In re Furniture Distributors, Inc.

• Decision Date: 14 September 1984
• Docket Number: Bankruptcy No. 84-879-HL.
• Citation: 45 BR 38
• Parties: In re FURNITURE DISTRIBUTORS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

45 B.R. 38 (1984)

In re FURNITURE DISTRIBUTORS, INC., Debtor.

Bankruptcy No. 84-879-HL.

United States Bankruptcy Court, D. Massachusetts.

September 14, 1984.

Henry J. Boroff, Framingham, Mass., for debtor.

Judy K. Mencher, Goodwin, Proctor & Hoar, Boston, Mass., for movants P & W Distributors, Inc., Jofran Sales, Inc., and Stoneville Furniture Co.

Richard E. Mikels, Peabody & Brown, Boston, Mass., for Creditors Committee.

MEMORANDUM DENYING RECONSIDERATION AND REOPENING

HAROLD LAVIEN, Bankruptcy Judge.

This matter most recently came before the Court on counsel's Motion for Reconsideration, for an Amendment of the Findings or, in the Alternative, for a New Trial on the Denial of the Reclamation Claims based upon the failure to prove insolvency.¹ Hearing was held on August 30, 1984. Counsel conceded that "bankruptcy," or "balance sheet," insolvency was unproven. Counsel, however, argued that 11 U.S.C. § 546(c)² tracked the Uniform Commercial Code ("UCC"), specifically UCC § 2-702,³ which permits proof of equity insolvency— the inability of the debtor to pay its bills as they come due. Further, it was argued that the Court prevented counsel from exploring this area or, in the alternative, that counsel had decided that, not needing to prove balance sheet insolvency, counsel should be provided with an additional opportunity to prove equity insolvency based upon events subsequent to the initial hearing. Counsel also argued that the filing of the involuntary coupled with the debtor's answer converting to Chapter 11 constituted an admission of equitable insolvency. Finally, it was argued that as a matter of equity, counsel's clients are entitled to another opportunity to prove their case. Motion denied.

In the case at bar, the motions for reclamation were first heard on August 8, 1984. Movants' reclamation motions were grounded upon 11 U.S.C. § 547(c) and Mass.Gen.Laws ch. (UCC) 106 § 2-702. Scheduled at the same time was a hearing on the sale⁴ of all of the inventory of Puritan Furniture Corp., another chapter 11 debtor who had actual possession of any of the goods⁵ in question. Although an expedited determination of the reclamation motions would not appear to have been necessary because the Court offered counsel an alternative that would have permitted hearing of the reclamation motions at a later date.⁶ Counsel for both debtors, the Creditor's Committee, and other creditors, opposed the expedited determination of the reclamation because of insufficient time to be fully prepared; however, counsel declined the offer and insisted on the need of proceeding on the reclamation on the basis of the expense and potential unavailability of out-of-town witnesses who were then present. After presenting two witnesses and eight pieces of documentary evidence, counsel rested. The Court noted, however,

If that concludes the evidence, unless I missed something, there is one essential piece of evidence that has not been submitted; and it would seem that, unless I\'ve missed it, because I\'m not going to reopen the evidence now to take new evidence, that there\'s a fatal gap here.

I don\'t recall any evidence that was offered that Furniture Distributors, Inc. was insolvent on the date that the goods were shipped. Did I miss it? Was it there somewhere?

Transcript pp. 66-67. Counsel was not able to point to any specific evidence. Instead, counsel alluded to the reclamation motions and the 2-702 telegram. Those items were rejected by the Court as unproven allegations, obviously not admitted or the present contested proceeding would have been unnecessary. Additionally, counsel noted the debtor's assent to the bankruptcy involuntary petition (transcript p. 73). That was also rejected by the Court as containing no probative weight as evidence. Actually, there was no admission but an answer assenting to the court jurisdiction and converting the case to Chapter 11 which did not require insolvency in either sense. Despite the Court's proposed rulings, the Court took a supper recess from the "long, hot day" to consider counsel's oral motion to reconsider the Court's finding and to reopen the evidence. When court resumed, the Court reopened the evidence despite the objection of at least one party on counsel's assurances that insolvency could be proven "easily," and in equity and fairness to the clients, she should be given an opportunity to correct the oversight of an obvious fact. No request for additional time was made. Accordingly, a witness was called and examined without any limitation imposed by the Court, but no evidence was produced of insolvency in either the balance sheet or equity sense. Counsel did not claim surprise and request a continuance. The motions for reclamation were denied.

