Action Industries, Inc. v. Dixie Enterprises, Inc.
| Decision Date | 31 August 1982 |
| Docket Number | Adv. No. 3-82-0078,Bankruptcy No. 3-81-02812. |
| Parties | ACTION INDUSTRIES, INC. (DOLLARAMA), Plaintiff, v. DIXIE ENTERPRISES, INC., Debtor-in-Possession, Provident Bank of Cincinnati, First National Bank of Dayton, Defendants. In the Matter of DIXIE ENTERPRISES, INC., Debtor. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio |
Ira Rubin, Dayton, Ohio, for debtor.
Garry O'Donnell, Peter Donahue, Dayton, Ohio, for plaintiff.
Walter Reynolds, William Smith, Dayton, Ohio, for First National Bank.
Don R. Gardner, Cincinnati, Ohio, for Provident Bank.
DECISION AND ORDER
Debtor, Dixie Enterprises, Inc. (Dixie), is an Ohio Corporation doing business as a retailer of various hard goods and other merchandise at retail from various stores. For several years Dixie had purchased some of its inventory from Action Industries, Inc. (Action) on open credit account, with a balance owing of $114,810.29 on 24 September 1981.
In the ordinary course of business Dixie received a delivery of ordered merchandise on account at $40,376.60 on 24 September 1981. On 5 October 1981, Dixie disclosed to Action it was insolvent. On the same day Action by a mailgram demanded return of the merchandise.
On 6 October 1981 Dixie filed a voluntary petition for relief seeking reorganization under Chapter 11 of the Bankruptcy Code.
Prior to the delivery by Action, The Provident Bank (Provident) as Dixie's major inventory financer has held the first and best perfected security interest since September 1973 in Dixie's present and afteracquired inventory, equipment, accounts, fixtures, contract rights, general intangibles and all proceeds thereof.
By application and court order entered on 3 December 1981 Dixie was duly authorized as Debtor-in-Possession to borrow pursuant to 11 U.S.C. § 364(c)(2), (3) up to $650,000.00 from Provident for the purpose of purchasing merchandise in the continued operation of its business, secured by a continuing security interest and a first priority over all administrative expenses.
On 16 February 1982 Action filed in the bankruptcy court a complaint for reclamation of the merchandise delivered to Dixie on 24 September 1981.
On 30 April 1982 the Official Creditors' Committee filed action for appointment of a Trustee or conversion to a case under Chapter 7 of the Bankruptcy Code. On 2 August 1982 an order converting to Chapter 7 was filed by the Court.
This matter is now before the Court upon motions to dismiss by Dixie, Provident, and The First National Bank (as participating Bank). By stipulation the time for filing briefs was extended until 18 June 1982 for Action to file a response memorandum.
Initially, before reaching the questions as to validity and priority of the respective interests claimed, a question has been raised as to the timeliness of notice of reclamation given by Action to Dixie on 5 October 1981.
In the case at bar, the Debtor received the goods on Thursday, September 24, 1981. This was a credit transaction. On October 5, 1981 the Debtor informed the Seller that it was insolvent. Upon receipt of such information Action sent a mailgram, dated October 5, 1981, of intent to reclaim the goods. None of the above stated facts are in dispute. However, as to whether the Seller has properly reclaimed goods in the Debtor's possession within 10 days of receipt of such goods by the Debtor is hotly contested. Action claims that according to Rule 6(a) of the Federal Rule of Civil Procedure its written demand for reclamation was timely. According to Action's theory counting from September 25th, the 10th day inclusive is Sunday, October 4, 1981; and because the 10th day falls on a Sunday, the demand period runs until the end of the next day which is not a Saturday or Sunday. Action then concludes that because written demand was on Monday, October 5, 1981 its demand for reclamation was within the prescribed time period. See 11 U.S.C. § 546(c).
The defendants argue that if the days between September 24, 1981 and October 5, 1981 are counted, without including September 24, then the ten day period provided for expired on October 4, 1981; and therefore demand for reclamation was made on the eleventh day, which does not comply with the statute and thus no relief can be granted.
