Physical Posession May Be Essential to Reclaimation Priority

Bruce W. Akerly
Jul 11 2018

Under the Uniform Commercial Code, a seller of goods to an insolvent buyer may be entitled to reclaim possession of the goods if certain requirements are met, like written demand within 10-days of delivery. The right to reclaim goods has been carried over into bankruptcy cases through Section 546. Under Section 546(c) a vendor may assert reclamation demand for return of goods received within 45-days of the bankruptcy filing. If the 45-day period expires after the commencement of the bankruptcy case, the vendor must make its reclamation demand not later than 20 days after the date of commencement of the case. Further, the vendor must have sold the goods to the debtor in the “ordinary course” of the vendor’s business and the goods must have been received by the debtor while the debtor was “insolvent”.

Section 503(b)(9) of the Bankruptcy Code further provides that a reclamation claimant has an administrative expense priority claim for the value of goods received by a debtor during the 20-day period prior to the filing of the commencement of the case. Otherwise, reclamation claims that do not satisfy the requirements of Section 503(b)(9) are generally regarded as unsecured claims.

Recently, a court confronted the issue of whether the debtor must be in possession of the goods when the demand is made? For example, what if the goods purchased by the debtor are shipped directly to the buyer’s customer? The word “received” is not defined in the Bankruptcy Code. If the goods are delivered directly to the buyer’s customers, have they been “received” by the buyer?

In re World Imports, Ltd., 862 F.3d 338 (3rd Cir. 2017) held that the issue is resolved by reference to the Uniform Commercial Code (UCC). Referencing comments to UCC section 2-103, the Court distinguished “delivery”’ (when title passes) and “receipt.” The UCC characterizes receipt of goods as taking physical possession of the goods. The UCC is an appropriate source of substantive law to determine the meaning of the word “received.” Accordingly, the Court held that, “regardless of FOB status, under the UCC and Chapter 11, receipt does not occur until after the seller’s ability to stop delivery ends—namely, upon the buyer’s physical possession. The upshot of all this is that the transfer of risk is not the same thing as receipt.” Id. at 345. If title may have passed to the buyer pursuant to the terms of the contract, those terms did not transfer actual physical possession of the goods.