The Reclaiming Seller and Code 546(c) Part One
Editor's Note: Part II of this article will be published in the March 1999 ABI Journal.
One of the more interesting interactions between the Bankruptcy Code and the Uniform Commercial Code (UCC) is the treatment of the reclaiming seller. Bankruptcy Code §546(c) recognizes the right of reclamation.1 Section 546(c) states:
(c) Except as provided in subsection (d) of this section, the rights and powers of a trustee under §§544(a), 545, 547 and 549 of this title are subject to any statutory or common-law right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller's business, to reclaim such goods if the debtor has received such goods while insolvent, but—
- (1) such a seller may not reclaim any such goods unless such seller demands in writing reclamation of such goods—
- (A) before 10 days after receipt of such goods by the debtor; or
- (B) if such 10-day period expires after the commencement of the case, before 20 days after receipt of such goods by the debtor; and
- (2) the court may deny reclamation to a seller with such right of reclamation that has made such a demand only if the court—
- (A) grants the claim of such a seller priority as a claim of a kind specified in §503(b) of this title; or
- (B) secures such a claim by a lien.
UCC §2-702(2) grants a seller the right of reclamation against an insolvent buyer, and it states:
Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within 10 days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery, the 10-day limitation does not apply. Except as provided in this subsection, the seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay.
- In order to establish a reclamation under §546(c), a plaintiff must prove the following:
- (1)the debtor was insolvent at the time the goods were delivered by the seller;
- (2)a written demand was made on the debtor within 10 days after the goods were delivered to the debtor;
- (3)the goods were identifiable at the time the demand was made; and
- (4)the goods were in possession and control of the debtor at the time the demand as made.5
It is the plaintiff's burden of proof to establish each element of §546(c) by a preponderance of the evidence.6 The following comments have been made concerning a reclaiming seller's burden of proof:
In addition, the burden of proof in reclamation actions is on the seller of the goods; the evidence must show that the "critical fact on which...recovery depends is true, and not merely that it is possible." The testimony heard at trial also "must be viewed in the light most favorable to the debtor," as the requirements for showing entitlement to reclamation are "rather stringent." If the evidence is in equipoise, the debtor prevails.7 (Citations omitted).
Section 546(c) is unambiguous, and any recovery under this statute is contingent upon a seller making a timely written demand on the debtor within 10 days of the debtor's receipt of the goods.8 The written demand requirement serves an important evidentiary function.9 One court has enunciated the following standard for the sufficiency of a written reclamation demand:
Considering the fundamental purpose of a demand for reclamation, therefore, the court concludes that, to be sufficient, the demand must identify the goods as to which reclamation is sought so as to permit their return pursuant to the demand at the time the demand is made. If the demand fails to be sufficiently detailed to accomplish that purpose, it must of necessity fail as a matter of law.10
An oral demand is insufficient to comply with §546(c).11 In Bojalad and Company v. Breakstone,12 the court denied the plaintiff's complaint for reclamation because the plaintiff made an oral reclamation demand. The plaintiff failed to comply with the express requirement of §546(c) that required a reclaiming seller to make a written demand. Another germane case is Fitzgerald Buick v. Rea Keech Buick Inc.,13 in which two motions to lift the automatic stay were filed by creditors that sold vehicles to the debtor. The court ruled that reclamation was the creditors' exclusive remedy. In addition, the court ruled that the creditors were not entitled to reclamation because they had failed to make written demands within the 10-day period after the debtor had received the automobiles.
As the preceding discussion reflects, it is imperative that a reclaiming seller comply with the written demand requirement. If a reclaiming seller fails to make a written demand seeking the return of its goods, then the reclaiming seller is not entitled to relief under §546(c).