Matter of Leeds Bldg. Products, Inc., Bankruptcy No. A91-81896-WHD.

• Decision Date: 09 June 1992
• Docket Number: Bankruptcy No. A91-81896-WHD.
• Citation: 141 BR 265
• Parties: In the Matter of LEEDS BUILDING PRODUCTS, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

141 B.R. 265 (1992)

In the Matter of LEEDS BUILDING PRODUCTS, INC., Debtor.

Bankruptcy No. A91-81896-WHD.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

June 9, 1992.

Frank B. Wilensky, Shayna M. Steinfeld, Macey, Wilensky, Cohen, Wittner & Kessler, Atlanta, Ga., for debtor.

William F. Mitchell, William H. Lawson, Lawson and Davis, Atlanta, Ga., for Prudential Metal Supply Corp. d/b/a Prudential Southern Bldg. Material.

Peter M. Pearl, David V. Levy, Smith, Gambrell & Russell, Atlanta, Ga., for MacMillan Bloedel Bldg. Materials, a div. of MacMillan Bloedel of America, Inc., Furman Lumber, Inc., Temco Metals, Inc., and Owens Corning Fiberglass Corp.

Lea Souza Rasile, Popham, Haik, Schnobrich & Kaufman, Ltd., Miami, Fla., for MiTek Industries, Inc.

Jay E. Loeb, Gershon, Olim, Katz & Loeb, Atlanta, Ga., for Bloch Lumber Co., Inc.

ORDER

W. HOMER DRAKE, JR., Bankruptcy Judge.

On March 10, 1992, this Court entered an Order in the above-referenced bankruptcy case for the sole purpose of ruling on two threshold legal issues concerning Motions for Reclamation filed by eight creditors (hereinafter referred to as "Sellers") against the debtor, Leeds Building Products, Inc. ("Debtor"). The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(b).

On November 22, 1991, Debtor, which is in the business of selling construction materials, filed a Chapter 11 bankruptcy petition in this Court. As of November 27, 1991, twenty seven creditors had filed notices of reclamation pursuant to O.C.G.A. § 11-2-702 (U.C.C. § 2-702), asserting the right to reclaim goods previously delivered to Debtor. None of the reclaiming creditors had filed UCC-1 forms to perfect a purchase-money security interest in the goods. Another creditor, CIT Group/Business Credit, Inc. ("CIT"), holds a lien on all of Debtor's inventory, both pre-existing and after-acquired. CIT's floating lien purportedly encompasses the goods sought to be reclaimed by Sellers.

On February 25, 1992, a hearing was held on the Motion to Reclaim filed by Prudential Metal Supply Corporation. However, because of the potential number of Motions for Reclamation that could be filed in the case, the parties agreed that it would be in the best interest of the parties and the Court's time if the Court would address two legal issues common to all of the Motions. These issues are as follows:

1. Whether a reclaiming creditor has the right of reclamation pursuant to O.C.G.A. § 11-2-702 if there is a creditor with a prior perfected security interest on Debtor\'s inventory; and

2. Whether a reclaiming creditor should be granted a lien and/or administrative claim pursuant to 11 U.S.C. § 546 when there is a secured creditor with a prior perfected lien on a Chapter 11 debtor\'s inventory.

Notice was sent to all interested parties, including any sellers who gave notice of reclamation, allowing them fifteen days to respond and support their position. Eight creditors responded, including Universal Forest Products, Inc., MacMillan Bloedel Building Materials, Mitek Industries, Inc., Furman Lumber, Inc., TEMCO Metals, Inc., Owens Corning Fiberglass Corporation, Gilman Building Products, Co., and Bloch Lumber Company, Inc. As stated, the Court will only address the two basic legal questions, and will not make specific findings of fact concerning the ultimate right of reclamation by Sellers. The Court will also not make specific findings of fact concerning the validity of CIT's security interest. Those determinations will be made at a later hearing, if necessary. The Court will now turn to the two legal issues at hand.

A. Whether a reclaiming creditor has the right of reclamation pursuant to O.C.G.A. § 11-2-702 if there is a creditor with a prior perfected security interest on Debtor's inventory.

Section 546 of the Bankruptcy Code allows a creditor to reclaim goods delivered to a debtor under certain conditions. The relevant section reads, in pertinent part, as follows:

(c) 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; or

(B) secures such claim by a lien.

