## Facts

- Arley Corporation (later renamed Arlco, Inc.) manufactured and wholesaled home-furnishings; its wholly owned subsidiary operated retail outlets.
- CIT Group/Business Credit, Inc. provided revolving credit secured by a prior, perfected security interest in substantially all of the debtor’s assets, including inventory and proceeds.
- Galey & Lord, Inc. sold textile goods to the debtor on credit in the ordinary course.
- Before the bankruptcy filings, Galey sent a written demand to reclaim goods delivered within the prior ten days, asserting seller reclamation rights under U.C.C. § 2-702.
- The debtors filed Chapter 11 petitions, later sold operating assets as a going concern, and the proceeds of collateral subject to the CIT lien were applied to reduce CIT’s secured claim.
- The cases were converted to Chapter 7; the trustee was appointed.
- Galey commenced an adversary proceeding seeking return of goods or their value and moved for summary judgment; it also sought alternative relief (administrative expense, replacement lien, and marshaling).

## Issues

1. Whether a reclaiming seller has an effective remedy under U.C.C. § 2-702 and Bankruptcy Code § 546(c) when the goods and proceeds are subject to, and exhausted by, a prior perfected inventory lender’s floating lien.
2. Whether § 546(c) permits substitute relief—an administrative expense claim, replacement lien, or marshaling—when reclamation is subordinate and yields no value.

## Decision

- The court denied Galey’s requested effective reclamation recovery because CIT’s prior perfected security interest had priority over reclamation.
- The court treated CIT, as a prior perfected floating-lien inventory lender, as a “good faith purchaser” whose rights defeated the seller’s reclamation claim.
- Because the collateral and proceeds were applied to satisfy CIT’s secured claim, the seller’s reclamation right was economically valueless.
- The court denied substitute remedies, including an administrative expense claim, replacement lien, and marshaling.

## Legal Principles

- Bankruptcy Code § 546(c) preserves applicable state-law reclamation rights; it does not create or expand reclamation beyond what nonbankruptcy law provides.
- Under U.C.C. § 2-702, a seller’s reclamation right is subordinate to the rights of a buyer in ordinary course or other good faith purchaser; a prior perfected inventory security interest may qualify as such a superior right.
- A reclaiming seller can recover only to the extent the debtor retains an interest in the goods or proceeds after satisfaction of superior liens; when senior secured debt absorbs the value, reclamation may provide no recovery.
- A seller cannot convert a valueless reclamation right into administrative priority, a replacement lien, or equitable marshaling to shift value from a senior secured creditor.

## Conclusion

The bankruptcy court held that the seller’s timely reclamation demand did not produce recoverable value because the goods and proceeds were subject to, and consumed by, a senior perfected inventory lien, and § 546(c) did not authorize administrative priority, a replacement lien, or marshaling as a substitute for unsuccessful reclamation.


Galey & Lord, Inc. v. Arley Corp. (In re Arlco, Inc.), 239 B.R. 261 (Bankr. S.D.N.Y. 1999)