![handle is hein.journals/rutgblaj2 and id is 1 raw text is: RUTGERS BANKR. LI.l
THE COMPETITION BETWEEN RECLAIMING SELLERS AND LIENHOLDERS IN BANKRUPTCY
By
Scott J. Kelley*
When a seller of goods on credit discovers that the buyer is insolvent, the seller, upon meeting state
law requirements, may demand return of those goods.1 This is the remedy of reclamation, and it is justified on
the belief that any receipt of goods on credit by an insolvent buyer amounts to a tacit business
misrepresentation of solvency and therefore is fraudulent as against the particular seller.2
The ability to reclaim goods is potentially an important remedy against a buyer who has filed for
bankruptcy. In some cases, a seller will not retain a security interest in the goods sold.3 Absent a valid security
interest, the seller's claim for payment is not a property interest in the goods the buyer purchased from the
seller.4 Rather, it is merely an asserted claim or right to payment devoid of the benefits of secured status in
bankruptcy proceedings.5 The seller, or any claim to payment the seller has in the goods, will be unsecured.6
To make matters worse, in most cases the buyer's payments on unsecured debts will only be a small fraction of
any amounts owed as compared with secured creditors.7 The seller can therefore expect to lose money.8
Since reclamation rights are available in bankruptcy proceedings, sellers may avoid the losses
associated with unsecured status by asserting their rights through reclamation.9 Unlike the unsecured creditor,
a more favorable remedy is afforded through reclamation in that the buyer debtor must return goods to a seller
*J.D. University of Houston Law Center 2004
1 U.C.C. § 2-702(2) (2001).
2 U.C.C. § 2-702(2), official comment 2.
3 Lynn M. LoPucki & Elizabeth Warren, Secured Credit, A Systems Approach, 581 (2003).
4 11 U.S.C. § 101 (51) says a security interest is a lien created by an agreement; § 101 (37) states that a lien
means charge against or interest in property to secure payment of a debt or performance of an obligation. See In re
Pittsburgh-Canfield Corp., 305 B.R. 688, 694 (Bankr.N.D.Ohio 2003) (stating a reclamation right is not a lien or
security interest).
5 11 U.S.C. § 101 (5)(A) defines claim as a right to payment, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured...
6 Per 11 U.S.C. § 506(a), secured status under the Bankruptcy Code is conferred on the holder of [a]n allowed claim
of a creditor secured by a lien on property in which the estate has an interest .......
7 See LoPucki & Warren, supra, note 3 at 121-122. The authors write that the vast majority of [unsecured creditors]
face discharge of all or a substantial portion of their outstanding debt with no payment or, at best, nominal payment.
8 See Id.
9 This assumes that a seller is actually able to achieve a remedy under §546(c). As discussed in this paper that may
be a very difficult task.
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