In re World Imports Ltd., Civ. A. No. 14-4920, Bankr. No. 13-15929 (E.D. Pa. Jan. 19, 2016) [click for opinion]
Appellants Fujian Zhangshou Foreign Trade Co., Ltd. and Haining Washeng Sofa Co., Ltd. were claimants in the bankruptcy filing of World Imports, Ltd. ("World Imports"), each seeking allowance and payment of administrative claims pursuant to 11 U.S.C. § 503(b)(9). A claimant seeking allowance and payment of an administrative claim must establish: (1) the vendor sold goods to the debtor; (2) the goods werereceived by the debtor within 20 days prior to the filling; and (3) the goods were sold to the debtor in the ordinary course of business. It was undisputed in this case that the Appellants were vendors who sold goods to World Imports in the ordinary course of business and shipped the goods from China "free on board" ("FOB").
The only issue remaining was whether World Imports received the goods from Appellants within 20 days prior to the bankruptcy filing. Although Appellants shipped the goods from China more than 20 days before the bankruptcy filing, World Imports took physical possession of the goods fewer than 20 days before the filing. Because the bankruptcy statute does not define the term "receive," the court was tasked with determining whether the authority controlling the definition was international commercial law or non-bankruptcy state law.
The Bankruptcy Court determined that international trade law was the controlling authority, but also noted that state law could provide a rule of decision for the gaps in federal statutes so long as the state law did not contravene an established federal law. Because the United States has adopted the United Nations Convention on Contracts for the International Sale of Goods ("CISG"), the court determined that federal law was established, and application of the UCC would be improper.
Appellants appealed to the U.S. District Court for the Eastern District of Pennsylvania, arguing that the Uniform Commercial Code ("UCC"), which defines "receipt" as taking "physical possession of [the goods]," should apply. The court, however, ultimately affirmed the Bankruptcy Court's decision to apply international trade law, including the CISG, over the UCC, reasoning that uniform federal law had displaced state law as to matters involving international relations. It first determined that the CISG applied to the transactions at issue, reasoning that the CISG applies to all contracts for the sale of goods between parties whose places of business are in different signatory states as long as the parties have not specifically elected to exclude the CISG's application. Both the United States and China are signatories to the CISG, and there was no indication that the parties here opted to exclude the CISG's application.
The court further observed that, although the CISG does not specifically define "receive," Articles 7(2) and 9(2) of that treaty endorse the interpretative approach whereby matters governed by the CISG, but not expressly settled by it, should be interpreted in conformity with private international law and widely known international trade usage. The court added that the International Commerce Commission ("ICC") had memorialized this approach by defining a number of commercial terms commonly used in international trade, called "Incoterms."
Although the Incoterms did not specifically define "receive," the court found the Incoterms definition of "FOB" (which was applicable in this case) was instructive. That definition states that "the risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards." Relying on this definition, the court found that the relevant date for purposes of determining whether claims are eligible for administrative expense priority is the date on which the goods were shipped. Because of this, the goods at issue were shipped more than 20 days before the bankruptcy filing, and as such, Appellants' claims did not warrant an administrative priority.