Journal Issue
Column Name
Reclamation Overview
ection
546(c) of the Bankruptcy Code gives the seller the right to reclaim goods sold on credit
to an insolvent debtor after the debtor has filed a bankruptcy action. However, §546(c)
does not create a substantive right to reclamation. It allows a seller to reclaim goods
only to the extent there is a statutory or common law right to do so. In
re Coast Trading Co. Inc., 744 F.2d 686, 692 (9th Cir. 1984)1
Exclusive Remedy
Section 546(c) is the exclusive remedy for a reclaiming seller when the buyer is in
bankruptcy. In
re Julien Co., 44 F.3d 426 (6th Cir. 1995).2
A reclaiming seller who fails to prove all the elements of a reclamation claim under
§546(c) cannot avail itself of a common-law fraud remedy because §546(c) is the
exclusive remedy for reclaiming creditors. See In
re MGS Marketing, 111 B.R. 264 (9th Cir. BAP 1990); In
re Flagstaff Foodservice Corp., 56 B.R. 899 (Bankr. S.D.N.Y. 1986).3
Seller of Goods
A reclaiming seller must be a "seller of goods" in order to bring a
reclamation claim under §546(c). See In
re Grossinger's Associates, 125 B.R. 106 (Bankr. S.D.N.Y. 1991) and In
re East Texas Steel Facilities Inc., 117 B.R. 235 (Bankr. N.D. Tex. 1990). In Grossinger's
Associates, the seller erected canopies for the debtor's hotel and was not just a
supplier of structural steel.
Elements of Proof
A seller has the burden of proving all of the elements of a valid reclamation claim. See
Matter
of Adventist Living Centers Inc., 52 F.3d 159, 162 (7th Cir. 1995); In re Mayer
Pollock Steel Corp., 157 B.R. (Bankr. E.D. Pa. 1993). The court in Matter
of Continental Airlines Inc., 125 B.R. 415, 417 (Bankr. D. Del. 1991), set out the
elements of a reclamation claim under §546(c): (1) The debtor was insolvent when the
seller delivered the goods to him; (2) the seller made written demand for return of the
goods within 10 days of the delivery of the goods; (3) the seller could identify the goods
at the time of the demand; and (4) the goods were in the possession of the debtor at the
time of demand. Once a reclaiming seller presents evidence of debtor's insolvency at the
time of the delivery of the goods, the burden of proof shifts to the debtor to rebut the
seller's proof of insolvency. Matter
of Continental Airlines Inc., 125 B.R. at 417.
One of the most difficult hurdles that a reclaiming seller must
overcome is the requirement that the seller must identify the goods that are subject to
the reclamation claim.
Insolvent Debtor
Only goods received by the debtor while insolvent are subject to reclamation. See
Matter
of Griffin Retreading Co., 795 F.2d 676, 679 (8th Cir. 1986); In
re Buyer's Club Market Inc., 100 B.R. 35, 36 (Bankr. D. Colo. 1989). The
Bankruptcy Code defines the term "insolvency" in §101(32)(A) to mean
"financial condition such that the sum of such entity's debts is greater than all of
such entity's property at a fair valuation (emphasis added). This definition is
referred to as the "balance sheet test." Bankruptcy Code definitions apply to
all sections of the Code, and the "balance sheet" definition of insolvency
should be used in reclamation proceedings. In
re Diamond Lumber Inc., 102 B.R. 77 (Bankr. N.D. Tex. 1988). The reclaiming
creditor must prove that the debtor was insolvent at the time the goods were delivered. See
In
re Julien, supra at 431; In
re Mayer Pollock Steel Corp., supra at 959-60; In
re Storage Technology Corp., 51 B.R. 206 (D. Col. 1985).
"Fair valuation" within the context of the "balance sheet" test for
determining the issue of insolvency in reclamation actions involves an estimate of what
can be realized out of the assets within a reasonable time either through collection or
sale at the regular market value. Storage
Technology, supra at 208. The "equity" definition of insolvency, the
inability of the debtor to pay its bills as they come due, will not support a reclamation
claim. In
re Furniture Distributors, 45 B.R. 38 (Bankr. D. Mass. 1989).
