Bankruptcy reclamation rights are often misunderstood. Unfortunately,
what trade creditors don't know about their reclamation rights
can cost the creditor company money. Here are some common questions
about the rights of pre-petition creditors in bankruptcy to reclaim
goods shipped to an insolvent customer that subsequently files
for bankruptcy protection:
Question. Do creditors have a right to reclaim merchandise within
a specific time period of the bankruptcy filing date?
Answer. Yes, under certain circumstances creditors can file reclamation
notices on merchandise shipped to a debtor that subsequently files
for bankruptcy protection in which the creditor demands the return
of their product.
Question. How would a company go about reclaiming their product?
Answer. The creditor would send a letter to the debtor company
demanding reclamation of goods as provided for under the U.S. Bankruptcy
code. This letter/demand should be faxed, sent by overnight delivery, and
sent by mail with return receipt requested. This letter should
be sent as soon as possible. It should contain certain specific
language. For example, it should instruct the debtor to set aside,
safeguard and not sell any of the merchandise in inventory that
is the subject of the reclamation demand.
Question. What is the timeframe for a reclamation demand?
Answer. While a seller generally has only ten days to make its
written reclamation demand, if the ten-day period expires after
the bankruptcy has been filed, the seller can make its reclamation demand
up to twenty days of the buyer's receipt of the goods.
Question. Under what conditions can a reclamation demand be sent?
Answer. A seller can reclaim goods delivered to a buyer if the
seller satisfies all of these conditions:
The seller delivered the goods to the buyer;
The goods were sold to the buyer in the ordinary course of
The buyer must have possession of the goods at the time of
the demand; and
The buyer was insolvent when it received the goods.
Question. Can a representative of the creditor company go into
the bankrupt debtor's facility company to verify or count inventory?
Answer. A creditor cannot require or demand that the debtor allow
them access to inspect and count inventory, but a creditor can
request permission to do so.
Question. Many times the company receives the bankruptcy paperwork
close to, or beyond the date that the paperwork needs to be filed.
Is there anything a creditor company can do to extend the filing
Answer. Unfortunately, no.
One final note: A creditor's right to reclamation under the Bankruptcy
Code are subordinate to the rights of a prior secured creditor
with a security interest in inventory. Sometimes, the existence
of a creditor with a blanket security interest in the buyer's assets
[or just in inventory] will result in the denial of a reclamation
claim in whole or in part.