Ningbo Chenglu Paper Products Manufacturing Co., Ltd. v. Momenta, Inc.
THIS ENTRY REPLACES DOCUMENT NO. 20. CORRECTED TYPO ON PAGE 6, LINE 22, CHANGED THE WORD AMENDABLE TO AMENABLE. ORDER as to 17 Appellee's Brief, 19 Appellant's Reply Brief. The bankruptcy court's decision denying Ningbos several administrative expense claims is AFFIRMED in all respects. So Ordered by Judge Steven J. McAuliffe.(lat)
UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
Ningbo Chenglu Paper
Products Manufacturing Co., Ltd.,
Case No. 11-cv-479-SM
Opinion No. 2012 DNH 133
O R D E R
This is an appeal from a decision of the United States
Bankruptcy Court for the District of New Hampshire.
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).
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.
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).
At issue is the meaning of the phrase “received by the
debtor,” as it is used in Section 503(b)(9).
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.”
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
Appellant Br., Doc. No. 19, at 4.
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).
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.
U.S.C. § 158(a).
The bankruptcy court's legal determinations are
reviewed de novo.
See, e.g., Dahar v. Jackson (In re Jackson),
A “drop shipment delivery” is defined as “a
manufacturer’s shipment of goods directly to the consumer rather
than initially to a wholesaler.” Black’s Law Dictionary (9th ed.
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
The Bankruptcy Court’s Decision
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.
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”).
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
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.
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
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).
No. 7-3, at 8.
Bankr. Ct. Mem. Op., Doc.
Section 546(c) addresses the rights of sellers to
reclaim goods which “the debtor . . . received . . . while
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
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
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
“Reclamation is the right of a seller to recover
possession of goods delivered to an insolvent buyer.” In re Dana
Corp., 367 B.R. 409, 413 (Bankr. S.D.N.Y. 2007).
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.
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
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.
Such goods, the court held, are not amenable to
reclamation, and do not qualify for alternative relief under
In other words, Section 503(b)(9) was enacted
to protect reclamation sellers from minor impediments to Section
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 arose and no alternative remedy under Section
503(b)(9) was available.
The bankruptcy court allowed an administrative expense in
the amount of $23,079.95, representing the value of goods shipped
by Ningbo directly to and received by Momenta, but otherwise
denied the claim.
Ningbo appealed the bankruptcy court’s
disallowance of its administrative expense claims for the dropshipped goods.
On appeal, Ningbo does not seriously contest the bankruptcy
court’s construction of the term “received” under Section 546(c).
It says, rather, that the bankruptcy court erred in holding that
Section 546(c)’s definition dictates the meaning of “received” as
the term as used in Section 503(b)(9).
It argues that the
commercial reality of drop-shipment arrangements (and the plain
language of Section 503(b)(9)) necessarily leads to the
conclusion that when goods are delivered, at the debtor’s
direction, to the debtor’s customer, during the twenty-day prepetition period, those goods are “received” (at least
constructively) when the debtor’s customer takes possession.
Unsecured creditors who supply goods or services to a debtor
pre-petition are generally treated the same.
See In re Nichols,
450 B.R. 307, 311 (Bkrtcy. D. Mass. 2011) (bankruptcy creditors
of the same class are generally entitled to an “equal and ratable
distribution” from the estate), citing Florida Dept. of Revenue
v. Piccadilly Cafeterias, Inc., 554 U.S. 33 (2008).
preferential exception exists, however, under Section 546(c), for
sellers who have valid reclamation claims.
11 U.S.C. Sec.
546(c); Marin Motor, 740 F.2d at 223 (Congress adopted Section
546(c) in 1978 to recognize state law reclamation rights).
also United States v. Westside Bank, 732 F.2d 1258, 1265 (5th
Cir. 1984) (allowing “a reclaiming seller a priority claim” under
Section 546(c) “[c]learly . . . constitutes preferential
treatment against the buyer’s general unsecured creditors.”)
Momenta contends that Section 503(b)(9) does not, and was
not intended to, create a new and broad class of preferred
Instead, that section provides a supplemental remedy
for those sellers who would be preferred reclamation sellers, but
for a minor disqualification under Section 546(a).
Ningbo, on the other hand, says Section 503(b)(9), by its
terms, extends priority status to a new and broad class of prepetition sellers.
It argues that goods drop-shipped directly to
a debtor’s customer are goods “received by the debtor,” without
regard to the context-specific meaning ascribed to the term
“received” under Section 546(c).
It points out that, while
U.C.C. Section 2-103 defines “receipt of goods” as “taking
physical possession of them,” the preface to that section
cautions that the definition will not apply if “the context
U.C.C. § 2-103(1).
In common drop-shipment
scenarios, Ningbo says, “received” should be defined in context —
in a way that accounts for the commercial reality of dropshipment arrangements.
