Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-18-03363/USCOURTS-ca7-18-03363-0/pdf.json

Parties Involved:
GACP Finance Co., LLC
Appellee
Wells Fargo Bank, N.A.
Appellee
Whirlpool Corporation
Appellant
hhgregg, Inc.

Document Text:

In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 18-3363

IN RE:

HHGREGG, INC., et al.,

Debtors.

WHIRLPOOL CORPORATION,

Plaintiff-Appellant,

v.

WELLS FARGO BANK, NATIONAL ASSOCIATION,

and GACP FINANCE CO., LLC,

Defendants-Appellees.

____________________

Appeal from the United States District Court for the

Southern District of Indiana, Indianapolis Division.

No. 1:17-cv-4662-WTL-TAB — William T. Lawrence, Judge.

____________________

ARGUED SEPTEMBER 5, 2019 — DECIDED FEBRUARY 11, 2020

____________________

Before SYKES, HAMILTON, and SCUDDER, Circuit Judges.

SYKES, Circuit Judge. 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 

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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.1 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 firstpriority 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 

1 The bankruptcy proceeding involves three related hhgregg companies. 

We refer to them collectively as “hhgregg.” 

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No. 18-3363 3

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 afteracquired 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 

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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.

I. Background

In March 2011 Wells Fargo, as administrative and collateral agent for a consortium of financial institutions, entered 

into a loan and security agreement with hhgregg to provide

the retailer with operating credit. The security agreement 

gave Wells Fargo a first-priority, floating lien on nearly all of

hhgregg’s assets, including existing and after-acquired 

inventory and its proceeds. This security interest was valid, 

perfected, and enforceable, so Whirlpool’s subsequent 

deliveries to hhgregg were made subject to Wells Fargo’s

lien.

On March 6, 2017, hhgregg petitioned for Chapter 11 

bankruptcy in the Southern District of Indiana. As of the 

petition date, hhgregg owed Wells Fargo at least $66 million

under the prepetition credit facility. That same day hhgregg 

entered into an agreement with Wells Fargo to obtain DIP 

financing. The agreement was similar in form and function 

to the prepetition credit facility. Wells Fargo, as agent for a 

group of postpetition lenders,2 agreed to extend $80 million 

in DIP financing in return for a priming, first-priority security interest on substantially all of hhgregg’s assets, including 

existing and after-acquired inventory and its proceeds.

2 GACP Finance Co., LLC, as agent for certain first-in last-out lenders, is 

also a party to the DIP financing agreement and a defendant in this 

adversary action. Because the interests of the two financial institutions 

align and they have proceeded jointly on appeal, we refer to them 

together as “Wells Fargo.” 

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No. 18-3363 5

DIP financing is crucial to a Chapter 11 debtor because it 

provides desperately needed operating cash during the

reorganization bankruptcy process. But lending to a company in bankruptcy necessarily carries high risk, so a DIP 

lender requires special security. A bankruptcy judge may

approve a debtor’s grant of a senior lien to a DIP lender 

provided the judge determines that the debtor is unable to 

obtain other financing and the interests of preexisting 

lienholders will be adequately protected. See 11 U.S.C. 

§ 364(d). Since postpetition financing is so valuable and 

difficult to obtain, a bankruptcy judge can authorize a debtor 

to grant a DIP lender a priming, first-priority lien—a lien

that leapfrogs over preexisting liens to top priority. Id.

Early on March 7, hhgregg moved for interim approval 

of the March 6 DIP financing agreement. The bankruptcy 

judge granted the motion that same day. The judge’s interim 

order implemented the March 6 DIP financing agreement 

and gave Wells Fargo a comprehensive, super-priority 

security interest in hhgregg’s assets, subordinating its prepetition lien. More to the point here, Wells Fargo obtained a 

“priming first priority, continuing, valid, binding, enforceable, non-avoidable, and automatically perfected” lien on 

hhgregg’s assets, including existing and after-acquired 

inventory and its proceeds. The lien was “effective immediately upon the entry of this Interim Order” and is “senior 

and superior in priority to all other secured and unsecured 

creditors.” The DIP financing order also authorized a “creeping roll-up” of the prepetition lenders’ secured debt.

