Preliminary Trade Creditor Remedies

With uncertainty hovering over the economic health of the nation, there has been
no shortage of troubled industries. Most notably, the automotive and subprime
mortgage lending industries, which are bound to have an impact on the consumer
level, have taken center stage for the ailing state of the economy.

"All of this is being affected by raising energy prices, over-leveraged
companies, tightening credit, increased payment defaults and, of course, that
dreaded increase in bankruptcy filings," Bruce Nathan, Esq., partner in the law
firm Lowenstein Sandler PC, told attendees of a recent NACM teleconference.
"Business bankruptcy filings in 2007 have increased significantly from the prior
year, and that just leads us to these reclamation, stoppage of delivery rights
and new trade creditor priority claims for goods shipped within 20 days of
bankruptcy, which are still the tried and true methods that an unsecured
creditor has to enhance the ability to obtain payment of their claim."

During The 20-Day Administrative Claim and Reclamation: An Added Dividend
for Unpaid Goods Suppliers
audio conference, Nathan laid out
several avenues like reclamation, stoppage of delivery and the new trade
creditor priority introduced by bankruptcy amendments two years ago, that
creditors should use to enhance their recovery from a troubled customer that has
either filed for bankruptcy or is on the verge of filing for bankruptcy. Though
all of these avenues specifically cater to suppliers.

"For those of you in services," said Nathan. "It is unfortunate that these
rights do no affect you. And you’re dealing with a situation where a certain
group of trade creditors—goods suppliers—actually have priority over unsecured
claims because you are not beneficiaries of this right."

Reclamation has been the tried and true remedy and is the law under the
Section 2-702 of the Uniform Commercial Code (UCC). If a creditor shipped goods
to an insolvent debtor, the creditor can reclaim the goods if it sends a
reclamation demand to the debtor within 10 days after the debtor’s receipt of
the goods.

"So long as you satisfy the requirements for state law reclamation, you can
exercise the rights regardless of whether a bankruptcy has been filed,"
explained Nathan.

The state law does not require a written reclamation demand, but Nathan
always suggested that creditors do so for purposes of proving that the demand
was made, also in bankruptcy proceedings creditors have to prove that they have
sent a written reclamation demand.

"The other side of the coin to reclamation is stoppage of delivery," said
Nathan. "Again, this is a state law right. Reclamation kicks in when the debtor
receives the goods. But before the debtor receives the goods—if the goods are
with a carrier or if the goods are still in the possession of the creditor, the
creditor also has the right to, under the UCC, to stop delivery of goods due to
insolvency or due to a breach of contract."

The creditor can withhold delivery until they are paid, or for any other
goods received under the same contract. Nathan explained that the more typical
scenario is when the stoppage of delivery of goods right is exercised while the
goods are in the possession of a carrier, warehouse or other third party, just
as long as the debtor has not yet received the goods. This forces the carrier to
hold them pending instructions. The automatic stay does not preclude stoppage of
delivery of goods, but it does preclude from any further recovery.

"Having exercised the stoppage of delivery right, gives you a lot of leverage
to get paid for those goods if the debtor needs them badly enough," stated
Nathan. "This right of stoppage of delivery, a state right, is cut off if the
debtor has received the goods. Then reclamation kicks in."

He explained that stoppage of delivery rights are not cut off if title
passes, or risk of loss passes from creditor to debtor. Most importantly, Nathan
said, stoppage of delivery rights are not cut off where the debtor, not the
creditor, had engaged the carrier.

"As long as it’s not actually a truck owned by the buyer, as long as it’s a
common carrier—whoever is engaged is irrelevant—the seller still has the right
to stop delivery," explained Nathan. "Unless there was a negotiable document of
title involved, which you are rarely going to see for a truck bill of lading or
an air bill of lading. Perhaps you will for an marine or ocean bill of

Nathan also made available a couple of generic forms for pre-bankruptcy and
bankruptcy reclamation demand, as well as explained in detail a number of cases
that highlighted the power and vulnerabilities of these creditor courses of
Matthew Carr, NACM staff writer

Leave a Reply

Your email address will not be published. Required fields are marked *