The 2005 Amendments to Section 546(c) Limited the Remedies of Reclamation Creditors

After the 2005 amendments to Section 546(c), a reclamation claimant no longer has an administrative claim or lien if a lender’s security interest eats up all the value in the reclaimed goods, according to a district judge who affirmed a ruling by Bankruptcy Judge Thomas L. Saladino of Omaha, Neb.

A creditor with a valid reclamation claim for $36 million offered arguments amounting to a plea for the court to use equitable powers to devise a remedy not provided by statute. District Judge Robert F. Rossiter, Jr. of Omaha held in substance that a reclamation creditor has nothing more than an unsecured claim if the secured lender is undersecured.

Reclaimed Goods Gobbled Up by the Lender

Before a retailer’s bankruptcy, a pharmaceutical supplier made a reclamation demand that was valid under state law. The debtor filed a chapter 11 petition before the supplier could reclaim the goods.

In bankruptcy, the supplier filed a proof of claim, including a reclamation claim for more than $36 million on account of goods delivered within 45 days of bankruptcy and a general unsecured claim for another $32 million. The lender had a secured claim for over $400 million. The lender’s collateral included the goods provided by the supplier.

Alongside approval of post-petition financing from the lender, the debtor and the supplier stipulated that the supplier would retain its reclamation rights, subject to the superior rights of the lender.

After the debtor’s inventory was sold, the supplier filed a motion to compel payment of the $36 million reclamation claim as an expense of administration. In the ensuing litigation, the supplier could not establish that the collateral was worth more than the debt owing to the lender. The failure of proof was significant, because the supplier bore the burden of proof in establishing equity in the reclaimed goods.

For the reclaimed goods, Bankruptcy Judge Saladino ruled that the supplier had no administrative claim or lien, only an unsecured claim. The supplier appealed but fared no better in Judge Rossiter’s July 24 opinion.

The Amendments to Section 546(c)

Before the 2005 amendments, Judge Rossiter explained that Section 546(c) permitted the bankruptcy court to deny reclamation only by granting the supplier a secured or administrative claim. The amendments changed the “deal” for reclamation creditors.

Section 546(c) was modified to expand the reclamation period from 10 to 45 days before bankruptcy. The amendment made it clear that a reclamation creditor’s rights were subject to the prior rights of a security interest in the goods. In addition, the language disappeared about a lien or administrative claim in favor of the reclamation creditor.

The supplier argued to Judge Rossiter that bankruptcy courts “historically” awarded administrative claims when the goods were no longer available for reclamation. Judge Rossiter said that Judge Saladino properly rejected the argument based on the 2005 amendments.

Judge Rossiter said that the plain language in the 2005 amendments “makes clear it requires” no administrative claim. He quoted Judge Saladino, who said that the 2005 amendments “‘radically alter[ed] how reclamation claims are treated in bankruptcy’ and do not maintain the alternative remedy of an administrative claim for reclaiming sellers.” The supplier, Judge Saladino said, only had an administrative claim for goods delivered within 20 days of bankruptcy under Section 503(b)(9).

Judge Rossiter rejected several other arguments by the supplier. One way or another, the supplier wanted the court to create a remedy not contained in Section 546(c). Some failed, the judge said, because the supplier “has shown no traceable excess proceeds exist for [the supplier’s] interests to attach to.”