By Scott W. Lee, JD, CCE, Vice President, NACM Business Credit Services

You just found out that the customer you sold to last week is insolvent. Now what?!? Actually, there is something you can do.  Reclamation.  It isn’t a guarantee of payment but it does improve your chances.

Let’s start by clearly stating the right of reclamation applies only to the goods delivered to the customer by you. You have no right of reclamation for any other goods. Next, it applies only to “goods.” “Services” are not covered. Making the demand for the return of your goods does not need to be complicated. But, if your customer actually files a bankruptcy petition you will need an attorney.

The right of reclamation under the Uniform Commercial Code (UCC) allows credit grantors the right to reclaim goods when the creditor discovers the customer received goods while the customer was insolvent. The demand for reclamation must be in writing and within 10 days of the date your customer received the goods. There is no prescribed form but you need to make clear who you are, delivery dates, what the goods are and that you want them returned because you understand the debtor (your customer) does not have the ability to pay for the goods. If the customer files a petition in bankruptcy within that 10 day period, you then have 20 days to make the demand. In bankruptcy situations the bankruptcy court can deny the reclamation claim, even a properly made claim, but the court should grant the requesting creditor a priority position in the bankruptcy estate in exchange (assuming the goods are still in your customer’s possession.)

What?! You exclaim. Yes. The right of reclamation is subject to the rights of a good faith purchaser in the ordinary course of business. If you remember your NACM Credit Law Class, a good faith purchaser is someone who purchases in good faith from a seller of goods who deals in those goods. The good faith purchaser is unaware of any problem. Therefore, if your customer sold inventory in the ordinary course of his/her/its business, you have no recourse against the customer’s customer for return of the goods. You may make the claim for everything you delivered during the covered period but it will only apply to what is left. So if you are in the food industry selling to restaurants, reclamation won’t do you much good. If you sell raw materials or hard goods that take weeks to months to re-sell or equipment that is used in your customer’s business, reclamation is an option for you.

Also, if another creditor has a floating security interest in goods being sold by your company, your reclamation claim may be behind that secured creditor.

The bankruptcy code provides for reclamation claims as well. The short statement is section 546(c) of the bankruptcy code allows for a claim to be made for goods sold within the immediately preceding 45 days, unless a bankruptcy petition is filed within that period and then the claim must be made within 20 days of the petition. The claim needs to be in writing.

The last major revision of the bankruptcy law, BAPCPA, made some changes to reclamation. If you didn’t make a timely written demand pursuant to UCC section 2-702 or 11 USC section 546(c), section 503(b)(9) of the bankruptcy codes still allows a claim for goods sold within 20 days of the bankruptcy petition. There are still unanswered questions such as the method and date of valuation i.e., retail, wholesale or liquidation value, the date of sale, the date of the petition or the date of hearing. Other questions include when must the claim be made and when will the claim be paid? The courts have not stated a deadline date but it’s likely the courts will set claim bar dates which could be separately stated or could be part of the general bar dates as set forth in the notice of bankruptcy.

In general, if you timely find that your customer is insolvent, you should make a reclamation demand. They can be as cheap as a simple certified letter if the bankruptcy has not yet been filed. You may actually get your goods back. I know that isn’t what you really want but it is better than nothing. You may enter into talks that allow you to reach a payment plan, or simply payment. And if bankruptcy is filed, you may find yourself in a higher priority than you would have had otherwise.

Note: The statements made herein are general in nature and should not be substituted for the advice of competent counsel.