2005 Bankruptcy Reform Legislation Changes of Interest to Trade Vendors
Pre-petition Goods and Reclamation
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 makes significant changes to how trade vendors are treated. The new law may provide a trade vendor (1) an administrative expense claim and (2) an expanded right to reclaim goods. The revised provisions are now effective.
I. PRE-“REFORM” LAW
Under prior law, a trade vendor who shipped goods to a soon-to-be debtor could reclaim those goods under applicable nonbankruptcy law if it gave written notice of reclamation within 10 days of the receipt of the goods by the other party (extended to 20 days if the 10 days had not run when the bankruptcy was filed). The bankruptcy court could deny the vendor the right to reclaim, but only if it gave the vendor an administrative claim or a lien.
However, because the Bankruptcy Code referred to the vendor’s rights under statute or common law, the state Uniform Commercial Code provisions governing reclamation applied. This meant that the right to reclaim was subject to (inferior to) the rights of a “good faith purchaser.” This almost always includes the buyer’s secured lender, so reclaiming vendors were often found not to have “valid reclamation claims” and were cut out by the secured lender. This is referred to as the “valueless” defense to the reclamation claim.
Agenda for the 2005 Winter Leadership Conference
With the massive revisions to the Bankruptcy Code, there will be plenty for trade creditors and their counsel to talk about at the Winter Leadership Conference at the Hyatt Grand Champions Resort in Indian Wells, Calif., Dec. 1–3, 2005. This is particularly so, since the revisions will have been in effect less than two months when the meeting takes place. We look forward to the participation of existing and new members at the committee’s meeting on Dec. 3 at 11:15 a.m.
The Unsecured Trade Creditors Committee will hold a forum on the changes to the Bankruptcy Code that will seriously impact the rights of unsecured creditors in Chapter 11 cases filed after Oct. 17. The discussion will focus specifically on:
- Committees—problems inherent in the new disclosure and solicitation of comments requirements, who is eligible to sit on a committee after reclaiming creditors become administrative claim-holders.
- Preferences—ordinary course, timing of payment, venue, small preferences.
- Reclamation and the New Administrative Expense Claim for Suppliers of Goods—carveouts and constitutional issues. What happened to suppliers of services - have they been denied due process?
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