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If you snooze, you may lose: know your reclamation rights.

All too often, suppliers of goods fail to exercise their reclamation rights. In many instances, a supplier's reclamation rights may represent the last chance to realize any return on account of goods supplied to an insolvent purchaser which has filed a bankruptcy petition. Assertion of reclamation rights, however, requires the supplier to proceed without delay. Accordingly, this article will provide a basic outline of a supplier's reclamation rights in bankruptcy and provide useful hints to assist you in maximizing the value of your company's reclamation rights.

What is a Reclamation Right?

A seller may only reclaim goods where the purchaser was insolvent when it received the goods, the goods were supplied in the ordinary course of business of the seller, a timely reclamation demand has been served upon the purchaser, and the debtor has possession of the goods at time of the written reclamation demand. A few general observations regarding reclamation rights are necessary to fully explain these legal requirements.

First, under the Bankruptcy Code, an entity is generally insolvent when its debts exceed the fair market value of its property.

Second, some courts have been flexible in determining written demand for reclamation. These courts have held that a demand is sufficient if it reflects some intention on the part of the seller to rescind the sale. There is, nevertheless, another line of cares which has indicated that the term reclamation must actually appear in the written demand. Accordingly, to avoid this issue, the term reclamation should be included in the written demand.

Finally, reclamation is only a viable remedy when the purchaser has taken actual, physical possession of the property. Prior to such time, your remedy as a seller is, where applicable, to instruct your personnel not to deliver or to stop transit of the goods if they are in the hands of a common carrier.

When Can I Assert a Reclamation Right?

On October 22, 1994, the President signed into law the Bankruptcy Reform Act of 1994. The Bankruptcy Reform Act increases the period within which a seller of goods may make a written demand for reclamation against a bankrupt purchaser. Under the pre-Bankruptcy Reform Act version of the reclamation provision of the United States Bankruptcy Code, a written demand for reclamation had to be made before 10 days after receipt of the goods by the debtor. Similarly, under the Uniform Commercial Code, a reclamation demand has to be made before ten days after receipt of the goods by the debtor. In contrast, under the Bankruptcy Reform Act, the reclamation period has been expanded if the ten day reclamation period expires after the commencement of a bankruptcy case by or against the purchaser. In such circumstances, the reclaiming seller may make a written demand for reclamation at any time before 20 days after receipt of the goods by the debtor.

How Can I Assert My Reclamation Rights?

Making a written demand for reclamation is an extremely inexpensive and easy process. A document which contains the following paragraph is generally sufficient to assert a proper written demand for reclamation.

Pursuant to U.C.C. [section] 2-702 and Bankruptcy Code [section] 546(c), the XYZ Corporation hereby demands reclamation of all its products received by you within the last _____ days, including but not limited to any products which may be listed below or on any attachment hereto.

The demand must, nevertheless, clearly indicate the goods which are subject to reclamation. The demand should be transmitted to the purchaser using a commercially reasonable method which will insure that it is received by the debtor and that it is received as soon as possible. Accordingly, it may be advisable to send the demand by a variety of different methods. For example, the demand might be sent by fax and Federal Express to insure that it is received by the purchaser and that it is received as soon as possible.

If possible, your attorney should be contacted as soon as you realize that you may possess reclamation rights. However, if you believe that you may have reclamation rights, even if you cannot reach your attorney immediately, you should send out the reclamation demand. To the extent that your notice is deficient, your attorney may send out a new notice, if it is still timely, as soon as he or she can be reached.

Can I Further Protect Myself After Making the Written Reclamation Demand?

Once the reclamation demand has been made, the possibility of taking further action should be closely examined by you and your attorney. Unfortunately, some debtors have been known to ignore the reclamation demand and continue to use the product. In such circumstances you may lose your reclamation rights because you will be unable to prove what product was in the possession of the debtor at the time of your demand. Accordingly, in cases where the value of the goods justifies litigation, it will often be advisable to immediately seek an injunction to stop the debtor from using your product. In such a fashion, the reclaiming seller can significantly strengthen its position in negotiations by pressuring the debtor and his attorneys at an extremely early stage of the bankruptcy case when they generally are more concerned with other issues such as obtaining post-petition financing and fighting off motions by their secured creditors.

On the other hand, the reclaiming seller which chooses not to take action after making its written demand for reclamation is taking a wide variety of risks. First, the debtor may use the product subject to the reclamation demand. Second, it may, at a later time, be difficult or impossible to prove how much product the debtor had in its possession at the time of the written reclamation demand. Finally, the breathing space which you will be providing to the debtor may enable it to formulate a strong defense to your reclamation claim by addressing issues, such as its insolvency and the value of the claims of its secured creditors, which it generally does not want to address right after the commencement of the bankruptcy case. Business realities, however, sometimes require that the reclaiming seller take these risks.

In conclusion, it is extremely easy to make a written demand for reclamation. The trick, however, is to yield a monetary return on account of the demand. Your chances for success in this regard increase exponentially by taking immediate action in the bankruptcy court. Do not be caught asleep at the wheel. If you snooze, you may lose all of your reclamation rights. By actively pursuing your rights, you can maximize the return on account of your reclamation rights.

Richard A. Robinson is an attorney with Baker & Hostetler, counsellors at law, Orlando.
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Author:Robinson, Richard A.
Publication:Business Credit
Date:Jun 1, 1995
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