Opinion
Jointly Administered Case Number 01-44007.
December 18, 2003
AMENDED ORDER
This cause is before the Court on the motion of Phar-Mor, Inc. and related entities ("Debtors") for reconsideration of this Court's prior memorandum opinion and order overruling Debtors' motion for entry of an order determining all reclamation claims to be general unsecured claims pursuant to 11 U.S.C. § 502(j) and FED. R. BANKR. P. 3008. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157(b) and 1334(b).
DISCUSSION I. HISTORY
On November 12, 2003, this Court entered a memorandum opinion and order denying Debtors' motion for entry of an order determining all reclamation claims to be general unsecured claims. See In re Phar-Mor, Inc., ___ B.R. ___, 2003 Bankr. LEXIS 1478 (Bankr. N.D. Ohio Nov. 12, 2003). This Court determined that numerous vendors that supplied Debtors with various goods prior to and during bankruptcy asserted valid reclamation claims pursuant to § 546(c) of the Bankruptcy Code and § 2-702 of the Uniform Commercial Code ("Vendors"). This Court also found that the value of these claims was not affected by the interests of the Pre-Petition Lenders because the Pre-Petition Lenders chose to release their security interests and were paid in full through the Interim DIP Order and Final DIP Order entered by the Court on September 24, 2001 and October 23, 2001. This Court further found that those reclamation claims submitted prior to the entry of the Interim Order could not be defeated by the interests of the DIP Lenders because a debtor's decision to grant a security interest in inventory to a subsequent secured lender cannot defeat a seller's reclamation rights. Several of the Vendors, whose reclamation claims Debtors sought to relegate to the status of general unsecured claim, submitted valid reclamation claims prior to September 24, 2001. Thus, these reclamation claims could not be affected by or were not subject to the interests of the DIP Lenders. This Court overruled Debtors' motion since it sought an order determining each of the reclamation claims to be general unsecured claims.
Hereinafter the term "Vendors" refer to American Leather Specialities Corp., Paper Magic Group, Inc., Magco Incorporated, Bonne Bell, Inc., McKesson Corporation, Fleming Companies, Inc., Liquidity Solutions, Inc., Proctor Gamble Distributing Corporation, Reckitt Benchiser, McCormick Co., Wyeth Consumer Products, Master Foods USA, Pepsi-Cola Company, Checkpoint Systems, Inc., Hershey Foods Corporation, The Dial Corporation, Bayer Corporation, CCA Industries, Inc., Golden Valley Microwave Foods, Inc., Sara Lee Knit Products, Ross Products Division Abbott Laboratories, Inc., Gray Company, Kimberly-Clark Corporation, Blueberry Confections, Inc., Union Wadding Company, Pfizer, Inc., Collegeware USA, Inc., Glaxo Smith Kline, and Unilever HPC USA.
Hereinafter the term "Pre-Petition Lenders" refers to the lenders that entered into a loan and security agreement with Debtors dated as of Nov. 16, 2000.
Interim DIP Order, Sept. 24, 2001, Doc. No. 13.
Final DIP Order, Oct. 23, 2001, Doc. No. 148.
On November 24, 2003 Debtors filed a motion for reconsideration of this Court's prior memorandum opinion and order overruling Debtors' motion. Debtors put forth two arguments as to why this Court should modify and alter its prior memorandum opinion and order overruling Debtors' motion. First, Debtors argue the value of a reclamation claim is established at the moment in time when the reclamation demand is received. Accordingly, Debtors argue the reclamation claims attributable to demands received prior to September 24, 2001 were of no value because the Vendors' goods were subject to the claims of the Pre-Petition Lenders. Second, Debtors argue reclamation claims attributable to demands received on or after September 24, 2001 are of no value because the Vendors' goods were subject to the claims of the DIP Lenders. Accordingly, Debtors argue the reclamation claims of all Vendors should be relegated to the status of general unsecured claim.
II. ANALYSIS A. Reclamation Demands Received Prior to September 24, 2001
This Court rejected Debtors' argument that the value of a reclamation claim is determined at the moment in time when the reclamation demand is received. To accept Debtors' argument would be tantamount to adopting the position that a seller's right to reclaim is automatically extinguished by the existing interest of a secured creditor. Nearly every court which has addressed this issue has found that a seller's right to reclaim is subject to the existing interest of a secured creditor, meaning that the right to reclaim is subordinate to the interest of a secured creditor and not automatically extinguished by such interest. Id. at *28 (citations omitted).
