With retail clothing companies seeing a 79% decline in business, several prominent retailers have recently filed for bankruptcy – most notably JC Penny, J. Crew (including Madewell) and Neiman Marcus.  As a result, many wholesale vendors of apparel may be having their first ever experience with customer bankruptcies. Sellers must act swiftly when they learn a retail customer has filed. Delay or failure to do so may leave the vendors with little to no means of recovery.

When a retailer files for bankruptcy, sellers have a variety of rights under the bankruptcy code and state law.  Two of those most valuable and time-sensitive rights are “Bankruptcy Code Section 503(b)(9) claims” and “Reclamation Rights”.

Section 503(b)(9) provides sellers an administrative expense priority claim for the value of goods sold to a debtor in the ordinary course of the debtor’s business that the debtor received within 20 days prior to its bankruptcy filing.  These claims are very valuable as they must be paid prior to payment of lower ranking unsecured claims. And the Bankruptcy Code requires full payment of all Section 503(b)(9) claims as a condition for approval of a Chapter 11 plan, which is the only way for the debtor to reorganize.

Reclamation rights under the Uniform Commercial Code also offer a valuable tool for apparel sellers during bankruptcy proceedings. The UCC provides sellers of goods with a right to demand the return of certain types of merchandise from a customer that received products on credit while insolvent.  The right is limited to goods delivered within 45 days of the bankruptcy petition filing. In order to exercise reclamation rights, the seller must send the debtor a written demand seeking the return which satisfies the UCC requirements.  Caveat: The reclamation claim is subject to the prior rights of a secured creditor, such as a factor, who holds a security interest in the debtor’s inventory.

Experienced SGR attorneys are available to help preserve and protect rights and prosecute claims under Section 503(b)(9) and the UCC.