescind. That case appears, however, to have confused the right to reclaim for fraud with an unpaid vendor's lien, which was regulated by statute. See Strauss v. Rothan, 102 Mo. 261, 14 S.W. 940 (1890). The general Missouri rule appears to have been the same as the Michigan rule. Those creditors who extended credit after the seller delivered goods and acquired a chattel mortgage without notice of the seller's right of reclamation could cut off the seller's right but those creditors who had extended credit before delivery of the goods could not. See, e. g., Swafford Bros. Dry Goods Co. v. Jacobs, 66 Mo.App. 362 (1896). See also Goebel v. Troll, 71 Mo.App. 123 (1897); H. F. Watson Co. v. Borden, 68 Mo.App. 567 (1897). We have discovered no Missouri cases involving a buyer's judicial lien creditor and a reclaiming seller. See Comment, Bankruptcy Reclamation and the Uniform Commercial Code, 33 Mo.L.Rev. 262, 269 (1968).

Thus, if we were to adopt the Kravitz analysis, we would rule in favor of the trustee because as "ideal" lien creditor, he could cut off the rights of Bassett under pre-Code Missouri law. If we were to adopt the Federal's analysis, we would rule in favor of Bassett because the trustee as the "lowest form of creditor" could not be presumed to have extended credit and obtained a judicial lien on the pertinent goods between the time of their delivery and the demand for their reclamation.

Both the Kravitz and Federal's analyses send the reader to pre-Code law. Pre-Code common law on the relative rights of reclaiming sellers as against lien creditors was neither uniform nor clear. See Bjornstad, Reclamation of Goods by Unsecured Sellers in Bankruptcy Proceedings, 24 Drake L.Rev. 357, 359 (1975); Note, Bankruptcy and Article Two of the Uniform Commercial Code: The Right to Recover the Goods Upon Insolvency, 79 Harv.L.Rev. 598, 608 (1966) (Harvard Note). Incorporating such common law into § 2-702(3) is not...