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Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), there has been some doubt as to the continued relevance of reclamation claims in a bankruptcy proceeding. BAPCPA, on its face, appears to enhance the leverage a vendor holds against a debtor in at least two ways. The first involves newly enacted Section 503(b)(9), which provides vendors with an administrative claim for goods sold in the ordinary course to a debtor within 20 days of the filing of its bankruptcy petition. In addition, Congress extended the reclamation period to 45 days from the date of product delivery, which is substantially longer than that previously allowed under the Bankruptcy Code or otherwise available under the Uniform Commercial Code. Notwithstanding BAPCPA, however, recent decisions have called into question the real value of a reclamation claim in a complex Chapter 11 case. For example, within the last few weeks, the U.S. Bankruptcy Court for the Southern District of New York in In re Dana Corporation, et al. issued a memorandum decision that upheld the debtor’s prior lien defense and denied more than $297 million of asserted reclamation claims. Dana Corporation, a manufacturer and supplier of various automotive systems, commenced Chapter 11 on March 3, 2006. Through June 30, 2006 it had received over 450 reclamation demands from vendors. The debtor, pursuant to court approved reclamation claim procedures, asserted substantial fact-based defenses that, if successful, would have reduced the claims to approximately $3 million. On top of the factual defenses, Dana also asserted certain legal defenses that effectively sought to render the reclamation claims worthless. The primary issue considered by the Dana court was the applicability of the prior lien defense. In effect, Dana sought a ruling consistent with that issued in the Dairy Mart Convenience Stores Inc. case, which held that the lien granted to a post-petition lender on the debtor’s assets defeated every asserted reclamation claim. Dana’s pre-petition financing consisted of a $400 million revolving credit facility, which was secured by a floating lien on substantially all of its assets. As of the filing date, there was an outstanding balance of approximately $381 million owed. After the petition date, Dana entered into a $1.45 billion senior secured credit facility, part of the proceeds of which was subsequently used to pay off the pre-petition secured loan. Under the new debtor in possession (DIP) loan facility, the lender was granted a “valid, binding, continuing, enforceable, fully perfected first priority senior priming security interest in and lien (the DIP Lien) upon all pre-petition and post-petition property of the Debtors . . . . Whether now existing or hereafter required, that is subject to the existing liens.” In its objection to the reclamation claims, Dana asserted that the reclamation claims were without value because the goods that were subject to the reclamation claims were disposed of as part of the debtor-in-possession loan facility, the proceeds of which were used to satisfy the pre-petition liens. In response, the reclamation claimants argued that the reclamation claims were subject only to the prior pre-petition liens and since the pre-petition liens were satisfied from the debtor-in-possession financing rather than the proceeds of the reclaimed goods, the reclaimed goods were no longer subject to the prior lien defense and must be valued in full. The objecting reclamation claimants cited to the Phar-Mor Inc. decision and what they alleged to be a newly created federal common law right of reclamation arising out of BAPCPA. The Bankruptcy Court noted that under BAPCPA the look back period for Section 546(c) reclamation claims had been expanded from 10 days to 45 days and that the post-petition grace period for asserting such claims was lengthened from 10 days to 20 days. Notwithstanding these changes, the court disagreed that BAPCPA now embodied an “independent, federal right of reclamation.” Rather, the pre-existing authority related to reclamation claims remained applicable to Section 546(c) as amended by BAPCPA. To that end, the court noted that under the Uniform Commercial Code, the right of reclamation claimants “is subject to the rights of a buyer in the ordinary course or other good faith purchaser.” In Dairy Mart, the debtor entered into a refinancing transaction substantially similar to the one entered into by Dana. The pre-petition lender’s floating lien on Dairy Mart’s inventory was satisfied from the proceeds of the DIP loan facility, which itself was secured by a new floating lien on the same inventory. The Dairy Mart court found that the DIP financing effectively resulted in the satisfaction of the pre-petition debt using, in part, proceeds from the disposition of the reclaimed goods. The Dana court refused to follow the Phar-Mor court decision, which found that the post-petition loan transaction “in which payment was swapped for liens was neither an assignment, nor an assumption, nor the sale of the subject goods.” Thus, under Phar-Mor, the reclaiming seller’s reclamation rights were honored on the theory that the pre-petition liens had been released and that the new post-petition liens could not attach “to the detriment of reclaiming sellers.” The Dana court disagreed with the Phar-Mor rationale and found, “[B]ecause the reclaimed goods or the proceeds thereof were either liquidated in satisfaction of the Pre-petition Indebtedness or pledged to the DIP Lenders pursuant to the DIP Facility, the reclaimed goods effectively were disposed of as part of the March 2006 repayment of the Pre-petition Credit Facility. Accordingly, the Reclamation Claims are valueless as the goods remained subject to the Prior Lien Defense.” The import of the Dana decision is fairly straightforward. It suggests that to the extent a reclaiming creditor intends to protect the value of its reclamation claim, it needs to take immediate action at the beginning of a bankruptcy case. BAPCPA makes clear that if the pre-petition secured creditor holds a blanket floating lien, which is under collateralized at the beginning of the case, then the reclamation claim will be worthless. However, if the pre-petition secured creditor is over collateralized, then it is possible that the reclamation claim may have value. To protect that value, the reclamation claimant must immediately interpose itself in the post-petition financing process and attempt to secure a ruling from the court before the post-petition financing is approved, that such post-petition financing will not prejudice the reclamation claim. Alternatively, the reclamation claimant needs to be prepared to pursue an injunctive action at the outset of the case seeking to immediately recover its goods subject to reclamation and challenge the value of the pre-petition lender’s collateral. Rarely does a reclamation claimant move quickly enough to protect its interest in this manner. Thus, assuming the Dana rationale is followed, most reclamation claims will be lost in future cases. On the positive side, with the new Section 503(b)(9) enacted under BAPCPA, there is still a chance for recovery at least with respect to goods sold within the 20-day period prior to bankruptcy. Bottom line, reclamation claimants need to be vigilant and prepare to move quickly at the beginning of the case or risk loss of their reclamation claim. FRANCIS J. LAWALL , a partner in thePhiladelphia office of Pepper Hamilton, concentrates his practice in national bankruptcy and reorganization matters. He routinely lectures to various creditor groups concerning general bankruptcy issues, including preferences, reclamation, the role of creditors’ committees and related issues.

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