In September 2010, the District Court for the Eastern District of Virginia denied a reclaiming seller rights despite the claimant’s service of a timely written reclamation demand and compliance with a reclamation procedures order and section 546(c) of the Bankruptcy Code.

Section 546(c) of the Bankruptcy Code provides that:

. . . subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof, the rights and powers of the trustee . . . are subject to the right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller’s business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but such seller may not reclaim such goods unless such seller demands in writing reclamation of such goods – (A) not later than 45 days after the date of receipt of such goods by the debtor; or (B) not later than 20 days after the date of commencement of the case, if the 45-day period expires after the commencement of the case.

In Paramount Home Entertainment Inc. v. Circuit City Stores, Inc. (In re Circuit City Stores, Inc.), 2010 U.S. Dist. LEXIS 92103, 3:10-CV-316, (Dist. Ct. E.D. Va. Sept. 3, 2010), Paramount complied with section 546(c) of the Bankruptcy Code. One day after Circuit City sought chapter 11 relief, Paramount served its written reclamation demand, seeking the return of $11,600,840.04 worth of goods delivered to and accepted by Circuit City while insolvent in the ordinary course of business within the 45-day period preceding Circuit City’s bankruptcy filing.

Pursuant to the reclamation procedures order entered by the Bankruptcy Court, Circuit City was permitted to reject rights asserted by reclamation claimants by doing nothing. The reclamation procedures order required a timely written reclamation demand from each creditor asserting a reclamation claim and, in turn, Circuit City was required to advise each reclamation claimant of the allowed amount, if any, of its reclamation demand. If no notice of allowed reclamation amount was given by Circuit City by the prescribed deadline, then Circuit City was deemed to have rejected the reclamation demand. Paramount was not sent a notice setting forth an allowed reclamation amount; accordingly, Paramount’s reclamation demand was deemed rejected by Circuit City.

The bankruptcy court ruled in favor of Circuit City on summary judgment, and the district court affirmed the bankruptcy court on appeal. Specifically, the district court concluded that a reclamation claimant must actively assert its rights in any proceeding where its rights may be affected. The district court explained the importance of actively asserting rights and pointed to motions to which Paramount failed to object, that were filed by Circuit City seeking approval of: (a) debtor-in-possession financing involving the award of post-bankruptcy collateral to the lender; and (b) “going out of business” sales. The district court determined that “a reclaiming seller must diligently assert its rights while bankruptcy proceedings progress, particularly in the context of the bankruptcy of such a large company with numerous creditors, such as Circuit City” and that a creditor may lose “whatever reclamation rights it might have … through lack of diligence in asserting those rights.”

In light of the Paramount decision in the Circuit City bankruptcy, and similar decisions cited in Paramount, the cost of monitoring bankruptcy proceedings and asserting a seller’s interest should be weighed against rights that may be lost. If the benefit outweighs the cost, then a reclamation claimant should carefully monitor all bankruptcy proceedings and file objections any time the goods sold are at issue, or risk losing reclamation rights. Careful cost-benefit analysis is required, because, even if a reclamation claimant provides a timely written demand and complies with a reclamation procedures order and section 546(c) of the Bankruptcy Code, valuable reclamation rights may be lost if rights are not also asserted in other non-reclamation related proceedings.