Rights of Suppliers under Bankruptcy Law
In light of yesterday's bankruptcy filing by Rockaway Bedding, suppliers to the retail chain need to be aware of how to proceed in protecting themselves for the goods they have shipped but not yet been paid for.
Section 503(b) of the Bankruptcy Code allows administrative-expense status to all claims for "the value of any goods" received in the ordinary course of business by a debtor within 20 days before the bankruptcy filing. The supplier must request administrative-expense status. By doing this, the supplier is in a better position than unsecured creditors to be paid, since a Chapter 11 plan of reorganization cannot be confirmed unless administrative claims are paid in cash on the effective date of the plan. Unsecured creditors typically receive only a fraction of their claims.
Suppliers of goods have another method to be paid ahead of unsecured creditors. They may seek reclamation of goods sold to a debtor in the ordinary course of business under Section 546(c) of the Bankruptcy Code. A supplier must demand in writing reclamation of such goods not later than 45 days after delivery. Suppliers must move quickly or their right to reclaim will be lost. If the 45-day period has not expired as of the filing of a bankruptcy case, a supplier will have an additional 20 days after the filing of the case to demand reclamation of the goods sold. A reclamation demand is "subject to the prior rights" of a holder of a security interest in the goods sold.
