How to seek payment from a customer in bankruptcy In today's volatile marketplace, it's not uncommon for suppliers to be caught off guard after shipping product on normal credit terms and learning soon thereafter, or indirectly through the news media, that a long-time customer has filed for bankruptcy protection. After trying to recover from the shock of the chain of events, the logical question becomes: Does a business have any hope of recovering payment on goods shipped to an insolvent customer? Alas, vendors do have certain limited rights under the concept of reclamation, which can be used to retrieve the actual goods or obtain payment under certain conditions if specific procedures are followed. In order to take advantage of reclamation, vendors must be vigilant and understand the potential pitfalls in attempting to recover payment or reclaim goods. Outside of bankruptcy, vendors are afforded some protection under the Uniform Commercial Code (Section 2-702). This provision, adopted by all states, provides that when an unpaid seller of goods discovers that a buyer was "insolvent" at the time of delivery of goods, the creditor may reclaim the goods upon demand made within 10 days after the receipt by the buyer of the goods. If the debtor/customer misrepresented his or her solvency in writing within three months before delivery, then the 10-day limitation does not apply. Under the UCC, insolvency is defined as when the customer has ceased to pay the debts in the ordinary course of business, other than as a result of a bona fide dispute, or being unable to pay the debts as they become due. Limitation on reclamation If the customer financed its operations through a lender which holds a valid security interest in the goods, then the reclamation claim is subject to the lender's rights under state law. Additionally, if the goods delivered are no longer in the possession of the buyer, the right of reclamation is lost. A reclaiming vendor's rights are also subject to the rights of a subsequent buyer who, in the ordinary course of business, purchases the merchandise in good faith from the customer of the reclamation vendor. Thus, the reclaimed goods cannot be chased into the hands of a subsequent good faith purchaser. After filing a bankruptcy petition, vendors must look to their rights under the United States Bankruptcy Code. The Code permits a vendor to make a written reclamation demand for goods transferred to a debtor/customer in the 45 days (after the receipt of goods) immediately preceding the Chapter 11 filing. If the 45-day period expires after the bankruptcy filing, the vendor has an additional 20 days to make a demand - thereby providing up to 65 days to recover goods from a bankrupt customer. These deadlines are fixed and failure to strictly adhere to them jeopardizes the vendor's rights to recover payment. Process of exercising right of reclamation The contents and delivery of a reclamation demand are critical. A demand letter should be sent via fax, overnight courier, certified mail to leave a paper trail. The letter also should be addressed to a specific person - preferably an officer at the company's headquarters with a copy to counsel, if known. A copy should be sent to the address where the goods were shipped.