            ELECTRONIC CITATION: 2004 FED App. 0004P (6th Cir.)
                         File Name: 04b0004p.06

          BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT

In re: PITTSBURGH-CANFIELD            )
       CORPORATION, et al.,           )
                                      )
                  Debtors.            )
_____________________________________ )
                                      )
YENKIN-MAJESTIC PAINT CORPORATION, )
THE VALSPAR CORPORATION,              )
and MISSISSIPPI LIME COMPANY,         )
                                      )
                  Appellants,         )
                                      )
       v.                             )                     No. 03-8030
                                      )
WHEELING-PITTSBURGH STEEL             )
CORPORATION,                          )
                                      )
                  Debtor-Appellee.    )
_____________________________________ )

                   Appeal from the United States Bankruptcy Court
          for the Northern District of Ohio, Eastern Division, at Youngstown
                             Nos. 00-43394 to 00-43402

                             Argued: November 5, 2003

                          Decided and Filed: May 3, 2004

      Before: AUG, LATTA, and RHODES, Bankruptcy Appellate Panel Judges.
                            ____________________

                                     COUNSEL

ARGUED: Kim Martin Lewis, DINSMORE & SHOHL, Cincinnati, Ohio, for Appellants.
Michael E. Wiles, DEBEVOISE & PLIMPTON, New York, New York, for Appellee. ON
BRIEF: Kim Martin Lewis, Tim H. Robinson, DINSMORE & SHOHL, Cincinnati, Ohio,
David L. Going, ARMSTRONG TEASDALE LLP, St. Louis, Missouri, for Appellants.
Michael E. Wiles, DEBEVOISE & PLIMPTON, New York, New York, Scott N. Opincar,
James M. Lawniczak, CALFEE, HALTER & GRISWOLD, Cleveland, Ohio, for Appellee.
                                   ____________________

                                         OPINION
                                   ____________________

       J. VINCENT AUG, JR., Chief Bankruptcy Appellate Panel Judge. Appellants,
Yenkin-Majestic Paint Corporation, Valspar Corporation and Mississippi Lime Company
(collectively, the “Appellants”), are vendors who filed timely reclamation claims against the
Debtor, Wheeling-Pittsburgh Steel Corporation (the “Debtor”). Appellants now appeal the
bankruptcy court’s decision finding that their reclamation claims are not entitled to
administrative expense priority pursuant to 11 U.S.C. § 546(c)(2) and relegating their
claims to the status of general unsecured.



                                   I. ISSUES ON APPEAL

       (1) Whether the bankruptcy court erred in denying administrative expense priority
or a lien to reclaiming sellers whose goods were proposed to be consumed by the Debtor
in its manufacturing activities.

       (2) Whether the bankruptcy court erred in determining the validity and priority of
reclamation claims pursuant to motion rather than adversary complaint.

       (3) Whether the bankruptcy court erred in determining that the Appellants were not
entitled to require a marshaling of the assets to protect their reclamation claims.



                    II. JURISDICTION AND STANDARD OF REVIEW

       The United States District Court for the Northern District of Ohio has authorized
appeals to the Bankruptcy Appellate Panel, and neither party has timely elected to have
this appeal heard by the district court. 28 U.S.C. § 158(b)(6), (c)(1). Accordingly, the
Panel has jurisdiction to decide this appeal.

       The order and judgment on appeal are “final” and may, therefore, be appealed as
of right. 28 U.S.C. § 158(a)(1); United States v. Hillsborough Holdings Corp. (In re


                                             2
Hillsborough Holdings Corp.), 116 F.3d 1391, 1393-94 (11th Cir. 1997) (order finding that
IRS’ claim was not entitled to administrative expense priority was final, appealable order);
Beneke Co., Inc. v. Economy Lodging Sys., Inc. (In re Economy Lodging Sys., Inc.), 234
B.R. 691, (B.A.P. 6th Cir. 1999) (order disallowing portion of attorney fees and denying
administrative expense priority to fees is final, appealable order).

       The bankruptcy court’s findings of fact are reviewed for clear error. Thus, a
bankruptcy court's findings of fact may not be set aside unless clearly erroneous.
Fed. R. Bankr. P. 8013; Laguna Assoc. Ltd. P’ship v. Aetna Cas. & Surety Co. (In re
Laguna Assoc. Ltd. P’ship), 30 F.3d 734 (6th Cir. 1994). A finding of fact is clearly
erroneous when, although there is evidence to support it, the reviewing court is left with a
definite and firm conviction that a mistake was made. Stevens v. McGinnis, Inc., 82 F.3d
1353, 1356 (6th Cir. 1996). The bankruptcy court's conclusions of law are subject to de
novo review. Canadian Pac. Forest Prods. Ltd. v. J.D. Irving Ltd. (In re Gibson Group,
Inc.), 66 F.3d 1436 (6th Cir. 1995). “De novo means ‘deciding the issue as if it had not
been heard before. No deference is given to the trial court’s conclusions of law.’” Tedeschi
v. Falvo (In re Falvo), 227 B.R. 662, 664 (B.A.P. 6th Cir. 1998) (citations omitted).

       The Panel reviews the bankruptcy court’s denial of administrative expense priority
status for an abuse of discretion. Economy Lodging Sys., Inc., 234 B.R. 691; Gull Indus.,
Inc. v. John Mitchell, Inc. (In re Hanna), 168 B.R. 386 (B.A.P. 9th Cir. 1994).



                                        III. FACTS

       The Debtor and other affiliate corporations filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code on November 16, 2000. Prior to the filing of the
petitions, the Appellants sold goods to the Debtor on open account, in the ordinary course
of business for both the Debtor and the Appellants. Each of the Appellants made timely
demand for reclamation pursuant to Uniform Commercial Code § 2-702 of certain goods
delivered to the Debtor’s plants in West Virginia and Ohio.            Yenkin-Majestic Paint
Corporation made demand on November 7, 2000, before the filing of the bankruptcy



                                             3
petitions. The Valspar Corporation and Mississippi Lime Company made demand on
November 17, 2000, after the filing of the petitions.

