## Facts

- Emery Corporation (buyer) had executed and properly filed security agreements granting First Pennsylvania Bank, Edward Schmauder, and Lennox K. Black perfected security interests in Emery’s inventory, including after-acquired inventory.
- On March 1, 1983, Lavonia Manufacturing Company (seller) delivered twenty-one cases of polyester yarn to Emery and invoiced $10,490.24.
- On March 3, 1983, Emery filed a voluntary Chapter 11 petition.
- On March 4, 1983, Lavonia demanded return of the yarn by letter; Emery received the demand on March 7, 1983 and refused to return the goods.
- Emery owed the secured creditors more than the invoice amount.
- The bankruptcy court held Lavonia could reclaim under 13 Pa. C.S.A. § 2702 and that the reclamation right had priority over the secured creditors’ perfected after-acquired inventory interests.
- Emery appealed; the district court reviewed whether the secured creditors qualified as “good faith purchasers” defeating reclamation.

## Issues

1. Whether, under 13 Pa. C.S.A. § 2702 (UCC § 2-702), an unpaid seller’s right to reclaim goods delivered to an insolvent buyer is subordinate to previously perfected secured creditors holding after-acquired inventory security interests.
2. Whether such secured creditors are “good faith purchasers” within the meaning of § 2702(3), notwithstanding that their financing and perfection predated the seller’s delivery and reclamation demand.

## Decision

- The district court reversed the bankruptcy court.
- The court held the secured creditors were “good faith purchasers” under the Pennsylvania UCC, so Lavonia’s reclamation right was subordinate to their perfected security interests.
- The court rejected the bankruptcy court’s view that a secured creditor is a “purchaser” for § 2702(3) only to the extent it gives new value after delivery but before reclamation demand.

## Legal Principles

- Under 13 Pa. C.S.A. § 2702, a seller’s reclamation right is subject to the rights of a buyer in ordinary course or other good faith purchaser.
- Under the UCC definitions (13 Pa. C.S.A. § 1201), “purchase” includes taking by security interest; a secured creditor who takes a security interest is a “purchaser.”
- A perfected security interest with an after-acquired inventory clause attaches to goods when the debtor acquires them, and such attachment can qualify the secured creditor as a purchaser of those goods for § 2702(3).
- “Good faith” for these purposes is honesty in fact in the transaction concerned; absent evidence of bad faith, perfected secured creditors are treated as acting in good faith.
- Courts should not add a temporal “new value after delivery” limitation to § 2702(3) where the statutory text and definitions contain no such restriction, particularly when doing so would disrupt secured-credit priority rules governing inventory financing.

## Conclusion

The district court held that an unpaid seller’s reclamation right under Pennsylvania UCC § 2702 does not defeat the rights of previously perfected secured creditors with after-acquired inventory interests because those creditors are good faith purchasers whose security interests take priority.


Lavonia Mfg. Co. v. Emery Corp., 52 B.R. 944 (E.D. Pa. 1985)