Court Denies TRO Application Of Reclamation Claimant Whose Goods Were Subject To Prior Liens Of Debtors' Lenders
In re Advanced Marketing Services, Inc., 360 B.R. 421 (Bankr. D. Del. 2007) (Judge Christopher S. Sontchi)
Simon & Schuster asserted a reclamation demand in excess of $5 million, and filed an adversary Complaint against the debtor to enforce its reclamation rights. In support of the complaint, Simon & Schuster sought a temporary restraining order to prevent the debtor from selling its goods. The court denied the application for the TRO, finding that the goods that were the object of the reclamation demand were subject to a prior, superior security interest of the debtors’ pre-petition and post-petition lenders. Accordingly, S&S was unable to show that it had a likelihood of success on the merits.
Simon & Schuster, Inc. sold goods to debtor Advanced Marketing Services, Inc. prior to the commencement of AMS’ bankruptcy case. S&S commenced an adversary proceeding under 11 U.S.C. § 546(c) seeking reclamation of goods sold to the debtors. S&S sought reclamation of goods amounting to $5,105,629.65. In connection with the adversary proceeding, S&S filed an emergency application for a temporary restraining order.The TRO application was opposed by the debtors and their secured lenders. The debtors’ pre-petition obligations to the secured lenders were secured by a blanket lien on substantially all of the debtors’ assets, including inventory. Pursuant to the debtor-in-possession loan agreement and order, the pre-petition lenders extended DIP funding to the debtors. The DIP agreement was a creeping roll-up of the pre-petition indebtedness, under which the pre-petition obligations were to be satisfied out of the debtors’ cash collateral, which was primarily derived from the proceeds of the sale of the debtors’ inventory. The pre-petition indebtedness was to be satisfied before the debtors’ post-petition obligations under the DIP loan. Under the DIP agreement, all the pre-petition liens granted by the debtors to the lenders remained in effect. As of the day prior to hearing on the TRO application, there remained $13 million in pre-petition debt, and $13.5 million in post-petition debt to the secured lenders.
In deciding a TRO request, the court must assess (1) the likelihood that the moving party will succeed on the merits; (2) the extent to which the moving party will suffer irreparable harm; (3) the extent to which the nonmoving party will suffer irreparable harm if the TRO is granted; and (4) the public interest.
Because section 546(c) makes a right of reclamation under that section subject to the rights of prior lienholders, the court found that S&S could not establish any likelihood of success. The liens associated with the secured lenders’ pre-petition and post-petition indebtedness were superior to S&S’ reclamation rights. The court rejected S&S’ arguments that, because the pre-petition indebtedness would soon be satisfied through the creeping roll-up, S&S would ultimately succeed on the merits. First, the pre-petition indebtedness had not yet been satisfied, and S&S did not show when it would be satisfied, or whether the debtors would still possess the goods subject to the reclamation demand. Second, under the cross-collateralization provision of the interim DIP order, the liens would ride through after the pre-petition debt was satisfied. Third, the court distinguished the instant facts from those in In re Phar-Mor, Inc. because, in Phar-Mor, the lenders had already been paid in full, and the pre-petition security interests of the lenders in the vendor’s goods had been released. Those were not the facts here.
S&S also failed to establish that it would be irreparably harmed. S&S only alleged that it would suffer monetary harm, such as incurring wrongful credits and additional expenses. Mere economic injury is insufficient to satisfy the irreparable harm requirement.
The court found that the “balancing of the equities” analysis was neutral. The debtors would be harmed if the TRO was entered. However, S&S’ reclamation claim would probably be made worthless if the order was not entered, because the debtors would probably sell off the subject goods. Because S&S bore the burden of showing that the equities tipped in their favor, and failed to do so, this factor also favored the debtors.
Finally, S&S failed to satisfy the public interest factor. Accordingly, the court denied the TRO application.
Simon & Schuster, Inc. has sought leave to appeal.
