On August 24, 2016, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware (the “Court”) issued an opinion and order overruling an objection by the liquidating trustee (the “Trustee”) of Reichold Holdings US, Inc. et al., (the “Debtor”) to the administrative reclamation claim of Covestro LLC (“Covestro”). In re: Reichold Holdings US, Inc. et al., Case no. 14-12237. In the opinion, the Court addressed a split in authority in other courts concerning whether a post-petition secured lender’s rights in inventory, although granted after a creditor’s reclamation rights arose, relate back to a prepetition secured lender’s rights in inventory when the debtor-in-possession loan repays the prepetition loan and found that the post-petition lien does not relate back. Compare In re Dana Corp., 367 B.R. 409, 420 (Bankr. S.D.N.Y. 2007) (quoting In re Dairy Mart Convenience Stores, Inc., 302 B.R. 128 (Bankr. S.D.N.Y. 2003) (the lien relates back) and In re Phar-Mor, 301 B.R. 482, 498 (Bankr. N.D. Ohio 2003), aff’d 534 F.3d 502, 506-07 (6th Cir. 2008) (the lien does not relate back).
The Debtor filed a chapter 11 bankruptcy petition on September 30, 2014. At the time of filing, the Debtor was a borrower under a prepetition credit facility (the “Prepetition Loan”) with Oaktree Capital Management, L.P. (the “Prepetition Lender”) secured by a lien on substantially all of the Debtor’s assets, including inventory. Three days later, on October 2, 2014, the Court entered an interim order authorizing the Debtor (i) to obtain post-petition financing (the “DIP Loan”) from a group of lenders (the “DIP Lenders”) secured by a first priority lien on all prepetition and post-petition collateral, including inventory, and (ii) to repay the Prepetition Loan from the proceeds of the DIP Loan. The first priority lien, however, did not attach to property that was subject to valid liens, perfected at the time or subsequent to the petition date.
Within days of the bankruptcy filing, on October 3, 2014, Covestro delivered a written reclamation demand to the Debtor and on December 14, 2014 it filed a proof of claim in the amount of $965,248.14. The claim was latter reduced to reflect two payments made by the Debtor to satisfy the 503(b)(9) portion of the claim for goods delivered within 20 days of the petition date, but not the balance. On October 1, 2015, Covestro filed a proof of claim (the “Reclamation Claim”) seeking $411,781.72 as an administrative expense related to goods delivered to the Debtor between 21 and 45 days of the bankruptcy filing.
The Trustee objected to the Reclamation Claim asserting that the Prepetition Loan and the DIP Loan were integrated transactions and that the DIP Lender’s security interest in the inventory should relate back to that of the Prepetition Lender and have priority over Covestro’s reclamation rights. Covestro maintained that the DIP Lender’s floating lien on the Debtor’s inventory did not constitute an assumption of the Prepetition Lender’s liens, but was an entirely new lien that did not defeat Covestro’s intervening reclamation rights. The Court agreed with Covestro concluding that Covestro’s reclamation rights arose before the DIP Lenders’ security interest attached to inventory and the DIP Lenders’ lien was expressly subject to the reclamation rights under section 546 of the Bankruptcy Code. The Court observed that the rational for relating the post-petition liens back to the prepetition liens in Dairy Mart and Dana Corp. was too much of a stretch, particularly in this dispute; finding that the repayment of the Prepetition Loan from the DIP Loan was not repayment from the sale of Covestro’s goods. Those goods were not sold and their proceeds were not paid to the Prepetition Lender. Moreover the DIP Loan and the Prepetition Loan were not an integrated transaction. They were two different loans with different lenders at two different times, and because Covestro’s reclamation rights arose before the DIP Lenders had any rights in the inventory, the DIP Lenders rights do not have priority under section 546(c) of the Bankruptcy Code.
A copy of the Court’s opinion is available here.