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Small Business Digest


'Reclamation' Can Protect a Small Company in a Time of Bankruptcies

With more and more large retailers filing for bankruptcy, a common question is whether there is anything small businesses can do, or whether they are stuck at the end of the line, where they will most likely receive nothing.  Unfortunately, for the most part, the small-business owner doesn't have much recourse, other than to file a claim and hope that one day payment arrives.

However, there is an exception that will allow a supplier to recoup at least some of the losses.  It is called "reclamation."  Just like the word sounds, reclamation permits a vendor to "reclaim" certain of its goods. 

Reclamation before a bankruptcy filing

If the customer hasn't filed for bankruptcy, a vendor's reclamation rights are governed by the Uniform Commercial Code (known as the "UCC").  This law provides a seller with the right to reclaim goods that a customer received on credit "while insolvent" if the seller makes a demand within 10 days after the customer received the goods. This 10-day period means that absent a bankruptcy, a vendor's reclamation right will be limited to reclaiming only those goods received by the customer in the 10 days prior to the demand.

To avoid any question, the demand needs to be in writing, directed to the customer, identify which goods are being reclaimed to the extent that information is available, include a general statement reclaiming all goods received by the customer from the vendor during the applicable time period, and demand that the goods be segregated.  Because of some of the specific language to be in a demand, it is better practice for a vendor to hire a lawyer to make the demand.  It is always best practice to send the letter certified, so the company has proof that it was received.

Reclamation after a bankruptcy filing

If the bankruptcy has already occurred, the Bankruptcy Code comes into play.  Once a bankruptcy is filed, a vendor can assert a reclamation demand for goods received within 45 days of the bankruptcy filing.  The right to reclamation applies only to goods still in possession of the debtor.  There is no right to reclaim goods that have been sold by the debtor.

It is important to note the following: 

* The goods must have been sold in the "ordinary course" of the vendor's business
* The debtor must have received the goods while insolvent. 

If the company meets those two requirements, the reclamation demand must be in writing and made within 45 days of the receipt of the goods by the customer.  If the 45-day period expires after the bankruptcy case is filed, the vendor must make the reclamation demand within 20 days after the bankruptcy filing.  The demand should identify the goods being reclaimed; include a general statement reclaiming all goods received by the debtor from the vendor during the 45-day period, and demand that the goods be segregated. Vendors may also want to file a notice of reclamation with the bankruptcy court.  If the company is a creditor of the company in bankruptcy, relatively soon after the case has been filed, the company will receive a notice of the case.  This notice will have information regarding the location of the bankruptcy court.  It is important for companies to act quickly to protect their rights. 

Even if a vendor fails to make a reclamation demand, all may not be lost. A new Bankruptcy Code section gives vendors an administrative priority claim for the value of any goods received by the debtor within 20 days prior to the bankruptcy filing if the goods were sold in the ordinary course of the debtor's business.

Edited from article by Robert Bovarnick, Managing Partner of Bovarnick and Associates

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