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11.5 Archer Daniels Midland v. Charter Int'l Oil Co. Contract Sales and Lease Contracts: Performance and Breach

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Page 1
60 B.R. 854, 1 UCC Rep.Serv.2d 110
(Cite as: 60 B.R. 854)

51V The Estate


51V(I) Reclamation
United States District Court, 51k2742 k. Seller's Reclamation Rights.
M.D. Florida, Most Cited Cases
(Formerly 51k209)
Jacksonville Division.
Under provision of Bankruptcy Code which allows
.
seller of goods, with certain restrictions, to exercise
ARCHER DANIELS MIDLAND COMPANY, Ap-
any statutory or common-law right to reclaim goods
pellant,
from insolvent buyer, seller's right of reclamation
v.
extended only to those goods which were identifi-
CHARTER INTERNATIONAL OIL COMPANY,
able and in buyer's possession at time demand for
Appellee and Cross-Appellant.
reclamation was received. Bankr.Code, 11 U.S.C.A.
Bankruptcy Nos. 85-1246-Civ-J-14,
§ 546(c); U.C.C. § 2-702.
84-289-BK-J-GP to 84-332-BK-J-GP and
85-1033-BK-J-GP. [2] Bankruptcy 51 2742
Adv. No. 84-152.
51 Bankruptcy
May 6, 1986. 51V The Estate
51V(I) Reclamation
Following buyer's insolvency, seller of ethanol
51k2742 k. Seller's Reclamation Rights.
sought to regain ethanol sold or its proceeds pursu-
Most Cited Cases
ant to statute allowing seller to reclaim goods from
(Formerly 51k675)
insolvent buyer. The Bankruptcy Court determined
Seller's right of reclamation pursuant to Bankruptcy
seller could reclaim only ethanol buyer had in stor-
Code and Texas reclamation statute was superior to
age at time it received notice of reclamation. Buyer
rights and interest in property held by debtor in
and seller appealed. The District Court, Susan H.
possession. Bankr.Code, 11 U.S.C.A. § 546;
Black, J., held that: (1) under provision of Bank-
V.T.C.A., Bus. & C. § 2.702.
ruptcy Code which allows seller of goods, with cer-
*855 Jerry Funk, Jacksonville, Fla., for appellant.
tain restrictions, to exercise any statutory or com-
mon-law right to reclaim goods from insolvent buy- Karen Jennemann, Smith & Hulsey, Jacksonville,
er, seller's right of reclamation extended only to Fla., for appellee, cross-appellant.
those goods which were identifiable and in buyer's
possession at time demand for reclamation was re-
ceived, and (2) seller's right of reclamation pursu-
OPINION
ant to Bankruptcy Code and Texas reclamation stat-
ute was superior to rights and interest in property SUSAN H. BLACK, District Judge.
held by debtor in possession.
This case came on upon the appeal from a Final
Affirmed. Judgment of the Bankruptcy Court entered July 25,
1985. Archer Daniels Midland Company
West Headnotes
[hereinafter “Archer”] filed its Notice of Appeal on
[1] Bankruptcy 51 2742 August 1, 1985, and Charter International Oil Com-
pany [hereinafter “Charter”] filed its Notice of
51 Bankruptcy Cross Appeal on August 6, 1985. Archer filed its

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60 B.R. 854, 1 UCC Rep.Serv.2d 110
(Cite as: 60 B.R. 854)

initial brief on November 13, 1985, and Charter Archer's Issue on Appeal
filed its brief on November 27, 1986, to which
Archer filed a reply brief on December 19, 1985. [1] Section 546(c) of the Bankruptcy Code, 11
The Court heard oral argument on March 11, 1986. U.S.C. § 546(c) (1982), allows a seller of goods,
with certain restrictions, to exercise any statutory or
There is no dispute as to the facts in this case. In common law right to reclaim goods from an insolv-
April, 1984, Archer sold ethanol for use in gasoline ent buyer. Archer concedes that the predominant
to Charter. Charter became insolvent and Archer view allows a seller to reclaim only those goods
sent a reclamation demand to Charter on April 21, which are identifiable and in the buyer's possession
1984, to regain the ethanal sold or its proceeds. at the time the reclamation demand is received.
Between April 11 and April 19, 1984, Archer sold Archer asserts, however, that the Court should ac-
80,804 gallons of ethanol worth $124,049.12 to cept the policy behind U.C.C. § 2-702, as adopted
Charter's facility in Houston. Of this amount, in U.S. v. Westside Bank, 732 F.2d 1258 (5th
Charter had 12,852 gallons of ethanol worth Cir.1984).
$20,049.12 remaining in storage in Houston when it
received the notice of reclamation. Between April In Westside Bank, the goods were delivered to the
11 and April 19, 1984, Archer also sold 16,324 gal- buyer on November 12 and 23, 1979, and the de-
lons of ethanol worth $26,118.40 to Charter's facil- mand for reclamation was made on November 30,
ity in Jacksonville. Charter did not have any of this 1979. The goods were subsequently sold on January
ethanol remaining in storage at the time it received 21, 1980, and the court allowed the seller to reclaim
the notice of reclamation. the traceable proceeds from the sale of the goods.
Id. at 1263. Therefore, at the time the reclamation
The Bankruptcy Court held that Archer could re- demand was received, the goods were identifiable
claim only the ethanol Charter had in storage at the and in the buyer's possession. Thus, Westside Bank
time it received the notice of reclamation. The is entirely consistent with the substantial body of
Bankruptcy Court also held that Charter, as a debt- authority which requires that goods be identifiable
or-in-possession, did not have a superior right to a and in the buyer's possession at the time the de-
seller's right of reclamation under Texas law. The mand for reclamation is received. Furthermore, the
Bankruptcy Court entered judgment for reclamation Westside Bank court stated: “the right [of reclama-
for Archer for the 12,852 gallons, granting Archer a tion] can never be asserted to defeat the interest of
priority administrative expense claim in the amount certain third parties who have dealt with the de-
of $20,049.12. faulting buyer.” Id. at 1260. Thus, a seller's right of
reclamation must be limited to goods in the buyer's
Archer raises the following issue on appeal: wheth- possession or their traceable proceeds at the time
er the Bankruptcy Court erred in denying Archer's the demand is received.
claim for reclamation of ethanol sold to Charter in
Jacksonville *856 and Houston which did not re- In conclusion, the Court holds that the seller's right
main in storage on the date Charter received the no- of reclamation extends only to those goods which
tice of reclamation. Charter presents the following are identifiable and in the buyer's possession at the
issue on appeal: whether the Bankruptcy Court time the demand for reclamation is received. In this
erred in holding that Charter was not a lien creditor case, Charter held 12,852 gallons of ethanol worth
with superior rights to those of a reclaiming seller $20,049.12 in storage at the time of the demand for
under Texas Business and Commercial Code reclamation. Therefore, the Bankruptcy Court did
[hereinafter “Texas UCC”], section 2.702(c). The not err when it limited Archer's right of reclamation
Court will address both of these issues. to $20,049.12, representing the value of the ethanol
which was identifiable and remaining in Charter's