Upon entry of the interim order, the DIP lenders immediately funded their $80 million loan obligations. On May 2,

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following notice and hearings, the bankruptcy judge entered 

a final order approving the DIP financing.

Before the bankruptcy filing, Whirlpool delivered home 

appliances to hhgregg on credit for resale in its retail stores. 

On March 10, 2017—three days after entry of the interim 

order approving the DIP financing—Whirlpool sent a reclamation demand seeking the return of approximately 

$16.3 million of unpaid inventory delivered to hhgregg in 

the 45-day period before the petition date. Whirlpool later 

filed a limited objection to the interim DIP order alerting the 

court to its reclamation demand and citing § 546(c). Meanwhile, the reorganization plan called for hhgregg to sell

existing inventory—including the Whirlpool reclaimed 

goods—and apply the proceeds to the prepetition debt owed 

to Wells Fargo.

In April Whirlpool filed an adversary complaint against 

hhgregg and Wells Fargo seeking a declaration that its 

reclamation claim was first in priority as to the reclaimed 

goods. Among other things, the complaint alleged that Wells 

Fargo had not acted in good faith because it knew hhgregg 

was insolvent and yet continued to provide financing, 

allowing hhgregg to acquire additional inventory from 

suppliers like Whirlpool in order to expand Wells Fargo’s 

own collateral base.

Events in the bankruptcy unfolded quickly. Reorganization proved unsuccessful, and on April 7, May 10, and 

May 17, the bankruptcy judge entered orders authorizing 

hhgregg to sell its inventory—including the Whirlpool 

goods—in going-out-of-business sales. Whirlpool objected to 

the sale of the reclaimed goods. To facilitate the proposed 

liquidation, the judge’s April 7 sale order reserved 

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No. 18-3363 7

Whirlpool’s reclamation claim, which was “deemed to attach 

to any proceeds of Whirlpool Goods” but “with the same 

validity, defects and priority, and/or lack of any of the 

foregoing” as before the order. By the time of the court’s 

May 2 final approval of the DIP financing, the prepetition 

secured debt was paid in full pursuant to the “final roll-up” 

specified in the interim DIP financing order, extinguishing 

Wells Fargo’s prepetition lien.

On May 18 Wells Fargo moved to dismiss Whirlpool’s 

adversary complaint, relying in part on the contents of the 

final DIP financing order. The bankruptcy judge was uncertain about the extent to which he could take judicial notice of 

factual material contained within his prior orders, so he 

treated Wells Fargo’s motion as one for summary judgment

and gave the parties an opportunity to supplement their 

submissions as required by Rule 12(d) of the Federal Rules

of Civil Procedure (incorporated by Rule 7012 of the Federal 

Rules of Bankruptcy Procedure). Hhgregg, for its part,

answered Whirlpool’s complaint and asserted counterclaims.

After reviewing the supplemental submissions, the judge

entered summary judgment for Wells Fargo. He began by 

tracing the interplay between U.C.C. § 2-702, which governs 

reclamation claims outside bankruptcy, and 11 U.S.C. 

§ 546(c), which governs reclamation claims within bankruptcy. Under section 2-702 a seller’s right to reclaim goods 

delivered to an insolvent purchaser has strict temporal and 

procedural requirements and as a substantive matter is

“subject to the rights of a buyer in ordinary course or other 

good faith purchaser.” U.C.C. § 2-702(3) (AM. LAW INST. &

UNIF. LAW COMM’N 1966); IND. CODE § 26-1-2-702(3) (as 

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adopted in Indiana). The judge noted that “[m]any [bankruptcy] courts have treated the holder of a prior perfected, 

floating lien on inventory as a ‘good faith purchaser’ for 

purposes of [section] 2-702(3), largely relying on the definition[s] of ‘purchase’ and ‘purchaser’” in the U.C.C. In re 

hhgregg, Inc., 578 B.R. 814, 818 (Bankr. S.D. Ind. 2017) (citing 

In re Arlco, Inc., 239 B.R. 261, 267–68 (Bankr. S.D.N.Y. 1999) 

(collecting cases)).

