Opposition Brief — Ogle v. Fidelity & Deposit Co.

Sn The

Supreme Court of the Gnited States

6

PHAR-MOR, INC.,

Petitioner,

Vv.

MCKESSON CORPORATION,

Respondent.

¢

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Sixth Circuit

£

BRIEF IN OPPOSITION

¢

JEFFREY K. GARFINKLE

Counsel of Record

DAVID M. LIu

BUCHALTER NEMER, PC

18400 Von Karman Avenue

Suite 800

Irvine, CA 92612

(949) 760-1121

Counsel for Respondent

March 30, 2009

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

COUNTER-STATEMENT OF

QUESTIONS PRESENTED

In its Petition for Writ of Certiorari (Petition),

the Debtor Phar-Mor, Inc. (Debtor) identifies an issue

under the Uniform Commercial Code (UCC) regard-

ing the supposed priority of secured creditors over

reclaiming sellers as to reclaimed goods and, in so

doing, makes almost no mention of the then operative

and dispositive section of the Bankruptcy Code, 11

U.S.C. § 546(c)(2) (1998) (amended in 2005 by Pub. L.

109-8 § 1227(a)). Respondent, McKesson Corporation

(McKesson) strongly disagrees with the issue framed

by the Debtor. McKesson also disagrees with the

Debtor’s claim that this matter has “exceptional

importance.” This is particularly true here where the

operative and dispositive bankruptcy statute was

substantially amended in 2005 and, concurrently, a

new statute was enacted that now governs the core

issues raised by this case.

The actual issues before the Bankruptcy Court

and the ones which were affirmed by the Sixth Cir-

cuit are as follows:

Whether the Bankruptcy Court properly

denied the Debtor’s request to reclassify

McKesson’s reclamation claim from an ad-

ministrative claim to a general unsecured

claim, and whether the Bankruptcy Court

properly applied the statutory language of

former 11 U.S.C. §546(cX2) in awarding

McKesson an administrative claim for the

$8.6 million of goods that McKesson delivered

COUNTER-STATEMENT OF

QUESTIONS PRESENTED - Continued

on the eve of the Debtor’s bankruptcy filing

and then sought to reclaim.

In addition to these issues, there remains an

unresolved issue which was not addressed by the

Sixth Circuit or either of the two lower courts:

Whether, in the absence of a secured creditor,

the Debtor has standing to assert rights of

secured party under § 2-702 of the UCC.

But it is unnecessary to resolve this issue be-

cause the Debtor’s Petition should be denied.

CORPORATE DISCLOSURE STATEMENT

Respondent is McKesson Corporation, a publicly

traded corporation under the market symbol MCK.

There are no parent corporations or publicly held

companies owning 10% or more of Respondent’s stock.

iv

TABLE OF CONTENTS

Page

COUNTER-STATEMENT OF QUESTIONS PRE-

RINE osha cs ica nabcsommasn tesnsyeraauesdesatsecnicniitis i

CORPORATE DISCLOSURE STATEMENT ........ ill

yy OP OS. Bots. ge i. 2) re iv

TABLE OF AUTHORITILBES. ........c.scccscsscccesessesscsoess Vv

STATEMENT OF THE CASE ..................cscceesseceees 1

RESPONSE TO STATEMENT OF FACTS ........... 3

REASONS EXIST WHY THE PETITION MUST

Se SE ie Cais Sais ints sgcisrpsduasisaruicneensbanscdacnseca ten dies D

A. The Sixth Circuit Properly Applied the

oI

Plain Test of § 546(c)(2) and Existing Cir-

ee I sox oa visaroncccveccceasasetaneunasiedebecsoxas

The DIP Lenders Were Not “Good Faith

ERT IRN he Ree aS ee NRE ORE OPO CTE ORR

There is No Circuit Split Which Warrants

Further Appellate Review ................scescsceees

The Sixth Circuit’s Decision Has Not Had

and Will Not Have a “Devastating” Impact

OTL CECURP OE LAID oo. osciccsccnenennnsdcvcseescnsnveses

The Debtor Lacks Standing to Assert

Secured Creditor Rights Under Section 2-

702(C) of the UCC When No Such Secured

RI WOE oirhonikeac deen sunceievcabucpeccrsansekecstes

RI 3s gusts crac ohcxaummusnabess odeabernunceeunaaes

15

TABLE OF AUTHORITIES

CASES

Greylock Glen Corp. v. Community Sav. Bank,

ee Bh UN Gee BOOED iis vevikcnscnnivscedennecskcncnseccenens 9

Griffin Retreading Co. v. Oliver Rubber Co.

