Federal's Inc., Matter of
| Decision Date | 14 June 1977 |
| Docket Number | No. 75-2490,75-2490 |
| Citation | 553 F.2d 509 |
| Parties | 21 UCC Rep.Serv. 689 In the Matter of FEDERAL'S INC., a Michigan Corporation, Debtor. Appeal of MATSUSHITA ELECTRIC CORPORATION OF AMERICA. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Robert N. Wienner, Katcher, Feldman & Wienner, James M. Wienner, Detroit, Mich., for appellant.
Herbert N. Weingarten, Hertzberg, Jacob & Weingarten, Detroit, Mich., for appellee.
Before WEICK and ENGEL, Circuit Judges and CECIL, Senior Circuit Judge.
In this appeal we consider whether Section 2-702(2) of the Uniform Commercial Code, as enacted in Michigan, grants to a seller of goods a right of reclamation superior to the right of the insolvent buyer's trustee in bankruptcy and if so, whether that right must be invalidated as conflicting with Sections 64 and 67c(1)(A) of the Bankruptcy Act. 11 U.S.C. §§ 104 and 107c(1)(A). The questions raised have been the subject of frequent academic discussion 1 and at least one article has focused directly on the instant case. 2
The facts were stipulated in the district court. On August 10, 1972 Matsushita Electric Corporation (Panasonic) delivered to Federal's, Inc. on credit electronic goods valued at approximately $64,000. On August 16, 1972 Federal's filed a petition under Chapter XI of the Bankruptcy Act and a receiver was appointed. Two days later, on August 18, 1972, Panasonic made timely demand, pursuant to Section 2-702(2) of the Uniform Commercial Code, M.C.L.A. § 440.2702, for the return of the merchandise delivered to Federal's. It was stipulated that Federal's intended to pay for the goods at the time they were ordered and received. 3
Upon these facts the district judge in a carefully considered opinion ruled in favor of the bankruptcy trustee on all issues, In the Matter of Federal's, Inc., 402 F.Supp. 1357 (E.D.Mich.1975).
In seeking to reclaim its merchandise, Panasonic relies upon the right of reclamation granted by § 2-702(2) of the Uniform Commercial Code as enacted in Michigan, M.C.L.A. § 440.2702(2). 4 In resisting that right, the trustee in bankruptcy first asserts that the status conferred upon him by § 70c of the Bankruptcy Act 5 makes him a "lien creditor" under § 2-702(3) to which Panasonic's rights are subordinate.
The district court recognized, as do we, that any resolution of the issue as it arises in this circuit must commence with our decision in In re Mel Golde Shoes, Inc., 403 F.2d 658 (6th Cir. 1968). In that case Johnston & Murphy Shoes delivered a shipment of merchandise to Mel Golde Shoes, only to find them subject to an attachment levied against Golde's inventory by one of Golde's creditors. On February 2, Mel Golde filed a petition under Chapter XI of the Bankruptcy Act, but only after Johnston & Murphy, exercising the right of reclamation under § 2-702(2) as enacted in Kentucky, KRS § 355.2-702(2), made timely demand for the return of the merchandise.
On petition for review the district court ruled that under the Code, Johnston & Murphy possessed an unperfected security interest in the goods within the meaning of U.C.C. § 9-301 and that its right was therefore inferior to the rights of a lien creditor. On appeal this court reversed and rejected the claim that a seller of goods under § 2-702(2) is to be treated as a creditor with an unperfected security interest. Instead, we held that the rights of an unpaid seller under the Code are tantamount to those of a defrauded seller of goods under common law, a view consistent with the Official Comment to § 2-702 that the subsection "takes as its base line the proposition that any receipt of goods on credit by an insolvent buyer amounts to a tacit business misrepresentation of solvency and therefore is fraudulent as against the particular seller". In re Mel Golde Shoes, supra, at 660, quoting the Official Comment. The question then was whether in Kentucky the rights of a defrauded seller of goods were superior to the rights of a lien creditor. Because we reasoned that the question was not resolved by any provision in the Kentucky Code, it was necessary to repair to the pre-Code common law of Kentucky. We concluded that Kentucky conformed to the general rule that a defrauded seller's right to reclaim his goods is superior to that of an attaching creditor.
Despite some dissatisfaction expressed by the bankruptcy judge and the district court concerning the requirement of Mel Golde that the rights of a lien creditor are to be determined by reference to pre-Code state law, see In the Matter of Federal's, supra, at 1359 n. 1, we adhere to that view here. See also, In re Kravitz, 278 F.2d 820 (3rd Cir. 1960).
