The Retail Supplier’s Ability to Reclaim Goods in Bankruptcy

For suppliers doing business with retailers involved in major bankruptcy cases, reclamation claims could reach into the millions of dollars.

Under Section 546(c) of the Bankruptcy Code, a supplier has the right to reclaim goods shipped on credit in the days leading up to the retail debtor’s bankruptcy filing. However, in order to do so, the supplier must satisfy all of the following requirements under the Code:
  • Submit a written demand letter for reclamation of its goods within 45 days of the retail debtor’s receipt of the goods[1]
  • Prove that the retail debtor was insolvent when it received the goods
  • Prove that the goods sold were on credit terms in the ordinary course of its business
  • Prove that the retail debtor was in possession of the goods sought to be reclaimed
If a supplier satisfies all of these requirements, the bankruptcy court may order the retail debtor to return the goods or provide equivalent monetary value for the goods. The bankruptcy court may also grant the supplier a security interest in the goods or other assets of the retail debtor to secure its obligation to pay for the goods. A third possibility is for the bankruptcy court to grant the supplier an administration expense claim that would be payable before the claims of general unsecured creditors.

In addition to the above requirements, reclamation rights can be further limited or denied by the bankruptcy court for a number of reasons including:
  • The goods were not specifically identifiable or were converted from raw materials into finished goods at the time when the demand letter was received
  • The goods were sold (no longer in stock) by the retail debtor in the ordinary course of its business before a written demand letter was submitted by the supplier
  • The goods were secured by a floating inventory lien
Even if all of the other criteria are satisfied, the floating inventory lien can be a significant hurdle for a supplier seeking reclamation.  If the retail debtor’s lender has a floating lien, the lien attaches to inventory delivered to the retail debtor, potentially giving the lender rights superior to those of suppliers seeking reclamation.  If the retail debtor’s entire inventory is encumbered by prior perfected liens, reclaiming suppliers can be left without any goods to reclaim.  Therefore, without unencumbered inventory and/or funds to satisfy these claims, the reclamation claim may not have any value.

Have you submitted a reclamation claim to a bankrupt retailer that was ultimately denied by the bankruptcy court?

[1] If the 45 day period expires after the bankruptcy filing date, an additional 20 days from the receipt of goods date will be granted by the bankruptcy court to submit a demand letter, potentially extending the period to file a demand letter to as much as 65 days if the goods were received on the filing date.