        Prior to the Petition Date, all of the Debtor’s inventory served as collateral to secure
a credit agreement entered into by the Debtor and its affiliates and certain prepetition
lenders (the “Prepetition Lenders”) and Citibank, N.A., as agent. Relying on the Debtor’s
and its affiliates’ schedules, the Appellants contend that on the Petition Date, the Debtor
was indebted to the Prepetition Lenders in the maximum amount of $115 million and the
indebtedness was secured by inventory in the amount of $245 million.                Therefore,
Appellants argue that the Prepetition Lenders were oversecured in the amount of $130
million. The Debtor received reclamation claims in the approximate amount of $5.4 million
from 37 vendors. In the liquidation process provided for in the Reclamation Procedures
Order described below, reclamation claims of approximately $2.9 million were verified by
the Debtor.

        Of significant importance in this case is the fact that on the Petition Date, the Debtor
and its affiliates moved for approval of a debtor-in-possession credit facility (the “DIP
Facility”).   Pursuant to the final order approving the DIP Facility (the “Post-Petition
Financing Order”) entered December 13, 2000, (1) all of the Prepetition Lenders were paid
in full, (2) the liens or security interests of the Prepetition Lenders were assigned and
transferred, to the extent permitted by applicable law, to the lenders under the DIP Facility
(the “DIP Lenders”), (3) the DIP Lenders were found to be entitled to a “superpriority”
status pursuant to § 364(c) of the Bankruptcy Code and (4) the DIP Lenders’ claims were
secured by, among other things, a floating first priority, perfected lien upon all of the
Debtor’s and its affiliates’ inventory and proceeds thereof. Under the DIP Facility, the
Debtor and its affiliates were authorized to borrow up to $290 million. Paragraph 14 of the
Post-Petition Financing Order provides:

        The Obligation under the DIP Credit Facility shall be an allowed
        administrative expense claim . . . with priority . . . under Bankruptcy Code
        section 364(c)(1) over all administrative expense claims and unsecured
        claims against the Debtor[], now existing or hereafter arising, of any kind or
        nature whatsoever including, without limitation, administrative expenses of



                                               4
       the kinds specified in or ordered pursuant to Bankruptcy Code sections . . .
       546(c).

(emphasis added.) None of the Appellants appealed the Post-Petition Financing Order
that in effect greatly increased the exposure of their inventory to this larger, floating lien.
       On March 8, 2001, the bankruptcy court entered an order (the “Reclamation
Procedures Order”) (a) prohibiting third parties from interfering with the Debtor’s receipt,
use or disposition of goods and (b) establishing procedures for the liquidation and
treatment of reclamation claims. As required by the Reclamation Procedures Order, the
Debtor and its affiliates filed Debtors’ First Amended Report Regarding Reclamation
Demands (the “Reclamation Claims Report”). That report specified that the amount of
each claim set forth in the report represents the amount of “[g]oods identified in the
reclamation claim which were (i) in the possession of the Debtor[], (ii) specifically
identifiable and (iii) unconverted as to form, in each case as of the date on which the
reclamation demand was received by the Debtor[].” Pursuant to the Reclamation Claims
Report, the Appellants have reclamation claims in the following amounts:

            Vendor                         Amount of Claim
            Yenkin-Majestic Paint Corp.        $107,612
            Mississippi Lime Co.               $143,353
            Valspar Corp.                      $203,989
       The amount of each reclamation claim agreed to by the parties was “deemed
liquidated without any further action by the Debtor or further action of the Court, subject to
such further defenses as may exist by reason of liens granted to the Debtors’ secured
creditors.” Finally, the Reclamation Procedures Order provided that “[v]endors shall not
be required to initiate adversary proceedings or to take any procedural steps (other than
those set forth above) in order to preserve or perfect their Reclamation Demand.”

       With respect to determining the effect of the secured creditors’ liens on the
liquidated reclamation claims, the Reclamation Procedures Order provided:

       (f) Following the determination of all of the Vendors’ Reclamation Claim
       Amounts, . . . the Debtors may commence further proceedings to determine
       the extent to which the Reclamation Claim Amounts are subject to further
       defenses by reason of liens granted to the Debtors’ secured creditors. In the

                                              5
       alternative, the Debtors may propose to resolve such issues through a
       proposed plan of reorganization that specifies the extent to which the
       Reclamation Claims shall be treated as allowed administrative expense
       priority claims.

       As noted above, the Reclamation Claims Report set forth the value of each
Appellants’ inventory remaining in the possession of the Debtor at the time the respective
reclamation demand was made. Pursuant to the Reclamation Procedures Order, the
Debtor was authorized to and continued to use Appellants’ inventory in its business
practices.

       On January 7, 2003, the Debtor filed a motion (the “Reclamation Motion”) requesting
the bankruptcy court to determine that Appellants’ claims were not entitled to administrative
expense status but were merely unsecured claims. The basis for the Debtor’s Reclamation
Motion was that all of the goods that were subject to the Appellants’ reclamation demands
were sold in the ordinary course of the Debtor’s business and the proceeds were applied
to repay the priority obligations under the DIP Facility.

       The Appellants objected to the Debtor’s Reclamation Motion on the basis that (1)
the plain language of § 546(c) required the bankruptcy court to grant the Appellants an
administrative claim since the court had denied them the right to reclaim the inventory, (2)
the secured creditors were oversecured, (3) the Debtor had failed to follow proper
procedure in bringing the Reclamation Motion, and (4) The Debtor was estopped by the
bankruptcy court’s prior orders from arguing that the Appellants’ claims were unsecured.

       Oral arguments on the Reclamation Motion and objections were heard on
January 30, 2003. By order entered March 13, 2003, the bankruptcy court overruled
Appellants’ objections and held that reclaiming sellers have no greater rights in bankruptcy
law than they hold under state law, and that under applicable state law, a seller’s rights are
limited to recovery of goods not yet sold. Inasmuch as the goods subject to the Appellants’
reclamation demands had been consumed by the Debtor in the manufacturing process,
they were no longer available for recovery, and the Appellants’ rights were extinguished.
Thus, as the Appellants had no rights under state law, they had no rights to administrative
priority under bankruptcy law. Appellants filed this timely appeal.


