Whirlpool Corp. v. hhgregg, Inc. (In re hhgregg, Inc.)
Docket: Case 17-01302-JJG-11 (Jointly Administered); Adv. Pro. No. 17-50104
Court: United States Bankruptcy Court, S.D. Indiana; December 4, 2017; Us Bankruptcy; United States Bankruptcy Court
Wells Fargo Bank's motion to dismiss Whirlpool Corporation's complaint for reclamation of goods was granted by the United States Bankruptcy Court. The court determined that the 2005 amendment to 11 U.S.C. 546(c)(1) affects reclamation claims in the context of prepetition and postpetition liens. The court established jurisdiction under 11 U.S.C. 157(b) and 1334, deeming the matter a core proceeding.
Whirlpool sought the return of goods supplied to hhgregg, Inc. and affiliated debtors within 45 days before their Chapter 11 filing on March 6, 2017. Whirlpool had made a timely reclamation demand. Prior to the bankruptcy, the debtors had a credit agreement with Wells Fargo, which held first priority floating liens on substantially all debtor assets. The court had authorized the debtors to secure additional financing through a DIP loan from Wells Fargo, which included "priming first priority" liens on nearly all of the debtor’s assets, effective from the petition date. The DIP lenders were also granted a super-priority administrative expense claim, while Wells Fargo received replacement liens and a subordinate super-priority administrative claim.
On May 2, 2017, the Court issued a Final DIP Order, which finalized the approval of a Debtor-in-Possession (DIP) Loan, authorized the use of Wells Fargo’s cash collateral, and granted super-priority administrative claims to Wells Fargo and the DIP Lenders. The Debtor was required to utilize the DIP Credit Agreement to repay over $66 million owed under a Prepetition Credit Agreement and to fund ongoing operations. However, the Debtor's reorganization efforts failed, leading to the sale of inventory, including Whirlpool Goods, as ordered on April 7, May 10, and May 17, 2017.
Summary judgment, as outlined under Federal Rule of Civil Procedure 56(c) and applicable to bankruptcy proceedings via Rule 7056, is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. The moving party must show the absence of evidence supporting the nonmoving party's case, after which the nonmoving party must present evidence of a genuine dispute to avoid summary judgment. If no such evidence is provided, the court will grant summary judgment against the nonmoving party.
Reclamation rights, defined under Section 2-702 of the Uniform Commercial Code (UCC), enable a seller to reclaim goods delivered to an insolvent buyer by sending a written demand within 10 days of receipt, provided the goods are still in possession and identifiable. In bankruptcy, these rights are further governed by Section 546(c) of the United States Bankruptcy Code, which stipulates conditions under which a seller may reclaim goods received by an insolvent debtor within 45 days prior to the bankruptcy filing. Specific timing for reclamation demands is also outlined, allowing for reclamation within 45 days of receipt or 20 days after the bankruptcy case commences if the 45-day period extends beyond that date.
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) amended 11 U.S.C. § 546(c) to clarify that reclamation rights are subordinate to the prior rights of a secured creditor. Whirlpool contends that Wells Fargo acted in bad faith by continuing to lend to the Debtors despite their inability to pay vendors, thus arguing for protection under UCC § 2-702. However, the DIP Lenders and Wells Fargo assert that good faith is irrelevant under the amended § 546(c) and that Whirlpool’s reclamation claim is nullified by their prior lien rights, rendering it essentially worthless.
The definition of "good faith purchaser" under UCC § 2-702 is ambiguous, with courts sometimes interpreting holders of perfected floating liens on inventory as "good faith purchasers." The legal landscape is further complicated by Indiana's unique approach, which only subjects reclamation claims to "good faith purchasers" and not specifically to "lien creditors." Additionally, commentators have criticized BAPCPA’s modifications to § 546(c) as vague and incomplete, creating challenges in interpreting its implications for reclamation claims. Most courts have determined that the 2005 amendments do not establish a federal right of reclamation but significantly changed how such claims are treated in bankruptcy, explicitly subordinating them to the rights of secured creditors without needing to assess their good faith status.
