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In re Arlco, Inc. | 239 B.R. 261 (1999)

Reclamation refers to the legal right of a seller to recapture goods it sold to a buyer. This right often arises when a seller has shipped goods to a buyer and subsequently discovers that the buyer is insolvent. In the case of In re Arlco, we consider whether a seller’s right of reclamation was valid against a secured creditor with rights to the same goods.

Arley Corporation was a home furnishings manufacturer and wholesaler. Home Fashions Outlet, Arley’s wholly owned subsidiary, was a retailer.

Since early 1995, CIT Group held a perfected security interest in Arley’s assets, including its inventory. In 1997, Galey & Lord, Incorporated, sold textiles to Arley. In May, Galey sent a letter to Arley, demanding that Arley return the textiles subject to Galey’s right of reclamation.

In June, Arley and Home Fashions filed for Chapter 11 bankruptcy. As part of an initial plan approved by the bankruptcy court, Arley became Arlco, and Home Fashions became HFO. However, the court later converted the case to Chapter 7 and appointed a trustee.

Galey commenced an adversary proceeding seeking reclamation of the textiles. The bankruptcy trustee, on Arley’s behalf, argued that Galey’s right to reclamation was subject to CIT’s perfected security interest.

Galey and the trustee both moved for summary judgment. The bankruptcy court considered the motions.

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