A Short Series on Reclamation for Credit Managers, Part 2: RECLAMATION AND BANKRUPTCY

Part 2: RECLAMATION AND BANKRUPTCY

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

I. RECLAMATION AND BANKRUPTCY

Sometimes, the reclamation demand is occasioned by the customer filing a Voluntary Petition for Relief under Chapter 11 of the U.S. Bankruptcy Code. Please note that once a bankruptcy case is initiated, Section 546(c) provides the exclusive remedy for a seller who is seeking to reclaim his goods. Therefore, once a debtor initiates a bankruptcy case, a seller must establish his right to reclaim the goods pursuant to 11 U.S.C. Section 546(c) of the Code.

A seller’s reclamation rights arise under Section 546(c) of the Code only if the seller has a right to reclaim under the non-bankruptcy law (generally the U.C.C.) of the state where the goods were sold. In addition to the nonbankruptcy law requirements, a seller’s failure to comply with the additional requirements of Section 546(c) will terminate his reclamation rights, regardless of compliance with more liberal requirements of the state’s nonbankruptcy laws.

II. SECTION 546(C)

11 U.S.C. Section 546(c) states:

(c) Except as provided in subsection (d) of this section and in section 507©, and subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof, the rights and powers of the trustee…are subject to any the 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 has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but

(1) such a seller may not reclaim such goods unless such seller demands in writing reclamation of such goods —

(A) not later than 45 days after the date of receipt of such goods by the debtor; or

(B) not later than 20 days after the date of commencement of the case, if the 45-day period expires after the commencement of the case.

(2) If a seller of goods fails to provide notice in the manner described in paragraph (1), the seller may still assert the rights contained in section 503(b)(9)

 

Section 546(c) is straightforward and is similar (although narrower) than Section 2-702(2) of the U.C.C. and the case law relating to Section 546(c) is well-defined. Case law reduced Section 546(c) into the five basic elements which give rise to a seller’s reclamation rights. These elements are as follows:

1. The seller sold goods to the debtor on credit;

2. The sale of goods was in the ordinary course of business of both the debtor and the seller;

3. The seller delivered the goods at a time when the debtor was insolvent, as defined by the Bankruptcy Code;

4. The seller made a written demand for return of the goods within 45 days (or 20 days if the 45 day period had not yet expired when the Petition was filed) after the goods were delivered to the debtor;

5. The debtor had possession of the goods at time of the written demand or the goods were not in the debtor’s possession in the ordinary course of business or the goods had been sold to a good-faith purchaser at the time of demand.

Next – Part 3: How It Works

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