First Lien Debt Priority over Unsecured Trade Credit Lines
First lien lenders hold absolute security over collateral, leaving unsecured trade credit lines completely exposed to zero recovery in insolvency liquidations.
Section 546 C
Meaning
Statutory limitation within the United States Bankruptcy Code that protects a seller’s right to reclaim goods from an insolvent buyer. Provisions in section 546 c require the seller to make a written demand for the return of the products within a specific timeframe.
Reclamation Right
Sellers can regain possession of inventory if they act quickly after the buyer files for bankruptcy. The demand under section 546 c must be made within forty-five days after the debtor receives the goods or within twenty days after the bankruptcy filing if the forty-five day period has not expired. This right applies only to goods that the debtor still possesses at the time the demand is made.
It does not apply to services or to goods that have already been sold to a third party.
Lien Subordination
Rights of the reclaiming seller are usually secondary to the rights of a lender with a floating lien on inventory. If the inventory is fully encumbered by a bank loan, the section 546 c claim may have no value. Courts sometimes grant the seller an administrative claim instead of returning the physical goods.
Asset Recovery
Successful reclamation reduces the total loss the supplier suffers on the account. Managing a section 546 c demand requires coordination between the shipping department and the legal team. The recovery value depends on the condition of the inventory and the cooperation of the debtor.