                                              6
                                    IV. DISCUSSION

      With respect to reclamation rights, the Bankruptcy Code provides:

      [T]he rights and powers of a trustee . . . 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 received such goods while insolvent, but–
             (1) such a seller may not reclaim any such goods unless such seller
      demands in writing reclamation of such goods–
                 (A) before 10 days after receipt of such goods by the debtor; or
                 (B) if such 10-day period expires after the com-mencement of
             the case, before 20 days after receipt of such goods by the debtor;
             and
             (2) the court may deny reclamation to a 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.

11. U.S.C. § 546(c). Section 546(c) “preserves reclamation rights as they exist outside of
bankruptcy and under state law. . . . The reclaiming seller has the burden of proof under
§ 546(c) by a preponderance of the evidence.” Mitsubishi Consumer Electronics Amer.,
Inc. v. Steinberg’s, Inc. (In re Steinberg’s, Inc.), 226 B.R. 8, 10 (Bankr. S.D. Ohio 1998)
(internal quotations and citations omitted). The parties are in agreement that the laws of
the states of Ohio and West Virginia apply in this case.

      In virtually every state, a vendor’s right of reclamation is governed by § 2-702 of the
Uniform Commercial Code. As adopted in Ohio and West Virginia, the UCC provides:

             (2) Where the seller discovers that the buyer has received goods on
      credit while insolvent he may reclaim the goods upon demand made within
      ten days after the receipt, but if misrepresentation of solvency has been
      made to the particular seller in writing within three months before delivery the
      ten-day limitation does not apply. Except as provided in this subsection the
      seller may not base a right to reclaim goods on the buyer's fraudulent or
      innocent misrepresentation of solvency or of intent to pay.
             (3) The seller's right to reclaim under subsection (2) is subject to the
      rights of a buyer in ordinary course or other good faith purchaser or lien
      creditor under this article (section 2-403). Successful reclamation of goods
      excludes all other remedies with respect to them.

                                             7
Ohio Rev. Code § 1302.76 (West 2003); W. Va. Code § 46-2-702 (West 2003).

       The right of reclamation is a rescissional remedy, based upon the theory that the
seller has been defrauded. Under the Uniform Sales Act (the predecessor to Uniform
Commercial Code, Article 2), a seller could only reclaim goods upon a showing that the
buyer misrepresented its solvency. See Pester Ref. Co. v. Ethyl Corp. (In re Pester Ref.
Co.), 964 F.2d 842, 844 (8th Cir. 1992). The Uniform Commercial Code expanded the
remedy     by   allowing   reclamation    in   certain   circumstances     without   proof   of
misrepresentation. Id. Because the buyer retains the apparent authority to deal with
goods, the sale of goods to a good faith purchaser cuts off a seller’s right to reclaim. Id.
Most secured creditors are good faith purchasers under the Uniform Commercial Code,
thus the rights of a reclaiming seller generally will be inferior to those of a secured creditor
who has a security interests in the goods but superior to those of the buyer’s general
unsecured creditors. Id. at 845.

       None of the Appellants contest the fact that any reclamation right they possess is
subject to the security interest of the DIP Lenders. What they contest is the meaning of
the phrase “subject to” as used in § 546(c)(2). The facts further indicate that the Debtor
conceded all issues regarding the Appellants’ reclamation claims except the legal issue of
the effect that the secured creditors’ claims have on the value of the Appellants’
reclamation claims.1



       1
        Pursuant to the Reclamation Procedures Order, the Debtor was required to provide
in the Reclamation Claims Report “Debtors’ reasons for excluding any portion of any
Reclamation Demand from the corresponding Reclamation Claim Amount, including all
known legal bases for excluding such value.” Since the Debtor did not reserve any
defenses other than the effect of any liens granted to the Debtor’s secured creditors, it
conceded the requirements of § 546 that: (1) The Appellants’ each sold the Debtor
inventory in the ordinary course of their respective business; (2) the Debtor received the
inventory while it was insolvent; (3) each Appellant demanded return of its inventory in
writing within the time prescribed; and (4) the Debtor was still in possession of a portion of
the inventory when its received the respective Appellant’s reclamation demand. See also
McLouth Steel Prods. Corp. v. Quaker Chem. Co. (In re McLouth Steel Prods. Corp.), 213
B.R. 978, 984 (E.D. Mich. 1997) (setting out elements reclaiming seller must prove to
establish valid reclamation claim).

                                               8
       The Panel reviews the effect of the DIP Lenders’ liens on the Appellants’
reclamation claims de novo and must determine whether the Appellants’ reclamation
claims have any value where all of the Debtor’s inventory is encumbered by a properly
perfected lien on all of the Debtor’s current and after-acquired inventory.2 None of the
individual Appellants can specifically identify their own goods, if any, remaining in the
Debtor’s possession because of the fungible nature of the goods. Further, even if we
assume the Debtor’s secured creditors (either the Prepetition Lenders or the DIP Lenders)
were oversecured at one point, no one Appellant’s goods were at any time of sufficient
value to pay either the Prepetition Lenders or the DIP Lenders in full.



Reclamation Claims Analysis: Where the Debtor’s inventory is subject to a valid and
properly secured claim, there are two lines of cases interpreting the rights of reclaiming
sellers to receive a lien or administrative expense priority under § 546(c).

       A. Regardless of the value of claim, the reclaiming seller is entitled to administrative
expenses priority or lien: This is the minority view and is relied upon by the Appellants.

       This line of cases looks only at the requirements of § 546(c) that (1) the reclaiming
seller sold inventory to the debtor in the ordinary course of business; (2) the debtor
received the inventory while it was insolvent; (3) the reclaiming seller demanded return of
its inventory in writing within the time prescribed; and (4) the debtor was still in possession
of the inventory when its received the reclaiming seller’s reclamation demand. McLouth
Steel Prods. Corp., 213 B.R. at 984. Obviously because of the concessions made by the
Debtor in the Reclamation Claims Report, the Appellants meet each of these requirements.
If these requirements are met, the courts in this first line of cases generally find that the
reclaiming seller is entitled to a lien or administrative expense to the full extent of the
seller’s valid reclamation claim as of the time the seller sent notice to the debtor. See Isaly

       2
        Pursuant to paragraph 3 to the Post Petition Financing Order the DIP Lenders were
granted valid and perfected security interests in and liens upon all present and after-
acquired property of the Debtor. Further, pursuant to paragraph 14 of that order, the DIP
Lenders were granted a superpriority administrative claim over all administrative expenses,
including those provide for under § 546(c).

