Griffin Retreading Co., Matter of, 86-5059

• Decision Date: 17 July 1986
• Docket Number: No. 86-5059,86-5059
• Citation: 795 F.2d 676
• Parties: Bankr. L. Rep. P 71,251, 1 UCC Rep.Serv.2d 1187 In the Matter of GRIFFIN RETREADING COMPANY, Debtor. GRIFFIN RETREADING COMPANY, Appellant, v. OLIVER RUBBER COMPANY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 676

795 F.2d 676

Bankr. L. Rep. P 71,251, 1 UCC Rep.Serv.2d 1187

In the Matter of GRIFFIN RETREADING COMPANY, Debtor.

GRIFFIN RETREADING COMPANY, Appellant, v. OLIVER RUBBER COMPANY, Appellee.

No. 86-5059.

United States Court of Appeals,

Eighth Circuit.

Submitted June 13, 1986.

Decided July 17, 1986.

Elizabeth L. Zerby, Minneapolis, Minn., for appellant.

Lauren R. Lonergan, Minneapolis, Minn., for appellee.

Before HEANEY and WOLLMAN, Circuit Judges, and BATTEY, ^* District Judge.

BATTEY, District Judge.

Griffin Retreading Company, debtor in bankruptcy, filed this appeal from the district court's ¹ reversal of an order for summary judgment issued by the bankruptcy court. ² Oliver Rubber Company had requested reclamation of rubber delivered one day prior to the filing by Griffin of a Chapter 11 bankruptcy petition. In the alternative, should Griffin not be able to redeliver the rubber, Oliver requested an administrative expense claim to the extent of its value. The bankruptcy court conceded to Oliver Rubber Company a right of reclamation under 11 U.S.C. Sec. 546(c) of the Bankruptcy Code, but denied administrative expense treatment in the amount of rubber unavailable for redelivery.

The district court, 56 B.R. 239, held that Sec. 546(c) of the Bankruptcy Code did not require a grant of a right to reclaim where the goods were no longer available. The goods had been sold in the ordinary course of business. The court held that the appropriate remedy under Sec. 546(c) was not reclamation, but rather the recovery of the value in the nature of an administrative expense claim to the extent of the value of the goods. The district court accordingly reversed the bankruptcy court and remanded the case for the purpose of granting the administrative expense claim.

For the reasons set forth below, we affirm.

I. BACKGROUND.

Oliver Rubber Company (Oliver) had been a regular supplier of rubber to Griffin Retreading Company (Griffin). Since rubber is a commodity which is not conducive to long-term inventory, Griffin would purchase no more than a usable one-month supply.

On April 12, 1984, Griffin ordered 40,000 pounds of ultratuff rubber. This order was delivered on April 22, 1984. On April 18, 1984, Griffin ordered 130,000 pounds of Oliver's ultratuff rubber to take advantage of a volume discount. Approximately ten days later, on April 27, 1984, Griffin contacted Oliver and asked that part of the April 18 order be delivered on May 2 because Griffin would be out of rubber by that time. At the time of that request Griffin had on hand enough rubber to last it until the end of May 1984. On May 2 Oliver delivered 35,000 pounds of rubber to the debtor and the next day Griffin filed a Chapter 11 bankruptcy petition. On May 10, 1984, Oliver sent a mailgram to Griffin demanding return of the rubber delivered on May 2, 1984. The rubber was never returned. At the time Griffin received the mailgram it still had on hand all of the rubber delivered by Oliver on May 2, 1984, which had a value of $27,922.36 as of May 10, 1984.

Griffin ignored its obligation to return the rubber pursuant to the notice of reclamation and sold the rubber to its retail outlets in the ordinary course of its business. Thus the rubber was no longer in existence to satisfy the demand for reclamation.

A complaint by Oliver was filed on August 20, 1984 (102 days from the date of the demand for reclamation), requesting reclamation ³ of the rubber, or in the alternative, relief in the nature of an administrative expense claim in the amount of the value of the rubber.

It is undisputed that on the date of delivery of the rubber Griffin was insolvent.

The Citizen's State Bank of St. Louis Park held a valid security interest on after-acquired property of Griffin and accordingly would have attained a security interest in the rubber delivered.

II. DISCUSSION.

Section 546(c) of the Bankruptcy Code, 11 U.S.C. Sec. 546(c) (1982) provides that the rights and powers of the trustee are subject to the right of the seller of goods, within certain statutory restrictions, to reclaim the goods from a bankrupt buyer. The seller may exercise any statutory or common law right provided by state law. In re Coast Trading Co., Inc., 744 F.2d 686 (8th Cir.1984). Oliver's right of reclamation is defined by Minn.Stat. Sec. 336.2-702(2) and 11 U.S.C. Sec. 546(c).

