Matter of AIC Photo, Inc.
| Decision Date | 29 October 1985 |
| Docket Number | Adv. No. 185-0055.,Bankruptcy No. 185-50388-21 |
| Citation | 57 BR 56 |
| Parties | In the Matter of AIC PHOTO, INC., et al., Debtor. AMBICO, INC., Plaintiff, v. AIC PHOTO, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Patterson, Belknap, Webb & Tyler, New York City by Scott Horton, for debtors.
Windels, Marx, Davies & Ives, New York City by Christopher T. Ragucci, for Ambico.
Zalkin, Rodin & Goodman, New York City by Andrew D. Gottfried, for Manufacturers Hanover Trust.
This is an adversary proceeding brought by Ambico, Inc. ("Ambico"), a creditor of the debtor-defendant A.I.C. Photo, Inc. ("AIC"), to reclaim certain goods delivered to AIC two days or less before AIC filed for relief under Chapter 11.
This is a core proceeding over which the United States Bankruptcy Courts enjoys jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(o). Venue is proper in the Eastern District of New York.
The parties have stipulated to the following facts:
1. On or about March 19, 1985, the defendant filed a petition in the United States Bankruptcy Court for the Eastern District of New York and has continued thereafter as a Debtor-in-Possession.
2. Certain equipment was shipped in March of 1985 by plaintiff to the defendant, and received by defendant in Carle Place, New York, on or after March 17, 1985.
3. Plaintiff has made written demand for the return of the equipment pursuant to 11 U.S.C. § 546(c) and § 2-702 of the Uniform Commercial Code as enacted in New York.
4. The defendant has not complied with the plaintiff's written demand.
5. Plaintiff received payment for the delivery of some of this merchandise, and defendant is entitled to other credits sufficient to reduce the amount in dispute to $4,613.80.
6. Manufacturers Hanover Trust Company has a secured interest.
7. The parties have agreed to the following as matters of law:
(a) That the reclamation sought by the plaintiff is based exclusively upon § 2-702(2) of the Uniform Commercial Code as enacted in New York and § 546(c) of the Bankruptcy Code.
(b) That both § 2-702 and § 546 convey a right of reclamation only if the debtor received goods while it was insolvent.
(c) That the meaning of the term "insolvency" is controlled by § 1-201(23) of the U.C.C.
8. The parties have likewise stipulated that the evidence previously taken in connection with AIC's application to use cash collateral may be relied on in this proceeding as if proffered and received herein. That evidence tended to show that at the time AIC filed for relief under Title 11, the sum of its debts was not greater than the fair value of all of its assets.
9. Furthermore, Ambico has conceded that the assets of AIC exceeded its liabilities. Tr. 6/12/85, at 45.
10. The letter which the parties concede satisfies 11 U.S.C. § 546(c) and § 2-702 of the Uniform Commercial Code was sent AIC by Ambico on March 26, 1985.
On the basis of the evidence adduced by the parties, the Court finds:
11. When Manufacturers cut off credit to AIC on March 15, 1985, AIC became unable to meet its debts as they fell due.
12. Therefore, AIC was insolvent beginning March 15, 1985 within the meaning of § 1-201(23) of the Uniform Commercial Code.
13. At the time the demand for reclamation was made, AIC had in its possession all the equipment Ambico wishes to reclaim or identical equipment received earlier from Ambico with which it had been intermingled.
One further point is relevant:
14. After this Court invited Manufacturers to become a party to this adversary proceeding, Manufacturers advised this Court that it asserts no interest in the equipment which is the subject of this proceeding.
In enacting the Bankruptcy Code, it was the intention of Congress "to recognize, in part, the validity of Section 2-702 of the Uniform Commercial Code, which has generated much litigation, confusion and divergent decisions in different circuits". See H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 371-72(19th) (1977); S.Rep. No. 95-989, 95th Cong., 2nd Sess. 86-87 (1978), U.S. Code Cong. & Admin.News 1978, pp. 5787, 5873, 6328.
The method by which Congress clarified the law was by making the rights of the trustee subordinate to those of the reclaiming seller. Section 546(c) preserves "any statutory or common-law right of a seller of goods that has sold goods to the debtor" to reclaim such goods "if the debtor has received such goods while insolvent". It subordinates to such right the trustee's rights and powers under Section 544(a) (), Section 545 (), Section 546 (preferences) and Section 549 (post-petition transactions).1 To exercise a right of reclamation, the seller must demand reclamation of such goods "before ten days after the receipt of such goods by the debtor". In lieu of actual reclamation, the Court may grant the seller a priority claim or a lien. 11 U.S.C. § 546(c)(2).
There would be no doubt in this case that Ambico came within the protection of § 546(c) were it not for the ambiguity created by the requirement that the debtor have received the goods being reclaimed "while insolvent". Insolvency in the Uniform Commercial Code is defined differently from the meaning given it in the Bankruptcy Code. According to the Uniform Commercial Code "a person is `insolvent' who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due or is insolvent within the meaning of the Federal Bankruptcy Law". Section 1-201(23). The definition of insolvency in the Bankruptcy Code is much narrower. The Bankruptcy Code provides that "insolvent means — (a) with reference to an entity other than a partnership, financial conditions such that the sum of such entity's debts is greater than all such entity's property, at a fair valuation. . . ."
No less an authority than Colliers has suggested that this difference in definition is fatal to a seller unable to establish an excess of liabilities over assets:
(Footnotes omitted). 4 Colliers on Bankruptcy, ¶ 546.04 at p. 546-14 (15th Ed.1985).
Colliers, however, supplies no reasons for a result which would seem to create as much confusion as § 546(c) was enacted to dissipate.
The question as to whether a debtor's assets at the time of filing exceed its liabilities is in most Chapter 11 proceedings extremely complex, both factually and legally. Many Chapter 11 debtors seek long extensions of their obligations to file schedules because of the difficulty they have in determining their own assets and liabilities. To require a supplier, a stranger to the debtor's affairs, to carry the burden of proving an excess of liabilities over assets in order to exercise a very narrowly circumscribed right to reclaim specific goods delivered over, at most, a ten-day period, would be to make the right of reclamation largely illusory, whereas Congress' expressed intention in enacting the Code was to recognize the right of reclamation created by § 2-702 of the Uniform Commercial Code.
True, Congress said...
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