A Short Series on Reclamation for Credit Managers, Part 5: CODE V. CODE

Part 5: CODE V. CODE

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

VI. CODE V. CODE

While the U.C.C. and Section 546(c) reclamation provisions are similar, they are not identical. There are several common risks for the unwary seller, arising from the differences between the U.C.C. and Section 546(c). Since Section 546(c) requires a seller to comply with nonbankruptcy law (usually the U.C.C.) as well as its own provisions, it is important to note the differences between the two provisions. The differences are as follows:

A. DEFINITION OF INSOLVENT

A debtor is “insolvent” under the U.C.C. if the debtor has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due. A debtor is “insolvent” under the Bankruptcy Code if he meets the Code’s “balance sheet” test, which requires that “the sum of the entity’s debt is greater that all of the entity’s property, as fair valuation…”

In a recent case, the seller sought reclamation pursuant of Section 546(c) for cotton which it had delivered to the debtor pre-petition. The Court held that, even though the seller complied with the U.C.C.’s reclamation requirements, the seller’s request for reclamation must be denied because the seller offered no evidence that the debtor’s liabilities exceeded its assets at the time the seller demanded the return of the cotton, as required under Section 546(c) of the Code.

In another case the Court held that the debtor’s poor financial condition which was evidenced by its Schedules and the fact that the debtor filed its Petition in the Bankruptcy Court within one week after it received the goods, provided the seller with strong probative evidence that the debtor’s liabilities exceeded its assets at the time the seller demanded the return of his goods.

B. WRITTEN NOTICE WITHIN 10-DAYS AFTER THE DEBTOR’S RECEIPT OF THE GOODS

Unlike some states’ nonbankruptcy laws which allow for oral demand by the seller for return of goods, Section 546(c) requires the demand to be in writing. Also, while some states’ nonbankruptcy laws provide that a seller’s reclamation rights are extinguished 10 days after receipt of the goods. Section 546(c) has recently been modified to extend a seller’s reclamation rights to 45 days after receipt of the goods or 20 days at the very lease if the 45 day period ends after the Petition date.

Next – Part 6: Receipt, Stoppage in Transit & Conclusion

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