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Bankruptcy Laws Provide Relief to Manufacturers, Suppliers
By Mark Shaiken, Marc Albert, Janet Nesse, Darrell Clark, Lawrence Block and Katie Sutcliffe Becker, Stinson Morrison Hecker LLP
 A building products retailer filing for bankruptcy protection is a constant threat and common problem for those who manufacture and supply wholesale building products.
Compounding the frustration is the likelihood that news of the bankruptcy may not reach the manufacturer or supplier for several days, a week or longer.
This is because of a provision in the bankruptcy laws that permits a bankruptcy to be filed in a state other than the state where the retailer’s principal place of business is located. Consequently, a supplier might not learn about the bankruptcy until it receives a notice mailed from the court in which the bankruptcy was filed.
That delay could mean the potential loss of the supplier’s once valuable weapon in an insolvency situation — the exercise of reclamation rights.
This legal remedy exists outside of bankruptcy. It becomes important in bankruptcy because without it the supplier is generally standing last in line for payment by the bankrupt customer. The ability to reclaim goods might be the only means for minimizing the financial loss imposed by an insolvent customer.
Outside of bankruptcy, depending upon the applicable state law, when a supplier of goods delivers product to a business on credit and then learns of the customer’s insolvency, the supplier may have as little as 10 days from the date of delivery to reclaim his goods. To accomplish this task, the goods must be in the customer’s possession, in their original form, and the wholesaler must specifically identify the goods sought.
Under the prior bankruptcy law, when a bankruptcy was filed within that 10-day window, the wholesaler had another 20 calendar days from the date of delivery to go to the bankruptcy court and seek reclamation. Unfortunately, as this scenario illustrates, if the supplier does not learn of the bankruptcy filing promptly, there is a possibility that the 20-day time period will expire before the supplier can adequately respond.
Fortunately, recent changes to bankruptcy laws provide much-needed relief to preserve the reclamation rights of suppliers. The 20-day window is expanded to either 45 days after delivery of the building products or 20 days after the bankruptcy petition is filed, whichever is later.
This should provide the supplier with greater access to the bankruptcy courts, so that the rights of the supplier can be adjudicated in a timely manner. Also, the new law eliminates the requirement that the reclamation claim be valid under state law.
Reclamation claims in bankruptcy are still subject to the prior rights of lenders who hold a security interest in a retailer’s inventory, resolving a dispute that existed prior to the new amendments.
Now, this issue — the rights of a reclaiming seller to its product versus the lender’s rights to its collateral — will determine the validity of most reclamation claims. Further, for those suppliers who delivered goods within 20 days of the bankruptcy filing, the new law grants a priority in payment without following the formal reclamation procedures and fighting with the retailer’s lender.
Since most suppliers would rather have a payment than return of product, this new legislation should provide an additional measure of improvement.
For more information on how recent changes in federal bankruptcy law affect the building industry, visit “The Regulatory Environment and Your Business” section of www.nahb.org/biztools. Many articles in this section are available to NAHB members only.
The legal firm of Stinson Morrison Hecker LLP, with offices throughout the Midwest and in Washington, D.C., includes construction, real estate, corporate finance, environmental and employment among its practice areas.
The preceding article is solely for informational purposes. The views and opinions of the authors expressed herein do not necessarily state or reflect those of the National Association of Home Builders. The National Association of Home Builders and the authors expressly disclaim any responsibility for any damages arising from the use, application, or reliance on any information contained in this article. The ideas presented in the article are not a substitute for considered professional advice. If specific legal advice or professional assistance is required, the reader should seek the services of a qualified professional.
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