Are reclamation rights preserved where debtor's secured dip lender pays off pre-petition secured inventory lender? Yes and no!(Credit Column)

Introduction

Over the past few years, many courts have denied preferred status to creditors asserting state law reclamation claims where the debtor's pre-petition lender had a security interest in all of the debtor's inventory. As a result, trade creditors that satisfied all of the state and bankruptcy law requirements for reclamation could not take advantage of the preferred status for allowed reclamation claims conferred by Section 546(c) of the Bankruptcy Code.

In two recent cases, In re Phar-Mor, Inc. and In re Dairy Mart Convenience Stores, Inc., the bankruptcy courts considered whether reclamation creditors were entitled to preferred status where ...