(In re Griffin Retreading Co.), 795 F.2d 676

CE IED hai cercekccksrenenicoeveviseveciaeaes ii, 32, 14, 37

Hartford Underwriters Ins. Co. v. Union Planters

Bank (In re Henhouse), 530 U.S. 1 (2000).......... 17, 18

In re Arico, Inc., 302 B.R. 128 (Bankr. S.D.N.Y.

i saiavnn beth cea eect edi lanai tewkivsstndeventaseeiie 14

In re Bosler Supply Group, 74 B.R. 250 (N.D.

RR Ce reece Poe me Ta TREC AN PTO TEES RC Tee 14

In re Bridge Information Systems, Inc., 288

BR. ISS Coa, BT. BAW TOOL) ons ccccecccccecsesvssccscsss 14

In re Dairy Mart Convenience Stores, Inc., 302

B.E, F206 CRORES. B.D. YL. BOOB) weccccvccvcccscccssesscesees 14

In re Diversified Food Serv. Distrib. Inc., 130

B.R. 427 GBankr. S.DIN.. TRGIR.....ccccceseccccoccncccecess 14

In re Federal’s, Inc., 553 F.2d 509 (6th Cir.

|| gS SPEEA eNO ee Eee nee OPE Ht Am DME 12. 33

In re Georgetown Steel Co., 318 B.R. 340

CS es, ED Cctiiiis os vdinc wasictbninthavesmsindduaevadeest 14,15

In re Made in Detroit, Inc., 414 F.3d 576 (6th

A ee eae AE eR AL LAE CR le Se 9

In re Mel Golde Shoes, 403 F.2d 658 (6th Cir.

vi

TABLE OF AUTHORITIES ~ Continued

Page

In re Phar-Mor, Inc., 301 B.R. 482 (Bankr. N.D.

ad das 7,8

In re Pittsburgh-Canfield Corp., 309 B.R. 277

aes PU Gate IED vnkevich cn cocscessnscdelevescucvacsicasens 13, 14

In re Sunstate Dairy & Food Products Co., 145

EE Ee. OOS CROAT, BED). FIG. LOGE) ocisscccvscossccsccossccce. 14

Phar-Mor, Inc. v. McKesson Corp., 534 F.2d 502

I ON is as can esg si skuouaanapencsshassaaeeled’ 6, 16

Stowers v. Mahon (In re Samuels & Co.), 526

fe BB tae Ly ¢ . | 9,10

Willemain v. Kivitz dn re Willemain), 764 F.2d

1019 (4th Cir. 1985) .......... (dieu okeikeccsaxtetescl atten 9

BANKRUPTCY STATUTES

NE, We MD a voi ccccsuvicncssneessedsventvacsseuicun 2, 18, 16

Be ee a. coved knits denvevuisbesataeacd Gavasecevaaseuntbasael 18

11 U.S.C. § 546(c) (pre-2005 amendment)....... passim

11 U.S.C. § 546(c) (post-2005 amendment)......... 3,5, 15

11 1).8.C. § 546(c)(2) (pre-2005 amendment).....passim

UNIFORM COMMERCIAL CODE

es oe Eiacatnteakidduuaedeans 1, 7, 16

I CP i cs ods 5 osdeivacecsxuvaruvesincevecnece 5, 8, 10, 17, 18

Vill

TABLE OF AUTHORITIES — Continued

Page

OTHER AUTHORITIES

Sixth Circuit’s Phar-Mor Decision Breathes

New Life Into Reclamation Remedy, Sept.

Fa, MUA, FE ad, EG vnc ceva vccincvcdssaccavessdicscics 16

Vendor Whose Reclamation Claim Is Trumped

by DIP Lender’s Superpriority, 2008 Comm.

