In re SRC Liquidation, LLC
573 B.R. 537
Bankr. D. Del.2017Background
- SRC (Debtor) sold assets to Taylor; Standard Register Inc. (SRI) was designated to assume liabilities including Section 503(b)(9) claims after the sale closed and the Chapter 11 plan was confirmed.
- IIMAK was a vendor to SRC that shipped goods both directly to SRC and, at SRC’s direction using SRC’s UPS account, to SRC’s customers (drop shipments) within the 20 days before SRC’s petition date.
- Parties stipulated the Directly Delivered Goods totaled $2,096.27 (plus $270.01 in shipping); both sides agree those goods qualify under §503(b)(9) though they dispute inclusion of shipping charges.
- Drop Shipped Goods delivered to UPS for shipment to SRC customers totaled $53,190.24; after prior payments, the balance was $44,439.78 (plus $1,608.37 shipping). IIMAK sought §503(b)(9) priority for these amounts; SRI opposed.
- The narrow legal question: whether goods delivered by IIMAK to a carrier (UPS) using SRC’s account for shipment to SRC customers constitute "received by the debtor" under 11 U.S.C. §503(b)(9).
Issues
| Issue | IIMAK's Argument | SRI's Argument | Held |
|---|---|---|---|
| Whether goods drop-shipped to carrier using debtor's account were "received by the debtor" under §503(b)(9) | Receipt can be determined by passing of title or commercial realities; constructive receipt beyond U.C.C. §2-705 may apply; thus drop shipments qualify | Receipt requires physical possession by debtor or its agent per U.C.C. §2-705; common carriers (UPS) are not agents, so drop shipments were not received | Held: "received" requires physical possession by buyer or its agent; shipments to UPS for delivery to third-party customers were not received by debtor and do not qualify for §503(b)(9) priority |
| Whether U.C.C. §2-705 reclamation framework controls §503(b)(9) receipt analysis | §2-705 is tied to reclamation (§546(c)) and need not limit §503(b)(9); §503(b)(9) is a separate remedy allowing broader receipt concepts | §503(b)(9) and §546(c) are linked; the same meaning of "received" should apply and §2-705's constructive/actual receipt framework is appropriate | Held: Words are functionally equivalent; courts may look to U.C.C. §2-705 and receipt means physical possession by buyer or its agent |
| Whether title or risk of loss determines "receipt" under §503(b)(9) | Title/risk transfer is a clearer commercial indicator of debtor receipt | U.C.C. emphasizes possession, not title, for buyer/seller rights; carriers are not agents | Held: Passing title or risk of loss does not constitute "receipt"; physical possession by buyer or agent controls (per In re World Imports) |
| Whether shipping charges are includable in allowed claim for Directly Delivered Goods | Shipping charges for goods delivered directly to the debtor should be included in §503(b)(9) claim | Shipping charges should be excluded from the §503(b)(9) administrative claim | Held: Court allowed direct goods as §503(b)(9) administrative claims; parties disputed shipping charges but court found IIMAK did not meet burden for drop shipments; final allowed nonpriority claim totaled $46,318.16 (administrative portion limited to direct deliveries) |
Key Cases Cited
- Montello Oil Corp. v. Marin Motor Oil, 740 F.2d 220 (3d Cir.) (reclamation context interpreting U.C.C. receipt concepts)
- In re World Imports, Ltd., 862 F.3d 338 (3d Cir.) ("received" requires physical possession by buyer or its agent; common carriers are not agents)
- In re Momenta, Inc., 455 B.R. 353 (Bankr. D. N.H.) (use of U.C.C. to interpret §503(b)(9))
- In re Erving Indus., Inc., 432 B.R. 354 (Bankr. D. Mass.) (distinguishing reclamation and §503(b)(9) remedies but applying U.C.C. principles)
- In re Circuit City Stores, Inc., 432 B.R. 225 (Bankr. E.D. Va.) (treating similar statutory terms as functionally equivalent when linked by legislative history)