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A creditor who has sold goods to a debtor while the debtor was insolvent has a right to reclaim the goods. To do so, the seller must send a reclamation demand in writing within 10 days or, in certain circumstances, 20 days after the debtor receives the goods. The purpose of this provision is to recognize the validity of Section 2-702 of the Uniform Commercial Code, which codifies the rights of sellers to reclaim goods sold to insolvent debtors. The court may refuse to permit reclamation, but if it does so, it must grant the seller's claim priority as an administrative expense or secure the claim by a lien and adequately protect the lien. Grounds for Reclamation Section 546(c) of the Bankruptcy Code permits the seller to reclaim goods from the buyer if all requirements are satisfied under Section 2-702 of the UCC. A seller can reclaim goods if all of the following conditions apply:
Reclamation Demand The written reclamation demand should do the following:
Reclamation Demand Time Period The Bankruptcy Code requires the reclaiming seller to make a written reclamation demand within ten days after the buyer receives the goods. If the ten-day period expires after the buyer's bankruptcy case starts, the seller is entitled to an extra ten days (within a total of 20 days) to make a written reclamation demand after the buyer receives the goods. Computing the Reclamation Demand Time Period In calculating the time period for making a reclamation demand, the seller must consider the following questions:
Buyer's Insolvency Another condition of reclamation is the buyer's insolvency when he or she received the goods. The Bankruptcy Code adopts the "balance sheet" definition of insolvency. Under this test, insolvency is when the debts exceed the fair market value of the assets. The UCC defines insolvency as either based on the balance sheet test or an "equity" test. According to the equity test, the buyer is insolvent when the he or she has ceased to pay debts in the ordinary course of business or is unable to pay debts as they become due. The equity test for insolvency may be easier to satisfy than a balance sheet test. Buyer's Possession of Reclamation Goods at the Time of Demand A seller seeking to reclaim goods has the burden of proving that the buyer was in possession of identifiable goods when the seller made the reclamation demand. If, at the time of the demand, the buyer was no longer in possession of the goods or the goods were no longer identifiable, the seller may lose reclamation rights. Priority of Debtor's Secured Creditor Over Reclaiming Seller The seller may lose his or her reclamation claim if all of the buyer's inventory is subject to a prior perfected (proven) security interest. Properly Enforcing A Reclamation Claim Often, a reclaiming seller will send a timely reclamation demand, satisfy all of the other requirements for reclaiming goods, and then take a wait-and-see attitude. This could result in losing the reclamation claim. A seller may be forced to initiate a reclamation lawsuit shortly after making the reclamation demand. This will force the buyer to address the seller's reclamation claim immediately and avoid the argument that the seller waived the claim by sitting on his or her rights. Remedies Available to the Successful Reclamation Creditor Where the seller has taken all steps necessary to enforce its reclamation claim, the bankruptcy court may do the following:
Seller's Right to Stop Delivery If the seller has not shipped goods to a buyer and discovers that the buyer has filed a bankruptcy petition or is otherwise insolvent, the seller can stop delivery of the goods. Under section 2-702(1) of the UCC, the seller can refuse delivery until the buyer pays for the goods and all outstanding invoices due under the same contract. This converts the seller's payment terms from credit to cash on or before delivery. Where the seller's goods are being held by a carrier, warehouse, or other third party bailee, and the buyer files a bankruptcy petition, the seller can also stop delivery of the goods. The seller's right of stoppage in transit is not affected by passage of title or risk of loss to the buyer. Under Sections 2-702(1) and 2-705 of the UCC, a seller seeking to stop delivery of goods must give notice to the carrier, warehouse, or other bailee. The seller also should give written notice of the stoppage to the buyer. Example of Reclamation Claim Letter Gentlemen: Demand is hereby made upon you pursuant to § 2-702 of the Uniform Commercial Code and § 546(c) of the United States Bankruptcy Code for the return of all goods consisting of ____________________________ received during the applicable periods re-ferred to in the above-cited sections and specifically including but not limited to goods described in the Schedule enclosed herewith. Please contact the undersigned for instructions in connection with the return of the goods. In light of your recent bankruptcy filing, you are further notified that all goods subject to __________'s right of reclamation should be protected and segregated by you and are not to be used for any purpose whatsoever except those specifically authorized following notice and a hearing by the Bankruptcy Court. Very truly yours, By: ___________________ SCHEDULE Vendor Invoice No. Invoice Date Amount Source:
Manual of Credit and Commercial Laws, edited by Charles M. Tatelbaum and
John K. Pearson available at the NACM
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