Whirlpool v. Wells Fargo Bank (In re HHGregg)

The 2005 amendments to Section 546(c) departed from state law under UCC § 2-702 by creating a federal rule making reclamation claims subordinate to existing secured claims and DIP financing.

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Case Status:
18-3363 (7th Circuit, Feb 11,2020) Published
A reclamation claim made under UCC § 2-702 and 11 U.S.C. § 546(c) does not give rise to a purchase money security interest, and is inferior to a previously perfected floating lien on the assets that are the subject of the reclamation claim.
Procedural context:
Prior to filing bankruptcy, appliance retailer hhgregg obtained financing from Wells Fargo secured by a first priority floating lien on all inventory. Shortly following hhgregg’s chapter 11 filing, Whirlpool delivered a reclamation demand for the return of appliances it had delivered in the 45 days prior to hhgregg’s bankruptcy filing and later filed an adversary proceeding seeking a determination of the superiority of its interest in the reclaimed goods. Wells Fargo filed a motion to dismiss the adversary proceeding, which the court treated as a motion for summary judgment and granted. The district court affirmed, and Whirlpool appealed.
Important to the court’s analysis was (i) the limited nature of the reclamation right and (ii) the 2005 amendments to section 546(c) that removed any prior ambiguities of the priority of that right relative to others. As the court observed, the reclamation right is “a limited in rem remedy that permits a seller to recover possession of goods…It is not the same as a purchase money security interest.” The right of reclamation has strict temporal requirements (both in when it must be asserted and how far it can reach back to reclaim prior deliveries) and—at least as codified under the UCC—is subject to the rights of a “good faith purchaser.” Prior to 2005, the phrasing of this latter requirement required courts to make an express finding that the intervening holder of a prior perfected floating lien was itself a good faith purchaser. Under BAPCPA, however, section 546(c) was amended to make a seller’s right to reclaim goods expressly “subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof.” This change made reclamation claims like that asserted by Whirlpool explicitly subordinate to the rights of a holder of a prior perfected lien on those same goods.
Sykes, Hamilton, and Scudder

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