Goods Must be Physically Received to Create Priority Claim

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By Daniel Gill

Goods are “received” by a debtor purchaser when it takes physical possession of them, not when they are delivered to a common carrier for transport, the Third Circuit Court of Appeals ruled July 10 ( In re World Imps., Ltd. , 2017 BL 236421, 3d Cir., No. 16-1357, 7/10/17 ).

The court considered the question in the context of whether to allow a priority claim to the supplier of goods within 20 days before the purchaser files bankruptcy.

The case “has important ramifications for a creditor that sells goods to a debtor soon before the debtor files a Chapter 11 bankruptcy petition,” the opinion by Judge Thomas M. Hardiman said.

Two Chinese companies that sold furniture to World Imports Ltd. shipped goods via common carrier on May 26, 2013. The goods were shipped “FOB,” or free on board, which means that the risk of loss or damage passed to World Imports “upon transfer at the port,” the court explained.

World Imports took physical possession of the goods in the United States on June 21, 2013.

Less than 20 days later, on July 3, 2013, World Imports filed its Chapter 11 reorganization case.

Federal law under 11 U.S.C. §503(b)(9) provides that suppliers can get priority for their claims if they deliver goods received by the debtor within 20 days of the bankruptcy filing.

When Were Goods Received?

Here, the question was when did the debtor receive the goods? If it was at delivery to the common carrier, the creditors would not be entitled to a priority claim. If it was when World Imports took physical possession in the U.S., then the creditors would enjoy priority.

The bankruptcy court and district court determined that the debtor received the goods when it assumed the risk of damage, when they were shipped FOB. But the appeals court disagreed.

That court looked at dictionary definitions of “receive” and also considered the Uniform Commercial Code definitions to conclude that physical possession was required.

The court also relied on a 1984 Third Circuit opinion, In the Matter of Marin Motor Oil, Inc. That case dealt with the rights of suppliers to reclaim goods under 11 U.S.C. §546(c), but determined that “receipt” by the debtor required the debtor taking actual physical possession.

It rejected the argument that the common carrier acted as an agent for the purchaser.

Circuit Judge Cheryl Ann Krause and District Judge Lawrence F. Stengel, sitting by designation, joined in the decision.

Bernstein-Burkley, Pittsburgh, represented the Chinese suppliers. World Imports was represented by Braverman Kaskey, Philadelphia.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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