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In re World Imports, Ltd.

United States Court of Appeals, Third Circuit

July 10, 2017

IN RE: WORLD IMPORTS, LTD., ET AL, Debtors HAINING WANSHENG SOFA CO., LTD, FUJIAN ZHANGZHOU FOREIGN TRADE CO., LTD, Appellants

          Argued March 8, 2017

         On Appeal from the United States District Court for the Eastern District of Pennsylvania (E.D.Pa. No. 2-14-cv-04920) District Judge: Honorable Petrese B. Tucker

          Kirk B. Burkley [Argued] Daniel R. Schimizzi Bernstein-Burkley Counsel for Appellants

          David L. Braverman [Argued] Helen M. Braverman John E. Kaskey Braverman Kaskey Counsel for Appellees

          Before: HARDIMAN, KRAUSE, Circuit Judges, and STENGEL, District Judge. [*]

          OPINION

          HARDIMAN, Circuit Judge.

         This appeal involves a question of bankruptcy law that has important ramifications for a creditor that sells goods to a debtor soon before the debtor files a Chapter 11 bankruptcy petition. Under 11 U.S.C. § 503(b)(9), a creditor may recover as a priority administrative expense the value of goods "received by the debtor within 20 days before" the bankruptcy petition is filed. In In re Marin Motor Oil, Inc., this Court interpreted a related provision of the Bankruptcy Code (11 U.S.C. § 546(c)), and held that "receipt" occurs when the buyer takes physical possession of the goods. 740 F.2d 220, 224-25 (3d Cir. 1984). Does the word "received" in § 503(b)(9) likewise require physical possession? We hold that it does.

         I

         The facts of this appeal are undisputed. Appellants Haining Wansheng Sofa Company and Fujian Zhangzhou Foreign Trade Company (the Creditors) are Chinese companies that sold furniture and similar goods to World Imports (the Debtor) in the ordinary course of business. Those goods were shipped via common carrier from China to the United States "free on board" (FOB) at the port of origin, so the risk of loss or damage passed to World Imports upon transfer at the port.

         The Haining shipment left Shanghai, China on May 26, 2013, and World Imports took physical possession of the goods in the United States on June 21, 2013. Fujian's goods were shipped on three separate dates from Xiamen, China on May 17, May 31, and June 7, 2013, and they were accepted in the United States within 20 days of July 3, 2013, the day on which World Imports filed its Chapter 11 petition.

         Both Haining and Fujian filed Motions for Allowance and Payment of Administrative Expense Claims under 11 U.S.C. § 503(b)(9). Such claims are allowed if: "(1) the vendor sold 'goods' to the debtor; (2) the goods were received by the debtor within twenty days [before the bankruptcy] filing; and (3) the goods were sold . . . in the ordinary course of business." In re Goody's Family Clothing, Inc., 401 B.R. 131, 133 (Bankr. D. Del. 2009).

          The dispositive question in the Bankruptcy Court was whether World Imports "received the goods within 20 days prior to the bankruptcy filing." In re World Imports, Ltd. (World Imports I), 511 B.R. 738, 741 (Bankr. E.D. Pa. 2014). The parties agreed that Appellants shipped the goods from China "more than 20 days before the July 3, 2013 bankruptcy filing, " and that World Imports "took physical possession of the goods in the United States fewer than 20 days before the bankruptcy filing." In re World Imports, Ltd. (World Imports II), 549 B.R. 820, 822 (E.D. Pa. 2016). They disagreed, however, about which action (shipment or physical acceptance) constituted receipt under § 503(b)(9).

         In evaluating the question, the Bankruptcy Court began by acknowledging that the operative word "received" in § 503(b)(9) is not defined. It then rejected the argument advanced by Haining and Fujian that state law (i.e., the Uniform Commercial Code) should "provide a rule of decision for [the] gap[] in [this] federal statute[]." World Imports I, 511 B.R. at 741. Instead, the Bankruptcy Court looked to the Convention on Contracts for the International Sale of Goods (CISG)-which it found governed disputes arising between the Debtor and Creditors-as a treaty that preempts the Uniform Commercial Code (UCC) in this case. Like the Bankruptcy Code, the CISG does not define the term "received, " so the Court looked to international commercial terms (Incoterms), which are incorporated into the CISG. And although no Incoterm defines "received, " the incoterm governing FOB contracts makes clear that the risk of damage or loss transfers to the buyer when the seller delivers the goods to the common carrier's vessel. Id. at 745 (quoting FOB ...


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