Matter of Bosler Supply Group

• Decision Date: 14 May 1987
• Docket Number: No. 86 C 9738.,86 C 9738.
• Citation: 74 BR 250
• Parties: In the Matter of BOSLER SUPPLY GROUP, et al., Debtor. AMERICAN SAW & MFG. COMPANY, Plaintiff, v. BOSLER SUPPLY GROUP, et al., Defendant.
• Court: U.S. District Court — Northern District of Illinois

74 B.R. 250 (1987)

In the Matter of BOSLER SUPPLY GROUP, et al., Debtor AMERICAN SAW & MFG. COMPANY, Plaintiff, v. BOSLER SUPPLY GROUP, et al., Defendant.

No. 86 C 9738.

United States District Court, N.D. Illinois, E.D.

May 14, 1987.

George W. Keeley, Halfpenny, Hahn & Roche, Chicago, Ill., for plaintiff.

Bruce Dopke, Schwartz, Cooper, Kolb and Gaynor, Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER

PLUNKETT, District Judge.

American Saw & Mfg. Company ("American Saw") appeals the final order of the bankruptcy court, 67 B.R. 71, denying American Saw's motion for summary judgment and granting the cross-motion of the debtor, Bosler Supply Group, et al. ("Bosler") for summary judgment. We have jurisdiction pursuant to 28 U.S.C. § 158. For the reasons set forth below, the judgment of the bankruptcy court is reversed and the case is remanded to the bankruptcy court for the purpose of granting American Saw appropriate relief pursuant to 11 U.S.C. § 546(c)(2).

Facts

The facts are undisputed, and we adopt, virtually verbatim, the bankruptcy court's rendition of those facts. On February 10, 1986, Bosler filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. ("Bankruptcy Code"). Before the filing of Bosler's petition, but at a time at which Bosler was insolvent, American Saw sold certain goods to Bosler on open account in the ordinary course of business. As a result of these sales, Bosler became indebted to American Saw for the amount of $33,550.33.

Prior to these sales, Bosler had entered into a certain accounts receivable financing arrangement with Manufacturers Hanover Commercial Corporation ("MHCC"). As part of this arrangement, Bosler granted MHCC liens on and security interests in its collateral, including, among other things, all of Bosler's inventory. MHCC properly perfected its security interest. At the time of the filing of the bankruptcy petition, Bosler was indebted to MHCC in the amount of approximately $4,645,000.00, plus interest and other fees and costs under the terms of the financing agreement.

Bosler did not make any payment of the $33,550.33, and on February 12, 1986, within ten days of Bosler's receipt of the goods, American Saw made a written demand for immediate reclamation of the goods. At the time Bosler received this notice, it had $31,787.62 of the goods in its possession; however, between February 13, 1986 and April 29, 1986, Bosler sold $26,960.70¹ of the goods to third parties, and on April 29, 1986, the remaining $4,826.92 of the goods were sold as part of a sale of all of Bosler's assets to Consolidated Stores International, Inc. and Engman-Taylor Co., Inc. The proceeds of this sale were paid to MHCC in full payment of Bosler's indebtedness. The parties agreed that the goods claimed by American Saw would be sold free and clear of any interest of American Saw and that any right of American Saw to reclaim its goods would attach to the proceeds of the sale. Bosler has not returned either the goods or the proceeds of sale to American Saw.

On May 15, 1986, American Saw filed an adversary complaint in the bankruptcy court seeking an order directing Bosler to return the goods or the proceeds.² On October 31, 1986, the bankruptcy court entered an order denying American Saw's motion for summary judgment and granting Bosler's cross-motion for summary judgment. The court held that although American Saw had made a timely written demand for reclamation of goods received by Bosler while Bosler was insolvent, American Saw had no right to reclaim the goods because MHCC had a superior lien, and that lien extinguished American Saw's right of reclamation. Finding that American Saw had no right to reclaim its goods, the bankruptcy court refused to grant American Saw an administrative expense priority or a lien on Bosler's assets. In this appeal, American Saw contends that the bankruptcy court's interpretation and application of the law are erroneous.

Discussion

In seeking reclamation of its goods, American Saw relies on § 2-702 of the Uniform Commercial Code, as adopted by Illinois, Ill.Rev.Stat. ch. 26, ¶ 2-702. That section provides, in pertinent part:

(2) where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within 10 days after the receipt. . . .

(3) The seller\'s right to reclaim under subsection (2) is subject to the rights of a buyer in ordinary course or other good faith purchaser under this Article.