Reconsideration is permitted in the cases of:

(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud (whether heretofore denominated intrinsic or extrinisic), misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; (5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment.

Fed.R.Civ.P. 60(b), made applicable to bankruptcy procedure by Bankruptcy Rule 9024. Reopening is permitted

in an action tried without a jury, for any of the reasons for which rehearings have heretofore been granted in suits in equity in the courts of the United States.

Fed.R.Civ.P. 59(a), made applicable to bankruptcy procedure by Bankruptcy Rule 9023. Although the rules have granted the Court broad discretion to decide the motion in question, such discretion cannot be described as limitless.

Of all of the arguments presented by counsel, the most intriguing is that "insolvency" for the purposes of reclamation includes not only a "balance sheet" analysis, 11 U.S.C. § 101(26)(A), but also an "equity" test, the non-payment of debts in the ordinary course of business. Mass.Gen. Laws ch. 106 (UCC) § 1-201(22). In sum, 11 U.S.C. § 546(c) is the exclusive remedy for creditor reclamation claims. In re Koro Corp., 20 B.R. 241, 243 (Bankr. 1st Cir.1982), affirming 10 B.R. 767 (Bankr.D. Ma.1981). However, § 546(c) recognizes the "statutory right or common law right of a seller, in the ordinary course of such seller's business, of goods to the debtor to reclaim such goods. . . ." "The purpose of the provision is to recognize, in part, the validity of section 2-702 of the Uniform Commercial Code. . . ." Senate Report No. 95-989, 95th Cong.2d Sess. 86-87 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5872-5873. Accordingly, § 546(c)'s endorsement of statutory and common law rights would imply use of similar statutory and common law definitions to construe and interpret such rights. In re Maloney Enterprises, Inc., 37 B.R. 290, 11 B.C.D. 764, 766 (Bankr.E.D.Ky. 1983); see also, In re Creative Buildings, Inc., 498 F.2d 1 (7th Cir.1974); In re Mel Golde Shoes, Inc., 403 F.2d 658 (6th Cir. 1968); In re Kirk Kabinets, Inc., 393 F.Supp. 798, 15 U.C.C.R.S. 746, 748 (Bankr. M.D.Ga.1975). Thus, the UCC definition of insolvency would apply to any application of a UCC remedy. See, Mann & Phillips, Section 546(c) of the Bankruptcy Reform Act: An Imperfect Resolution of the Conflict Between the Reclaiming Seller and the Bankruptcy Trustee, 54 Am.Bankr. L.J. 239, 262, n. 116 (1980) (arguing that "the obvious intent of the Bankruptcy Code drafters to track the language of UCC § 2-702(2)"). Moreover, when the writers of the Bankruptcy Code wanted to draw specific exception to the UCC, a specific subsection was written. Yet, all the terms of a statute must be read as meaningful. Still, one could argue that the term "insolvent" could be read merely to excluded non-insolvency reclamation rights. Mass.Gen.Laws ch. 106 (UCC) § 2-507; see also, Quinn's Uniform Commercial Code Commentary and Law Digest, § 2-507(A) (1978 Ed. and 1984 Cumulative Supplement No. 1).

But, is § 546(c) a mirror image of the UCC provisions of § 2-702? A careful reading reveals at least four important differences. First, they start from a different point of reference. Section 546(c) is a limitation on the avoiding powers of the trustee and, like all limitations, are generally strictly construed⁷ while § 2-702 is intended as a liberal provision to aid the seller. Second, in keeping with this difference in emphasis, the demand for reclamation in bankruptcy must be in writing while no such limitation is required by the UCC. Third, § 547(c) has an ordinary course of business requirement. Finally, § 547(c) requires that the goods be delivered while insolvent, a rather superfluous statement unless the words are to have a meaning other than those of the UCC.

The proper application of § 547(c) involves a two-step process—first, the Bankruptcy Act requirements must be met and then, and only then, do we look to see if there is any statutory or common law right.

The bankruptcy requirement is, first, the goods must be delivered in the ordinary course while the debtor is insolvent, and then, the demand must be in writing within ten (10) days. 11 U.S.C. § 101(26) defines insolvency as the "financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation. . . ." Section 101 of title 11 (the Bankruptcy Code), wherein the above definition is contained, begins with the following "§ 101 Definitions: In this title. . . ." It is black-letter law that

Where the language of a statute is clear, it must be complied with, even though the statute contains a provision for liberal construction. No objection can be made because the statutory definitions differ from

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