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Jerry Cohen Law and the Business of Furniture blog.

Bombay, and Mattress Gallery, and Levitz! Oh My! Reclamation: a Seller’s Remedy

November 9, 2007

In today’s market where even long standing establishments are in distress and potentially unable to pay for merchandise delivered, manufacturers/sellers are seeking every available means to safeguard against financial loss. In this uncertain environment, reclamation (or the right to demand the return of merchandise), has gained new respect and urgency. Faithful readers, let me know if you have been exposed to this remedy (making a demand or receiving one) and the results achieved.

Reclamation before bankruptcy: Before a buyer files for bankruptcy a seller’s reclamation right is governed by the Uniform Commercial Code Section 2-702. Under this statute a seller can reclaim merchandise that is delivered on credit to an “insolvent” buyer (as defined in the UCC) if the seller demands its return within 10-days after the buyer received the merchandise. The ten day limitation does not apply if the buyer misrepresented its solvency in writing within three months before delivery of the merchandise. If possible creditors should obtain written representations of solvency from their customers on a quarterly basis to take advantage of this longer reclamation window, and buyers/retailers should respond to such inquiry carefully.

Reclamation after bankruptcy: Once a bankruptcy is filed a seller can demand reclamation for merchandise received by the debtor within 45-days of the bankruptcy filing under Section 546(c) of the Bankruptcy Code if (a) the goods were sold to an “insolvent” debtor (as defined in the Bankruptcy Code) in the “ordinary course” of the seller’s business, and (b) the demand is made in writing within 45-days of the receipt of the merchandise by the debtor. However, if the debtor files for bankruptcy within 45-days of receiving merchandise, the seller can make the reclamation demand within 20 days after the bankruptcy filing.

Additional Bankruptcy Protection: Whether or not a reclamation claim is made, the value of any merchandise received by the debtor within 20-days prior to the bankruptcy filing is entitled to administrative claim status under Section 503(b)(9) of the Bankruptcy Code which gives the seller priority over unsecured creditors.

Limitations:

There is no right to reclaim merchandise that was sold by the debtor.

The reclamation claim is effective only if the merchandise was delivered to the debtor itself and not drop shipped or delivered directly to a third party such as the debtor’s customer.

The reclamation right is subject to the prior rights of the debtor’s secured creditors having a lien on the merchandise. In a future post we’ll discuss how a seller itself may obtain a purchase money security interest, properly establish a consignment relationship, or take additional measures to further protect the seller’s merchandise from loss or a grab by other creditors.

Procedure:

The demand for reclamation under the UCC must be in writing and follow a specific format including a statement demanding reclamation of merchandise received by the buyer during the applicable period, a full description of the merchandise being reclaimed, and a demand the merchandise be accounted for and segregated, among other things. A demand in bankruptcy should follow a similar format and the seller can also file a notice or reclamation Proof of Claim with the bankruptcy court. You may want to consult with your attorney to make sure that the demand is properly drafted to safeguard your rights.

Keep in mind that the written reclamation demand is not enough to protect the seller’s rights; therefore if possible, the seller or its representative should visit the buyer’s facility to inspect and count the inventory and ensure that it’s segregated and safeguarded.



"This blog is intended to provide basic and useful information but not legal advice.  As legal advice must be tailored to the specific circumstances of each case, and laws are constantly changing, nothing provided in this blog should be used as a substitute for the advice of competent counsel.  We recommend you consult a lawyer to ensure that the information provided, and your interpretation of it, is applicable to your particular situation."