The Bankruptcy Code expressly recognizes a seller's right to reclaim under § 2-702, adding only a requirement that the demand for reclamation be in writing. The applicable provision is § 546(c), which provides:

Except as provided in subsection (d) of this section, the rights and powers of a trustee under sections 544(a), 545, 547, and 549 of this title are subject to any statutory or common-law right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller\'s business, 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 the court —

(A) grants the claim of such a seller priority as a claim of a kind specified in section 503(b) of this title;³ or

(B) secures such claim by a lien.

In addition to these prerequisites, various courts have also required that the goods be in the debtor's possession at the time of the demand. See, e.g., Dukseung of America, Inc. v. New York Wholesale Distributors Corp. (In re New York Wholesale Distributors Corp.), 58 B.R. 497, 500 (Bankr.S.D.N.Y.1986); In re Flagstaff Foodservice Corp., 56 B.R. 910, 914 n. 9 (Bankr.S.D.N.Y.1986); Ecolotec, Inc. v. Deephouse Equipment Co. (In re Deephouse Equipment Co.), 22 B.R. 255, 258 (Bankr.D.Conn.1982) (no right to proceeds).

In the case before us, there is no dispute that Bosler received the goods from American Saw while insolvent, that American Saw demanded reclamation of the goods within 10 days of Bosler's receipt of the goods, and that the reclamation demand was in writing. Thus, American Saw has fulfilled all of the statutory requirements to entitle it to a right of reclamation. Furthermore, at the time of the demand, Bosler had in its possession $31,787.62 of the goods, and it is only to this extent that American Saw seeks an administrative expense priority.

Although American Saw appears to meet all of the rather stringent requirements for reclamation, the bankruptcy court nonetheless found that American Saw had no such right to reclaim its goods from Bosler. The bankruptcy court took the position that "there is but one moment of truth under Bankruptcy Code § 546(c)(2)(a) sic: that moment of truth is that when American Saw attempts to assert its right to reclaim." American Saw & Mfg. Co. v. Bosler Supply Group (In re Bosler Supply Group), 67 B.R. 71, 74 (Bankr.N.D.Ill. 1986). The court noted that at the operative moment, MHCC was a secured creditor of Bosler, holding a lien superior to any rights held by American Saw. The court held that the existence of that lien extinguished American Saw's right of reclamation, and further held that the right was not reestablished when MHCC was paid in full.

We disagree with the decision of the bankruptcy court. In holding that the existence of a secured creditor extinguishes a seller's right to reclaim goods, the bankruptcy court has essentially placed an additional prerequisite on the right of reclamation; i.e., there must be no senior lienholders. We conclude that the drafters of neither the Uniform Commercial Code nor the Bankruptcy Code intended such a result. Subsection 2-702(3) expressly states that "the seller's right to reclaim under subsection (2) is subject to the rights of a buyer in ordinary course or other good faith purchaser under this Article." (emphasis added). Even assuming that a secured creditor falls within one of these categories,⁴ the language clearly indicates that the reclaiming sellers' right is subject to, not extinguished by, the existence of a secured creditor. Thus, the reclaiming seller may have to wait in line behind the secured creditor, but we read nothing in the statute that indicates the reclaiming seller loses his state-created right entirely simply because an entity holds a right senior to his.

The case law addressing this issue is consistent with our reading of the statutes. In Harris Trust and Savings Bank v. Wathen's Elevators, Inc. (In re Wathen's Elevators, Inc.), 32 B.R. 912 (Bankr.W.D. Ky.1983), the court held first that the sellers' rights of reclamation were subject to that of Harris, a secured creditor, and then addressed the sellers' rights, stating:

However, to say that reclamation is "subject to" superior claims is neither to deny the validity of the sellers\' rights nor to bar their claims. Rather the effect of this language is to eliminate their first position and relegate the sellers to some less commanding station.

Providently, the Bankruptcy Code does not leave unattended those eight parties whose reclamation rights were properly preserved. Section 546(c) does offer some limited protection to these claimants. When reclamation is denied to a seller with an otherwise valid right — where, for example, as here, the goods were subject to a senior secured claim — the court may do so only by granting that seller an alternative form of relief. The statute contemplates the replacement of reclamation by a lien equal in value and effectiveness to the right of reclamation at the time it was asserted.

32 B.R. at 923. Similarly, in Western Farmers Association v. Ciba Geigy (In re Western Farmers Association), 6 B.R. 432 (Bankr.W.D.Wash.1980),...