                                              9
Klondike Co. v. Sunstate Dairy & Food Prods. Co. (In re Sunstate Dairy & Food Prods.
Co.), 145 B.R. 341, 346 (Bankr. M.D. Fla. 1992) (“Once a right of reclamation is
acknowledged in bankruptcy, [reclaiming seller] has a right to obtain from this Court a lien
or administrative expense award.”); In re Roberts Hardware Co., 103 B.R. 396, 399 (Bankr.
N.D.N.Y. 1988) (granting administrative claim where secured creditors “superior status
precludes [reclaiming seller’s] ability to exercise its right of reclamation with respect to the
goods and any ensuing proceeds.”); Harris Trust & Sav. Bank v. Wathen’s Elevators, Inc.
(In re Wathen’s Elevators, Inc.), 32 B.R. 912 (Bankr. W.D. Ky. 1983) (without discussion
of whether secured creditor was over or undersecured, the bankruptcy court granted
reclaiming sellers a lien junior to that of priority secured creditor and stated bankruptcy
court would determine exact amount of claims at a later date); Ohio Farmers Grain &
Supply Assoc. v. Melvin Liquid Fertilizer Co., Inc. (In re Melvin Liquid Fertilizer Co., Inc.),
37 B.R. 587 (Bankr. S.D. Ohio 1984) (again without discussion of whether the secured
creditor was over or undersecured, the bankruptcy court granted reclaiming seller’s claim
administrative expense priority, secured by a lien on the property of the estate but
subordinate to the existing lien of the secured creditor).

       The results of this first line of cases are justifiably criticized by the second line of
cases on two bases. First, they fail to consider the requirement of § 546(c) that the
reclaiming seller must have been entitled to a reclamation claim under state law. If that
claim would have no value under state law, it cannot have any value under the Bankruptcy
Code. See In re Quality Stores, Inc., 289 B.R. 324, 333 (Bankr. W.D. Mich. 2003) (court’s
analysis of whether a reclaiming seller is a seller “with such a right of reclamation” as
required by § 546(c) does not stop after the court determines that the reclaiming seller has
met the initial requirements of § 546(c)). As a result of this first flaw, this line of cases
elevate the reclaiming sellers to an unwarranted status above the general unsecured class.
They do this by giving the reclaiming seller’s claim administrative expense priority status
without considering the value of the original reclamation claim over and above the priority
interest of the secured creditor or by giving the reclaiming seller a lien in other assets of
the bankruptcy estate in which the reclaiming seller originally had no interest.



                                              10
       The Eighth Circuit has found that:

       If reclamation is denied[,] the court must choose one of two alternatives.
       Under § 546(c)(2)(A) the court may treat the claim as an administrative
       expense priority under § 503(b), or under § 546(c)(2)(B) the court may
       secure such claim by a lien. Such lien is in the nature of a lien on the assets
       of the bankruptcy estate, including the goods so delivered.

Griffin Retreading Co. v. Oliver Rubber Co. (In re Griffin Retreading Co.), 795 F.2d 676 (8th
Cir. 1986) (citing In re Coast Trading Co., Inc., 744 F.2d 686, 692 (8th Cir. 1984))
(emphasis added). In their reply brief, the Appellants rely on Griffin Retreading. However,
the Appellants misstate the importance of the decision because the Eighth Circuit
specifically indicated in Griffin Retreading that it was not addressing the effect that the
interests of the secured creditor in that case had on the seller’s reclamation claim. The
Eighth Circuit stated that:

       The conflicting interest of a secured creditor vis-a-vis the rights of the
       reclaiming creditor, . . . must await the day when the conflict between such
       competing interests is ripe for determination. The court is not unmindful of
       the various decisions on the subject. However, since 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 appropriateness of
       granting the alternative remedies under 11 U.S.C. § 546(c)(2)(A) or (B), such
       cases are not dispositive.

Griffin Retreading, 795 F.2d 676, 680 (citations omitted). As discussed below, in Pester
Refining Co., the Eighth Circuit did later address this specific issue of the effect of the
secured creditor’s prior lien on the value of the reclaiming seller’s reclamation claim. Its
analysis was not favorable to the Appellants.

       B. Reclaiming seller is not entitled to administrative expense priority or lien without
showing that claim has value outside of bankruptcy: In the second line of cases, most of
the courts recognize that the mere presence of a secured creditor’s prior lien in a debtor’s
inventory is not the equivalent of automatic extinguishment of the reclamation right. Pester
Refining Co., 964 F.2d 842, 846; In re Leeds Bldg. Prods., Inc. 141 B.R. 265, 268 (Bankr.
N.D. Ga. 1992). These courts emphasize that the reclaiming seller is entitled to a lien or
administrative expense claim only to the extent that the value of the specific inventory in
which the reclaiming seller asserts an interest exceeds the amount of the floating lien in

                                             11
the debtor’s inventory. In re Leeds Bldg. Prods., 141 B.R. 265. Likewise, the Appellants
here are not entitled to a lien or administrative priority status ahead of the general
unsecured creditors in other assets of the bankruptcy estate.

               We choose to follow the well-reasoned line of cases which hold that
       the reclaiming seller is entitled to an administrative claim in any surplus
       proceeds remaining after the perfected secured creditor’s interest has been
       satisfied or released.

Steinberg’s, 226 B.R. at 12 (emphasis added). In Steinberg’s, there was only one secured
creditor and one reclaiming seller. It is also clear from the case that all of the collateral
referred to was sold to Steinberg’s by the one reclaiming seller. Therefore, any surplus
proceeds resulted from the sale of the particular reclaiming seller’s collateral, not from
other estate assets.

       [I]f the goods are not returned to the seller, the seller must be given
       alternative remedies under section 546(c)(2), i.e., an administrative expense
       priority claim or a secured claim. In this case, however, the administrative
       expense priority claim or the secured claim may only be paid from the
       residual value of the goods after payment of all secured claims collateralized
       by the goods. If, in satisfying their claims, secured creditors take the entire
       value of the goods, the seller’s administrative expense claim or lien is
       worthless and may not be satisfied from other assets of the estate.