It points to the fact that drop-shipment
arrangements are not only common, but often call for flexibility,
and that a buyer’s decision to direct delivery to a third-party
should not permit the buyer to later deny receipt of the goods.
See Appellant’s Br., Doc. No. 10, at 11-13, citing U.C.C § 2310(a) (where there are “open” payment terms, “payment is due at
the time and place at which the buyer is to receive the goods”)
and U.C.C § 2-705(2)(a) and official comments (“seller may stop
delivery until . . . receipt of the goods by the buyer,” which
includes receipt “by the buyer’s . . . subpurchaser”).
As a general matter, Ningbo’s point is well-taken.
in some contexts commercial reality might well counsel
application of an expansive definition of “received.”
statutory construction it proposes here does not fit the context.
Priorities in bankruptcy, such as the administrative expenses
listed in Section 503(b), 11 U.S.C. Sec. 503(b)(1)-(9), stand as
discrete exceptions to the general equality principle.
they must be strictly construed and be “clearly authorized by
Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co.,
547 U.S. 651, 655 (2006).
Therefore, Ningbo’s claim to priority
turns not on “commercial reality” with respect to the delivery of
purchased goods, but on whether Congress “clearly authorized” the
specific priority Ningbo seeks.3
In any event, “commercial reality” might not support
Ningbo’s position. Under familiar rules of the marketplace
relating to the relative priorities of creditors, Ningbo could
not, at the time it agreed to deliver goods directly to Momenta’s
customers, have had any expectation that it could reclaim them.
Reclamation is generally available only while delivered goods
remain in the buyer’s possession. Ningbo’s suggestion that it
would be unfair to exclude those transactions from priority
treatment runs counter to “commercial reality” of creditor’s
Congress did not define the term “received” as it is used in
Nor is that term defined elsewhere in the
But it appears that Congress intended that the
term, as used in Section 503(b)(9), should be construed
consistently with the reclamation section of the Code, Section
As the bankruptcy court correctly noted, changes made to
the Bankruptcy Code in 2005 suggest an intent to create a
priority administrative expense as a supplemental remedy for
reclamation sellers, and not, as Ningbo argues, a priority remedy
for all sellers who deliver goods pursuant to a contract with the
debtor and within twenty days preceding bankruptcy.
Before the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (“BAPCPA”), Section 546(c)(2) allowed a
“‘court [to] deny reclamation to a seller with such right of
reclamation that has made such a demand,” but “only if the
court’” awarded an administrative expense claim or secured the
seller’s “‘claim by a lien.’”
Dana Corp., 367 B.R. at 414
(quoting 11 U.S.C. Sec. 546(c)(2) prior to BAPCPA).
words, before BAPCPA, an administrative expense priority served
Without definitional guidance, the word “received” is
ambiguous, since commercial practices and the larger statutory
context may suggest different plausible meanings. See Bankr. Ct.
Mem. Op., Doc. No. 7-3, at 8 (goods may be “received” when “the
risk of loss passes, when title passes, . . . or when a party
takes possession of [the goods].”)
as an alternative remedy to reclamation, but only if the seller
met Section 546(c)’s notice requirement.
See In re Microwave
Prods. of Am., Inc., 94 B.R. 967, 970 (Bankr. W.D. Tenn. 1989)
(“Copyfax failed to comply with the demand requirements,
therefore, it is not to be protected by the Court pursuant to
Section 546(c) once reclamation is denied.”).
In 2005, BAPCPA modified the reclamation rules under an
amendatory provision titled “Reclamation.”
See Sec. 1227
“Reclamation,” Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Pub. L. No. 109-8, § 1227(b), 119 Stat.
The provision deleted language in Section 546(c)(2)
authorizing courts to allow an administrative expense claim
(i.e., allow a cash payment in lieu of reclamation) where a
seller had otherwise made a proper reclamation demand.
See In re
TI Acquisition, LLC, 410 B.R. 742, 745-46 (Bankr. N.D. Ga. 2009)
(detailing legislative changes).
It also added new language to
Section 546(c) specifying that, even if “a seller of goods fails
to provide notice in the manner described [in Section 546(c)(1),
it] still may assert the rights contained in Section 503(b)(9).”
11 U.S.C. Sec. 546(c)(2).
Finally, it added Section 503(b)(9),
providing an administrative priority claim for goods the debtor
received within twenty days before bankruptcy.
Acquisition, 410 B.R. at 746.
See In re TI
As noted, the provision that made these changes was titled
Outside of the provision, BAPCPA made no other
reference to Section 503(b)(9)’s new administrative expense
See Frederick J. Glasgow, III, Comment, Reclaiming the
Defenses to Reclamation, 26 EMORY BANK. DEV. J. 301, 315 (2010).
It seems likely, then, that in creating Section 503(b)(9),
Congress meant to expand and clarify the rights of reclamation
sellers, but did not intend to quietly create a new and expansive
creditor class entitled to a unique priority.
Other courts have reached the same conclusion.