As the judge explained, the 2005 amendments to the 

Bankruptcy Code made that type of analysis obsolete: the 

revised § 546(c) expressly makes a seller’s reclamation right

“subject to the prior rights of a holder of a security interest in 

such goods or the proceeds thereof.” The judge reasoned 

that “[a]s amended [in 2005], § 546(c) explicitly renders an 

otherwise valid reclamation claim under state law subordinate to a secured creditor’s prior lien rights—without reference or resort to the [U.C.C.] to ascertain whether the 

secured creditor is a good faith purchaser.” Id. at 819.

Applying this understanding, the judge held that Wells 

Fargo’s “lien chain ... remains unbroken and prior to 

Whirlpool’s reclamation demand.” Id. at 820. Before and on 

the March 6 petition date, Wells Fargo held a first-priority, 

perfected floating lien on hhgregg’s assets pursuant to the 

prepetition credit facility. By the terms of the court’s March 7 

DIP financing order, Wells Fargo obtained a priming, firstpriority, perfected lien on hhgregg’s assets, effective immediately. Id. So “[w]hen Whirlpool made its reclamation 

demand[,] the Whirlpool Goods were encumbered by the 

DIP Lenders’ and Wells Fargo’s prior interests.” Id. Because 

a reclamation demand is “subject to” the prior rights of 

secured creditors under the express terms of § 546(c), the 

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No. 18-3363 9

judge subordinated Whirlpool’s claim to Wells Fargo’s DIP 

financing lien. Id.

The claims and counterclaims between Whirlpool and 

hhgregg remained, but the judge found no just reason for 

delay and entered final judgment for Wells Fargo, authorizing Whirlpool to take an immediate appeal to the district 

court. The district judge affirmed, largely adopting the 

bankruptcy judge’s reasoning.

II. Discussion

Whirlpool asks us to hold that its reclamation claim is 

first in priority as to the reclaimed goods, ahead of Wells 

Fargo’s DIP financing lien. Alternatively, Whirlpool seeks a

remand to establish that Wells Fargo did not act in good 

faith and thus does not have prior rights as a good-faith 

purchaser under Indiana’s version of U.C.C. § 2-702. (Recall 

that the bankruptcy judge did not address this question, 

holding instead that a “good-faith purchaser” inquiry under 

the U.C.C. is unnecessary in light of the 2005 amendments to 

§ 546(c).)

First, a few words about the standard of review. A summary judgment in a bankruptcy adversary proceeding is

treated as any other summary judgment, so our review is de 

novo. Doe v. Archdiocese of Milwaukee, 772 F.3d 437, 440 (7th 

Cir. 2014). Wells Fargo argues for the more deferential clearerror standard, drawing an analogy to a strand in our circuit

caselaw involving summary judgments in cases raising 

ERISA claims. Briefly stated, because ERISA authorizes 

equitable relief and there is no right to a jury trial, we’ve 

held that when a district court resolves the claim on summary judgment and the only issue is the characterization of 

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the undisputed subsidiary facts, the judge’s ruling is best 

understood as presenting a mixed question of law and fact 

and reviewed for clear error. See, e.g., Cent. States, Se. & Sw. 

Areas Pension Fund v. Nagy, 714 F.3d 545, 549–50 (7th Cir. 

2013); see also French v. Wachovia Bank, N.A., 722 F.3d 1079, 

1084–85 (7th Cir. 2013) (explaining our practice in the ERISA 

context but declining to extend it to a case involving a 

summary judgment in a common-law claim for breach of 

fiduciary duty).

