Bankruptcy – Reclamation Claim

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7^th Circuit Court of Appeals

Case Name: Whirlpool Corporation v. Wells Fargo Bank, National Association, et al.

Case No.: 18-3363

Officials: SYKES, HAMILTON, and SCUDDER, Circuit Judges.

Focus: Bankruptcy – Reclamation Claim

This is an appeal from an adversary proceeding in a Chapter 11 bankruptcy and concerns a trade creditor’s right to reclaim goods it sold to the debtor on the eve of bankruptcy. The question is whether the seller’s reclamation claim is superior to the claims of secured lenders—more specifically, the lenders that extended debtor-inpossession financing in exchange for a priming, first-priority floating lien on existing and after-acquired inventory. The debtor is appliance retailer hhgregg, Inc. Whirlpool Corporation, a longtime supplier, delivered appliances to hhgregg during the period just before the bankruptcy filing. Wells Fargo Bank, as administrative agent for several lenders, extended operating financing to hhgregg in the years leading up to the bankruptcy. Under the prepetition credit agreement, Wells Fargo’s advances were secured by a first priority floating lien on nearly all of hhgregg’s assets, including existing and after-acquired inventory and its proceeds.

In the first 24 hours of the Chapter 11 proceeding, hhgregg sought the court’s approval for $80 million in debtor-in-possession (“DIP”) financing, with Wells Fargo now acting as administrative agent for a group of postpetition lenders. The DIP financing agreement authorized a “creeping roll-up” of the secured lenders’ prepetition debt and gave Wells Fargo a priming, first-priority floating lien on substantially all of hhgregg’s assets, including existing and after-acquired inventory and its proceeds. The bankruptcy judge approved the DIP financing that same day. Three days later Whirlpool sent a reclamation demand to hhgregg seeking the return of appliances it had delivered in the 45-day period before the bankruptcy petition. Whirlpool later filed an adversary action against Wells Fargo seeking a declaration that its reclamation claim is first in priority as to the reclaimed goods. Wells Fargo moved to dismiss. The bankruptcy judge treated the motion as one for summary judgment and entered final judgment for Wells Fargo. The district court affirmed.

We likewise affirm. Reclamation is a limited in rem remedy that permits a seller to recover possession of goods delivered to an insolvent purchaser—subject, however, to significant temporal, procedural, and substantive restrictions. It is not the same as a purchase money security interest. The remedy appears in Article 2 of the Uniform Commercial Code—not Article 9—and is codified in the relevant state’s version of U.C.C. § 2-702. Within bankruptcy a reclamation claim is governed by 11 U.S.C. § 546(c).

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA” or “the 2005 amendments”) made important changes to § 546(c). Before BAPCPA most bankruptcy courts applied a “prior lien defense” drawn from the U.C.C.’s substantive limitations on the reclamation remedy, subordinating the seller’s reclamation claim to a secured lender’s floating lien on the debtor’s inventory. The 2005 amendments adopted that norm as a federal priority rule: under BAPCPA a seller’s right to reclaim goods is “subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof.” § 546(c).

Wells Fargo, as agent for the postpetition lenders, holds a priming, first-priority lien on hhgregg’s existing and after acquired inventory and its proceeds under the DIP financing agreement, approved by the court in the first 24 hours of the Chapter 11 proceeding. By operation of § 546(c), Whirlpool’s later-in-time reclamation demand is “subject to” Wells Fargo’s prior rights as a secured creditor, so its reclamation claim is subordinate to the DIP financing lien.

Affirmed

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Derek A Hawkins is trademark corporate counsel for Harley-Davidson. Hawkins oversees the prosecution and maintenance of the Harley-Davidson’s international trademark portfolio in emerging markets.