In re Flagstaff Foodservice Corp., Bankruptcy No. 81 B 11430(PBA) to 81 B 11436(PBA)

• Decision Date: 14 January 1986
• Docket Number: Adv. No. 82-6286-A.,Bankruptcy No. 81 B 11430(PBA) to 81 B 11436(PBA)
• Citation: 56 BR 899
• Parties: In re FLAGSTAFF FOODSERVICE CORP., et al., Debtors. ALLSTATE FABRICATORS CORP., Plaintiff, v. FLAGSTAFF FOODSERVICE CORP. and General Electric Credit Corporation, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

56 B.R. 899 (1986)

In re FLAGSTAFF FOODSERVICE CORP., et al., Debtors ALLSTATE FABRICATORS CORP., Plaintiff, v. FLAGSTAFF FOODSERVICE CORP. and General Electric Credit Corporation, Defendants.

Bankruptcy Nos. 81 B 11430(PBA) to 81 B 11436(PBA), Adv. No. 82-6286-A.

United States Bankruptcy Court, S.D. New York.

January 14, 1986.

Robert Herzog, New York City (Robert P. Herzog and John Pereira, of counsel), and Marshall G. Kaplan, Brooklyn, N.Y., co-counsel, for Allstate Fabricators Corp.

Levin, Weintraub & Crames, New York City (Mitchell Perkiel and Vincent Torna, of counsel), for debtors.

Raff, Scheider & Wiener, Newark, N.J. (Jeremy Galton, of counsel), for Gen. Elec. Credit Corp.

Robert Fisher, Fisher, Hecht & Fisher, New York City, Trustee.

PRUDENCE B. ABRAM, Bankruptcy Judge:

On October 21, 1982, Allstate Fabricators Corp. (hereinafter "Allstate") commenced this adversary proceeding against Flagstaff Foodservice Corp. ("Foodservice"), then a Chapter 11 debtor. Subsequently, on June 28, 1984, an order was signed converting the cases to Chapter 7 and a Chapter 7 trustee thereafter appointed.

The complaint has three counts: Count I seeks to reclaim certain kitchen equipment (the "Equipment") having an invoice price of $29,287 delivered to the debtor on July 14, 1981 in reliance on Uniform Commercial Code ("UCC") § 2-702 and Bankruptcy Code § 546(c); Count II seeks to recover the Equipment or its value on the theory that the goods were received by the debtor with an intent to defraud Allstate; and Count III seeks reimbursement for attorney's fees pursuant to Section 276-a of the New York Debtor-Creditor Law. On December 21, 1982, an amended complaint was filed adding General Electric Credit Corporation ("GECC") as a defendant because GECC as a secured creditor might claim an interest in the Equipment or its value or the account receivable generated by Flagstaff's sale of the Equipment.

Foodservice's answer denies the material allegations of the amended complaint and avers that Counts II and III fail to state a claim upon which relief can be granted. The answer further states that at the time of the receipt of the reclamation demand, the Equipment had already been sold and shipped to a customer and that, absent possession of the goods, Counts I and II must be denied. GECC also filed an answer. GECC's answer asserts five separate defenses: 1) Counts II and III fail to state a claim upon which relief can be granted; 2) Foodservice was not insolvent at the time of receipt of the Equipment or of the reclamation demand; 3) the Equipment had been sold and shipped to a customer by the time reclamation demand was made; 4) proper and timely demand was not made; and 5) any money judgment under Count III would not have priority in payment over GECC by virtue of the order of the bankruptcy court dated July 29, 1981 approving a financing agreement with GECC.

A trial was held on June 14 and 23, 1983 at which time the court heard testimony from two witnesses and a number of documents were received in evidence. Although the parties were directed to submit a pretrial order, no order was agreed upon as GECC objected to virtually all of the proposed facts. The supposed disputes have been generally resolved in favor of Allstate in the court's findings; notwithstanding this, the court's legal conclusions favor GECC. The effect of the contentiousness on factual matters, which should have been unnecessary, has been to force the court to consider and resolve the numerous small legal points raised which will have collateral (and generally adverse to GECC) effect on GECC's pending motion for reconsideration of several other previously allowed reclamation claims. See Footnote 2.

Based on its findings of fact, the court concludes that Count I fails to state a claim on which relief may be granted. Allstate's reclamation demand under § 546 fails because, although proper and timely demand was made and insolvency existed, the Equipment was not shown to have been on hand at the time reclamation was sought. Count II also fails to state a claim for relief because GECC's pre- and post-petition security interests in accounts receivable, including the proceeds of the sale of the Equipment, are superior to the claim to the proceeds made by Allstate, a seller who did not retain a purchase money security interest. As Counts I and II fail, Count III must necessarily fail.