BE Py PO whecereasicccisenisaiteensverteinnnoseseeeaassesenme 16

STATEMENT OF THE CASE

In September 2001, on the eve of a Chapter 11

filing, petitioner Phar-Mor, Inc. (Debtor) purchased

over $18 million dollars in goods on credit from

McKesson and 140 other vendors. It did so with full

knowledge that it intended to file bankruptcy days

later. These pre-bankruptcy purchases were not

typical; they were fraudulent. Both the Uniform

Commercial Code (UCC) and the Bankruptcy Code

contain provisions to protect vendors from this kind of

fraud. UCC § 2-702 allows defrauded vendors the

right to reclaim their goods, while former 11 U.S.C.

§ 546(c)(2) required that reclaimed goods either be

returned or the reclaiming seller be granted an

administrative claim or a replacement lien.

In this case, the Bankruptcy Court did exactly

what was required by statute: It awarded McKesson,

as a defrauded reclaiming seller, an administrative

claim for the value of its reclaimed goods. Then, one

and a half years later, the Bankruptcy Court denied

the Debtor’s request to reclassify McKesson’s admin-

istrative claim as a general unsecured claim (Reclas-

sification Motion). Both the District Court for the

Northern District of Ohio and the Sixth Court af-

Srmed that decision.

In a brazen attempt to generate interest in

Supreme Court review, the Debtor proclaims that the

Sixth Circuit’s decision, among other dire conse-

quences, will have a “devastating impact upon se-

cured loan transactions.” The Debtor also contends

2

that the decision “strips” asset based lenders of their

“priority interest in inventory collateral.” No evidence

supports these hyperbolic statements. In fact the

evidence is the contrary. As evidenced by the recent

rash of large corporate bankruptcy cases, many of

which involve some of this nation’s largest retailers,

asset based lenders have maintained their security

interests in all of their collateral, including inventory

legitimately acquired, and lending to these types of

companies has not been disrupted.

The issues raised in this case have not arisen in

these more recent bankruptcy cases (filed since July

2008). This is due, in part, to the fact that the opera-

tive statute in this case no longer exists. In 2005,

substantial amendments were made to 11 U.S.C.

§ 546(c) and 11 U.S.C. § 503(b)(9) was enacted. The

end result of those amendments is that any seller

that delivers goods to a debtor within 20 days of

bankruptcy is automatically entitled to an adminis-

trative claim.

In arguing for Supreme Court review, the Debtor

also disregards the Sixth Circuit’s analytical frame-

work, which rests on the application of the plain text

of 11 U.S.C. § 546(c)(2) (1998) (amended in 2005 by

Pub. L. 109-8 § 1227(a)). Indeed, the Petition contains

only two brief mentions of this statute. The Debtor

hopes that by ignoring the operative bankruptcy

statute and then proclaiming the Sixth Circuit’s

decision as having a “devastating” impact on asset

based lending and businesses, it can convince this

Court to grant certiorari. The Sixth Circuit correctly

3

applied the plain text of § 546(c)(2) of the Bankruptcy

Code, as well as its existing precedents. The Sixth

Circuit’s decision represents a mere reaffirmation of

decades of precedent, both under pre-UCC common

law and under the UCC, regarding the relative rights

of defrauded, reclaiming sellers vis-A-vis debtors and

secured creditors. There is nothing remarkable about

this decision which would warrant Supreme Court

review.

RESPONSE TO STATEMENT OF FACTS

The Debtor’s factual recitation contains three

materially misleading or omitted facts. Those facts

further justify denial of the Petition.

The Debtor states that, at the outset of its bank-

ruptcy case, its pre-petition lenders increased the

amount of the secured loan by $35 million in debtor

in possession financing (DIP Financing). The truth,

however, is quite different and perhaps is best sum-

marized by United States District Judge Boyko, in his

affirmation of the Bankruptcy Court’s order denying

the Reclassification Motion.

Referencing [the] Final DIP Order, Judge

Bodoh found that the Pre-Petition debt was

fully satisfied and that there was no transfer

or assignment of any lien or security interest

to the DIP Lenders.... Judge Bodoh found

that the Pre-Petition Lenders elected to re-

lease their security interests and were paid

in full, and that their security interests were

4

not assigned or preserved.... [McKesson’s]

[rleclamation claim ... deserved to be

granted an administrative priority pursuant

to United States Bankruptcy Code § 546(c).

