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:
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.
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.
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:
a. The seller delivered the goods to the buyer;
b. The goods were sold to the buyer in the ordinary course of business
c. The buyer must have possession of the goods at the time of the demand;
d. The buyer was insolvent when it received the goods.
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.
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.
Some final thoughts: 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.
Reclamation rights are not limited to bankruptcy. Creditors have
rights, under certain conditions, to demand reclamation from companies
not in bankruptcy under provisions of the Uniform Commercial Code.
A more complete description of these reclamation rights will be
included in an upcoming article.
Disclaimer: The information provided in this Bulletin is not
legal advice and is not a substitute for legal advise. Readers
are encouraged to contact an attorney to discuss any questions
that may arise after reading this Bulletin with their attorney
to clarify any of the issues raised.
Reprinted with permission from the Covering
Credit Newsletter 3/21/03 Edition