Reclamation demand against customer that later files bankruptcy should be in writing or risk preference action.(Credit Column)

News of a major customer's insolvency can be devastating to a vendor selling on an open account. However, the right of reclamation may afford a vendor a cost-effective method of recovery for goods recently shipped if the customer has not filed bankruptcy, or, if the customer Files bankruptcy, a priority claim for the reclaimed goods.

Reclamation is the right of a seller to recover possession of goods delivered to an insolvent buyer. The remedy of reclamation is needed when an unsecured vendor is unable to retrieve goods or stop them in transit. A reclaiming vendor need not prove fraud, although the premise of reclamation is that the vendor was defrauded.

One element for a vendor to prevail on its reclamation demand under the Bankruptcy Code is written demand for the return of the goods within 10, or in certain cases 20, days after the goods were delivered to the debtor, and the goods are identifiable at the time of demand. However, a vendor's failure to strictly comply with the provisions of the Bankruptcy Code reclamation requirements, not merely state law reclamation requirements, may open the door for a preference lawsuit. A bankruptcy court in In re Zeta Consumer Products Corporation, 291 B.R. 336 (Bankr D.N.J. 2003), recently ruled that a vendor reclaiming goods based on an oral reclamation demand resulted in a bankruptcy preference, even though the debtor Filed bankruptcy after the vendor bad reclaimed the goods (the reclamation was within the preference period).

Reclamation: State Law Right and the Interplay With the Bankruptcy Code

Reclamation is the right of a vendor, the seller, to recover possession of goods delivered to an insolvent buyer, upon demand made within 10 days after receipt of the goods, which is provided under Article 2-702 of the Uniform Commercial Code (UCC). The remedy of reclamation is needed when an unsecured vendor is unable to retrieve goods or stop them in transit. A reclaiming vendor need not prove fraud, although the premise of reclamation is that the vendor was defrauded. Under the common law and the old Uniform Sales Act, the seller could only exercise its reclamation rights if it proved the buyer obtained delivery by misrepresenting its solvency: However, the UCC has expanded this remedy where the buyer does not misrepresent solvency. If the debtor has misrepresented its solvency in writing within three months before delivery, the 10-day demand period does not apply.

What is the effect of a vendor's right of reclamation upon a debtor's bankruptcy filing? The requirements for reclaiming goods under state law (Article 2 of the UCC) differ from a vendor reclaiming under bankruptcy law. In most states, a demand to reclaim under Article 2 of the UCC need only be made within 10 days after delivery of goods. Bankruptcy Code section 546(c) requires that a reclamation demand be in writing.

The Vendor Reclaims Goods