atLaw
Andrew G. Lizotte
617 226-3415
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Areas of Concentration
Bankruptcy and Financial Restructuring
Office
Upon the filing of a bankruptcy petition, federal law grants numerous protections to the new debtor, including among other things a temporary reprieve from litigation and collection efforts. One sometimes overlooked right of creditors, however, is the right to reclaim goods sold to the debtor in the ordinary course of business just prior to the bankruptcy filing, often referred to as a reclamation claim.
To be effective, the creditor’s reclamation claim must satisfy several conditions.
First, the reclamation claim must be in writing. The writing should specify the invoice date and amount, the date of shipment, a description of the goods, and a demand that the goods be returned to the creditor immediately.
The demand must be made less than ten days after the debtor has received the goods (if the ten day period expires after the bankruptcy case has begun, the creditor is given an additional ten days for providing notice).
If the reclamation demand is timely, it will be effective to the extent that the debtor is in possession of the goods at the time of receipt of the demand and to the extent the goods remain identifiable. If the product has been used in production or otherwise transformed in a manner no longer recognizable, the reclamation claim will be ineffective.
If the creditor has satisfied the conditions outlined above, the reclamation demand will likely be held to be valid. Several remedies exist if a reclamation demand is validly asserted. The creditor may request return of the goods shipped. Alternatively, if the debtor has an immediate need for use of the product, the debtor may agree to grant the creditor a lien on other assets to secure payment for the goods, or may stipulate that the claim is given a higher priority for repayment than other pre-bankruptcy claims. (If all of the debtor’s assets are already secured and the secured creditor’s claim exceeds the value of the debtor’s assets, the debtor may dispute the reclaiming creditor’s right to a priority or secured claim). If the debtor refuses to acknowledge the reclamation claim, the creditor will need to timely commence litigation in the Bankruptcy Court in order to preserve its rights.
Reclamation can be a powerful tool for creditors dealing with an insolvent business, provided that creditors keep apprised of changing circumstances and timely assert their rights.
