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DECEMBER 2013



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"Reclaiming" Unpaid Goods In Bankruptcy
by Allan P. Hillman

Everyone has probably had the dismal experience of selling goods to a customer who, before paying, files for bankruptcy under Chapter 7 (liquidation) or Chapter 11 (reorganization under court supervision). Unsecured creditors stand behind the banks and other secured creditors.

The best remedy for a dealer victimized by a "quickie" bankruptcy is "reclamation." Uniform Commercial Code section 2-702(2) allows this if notice is sent within ten days of delivery, where dealer learns buyer ordered goods on credit while insolvent. If buyer lied about being insolvent, in writing, the ten day limit is wiped out. Note: dealer has no right to reclaim against a person who purchased the goods from buyer in the ordinary course, in good faith.

Working in harmony with the UCC is the bankruptcy law. Section 546(c) allows seller to reclaim goods within 45 days after sale, as long as seller makes written demand within twenty days after buyer's bankruptcy filing. The right is "subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof." Note that the rights under Section 546(c) are still subject to the UCC Section 2-702(2) rights protecting from reclamation innocent persons who buy from the buyer.

Finally, Section 546(c)(2) provides that section 503(b) (9) is another way for a pre-bankruptcy petition seller to assert rights to the value of the goods. It allows a damage recovery as an "administrative claim" for the value of the goods received by the debtor within twenty days before bankruptcy, if they were sold.

Allan P. Hillman is a partner at Kern & Hillman, LLC, Hamden, Connecticut. allan@franchiselawsource.com

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