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Protection Against Insolvency for Trade Creditors and Vendors

Protection Against Insolvency for Trade Creditors and Vendors
"""Rather than being uncertain about when and how much they will be paid, many vendors prefer to have their products returned. In the context of bankruptcy, this is known as reclamation. Although this is not an ideal solution, it eliminates the need to submit a proof of claim and wait for payment from the debtor.

Restitution pursuant to the Bankruptcy Code

The ability of vendors to reclaim their products was expanded by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (abbreviated as """"BAPCPA""""), which amended the Bankruptcy Code in 2005. These provisions are applicable to both Chapter 11 reorganization and Chapter 7 liquidation proceedings. 11 U.S.C. 546© outlines a vendor's ability to reclaim their products as follows:

The vendor has the right to reclaim goods received by the debtor within 45 days of the date of the commencement of the bankruptcy case. The reclamation demand must be in writing and made within 45 days of the debtor's receipt of the goods.

Possible Obstacles to Reclamation

A seller's right to reclaim their products is not absolute. The following is a non-exhaustive list of potential obstacles to a successful reclamation:

If the vendor fails to make a timely written demand, it will be unable to reclaim its goods. This demand may also need to be lodged with the bankruptcy court; if the debtor has sold the goods, they cannot be reclaimed. This is a risk if the debtor has a high inventory turnover rate; the debtor must have received the products. Deliveries to the debtor's customers, including drop shipments and other shipments, cannot be recovered; and
If the commodities become subject to a lien by a secured creditor, they cannot be reclaimed. This occurs when the debtor has granted a bank or other lender a security interest in the collateral. 11 U.S.C. 546©, as amended in 2005, now expressly subordinates reclamation rights to the rights of a secured creditor with a security interest in the products or their proceeds.

Contents of the Demand for Restitution

The reclamation demand should designate the goods to be reclaimed, include a general statement reclaiming all goods shipped during the 45-day period, and require the goods to be segregated to ensure their prompt return. However, demand may not be sufficient to safeguard a vendor's products. In the absence of an agreement with the debtor or a court-ordered reclamation program, a vendor may be required to seek and obtain a court order prohibiting the sale of reclaimed goods.

Failure of Recovery

A vendor still has recourse in the form of an administrative priority claim if its products are not recovered. 11 U.S.C. 503(b)(9) provides vendors with administrative priority claims for the value of products received by the debtor within twenty days of its bankruptcy filing. The administrative priority claim covers a lesser time period, but serves as a backup in the event that remediation efforts fail.

Legal Advice

As described previously, reclamations can be complex, involve multiple issues, and are time-sensitive. Upon learning of a customer's bankruptcy or insolvency, vendors with a reclamation claim should promptly seek legal counsel from an attorney. In bankruptcy and insolvency matters, Ronald Page has experience representing trade creditors and vendors.

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"Protection Against Insolvency for Trade Creditors and Vendors" was written by Mary under the Finance / Wealth category. It has been read 180 times and generated 1 comments. The article was created on and updated on 02 June 2023.
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