Companies or lenders hoping to defeat reclamation claims will find a more favorable forum in New York than in Delaware, in light of an Aug. 24 decision by Bankruptcy Judge Mary F. Walrath of Wilmington.
The case before Judge Walrath and the two cases in New York were similar. There was a pre-petition lender with a lien on inventory. A supplier gave the required notice of a reclamation claim under Section 546(c) pertaining to goods delivered within 45 days of bankruptcy. After filing, a loan from the debtor-in-possession lenders fully repaid the pre-petition secured claim. The DIP lenders were given a lien on all assets, including inventory.
In New York cases known as Dairy Mart and Dana Corp., Bankruptcy Judges Arthur Gonzalez and Burton Lifland had held in 2003 and 2007, respectively, that the assets were effectively sold to repay pre-petition loans, in the process extinguishing reclamation rights. They also reasoned that the pre- and post-petition loans were in substance integrated transactions, giving lien rights to post-petition lenders ahead of reclamation rights.
Judge Walrath said she “respectfully disagrees” with the New York decisions. Instead, she followed the Sixth Circuit’s Phar-Mor opinion from 2008, where the appeals court specifically rejected the two New York decisions.
The reclamation creditor’s rights arose before the DIP lenders’ security interest attached, according to Judge Walrath. She said it was “too much of a stretch” to believe that repayment of the pre-petition loan was a sale of the reclamation creditor’s goods. The inventory in fact was not sold nor were proceeds paid to the lender, she said.
Similarly, she said the pre- and post-petition loans were not integrated transactions because they were made by two different lenders at two different times.
Judge Walrath recited how the DIP loan contained a provision stating that the new loan would be subject to liens perfected after bankruptcy under Section 546(b). It is unclear whether the result would have been the same were there no such provision in the DIP loan.
It is also unclear how much, if at all, Judge Walrath’s decision was influenced by the realities of present-day reorganizations. When Dairy Mart and Dana were written, companies actually reorganized or attempted to do so. Thus, dropping a reclamation claim from administrative status to the level of a general unsecured claim would ease the burden on a debtor struggling to reorganize.
Today, large chapter 11 cases are often largely for the benefit of secured creditors aiming to buy the companies as cheaply as possible. In those cases today, lowering the status of reclamation claims mostly benefits the lenders. Thus, bankruptcy judges inclined to help debtors may now feel less need to do so since lenders today often are the chief beneficiaries.