Does Your Reclamation Demand Letter Sufficiently Identify Our Goods?
By Scott Blakeley
News of a major customer's insolvency is frustrating to a vendor
selling on open account. However, the right of reclamation may
afford a vendor a costeffective method of recovery for goods recently shipped
if the customer has not filed bankruptcy, or, if the customer files
bankruptcy, a priority claim for the reclaimed goods.
Reclamation is the right of a seller to recover possession of goods delivered
to an insolvent buyer. The remedy of reclamation is needed when an unsecured
vendor is unable to retrieve goods or stop them in transit. A reclaiming vendor
need not prove fraud, although the premise of reclamation is that the vendor
Establishing Your Reclamation Claim
Courts have settled upon the following elements to establish
a valid reclamation claim under the Bankruptcy Code:
(1) the seller sold goods on credit to the debtor in the ordinary course of
business of both;
(2) the seller delivered the goods to the debtor at a time when the debtor
(3) the seller made a written demand for the return of the goods within ten,
or in certain cases twenty, days after the goods were delivered to the debtor
which sufficiently identifies the goods to be reclaimed; and
(4) the debtor had possession of the goods at the time of the reclamation demand
or the goods were not in the hands of a buyer in the ordinary course or a good
faith purchaser at the time of demand.
Reclaimed Goods Must Be Sufficiently Identified
As noted, one element for a vendor to prevail on its reclamation
demand is written demand for the return of the goods which sufficiently
identifies the goods to be reclaimed. But what language should
the reclamation demand letter contain to sufficiently identify
the goods so as to make an effective demand? The bankruptcy court
in In re the Hechinger Investment Company of Delaware,
274 B.R. 402 (Bankr. D. Del. 2001), considered the debtor's objection
to a vendor's reclamation suit contending that the vendor's reclamation
demand letter failed to properly identify the goods.
In Hechinger, the vendor filed a complaint for reclamation in the bankruptcy
court, and the debtor filed a motion to dismiss contending that the reclamation
demand letter failed to sufficiently identify the reclaimed goods. The bankruptcy
court focused on the vendor's reclamation demand letter. The court noted that
the demand letter did not identify the goods, nor did the letter attach documents
to identify the goods, such as shipment or delivery dates, invoice numbers
or P.O. numbers. The court stated the vendor's burden: "the U.C.C. requires
strict compliance with its procedural and substantive rules for reclamation.
Moreover, the reclaiming vendor maintains the burden of proof to establish
each element of the right to reclamation by the preponderance of the evidence." Hechinger,
274 B.R. at 407. To that end, the court ruled: "the demand must identify the
goods as to which reclamation is sought so as to permit their return pursuant
to the demand at the time the demand is made. If the demand fails to be
sufficiently detailed to accomplish that purpose, it must of necessity fail
as a matter of law." (citation omitted). Hechinger, 274 B.R. at
However, in the context of the debtor's motion to dismiss the reclamation suit,
the court found that the vendor's demand letter was sufficient to identify
the goods at the time of demand. But the court decided that the vendor had
made a "minimal" identification of the goods, and that the vendor had the burden
to establish that the debtor was in a position to identify the goods, such
as through an inventory control system. That may be a high hurdle, the court
observed, given the debtor's nationwide operations and financial difficulty.
Is Your Demand Letter Sufficient?
The Hechinger decision reminds vendors to identify the goods
being reclaimed to minimize the risk of litigation with the debtor
or trustee. The attached reclamation demand letter may be of interest
where the customer files bankruptcy.
BANKRUPTCY RECLAMATION DEMAND LETTER
VIA FACSIMILE AND OVERNIGHT MAIL
Re: [Debtor's Case Name]
Dear [Debtor's Officer]:
.....This letter constitutes a notice of demand for
the return of certain goods purchased by the abovecaptioned debtor
("Debtor") from [Vendor] (the "Seller"). Please take notice that
pursuant to [State] Commercial Code 2702, 11 U.S.C. section 546
(c), and by virtue of the Debtor's insolvency, the Seller hereby
demands the segregation and return of all the [Reference goods]
(the "Goods") currently in your possession and delivered to you
on or after [Delivery Date] pursuant to the invoices, dated [Invoice
Date and Invoices Numbers. Invoices attached]. Unless you authorize
the return of the Goods immediately, further appropriate measures
will be taken.
Please contact the undersigned immediately to make arrangements to allow the
Seller to reclaim the Goods. I look forward to hearing from you shortly.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley
LLP Summer 02