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Ningbo Chenglu Paper Products Manufacturing Co., Ltd. v. Momenta, Inc.

United States District Court, D. New Hampshire

August 29, 2012

Ningbo Chenglu Paper Products Manufacturing Co., Ltd., Appellant,
Momenta, Inc., Appellee. Opinion No. 2012 DNH 133


          STEVEN J. McAULIFFE, District Judge.

         This is 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). Ningbo appeals.

         At 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, [1] 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).

         Standard of Review

         Jurisdiction 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)).

         Momenta 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.

         On 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).

         Momenta 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.

         The 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).[2] 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. § 546(c)(2).

         Given 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)").

         Construing "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.

         Applying 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 ...

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