In re Furrs Supermarkets, Inc., No. 11-01-10779 SA (Bankr. D.N.M. Aug. 15, 2012)
An unsecured trade creditor of the debtor filed a reclamation claim to recover certain goods sold to the debtor. The Trustee filed a Motion of Summary Judgment and argued that the debtor’s secured creditors had a blanket lien on all of the debtor’s inventory; therefore, the unsecured creditor’s reclamation claim was valueless because the debtor’s inventory was worth less than the claims held by the secured creditors. The court agreed with the Trustee’s analysis and held that the unsecured creditor was not entitled to an administrative or secured claim.
On the chapter 11 petition date, the debtor, Furrs Supermarkets, owed its secured creditors more than $127 million. The secured creditors held a floating security interest in the debtor’s inventory. The value of the inventory on the petition date was $66 million. Certain unsecured trade creditors filed motions for reclamation. The Trustee initially objected to each reclamation claim, and one unsecured creditor filed a response. The Trustee then filed a motion for summary judgment pursuant to Federal Rule of Bankruptcy Procedure 7056. The creditor failed to file any response. The court granted the Trustee’s motion for summary judgment.
The court first looked to section 546(c) of the Bankruptcy Code and outlined an unsecured creditor’s right to reclaim goods from an insolvent debtor. The court did not dispute the unsecured creditor’s right to make a reclamation demand; rather, the court focused its analysis on whether a creditor with a prior perfected security interest defeats a reclamation demand. Also important in the court’s analysis was the language of the floating lien that provided an after-acquired property clause, which gave the secured creditor a blanket lien on all of the debtor’s after-acquired inventory. The court agreed with a Delaware Bankruptcy Court decision providing: "where a secured creditor has a floating lien on all of a debtor’s inventory and its claim exceeds the value of the inventory, a creditor’s reclamation right is valueless and the reclamation creditor is not entitled to receive an administrative or secured claim under section 546(c)(2)." The court applied this reasoning to the case before it, and granted the Trustee’s motion.
While the Bankruptcy Code and state law provide creditors with reclamation rights, the creditor should thoroughly analyze whether any creditors – quite often banks – have blanket security interests in the debtor’s inventory. A secured party with a blanket lien is considered a good faith purchaser under the Uniform Commercial Code, and the secured creditor’s lien will trump the unsecured creditor’s reclamation demand.