The facts are as follows: on July 21, 1981, Foodservice and six of its subsidiaries (collectively "Flagstaff") filed petitions for reorganization under Chapter 11 of the Bankruptcy Code.¹ At the time of the filings, Flagstaff was actively engaged in the institutional food service and distribution business. One of the filing subsidiaries, Flagstaff Foodservice Co. of New England, Inc. ("Flagstaff-New England") operated a food distribution business in the New England area from premises located at One Venus Way, Attleboro, Massachusetts. Another subsidiary, Flagstaff Foods Corp. ("Foods") had a warehouse and distribution center at 536 Fayette Street, Perth Amboy, New Jersey.

At the time the Chapter 11 petitions were filed, GECC held security interests in all of Flagstaff's inventory and accounts receivable, as well as substantially all other assets of the debtors, as a result of a loan agreement entered into on November 29, 1978. The outstanding prepetition indebtedness to GECC was approximately $22 million. Each of the debtors was jointly and severally liable to GECC for this amount. On or about July 21, 1981, Flagstaff obtained a court order authorizing an emergency borrowing arrangement with GECC. On July 29, 1981, the bankruptcy court approved an order authorizing the debtors in possession to borrow from GECC on a secured basis and granting to GECC a super-priority status. Although the order originally submitted would have granted GECC a lien superior to any prior or later lien, the court amended the order to provide that GECC's super-priority status was subject to the following:

"Except for administration claims fixed by court order pursuant to § 546(c)(2) of the Bankruptcy Code to which GECC liens and administration claims shall be subordinate."

The July 29 GECC financing order and reclamation demands by other entities in this case have been the subject of several decisions and familiarity with the earlier decisions will be presumed. See In re Flagstaff Foodservice Corporation (McCain Foods, Inc. v. Flagstaff Foodservice Company New England, Inc.), 14 B.R. 462 (Bktcy.S.D.N.Y.1981) (Seller of frozen french filed potatoes entitled to reclamation under Code § 546 only to extent that the foodstuffs were in debtor's possession on date of seller's demand for reclamation); In re Flagstaff Foodservice Corporation (General Electric Credit Corp. v. Levin & Weintraub, et al.), 739 F.2d 73 (2d Cir.1984) (Flagstaff I) (Attorneys not entitled to payment from GECC's collateral because services were not for the benefit of GECC); In re Flagstaff Foodservice Corporation (General Electric Credit Corporation v. Peltz, et al.), 762 F.2d 10 (2d Cir.1985) (Flagstaff II), reversing district court's affirmance of 29 B.R. 215 (Bankr.S.D.N.Y.1983) (GECC's superpriority security interest would not be subordinated to outstanding payroll taxes incurred during Chapter 11 absent proof of direct benefits received by GECC or GECC's consent); and In re Flagstaff Foodservice Corp., 32 B.R. 820 (Bankr.N.Y.1983) (court denied motion to vacate orders allowing reclamation claims and permitted GECC to move for reconsideration of certain order allowing reclamation claims).²

The reclaiming creditor in this adversary proceeding, Allstate, is in the business of fabricating kitchen equipment. The Equipment Allstate is seeking to reclaim was specially fabricated to order for a Flagstaff customer. At trial, it was asserted that there is some uncertainty about which one of the Flagstaff entities was the buyer. Allstate's invoice for the Equipment is addressed to "Flagstaff Foodservice Co., One Venus Way, Attleboro, Massachusetts 02703". There is no entity in the Flagstaff group bearing that exact name. The proper legal name of the corporation using that address was Flagstaff Foodservice Co. of New England, Inc. The parent company was Flagstaff Foodservice Corporation, not Co. The invoices sent by the debtors seeking payment from Flagstaff's customer are on a printed form captioned "Flagstaff Foodservice Co. New England Division" and give the Attleboro address. The bottom of the invoice reads "Hartford Division — 24 East Newberry Road, Bloomfield, Connecticut * * * Metropolitan New York Division — Flagstaff Foods Corp. — Perth Amboy, N.J." The check ultimately received in payment of the invoices was payable to "Flagstaff". The court finds that Allstate intended to deal with Flagstaff-New England and that Flagstaff-New England intended to be and was the buyer of the Equipment.

Mary Casey, bookkeeper and office manager for Allstate testified that on July 14, 1981, the Equipment was picked up from the Allstate premises by an independent trucker hired by Flagstaff. Although Allstate had indicated in its pretrial order that it would call a representative of the trucking company as a witness, no such witness testified at trial. The Allstate purchase order signed by the trucker when picking up the goods offers scant help in ascertaining the first destination of the goods. The Flagstaff-New England Attleboro address appears at the top of the purchase order, which also states that the crates were "marked for: Schuwayer Worker's Camp." Attleboro, Massachusetts; Perth Amboy, New Jersey; and Newark, New Jersey, the three probable destinations of the equipment, are all less than a day's drive from Allstate's facilities in Rhode Island. The bills of lading were not introduced at trial.

After the Equipment was picked up, Mrs. Casey received a telephone call from a Flagstaff sales representative who informed her that...