BE WARY: KNOW YOUR RECLAMATION RIGHTS

You've just made a large sale and had 20,000 yards of fabric delivered to one of your customers. A mere five days later, you receive notice that your customer has declared bankruptcy. Are you doomed to receive only pennies on the dollar over an indefinite period in payment for your merchandise? Not necessarily.

Now is the time to exercise your rights of reclamation. By acting quickly, you may be able to recover your merchandise or receive a replacement lien. There are steps you can take to protect yourself in these situations.What are reclamation rights? Based on the presumption that credit was extended to the buyer by virtue of a fraudulent misrepresentation made to the seller, they allow a seller to reclaim merchandise from an insolvent buyer.

Both the Uniform Commercial Code and the U.S. Bankruptcy Code have time requirements for reclamation sellers. The UCC allows a seller to reclaim goods within 10 days of receipt of the goods, while under the Bankruptcy Code all demands for the return of merchandise must be made in writing before 10 days have passed.

While both the UCC and the Bankruptcy Code require prompt action, both also have provisions that can extend this time constraint.

The 10-day requirement under the UCC may not be applicable if the buyer makes written misrepresentations of solvency to the seller, such as financial statements, within three months prior to delivery of the merchandise.

Under the Bankruptcy Code, the 10-day period increases to 20 days if the original 10-day period expires after the date of the bankruptcy petition. For example, if your customer receives your merchandise on Feb. 1, and subsequently files for bankruptcy on Feb. 10, your reclamation rights extend to Feb. 20.

In addition, in order to successfully assert your reclamation rights as a seller, the merchandise must still be in your buyer's possession when you make your claim. Clearly, the sooner you notify the customer in writing, the better chance you have of recovering your merchandise.

Unfortunately, even a timely reclamation demand does not guarantee that a reclaiming seller will prevail. The buyer who misled you into extending credit has other creditors vying for a piece of the remaining pie.

A seller's reclamation rights may be defeated, for example, by the rights of subsequent good-faith purchasers or secured creditors holding inventory liens, such as banks.

In these cases, the reclaiming seller may not be as fortunate in recovering its merchandise or availing itself of substitute remedies. Secured creditors must also remain aware and should monitor all reclamation requests to ensure that their collateral is not being returned to reclaiming sellers.

In the instances where timely reclamation claims are made against a debtor, the Bankruptcy Court may provide the reclaiming seller with either a replacement lien for the merchandise on hand, or a priority claim ahead of other pre-petition unsecured creditors.

Let the seller beware: When selling to new or financially distressed customers, you should always proceed with caution. Consider the following steps to protect yourself:

* Research: Perform thorough investigations of potential new customers prior to extending credit, including D&B reports, trade association surveys, financial statements and word of mouth.

* No payment, no merchandise: Consider requiring cash on delivery, cash before delivery or letter-of-credit terms for new customers.

* Cover your costs: If credit terms are inevitable, consider requiring at least enough up-front cash from your customer to cover your own costs.

* Put it in writing: If you do have an insolvent customer, put your reclamation demand in writing. Send this letter via registered mail and copy to the debtor's bankruptcy counsel, your attorney and creditors committee counsel, if formed.

* Professional advice: As noted, time is of the essence in these situations. If you find yourself in this position, seek the advice of experienced professionals to assist you in the recovery process before it is too late.

Follow these precautionary measures or you may find yourself standing in the same line as other general unsecured creditors - and waiting years to recover a fraction of your outstanding claims.

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