The Delaware bankruptcy court has ruled that a creditor’s reclamation rights survive a lender’s security interest when the proceeds from that lender’s post-petition loan are used to repay a debtor’s pre-petition loan.
The case — In re Reichhold Holdings US Inc. — involved a North Carolina manufacturing company (Reichhold) that filed Chapter 11 bankruptcy in 2014. Reichhold had an outstanding pre-petition loan with Oaktree Capital Management, L.P., which held a blanket lien on almost all Reichhold assets. After filing bankruptcy, Reichhold obtained a post-petition loan (known as a debtor-in-possession or DIP loan) that was secured by a first priority lien on all pre- and post-petition property and used the DIP loan to repay Oaktree.
Following Reichhold’s Chapter 11 filing, one of its suppliers, Covestro LLC, sent a written reclamation demand to Reichhold. Reichhold claimed that the reclamation demand had no value once the pre-petition loan was repaid by the DIP loan.
The Delaware bankruptcy court considered whether the pre- and post-petition loans were related and concluded that they were separate transactions. The court found that the repayment of the pre-petition loan with proceeds from the DIP loan did not affect Covestro’s reclamation rights, noting that the DIP loan’s first priority lien did not attach to property that was “subject to valid, perfected and non-avoidable liens or to valid liens in existence as of the Petition Date that are subsequently perfected as permitted by section 546(b) of the Bankruptcy Code.”
In addition, the court emphasized, “Covestro’s reclamation rights arose before the DIP Lenders’ security interest attached, and the DIP Lenders’ lien was expressly subject to reclamation rights under section 546.”
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