A debtor's bankruptcy schedules are probative evidence of insolvency. In
re Flagstaff Foodservice Corp., 56 B.R. 899, 905 (Bankr. S.D.N.Y. 1986). While the
schedules are probative evidence of insolvency, they are not dispositive of the issue of
insolvency. In
re Flagstaff Foodservice Corp., 56 B.R. at 907. While the schedules may show that
debtor was insolvent on the date of the filing of the petition, the claimant must still
show that debtor's financial condition did not change materially from date of the delivery
of the materials to the date of the filing of the petition. In
re Penthouse Travelers of Aripeka Inc., 120 B.R. 226 (Bankr. M.D. Fla. 1990).
Written Demand to Debtor for Return of Goods Within 10 Days
A reclaiming seller must serve a written demand for reclamation on the buyer; an oral
reclamation demand will not sustain a reclamation claim under §546(c). In
re Julien Co., 44 F.3d at 431-432. The plaintiff in In
re Charter Co., 52 B.R. 263, 265-66 (Bankr. M.D. Fla. 1985), failed to send a
written demand for reclamation within 10 days from the date of delivery of the goods to
the insolvent buyer. The plaintiff argued that the buyer had misrepresented his solvency
at the time of purchase and that the 10-day limitation did not apply. The court recognized
that under UCC
§2-702, a timely demand for reclamation is excused when the buyer made a written
misrepresentation of solvency by the seller, but the court rejected the plaintiff's
argument, stating that the case law and the unambivalent wording of §546(c) did not
support the plaintiff's position. The §546(c) requirement for a written demand for
reclamation within 10 days of delivery was absolute and could not be waived. In re
Charter Co. at 266.
The plaintiff in In
re Rozel Industries Inc., 74 B.R. at 645-46, also failed to give written demand
for reclamation in the 10-day period, and argued that §546(c) was merely a "safe
harbor" provision shielding a seller's reclamation rights against the avoiding powers
of a trustee or debtor-in-possession and that it should still be able to proceed under its
state right of reclamation. The court summarily rejected plaintiff's position and made it
clear that the §546(c) requirement of a 10-day written notice was absolute. Rozel
at 646. See, also, In
re Rea Keech Buick Inc., 139 B.R. at 629. The written demand must explicitly state
that it is asserting the right to reclamation. Matter
of Marin Motor Oil Inc., 740 F.2d 220, 221 (3d Cir. 1984). One court stated that
the written demand for reclamation must use the word "reclamation" in the
demand. In
re Buyer's Club Market Inc., 100 B.R. at 36. Other courts hold, however, that the
notice of reclamation is sufficient if it reflects an intention to rescind the sale. In
re Graphic Productions Corp., 176 B.R. 65, 73 (Bankr. S.D. Fla. 1994).
The "dispatch rule" applies to reclamation demands. Under the dispatch rule,
a reclamation demand is considered made when it is sent rather than when it is received,
so long as it is sent in a commercially reasonable manner. Matter
of Marin Motor Oil Inc., 740 F.2d at 228 (which expressly rejected the
"receipt rule").4 The
10-day period begins running from the date debtor actually receives the goods, rather than
the date the seller delivers the goods to a common carrier. In
re Maloney Enterprises Inc., 37 B.R. 290, 292 (Bankr. E.D. Ky. 1983); Matter
of Marin Motor Oil Inc., supra, 740 F.2d at 225-26. Making a demand for
reclamation does not violate the automatic stay. In
re Production Steel Inc., 21 B.R. 951, 953-54 (Bankr. M.D. Tenn. 1982). Goods
shipped more than 10 days prior to the date of the written demand cannot be the object of
a reclamation action. In
re Landy Beef Co. Inc., 30 B.R. 19 (Bankr. D. Mass. 1983). Finally, the seller's
failure to make a timely written demand for reclamation leaves him as an unsecured,
non-priority claimant. In
re Gibson Distr. Co.-Permian Basin, 40 B.R. at 769.
