Financial Restructuring Client Advisory

October 17, 2005

Sellers Of Goods Have Expanded Reclamation Rights in Bankruptcy Cases Filed

The Bankruptcy Abuse, Prevention and Consumer Protection Act of 2005 ("BAPCPA") takes effect for all bankruptcy cases filed after October 17, 2005. Most BAPCPA publicity centers on consumer bankruptcy changes. However, BAPCPA also makes important changes to business bankruptcy cases. For those who sell goods to business customers, nowhere are such changes more important than in regard to creditors' reclamation rights. Sellers need to get up to speed on their expanded reclamation rights.

In a non-bankruptcy context, a seller of goods who discovers that a buyer is insolvent always has the right to make written demand for return of goods shipped within 10 days. This right arises under Uniform Commercial Code ("UCC") Section 2-702. Although there has been much litigation regarding the issue, it is now well settled in most jurisdictions that reclaiming seller rights are subject to the lender with a prior perfected lien on the buyer's inventory.

When a buyer of goods files bankruptcy, those rights of a reclaiming seller become subject to section 546 of the Bankruptcy Code. BAPCPA amends section 546, significantly improving those rights. Section 546 as revised by BAPCPA allows a seller to reclaim goods delivered to a debtor within a 45 day window (formerly 10 days). Also, under revised section 546, the reclaiming seller has 45 days (also formerly 10 days) after the date of receipt of goods by the debtor to make written demand for reclamation of the shipped goods.

In addition, under current section 546 a reclaiming seller who failed to make a timely written demand lost all reclamation rights. Under section 546 as revised by BAPCPA, the seller who forgets or fails to timely make a written demand for reclamation may nevertheless obtain an administrative claim for the value of goods received by the debtor within 20 days before the day of the commencement of the case, merely by timely filing an administrative claim in the buyer's bankruptcy! Having administrative claim status doesn’t guarantee that a reclaiming seller will receive payment of its entire administrative claim. There are many bankruptcy cases that turn out to be partially or wholly administratively insolvent (only enough money to pay secured creditors). But in all cases, the reclaiming seller with an administrative claim will be ahead of general unsecured creditors in priority of payment of claims, which is a tremendous advantage.

These changes are a significant victory for creditors who ship goods to debtors (and a loss for general unsecured creditors). We urge any client dealing with a customer filing bankruptcy or or after October 17, 2005, to (i) timely make written demand for reclamation of all goods delivered to within 45 days (extendable up to 20 days if the filing occurs before the end of the 45 day period), (ii) monitor all bankruptcy pleadings (particularly "First Day" orders, cash collateral orders and any Chapter 11 plan) for any motion or order that would adversely affect the rights of reclaiming sellers and (iii) quickly file administrative claim(s) for all goods for which reclamation is sought, asserting a right to reclamation of goods delivered within the 45 day period for which written notice has been given. Other strategies may also need to be considered as case law regarding new section 546 of the Bankruptcy Code develops.

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