A Short Series on Reclamation for Credit Managers, Part 4: CASH, LIEN OR CLAIM?

Part 4: CASH, LIEN OR CLAIM?

Contributed by:
Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.

V. RECLAMATION RIGHTS VS. SECURED CREDITORS
AND/OR GOOD FAITH PURCHASERS

A seller seeking reclamation must contend with two common hurdles to recovery. One is a prior secured creditor with a floating lien on the assets of the debtor. The second hurdle is the good faith purchaser, where a debtor no longer has the goods because they were sold to a good faith purchaser prior to the reclamation demand. Even Section 2-702(3) of the U.C.C. provides that a seller’s reclamation rights are “subject to the rights of a buyer in the ordinary course or other good faith purchaser…” Since secured creditors are considered good-faith purchasers pursuant to Sections 1-201(32) and (33) of the U.C.C., a seller is unable to reclaim the physical possession of the goods against either a secured creditor or a good faith purchaser.

Recent case law has all but eliminated a seller’s right to reclamation if there is a prior secured creditor with a floating lien on the assets of the debtor. See In re Dana Corporation, 2007 Bankr. LEXIS 1466 (Bankr. S.D. NY 2007). In Dana Corp., even though the Debtor’s assets had significant equity above the floating lien of its pre-petition secured lender, the Court held that the plain language of Section 546(c) rendered the reclamation claims valueless.

Next – Part 5: Code v. Code

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