Appendix B, page 18a.

The Debtor frequently speaks of secured lenders

and how their rights will be impacted in this and

perhaps other cases. Yet, the Debtor fails to mention

that there are no longer any secured lenders in this

case. The DIP Lenders were paid in full in 2002. This

is another key fact that supports denial of the Peti-

tion.’

Lastly, the Debtor fails to mention that in addi-

tion to paying the DIP Lenders in full, the Debtor

received over $155 million in revenue. Much of the

revenue was generated from, or ascribed to, inventory

which the Debtor fraudulently procured from sellers

on the eve of bankruptcy.

' Throughout this litigation, McKesson has disputed the

Debtor’s standing to assert the rights of non-existent secured

creditors. Undeterred, the Debtor argues in its Petition that the

decison deprives secured creditors of their supposed senior

security interest in inventory. While the Sixth Circuit (and the

lower courts) did not address this standing issue, it remains

valid and provides an independent basis upon which the Petition

must be denied.

5

REASONS EXIST WHY THE

PETITION MUST BE DENIED

A. The Sixth Circuit Properly Applied the

Plain Text of § 546(c)(2) and Existing Cir-

cuit Precedent.

The Petition makes it appear that the only

relevant statute at issue is § 2-702(C) of the Ohio

UCC and this appeal somehow involves a lien priority

dispute between McKesson and the Debtor’s DIP

Lenders. That is not the case. The only issue on

appeal was whether the Bankruptcy Court properly

denied the Reclassificaiion Motion and, correspond-

ingly, properly granted McKesson an administrative

claim after the Debtor refused to return the reclaimed

goods to McKesson.

The pertinent Bankruptcy Code section (now

amended) is 11 U.S.C. § 546(c). That statute provided,

ir part:

§ 546. Limitations on avoiding powers

* *

(c) Except as provided in subsection (d) of

this section, the rights and powers of a trus-

tee under sections 544(a), 545, 547, and 549

of this title are subject to any statutory or

common-law right of a seller of goods that

has sold goods to the debtor, in the ordinary

course of such seller’s business, to reclaim

such goods if the debtor has received such

goods while insolvent, but —

6

(1) such a seller may not reclaim any

such goods unless such seller demands in

writing reclamation of such goods before ten

days after receipt of such goods by the

debtor; and

(2) the court may deny reclamation toa

seller with such a right of reclamation that

has made such a demand only if the court —

(A) grants the claim of such a

seller priority as a claim of a kind specified

in section 503(b) of this title; or

(B) secures such claim by a lien.

The Sixth Circuit held that, under the plain text of

§ 546(c)(2), McKesson was properly granted an ad-

ministrative claim on account of its unfulfilled recla-

mation demand.

It appears clear from the plain language of

this statute that McKesson had the right

to reclaim the goods delivered to Phar-Mor.

See id. at § 1302.76(B). This finding — that

McKesson had a right to reclaim the goods —

would seem to answer the pending question

and end our analysis; the court, having de-

nied reclamation, was indeed obligated to

grant McKesson a priority on its claim,

which it did by granting the administrative-

expense priority in the amount of the goods.

Phar-Mor, Inc. v. McKesson Corp., 534 F.2d 502, 505

(6th Cir. 2008); App. 7a-8a.

i

Correspondingly, the Sixth Circuit rejected Phar-

Mor’s contention that the DIP Lenders’ security

interest defeated McKesson’s entitlement to an

administrative claim under 11 U.S.C. § 546(c)(2). In

so doing, the Sixth Circuit adopted a similar analysis

to that employed by the Bankruptcy Court when it

denied the Reclassification Motion:

Debtors maintain that all of the goods that

were subject to Vendors’ Reclamation De-

mands were sold during the [case], and the

proceeds thereof were applied to repay Debt-

ors’ obligations under the DIP Facility. No

action on the part of a debtor should be per-

mitted to defeat a seller’s right to reclama-

tion. [citations omitted.] A debtor’s decision

to grant a security interest in inventory toa

subsequent secured lender cannot defeat a

seller’s reclamation rights if the seller as-

serted its rights before the security interest

is granted. Moreover, the Interim and Final

DIP Orders explicitly prohibit Debtors from

returning the goods constituting collateral

under § 546(c) of the Bankruptcy Code.