Goods Must Be Identified at Time of Demand
A reclaiming seller must identify in its written demand for reclamation the goods that
are subject to such reclamation. In
re Braniff, 113 B.R. 745, 752 (Bankr. M.D. Fla. 1990); In
re Landy Beef Co., supra at 21. The goods subject to reclamation must be
identifiable. In
re Morken, 182 B.R. at 1016. One of the most difficult hurdles that a reclaiming
seller must overcome is the requirement that the seller must identify the goods that are
subject to the reclamation claim.
There is scant law on this critical area of reclamation claims. The court in Braniff
held that if the written reclamation demand was not sufficiently detailed in the
description of the goods subject to reclamation, then the reclamation claim must fail as a
matter of law. Braniff,
113 B.R. at 752. However, the court in Braniff tells reclaiming creditors by
way of dicta that if they can devise a formula by which they can trace the product,
establish the time frame in which it was delivered to the seller and convince the court
that the formula traces the product within the time frame with a fair degree of accuracy,
then it does not have to physically identify its goods to sustain a reclamation claim. Braniff
at 755.
Goods Must Be in Possession of Debtor at Time of Demand
The reclaiming vendor must prove that the debtor possessed the goods at the time of the
reclamation demand. See In
re Pester Refining Co., 964 F.2d 842, 846 (8th Cir. 1992); In
re Rawson Food Service Inc., 846 F.2d 1343, 1347-49 (11th Cir. 1983); In
re Arlco, 239 B.R. at 266. A seller of goods is only entitled to reclaim goods
that the debtor had on hand at the time of the demand for reclamation was made. See
In
re Morken, 182 B.R. at 1016; In
re Buyer's Club Market Inc., 100 B.R. 37, 38 (Bankr. D. Colo. 1989).5 The seller in a reclamation case has the burden of
proving that the debtor possessed the goods when it received the reclamation demand. This
is a fairly stringent requirement. See In
re Adventist Living Ctrs. Inc., 52 F.3d 159, 163 (7th Cir. 1995); Matter
of Flagstaff Foodservice Corp., 14 B.R. 462, 469 (Bankr. S.D.N.Y. 1981). There is
no presumption that the goods remained with the debtor simply because the goods were
delivered. See In
re Adventist Living Ctrs. Inc., supra at 163 and In re Rawson Food Service Inc.
at 1350 N. 11.
In Adventist Living Centers, the reclaiming seller did not take a prompt and
accurate inventory of the goods on hand on the date of the reclamation demand. The Seventh
Circuit rejected the seller's assertion that it could accurately estimate the amount of
goods on hand based on delivery invoices and other such records, and the court rejected
the seller's reclamation claim. The court in In
re Landy Beef Co. Inc., 30 B.R. at 21, however, looked at the normal business
practice of the debtor in disposing of goods to determine what product was on hand on the
date of the reclamation demand.
Right of Reclamation Subject to Prior Lien of Secured Creditors
A seller's right to reclamation is subject to the right of a good-faith purchaser. See
UCC
§2-702(3); Matter
of Reliable Drug Stores Inc., 70 F.3d 948, 950 (7th Cir. 1995); In
re Coast Trading Co., 744 F.2d 686, 690 (9th Cir. 1984). State law usually deems a
secured creditor having a security interest in a debtor's property, including an
after-acquired security interest, to be a good-faith purchaser for value, thus having
rights superior to those of a reclaiming seller.6
In
re Pester Refining Co., 964 F.2d at 846.