5 Collier on Bankruptcy ¶ 546.04[2][a] at 546-32 (Lawrence P. King, ed., 15th ed. rev.
2002) (emphasis added).

       As the Eighth Circuit explained in Pester Refining, the presence of a lien
       creditor does not extinguish a seller's reclamation rights; it only subordinates
       them to whatever rights the lien creditor possesses. Thus, the issue is
       whether Appellants' subordinated right[s] of reclamation ha[ve] any value.
       The following example is useful. If the seller exercised its state law right to
       reclaim and was given goods subject to the claims of a secured creditor, the
       seller would have to pay the secured creditor the value of its lien before
       obtaining possession. Alternatively, if the buyer files for bankruptcy relief,
       and the seller is not allowed to reclaim the goods, the seller must be given
       a comparable remedy in the form of either an administrative expense claim
       or a substitute lien. But the administrative expense claim or the substitute
       lien can only be paid from the residual value of the goods after payment of
       the secured claim collateralized by the goods. In other words, if the lien
       creditor is oversecured, a seller's reclamation right might have some value.
       . . . [T]he result in bankruptcy mirrors the result under state law. As the

                                             12
       bankruptcy court explained in In re Primary Health Systems, Inc., Congress
       did not intend to grant additional rights to sellers when it drafted section
       546(c). Under state law a reclaiming seller's right to reclaim would be
       valueless if the goods were worth less that the value of a floating lien. If the
       remedy under state law has no value, [then] the substitute remedy afforded
       by the Code would, likewise, have no value.

In re Houlihan’s Rest., Inc., 286 B.R. 137, 140 (Bankr. W.D. Mo. 2002) (emphasis added)
(footnotes omitted). As of the Petition Date, the Prepetition Lenders were owed $115
million. The Appellants’ reclamation claims verified by the Debtor in the Reclamation
Claims Report and not contested by the Appellants were

              Yenkin-Majestic Paint Corp.                        $107,612
              Mississippi Lime Co.                               $143,353
              Valspar Corp.                                      $203,989

There is no question in this case that if any of the Appellants chose (or were permitted) to
obtain possession of their goods and were required to pay the DIP Lenders (or Prepetition
Lenders for that matter) an amount sufficient to satisfy the outstanding lien at the time, that
none of the Appellants would have come away with any proceeds. “[A] seller’s right to
reclaim goods [under state statute substantially similar to U.C.C. § 2-702] only extends to
the particular goods it sold to the buyer. Thus, its reclamation rights only extend[] to the
goods or its traceable proceeds.” In re Bridge Info. Sys., Inc., 288 B.R. 133, 138 (Bankr.
E.D. Mo. 2001) (citing Pester Ref. Co., 964 F.2d at 847).

       In Pester Refining Co., the Court of Appeals for the Eighth Circuit rejected the
reclaiming seller’s argument “that the [reclamation] claim is worth full value because the
secured creditors have been satisfied.” Pester Ref. Co., 964 F.2d at 847. The Eighth
Circuit found that this argument “ignores the possibility that [the secured creditor’s claims]
were satisfied by the goods to be reclaimed, rather than by other [debtor] assets, in which
case the right to reclaim would be extinguished (rendered valueless) under state law.” Id.
at 847 (emphasis in original).

       We find that the bankruptcy court did not abuse its discretion. The Appellants are
not entitled to a lien or administrative expense status with respect to their reclamation
claims. That result may be harsh. However, in this case, the Post-Petition Financing

                                              13
Order grants the DIP Lenders a superpriority position. That order has not been appealed
and is a final order. Further, Appellants were in a position at the time the goods were
delivered to the Debtor to more adequately protect their interests by retaining and
perfecting a purchase money security interest in the goods sold and notifying the secured
creditors of their security interest. They chose not to do so and therefore, lost the right to
prevent the commingling and use of their products so that it is now impossible to determine
whose inventory remains in the Debtor’s possession. See Steinberg’s, 226 B.R. at 11
(“reclaiming seller could always have availed itself of greater protection by procuring a
purchase money security interest on the subject goods”); see also Wathen’s Elevators,
Inc., 32 B.R. at 923 (“the UCC presents the seller the possibility of complete protection
through a different medium [rather than the reclamation process], the purchase money
security interest.”); U.S. Billiards Co., Inc. v. Greenberger (In re Bensar Co., Inc.), 36 B.R.
699, 704 (Bankr. S.D. Ohio 1984); U.C.C. §§ 9-107, 9-312(3).



Appellants’ Additional Arguments: We find that Appellants’ additional arguments are also
without merit.

       A. Due Process and Procedural Deficiencies: Appellants assert that they did not
receive adequate notice of the hearing, that the relief sought required an adversary
proceeding and that they were not allowed adequate discovery. These arguments are all
without merit. The Reclamation Procedures Order specifically provided:

       (f) Following the determination of all of the Vendors’ Reclamation Claim
       Amounts, . . . the Debtors may commence further proceedings to determine
       the extent to which the Reclamation Claim Amounts are subject to further
       defenses by reason of liens granted to the Debtors’ secured creditors. In the
       alternative, the Debtors may propose to resolve such issues through a
       proposed plan of reorganization that specifies the extent to which the
       Reclamation Claims shall be treated as allowed administrative expense
       priority claims.

(Emphasis added). This language specifically anticipates that there may be additional
proceedings challenging the reclamation claims. Appellants were on notice of such and
cannot now assert that they were surprised because the Debtor determined it was in its


                                              14
best interest to take advantage of rights specifically reserved to it by the Reclamation
Procedures Order. Courts have ruled on motions, complaints or adversary proceedings
when considering reclamation issues and the “Sixth Circuit has not directly addressed the
issue of whether reclamation claimants are required to file an adversary proceeding or
some other [proceeding], such as a motion or complaint.” In re McLouth Steel Prods.
Corp., 213 B.R. at 987; see also Quality Stores, 289 B.R. at 338 (in similar factual
situation, the court indicated that the reclamation procedures order granted no substantive
rights and debtor acted consistently with that order when it filed a motion for determination
that reclaiming sellers’ reclamation claims were not entitled to administrative expense
priority status). Likewise, the Debtor here filed a motion to put the value and status of
Appellants’ reclamation claims at issue before the bankruptcy court. Such action was
contemplated by the Reclamation Procedures Order.