See e.g., In
re Circuit City, 432 B.R. at 229 (“Both § 503(b)(9) and the
amendments to § 546(c) were enacted as part of [BAPCPA] to
enhance certain types of reclamation claims.”) (quotation
omitted); In re Deer, 2007 WL 6887241, at *2 (Bankr. S.D. Miss.
June 14, 2007) (Section 503(b)(9) “was adopted to operate in
conjunction with 11 U.S.C.A. § 546(c)(2) to provide
administrative expense treatment to a creditor with reclamation
rights even if the seller fails to make a demand.”) (quotation
omitted); In re TI Acquisition, LLC, 410 B.R. 742, 745 (Bankr.
N.D. Ga. 2009) (“The treatment of expenses in Section 503(b)(9)
appears to be an outgrowth of the policy that first appeared in
11 U.S.C. § 546(c)”).
But see In re Erving Indus. Inc., 432 B.R.
354, 373 (Bankr. D. Mass. 2010) (“‘Section 546 does not limit or
control in any way the rights that claimant has under §
503(b)(9)’”) (quoting In re Plastech Engineered Prods., Inc., 397
B.R. 828, 838 (Bankr. E.D. Mich. 2008)).
Ningbo insists that Congress could not have intended Section
503(b)(9) to protect only reclamation sellers because neither
that Section, by its terms, nor Section 546, require a seller to
qualify as a “reclamation” seller in order to invoke the Section
That is, Ningbo asserts that (1) under the
express terms of Section 546(c), sellers who have not filed a
timely reclamation demand can still pursue the Section 503(b)(9)
remedy; and (2) sellers who invoke Section 503(b)(9) need not
show that the debtor still possesses the delivered goods — a fact
essential to a traditional reclamation claim.
Ningbo’s argument is plausible, but the factors it relies
upon equally suggest a more focused congressional intent, i.e.,
to provide a supplemental remedy to sellers who, but for a minor
deficiency, otherwise would have qualified for reclamation under
It is one thing to say that, for bankruptcy
purpose, Congress modified traditional U.C.C. prerequisites to
reclamation seller relief; it is quite another to say that it
meant to abandon them entirely.
Of course, Congress can do
either, as it chooses, but there is no clear indication, as there
must be, that Congress intended to create a new and potentially
very large class of priority sellers, a class that would likely
distort if not completely undermine the Code’s general equity
principles governing asset distribution.
Ningbo lastly argues that policy reasons support the
statutory construction it presses.
But each party’s proffered
construction of “received” promotes some recognized objective of
the Bankruptcy Code.
For example, were Section 503(b)(9) read
broadly to extend priority status to the claims of all sellers
who deliver to debtors or third-parties within twenty days before
bankruptcy, more trade creditors would likely be “encourage[d]
. . . to continue to extend credit to a debtor potentially
heading for bankruptcy.”
In re Arts Dairy, LLC, 414 B.R. 219,
220 (Bankr. N.D. Ohio 2009).
On the other hand, a narrow reading
of Section 503(b)(9), that reserves its remedy for would-be
reclamation sellers, would likely enhance prospects for
successful reorganization, while respecting creditor equality
Because the debtor must set aside cash to pay
priority administrative expenses, the larger the class of
creditors entitled to 503(b)(9) relief, the larger the potential
cash reserve needed, and the less likely a debtor will
That is not an insignificant
See In re Plastech Engineered Prods., Inc., 394
B.R. 147, 151 (Bankr. E.D. Mich. 2008) (Section 503(b)(9)
“creat[es] a large and potentially insurmountable cash hurdle for
a debtor to confirm a plan”).
The bankruptcy court correctly concluded that Sections
503(b)(9) and 546 are related statutory provisions enacted for
the benefit of reclamation sellers.
It also properly determined
that the word “received” should be given the same meaning in both
See generally United States v. Delgado-Garcia, 374
F.3d 1337, 1347 (D.C. Cir. 2004) (courts should “construe related
statutory provisions in similar fashion.”).
The phrase “received
by the debtor” as used in Section 503(b)(9) means: possessed by
the debtor, either actually or constructively.
court also correctly held that, under Section 503(b)(9), delivery
to, or possession by, a debtor’s customer under a drop-shipment
arrangement does not constitute constructive possession by the
debtor for Section 503(b)(9) purposes.
Because, in this case, Momenta never had actual or
constructive possession of the drop-shipped goods, those goods
were not “received by the debtor” for purposes of Ningbo’s
administrative expense claim under Section 503(b)(9), and that
The bankruptcy court’s decision denying Ningbo’s several
administrative expense claims is AFFIRMED in all respects.
Steven J. McAuliffe
United States District Judge
August 29, 2012
David E. LeFevre, Esq.
Charles R. Bennett, Jr., Esq.
Ann M. Dirsa, Esq.
John C. Elstad, Esq.
Geraldine L. Karonis, Esq.
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