Courts generally recognize that a credit seller's right to reclamation is "subject
to" the prior lien of a secured creditor. The courts, however, have split into three
lines of authority as to the effect of the words "subject to":
- Reclamation Right Extinguished by Prior Lien. The Ninth Circuit in In
re Coast Trading Co. Inc., 744 F.2d at 690-692, held that reclaiming seller's
right to reclamation and any claim for priority is extinguished by the existence of the
claim of a secured creditor. - Reclamation Right Not Extinguished by Prior Lien; Claimant, However, Is Entitled Only
to Priority Claim in Lieu of Reclamation. Several courts have held that when a secured
creditor precludes a seller from reclaiming goods subject to the secured claim, the rights
of the reclaiming seller are not cut off by the existence of the secured creditor; the
court can award the reclaiming seller an administrative priority in lieu of the
reclamation claim.7 In
re Mayer Pollock Steel Corp., 157 B.R. at 960. - Reclamation Right Not Extinguished, But if Claim Is Worthless Outside Bankruptcy, It
Is Worthless Inside Bankruptcy. The Eighth Circuit in In
re Pester Refining Co., supra, held that a seller's right to reclaim is not
extinguished because secured creditors assert a perfected security interest in the goods
sought to be reclaimed. Pester at 846. The Eighth Circuit, however, went to state
"[w]hen the secured creditors have satisfied their claims out of the goods to be
reclaimed, granting §546(c)(2) relief would afford the reclamation seller something
it does not have under the UCC—a priority interest in the buyer's assets other than
the goods to be reclaimed." Pester at 847. Therefore, if the secured creditor
satisfies its claim out of the goods otherwise subject to reclamation, the reclamation is
not extinguished, but is valueless. Since the claim has no value, a court cannot grant the
seller an administrative priority under §546(c)(2). The underlying rationale for this
holding is that Congress did not expand the right of reclamation in bankruptcy over the
rights a reclaiming seller would have under the UCC.8If the secured creditor is over-secured and satisfies its claim out of goods other than
the goods sought to be reclaimed, or all of the goods subject to reclamation are not
needed to satisfy the secured claim, then the reclaiming seller will be entitled to a
priority claim, but only to the extent of the value of the goods not used to satisfy the
secured claim. Pester,
964 F.2d at 847.
Diligence in Pursuing Claim
A reclaiming seller must demonstrate to the court that he has diligently pursued his
reclamation claim in order to prevail, and if he fails to diligently pursue the
reclamation claim, then he loses that right. See In
re McLouth Steel Products Corp., 213 B.R. 978, 987 (E.D. Mich. 1997); Matter
of Crofton & Sons Inc., 139 B.R. 567, 569 (Bankr. M.D. Fla. 1992).Sale to Buyer Was in Seller's Ordinary Course of Business
A seller must also prove that the sale of the goods in question was made in the
ordinary course of the business of the seller. See In
re Arlco, 239 B.R. at 266; In
re Morken, 182 B.R. at 1016.Reclamation Rights in Proceeds
The Fifth Circuit in a non-bankruptcy case, United
States v. Westside Bank, 732 F.2d 1258 (5th Cir. 1984), held that when a seller of
goods has met the requirements of UCC
§2-702 and when all prior lienholders have been satisfied, the seller will be
accorded a priority status that will extend to proceeds that are traceable to the goods.
Several courts, however, have held that no reclamation rights exist in the proceeds from
the resale of goods sought to be reclaimed. In
re Coast Trading Co., 744 F.2d 686, 691 (9th Cir. 1984).9Reclaiming Seller's Right to Interest
Two courts have held that a seller is entitled to interest calculated from the date of
the reclamation demand when a court grants the seller an administrative priority claim in
lieu of reclamation. In
re Wheeling-Pittsburg Steel Corp., 74 B.R. 656, 661 (Bankr. W.D. Pa. 1987); In
re Mesa Refining Inc., 66 B.R. 36, 38-9 (Bankr. D. Colo. 1986). Other courts,
however, have denied a seller's claim to interest on its reclamation claim because there
is no specific statutory authority for doing so. In
re Western Farmers Ass'n., 6 B.R. 432, 437 (Bankr. W.D. Wash. 1980) (a
pre-Bankruptcy Code case). See, also, In
re American Int'l Airways Inc., 77 B.R. 490, 494-95 (Bankr. E.D. Pa. 1987).The Eighth Circuit in In
re Pester Refining Co., 964 F.2d at 849, held that the reclaiming seller is
entitled to post-judgment interest from the date of a judgment. The court, however, left
open the question whether the plan could curtail post-judgment interest.Date Reclamation Claims Are Paid
A court has the discretion to allow some administrative claims to be paid prior to the
effective date of the plan of reorganization. Matter
of Isis Foods Inc., 27 B.R. 156 (W.D. Mo. 1982), and In
re Verco Indus., 20 B.R. 664, 665 (BAP 9th Cir. 1982). Normally, however, an
administrative claim is paid on the effective date of the plan. 11
U.S.C. §1129(a)(9)(A).