       With respect to the Appellants’ contention that they were not permitted to perform
discovery, the bankruptcy court notes that no discovery requests were served by the
Appellants. The bankruptcy court further stated

       Although several of the Objecting Vendors argued that they should be
       allowed to take discovery as to the “good faith” of the Prepetition Lenders
       and the lenders under the DIP Facility, they did not identify any question as
       to such “good faith” that would warrant such discovery. See e.g. In re
       Steinberg’s, Inc. 226 B.R. 8, 11-12 (secured creditor who enforces security
       agreement “in a manner consistent with the clear terms thereof” acts in good
       faith; discovery not proper unless reclaiming seller shows “some basis on
       which to question” the secured creditor’s good faith); In re Wathen’s
       Elevators, Inc., 32 B.R. 912, 920-21 (Bankr. W.D. Ky. 1983) (“good faith”
       only requires honesty and reasonable commercial standards; secured
       creditor’s alleged “knowledge” of reclamation demands is irrelevant to good
       faith); In re Arlco, Inc. 239 B.R. 261, 271-72.

Likewise, the Appellants’ have not made any arguments in this appeal setting forth a basis
for permitting them to engage in a fishing expedition under the guise of permitted
discovery.

       B. Judicial Estoppel: Appellants also assert that the Debtor is estopped from
asserting that the Appellants are not entitled to the remedy required under § 546(c) based
on the language of the Reclamation Procedures Order. Appellants assert that the Debtor’s

                                             15
basis for seeking the Reclamation Procedures Order was that it would be “impossible or
impractical to segregate and return such goods at this time.” Therefore, Appellants argue
that judicial estoppel should bar the Debtor “from later arguing their consumption of the
very goods which Appellants were enjoined from recovering under the Reclamation
Procedures Order provides a basis to deny Appellants’ reclamation claims administrative
expense priority status.” Appellants cite Quality Stores for the rule of judicial estoppel:

       [W]here a party assumes a certain position in a legal proceeding, and
       succeeds in maintaining that position, he may not thereafter, simply because
       his interests have changed, assume a contrary position, especially if it be to
       the prejudice of the party who has acquiesced in the position formerly taken
       by him.

Quality Stores, 289 B.R. at 338 (citing New Hampshire v. Maine, 532 U.S. 742, 749, 121
S. Ct. 1808, 1814, (2001) (citations omitted)).

       Appellants argue that

       Nothing in the Reclamation Procedures Motion or the subsequent order
       suggested that while the reclaiming creditors were prevented by court order
       from taking steps to preserve their rights, the ordinary course turnover of
       inventory during the interim would be used by the Debtors to defeat
       reclamation claims. While Debtors did reserve the right to raise further
       defense by way of liens granted to the Debtors’ secured creditors, the
       implication was that such defense would be raised only in the event that the
       Debtors’ secured creditors proved to be undersecured[.]

       Judicial estoppel is not appropriate in this case. The Debtor has consistently
asserted that the reclamation claims had no value and were not entitled to a remedy
pursuant to § 546(c) because there was a priority floating inventory lien. Debtor’s motion
for the reclamation procedures order explains that

       the Reclamation Demands are subject to two separate sets of defenses.
       The first group of defenses are those that relate to the specifics of the
       individual Reclamation Demands (such as the timeliness of notice, the
       condition of the goods at the time notices were received, etc.) The second
       group of defenses relate to the inventory lien that the Debtors granted in
       favor of their secured lenders. Under applicable law, these liens create
       rights that are superior to the rights of reclamation claimants and give rise to
       defenses to the Reclamation Demands.



                                             16
The Reclamation Procedures Order itself provides: “the Debtors may commence further
proceedings to determine the extent to which the Reclamation Claim Amounts are subject
to further defenses by reason of liens granted to the Debtors’ secured creditors.” The
Debtor also produced a letter dated February 13, 2001, sent to Yenkin-Majestic’s counsel
prior to entry of the Reclamation Procedures Order which stated:

       we are not in a position to stipulate that any reclamation claimants actually
       have allowed claims, or as to how those claims will be treated. This is
       primarily because of the inventory liens held by the bank lenders. These
       inventory liens constitute defenses to all of the reclamation claims that have
       been made. Because of those liens, it is premature to discuss whether any
       reclamation claimants will have allowed claims, or how those claims would
       be treated.

       In Quality Stores, the court faced a similar request for judicial estoppel. The court
denied the request, stating:

       The Reclamation Procedures Order granted no substantive rights and, by
       entry of that order, no party prevailed. By filing the Substantive Reclamation
       motion, the Debtor acted consistently with the requirements of the
       Reclamation Procedures Order. Any argument that this court should
       exercise discretionary judicial estoppel to bar a determination of the merits
       constitutes an enormous stretch of this theory.

Id. at 338.

       The same is true in the present case. Nothing in the Reclamation Procedures Order
substantively determined that any reclamation claimant had an allowed claim or was
entitled to a remedy pursuant to § 546(c). The Reclamation Procedures Order specifically
noted that the Debtor would assert the bank lenders liens’ as defenses to the reclamation
demands. Moreover, nothing in the order implies that this defense would only be used if
the bank lenders were undersecured. Even upon making a valid reclamation claim outside
of bankruptcy a vendor is not entitled to the return of his goods if there is a superceding
priority floating inventory lien. In such a case, the secured creditor is entitled to be paid
from those goods. If a vendor is allowed to repossess the goods it is subject to the priority
secured creditors’ lien. In this case, the bank lenders had better rights in the goods even
at the time the reclamation demand was made. Accordingly the Reclamation Procedures
Order did not reduce Appellants’ rights. The only reason consumption of the goods is at

                                             17
all an issue, is that if, by chance, there were traceable goods and/or proceeds after the
secured creditors were paid in full, then and only then, would Appellants have a
reclamation claim of any value. In this case, there are no traceable goods or proceeds
remaining.