That reasoning does not apply here. Although the material facts are undisputed, we’re not reviewing the bankruptcy court’s characterization of the facts. Rather, the appeal 

presents a legal issue regarding the operation of the 2005 

amendments to § 546(c). We see no reason to treat the bankruptcy judge’s order any differently than an ordinary summary judgment. Our review is plenary, though we benefit 

from the work of the bankruptcy and district judges.

We begin with some background on the right of reclamation both outside and within bankruptcy.

A. Reclamation Outside Bankruptcy

Reclamation is a limited in rem remedy that permits a

seller to regain possession of goods delivered to an insolvent 

purchaser on credit. See In re Pester Ref. Co., 964 F.2d 842, 844 

(8th Cir. 1992); In re Circuit City Stores, Inc., 441 B.R. 496, 510–

11 (Bankr. E.D. Va. 2010); In re Dana Corp., 367 B.R. 409, 419 

(Bankr. S.D.N.Y. 2007). “It is a rescissional remedy, based 

upon the theory that the seller has been defrauded. Indeed, 

at common law and under the Uniform Sales Act, the seller 

could only reclaim goods by proving that the buyer frauduCase: 18-3363 Document: 34 Filed: 02/11/2020 Pages: 19
No. 18-3363 11

lently induced delivery by misrepresenting its solvency.” In 

re Pester, 964 F.2d at 844.

The Uniform Commercial Code codified the remedy in a 

different form, removing the requirement to prove fraudulent inducement—but only for a small set of time-limited 

claims. Under section 2-702(2), a credit seller may reclaim 

goods delivered to an insolvent buyer provided a demand for 

reclamation is made within ten days of the buyer’s receipt of 

the goods; if the buyer made a written misrepresentation of

solvency in the three months before delivery, the ten-day 

limit does not apply. In addition to these temporal and 

procedural qualifiers, the U.C.C. remedy is substantively 

limited: a seller’s reclamation right is subject to the rights of 

buyers in the ordinary course and other good-faith purchasers. U.C.C. § 2-702(3).

Here is the relevant text of the U.C.C. reclamation remedy:

Seller’s Remedies on Discovery of Buyer’s 

Insolvency

...

(2) Where the seller discovers that the buyer 

has received goods on credit while insolvent[,]

he may reclaim the goods upon demand made 

within ten days after the receipt, but if misrepresentation of solvency has been made to the 

particular seller in writing within three months 

before delivery[,] the ten day limitation does

not apply. ...

(3) The seller’s right to reclaim under subsection (2) is subject to the rights of a buyer in orCase: 18-3363 Document: 34 Filed: 02/11/2020 Pages: 19
12 No. 18-3363

dinary course or other good faith purchaser ... .

U.C.C. § 2-702. The corresponding provision in Indiana is 

identical. IND. CODE § 26-1-2-702.

The commentary to section 2-702 explains that the remedy 

takes as its base line the proposition that any 

receipt of goods on credit by an insolvent buyer amounts to a tacit business misrepresentation of solvency and therefore is fraudulent as 

against the particular seller. This Article makes 

discovery of the buyer’s insolvency and demand within a ten day period a condition of 

the right to reclaim goods on this ground.

U.C.C. § 2-702 cmt. 2.

B. Reclamation Within Bankruptcy

Within bankruptcy, reclamation has a checkered history. 

Prior to the Bankruptcy Reform Act of 1978, it was unclear

whether the trustee could use his various strong-arm powers 

against a trade creditor’s section 2-702 reclamation claim. See

5 COLLIER ON BANKRUPTCY (“COLLIER”) ¶ 546.LH[3] (16th

ed.); Lawrence Ponoroff, Reclaim This! Getting Credit Seller 

Rights in Bankruptcy Right, 48 U. RICH. L. REV. 733, 739–46

(2014). In response, the 1978 Act added a new subpart to

11 U.S.C. § 546, the section of the Bankruptcy Code that sets 

limits on the trustee’s avoidance powers.