11 U.S.C. § 546(c). This section is the exclusive remedy of a seller who seeks to reclaim goods from a debtor. In re Rawson Food Service, Inc., 846 F.2d 1343, 1346 (11th Cir.1988) (citing In re Rozel Industries, 74 B.R. 643, 646 (Bankr.N.D.Ill. 1987)); In re MGS Marketing, 111 B.R. 264, 267 (Bankr. 9th Cir.1990); In re Dynamic Technologies Corp., 106 B.R. 994 (Bankr.D.Minn.1989). Thus, in order to establish an entitlement to reclaim goods, a seller has the burden of establishing the following:

1. A statutory or common law right to reclaim the goods;

2. Debtor\'s insolvency at the time it received the goods; and

3. A written demand for reclamation made within ten days after Debtor\'s receipt of the goods.

Rawson, 846 F.2d at 1343; see also In re Braniff, Inc., 113 B.R. 745, 751 (Bankr. M.D.Fla.1990); In re Video King of Illinois, Inc., 100 B.R. 1008, 1013-14 (Bankr. N.D.Ill.1989); In re Bosler Supply Group, 74 B.R. 250 (N.D.Ill.1987); In re Flagstaff Foodservice Corp., 56 B.R. 899, 905 (Bankr.S.D.N.Y.1986). The second and third factors are questions of fact which will not be addressed in this Order. However, the first requirement, that a seller establish a statutory or common-law right of reclamation, is at the heart of the issues now before the Court.

Sellers allege that they have a statutory right to reclaim the goods sold pursuant to § 11-2-702 of the Official Code of Georgia, which mirrors § 2-702 of the Uniform Commercial Code. That section states, in pertinent part:

(2) Where the seller has discovered that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten-day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer\'s fraudulent or innocent misrepresentation of solvency or of intent to repay.

(3) The seller\'s right to reclaim under subsection (2) of this Code section is subject to the rights of a buyer in ordinary course or other good faith purchaser or lien creditor under this article (Code Section 11-2-403). Successful reclamation of goods excludes all other remedies with respect to them.

O.C.G.A. § 11-2-702. Thus, in addition to the requirements found in § 546(c) of the Bankruptcy Code, Sellers must also satisfy O.C.G.A. § 11-2-702. The primary differences between the Code and the UCC are that the Code does not waive the ten-day notice requirement if the buyer fraudulently misrepresents its solvency to the seller, and the Code specifies that notice must be in writing. Rawson, 846 F.2d at 1347 (and cases cited therein); see also In re Griffin Retreading Co., 795 F.2d 676, 678-79 (8th Cir.1986).

The specific issue before the Court is whether a reclaiming seller, assuming it has otherwise established the requirements of a right to reclaim under O.C.G.A. § 11-2-702(2), retains the right of reclamation if there is a creditor with a prior perfected security interest on Debtor's after-acquired inventory. The Georgia Code, as noted, states that a seller's right to reclaim is subject to the rights of a good faith purchaser. O.C.G.A. § 11-2-702(3). Included in the definition of "purchase" is the taking by mortgage, pledge, lien, or any other voluntary transaction creating an interest in property. O.C.G.A. § 11-1-201(32). To purchase in good faith means to act honestly in the conduct or transaction concerned. O.C.G.A. § 11-1-201(19). It is well established that these statutory provisions clearly include a secured party with a properly perfected security interest in a debtor's inventory in the definition of "good faith purchaser". In re Samuels & Co., 526 F.2d 1238 (5th Cir.1976), cert. denied sub nom., Stowers v. Mahon, 429 U.S. 834, 97 S.Ct. 98, 50 L.Ed.2d 99 (1976); In re Smith, 51 B.R. 904, 910 (Bankr.M.D.Ga.1985); B & P Lumber Co. v. First National Bank, 147 Ga.App. 762, 764, 250 S.E.2d 505 (1978); Lavonia Manufacturing Co. v. Emery Corp., 52 B.R. 944, 946 (E.D.Pa.1985); In re Roberts Hardware Co., 103 B.R. 396, 398 (Bankr.N.D.N.Y.1988); In re Diversified Food Service Distributors, Inc., 130 B.R. 427, 429-30 (Bankr.S.D.N.Y.1991); In re FCX, Inc., 62 B.R. 315, 322 (Bankr. E.D.N.C.1986); In re Lawrence Paperboard Corp., 52 B.R. 907 (Bankr.D.Mass. 1985); In re MacMillan Petroleum (ARKANSAS), Inc., 115 B.R. 175, 179 (Bankr. W.D.Ark.1990). Therefore, if the Court finds that CIT's security interest in Debtor's inventory is valid, Sellers' right to reclaim the goods sold to Debtor would be subject to the prior right of CIT as a good faith purchaser.

However, the fact that Sellers' rights to reclaim would be subordinate to the claims of CIT does not necessarily mean that the right would be extinguished. The statutory language explicitly states that a seller's right to reclaim is "subject to the rights of . . . good faith purchaser . . ." O.C.G.A. § 11-2-702(3) (emphasis added). The use of the term "subject to" indicates that right to reclaim is not automatically extinguished merely because...