Reclamation Clause

Unless the seller has agreed to extend credit to the buyer, the buyer must pay for the goods at the time they are delivered. When the seller is ready to make delivery of the goods, the seller may withhold delivery until the payment is made. If the seller discovers that the buyer is insolvent before making delivery, the seller has the right to withhold delivery until the buyer pays cash for the goods and for any goods previously delivered for which payment has not been made. The seller has the right to require the buyer to return any goods the insolvent buyer obtained from the seller within the previous 10 days.

If a seller demands the return of merchandise from an insolvent buyer within 10 days of the receipt of the shipment and the buyer fails to comply, the seller may recover the goods without proving any misrepresentation of solvency or fraud. Insolvency under the UCC is defined to include the so-called equity rule (inability to pay debts as they mature) as well as the bankruptcy definition (liabilities exceeding assets.) If the buyer misrepresented solvency in writing within three months, then the 10-day limitation does not apply and the demand can be made at any time. If a seller discovers that a buyer is insolvent, the seller has the right to stop delivery of any goods in transit. Except in these two situations, the seller may not recover merchandise on the basis of any misrepresentation of solvency. For example, if the seller fails to demand the return of merchandise within 10 days of its receipt, it cannot be reclaimed from any insolvent buyer even though the buyer had made all kinds of misrepresentations of solvency, unless they were in writing and made within three months of delivery. In addition to the provisions of Article 2, reclamation can also be negotiated between a debtor in Chapter 11 of the Bankruptcy Code and the creditors' committee. Section 546 of the Bankruptcy Code recognizes the rights of a reclaiming seller.