Michigan's enactment of § 2-702, like Kentucky's, does not provide any express guidance concerning the relative priorities of a seller under § 2-702(2) and the trustee of the bankrupt buyer. 6 As in Mel Golde, we are therefore put to the task of examining pre-existing Michigan law, of applying it to the extent we can ascertain it and making an educated determination of how Michigan courts would deal with the question to the extent it has not been precisely answered.
The district court correctly observed that there are no reported cases in Michigan which involve the competing claims of a buyer's judicial lien creditor and a reclaiming defrauded seller. In a review of numerous early Michigan decisions, Zucker v. Karpeles, 88 Mich. 413, 50 N.W. 373 (1891); Heenan v. Forest City Paint Co., 138 Mich. 548, 101 N.W. 806 (1904); Hoffman v. Lake Shore & Michigan Southern R.R., 125 Mich. 201, 84 N.W. 55 (1900); Cappon & Bertsch Leather Co. v. Preston National Bank, 114 Mich. 263, 72 N.W. 180 (1897) and Schloss v. Feltus, 96 Mich. 619, 55 N.W. 1010 (1893), aff'd on rehearing, 103 Mich. 525, 61 N.W. 797 (1895), the district court concluded that Michigan makes a distinction between lien creditors on the basis of whether the consideration for the lien was advanced before or after the seller had delivered the goods to the insolvent buyer. It concluded that at least to the extent that the consideration was advanced after the delivery of the goods, the rights of the lien creditor were superior to the rights of the reclaiming seller. This line of reasoning, however, required a further inquiry into whether the hypothetical lien creditor under § 70c is to be construed as one whose judgment is based upon a consideration which arose before or after the delivery of the goods. The crux of the district court's ruling is best illustrated in its own words:
However, § 70c does not specify when this hypothetical creditor must have extended to the bankrupt the credit which his lien secures. In Constance v. Harvey, 215 F.2d 571 (2nd Cir. 1954), cert. denied 348 U.S. 913, 75 S.Ct. 294, 99 L.Ed. 716 (1955), it was held that the trustee could step into the gap between the creation and perfection of a chattel mortgage and thus defeat the mortgagee even if the mortgage had been filed and perfected prior to the date of bankruptcy. But in In Re Alikasovich, 275 F.2d 454 (6th Cir. 1960) the Sixth Circuit disagreed with the reasoning of Constance v. Harvey and held that the hypothetical lien creditor must be viewed to have extended the credit and secured his lien as of the date of the filing of the petition in bankruptcy. On appeal to the Supreme Court the Sixth Circuit's decision in Alikasovich was upheld and Constance v. Harvey was specifically overruled sub nom Lewis v. Manufacturers National Bank, 364 U.S. 603, 81 S.Ct. 347, 5 L.Ed.2d 323 (1961).
In this case Federal's petition in bankruptcy was filed before Panasonic's demand and thus the Lewis decision makes it clear that the receiver must be viewed as an "intervening" lien creditor, i. e. one who extended credit and secured his lien between delivery and demand for reclamation. Because this Court has determined that the Michigan courts would have found an intervening lien creditor to have rights and equities superior to those of a reclaiming seller, Panasonic's reclamation petition in bankruptcy must be denied.
Matter of Federal's, Inc., 402 F.Supp. at 1362-3. Although the district court's holding on this point has a certain consistency, we conclude upon reflection that it is in error in two respects.
To endow the hypothetical creditor under § 70c with a priority based upon an imagined superior quality of the underlying indebtedness reads more into the language of Lewis v. Manufacturer's National Bank, 364 U.S. 603, 81 S.Ct. 347, 5 L.Ed.2d 323 (1961), than was intended. The Bankruptcy Act merely premises the existence of a creditor who has obtained a lien by legal or equitable proceedings upon the property of the bankrupt. It does not endeavor to spell out either the kind or quality of debt which formed the basis for the lien. In this respect we think the district court erred much as did the court in Constance v. Harvey, 215 F.2d 571 (2d Cir. 1954), cert. denied, 348 U.S. 913, 75 S.Ct. 294, 99 L.Ed. 716, by seeking to establish a sort of hypothetical super creditor. Such an approach is inconsistent with the holding in our circuit that In re Richards, 455 F.2d 281, 284 (6th Cir. 1972). In re Clemens, 472 F.2d 939 (6th Cir. 1972); In re Alikasovich, 275 F.2d 454 (6th Cir. 1960); In re Troy, 490 F.2d 1061 (6th Cir. 1974); In re Easy Living, Inc., 407 F.2d 142 (6th Cir. 1969).
In Constance v. Harvey, supra, a trustee in New York was permitted under § 70c to assume the position of a hypothetical creditor who...
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