Document Type
Research Memorandum
Publication Date
2017
Abstract
(Excerpt)
Reclamation is the right of a vendor “to recover possession of goods delivered to an insolvent buyer.” This right is codified in section 2-702 of the Uniform Commercial Code as adopted in each of the several states. Where an insolvent buyer has filed for bankruptcy after receiving goods on credit, section 546(c) of title 11 of the United States Code (the “Bankruptcy Code”) affords the vendor of those goods a remedy in reclamation. In the event an insolvent buyer in bankruptcy has disposed of the goods subject to reclamation, the bankruptcy court may grant the vendor a lien or an administrative expense claim on the assets of the buyer’s estate equal to the value of the goods.
Reclaiming vendors, however, must often contend with the presence of senior secured creditors in a bankruptcy case. Section 546(c)(1) of the Bankruptcy Code subjects a vendor’s reclamation rights to the prior rights of a secured creditor with a blanket lien on the debtor’s assets in inventory. See 11 U.S.C. 546(c)(1) (2012). Thus, a vendor’s right to reclaim becomes “subordinated to the secured creditor’s claim.”
Consequently, section 546(c)(1) is often invoked by a debtor or trustee as a “Prior Lien Defense” to effectively bar relief on a vendor’s reclamation claim. Recognizing the statutory priority of senior secured lenders to reclaiming vendors, a number of courts presiding over reclamation claims have made reclamation the “most illusory of remedies” in bankruptcy practice, providing little or no protection for vendors of goods from insolvent buyers.