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Reclamation Right Worthless Where Debtor's Assets Fully Encumbered.

Article Excerpt
Sellers dealing with a financially troubled company that may be on the brink of filing for bankruptcy ordinarily do so with the assurance that their state law right to reclaim goods sold in the ordinary course of business will either be honored in bankruptcy, or if not, protected by means of a priority administrative claim or a lien. However, the reclamation rights preserved by the Bankruptcy Code are limited. Sellers must be wary to ensure that they take all of the immediate steps prescribed by the statute to effectuate their reclamation rights. A recent decision handed down by the Sixth Circuit bankruptcy appellate panel illustrates that sellers must also ensure that ongoing developments during the case do not impair their reclamation rights. In In re Pittsburgh-Canfield Corp., the court affirmed the denial of administrative expense Corp. priority for a seller's reclamation claim where the seller failed to preserve the validity of its claim during the case.

Reclamation Rights In Bankruptcy

Under the Uniform Commercial Code ("UCC") and common law, a seller of goods generally has the right to reclaim goods sold to an insolvent buyer by making a reclamation demand within the appropriate period of time, which varies depending upon whether or not the seller shipped the goods in reliance upon the buyer's written (mis)representation of solvency. The goods must be in the buyer's possession at the time reclamation is sought,...