In re World Imports, Ltd.

• Decision Date: 18 June 2014
• Docket Number: No. 13–15929 SR.,13–15929 SR.
• Citation: 511 B.R. 738
• Parties: In re WORLD IMPORTS, LTD., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

511 B.R. 738

In re WORLD IMPORTS, LTD., Debtor.

No. 13–15929 SR.

United States Bankruptcy Court,

E.D. Pennsylvania.

Signed June 18, 2014.

United States Trustee, Office of the U.S. Trustee, Philadelphia, PA, for Interested Parties.

John E. Kaskey, Esquire, Braverman Kaskey, P.C., Philadelphia, PA, for Debtor.

Daniel Schimizzi, Esquire, Kirk K. Burkley, Esquire, Pittsburgh, PA, for Claimants.

Martha B. Chovanes, Esquire, Fox Rothschild LLP, Lawrenceville, NJ, for Creditors Committee.

Ronald S. Gellert, Esquire, Gellert, Scali, Buskenell & Brown LLC, Wilmington, DE, for Sunrise Furniture Co.

Opinion

STEPHEN RASLAVICH, Bankruptcy Judge.

Introduction

Before the Court are two Motions for Allowance and Payment of Administrative Expense Claim. The first was filed by Fujian Zhangzhou Foreign Trade Co., Ltd. (Fujian) and the second by Haining Wansheng Sofa Co., Ltd. (Haining). Both motions are opposed by the Debtor and the Official Committee of Unsecured Creditors. A hearing on the Motions was held on May 28, 2014, after which the Court took the matter under advisement. For the reasons set forth below, the Motions will be denied.¹

Administrative Claim For the Sale of Goods

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 vendor 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 thus an exception to the usual 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, 2112 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) (noting that § 503(b)(1)-(9) stand as discrete exceptions to the general equality principle and as such must be “clearly authorized by Congress”). A claimant seeking allowance of an administrative claim bears the initial burden of proof. Goody's, 401 B.R. at 137 n. 27.

Record

The matters have been submitted to the Court on a stipulated evidentiary record and there are no facts in dispute. 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 Haining claim, the goods were shipped from Shanghai on May 26, 2013 and the Debtor took physical possession of the goods in the United States on June 21, 2013. As to the Fujian claim, the goods were shipped from Xiamen on May 17, May 31 and June 7, 2013. The Fujian claim differs from the Haining claim in one material respect: some of the goods were shipped directly to the Debtor's customers (i.e., drop-shipped) while the remainder went directly to the Debtor. Transcript of Hearing (Tr.) 16.² As to the exact date that the Debtor (or its customers in the case of drop-shipments) took physical possession of the subject goods in the United States, the record is unclear. However, the parties appear to agree that this occurred within 20 days prior to bankruptcy.

Issue

The sole question before the Court is whether the Debtor “received the goods” within 20 days prior to the bankruptcy filing. The parties disagree on this point because the seller shipped the goods from China much more than 20 days before the bankruptcy filing (July 3, 2013), while the Debtor took physical possession of the goods in the United States fewer than 20 days before bankruptcy. If, as the Debtor and Committee maintain, “receipt” for purposes of the statute is the date on which the goods were loaded onto a ship in China, then the claim for administrative expense priority must be rejected. If, as the claimants insist, “receipt” is the date that the Debtor took physical possession of the goods in the United States, then the claim will enjoy the highest priority.

Arguments

In lieu of briefs, the parties argued their positions in open court. They both agree that this appears to be a case of first impression, as neither could locate a decision on point. The parties disagree on the applicable rule of decision.

Arguing first were the Debtor and the Committee. They maintain that the controlling authority is international commercial law. According to accepted terms of international trade, where a sale occurs FOB in the country of origin, the property is transferred to the buyer once the goods are put on the ship. Tr. 11. Here, that would mean that in each case the Debtor received the goods in question on a date which is more than 20 days prior to bankruptcy. That, in turn, would preclude the claim from administrative expense status.

The claimants counter that because the Bankruptcy Code does not define the word “receive,” the Court must look to applicable non-bankruptcy law for an express definition. In this regard, they argue that the Uniform Commercial Code article dealing with sales of goods should apply. They stress that the UCC specifically defines “receipt” as taking physical possession of the goods. They maintain that, since the Debtor did not take physical possession of the goods until they were in U.S. ports, that is when receipt of the goods occurred. Tr. 13. Those dates were within 20 days prior to bankruptcy, and the claims, they argue, would therefore qualify for administrative priority.

Supremacy Clause and Rules of Decision Act

Implicit in the claimants' argument is that state law may provide a rule of decision for gaps in federal statutes. That is indeed the case, so long as the state law does contravene an established federal interest. O'Melveny & Myers v. FDIC, 512 U.S. 79, 87, 114 S.Ct. 2048, 2055, 129 L.Ed.2d 67 (1994) In that regard, Article VI of the Constitution provides:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

U.S. Const. Art. VI cl. 2. See Malley–Duff & Assoc., Inc. v. Crown Life Insur. Co., 792 F.2d 341, 346 (3d Cir.1986) (“If federal law is both pertinent and valid, it applies because the supremacy clause of the Constitutionso commands.”) In confluence with the Supremacy Clause, the federal Rules of Decision Act provides that

the laws of the several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply.

28 U.S.C. § 1652 (emphasis). A rule of decision is defined as a “statute ... that provides the basis for deciding or adjudicating a case.” Wazir v. Gates, 629 F.Supp.2d 63, 65 (D.D.C.2009). See Erie R.R. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938) (“Except in matters governed by the Federal Constitution or by acts of Congress, the law to be applied in any case [in federal court] is the law of the state”) (overruling Swift v. Tyson, 41 U.S. 1, 16 Pet. 1, 10 L.Ed. 865 (1842)); Highlands Ins. Co. v. Hobbs Group, LLC, 373 F.3d 347, 351 (3d Cir.2004).

The Debtor does not dispute that the UCC defines the word “receipt.” Rather, the Debtor argues that there exists a treaty which constitutes an exception to the general rule that the UCC would otherwise dictate. A relevant treaty, it goes on to say, incorporates the terms used in international trade that apply to this dispute.

Treaties are a species of federal law. The Constitution vests in the Executive Branch the “[p]ower, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur.” U.S. Const. Art. II § 2, cl. 2. States are denied the right of treaty-making. Id., Art. I § 10, cl. 1. The general federal question jurisdiction statute grants subject matter jurisdiction over every civil action that arises, inter alia, under a treaty of the United States. 28 U.S.C. § 1331 (“The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”) (emphasis added). Under the constitution, “a treaty is placed on the same footing, and in order of like obligation, with an act of legislation; both are declared by instrument to be the supreme law of the land, and no superior efficacy is given to either over the other.” Whitney v. Robertson, 124 U.S. 190, 194, 8 S.Ct. 456, 458, 31 L.Ed. 386 (1888); Flores–Nova v. Att'y General of the U.S., 652 F.3d 488, 494 n. 6 (3d Cir.2011) (explaining that a ratified treaty “is the law of the land as an...