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 was defrauded.

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 was insolvent;

(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 407.

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

[date]

VIA FACSIMILE AND OVERNIGHT MAIL
[OR, HAND DELIVERY]

[Debtor]

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.

Sincerely,

[Credit Executive]

EXHIBIT "A"

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP Summer 02