Outside of bankruptcy a reclaiming seller retains a priority interest in any surplus proceeds traceable to the goods when an existing secured creditor forecloses on such goods. Pester Ref. Co. v. Ethyl Corp. ( In re Pester Ref. Co.), 964 F.2d 842, 846 (8th Cir. 1992). The value of a reclamation claim is not determined at the moment in time when the reclamation demand is received. See Id. at 847 (rejecting debtor's argument that reclamation claim is worthless because the secured creditors were undersecured at the outset because argument "ignores the freedom of secured creditors in non-bankruptcy contexts to relinquish all or part of their security interests."). The Pre-Petition Lenders chose to release their security interests and were paid in full through the Interim and Final DIP Orders. Accordingly, the Vendors' reclamation claims were not rendered valueless because of the interests of the Pre-Petition Lenders.
B. Reclamation Demands Received on or After September 24, 2001
Debtors' second argument is that reclamation claims attributable to demands received on or after September 24, 2001 are of no value. Debtors argue these reclamation claims are valueless because the Vendors' goods were then subject to the claims of the DIP Lenders. Debtors effectively ask the Court to reconsider its decision as it concerns only those reclamation claims attributable to demands received on or after September 24, 2001.
This Court did not consider each reclamation claim Debtors sought to relegate to the status of a general unsecured claim on an individual basis. Debtors sought the entry of an order determining each of the reclamation claims to be general unsecured claims. Debtors did not argue that only some of the reclamation claims should be allowed only as general unsecured claims. Accordingly, Debtors failed to direct this Court's attention to the part of the Reclamation Report stating the date each reclamation demand was received. Debtors mistakenly thought that the Pre-Petition Lenders had assigned their interests to the DIP Lenders thereby making this case indistinguishable from this Court's prior decision in the Wheeling-Pittsburgh bankruptcy. Unlike in Wheeling-Pittsburgh, however, the Pre-Petition Lenders in this case did not assign their security interests to the DIP Lenders.
The last page of Debtors' motion provides: "WHEREFORE, Debtors pray for an order determining that each of the claims of the Reclamation Claimants identified in the Reclamation Reports be allowed as a general unsecured claim only and that to the extent such Reclamation Claimants asserts a claim entitled to priority allowance, that such claim be denied, together with such other and further relief as to this Court seems proper." Debtors' Motion Determining Reclamation Claims, p. 11, Feb. 13, 2003, Doc. No. 1539.
Reclamation Report, Apr. 9, 2002, Doc. No. 601.
See In re Pittsburgh-Canfield Corp., Case No. 00-43394 (Bankr. N.D. Ohio Mar. 13, 2003).
Upon a closer examination of the Reclamation Report it is evident that some of the Vendors' reclamation claims are attributable to demands received on or after September 24, 2001. In its decision, this Court did not find that the reclamation claims received on or after September 24, 2001 were not subject to the interests of the DIP Lenders. This Court found that a debtor's decision to grant a security interest in inventory to a subsequent secured lender cannot defeat a seller's reclamation rights. The interests of the DIP Lenders, however, did not arise subsequent to the creation of these reclamation claims. This Court recognizes that a reclamation claim does not exist until a reclamation demand asserting such claim is received. See Flav-O-Rich, Inc. v. Rawson Food Serv., Inc. ( In re Rawson Food Serv., Inc.), 846 F.2d 1343, 1347-48 (11th Cir. 1988). Therefore, the reclamation claims attributable to demands received on or after September 24, 2001 were subject to the interests of the DIP Lenders.
At the hearing conducted on June 10, 2003, Debtors proffered the testimony of Martin S. Seekely, Debtors' Vice President and Chief Financial Officer, that the goods subject to reclamation demands were sold in satisfaction of the DIP Lenders' loan prior to the weak of July 20-27, 2002. Mr. Seekely was available for cross examination. As noted in this Court's decision, the DIP operating reports for July 2002 to January 2003 reveal that the DIP loan of One Hundred Thirty-Five Million Dollars ($135,000,000.00) was paid off by the week of July 20-27, 2002. Since the reclamation claims attributable to demands received on or after September 24, 2001 were subject to the interests of the DIP Lenders, and since the subject goods were in fact sold in satisfaction of the DIP Lenders' loan, these claims are of no reclamation value and should be allowed only as general unsecured claims.
CONCLUSION
For the reasons set forth in this Court's prior opinion, those reclamation claims attributable to demands received prior to September 24, 2001 should be granted an administrative priority pursuant to § 546(c). Those reclamation claims attributable to demands received on or after September 24, 2001, however, should be allowed only as general unsecured claims. This order amends this Court's December 16, 2003 order overruling Debtors' motion for reconsideration of the Court's opinion overruling Debtors' motion for entry of an order determining all reclamation claims to be general unsecured claims. This order also amends this Court's November 12, 2003 memorandum opinion and order denying in full Debtors' motion for entry of an order determining each of the reclamation claims to be general unsecured claims. Debtors' motion is hereby granted in part and denied in part, consistent with this order.