Because the Code’s reclamation provision is stated as a 

limitation on the trustee’s powers, the language is a bit 

clunky; we paraphrase here. As originally adopted, § 546(c)

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No. 18-3363 13

declared that the trustee’s rights and powers under § 544(a)

(the strong-arm provision), § 545 (statutory liens), § 547

(preferences), and § 549 (postpetition transactions) were 

“subject to any statutory right or common-law right of a 

seller ... of goods ... to reclaim such goods if the debtor has 

received such goods while insolvent” provided the seller 

made written demand for reclamation within “ten days after 

receipt of such goods by the debtor.” Bankruptcy Reform 

Act of 1978, Pub. L. No. 95-598, § 546(c)(1), 92 Stat. 2549, 

2597.

In its original form, § 546(c) preserved the bankruptcy

court’s flexibility to facilitate reorganization by authorizing a 

substitute remedy: the court could deny an otherwise valid 

reclamation demand (thus leaving the goods in the estate) if 

it granted the seller an administrative expense claim (these 

are governed by 11 U.S.C. § 503(b)) or secured the claim with 

a lien. Id. § 546(c)(2); see also COLLIER ¶ 546.LH[3]. A later 

amendment to § 546(c) extended the deadline for written 

notice to 20 days if the ten-day period expired after commencement of the bankruptcy case. Bankruptcy Reform Act 

of 1994, Pub. L. No. 103-394, § 209, 108 Stat. 4106, 4125; see 

also COLLIER ¶ 546.LH[3].

Before BAPCPA, bankruptcy courts struggled to resolve 

conflicts between claims of reclaiming sellers under § 546(c) 

and claims of secured lenders holding floating liens on the 

debtor’s inventory. As originally enacted § 546(c) did not 

address the effect of a prior lien on the rights of a reclaiming 

seller. So judges looked to state-law rules—specifically, the 

relevant state’s version of section 2-702. As we’ve explained, 

under section 2-702(3) the right of a seller to reclaim goods is 

“subject to the rights of a buyer in ordinary course or other 

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14 No. 18-3363

good faith purchaser.” A “purchaser” is “a person that takes 

by purchase,” U.C.C. § 1-201(b)(30) (AM. LAW INST. & UNIF.

LAW COMM’N 2001), and “purchase” means “taking by sale, 

lease, discount, negotiation, mortgage, pledge, lien, security 

interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property,” id. § 1-201(b)(29) 

(emphasis added).

Extrapolating from these broad definitions, the prevailing view was that “[s]ince most secured creditors are good 

faith purchasers under the [U.C.C.],” section 2-702(3) “has 

the effect, in priority terms, of placing the reclaiming seller 

behind the insolvent buyer’s secured creditors who have 

security interests in the goods, but ahead of the buyer’s 

unsecured creditors.” In re Pester, 964 F.2d at 845; see generally Charles J. Shaw & Brent Weisenberg, Effect of a Preexisting 

Security Interest in the Debtor’s Inventory on the Rights of 

Reclamation Creditors, 2005 NORTON ANN. SURV. OF BANKR. L.

15 (collecting pre-BAPCPA cases). We noted this trend in the 

caselaw more than two decades ago but did not weigh in. In 

re Reliable Drug Stores, Inc., 70 F.3d 948, 949–50 (7th Cir. 

1995). In Reliable Drug Stores the seller conceded that “a 

reclamation claimant stands in line after a creditor with a 

security interest in after-acquired inventory.” Id. at 950.

