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Corinne Ball is a partner at Jones Day. Corinne Ball

Reclamation is a remedy that permits a seller to regain possession of goods delivered to an insolvent purchaser on credit. Reclamation has its origins in the state law implementations of Uniform Commercial Code (UCC) §2-702. The remedy has an analogue in §546(c) of the Bankruptcy Code, which was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Before BAPCA, bankruptcy courts struggled to resolve conflicts between reclaiming sellers and claims of secured lenders holding floating liens. They generally looked to state law, and notably to the UCC’s substantive limitations on the reclamation remedy. One such limitation treats a secured lender with a floating lien as a “good faith purchaser,” thereby cutting off a seller’s reclamation remedy.

On Feb. 11, 2020, the U.S. Court of Appeals for the Seventh Circuit held that the lien of a debtor-in-possession lender in a Chapter 11 proceeding has priority over valid reclamation claims held by a trade supplier. See Whirlpool v. Wells Fargo Bank, Nat’l Assoc. (In re Hhgregg), No. 18-3363 (7th Cir. 2020) (Sykes, J.), ECF No. 35. The Seventh Circuit’s holding clarifies that the BACPA amendments to §546(c) of the Bankruptcy Code created a federal reclamation remedy and a federal priority rule for resolving disputes between reclaiming sellers and secured lenders over the same goods. Significantly, the Seventh Circuit found that questions about a lender’s good faith under §2-702 of the UCC are not pertinent to interpretation of §546(c) of the Bankruptcy Code, even if such questions would be pertinent to a creditor’s state law reclamation rights outside of bankruptcy. Interestingly, the Seventh Circuit’s decision involved: (1) a DIP financing which “rolled up” prepetition liens securing a $66 million loan into an $80 million DIP financing that was approved on the second day of the case; (2) a subsequent reclamation demand; and (3) proceeds of the reclaimed goods liquidated that exceeded the prepetition secured loan, but not the total DIP financing.

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