In re Imports
| Decision Date | 10 September 2014 |
| Docket Number | No. 13–15929 SR.,13–15929 SR. |
| Citation | 516 B.R. 296 |
| Parties | In re WORLD IMPORTS, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
OPINION TEXT STARTS HERE
George M. Conway, United States Trustee, Philadelphia, PA, for U.S. Trustee.
John E. Kaskey, Braverman Kaskey, P.C., Philadelphia, PA, for Debtor.
Before the Court are the Requests of Sunrise Furniture Co. Ltd. (Sunrise) and Weisheng Zhangzhou Industrial (Weisheng) for Payment of Administrative Expenses. Both the Debtor and the Official Committee for the Unsecured Creditors oppose the Requests. For the reasons set forth below, the request of Sunrise will be denied in its entirety. The request of Weisheng for the same relief will be granted in part and denied in part.1
Sunrise and Weisheng base their entitlement to administrative priority upon their having sold goods to the Debtor within a short period of time prior to its bankruptcy filing. The Bankruptcy Code provides that “[a]fter notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including—the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business.” 11 U.S.C. § 503(b)(9). The language of the statute provides for the allowance of an administrative claim provided the claimant establishes: (1) the claimant sold “goods” to the debtor; (2) the goods were received by the debtor within twenty days prior to filing; and (3) the goods were sold to the debtor in the ordinary course of business. In re Goody's Family Clothing, Inc., 401 B.R. 131, 133 (Bkrtcy.D.Del.2009) (emphasis added).
This section is an exception to the treatment of unsecured creditors who supply goods or services prepetition. In re Pilgrim's Pride Corp., 421 B.R. 231, 240 (Bkrtcy.N.D.Tex.2009). It is intended to work in conjunction with § 546(c) for sellers who have valid reclamation claims. Ningbo Chenglu Paper Products Mfg. Co., Ltd. v. Momenta, Inc. (In re Momenta, Inc.), 11–cv–479, 2012 WL 3765171, at *4 (D.N.H. Aug. 29, 2012). Section 503(b)(9) “provides a supplemental remedy for those sellers who would be preferred reclamation sellers, but for a minor disqualification under section 546(a).” Id. Not being intended to create a new class of creditors, § 503(b)(9) is to be strictly construed. See Howard Delivery Serv. Inc. v. Zurich Am. Insur. Co., 547 U.S. 651, 655, 126 S.Ct. 2105, 2106, 165 L.Ed.2d 110 (2006) (). A claimant seeking allowance of an administrative claim bears the initial burden of proof. Goody's, 401 B.R. at 137 n. 27.
The matters have been submitted to the Court on a stipulated evidentiary record and there are no facts in dispute. The parties agree on two of the three elements required for priority under § 503(b)(9): (1) that the claimants sold goods to the Debtor and (2) that such sales occurred in the ordinary course of the Debtor's business. That leaves only the question of whether the Debtor received the goods within the 20 days prior to bankruptcy. In this regard, the operative dates, in particular, are not in dispute and are found in the supporting documents attached to both claims. Each claim is comprised of more than one order for the purchase of goods. For each such order, there is a set of four documents: Purchase Order, Packing List, Commercial Invoice, and Bill of Lading. As to the Sunrise claim, two shipments of goods originated from China and were shipped from Shenzhen on June 19 and June 23, 2013. Both of the Sunrise shipments were delivered directly to customers of the Debtor (i.e., “drop-shipped”) on July 13 and July 18, 2013. As to the Weisheng claim, three shipments of goods likewise originated from China and were shipped from Xiamen on June 13 and June 17, 2013. Two of the three Weisheng shipments were “drop-shipped” and the third shipment was delivered directly to the Debtor. These deliveries occurred on July 13 and July 17, 2013, respectively.
There are two issues for the Court to address, the first is legal and the second factual. The legal issue arises because four of the five shipments were delivered directly to the Debtor's customers. Just one shipment went directly to the Debtor. It is the Debtor's position that a drop-shipment is not received by the retail merchant and so it can never qualify for administrative priority status under § 503(b)(9).
The factual issue pertains to the one Weisheng shipment which did go directly to the Debtor. For that shipment to attain priority, the record must reflect that it was received by the Debtor within 20 days prior to bankruptcy.