The proper methods of computing periods of time remains an open question. See 74 Am. Jur. 2d, Time § 15 at 599. Rule 6(a) of the Federal Rules of Civil Procedure (B.R.P. 906(a)) does not provide a general rule of statutory construction. The Advisory Committee suggests B.R.P. Rule 906(a) should apply by analogy to the Uniform Commercial Code. See Comment to B.R.P. 906(a) in Collier Pamphlet Edition, Part II, Bankruptcy Rules (1981). Also 2 Moore's Federal Practice ¶ 6.061 states "in the absence of a contrary and controlling rule of construction, ... justice will be served by applying the principle of Rule 6(a) of the F.R.C.P. B.R.P. 906(a) by analogy." It may be noteworthy that Section 31 of the Bankruptcy Act excluded the first day and included the last. In re Behring, 5 U.C.C. Rep. Serv. 600 (N.D. Tex. 1968). Ohio Revised Code Section 1.14 states, in pertinent part, that the "first day is excluded and the last day is included in computing time; except that when the last day falls on Sunday, then the act may be done on the next succeeding day which is not a Sunday." The rule found in this section providing how time shall be computed, applies to any "act required by the law" to be performed. O.R.C. § 1.14.
Also as a general rule, where an act is required to be done a specified number of days "before" an event, the required number of days is to be computed by excluding the day on which the act is done and including the day on which the event is to occur. 74 Am.Jur.2d Time § 24 and Note 5.
It is the conclusion of this Court that it is appropriate, under the facts as given, and all of the cited provisions of law applicable, to begin counting from September 25, 1981, inclusive, the 10th day would be October 4, 1981. Since the 10th day falls on a Sunday the demand period runs "until the end of the next day which is not a Sunday." O.R.C. § 1.14. The reclamation notice being timely, the more crucial questions raised must be addressed.
The motions to dismiss raise the question of whether or not Action would be entitled to any relief under any state of facts which can be proved in support of its complaint. If there is any legal basis for recovery, obviously the motions in their many details must be forestalled pending submission of evidence.
It is initially important to note that 11 U.S.C. § 546(c) and the stated legislative purpose underlying this provision to recognize the applicability to a degree of the Uniform Commercial Code § 2-702 (O.R.C. § 1302.76) in the context of bankruptcy proceedings1 does not bear the thrust of all relief requested by Action.
Under the "strong arm" effect of Section 70c of the Bankruptcy Act giving the trustee the status of a judicial lien creditor, the attempted reclamation by a seller would be defeated by the trustee in bankruptcy. Under the decisions of nearly all states prior to enactment of the Uniform Commercial Code (UCC) however, the lien creditor was subject to the rights of a reclaiming seller asserting fraud, even as against an intervening trustee in bankruptcy ("the ideal lien creditor"). Respected authority then precipitated endless dialogue in commercial circles by holding, in effect, that the common law theories no longer prevail because the answer lies in the Uniform Commercial Code. See In re Kravitz, 278 F.2d 820 (3d Cir. 1960).
The Permanent Editorial Board for the Uniform Commercial Code then drafted and promoted a change in Section 2-702(3) deleting "or lien creditor" for the purported purpose of uniformity among the states. The legislature of Ohio has not adopted the proposed change (O.R.C. § 1302.76). The Court of Appeals for the Sixth Circuit, nevertheless, has declined to follow the conclusion of In re Kravitz, rather looking to Kentucky and Michigan common law, which have the same 1962 version of U.C.C. § 2-702 as Ohio (O.R.C. § 1302.76, never having adopted the 1966 amendment omitting "lien creditor"). See In re Mel Golde Shoes, Inc., 403 F.2d 658 (6th Cir. 1968) and Matter of Federals, Inc., 553 F.2d 509 (6th Cir. 1977).
This brief background resume is important, to understand that 11 U.S.C. § 546(c)2 does not affect the rights of parties claiming an interest other than the lien rights of a trustee in bankruptcy (and debtor-in-possession). State law is still pertinent as to other lien creditors. §§ 1302.76 Ohio Revised Code.3
If there were no other lienholders, and the goods in question were still in possession of the Debtor-in-Possession (no good faith purchasers) the right of Action to reclaim could be determined strictly according to the teaching of In re Mel Golde Shoes, Inc., 403 F.2d 658 (6th Cir. 1968). That decision, however, involved the right to reclaim goods and did not involve proceeds of sales. The case does hold that a defrauded seller's reclamation rights are superior to the rights of attaching creditors on the basis of the common law (in Kentucky).
Hence, Provident Bank's security interest is not affected by the rights of Action derived from 11 U.S.C. § 546. Section 1302.76 O.R.C. expressly protects good faith purchasers or secured parties. Provident by statutory definition qualified as both. O.R.C. §§ 1301.01(FF), (GG)4 (U.C.C. 1-201).
In addition to its pre-Chapter 11 "floating lien," Provident's interest is protected by the Cash Collateral Order entered on 6 October 1981, which grants "priority over any and all administrative expenses," conformably to Section 364(c) and 507(b) of the Code, "and a continuing security interest."
A right to reclamation is literally an in rem right. It must be implemented by immediate possession. Section 546 must and can be invoked...
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