Congress addressed this issue in 2005 when it enacted 

BAPCPA, which substantially reworked § 546(c). The statutory language is still clunky—more so in fact. For completeness we include the relevant text in full:

(c)(1) ... subject to the prior rights of a holder of a 

security interest in such goods or the proceeds 

thereof, the rights and powers of the trustee under sections 544(a), 545, 547, and 549 are subCase: 18-3363 Document: 34 Filed: 02/11/2020 Pages: 19
No. 18-3363 15

ject to the right of a seller of goods that has 

sold goods to the debtor, in the ordinary 

course of such seller’s business, to reclaim such 

goods if the debtor has received such goods 

while insolvent, within 45 days before the date 

of the commencement of a case under this title, 

but such seller may not reclaim such goods unless such seller demands in writing reclamation of such goods—

(A) not later than 45 days after the date of 

receipt of such goods by the debtor; or

(B) not later than 20 days after the date of 

commencement of the case, if the 45-day 

period expires after the commencement of 

the case.

(2) If a seller of goods fails to provide notice in 

the manner described in paragraph (1), the 

seller still may assert the rights contained in 

section 503(b)(9).

§ 546(c) (emphasis added).

Among other key modifications to the statute, the 2005 

amendments (1) omitted the prior version’s reference to 

statutory or common-law reclamation rights; (2) enlarged

the reclamation look-back period from 10 to 45 days; (3) set a 

hard deadline to serve a written reclamation demand at 

20 days after the petition date; and (4) added new language 

making explicit that 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.” Id. One more notable 

change: the substitute remedies in the earlier version of the 

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16 No. 18-3363

statute—an administrative expense claim or a lien—are 

gone. Instead, subsection (c)(2) cross-references to a new 

§ 503(b)(9), another BAPCPA innovation.

Section 503(b) of the Code lists the allowable administrative expenses that ordinarily enjoy priority in bankruptcy 

over other unsecured claims; generally speaking, these are 

costs incurred in the preservation and administration of the 

estate. The 2005 amendments added a new subsection (b)(9), 

which lists as an allowable administrative expense “the 

value of any goods received by the debtor within 20 days 

before the date of commencement of a case under this title in 

which the goods have been sold to the debtor in the ordinary 

course of such debtor’s business.” So by operation of the 

cross-reference in § 546(c)(2), a reclaiming seller might have 

an administrative expense claim for the value of goods 

delivered to the debtor on days 1–20 before the start of the 

bankruptcy case even if the seller fails to serve a timely 

written reclamation demand and thus forfeits a claim to 

recover goods delivered during the 45-day look-back period 

under § 546(c)(1).

Section 503(b)(9) raises its own set of interpretive and 

application issues, but this appeal doesn’t require us to 

address them. The only question here is whether Whirlpool’s 

reclamation claim is subordinate to Wells Fargo’s DIP financing lien. It is, for reasons we’ll turn to now.

C. BAPCPA’s § 546(c) Created a Federal Priority Rule

As we’ve just explained, one of BAPCPA’s key changes 

to § 546(c) was the adoption of a federal priority rule for 

resolving disputes between reclaiming sellers and secured 

lenders over the same goods. To the extent that priority was 

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No. 18-3363 17

uncertain under the old version of § 546(c), after the 2005 

amendments, it’s crystal clear that a seller’s reclamation 

claim is subordinate to “the prior rights of a holder of a 

security interest.” § 546(c)(1). What this means as a practical 

matter is that “if the value of any given reclaiming supplier’s 

goods does not exceed the amount of debt secured by the 

prior lien, that reclamation claim is valueless.” In re Dana 

Corp., 367 B.R. at 419; see also In re Reliable Drug Stores, 

70 F.3d at 950 (explaining in a case governed by the preBAPCPA statute that if the debtor’s secured lenders are 

undersecured, the court “ha[s] no option other than to deem 

[the reclaiming seller’s] administrative claim worthless”).