On the question of whether a retail merchant ever “receives” drop-shipped goods the Debtor maintains that every case to consider the question has held that § 503(b)(9) applies only if the debtor physically received goods and not merely the value of the goods with in the requisite time period. Debtor's Objection, 4. The claimants respond that the Uniform Commercial Code recognizes that receipt of goods by a buyer includes receipt by the buyer's representative or subpurchaser. Sunrise/Weisheng Letter Brief, 5. Other than that statutory authority, the claimants rely on an article in a trade journal wherein the author opines that drop-shipped goods should be deemed to have been received by the debtor for purposes of § 503(b)(9). Id.
Of the four cases cited by the Debtor for the proposition that drop shipments are never received by a debtor, the Court finds two of the four cases particularly helpful to its analysis.2 In In re Plastech Engineered Products, Inc., 394 B.R. 147 (Bkrtcy.E.D.Mich.2008), the seller of goods argued that although the goods were delivered directly to a customer of the debtor, the debtor need not receive the goods in order to claim administrative priority. Id. at 153 Instead, argued the seller, the debtor's receipt of the value of the goods should suffice. The Bankruptcy Court rejected the reasoning based on the express language of § 503(b)(9). Id. at 161
The case which is most useful for present purposes is the District Court of New Hampshire's decision in Ningbo, supra. In that case, the Court undertook a thorough analysis of the history of section 503(b)(9) to determine the meaning of “receipt”
Congress did not define the term “received” as it is used in Section 503(b)(9). Nor is that term defined elsewhere in the Bankruptcy Code. But it appears that Congress intended that the term, as used in Section 503(b)(9), should be construed consistently with the reclamation section of the Code, Section 546(c). As the bankruptcy court correctly noted, changes made to the Bankruptcy Code in 2005 suggest an intent to create a priority administrative expense as a supplemental remedy for reclamation sellers, and not, as Ningbo argues, a priority remedy for all sellers who deliver goods pursuant to a contract with the debtor and within twenty days preceding bankruptcy.
Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Section 546(c)(2) allowed a “ ‘court [to] deny reclamation to a seller with such right of reclamation that has made such a demand,’ but ‘only if the court’ ” awarded an administrative expense claim or secured the seller's “ ‘claim by a lien.’ ” Dana Corp., 367 B.R. at 414 (quoting 11 U.S.C. Sec. 546(c)(2) prior to BAPCPA). In other words, before BAPCPA, an administrative expense priority served as an alternative remedy to reclamation, but only if the seller met Section 546(c)'s notice requirement. [citations omitted]
In 2005, BAPCPA modified the reclamation rules under an amendatory provision titled “Reclamation.” See Sec. 1227 “Reclamation,” Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109–8, § 1227(b), 119 Stat. 23, 119–200. The provision deleted language in Section 546(c)(2) authorizing courts to allow an administrative expense claim ( i.e., allow a cash payment in lieu of reclamation) where a seller had otherwise made a proper reclamation demand. See In re TI Acquisition, LLC, 410 B.R. 742, 745–46 (Bankr.N.D.Ga.2009) (detailing legislative changes). It also added new language to Section 546(c) specifying that, even if “a seller of goods fails to provide notice in the manner described [in Section 546(c)(1), it] still may assert the rights contained in Section 503(b)(9).” 11 U.S.C. Sec. 546(c)(2). Finally, it added Section 503(b)(9), providing an administrative priority claim for goods the debtor received within twenty days before bankruptcy. See In re TI Acquisition, 410 B.R. at 746.
Ningbo, supra, 2012 WL 3765171, at **4–5. While “Congress meant to expand and clarify the rights of reclamation sellers, [it] did not intend to quietly create a new and expansive creditor class entitled to a unique priority.” Id. at *5 The Ningbo Court also observed that such an intent comported with the policy behind Chapter 11 reorganizations:
[A] narrow reading of Section 503(b)(9), that reserves its remedy for would-be reclamation sellers, would likely enhance prospects for successful reorganization, while respecting creditor equality principles. Because the debtor must set aside cash to pay priority administrative expenses, the larger the class of creditors entitled to 503(b)(9) relief, the larger the potential cash reserve needed, and the less likely a debtor will successfully reorganize. That is not an insignificant consideration. See In re Plastech Engineered Prods., Inc., 394 B.R. 147, 151 (Bankr.E.D.Mich.2008) ().
Id. at *6 The District Court construed the phrase “received by the...
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