What to Do When Your Customer Declares Bankruptcy

If you have delivered goods to a buyer on credit, and the buyer declares bankruptcy, you have two potential remedies under the United States Bankruptcy Code: (1) you may make a demand for reclamation of the goods; and/or (2) you may file a request for an administrative expense for the monetary value of the goods delivered. However, you must act quickly when a buyer is insolvent – the timeframe for a demand for reclamation of goods could be as short as ten (10) days from date of the buyer’s receipt of goods.

Reclamation of Goods
A seller’s right to reclaim goods from an insolvent buyer exists under the Uniform Commercial Code (state law) and under the United States Bankruptcy Code (federal law). Under the Maryland Commercial Law Article (which enacts the Uniform Commercial Code), if a seller discovers that a buyer has received goods on credit while insolvent, the seller may reclaim the goods upon demand made within ten (10) days after the receipt. A similar provision under the U.S. Bankruptcy code provides that a seller may make a demand for reclamation of goods received by the buyer within forty-five (45) days before the date of the commencement of the buyer’s bankruptcy. The seller shall have forty-five (45) days after the buyer received goods to make a demand for reclamation, or not later than twenty (20) days after the bankruptcy commencement, if the 45-day period expires after the bankruptcy commencement.

However, the vendor’s rights to reclamation are subject to the prior rights of a pre- or post petition lienholder of a security interest in such goods, such as a lienholder with a security interest in the debtor’s inventory.

Value of the Goods as an Administrative Expense
A potentially more useful remedy is the right to claim an administrative expense for the value of the goods delivered to the bankrupt seller. Under the U.S. Bankruptcy Code, sellers can seek the value of any goods (sold to a debtor in the ordinary course of business) received by the debtor within twenty (20) days before the bankruptcy commencement. This claim is given a priority status on par with other post-petition expenses, such as legal fees. The deadline for filing these administrative expenses is set by the court after the commencement of bankruptcy.

Because deadlines for both a demand for reclamation and a request for an administrative expense are based on the bankruptcy commencement, credit managers should diligently track a buyer’s state of solvency, the date of any bankruptcy filing, and any filing deadlines set by the court subsequent to any bankruptcy filing.

For more information on these remedies, please email Vincent M. Guida, Jr. or call 410-583-2400.