Whirlpool Corp. v. hhgregg, Inc. (In re hhgregg, Inc.)
578 B.R. 814 (2017)
Rule of Law:
Under 11 U.S.C. § 546(c)(1) as amended by BAPCPA, a seller's reclamation claim against a debtor's goods in bankruptcy is explicitly subordinate to the prior rights of a holder of a security interest in those goods, without requiring an inquiry into whether the secured creditor acted in 'good faith' or qualifies as a 'good faith purchaser' under state UCC provisions.
Facts:
- hhgregg, Inc. (Debtor) operated 220 brick-and-mortar retail stores in 20 states, selling home appliances, electronics, and related services.
- Whirlpool Corporation sold goods (the 'Whirlpool Goods') to hhgregg in the ordinary course of business during the 45 days preceding hhgregg's bankruptcy filing.
- Prior to its bankruptcy filing, hhgregg had a revolving credit facility with Wells Fargo Bank, which held first priority floating liens on substantially all of hhgregg’s assets, including existing and after-acquired inventory and the proceeds thereof.
- hhgregg filed for voluntary Chapter 11 bankruptcy on March 6, 2017.
- On March 10, 2017, Whirlpool sent a written demand to hhgregg for reclamation of the Whirlpool Goods, and later filed an adversary proceeding seeking their return or proceeds.
- After the bankruptcy filing, Wells Fargo and GACP Finance Co., LLC (the 'DIP Lenders') provided debtor-in-possession (DIP) financing, for which they were granted 'priming first priority' liens on virtually all of hhgregg’s assets, including existing and after-acquired inventory, effective as of the Petition Date.
- The DIP financing was used to repay hhgregg's outstanding indebtedness to Wells Fargo under the prepetition agreement and to finance hhgregg's ongoing post-petition operations.
- hhgregg eventually sold its inventory, including the Whirlpool Goods, as part of its unsuccessful reorganization efforts.
Procedural Posture:
- Debtors hhgregg, Inc., Gregg Appliances, Inc., and HHG Distributing, LLC filed voluntary Chapter 11 petitions in the United States Bankruptcy Court on March 6, 2017.
- Whirlpool Corporation initiated an adversary proceeding by filing a Verified Complaint for Declaratory and Other Relief against Wells Fargo Bank, National Association, and other defendants in the United States Bankruptcy Court, seeking the return of its goods or their proceeds.
- Wells Fargo Bank, National Association, joined by GACP Finance Co., LLC (DIP Lenders), filed a motion to dismiss Whirlpool's complaint pursuant to Federal Rule of Bankruptcy Procedure 7012 and Federal Rule of Civil Procedure 12(b)(6).
- The United States Bankruptcy Court, noting that matters outside the pleadings were presented, converted Wells Fargo's motion to dismiss into a motion for summary judgment under Federal Rule of Civil Procedure 56(c), applicable via Federal Rule of Bankruptcy Procedure 7056, and directed the parties to file supplemental briefs.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the 2005 amendment to 11 U.S.C. § 546(c)(1) render a seller's reclamation claim subordinate to a secured creditor's prior floating liens on the debtor's assets, irrespective of whether the secured creditor qualifies as a 'good faith purchaser' under UCC § 2-702?
Opinions:
Majority - Jeffrey J. Graham
Yes, the 2005 amendment to 11 U.S.C. § 546(c)(1) renders a seller's reclamation claim subordinate to a secured creditor's prior floating liens on the debtor's assets, without requiring an inquiry into whether the secured creditor acted in 'good faith' or qualifies as a 'good faith purchaser' under state law. The court found that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) significantly altered the treatment of reclamation claims in bankruptcy by amending § 546(c)(1) to explicitly state that such claims are 'subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof.' This amendment eliminated the need to determine if a secured lender was a 'good faith purchaser' under UCC § 2-702, making the only relevant inquiry whether the secured creditors (Wells Fargo and the DIP Lenders) had a valid security interest in the goods that arose prior to the reclamation claim. The court determined that Wells Fargo maintained an unbroken chain of liens, initially through its prepetition credit agreement and subsequently through the DIP financing and replacement liens, all of which were perfected prior in time to Whirlpool’s reclamation demand. Therefore, Whirlpool’s reclamation claim was subordinate to the prior security interests of Wells Fargo and the DIP Lenders. The court also held that 'savings' provisions in the DIP and Sale Orders, while preserving UCC § 2-702 rights, explicitly made those rights subject to § 546(c), thus doing nothing to elevate Whirlpool’s rights above those of the secured creditors.
Analysis:
This case clarifies the definitive impact of the BAPCPA 2005 amendments to 11 U.S.C. § 546(c)(1), firmly establishing the subordination of reclamation claims to prior security interests in bankruptcy. The ruling effectively removes any ambiguity regarding the 'good faith purchaser' doctrine from state UCC § 2-702 in federal bankruptcy proceedings concerning reclamation, simplifying the inquiry to one of temporal priority of liens. This decision significantly strengthens the position of secured creditors with floating liens, providing greater certainty that their security interests will prime reclamation demands, even if the prepetition debt is rolled into a post-petition DIP financing arrangement, so long as the lien chain remains unbroken. This could impact future cases by reducing litigation over secured creditors' good faith in reclamation disputes and by reinforcing the importance for sellers to consider the secured debt landscape of their buyers.
