United States District Court, D. New Hampshire
Ningbo Chenglu Paper Products Manufacturing Co., Ltd., Appellant,
Momenta, Inc., Appellee. Opinion No. 2012 DNH 133
J. McAULIFFE, District Judge.
an appeal from a decision of the United States Bankruptcy
Court for the District of New Hampshire. In the proceedings
below, a creditor, Ningbo Chenglu Paper Products
("Ningbo"), sought payment under Section 503(b)(9)
of the Bankruptcy Code for the value of goods it sold to the
debtor, Momenta, Inc. ("Momenta") within twenty
days before bankruptcy protection was sought. See 11 U.S.C.
§ 503(b)(9). Section 503(b)(9) entitles a limited class
of sellers to priority payment for goods sold to a debtor, so
long as the goods were "received by the debtor"
during a twenty-day pre-petition period. Id. The
bankruptcy court granted Ningbo's motion with respect to
the value of goods Ningbo shipped directly to Momenta, but
denied Ningbo's request for payment of approximately
$140, 000 related to goods it shipped, at Momenta's
direction, to third parties (Momenta's own customers).
issue is the meaning of the phrase "received by the
debtor, " as it is used in Section 503(b)(9). Ningbo
contends that, where goods are delivered under a
drop-shipment arrangement to a debtor/buyer's customer,
commercial reality requires that the phrase "received by
the debtor" be broadly construed to include goods
"received by the debtor's customer." For
obvious reasons, Ningbo urges a broad construction - one that
would extend Section 503(b)(9)'s priority provision to
all sellers who delivered goods within twenty days before the
debtor's petition - i.e., including sellers who do not
otherwise possess traditional reclamation rights. Appellant
Br., Doc. No. 19, at 4. Momenta, on the other hand, presses
for a narrow construction of the term "received" -
limiting Section 503(b)(9) as a supplemental remedy to a
seller's right of reclamation under Section 546(c)(1).
See 11 U.S.C. § 546(c)(1).
over appeals from final judgments, orders, and decrees issued
by the bankruptcy court lies in this court. 28 U.S.C. §
158(a). The bankruptcy court's legal determinations are
reviewed de novo. See, e.g., Dahar v. Jackson (In re
Jackson), 459 F.3d 117, 121 (1st Cir. 2006);
Askenaizer v. Seacoast Redimix Concrete, LLC, 2007
WL 959612, at *1 (D.N.H. March 29, 2007). But its findings of
fact are accorded deference and will not be disturbed unless
clearly erroneous. Groman v. Watman (In re Watman),
301 F.3d 3, 7 (1st Cir. 2002); Brown v.
Reifler, 2008 WL 4722987, at *1 (D.N.H. Oct. 23, 2008).
A factual finding "is `clearly erroneous' when
although there is evidence to support it, the reviewing court
on the entire evidence is left with the definite and firm
conviction that a mistake has been committed."
Anderson v. Bessemer City, 470 U.S. 564, 573 (1985)
(quoting United States v. United States Gypsum Co.,
333 U.S. 364, 395 (1948)).
filed its bankruptcy petition on October 23, 2010. During the
twenty days preceding that event, seven shipments of goods
purchased by Momenta were delivered by Ningbo. At
Momenta's direction, three shipments, valued at about
$23, 000, were delivered to Momenta. Four other shipments
(the "drop-shipped goods"), valued at over $140,
000, were delivered to Momenta's customers in the United
Kingdom and Canada.
December 6, 2010, Ningbo petitioned the bankruptcy court to
allow its "administrative expense" payment claims
under Section 503(b)(9) of the Bankruptcy Code, 11 U.S.C.
§ 503(b)(9). It sought payment for the full value of all
goods shipped during the twenty-day pre-petition period. See
11 U.S.C. § 1129(a)(9)(A) (the holder of an
administrative expense claim "will receive . . . cash
equal to the allowed amount"). Section 503(b)(9)
provides in pertinent part:
[T]here shall be allowed administrative expenses . . .
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) (emphasis added).
conceded that all seven shipments consisted of goods Ningbo
sold to Momenta "in the ordinary course of
business." Momenta also conceded that goods delivered
directly to it were "received" for purposes of
Section 503(b)(9). But it objected to Ningbo's request
for payment of the value of the drop-shipped goods, arguing
that those goods were not "received by the debtor,
" but by the debtor's customers. Accordingly,
Momenta argued, the statutory language did not literally
apply, and should not be construed to apply, given the
relationship between Section 503(b)(9) and the development of
reclamation seller protection under the Code, as well as the
Code's general policy of construing preferences narrowly.
The bankruptcy court agreed that the provision protects only
sales of goods subject to reclamation rights, that is, goods
delivered to the debtor within the twenty days preceding a
buyer's filing for bankruptcy protection.
bankruptcy court first considered whether the term
"received" as used in Section 503(b)(9) should be
given the same meaning as "received" as found in
the reclamation provision of the Bankruptcy Code, Section
546(c). Bankr. Ct. Mem. Op., Doc. No. 7-3, at 8. Section
546(c) addresses the rights of sellers to reclaim goods which
"the debtor . . . received . . . while insolvent."
11 U.S.C. § 546(c). It provides that, with some exceptions,
a seller's state-created right of reclamation is
protected from the bankruptcy trustee's avoiding powers,
so long as the seller's demand for reclamation is filed
within a specified time. Id. The section provides,
moreover, that "[i]f a seller of goods fails to provide
notice in the manner described. . . [it] still may assert the
rights contained in section 503(b)(9)." 11 U.S.C. §
the "language of the Bankruptcy Code, its legislative
history, and pre-BAPCPA practice, " the bankruptcy court
held that Sections 503(b)(9) and 546(c) "are related
provisions that should be read together, " such that the
term "received" should be given the same meaning in
both sections. Bankr. Ct. Mem. Op., Doc. No. 7-3, at 6-8
(citing In Re Circuit City Stores, Inc., 432 B.R.
225, 229 (Bankr. E.D. Va. 2010)). The court found that
Congress intended the sections to operate in tandem to
provide enhanced remedies for reclamation sellers:
"[Section] 503(b)(9) provides a seller, who did not
comply with the notice requirements of § 546(c)(1), an
alternative remedy to reclamation." Id. at 6.
See also Id. at 12 (Section 503(b)(9) "is
related to, and a part of the remedies provided under the
provisions of § 546(c)").
"received, " as it is used in Section 546(c), the
bankruptcy court concluded that the term "is the
equivalent of `receipt' in the UCC." Id. at
8. "`[R]eceipt of goods'" under UCC Section
2-103(c) means "`taking physical possession of
them.'" Id. (quoting UCC § 2-103(c)).
The bankruptcy court found, however, that
"possession" for purposes of reclamation can mean
actual physical possession or constructive possession, as
outlined in U.C.C. § 2-705(2), but that the debtor/buyer
in a reclamation situation does not have constructive
possession of goods delivered to a third-party good faith
purchaser. Id. at 10-12. Such goods, the court held,
are not amenable to reclamation, and do not qualify for
alternative relief under Section 503(b)(9). In other words,
Section 503(b)(9) was enacted to protect reclamation sellers
from minor impediments to Section 546(c) relief. It was not
meant to create a new class of sellers entitled to a priority
remedy at the expense of other creditors.
that definition of "received" to Ningbo's claim
under Section 503(b)(9), the bankruptcy court held that the
goods Ningbo drop-shipped directly to Momenta's customers
were not "received" by Momenta. Because Momenta did
not have possession of those goods, either actual or
constructive, Id. at 12, no reclamation rights ...