The facts indicate an obvious plan on the part of Griffin to obtain an inventory of rubber in excess of its current needs. The day following delivery (May 3, 1984), Griffin filed a Chapter 11 bankruptcy petition. It was insolvent on the date of delivery (May 2, 1984). When Oliver gave the appropriate notice of reclamation on May 10, 1984, pursuant to Minn.Stat. Sec. 336.2-702, it would have been entitled to exercise its reclamation rights to reclaim the delivered rubber, absent the filing of the bankruptcy petition. 11 U.S.C. Sec. 362(a) ⁴ effectively prevented Oliver from proceeding with any state action at law based upon its reclamation rights. A remedy remaining for Oliver was to seek a recovery from the trustee in bankruptcy under Bankruptcy Code 11 U.S.C. Sec. 546(c) (1982).

Bankruptcy Code Sec. 546(c) (1982) ⁵ substantially codifies Minn.Stat. Sec. 336.2-702 but refines the statute by requiring the existence of three predicate limitations: (1) the goods must have been sold in the ordinary course of business, (2) the debtor must have been insolvent on the date of delivery, and (3) a timely demand (10 days after delivery) for reclamation must have been made. The three conditions existed in this case.

Under Sec. 546(c) (1982), while the reclaiming seller has the right (assuming the predicate conditions are met) to reclaim, the right is not an absolute one. If reclamation is denied the court must choose one of two alternatives. Under Sec. 546(c)(2)(A) the court may treat the claim as an administrative expense priority under Sec. 503(b), or under Sec. 546(c)(2)(B) the court may secure such claim by a lien. Such lien is in the nature of a lien on the assets of the bankrupt estate, including the goods so delivered. In re Coast Trading Co., Inc., 744 F.2d 686 at 692; In re Flagstaff Food Service Corp., 14 B.R. 462 at 467.

In this case the right to reclaim was meaningless since Griffin sold the goods thus removing them from the corpus of the bankrupt's assets. The only logical solution would have been to grant the administrative expense under Sec. 546(c)(2)(A) or secure such claim by a lien under Sec. 546(c)(2)(B). The bankruptcy court denied the alternative administrative expense treatment because Oliver failed to immediately seek relief from the automatic stay provisions of the law or to take some other adversary action. The bankruptcy court did not address the alternative remedy of priority lien treatment. Had it done so, presumably its decision would not have been different since the basis for the decision was the delay on the part of Oliver in pursuing its reclamation rights.

The district court held that to require the reclaiming seller to file an adversary action would add an additional requirement or prerequisite to the right of reclamation which was not required by the term of the statute.

There is no question but what Oliver had a right to reclaim on May 10, 1984. No action on the part of the bankrupt should be held to defeat that right. Western Farmers Assoc. v. Ciba Geiga (In re Western Farmer's Assoc.), 6 B.R. 432 (Bankr.W.D.Wash.1980).

The granting of an administrative claim under Sec. 546(c)(2)(A) is not inconsistent with the right to reclaim, but supplements that right. It provides additional protection to a seller who has delivered goods to a bankrupt debtor on the eve of the bankruptcy. It provides flexibility to the bankrupt estate by permitting the use of the property, if needed for the successful completion of the plan of reorganization. In such case the seller is protected without placing the plan in jeopardy.

While one might be inclined to discuss the conduct of Griffin in the context of fraud, the bankruptcy court correctly found that fraud is irrelevant. ⁶

In this case the disposal of the goods by Griffin prevented successful reclamation. To order reclamation where such is impossible to attain is to acknowledge a right without a remedy. Once Griffin received notice of Oliver's intent to reclaim it became obligated to hold the goods for re-delivery to the seller. If Griffin desired to utilize the goods for the purpose of effecting a reorganization then it had the burden of requesting such use from the court. Should the court agree that it was important to the success of the plan to utilize the goods so reclaimed then reclamation may be denied. The court would then address the two ways in which the reclaiming creditor could be protected. To require the reclaiming creditor to follow its demand with an adversarial proceeding would only foster a race to the courthouse. At any rate, one cannot say that 102 days from notice to the filing of an adversarial action is unreasonable.

This court need not address the interest of the secured creditor Citizen's State Bank of St. Louis Park. The conflicting interest of a secured creditor vis-a-vis the rights of the reclaiming creditor, and the question of whether a creditor holding a valid security interest in the debtor's inventory is a good faith purchaser or lien creditor under Minn.Stat. Sec. 336.2-702, must await the day when the conflict between such competing interests is ripe for determination. The court is not unmindful of the various decisions on the subject. See Action Industries, Inc. v. Dixie Enterprises, Inc., 22 B.R. 855 (Bankr.S.D.Ohio 1982); Lavonia Manufacturing Co. v. Emery Corp., 52 B.R. 944 (Bankr.W.D.Wash.1980). However, since this action is not one between the competing interests of the reclaiming creditor and the secured creditor, but rather involves the narrower issue of the appropriateness of granting the alternative...