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Reclamation Claim, Even If Valid, Is Primed By Prior Floating Lien

Reclamation Claim, Even If Valid, Is Primed By Prior Floating Lien

Section 2-702 of the Uniform Commercial Code allows a seller of goods to reclaim goods sold to a buyer when the seller discovers that the buyer is insolvent. But what happens when that insolvent buyer files for bankruptcy? In hhgregg, Inc. (Whirlpool Corporation v. Wells Fargo Bank), the Bankruptcy Court for the Southern District of Indiana held that Section 546(c)(1) of the Bankruptcy Code allows the holder of a prior security interest in such goods to prime a reclamation claim. While Section 2-702 of the Uniform Commercial Code references the rights of “good faith purchasers,” Section 546(c)(1) of the Bankruptcy Code references only “the prior rights of a holder of a security interest.” In hhgregg, Inc., Whirlpool sought reclamation of goods that it had sold to the Debtor and commenced an adversary proceeding to recover the goods. Whirlpool argued that hhgregg’s lender, Wells Fargo, was not a “good faith purchaser” and therefore not entitled to the protections of Section 2-702 of the Uniform Commercial Code, but the Bankruptcy Code held that this argument was irrelevant. The “only relevant inquiry . . . is whether Wells Fargo and the DIP Lenders have a valid security interest in the Whirlpool Goods that arose prior to Whirlpool’s reclaim claim.” Finding that Wells Fargo maintained a floating lien on hhgregg’s inventory at all times, the Bankruptcy Court entered judgment in favor of Wells Fargo.

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