Too often a credit manager learns that just after a delivery of merchandise a customer has filed or is about to file bankruptcy. The Seller faces loss of both the goods and payment.
The UCC provides a powerful but seldom used remedy. UCC 2-702(2) provides that where the Seller discovers that a customer received goods on credit while insolvent, the Seller may “reclaim” (recover) the goods upon demand made within 20 days after the customer receives the goods.
Many credit managers believe that the Bankruptcy Code’s Automatic Stay bars a reclamation effort. To the contrary, the Code specifically protects this right and requires the Court provide a Seller with a valid reclamation claim by one of three remedies: (1) return of the Seller’s merchandise; (2) a lien on the Customer’s assets adequate to pay the reclamation claim; or (3) an administrative priority claim (which is the highest priority usually available). More specifically the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 clarified and expanded to some extent the Reclamation power of merchants. If the debtor “received the goods while insolvent” (presumed insolvent for the 90-days prior to filing), “within 45 days before the date of the commencement” of a bankruptcy, then the seller may claim the goods. However, this may only be done if “the seller demands in writing the reclamation of such goods” either not later than 45 days after the date of receipt of the goods by the debtor; or not later than 20 days after the petition is filed if the 45-days expires after the petition is filed. See 11 USC §546(c)(1).
A couple of pitfalls may trap an unwary Seller. First, the UCC and Bankruptcy Code protect the rights of a “buyer in the ordinary course of business or other good faith purchaser” of the merchandise. However, the Seller can perform a UCC check in advance and learn whether a prior security interest exists and, if so, can take steps to protect itself.
Second, the UCC limits reclamation to goods received by the customer within the last 10 days, and the Bankruptcy Code requires that the customer have the merchandise in its possession at the time the reclamation demand is made. Therefore, the Seller must ACT IMMEDIATELY upon learning of the customer’s insolvency or bankruptcy. There is no substitute for contacting the Seller’s attorney at once and faxing to him or her copies of all relevant invoices and other relevant information about the customer. Immediate action means that more invoices are recoverable and reduces the risk that the customer will dispose of the merchandise.
Reclamation is a forgotten remedy. However, prompt action by a credit manager can increase the opportunity that the Seller will be repaid.