       C. Marshaling of Assets: The Appellants also argue that they were entitled to
request or require a marshaling of the Debtor’s assets to protect their reclamation claims.
Marshaling of assets applies “when a senior secured creditor can collect on its debt against
more than one property or fund held by the debtor but a junior secured creditor can only
proceed against one of those sources.” Arlco, 239 B.R. at 274 (emphasis added).
Assuming certain elements are met, the process then requires the senior secured creditor
to first collect its debt against the collateral other than that in which the junior secured
creditor holds an interest, thereby leaving that collateral for the junior secured creditor’s
benefit. However, as found by the bankruptcy court in Arlco, Appellants do not even meet
the first requirement because they are not secured creditors and unsecured creditors
cannot invoke the equitable doctrine of marshaling. See Arlco, 239 B.R. at 274; see also
In re Gibson Group, Inc., 151 B.R. 133, 134-35 (Bankr. S.D. Ohio 1993) (“majority rule . . .
denies unsecured creditors standing to invoke the doctrine of marshaling.”)

       In any event, there were 37 reclaiming sellers initially involved in this case. If the
Debtor was required to use assets other than those of the Appellants’ first, whose should
it use? What other vendor’s assets should be consumed first with the result that a different
vendor’s reclamation claim was rendered without value? The Appellants’ argument that
rather than using its inventory in the ordinary course of business the Debtor should have
picked and chosen which vendor’s inventory should be protected at the expense of other
unsecured creditors flies in the face of the policies behind the Bankruptcy Code prohibiting
similarly situated creditors from being discriminated against and providing for an orderly
distribution of estate assets.

       The Appellants were not entitled to require the Debtor to use the collateral of other
vendors first in an effort to preserve the value of the Appellants’ reclamation claims.




                                             18
                          V. CONCLUSION

For the reasons stated above, we AFFIRM the decision of the bankruptcy court.




                                  19
       JENNIE D. LATTA, Bankruptcy Appellate Panel Judge, dissenting. I agree with my
colleagues that, as an initial matter, the Appellants’ rights can be no greater in bankruptcy
than they would have been outside of bankruptcy. I further agree that, pursuant to the
Post-Petition Financing Order, the claims of the Appellants were subordinated to the liens
of the DIP Lender and that the value of the Appellants’ claims cannot exceed the value of
those claims outside of bankruptcy. Because I believe that the reclamation claims were
not extinguished by the Post-Petition Financing Order, and thus that the bankruptcy court
erred in failing to assign them administrative expense or junior lien status as of the date
of demand, and further, because I believe that the bankruptcy court erred in failing to
require that the Debtor seek its requested relief by way of adversary proceeding, I
respectfully dissent, and would remand this case to the bankruptcy court for further
proceedings.

       It is apparently undisputed that as of the date of the filing of the bankruptcy petition,
the Debtor was indebted to the Prepetition Lenders in the maximum amount of $115 million
and that the indebtedness was secured by inventory with a value of $245 million. The
claims of the Prepetition Lenders were over-secured in the amount of $130 million. The
Appellants made timely reclamation demands at or near the date of the filing of the
petition. Pursuant to the claims liquidation process provided for in the Reclamation
Procedures Order, reclamation claims in the approximate amount of $2.9 million were
validated by the Debtor as supported by goods that were (i) in the possession of the
Debtor, (ii) specifically identifiable, and (iii) unconverted as to form, in each case as of the
date on which the reclamation demand was received by the Debtors.

       Pursuant to the Post-Petition Financing Order, the Prepetition Lenders were paid
in full, and the DIP Lender was granted superpriority status pursuant to § 364(c) of the
Bankruptcy Code and a floating lien upon all inventory and proceeds with priority over all
administrative expense claims including reclamation claims.

       Some two years later, at the hearing on the Debtor’s Reclamation Motion, the
Debtor offered proof that following validation of the Appellants’ claims, all goods subject
to those claims had been consumed in the manufacturing process, the final products sold,


                                              20
and the proceeds paid to the DIP Lender. The Appellants argued that the Prepetition
Lender was over-secured at the time their demands were made, but were unable to offer
proof as to the status of the security interests held by the DIP Lender. Rather, the
Appellants argued that the Debtor should have filed an adversary complaint to determine
the extent, validity and priority of their claims, which would have given them the opportunity
to gather evidence about the liens through discovery. The bankruptcy court overruled the
Appellants’ objections and granted the Debtor’s motion. The court held that reclaiming
sellers have no greater rights in bankruptcy than they hold under state law, and that under
applicable state law, a seller’s rights are exclusively limited to recovery of goods sold.
Inasmuch as the goods subject to the Appellants’ reclamation demands were consumed
by the debtor in possession in the manufacturing process, they were no longer available
for recovery, and the sellers’ rights were extinguished. Thus, as the sellers had no rights
under state law, they had no right to a priority claim under bankruptcy law.

       The bankruptcy court failed to recognize that, even under state law, reclamation
claims can extend to identifiable proceeds of reclaimed goods sold to satisfy a prior
security interest.   Further, the court failed to recognize that the Bankruptcy Code
specifically provides a substitutionary remedy for reclaiming sellers whose goods are to be
consumed in the administration of a bankruptcy estate. Upon a showing of the validity of
the reclaiming sellers’ claims, the bankruptcy court should have granted the reclaiming
sellers an administrative claim or lien junior to the DIP Facility, while leaving the
determination of the value of the claims to a later, meaningful time.



                                             A.

       At the time of their reclamation demands, the Appellants had claims under Uniform
Commercial Code § 2-702 that were supported by existing and identifiable goods in the
possession of the Debtor. At the time of demand, there was more than adequate inventory
to pay the Prepetition Lender’s claim without resort to the goods subject to the reclamation
demands.     As such, unless the prior secured claims automatically extinguished the
reclaiming sellers’ claims, proceeds from the sale of the Debtor’s inventory could have


                                             21
satisfied both the Prepetition Lender’s claim and the Appellants’ claims. See United States
v. Westside Bank, 732 F.2d 1258, 1265 (5th Cir. 1984) (Foreclosure by a secured creditor
does not cut off the rights of a reclaiming seller to identifiable proceeds not needed to
satisfy prior liens.).

