You can exercise your reclamation rights against goods purchased and delivered to a customer who is "insolvent."
What is Insolvency?
Insolvency in general is an inability to pay debts. The Uniform Commercial Code defines "insolvent" as:
(A) having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute; (B) being unable to pay debts as they become due; or (C) being insolvent within the meaning of federal bankruptcy law.Insolvency under federal bankruptcy code means that the business debts exceed its assets ("balance sheet" insolvency).
Reclamation Rights Before Bankruptcy
Before bankruptcy, reclamation rights are governed by the Uniform Commercial Code. Section 2-702 of the UCC describes the process
Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay.Note that your rights to reclaim goods before bankruptcy are limited to the ten-day period after the goods are received.
Reclamation Rights After Bankruptcy
After bankruptcy has been declared, your reclamation rights are governed by the current bankruptcy law, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The new bankruptcy law expands your rights to reclaim goods purchased from you by someone who has filed bankruptcy:
- You can assert a reclamation demand for goods received within 45 days of the bankruptcy filing by filing a written demand.
- The goods must have been sold in the "ordinary course" of your business and the goods must have been received while the debtor was "insolvent" (using the bankruptcy definition above
- If the 45-day period expires after the bankruptcy case is filed, you must make the reclamation demand within 20 days after the bankruprcy filing.
Writing the Demand Letter
The demand letter you write must identify the goods you want to reclaim, include a general statement reclaiming all goods received by the debtor during the 45-day period, and demanding that your goods be segregated from those of other claimants. You should file a copy of this demand notice with the bankruptcy court.
