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Bankruptcy Reclamation, Questions and Answers
By Michael C. Dennis, MBA, CBF

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:

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; and
d. 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 date?

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

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