Therefore, having notice of the Reclamation

Demands, DIP Lenders cannot qualify as

good faith purchasers under § 2-702(3).

In re Phar-Mor, Inc., 301 B.R. 482, 497 (Bankr. N.D.

Ohio 2003); App. 64a.

8

B. The DIP Lenders Were Not “Good Faith

Purchasers.”

Key to the Petition is the repeated declaration

that the DIP Lenders were good faith purchasers and

that all secured creditors qualify as “good faith pur-

chasers” and enjoy the protections of UCC § 2-702(C).

Yet, the Debtor blithely ignores the actual facts of the

case, as found by the Bankruptcy Court, and twice

affirmed by the reviewing courts.

At an evidentiary hearing, McKesson proved that

the DIP Lenders knew of the reclamation demand

before they made the DIP loan and, as a result, did

not qualify as “good faith purchasers” under UCC § 2-

702(C). The Bankruptcy Court agreed and found that

the DIP Lenders were not good faith purchasers.

Phar-Mor, Inc., 301 B.R. at 497; App. 64a. The Sixth

Circuit agreed that DIP Lenders were not good faith

purchasers. It did so based upon similar analysis to

that employed by the lower courts.

The Sixth Circuit properly reached this conclu-

sion based on the facts of this case. Neither the

Bankruptcy Code nor the UCC defines the term “good

faith purchaser.” However, the Sixth Circuit properly

applied the prevailing definition for good faith pur-

chaser in bankruptcy and non-bankruptcy cases: “one

* The UCC does define, independently, the terms “good

faith” and “purchaser.” But the term “good faith purchaser” has

three distinct words which, when combined, have a _ well-

established meaning.

9

who purchases the assets for value, in good faith, and

without notice of adverse claims.” In re Made in

Detroit, Inc., 414 F.3d 576, 581 (6th Cir. 2005); Wille-

main v. Kivitz Un re Willemain), 764 F.2d 1019, 1023

(4th Cir. 1985) (defining “good faith purchaser” as

“one who purchases the assets for value, in good faith,

and without notice of adverse claims”); Greylock Glen

Corp. v. Community Sav. Bank, 656 F.2d 1, 4 (1st Cir.

1981) (same). Here, as the Bankruptcy Court deter-

mined, the DIP Lenders had prior knowledge of

McKesson’s reclamation demand prior to making the

DIP loan and thus did not qualify as “good faith

purchasers” with respect to McKesson’s reclaimed

goods. For these reasons, every reviewing court has

concluded that the DIP Lenders were not good faith

purchasers and, as a result, there was no basis to

deprive McKesson of its administrative claim, even

assuming that was permissible under 11 U.S.C.

§ 546(c)(2). Without even the possibility of an actual

“good faith purchaser,” the Debtor has no legitimate

grounds to seek further appellate review of this

factual issue.

C. There is No Circuit Split Which Warrants

Further Appellate Review.

In an attempt to convince further appellate

review, the Debtor argues that the Sixth Circuit’s

decision is in conflict with the Fifth Circuit’s decision

in Stowers v. Mahon (In re Samuels & Co.), 526 F.2d

1238 (5th Cir. 1976), cert. denied, 429 U.S. 834 (1976).

There is no inter-circuit conflict.

10

Samuels was a pre-Bankruptcy Code case involv-

ing a priority dispute over sale proceeds between the

seller of cattle and a debtor’s secured creditor. As

between those two parties, the Fifth Circuit (over a

vigorous dissent) ruled that the sale proceeds be-

longed to the secured creditor.

In contrast, the present case did not involve a

priority dispute between McKesson and the DIP

Lenders. The Debvor’s DIP Lenders were paid in full

during the course of the bankruptcy case. Rather, this

case involved the question as to whether McKesson,

as a reclaiming seller was entitled to an administra-

tive claim in the Debtor’s bankruptcy case under 11

U.S.C. § 546(c) when the Debtor used McKesson’s

reclaimed goods in the bankruptcy case.

Moreover, unlike Samuels, the Bankruptcy Court

here conducted an evidentiary hearing on whether

the Debtor’s lenders qualified as good faith purchas-

ers under § 2-702(C) of the UCC. Based upon lan-

guage in the then operative DIP loan documents,

McKesson established that the Debtor’s DIP Lenders

knew of the reclamation claims and did not qualify as

good faith purchasers. The Debtor, on the other hand,

failed to present any evidence to refute this fact.