Footnotes
1 In
re Arlco Inc., 239 B.R. 261 (Bankr. S.D.N.Y. 1999); In
re Steinberg's Inc., 226 B.R. 8 (Bankr. S.D. Ohio 1998); In
re Victory Markets Inc., 212 B.R. 738 (Bankr. N.D.N.Y. 1997); In
re Morken, 182 B.R. 1007 (Bankr. D. Minn. 1995). Return to article2 In
re Mayer Pollock Steel Corp., 157 B.R. 952 (Bankr. E.D. Pa. 1993); Matter
of Leeds Bldg. Products Inc., 141 B.R. 265 (Bankr. N.D. Ga. 1992); In
re Rea Keech Buick Inc., 139 B.R. 625 (Bankr. D. Md. 1992); In
re Video King of Illinois Inc., 100 B.R. 1008 (Bankr. N.D. Ill. 1989); In
re Energy Co-Op Inc., 94 B.R. 975 (N.D. Ill. 1988); In
re Rozel Industries Inc., 74 B.R. 643 (Bankr. N.D. Ill. 1987); In
re Gibson Distributing Co. Inc.-Permian Basin, 40 B.R. 767 (Bankr. W.D. Tex. 1984).
Return to article3 There are three Flagstaff opinions
cited in this article: Matter
of Flagstaff Foodservice Corp., 14 B.R. 462 (Bankr. S.D.N.Y. 1981); In
re Flagstaff Foodservice Corp., 56 B.R. 899 (Bankr. S.D.N.Y. 1986), and In
re Flagstaff Foodservice Corp., 56 B.R. 910 (Bankr. S.D.N.Y. 1986). Return
to article4 In
re Bill's Dollar Stores Inc., 164 B.R. 471 (Bankr. D. Del. 1994); In
re Flagstaff Foodservice Corp., 56 B.R. 910, 915 (Bankr. S.D.N.Y. 1986); and In
re Lawrence Paperboard Corp., 52 B.R. 907, 910 (Bankr. D. Mass. 1985). Return to article5 There are two Buyer Club Market Inc.
cases: In
re Buyer's Club Market Inc., 100 B.R. 35 (Bankr. D. Colo. 1989) and In
re Buyer's Club Market Inc., 100 B.R. 37 (Bankr. D. Colo. 1989). Return
to article6 See, also, In
re Arlco, 239 B.R. at 273; In
re Steinberg's Inc., 226 B.R. at 10; In
re Victory Markets Inc., 212 B.R. at 742; Matter
of Sunstate Dairy & Food Products Co., 145 B.R. 341, 344 (Bankr. M.D. Fla. 1992);
Matter
of Leeds Bldg. Products Inc., 141 B.R. at 268; In
re Rea Keech Buick Inc., 139 B.R. at 629; In
re Diversified Food Service Distributors Inc., 130 B.R. 427, 429 (Bankr. S.D.N.Y.
1991); In
re Roberts Hardware Co., 103 B.R. 396, 398 (Bankr. N.D.N.Y. 1988); Lavonia
Mfg. Co. v. Emery Corp., 52 B.R. 944, 946 (E.D. Pa. 1985); Matter
of Bensar Co., 36 B.R. 699, 703 (Bankr. S.D. Ohio 1984); Matter
of McLouth Steel Corp., 22 B.R. 722, 725 (Bankr. E.D. Mich. 1982). Return
to article7 In
re Marko Electronics Inc., 145 B.R. 25 (Bankr. N.D. Ohio 1992); Matter
of Sunstate Dairy &
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