Reclamation Rest in Peace? The Eighth Circuit Will Soon Weigh in

Trade creditors that provide goods on credit to struggling customers can assert reclamation rights prior to and after the customer’s bankruptcy filing as part of their collection toolkit. Specifically, Bankruptcy Code Section 546(c) preserves a creditor’s state law reclamation rights in goods sold to an insolvent debtor that the debtor receives within the 45 days of the debtor’s bankruptcy filing.

However, creditors’ reclamation rights have been chipped away over the years. This trend continues in the Chapter 11 cases of Specialty Retail Shops Holding Corp. (“Specialty Shops”) involving the retailer, Shopko, where the U.S. District Court for District of Nebraska has recently affirmed the bankruptcy court’s holding that denied a reclaiming creditor, McKesson Corporation (“McKesson”), an administrative claim or lien on account of the goods subject to its reclamation rights. The court concluded that Section 546(c) provides that a creditor’s reclamation of goods is the sole remedy for a valid reclamation claim. The court’s decision illustrates the significant impact of an amendment to Section 546(c) made by Congress through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). While the pre-BAPCPA version of Section 546(c) had explicitly provided creditors with additional remedies of an administrative claim or replacement lien where the creditor could no longer reclaim goods, the current version of Section 546(c) omits these remedies. The court also relied on Section 546(c)’s language that reclamation rights are explicitly subject to the prior rights of the debtor’s secured creditor with a security interest in the debtor’s inventory that includes the goods subject to reclamation. The court’s decision continues the adverse trend of eviscerating reclamation rights where the debtor sells goods subject to a creditor’s reclamation rights and then uses the proceeds to pay down the debtor’s secured indebtedness.