In re Lawrence Paperboard Corp., Bankruptcy No. 84-00367-JG to 84-00369-JG.
| Decision Date | 24 September 1985 |
| Docket Number | Bankruptcy No. 84-00367-JG to 84-00369-JG. |
| Citation | 52 BR 907 |
| Parties | In re LAWRENCE PAPERBOARD, CORP., Debtor. In re LAWRENCE PACKAGING, CORP., Debtor. In re HARRIMAN PAPERBOARD, CORP., Debtor. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Steven J. Marullo, Marullo & Barnes, Boston, Mass., for petitioner.
Joel Rosenthal, Boston, Mass., for Chase Manhattan Bank, secured creditor.
Mark Polebaum, Hale & Dorr, Boston, Mass., for creditors' committee.
MEMORANDUM
The debtor's Motion to Settle Reclamation Demands seeks to grant eighteen sellers of goods to the debtor an administrative expense priority in the full amount of their claims for reclamation pursuant to 11 U.S.C. § 546(c). The debtor notified each reclaiming seller and the limited chapter 11 notice list of the hearing on the Motion. The creditors committee and a secured creditor, Chase Manhattan Bank, filed objections to allowance of the Motion.
The debtor filed its bankruptcy petition on March 15, 1984. Copies of the eighteen demands for reclamation are attached to the debtor's Motion as "Attachments A through Q." Thomas F. Fay Oil Sales, Inc. made demand for reclamation on March 16, 1984. The demand letter does not disclose when the debtor received the goods. (See Attachment A). Crown Zellerback Corp. sent demand for reclamation on March 17, 1984; its demand does not state when the debtor received the goods. (See Attachment B). NL Chemicals sent notice of reclamation on March 19, 1984 concerning goods shipped on March 7 and March 9, 1984. (See Attachment C). Menasha Corp. sent demand for reclamation on March 19, 1984 for goods shipped on March 9, and March 15, 1984. (See Attachment D). Container Corporation of America sent its demand for reclamation on March 19, 1984 for goods shipped on March 8, March 9, March 13, March 14, and March 15, 1984. (See Attachment E). Diamond Shamrock Chemicals Co. sent a letter demanding reclamation on March 20, 1984 for goods delivered on March 12, 1984. (See Attachment F). Borden, Inc. sent demand for reclamation on March 20, 1984 for goods received on March 11, 1984 and March 19, 1984. (See Attachment G). Albany International Corp. sent demand for reclamation on March 22, 1984 for goods shipped on March 14, 1984 and on another undisclosed date. (See Attachment H). Harriman Utility Board sent demand for reclamation for services rendered on March 13, March 14 and March 15, 1984 on March 22, 1984. (See Attachment I). On March 23, 1984 H.B. Fuller Company sent demand for reclamation of goods received by the debtor on March 15, 1984 in the afternoon. (See Attachment J). Wrenn Handling, Inc. sent demand for reclamation on March 23, 1984; the notice does not state when the goods were received. (See Attachment K). Williamsburg Pulp Wood and Timber Co. sent a telegram demanding reclamation on March 8, 1984 for goods shipped on March 2, 1984. (See Attachment L). Garden State Paper Co., Inc. sent demand for reclamation on March 30, 1984 for goods shipped on March 5, March 6, March 7, and March 8, 1984. (See Attachment M). Union Camp Corp. sent a telegram demanding reclamation on March 20, 1984 for goods shipped on March 7, March 13, and March 14, 1984. (See Attachment N). Georgia Pacific sent a mailgram demanding reclamation on April 3, 1984; it does not state when the debtor received the goods. (See Attachment O). Interstate Construction Corp. sent a telegram demanding reclamation on March 16, 1984; it is not known when the goods were received by the debtor. (See Attachment P). Perry H. Koplik & Sons, Inc. sent a mailgram demanding reclamation on March 21, 1984, which did not specify the date the goods were received by the debtor. (See Attachment Q).
