Vendor’s Right to Reclaim

Put this in the category of “stuff I didn’t know.”  I knew that vendors have a right to reclaim goods from an entity that files a bankruptcy petition.  I thought it was goods shipped within 20 days of the petition – typical sort of right.

There are two code sections that deal with this issue.

Section 503(b)(9):  A vendor has an administrative claim for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”  This is really nice. 

Section 546(c):  [The avoiding powers of the trustee]

“are subject to 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 [petition date], but such 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 still may assert the rights contained in section 503(b)(9).”

In other words, the vendor may reclaim goods

1.  shipped within 45 days of the petition date,

2.  in the ordinary course of business

3.  when the debtor was insolvent

4.   but must give notice generally within 20 days after the petition date.

Of course how you do that is another thing.  If a vendor ships 10,000 shoes or 10,000 gallons of gasoline, I assume the vendor has to identify the shoes or gasoline to reclaim.  This stuff keeps me young.

The day I uploaded this, Bill Rochelle posted a case that deals with priority rights between a secured creditor and a reclamation creditor.

December 11, 2017

Inventory Liens Always Prevail over Reclamation Claims, Indianapolis Judge Says

Bankruptcy Judge Jeffrey J. Graham of Indianapolis advanced a straightforward rationale for deciding who comes out on top when a reclamation claim collides with the blanket lien of a secured lender.

Under Judge Graham’s view of Section 546(c)(1), a lender with a valid secured claim on inventory should always prevail over a reclamation claim.

In a typical fact pattern, a trade supplier delivered goods to a retailer within 45 days of the retailer’s chapter 11 filing. The supplier took all steps required for a valid reclamation claim under UCC § 2-702 and Section 546(c)(1) of the Bankruptcy Code.

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