Post-BAPCPA, Dairy Mart Retains its Frosty Goodness

Reclamation claims aren't something that practioners in smaller bankruptcy cases used to see every day. In the past, in order for reclamation to rear its head you needed a credit sale of goods to the debtor which was large enough to motivate the seller to seek immediate legal advice following a bankruptcy filing, within the short time period allowed to perfect the claim.

When BAPCPA rewrote 11 U.S.C. section 546(c), questions were raised as to how this expanded right would fit into the post-petition financing transactions which often occur in the big cases. Amended section 546(c) still says that the reclamation right is "subject to the prior rights of a holder of a security interest in such goods." What about the situation where a floating lien on the goods is released and replaced by a lien in favor of the DIP financer? Do you have to structure your new DIP financing as a assignment of the pre-existing lien? Does it matter that the pre-petition blanket lienholder was oversecured and would have remain adequately protected if the reclamation rights were honored?

These questions were answered in pre-BAPCPA days by the Southern District of New York in In re Dairy Mart Convenience Stores, Inc., 302 B.R. 128 (Bankr. S.D.N.Y. 2003). According to Dairy Mart, reclamation claimants have no marshaling rights vis a vis an oversecured floating lien creditor. Further, new DIP financing still trumps the reclamation creditor, on the theory that the reclaimed goods securing the prepetition lender's debt have been disposed in satisfaction of that debt by providing them as collateral to the DIP lender. For the contrary view, see In re Phar-Mor, Inc., 301 B.R. 482 (Bankr. N.D. Ohio 2003).

Last week the Southern District of New York issued its opinion in In re Dana Corporation, 2007 WL 1199221 (Bankr. S.D.N.Y. April 19, 2007). The decision holds that post-BAPCPA, Dairy Mart retains all of its frosty goodness (or badness, if you're a reclamation creditor). Enroute to disallowing any reclamation right, the Court was at pains to debunk the notion that BAPCPA had created a new federal right of reclamation.

Even practical problems aside, under the holding in Dairy Mart and now Dana Corporation, the right to actually receive back the reclaimed goods is not legally available in any case where a blanket lien is present (that is, all but the smallest cases). Dana Corporation does not deal with the reclamation claimant's alternative remedy, which under BAPCPA no longer depends on timely perfection or the absence of a blanket lien. Reclamation claimants get administrative claims. Trustees are going to be seeing a lot more of those as creditor attorneys catch on.

Copyright Dean T. Kirby 2007. All rights reserved.