       Under the Uniform Commercial Code, the rights of a reclaiming seller are not
extinguished by, but are inferior to those of a secured creditor and superior to those of the
buyer’s general unsecured creditors. See Pester Refining Co. v. Ethyl Corp. (In re Pester
Refining Co.), 964 F.2d 842, 845-46 (8th Cir. 1992). Outside of bankruptcy, in the event
of liquidation, good faith would require the secured creditor to liquidate its collateral in such
a way as not unnecessarily impair the rights of junior lien holders or reclaiming sellers.
Toshiba America, Inc. v. Video King of Illinois, Inc. (In re Video King of Illinois, Inc.), 100
B.R. 1008, 1014 (Bankr. N.D. Ill. 1989). In that event, if the secured creditor were over-
secured, junior lien holders and reclaiming sellers could expect to be paid from the
proceeds of goods subject to their interests ahead of unsecured creditors. Westside Bank,
732 F.2d at 1265; In re Victory Markets, Inc., 212 B.R. 738, 743 (Bankr. N.D.N.Y. 1997);
American Saw & Mfg. Co. v. Bosler Supply Group (In re Bosler Supply Group), 74 B.R.
250, 253 (N.D. Ill. 1987). See also 4 White and Summers, Uniform Commercial Code
§ 32-10, n.29 (West 5th ed. 2002).

       Similarly, in the bankruptcy context, Bankruptcy Code section 546(c) makes a
trustee’s or debtor in possession’s rights subordinate to those of a reclaiming seller. That
section specifically empowers a bankruptcy court to permit a debtor in possession to
consume goods subject to a reclamation demand in its ongoing business, provided that the
rights of the reclaiming seller are protected. In exchange for the debtor in possession’s use
of goods subject to reclamation, reclaiming sellers are granted administrative expense or
junior lien priority. Section 546(c)’s grant of priority is a substitutionary remedy. It
substitutes a priority claim for the reclaiming seller’s interest in the goods sold, and thus
permits a debtor in possession to continue in business without having to return goods
subject to reclamation. This remedy is not available in addition to reclamation rights, but
in lieu of turning over the property. In effect, the Bankruptcy Code treats the valid right of


                                               22
reclamation as a perfected security interest or lien. See 11 U.S.C. § 101(37); see also
Westside Bank, 732 F.2d at 1265.

       Pursuant to section 546(c)(2), once the Appellants established the validity of their
reclamation claims – that is that the claims were supported by goods that were in the
possession of the Debtors, specifically identifiable, and uncontraverted as to form, as of
the date on which the reclamation demand was received by the Debtors – their right to
protection in the event that the debtor in possession sought to use the goods was
established. Because the reclamation claims were specifically subordinated to the DIP
Lender by the Post-Petition Financing Order, the value of those claims remained in
question. Pursuant to section 546(c)(2), they should have been treated as junior liens,
subordinate to the lien of the DIP Lender. The value of those liens then would have been
determined at an appropriate time, such as in connection with the confirmation of a plan,
or a sale of assets outside of the ordinary course of business.

       The rights of reclaiming sellers are fixed as of the demand for reclamation. In re
Victory Markets, Inc., 212 B. R. at 744. Satisfaction of a secured creditor’s under-secured
claim may reduce the value of any recovery pursuant to those rights, even to zero, but
cannot extinguish those rights. Id. at 743 (“If the secured creditor’s rights are superior to
the seller’s, the seller is left with a nonpriority unsecured claim as to the value of goods
subject to the superior secured creditor’s claim, and a right of reclamation as to the goods
or value which are in excess of the creditor’s claim.”). See also Matter of Reliable Drug
Stores, Inc., 70 F.3d 948, 950 (7th Cir. 1995) (“How much a particular reclamation claim
is worth, once § 546(c)(2)(A) transmutes it into an administrative claim, is a question
distinct from the ‘validity’ of the reclamation claim.”). In this case, however, it appears that
the claims of the Prepetition Lenders were over-secured, and that the claims of the DIP
Lender were also, at least initially, over-secured. The Appellants were not permitted to
determine whether the claims of the DIP Lender were over-secured at the time of the
hearing on the Reclamation Motion, and it appears that time might have been an artificial
one for determining the value of the reclamation claims in any event. The claims should




                                              23
have been evaluated in connection with some proposed disposition of the inventory, such
as a plan or sale.

       Once the validity of the reclaiming sellers’ claims had been established, the
bankruptcy court erred in failing to provide the reclaiming sellers a remedy in exchange for
the use of their goods. In this case, in which the Post-Petition Financing Order provided
for the subordination of reclamation claims, the most appropriate substitutionary remedy
would appear to have been the securing of the claims by a junior lien. In that event, if at
some later time it appeared that the assets securing the DIP Facility were inadequate, then
the value of the Appellants’ liens might have been reduced or even eliminated. The value
of a reclaiming seller’s claim need not be fixed as of the granting of the substitutionary
remedy, but clearly the priority of these claims over general unsecured claims (and over
a debtor in possession as hypothetical lien creditor) is to be established pursuant to section
546(c) before a debtor in possession is permitted to use goods subject to reclamation.



                                              B.

       Both Yenkin-Majestic Paint Corporation and Mississippi Lime Company urged the
bankruptcy court that the Debtors’ motion presented questions as to the extent, validity and
priority of liens and sought declaratory relief, and thus should be treated as an adversary
proceeding, which would have provided them an opportunity for discovery. This issue was
properly preserved for appeal. Despite Debtor’s arguments to the contrary, the Debtor’s
motion clearly sought the determination of the extent, validity and priority of the Appellants’
claims and sought a declaration that those claims were generally unsecured. As such, the
relief sought should have been brought by adversary complaint. See Fed. R. Bankr. P.
7001. The bankruptcy court erred in making determinations about the value of the
Appellants’ liens outside of an adversary process.




                                              24
                                      CONCLUSION

       The bankruptcy court erred in permitting the Debtor to consume goods subject to
the reclamation claims of the Appellants without first protecting those rights by granting the
Appellants a lien pursuant to section 546(c)(2). The court further erred in determining the
value of the Appellants’ claims in connection with the Debtor’s motion rather than pursuant
to adversary proceeding. Accordingly, I would reverse the decision of the bankruptcy court
and remand this case for further proceedings consistent with this opinion.




                                             25