Here, under the terms of the March 6 DIP financing 

agreement and effective upon entry of the court’s March 7 

interim DIP financing order, Wells Fargo obtained a priming, first-priority security interest in all hhgregg assets, 

including the Whirlpool inventory. Whirlpool’s reclamation 

demand came later, on March 10, and is therefore “subject 

to” Wells Fargo’s prior rights as the holder of a perfected, 

first-priority security interest in the reclaimed goods.

Whirlpool counters that its reclamation claim was “in effect” as of the March 6 petition date (even though demand 

was not made until March 10) and “jumped into first position” during a “gap in the lien chain” that occurred between

March 6, when Wells Fargo’s prepetition security interest 

was concededly superior, and March 7, when Wells Fargo’s 

postpetition security interest attached pursuant to the court’s 

DIP financing order. Whirlpool insists that its reclamation 

claim jumped ahead of Wells Fargo’s DIP financing lien 

when the prepetition lien was extinguished in the final rollup of the collateralized prepetition debt.

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There are at least two problems with this argument. First, 

a reclamation right is not a security interest; nor is the

reclamation remedy self-executing, either within or outside 

bankruptcy. See In re Circuit City Stores, 441 B.R. at 505 

(collecting cases). Absent a timely written demand, the seller 

has no reclamation right under § 546(c)(1). Even under the 

U.C.C., the right of reclamation is conditioned on a timely 

demand, though it need not be in writing. U.C.C. § 2-702(2).

Whirlpool served its written reclamation demand on 

March 10, three days after Wells Fargo’s postpetition lien 

attached by order of the bankruptcy court. There is no 

support for Whirlpool’s assertion that its reclamation claim 

was actually “in effect” on the petition date, four days before

demand was made.

Second, there was no gap in the Wells Fargo lien chain.

Before and as of the March 6 petition date, Wells Fargo held 

a first-priority, perfected lien on hhgregg’s assets, including 

the Whirlpool inventory. Effective March 7 Wells Fargo 

obtained a court-approved, priming, first-priority, perfected 

lien on hhgregg’s assets, including the Whirlpool inventory.

As the bankruptcy judge explained, the Whirlpool goods 

were continuously encumbered by one or both of Wells 

Fargo’s liens. Whirlpool’s reclamation claim did not spring 

into first position when Wells Fargo’s prepetition lien was 

extinguished in the final roll-up. The lien chain remained 

unbroken.

Whirlpool’s fallback argument is that the prior rights of a 

secured creditor must be determined by reference to state 

law—here, Indiana’s version of U.C.C. § 2-702, which (like 

the uniform law) states that a seller’s right to reclaim goods 

is “subject to the rights of a buyer in ordinary course or other 

Case: 18-3363 Document: 34 Filed: 02/11/2020 Pages: 19
No. 18-3363 19

good faith purchaser.” IND. CODE § 26-1-2-702. Whirlpool 

insists that Wells Fargo cannot be considered a good-faith 

purchaser based on its conduct as agent for the DIP lenders

and seeks a remand for an opportunity to litigate that question. 

Whatever force this argument might have had under the 

old version of § 546(c), with the 2005 amendments, the 

rationale for examining the lienholder’s status as a goodfaith purchaser has evaporated. The post-BAPCPA text of 

§ 546(c) expressly subordinates a seller’s reclamation claim to 

the prior rights of a lienholder; there is neither need nor any 

reason to import a state-law good-faith purchaser inquiry.

The bankruptcy judge therefore correctly concluded that 

Whirlpool’s allegations of bad faith are irrelevant to the

priority determination under § 546(c). 

When Whirlpool made its reclamation demand on 

March 10, the reclaimed goods were subject to Wells Fargo’s 

prepetition and DIP financing liens. While the prepetition 

lien was later lifted, the reclaimed goods remained subject to 

Wells Fargo’s DIP financing lien. The bankruptcy judge 

correctly subordinated Whirlpool’s reclamation claim to the 

DIP financing lien. 

AFFIRMED

Case: 18-3363 Document: 34 Filed: 02/11/2020 Pages: 19