Bankruptcy Court Fails to Find Wholesaler-Debtor Constructively Received Goods Delivered to Third Parties Twenty Days Before Bankruptcy; 503(b)(9) Claim Reclassified

In re ADI Liquidation, Inc., No. 14-12092 (KJC), 2017 WL 2712287 (Bankr. D. Del. June 22, 2017), aff’d Bimbo Bakeries USA, Inc. v. AW Liquidation, Inc. (In re ADI Liquidation, Inc.), No. 17-903 (CFC), 2019 WL 211528 (D. Del. Jan. 16, 2019)

In this Opinion, the Delaware Bankruptcy Court examined whether a debtor, formerly known as Associated Wholesalers, Inc. (“AWI”), constructively received goods that were ordered by and delivered to its customers from claimant, Bimbo Bakeries USA, Inc. (“BBU”) during the twenty day period prior to AWI’s petition date (the “Twenty Day Goods”).  While the goods were never in AWI’s physical possession, AWI’s customers remitted payment for the goods to AWI, which then remitted payment to BBU after retaining a percentage.  BBU filed a large section 503(b)(9) claim on account of the Twenty Day Goods, to which AWI objected.  The question for Judge Carey was whether AWI constructively received the Twenty-Day Goods given its substantial involvement in facilitating the sales transactions between BBU and AWI’s customers.  If the answer was yes, the Court would have expanded the meaning of constructive receipt beyond the customary situation in which a third party recipient is a bailee for the debtor.  The Court, however, answered no and in doing so, drew parallels to “drop-ship transactions.”  A “drop-ship transaction” is a transaction in which a buyer purchases goods from a middleman, who in turn forwards the purchase order to a third party, who then fulfills and ships the order directly to the buyer.  In these situations, courts have found that the middleman does not take constructive possession of the goods.  And while the Delaware Bankruptcy Court found the AWI-BBU transaction similar, it also found the situation a step further removed given that AWI’s customers ordered their goods directly from BBU.  Accordingly, AWI never received the goods nor made the sales.  For those reasons, the Bankruptcy Court sided with AWI and permitted the reclassification of BBU’s section 503(b)(9) claim to a general unsecured claim.

[Update – On January 16, 2019, the Delaware District Court affirmed the decision of the Bankruptcy Court, highlighting in part the Third Circuit’s subsequent decision in In re World Imports, Ltd., 862 F.3d 338, 346 (3d Cir. 2017), in which the World Imports Court held that “receipt as used in [section 503(b)(9)] requires physical possession by the buyer or his agent.”  In this AWI-BBU appeal, it was undisputed that AWI did not take actual physical possession of the goods shipped by BBU directly to AWI’s customers.  The affirming Opinion can be found here.  Our analysis of the World Imports decision can be found here.]