Decisions From Delaware Factor Into NY Bankruptcy Court's Denial Of Reclamation Claims
In holding that such claims are valueless except where the individual reclamation claim exceeds the value of the claim of a prior lienor, Judge Lifland noted the Delaware Bankruptcy Courts' opinions in In re Advanced Marketing Services., Inc. and In re Primary Health Systems, Inc., 258 BR 111 (Bankr. D. Del. 2001) where the Delaware Courts likewise, had denied a claimant's right to reclamation. In particular, Judge Lifland cited Judge Christopher S. Sontchi's decision in Advanced Marketing in support of the proposition that "where the claim of a prepetition secured lender with a floating lien on inventory is paid out of the proceeds of a postpetition credit facility supported by a new floating lien on inventory, the reclaimed goods securing the prepetition lender's debt effectively have been disposed of in satisfaction of that debt. Such a sale of goods in satisfaction of the prepetition secured debt renders all reclamation claims for those goods valueless." Judge Lifland noted that Judge Sontchi had likewise held that reclamation rights were subject to both pre- and post-petition liens.
Judge Mary F. Walrath's opinion in Primary Health was likewise favorably referenced by Judge Lifland. In Primary Health, Judge Walrath had indicated that "under state law, a reclaiming seller would not have been able to reclaim its goods if the goods were not worth more than the value of the floating lien, because the holder of the first lien could have asserted its rights and been entitled to all of the inventory." Further bolstering Judge Lifland's opinion was Judge Sontchi's observation in Advanced Marketing that "unsecured creditors [like reclamation claimants] cannot invoke the equitable doctrine of marshaling."
As the reclaming creditor in Advanced Marketing is seeking leave to appeal directly to the Third Circuit, it will be interesting to see what import Judge Lifland's decision has if leave is granted. In our prior statement on the Advanced Marketing decision (here), we noted that if the Delaware District Court grants leave to appeal, the Advanced Marketing debtor will support the direct appeal to the Third Circuit.