Based upon the evidence presented, the Bankruptcy

Court agreed with McKesson and specifically ruled

that the DIP Lenders were not good faith purchasers.

This fact further distinguishes this case from Samuels.

In the 30 years since the Bankruptcy Code was

enacted and prior to the Sixth Circuit’s decision here,

11

only one other Circuit directly addressed the prior

version of 11 U.S.C. § 546(c) and the issue of a re-

claiming seller’s entitlement to an administrative

claim under that statute. The Eighth Circuit specifi-

cally upheld the reclaiming seller’s entitlement to an

administrative claim, when the reclaimed goods are

consumed or disposed of during the course of the

bankruptcy case. See Griffin Retreading Co. v. Oliver

Rubber Co. Un re Griffin Retreading Co.), 795 F.2d

676 (8th Cir. 1986). As the Griffin court aptly noted:

In this case the right to reclaim was mean-

ingless since Griffin sold the goods thus re-

moving them from the corpus of the

bankrupt’s assets. The only logical solution

would have been to grant the administrative

expense under § 546(c)(2)(A) or secure such

claim by a lien under § 546(c)(2)(B).... The

granting of an administrative claim under

§ 546(c)(2)(A) is not inconsistent with the

right to reclaim, but supplements that right.

It provides additional protection to a seller

who has delivered goods to a bankrupt

debtor on the eve of the bankruptcy. It pro-

vides flexibility to the bankrupt estate by

permitting the use of the property, if needed

for the successful completion of the plan of

reorganization. In such case the seller is pro-

tected without placing the plan in jeopardy.

This court need not address the interest of

the secured creditor | |. The conflicting inter-

est of a secured creditor vis-a-vis the rights

of the reclaiming creditor, and the question

12

of whether a creditor holding a valid security

interest in the debtor’s inventory is a good

faith purchaser or lien creditor ... , must

await the day when the conflict between

such competing interests is ripe for determi-

nation. [S]ince this action is not one between

the competing interests of the reclaiming

creditor and the secured creditor, but rather

involves the narrower issue of the appropri-

ateness of granting the alternative remedies

under 11 U.S.C. § 546(c)(2)(A) or (B), such

cases are not dispositive.

Id. at 679-80.

The Sixth Circuit's decision affirming McKesson’s

administrative claim was consistent with its prior

decisions in Jn re Mel Golde Shoes, 403 F.2d 658 (6th

Cir. 1968) and In re Federal’s, Inc., 553 F.2d 509 (6th

Cir. 1977) and the Eighth Circuit decision in Griffin

Retreading.

In its Petition, the Debtor relies on five main

bankruptcy court decisions to support stripping

McKesson of its $8.6 million administrative claim.

The Sixth Circuit correctly found that those cases,

and several] others, ignored years of Circuit Court

precedent protecting the rights of reclaiming sellers,

disregarded the plain language of 11 U.S.C.

13

§ 546(c)(2), and were not practical, in that they evis-

cerated the remedy of reclamation.*

For example, as noted by the Sixth Circuit, the

Sixth Circuit Bankruptcy Appellate Panel in J7: re

Pitisburgh-Canfield Corp., 309 B.R. 277 (BAP 6th Cir.

2004) completely overlooked the Sixth Circuit’s

decisions in Mel Golde Shoes and Federal’s. The Sixth

Circuit also correctly noted that the Pittsburgh-

Canfield court failed to understand that a reclaiming

seller’s priority rights cannot be dependant on the

post-petition conduct of a debtor, such as consensu-

ally encumbering assets in favor of a DIP lender.

The Debtor asserts that all of the reported cases

are uniform and support the conclusion that “the

right of reclamation is subject to the rights of secured

creditors” and therefore McKesson is not entitled to

an administrative claim under 11 U.S.C. § 546(c)

(1998). This is not true. Numerous cases, including

* The Debtor attempts to make much of the fact that

several of the bankruptcy decisions that the Sixth Circuit

rejected were issued by two judges in the Southern District of

New York, who by happenstance of bankruptcy venue rules and

the tactical decision of debtors to bypass their home forums,

preside over large bankruptcy cases. Merely because these

judges handle large bankruptcy cases does not validate the

flawed legal analysis contained in their decisions. To the con-

trary, Congress’ 2005 amendment to § 546(c) and the inclusion of

§ 503(b)\(9), through which any seller of goods on credit within 20

days of bankruptcy automatically receives an administrative

claim, evidences Congressional repudiation of these judges’

aberrant decisions.

