Today’s uncertain economic climate threatens the financial well-being of companies of all sizes, from closely-held businesses to Fortune 500 firms. Businesses that sell goods on credit face an everincreasing risk that their buyers will be unable to pay for the products they have purchased. A solid understanding of available remedies is a critical element of credit risk management. One of those remedies is reclamation.

RECLAMATION RIGHTS UNDER THE UNIFORM COMMERCIAL CODE

The Uniform Commercial Code (UCC), which has been adopted throughout the United States, provides sellers of goods with the right of reclamation outside bankruptcy. When a seller discovers that its buyer has received goods on credit while insolvent, the seller may reclaim the goods so long as the seller demands return of the goods within 10 days after receipt.1 Note, however, that the 10-day limitation does not apply if the buyer has made a misrepresentation of solvency within three months before the delivery.

The right of reclamation under the UCC is subject to several limitations and conditions:

• A reclamation claim is subject to the rights of a subsequent buyer in the ordinary course of business or other good faith purchaser.2 As a result, in most cases, once the property delivered is no longer in the possession of the buyer, the right of reclamation is lost.
• A reclamation claim is subject to the rights of a holder of a prior perfected security interest in the goods.3
• Successful reclamation of goods excludes all other remedies with respect to those goods.4 The seller should consider whether it would be better off pursuing recovery of the debt rather than reclaiming the goods, especially in those cases in which the goods are of questionable value or would be difficult to resell.

ADVANCE PLANNING

There are a number of steps that sellers can take in advance to put themselves in a better position to pursue reclamation claims:

• In the standard terms and conditions of sale, include a statement that the buyer, by accepting the goods, is deemed to have represented that it is solvent at the time of receipt of the goods. This may constitute a representation of solvency that would enable the seller to avoid the 10-day time limit for demanding reclamation.
• Prepare a standard-form reclamation demand that is ready for use whenever the seller discovers a buyer’s insolvency.
• Carefully monitor the financial condition of all customers that are buying goods on credit.5

RECLAMATION RIGHTS IN BANKRUPTCY

In some cases, a seller may not learn of a buyer’s insolvency until after the buyer has filed a bankruptcy petition. In general, the filing of a bankruptcy petition automatically stays virtually all creditor actions against the debtor; however, the Bankruptcy Code offers some relief for the seller seeking reclamation.

Reclamation Claims

A seller has the right to reclaim goods that the debtor received within 45 days before the commencement of the bankruptcy case if:

• The debtor received the goods while insolvent; and
• The seller makes a written reclamation demand not later than 45 days after the debtor’s receipt of the goods (or later than 20 days after the commencement of the bankruptcy case, if the initial 45-day period expires after the commencement of the bankruptcy).6

Administrative Expense Claims

In addition, the Bankruptcy Code gives a seller of goods a first-priority administrative expense claim for all goods received by a bankruptcy debtor within 20 days before the filing of a bankruptcy petition, whether or not the seller has made a reclamation demand.7 These claims are entitled to payment in full before the holders of general unsecured claims receive any payment from the bankruptcy estate, and must be paid in full as a condition to confirmation of any chapter 11 reorganization plan.8 The courts are grappling with a number of questions in connection with this relatively new remedy, including:

• How is the claim calculated (invoice price? claimant’s cost? are freight, shipping and other charges included?)?
• Do bankruptcy debtors have setoff rights against these claims?
• When is the claimant entitled to payment?
• Can the claimant assert the claim if the goods were shipped directly to the debtor’s customer (and therefore never “received by” the debtor)?

While the remedy of reclamation is subject to a number of significant limitations, it is easy and inexpensive to pursue. By closely monitoring sales on credit, demanding adequate assurances in writing immediately when a reasonable belief exists that a purchaser of inventory on unsecured credit is insolvent, and issuing reclamation demand letters in a timely fashion, sellers can realize the benefits of reclamation with limited effort and cost.

[1] UCC section 2-702(2).

[2] UCC section 2-702(3).

[3] The typical security agreement will provide that the secured party’s security interest covers not only property then owned by the debtor, but also after-acquired property. A “dragnet” clause of this kind will cover goods sold to the debtor after the secured party has perfected its security interest. Under these circumstances, the reclamation creditor’s only hope is that the secured party has more than enough collateral to satisfy its claim, leaving some remaining assets, perhaps including the goods sold by the seller, to satisfy the claims of other creditors.

[4] UCC Section 2-702(3).

[5] As an additional advance planning measure, a seller can include on its invoices and bills of lading a written demand for reclamation in the event that the buyer receives the goods in question while insolvent. This is of questionable enforceability in the event of a subsequent insolvency but may give the seller leverage for negotiation with the buyer.

[6] 11 U.S.C. section 546(c). As is the case outside bankruptcy, the rights of a reclamation claimant are subject to the rights of a holder of a prior perfected security interest in the goods.

[7] 11 U.S.C. section 503(b)(9).

[8] 11 U.S.C. section 1129(a)(9).