Reclamation Right Worthless Where Debtor’s Assets Fully Encumbered

Sellers dealing with a financially troubled company that may be on the brink of filing for bankruptcy ordinarily do so with the assurance that their state law right to reclaim goods sold in the ordinary course of business will either be honored in bankruptcy, or if not, protected by means of a priority administrative claim or a lien. However, the reclamation rights preserved by the Bankruptcy Code are limited. Sellers must be wary to ensure that they take all of the immediate steps prescribed by the statute to effectuate their reclamation rights. A recent decision handed down by the Sixth Circuit bankruptcy appellate panel illustrates that sellers must also ensure that ongoing developments during the case do not impair their reclamation rights. In In re Pittsburgh-Canfield Corp., the court affirmed the denial of administrative expense Corp. priority for a seller’s reclamation claim where the seller failed to preserve the validity of its claim during the case.