14

the Eighth Circuit’s decision in Griffin, hold other-

wise. See e.g., Griffin Retreading Co., 795 F.2d at 680;

In re Diversified Food Serv. Distrib. Inc., 130 B.R. 427

(Bankr. S.D.N.Y. 1991); In re Sunstate Dairy & Food

Prods. Co. 145 B.R. 341 (Bankr. M.D. Fla. 1992); In re

Bosler Supply Group, 74 B.R. 250 (N.D. Ill. 1987).

In In re Georgetown Steel Co., LLC, 318 B.R. 340

(Bankr. D.S.C. 2004), a bankruptcy court reviewed

and then rejected the holdings in cases such as Pitts-

burgh-Canfield; In re Dairy Mart Convenience Stores,

Inc., 302 B.R. 128 (Bankr. S.D.N.Y. 2003); In re

Bridge Information Systems, Inc., 288 B.R. 133

(Bankr. E.D. Mo. 2001); and Jn re Arico, Inc., 302 B.R.

128 (Bankr. S.D.N.Y. 1999). Faced with a factual

situation almost identical to this case, the George-

town court correctly noted:

Rather than presuming that a senior secured

creditor would always assert its rights in a

reclaiming creditor’s goods as the valuation

cases seem to do, in this case no senior se-

cured creditor objected to the relief sought

... and at the time of the sale of Debtor’s as-

sets, including inventory, excess funds re-

mained for distribution ... [I|n the matter

before the Court, the issue no longer involves

the competing interests of the secured credi-

tors and the Reclamation Creditors... . [T]he

Court sees no reason to deviate from the lan-

guage of § 546(c).... Based upon the lan-

guage of the statute, ... , the Reclamation

Creditors should be entitled to that which

§ 546(c)(2) provides.

15

Id. at 348, 351. The Georgetown decision, like the

others cited by McKesson, provides further support

that the Sixth Circuit’s decision to affirm was well

grounded in law.

D. The Sixth Circuit’s Decision Has Not Had

and Will Not Have a “Devastating” Impact

on Secured Lending.

The Debtor states that the Sixth Circuit’s deci-

sion has resulted in a “sea of uncertainty” throughout

the lending and business communities and predicts

that lenders will be unwilling to make asset-backed

loans. Those statements have no basis in reality.

Large commercial enterprises have filed and

continue to file for bankruptcy throughout the United

States since the Sixth Circuit’s decision. Some of the

larger retail bankruptcy cases include Circuit City

Stores (E.D. Va.; 11/10/08); Mervyn’s (D. Del.; 7/29/08);

KB Toys (D. Del.; 12/11/08); Boscou’s (D. Del.; 8/24/08);

Fortunoff Holdings (S.D.N.Y.; 2/5/09); Value City

Department Stores (D. Del.; 10/26/08); and Gottschalks,

Inc. (D. Del.; 1/14/09). In each of these cases and

many others, multiple reclamation claims have been

asserted, while at the same time lenders continue to

provide DIP financing. A simple review of the docket

from any of these cases confirms that asset based

financing, including DIP financing, is as vibrant as

ever, even while sellers continue to assert reclamation

claims and their rights under 11 U.S.C. § 503(b)(9) and

the current version of 11 U.S.C. § 546(c).

16

In the aftermath of the Sixth Circuit’s decision

here, legal commentators are in general agreement

that the Phar-Mor decision was correctly decided. See

e.g., Vendor Whose Reclamation Claim Is Trumped by

DIP Lender’s Superpriority, 2008 Comm. Fin. News.

