The filing of the Pike Nurseries Chapter 11 case yesterday led to me reviewing the rights of a vendor to "re-claim" (i.e., pick up from the debtor, following the appropriate procedures) goods delivered to the debtor shortly before filing. The key – act quickly!
Section 2-702 of the Uniform Commercial Code and Section 546 of the Bankruptcy Code (statutes are at the bottom of this post, after the jump) covers reclamation. It provides that a vendor of goods may invoke its right to reclamation —
- Written notice of reclamation is sent to the debtor.
- The goods were received by the debtor within 45 days of the written notice, or not later than 20 days after the filing of the Bankruptcy petition, if the 45 day time limit expires after filing. This extends the time
- The debtor was insolvent when the goods were received.
- The good were sold in the ordinary course of the vendor’s business, and received in the ordinary course of the debtor’s business.
- The written notice should specify the goods subject to reclamation. Often, the purchase orders will contain this information and can be attached and made part of the notice. The notice should also state that the goods should be segregated by the debtor.
Why should a vendor act quickly if it has 45 days or more to provide the notice?
- There is no right of reclamation for goods sold by the debtor before written notice is provided, and authority suggests that there is no right or remedy for good sold after notice is provided. Every day that goes by is a day that the vendor’s products are sold. The vendor may have to seek a court order to halt further sales.
- The vendor’s remedies may be trumped by a secured creditor. It is important to ascertain priorities as soon as possible.
- The debtor may request post-petition financing from a lender who then has a super-priority lien on all of the debtor’s assets, including the vendor’s goods. (for example, see the Motion filed in the Pike case yesterday, Nov. 15).
- The debtor will likely want to negotiate the matter, rather than risk losing its inventory. Often, the debtor will have multiple reclamation notices shortly after filing. It is best to start the process early.
§ 2-702. Seller’s Remedies on Discovery of Buyer’s Insolvency.
(1) Where the seller discovers the buyer to be insolvent he may refuse delivery except for cash including payment for all goods theretofore delivered under the contract, and stop delivery under this Article (Section 2-705).
(2) Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay.
(3) The seller’s right to reclaim under subsection (2) is subject to the rights of a buyer in ordinary course or other good faith purchaser under this Article (Section 2-403). Successful reclamation of goods excludes all other remedies with respect to them.
11 U.S.C. §546(c) – Reclamation
(c)(1) Except as provided in subsection (d) of this section and in section 507(c), 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 under sections 544(a), 545, 547, and 549 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 date of the commencement of a case under this title, 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).
11 U.S.C. §509 (b)(9) – Allowance of Administrative Expense
(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including–
(9) 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.