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60 B.R. 854, 1 UCC Rep.Serv.2d 110
(Cite as: 60 B.R. 854)

possession at the time the notice of reclamation was (Bankr.N.D.Tex.1968). The Daylin court recog-
received. nized that In re Behring & Behring was a straight-
forward interpretation of the statutory language but
declined to follow that approach. 596 F.2d at 856 n.
Charter's Issue on Appeal
4. In addition, the post-Goodson Steel Corp. and
Texas UCC § 2.702(c) provides that a seller's right Behring & Behring Bankruptcy Code Section
to reclaim goods is subject to the rights of a buyer 546(c) expressly makes the rights and avoidance
in ordinary course or other good faith purchaser or powers of the trustee subject to the seller's right of
lien creditor under this chapter. Charter asserts that reclamation. Pursuant to Section 546(c), if the court
under Texas law, a bankruptcy trustee is a lien denies the seller's right of reclamation, the court
creditor pursuant to Texas UCC § 9.301(c), which must afford the seller's claim priority as an admin-
provides that a lien creditor includes a trustee in istrative expense or secure the seller's claim with a
bankruptcy. Charter further asserts that as a debtor- lien. 11 U.S.C. § 546(c)(2). Thus, the Bankruptcy
in-possession, Charter has all the rights and powers Code affords the seller's right of reclamation the
of a trustee in bankruptcy pursuant to §§ 1107 and same priority status as a perfected security interest
1108 of the Bankruptcy Code. under Article Nine and the filing of a bankruptcy
petition does not cut off a perfected security in-
If Charter's position were correct, there would be terest. See Westside Bank, 732 F.2d at 1265. A per-
no right of reclamation in Texas, despite Texas fected security interest also has priorty over a lien
UCC section 2.702, against an insolvent buyer once holder under U.C.C. § 9-301.
the buyer filed a petition in bankruptcy. This appar-
ent inconsistency in the statutes has led the courts Charter also argues that the Daylin and Westside
to conclude that a buyer's filing of a petition in Bank courts should not be rewriting the Texas stat-
bankruptcy does not terminate a seller's right of re- utes, especially in light of the Texas cases which
clamation, despite the language of the statute. In give a literal interpretation to these sections. The
Westside Bank, the Fifth Circuit in determining pri- Fifth Circuit, which decided Westside Bank, has
orities under the UCC, stated: “The Ninth Circuit within its jurisdiction the State of Texas. Thus,
has held that the Texas right of reclamation sur- Westside Bank, which gave the seller's right of re-
vives bankruptcy; thus, the right of the trustee as a clamation priority, is a strong indication that the
hypothetical lien creditor cannot supercede the right law of Texas has changed and that the Texas stat-
of the seller to reclaim despite the words of the stat- utes are not to be interpreted literally.
ute.” 732 F.2d at 1263, citing, In re Daylin, 596
In conclusion, the Court holds that a seller's right of
F.2d 853, 855-56 (9th Cir.1979). The Daylin court,
reclamation pursuant to Bankruptcy Code § 546
analyzing Texas law, concluded that only a good
and Texas UCC § 2.702 is superior to the rights and
faith purchaser can cut off a seller's right of reclam-
interests in property held by a debtor-in-possession.
ation *857 and that a trustee in bankruptcy only oc-
Therefore, the Bankruptcy Court did not err when it
cupies the position of a lien creditor. See Daylin,
denied Charter priority status over Archer as a lien
596 F.2d at 856. Thus, the courts have interpreted
creditor under Texas law.
Texas law so as to give priority to the reclaiming
seller over the bankruptcy trustee. Having concluded that the decision of the Bank-
ruptcy Court was correct in all respects, the Final
[2] Charter supports its position by citing the Texas
Judgment entered by the Bankruptcy Court on July
cases of In re Goodson Steel Corp., 10 UCC
25, 1985, is hereby affirmed.
Rep.Serv. 387 (Bankr.S.D.Tex.1968), and In re
Behring & Behring, 5 UCC Rep.Serv. 600 M.D.Fla.,1986.

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60 B.R. 854, 1 UCC Rep.Serv.2d 110
(Cite as: 60 B.R. 854)

Archer Daniels Midland Co. v. Charter Intern. Oil


Co.
60 B.R. 854, 1 UCC Rep.Serv.2d 110

END OF DOCUMENT

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