## Facts

- Emery Corporation operated as a Chapter 11 debtor and had granted lenders perfected security interests in its inventory and after-acquired property.
- Lavonia Manufacturing Company sold and delivered yarn to Emery on open credit for approximately $10,490.24 on March 1, 1983.
- Emery filed a voluntary Chapter 11 petition on March 3, 1983, shortly after receiving the goods.
- Lavonia sent Emery a written reclamation demand for the yarn within 10 days after Emery’s receipt of the goods.
- The parties did not dispute that Emery was insolvent at delivery or that Lavonia’s demand was timely.
- The dispute centered on whether Lavonia’s reclamation rights could be enforced against goods subject to the secured lenders’ prior perfected floating liens.

## Issues

1. Whether an unpaid seller who delivered goods to an insolvent buyer and made a timely written demand had a reclamation right under U.C.C. § 2-702 as preserved by 11 U.S.C. § 546(c).
2. Whether that reclamation right could take priority over, or be enforced to the detriment of, secured creditors with prior perfected security interests in inventory and after-acquired property.
3. If turnover was unavailable because of secured creditors’ superior rights, whether the court should grant an alternative remedy under § 546(c), such as a lien or administrative expense priority.

## Decision

- The court held Lavonia established a prima facie reclamation right because the goods were delivered while Emery was insolvent and Lavonia made a timely written demand.
- The court held Lavonia’s reclamation right was subordinate to the secured creditors’ prior perfected inventory and after-acquired property liens.
- The court denied physical reclamation/turnover of the yarn because the goods were fully encumbered and turnover would impair the secured creditors’ collateral position.
- The court granted Lavonia alternative relief authorized by § 546(c) (a lien or administrative priority), subordinate to the secured creditors’ interests.

## Legal Principles

- A seller may reclaim goods delivered on credit to an insolvent buyer if the seller makes a written demand within 10 days of the buyer’s receipt, but the right is limited by the rights of good-faith purchasers and secured parties under applicable commercial law.
- Section 546(c) preserves a seller’s nonbankruptcy reclamation right against the debtor’s estate, but does not guarantee return of goods when superior third-party rights exist.
- A reclaiming seller’s rights are generally junior to a secured creditor’s prior perfected security interest in the debtor’s inventory and after-acquired property.
- When reclamation in kind would prejudice secured creditors with superior rights, a bankruptcy court may deny turnover and instead award the seller a substitute remedy permitted by § 546(c), such as a lien or administrative expense priority.

## Conclusion

The court recognized the seller’s timely reclamation right but refused to order return of goods subject to prior perfected inventory liens, limiting the seller to substitute relief under § 546(c) that did not disturb secured creditors’ priority.


In re Emery Corp., 38 B.R. 489 (Bankr. E.D. Pa. 1984)