Bankruptcy Protection for Trade Creditors and Vendors
When a company files for protection under the Bankruptcy Code, its trade creditors and vendors are left scrambling to understand how the bankruptcy will affect them. As explained below, time is of the essence and so vendors must act quickly to take full advantage of their rights under the Bankruptcy Code. Instead of having the uncertainty of when and how much they are going to be paid, many vendors simply want their goods returned. In the bankruptcy context, this is referred to as reclamation. While not an ideal solution, it avoids having to file a proof of claim and waiting for payment from the debtor for these goods.
Reclamation under the Bankruptcy Code
Under the 2005 amendments to the Bankruptcy Code, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), the ability of vendors to reclaim their goods was expanded. These provisions apply in both Chapter 11 reorganization cases and Chapter 7 liquidation cases. 11 U.S.C. 546(c) details the ability of a vendor to reclaim their goods as follows:
- The vendor has the right to reclaim goods received by the debtor within 45 days of the date of the commencement of the bankruptcy case;
- The reclamation demand must be in writing and made within 45 days of the receipt of the goods by the debtor;
- If the 45-day period expires after the commencement of the bankruptcy case, the vendor must make their reclamation demand not later than 20 days after the date of commencement of the case; and
- The vendor must have sold the goods to the debtor in the “ordinary course” of the vendor’s business and the goods must have been received by the debtor while the debtor was “insolvent”.
Issues That May Prevent Reclamation
The right of a vendor to reclaim their goods is not absolute. Detailed below is a non-exclusive list of issues that may prevent a successful reclamation:
- A vendor will not be able to reclaim its good if its fails to make a timely, written demand. This demand may also need to be filed with the bankruptcy court;
- The goods cannot be reclaimed if the debtor has sold them. This is a danger where the debtor has rapid inventory turnover;
- The goods have to have been received by the debtor. Drop shipments or other shipments that are delivered to the debtor’s customers will not be able to be reclaimed; and
- If the goods become subject to a secured creditor’s lien, the goods will not be able to be reclaimed. This comes about in cases where the debtor has granted a bank or other lender a security interest in the goods. As amended in 2005, 11 U.S.C. 546(c) now expressly makes reclamation rights subject to the prior rights of a secured creditor with a security interest in the goods or their proceeds.
Contents of the Reclamation Demand
The reclamation demand should identify the goods to be reclaimed, include a general statement reclaiming all goods shipped during the 45-day period, and demand that the goods be segregated so as to guarantee their swift return. However, demand may not be enough to protect a vendor’s goods. Absent an agreement with the debtor or a court ordered reclamation program, a vendor may be forced to seek and obtain a court order preventing sale of the goods to be reclaimed.
Failure of Reclamation
If a vendor fails to reclaim its goods, it still has recourse in the form of an administrative priority claim. 11 U.S.C. 503(b)(9) gives vendors an administrative priority claim for the value of goods received by the debtor within 20 days of its bankruptcy filing. The administrative priority claim covers a shorter period of time, but is a recourse if reclamation efforts fail.
As detailed above, reclamations can be complicated, involving a number of issues, and are time sensitive. Vendors who have a reclamation claim should contact an attorney for advice immediately upon learning of the bankruptcy or insolvency of a customer. Ronald Page has experience representing trade creditors and vendors in bankruptcy and insolvency matters.