On August 24, 2016, Judge Mary F. Walrath of the Delaware Bankruptcy Court overruling an objection to claim for reclamation.   The decision was issued in the Reichold Holdings US, Inc. Bankruptcy (Case No. 14-12237) in the Delaware Bankruptcy Court.  A copy of the Opinion is available here.

While the background to this dispute is laid out in detail in the Opinion, it can be easily summarized.  A prepetition lender had a lien on substantially all the Debtor’s assets, including inventory.  Covestro LLC (the “Claimant”) supplied goods to the Debtor within the 45-day reclamation period.  Claimant issued a reclamation demand to the Debtor within days of the Debtor’s bankruptcy filing and later filed a proof of claim for all goods provided within the reclamation period.  As part of the DIP financing, the prepetition loan was paid in full and the DIP lender obtained a first priority lien on all prepetition and postpetition property of the Debtor’s estate, including inventory.  The DIP loan was repaid from the sale of the Debtor’s assets and a plan of liquidation was confirmed.  Opinion *1-3.

The Liquidation Trustee objected to Covestro’s claim, arguing that its security interest was rendered valueless when the Prepetition Loan was repaid.  Opinion at *3.  However, Judge Walrath disagreed, holding that once the prepetition lien was repaid, the reclamation lien became the first priority lien.  “The function of a lien is to secure a debt; once that debt is repaid, the lien and the rights of the lien-holder terminate.”  Opinion at *8.  The DIP lien was expressly subject to reclamation rights.  Id.  Judge Walrath held that if the prepetition lien holder had foreclosed on the inventory, the analysis would be different.  However, “Covestro’s goods were not sold and their proceeds were not paid to the Prepetition Lender.”  Opinion at *9 (emphasis in original).

Judge Walrath concluded by opining that “Because Covestro’s rights arose before the DIP Lenders had any rights in the goods, the Court concludes that the DIP Lenders do not have prior rights in the goods.”  Id.  The Court thus overruled the Liquidating Trustee’s objection to the claim.

What remedies do you have to recover goods shipped to a company in the weeks leading up to its bankruptcy?  As to those goods shipped 45 days prior to a debtor’s filing, Section 546(c) of the Bankruptcy Code provides a reclamation right to creditors to recover such goods.  This may provide you with the ability to recover your goods directly from the debtor.

There are several requirements under Section 546(c).  The goods must have been sold in the “ordinary course” of the vendor’s business and the debtor must have received the goods while insolvent.  Also, the reclamation demand must be in writing and made within 45 days of the receipt of the goods by the customer (now the debtor in bankruptcy).

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.  As with pre-bankruptcy demands under the UCC, 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. Often times, vendors will file a notice of reclamation with the bankruptcy court.

Conclusion

If you or your company shipped goods to a debtor prior to its filing for bankruptcy, then you should act quickly to file a reclamation claim against the debtor.  It may provide you with the ability to recover your goods from the debtor.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.