## Facts

- Dana Corporation and about 40 subsidiaries filed Chapter 11 petitions on March 3, 2006.
- Dana’s prepetition secured lenders held perfected blanket liens on substantially all assets, including inventory and proceeds, securing about $381 million.
- Numerous vendors asserted reclamation demands for goods delivered shortly before the petition date; twenty-four trade creditors objected to Dana’s valuation motion.
- Postpetition, Dana obtained DIP financing that paid off and refinanced the prepetition secured debt and granted the DIP lenders replacement liens on substantially the same collateral, including inventory.
- Dana moved to value certain reclamation claims at zero on the ground that any reclamation rights were junior to secured liens that exhausted all inventory value.

## Issues

1. Whether reclamation claims under Bankruptcy Code § 546(c) have realizable value when the goods are subject to a prior perfected blanket lien that exceeds the value of the inventory.
2. Whether BAPCPA’s 2005 amendments to § 546(c) created an independent federal reclamation right that is not subordinate to prior floating liens or replacement DIP liens.
3. Whether payoff of prepetition secured debt with DIP financing eliminates the prior-lien barrier such that reclamation rights regain value.

## Decision

- The court granted the debtors’ motion and valued the contested reclamation claims at zero.
- The court held that reclamation rights were subordinate to the secured lenders’ liens on inventory and proceeds, leaving no residual value for reclaiming sellers.
- The court held that BAPCPA expanded timing and procedures for reclamation demands but did not alter the priority of reclamation rights relative to prior secured creditors.
- The court rejected the argument that paying off prepetition debt “freed” inventory from liens, concluding the DIP replacement liens continuously encumbered the inventory.

## Legal Principles

- Section 546(c) preserves only those reclamation rights available under applicable nonbankruptcy law and limits them in bankruptcy; it does not create a standalone federal right of reclamation.
- Reclamation is an in rem remedy that is effective only to the extent the goods (or proceeds) are not subject to superior rights, including prior perfected security interests.
- A reclaiming seller’s recovery is limited to any residual equity in the goods after satisfaction of prior liens; if the inventory is fully encumbered, the reclamation claim may be valued at zero.
- Replacement liens granted to DIP lenders can maintain continuous senior encumbrances on inventory, preventing reclamation claimants from obtaining value despite payoff of prepetition secured debt.

## Conclusion

The court determined that the objecting vendors’ reclamation rights had no realizable value because Dana’s inventory and proceeds were continuously subject to senior prepetition and DIP replacement liens that exceeded the inventory’s value, and the BAPCPA amendments to § 546(c) did not elevate reclamation above prior secured interests.


In re Dana Corp., 367 B.R. 409 (Bankr. S.D.N.Y. 2007)