As of the date of the filing The Chase Manhattan Bank and Arlington Trust had liens on all assets of the debtor (including inventory) pursuant to security agreements containing after-acquired property clauses. On March 31, 1984 the Bankruptcy Court entered an order pursuant to § 364 authorizing the debtor to borrow funds on a post-petition basis from both banks. The new advances were to be secured by a security interest in all pre-petition and post-petition assets of the debtor.
The creditors' committee and the Bank argue that the debtor has not met the requirements of 11 U.S.C. § 546 since there has been no showing that the reclamation demands were timely made, that the debtor possessed the goods when the demand was received, or that the debtor was insolvent when the goods were received. In addition, the creditors' committee asserts that the existence of floating liens on the debtor's inventory extinguishes the rights of a reclaiming seller.
Bankruptcy Rule 9019 gives the court power to approve the compromise of a dispute after notice and a hearing. Bankruptcy Rule 9019 (1983). The notice of hearing must be sent to all creditors, unless the court has reduced the required notice. Bankruptcy Rule 2002(a)(3) (1983). In determining whether to approve a compromise, it is the court's obligation to evaluate whether the settlement is reasonable based upon an examination of the following factors:
In re Lion Capital Group, 49 B.R. 163, 175 (Bankr.S.D.N.Y.1985) (citations omitted). A record of evidence containing adequate and detailed information is necessary to enable the court to decide whether the settlement falls below the range of reasonableness. Id. at 176.
The enactment of § 546(c) in the Bankruptcy Reform Act of 1978 resolved the question whether a seller's right to reclamation is preserved in bankruptcy. The Code essentially adopts UCC § 2-207(2) as bankruptcy law, and further requires a seller to make a written demand for reclamation. 11 U.S.C. § 546(c) provides:
"The rights and powers of the trustee1 . . . are subject to any 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 if the debtor has received such goods while insolvent, but (1) such a seller may not reclaim any such goods unless such seller demands in writing reclamation of such goods before ten days after receipt of such goods by the debtor; and (2) the court may deny reclamation to a seller with such a right of reclamation that has made such a demand only if court — (A) grants the claim of such a seller priority as an administrative expense; or (B) secures such claim by a lien."
11 U.S.C. § 546(c) (1979).
The rights of a reclaiming seller under Massachusetts law are set forth in M.G.L. c. 106 Section 2-702 which provides:
M.G.L. c. 106 § 2-702(2) and (3) (1962).
The courts have unanimously ruled that a written demand by the seller within ten days of delivery of the goods to the debtor is necessary under § 546(c). In re Storage Technology, Inc., 48 B.R. 862, 863, 866 (D.Colo.1985). The demand made pursuant to § 546(c) is effective on dispatch, as long as it is made in a commercially reasonable manner. Matter of Morin Motor Oil, Inc., 740 F.2d 220, 222 (3d Cir.1984). In addition, the goods must actually exist and be intact in the hands of the debtor at the time of the demand; proceeds of the sale of goods subject to a demand for reclamation are not recoverable by the seller in the absence of proof sufficient to establish a trust. In re Landy Beef Co., Inc., 30 B.R. 19 (Bankr.D.Mass. 1983). One court has imposed the requirement that the reclaiming seller commence a reclamation action in the bankruptcy court while the goods are intact. Action Industries, Inc. v. Dixie Enterprises, Inc., 22 B.R. 855 (Bankr.S.D.Ohio 1982). Finally, it is the burden of the reclaiming seller to prove that the debtor was insolvent at the time of the sale. In re Furniture Distributors Inc., 45 B.R. 38, 43 (Bankr.D.Mass. 1984). These conditions must be literally satisfied before reclamation will be permitted or administrative expense priority will be granted. In re Koro Corp., 20 B.R. 241 (Bankr. 1st Cir.1982).
In the present case, the record is devoid of facts from which the Court can find that awarding the eighteen sellers an administrative expense priority in the full amount of their claims for goods sold is a reasonable compromise. The copies of demands for reclamation attached to the debtor's Motion do not permit a finding that each seller made a proper written demand within ten days of the debtors receipt of the goods. Only two, possibly three, of the attached demands specify the date the debtor received the goods. Moreover, there has been no evidence that the goods were intact and in possession of the debtor when the...
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