## Facts

- Victory Markets, Inc., a grocery/retail business, bought goods from Imperial Distributors, Inc. on trade credit in the ordinary course, totaling $101,985.45.
- Imperial delivered the goods shortly before Victory filed for Chapter 11 relief on September 20, 1995, without having been paid.
- On September 20, 1995, within 10 days of delivery and after learning of the bankruptcy filing, Imperial sent Victory a written demand to reclaim the goods under U.C.C. § 2-702 and 11 U.S.C. § 546(c).
- Victory’s inventory, including the delivered goods, was subject to prior perfected floating liens held by two secured lenders.
- Imperial sought allowance and payment of an administrative expense claim under 11 U.S.C. § 503(b), relying on its asserted reclamation rights; Victory opposed, arguing the prior liens made reclamation ineffective and left Imperial unsecured.

## Issues

1. Whether a seller’s timely reclamation demand under U.C.C. § 2-702 and 11 U.S.C. § 546(c) is effective when the debtor’s inventory is subject to prior perfected floating liens.
2. Whether, if reclamation is defeated or rendered valueless by prior liens, the seller is entitled to an administrative expense claim (or other priority substitute) for the value of the goods.

## Decision

- The court denied Imperial’s request for an administrative expense claim.
- The court treated Imperial’s claim as a general unsecured claim rather than granting § 503(b) priority.
- The court accepted that Imperial’s reclamation demand was timely and procedurally proper, but held the right was subordinate to the secured lenders’ prior perfected inventory liens.
- Because the secured liens fully encumbered the inventory value, Imperial’s reclamation interest had no realizable value and could not support substitute priority relief.

## Legal Principles

- Reclamation rights under U.C.C. § 2-702 and 11 U.S.C. § 546(c) are subject to the prior rights of secured creditors holding perfected security interests in the goods or their proceeds.
- A timely written reclamation demand does not create priority over preexisting perfected inventory liens; if those liens exhaust the goods’ value, the reclamation right is economically valueless.
- Section 546(c) permits a court to deny physical reclamation and instead grant an administrative expense priority or lien only to the extent the seller has a meaningful reclamation interest after accounting for prior liens.
- Bankruptcy courts will not award administrative expense priority merely because a reclamation demand was made where doing so would disrupt the Bankruptcy Code’s priority scheme and the secured creditors’ superior rights.

## Conclusion

The court held that although Imperial made a timely reclamation demand, prior perfected floating liens on Victory’s inventory left no residual value in the goods, so Imperial could not obtain an administrative expense substitute and remained a general unsecured creditor.


In re Victory Markets, Inc., 212 B.R. 738 (Bankr. N.D.N.Y. 1997)