The Court will not evaluate whether Wells Fargo and the DIP Lenders qualify as "purchasers" under the UCC or acted in "good faith." Instead, the primary focus is on whether they possess a valid security interest in the Whirlpool Goods established before Whirlpool's reclamation claim. Wells Fargo and the DIP Lenders argue that the Prepetition Credit Agreement, DIP Loan, and DIP Orders form an "integrated transaction," which grants them prior liens on the Whirlpool Goods, citing Dana Corp. as support. Whirlpool counters that several courts have rejected the "integrated transaction" concept and calls for the same outcome here, referencing Reichhold and In re Phar-Mor. The Court finds that the term "integrated transaction" does not influence the application of Section 546(c); rather, the key issue is whether secured creditors had prior liens on the reclaimed goods before the reclamation demand was made.
In this case, the liens were perfected prepetition under the Prepetition Credit Agreement and postpetition through the DIP Loan executed on the bankruptcy filing date. The Court notes that the Debtor’s goods were never free from a floating lien, contrasting with Reichhold, where the liens were fully satisfied, leaving the collateral lien-free. Although Phar-Mor shares factual similarities with Dana Corp., it reached a different conclusion, stating that postpetition liens granted after satisfying the prepetition facility were junior to a reclaiming creditor’s interests. The Court respectfully disagrees with this viewpoint, asserting that Section 546(c) concerns prior rights and that the prepetition and postpetition liens relate back to a time prior to Whirlpool's reclamation claim.
The Final DIP Order confirms that no reclamation rights will take precedence over the DIP Liens, maintaining an unbroken lien chain prior to Whirlpool’s reclamation demand. Before the Petition Date, Wells Fargo held a lien on all Debtor assets under the Prepetition Credit Agreement, and as of the Petition Date, the DIP Lenders received DIP Liens on these assets, including the Whirlpool Goods. Therefore, when Whirlpool made its reclamation demand, the goods were already encumbered by the prior interests of the DIP Lenders and Wells Fargo, leading the Court to conclude that Whirlpool's reclamation claim is subordinate to those existing security interests.
Whirlpool claims that provisions in the Final DIP Order and the April 10, 2017 Sale Order protect its reclamation rights concerning the Whirlpool Goods. The Final DIP Order indicates that these rights under UCC 2-702 are preserved but subject to section 546(c) of the Bankruptcy Code, which subordinates reclamation claims to the rights of secured creditors. The Sale Order similarly states that Whirlpool's rights in the Whirlpool Goods and any proceeds are reserved, but again, these rights are still subordinate to those of Wells Fargo and the DIP Lenders. The Court concludes that Whirlpool's reclamation rights do not supersede the security interests of Wells Fargo and the DIP Lenders, denying Whirlpool the relief sought in its Complaint.
Additionally, the Court addresses procedural matters regarding the conversion of the Motion under Rule 12(d) due to references to materials outside the pleadings, specifically orders from the underlying bankruptcy case. The Court held a status conference to inform parties that the Motion would be treated as one for summary judgment because of these external references. Although judicial notice of its own orders does not require conversion, the Court emphasizes that its reliance on the truth of the Final DIP Order necessitates this conversion, moving the proceedings from Rule 12(b)(6) to Rule 56 standards.
BAPCPA's amendments to § 546(c) are irrelevant to this case. The Court assumes Whirlpool has a valid reclamation claim under UCC § 2-702. The procedural context of the Motion is recognized as awkward, as Wells Fargo and the DIP Lenders conceded certain factual issues which they might have contested. Whirlpool, defending under Rule 12(b)(6), was not required to provide evidence for its claims and did not have a full opportunity to develop factual support even after the Motion was treated as one for summary judgment. The Court aims not to prejudice any party's legal or factual positions on issues outside of its current ruling, which are primarily legal or based on undisputed facts.
Whirlpool's requests include: (1) an order for DIP Lenders to honor their demand; (2) a declaration securing priority for Whirlpool's interest in its goods and proceeds; (3) an order to prevent the Debtor from selling or transferring Whirlpool goods; (4) an order for an accounting of said goods; (5) an order to segregate Whirlpool goods and proceeds; and (6) other appropriate relief, including a directive for the Debtor to marshal sale proceeds. The Court notes that the Final DIP Order prohibits marshalling, which may affect the sixth request for relief. Gordon Brothers Retail Partners and Hilco Merchant Resources were dismissed from the proceedings, leaving Whirlpool's claims against the Debtors. Although the ruling appears to resolve Whirlpool's claims, the Debtors did not formally join the Motion, and they have raised counterclaims against Whirlpool that remain unresolved. A pre-trial conference will be scheduled for the outstanding claims.