64. One legal commentator even praised the Sixth

Circuit for restoring reclamation as a viable remedy

in bankruptcy cases to defrauded sellers, following

recent years in which a select few bankruptcy judges

disregarded the plain text of 11 U.S.C. § 546(c) and

§ 2-702 of the UCC and the rights of defrauded sell-

ers, such as McKesson. See Sixth Circuit’s Phar-Mor

Decision Breathes New Life Into Reclamation Remedy,

Sept. 2008 Am. Bankr. Inst. J. 14. These articles

refute the Debtor’s hyperbolic assertions that the

Sixth Circuit’s decision is “devastating” and a “disas-

ter” and has resulted in a “vast amount of debate.”

Asset based lenders routinely exclude certain

collateral from their borrowing bases, whether it is

aged receivables or ineligible inventory. In this case,

the Sixth Circuit correctly concluded that when a

seller reclaims goods, the debtor/purchaser lacks title

to those goods and the reclaiming seller’s interest in

those goods is superior to all types of secured credi-

tors. Just as a secured creditor has no right to claim a

superior interest in stolen goods which happen to be

in the possession of a debtor, a secured creditor has

no right to claim a superior interest vis-a-vis a re-

claiming seller in goods that were obtained by a

debtor through fraud (by concealing the imminent

17

bankruptcy filing from the seller) if that seller prop-

erly asserts a reclamation claim to recover its goods.

E. The Debtor Lacks Standing to Assert Secured

Creditor Rights under Section 2-702(C) of the

UCC When No Such Secured Creditor Exists.

The core of the Debtor’s Petition involves a

transparent attempt to assert rights of its former

secured creditors under § 2-702(C) of the UCC. This

attempt is improper. That section provides that the

seller’s right to reclaim goods is “subject to” a good

faith purchaser, which in this case the Debtor con-

tends is the paid-off lenders. Under the text of § 2-

702(C), it is a good faith purchaser (assuming, ar-

guendo, that the lenders qualified as good faith

purchasers, which for the reasons explained above

they do not) and not a buyer/debtor who has the right

to assert priority over reclamation rights under

certain circumstances. Simply put, the Debtor does

not have standing to avail itself of the protections

afforded good faith purchasers under § 2-702(C). The

policy — of protecting a secured lender that qualifies

as a good faith purchaser — underlying that statute

does not exist here when the DIP Lenders were paid

off in full and have no claim to the remaining surplus.

This point was recognized by the Eighth Circuit in

Griffin, 795 F.2d 676, 680.

In Hartford Underwriters Ins. Co. v. Union

Planters Bank Un re Henhouse), this Court addressed

the issue of whether a third party may assert rights

18

conferred on another party by statute. Henhouse, 530

U.S. 1, 7 (2000). In that decision, a party other than

the trustee sought to assert the right of surcharge

under 11 U.S.C. § 506(c). This Court found that this

statute had to be read with exclusivity and, therefore,

since the statute stated that a “trustee” could assert a

surcharge, that only a “trustee” to the exclusion of all

others could assert such a claim. Had Congress

intended for any other party to assert a surcharge,

the statute would have so stated. Henhouse, 530 U.S.

at 7.

Similar to the reasoning in Henhouse, only a good

faith purchaser has standing to utilize § 2-702(C) of

the UCC. Had the eiactors of Article 2 of the UCC

intended to allow buyers/debtors to step into the

shoes of satisfied secured creditors (in their allegea

capacity as good faith purchasers), they would have

written the statute that way. They did not. As a

result, because no secured party exists, the Debtor

cannot utilize UCC § 2-702(C) to defeat the statutory

protections of 11 U.S.C. § 546(c) (1998) afforded

McKesson and the other reclaiming sellers.

For this reason, the Debtor lacks standing under

UCC § 2-702(C) and the Petition must be denied.

*

19

CONCLUSION

The Sixth Circuit’s decision affirming McKesson’s

administrative claim was well reasoned and based

upon the applicable statutes, existing precedent and

the facts. In particular, the Debtor’s DIP Lenders

were not good faith purchasers, a factual finding that

completely undermines the overriding argument set

forth in the Petition. There is no reason to review the

Sixth Circuit’s decision and the Petition must be

denied.

Respectfully submitted,

JEFFREY K. GARFINKLE

Counsel of Record

Davip M. Liu

BUCHALTER NEMER, PC

18400 Von Karman Avenue

Suite 800

Irvine, CA 92612

(949) 760-1121

Counsel for Respondent