## Facts

- Gregg Appliances, Inc., hhgregg, Inc., and HHG Distributing, LLC (collectively, HHGregg) operated a chain of retail stores selling appliances and related goods.
- Whirlpool Corporation regularly sold appliances to HHGregg on credit, including shipments delivered within 45 days before HHGregg filed Chapter 11.
- Four days after the petition date, Whirlpool sent a written demand seeking reclamation of the goods, and later filed an adversary proceeding seeking return of the goods or, alternatively, the proceeds of any postpetition sales of those goods.
- Before bankruptcy, HHGregg was party to a revolving credit facility with Wells Fargo Bank, N.A., as administrative and collateral agent for lenders whose loans were secured by first-priority floating liens on substantially all HHGregg assets, including existing and after-acquired inventory and its proceeds.
- After the filing, the court approved debtor-in-possession financing that granted new first-priority liens on substantially all assets, including inventory and proceeds, and included a roll-up of certain prepetition secured obligations into postpetition DIP debt.
- Whirlpool argued that Wells Fargo should not be treated as a protected “good-faith purchaser” under U.C.C. § 2-702 because it continued lending close to bankruptcy while allegedly knowing HHGregg could not pay vendors like Whirlpool.
- Wells Fargo (and GACP Finance Co., LLC, which joined) moved to dismiss. Because the court considered orders and record materials from the main case, the motion was treated as one for summary judgment under Rule 12(d).

## Issues

1. Whether, under 11 U.S.C. § 546(c) as amended in 2005, a seller’s reclamation rights are subordinate to a secured lender’s prior perfected floating lien on the debtor’s inventory and proceeds, including liens granted or continued through postpetition DIP financing.
2. Whether allegations that the secured lender lacked “good faith” under U.C.C. § 2-702 can defeat the lender’s lien priority and allow the reclaiming seller to recover goods or proceeds ahead of the lender.
3. Whether reservation-of-rights or “savings clause” language in bankruptcy financing or related orders preserves reclamation rights in a way that changes the lien-priority outcome under § 546(c).

## Decision

- The court treated Wells Fargo’s motion to dismiss as a motion for summary judgment and granted summary judgment for Wells Fargo (and for GACP as a joining party).
- The court held that Whirlpool’s reclamation claim under § 546(c) was subject to the prior rights of the secured lenders holding first-priority liens on HHGregg’s inventory and proceeds, making the reclamation claim effectively without value where the inventory and proceeds were fully encumbered.
- The court rejected Whirlpool’s attempt to use U.C.C. § 2-702 “good-faith purchaser” concepts to alter the federal statutory result, concluding that § 546(c) (as amended) governs the priority relationship and makes reclamation subordinate to prior security interests.
- The court declined to read any “savings” or reservation language in the case orders as creating a right to recover goods or proceeds ahead of the secured lenders’ liens where the statute and the operative lien grants provided otherwise.

## Legal Principles

- Under 11 U.S.C. § 546(c)(1) (post-2005), a seller’s reclamation right is expressly “subject to the prior rights” of a holder of a security interest in the goods or their proceeds.
- A reclaiming seller can recover value through reclamation only to the extent the goods (or proceeds) are not already committed to, and absorbed by, senior secured claims; when inventory and proceeds are fully encumbered by first-priority liens, reclamation provides no practical recovery.
- State-law limits on reclamation based on “good-faith purchaser” status under U.C.C. § 2-702 do not override § 546(c)’s subordination of reclamation to prior security interests in a bankruptcy case.
- Where prepetition inventory liens continue into the case and are reinforced through DIP financing (including roll-up features), the secured lenders’ position can be treated as a continuous first-priority interest for purposes of evaluating whether any reclaimable value remains for a seller.
- Reservation-of-rights language in financing or related orders cannot be read to reorder statutory lien priorities or to grant reclaiming sellers rights that conflict with § 546(c) and the liens approved by the court.

## Conclusion

In re HHGREGG, Inc. holds that Whirlpool’s timely reclamation demand and adversary complaint could not overcome Wells Fargo’s and the lenders’ first-priority floating liens (as continued and supplemented through postpetition DIP financing) because § 546(c), as amended in 2005, makes reclamation claims subordinate to prior security interests in the goods and their proceeds; allegations about Wells Fargo’s lack of “good faith” under the U.C.C. and general reservation language in court orders did not change that priority result, so summary judgment was entered for the secured lenders.


In re HHGREGG, Inc., 578 B.R. 814 (2017)