Question

Your client, Wholesaler, sold a large number of freezers to Retailer on credit. This occurred on May 1, 2017. Wholesaler had purchased these freezers from Manufacturer on March 1, 2017. Manufacturer had purchased the components from Supplier on November 1, 2016. Assume that each transaction is a credit sale and that every creditor timely filed a UCC-1 such that they are secured parties.

A. Now assume that Cindy bought a freezer for her house from Retailer on May 15, 2017. Retailer filed the UCC-1 on July 1, 2017. Cindy sold that freezer to her friend, Cool Girl, on January 5, 2018. Cool Girl was paying Retailer for the debt in Cindy’s name until Cool Girl lost her job on March 1, 2018. Cool Girl has not made a payment since but he has not told Cindy about this either. What are Retailer’s rights as to this freezer? Would that change if Retailer did not file a UCC-1? Why or why not?

B. Assume that Supplier never filed when it sold to Manufacturer. Manufacturer files for Chapter 7 bankruptcy on January 5, 2017 and Manufacturer had not paid Supplier at that time. What are Supplier’s rights and remedies? What is the likely result for Supplier in this Chapter 7 bankruptcy since Supplier never filed?

Answer 1

Answer (A) :-

A UCC-1 statement is a document which serves as a lien on commercial property in a business loan. UCC-1 statements can be filed for all types of assets. The filing of a UCC-1 statement for securing collateral is required for business loans under the Uniform Commercial Code (UCC).

A financing statement (Form UCC1) is filed to perfect a security interest in named collateral and establishes priority in case of debtor default or bankruptcy.

The Addendum (Form UCC1Ad) and the Additional Party forms (Forms UCC1AP) should only be completed and submitted with the Form UCC1 if they are needed to record additional debtors and/or secured parties.

Now as per the above rule of UCC-1 the reatilers's right regarding to the freezer is :-

Cindy bought a freezer for her house from Retailer on May 15, 2017. Retailer filed the UCC-1 on July 1, 2017. Cindy sold that freezer to her friend, Cool Girl, on January 5, 2018. Cool Girl was paying Retailer for the debt in Cindy’s name until Cool Girl lost her job on March 1, 2018. Cool Girl has not made a payment since but he has not told Cindy about this either.

In this case Retailer's are liable to recover the amount from the Ciddy because retailer's filled the UCC 1 in the name of the ciddy and not in the name of cool girl.

If cindy transfers the freezer to the cool girl than it is the responsibility of the Cindy to file (UCC 1 Ad) statement through the Retialer's to add the Cool Girl name as the additional party.

Hence Ratiler's is liable to recover the amount from the Cindy instead of cool girl.

If retailer's in not filled the UCC 1 than he has the option to file the original UCC 1 in the name of Cool girl. In that very option Retiler's will recover the amount from the cool girl instead of Cindy.

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Answer (B) :-

Under the Bankruptcy Code, debtors are granted certain protections from creditors upon the filing of a bankruptcy case. The most significant of these protections is the “automatic stay” imposed by section 362 of the Bankruptcy Code. The automatic stay is intended to provide a debtor with a breathing spell during its bankruptcy case and prohibits a very broad range of acts, including:

(i) contacting the debtor to demand repayment of amounts owed as of the bankruptcy filing;

(ii) taking actions against the debtor to collect money owed as of the bankruptcy filing;

(iii) taking or exercising control of property owned or possessed by the debtor;

(iv) starting or continuing collection actions, foreclosure actions, or repossessions against the debtor;

(v) seeking to create, perfect, or enforce any lien against the debtor’s property;

(vi) terminating or modifying the debtor’s rights under a contract; and

(vi) exercising a setoff right against the debtor. If a creditor violates the automatic stay, a bankruptcy court may hold the creditor in contempt of court and award the debtor compensatory damages. In addition, where the violation is willful, the bankruptcy court may award punitive damages.

If Supplier never filed when it sold to Manufacturer and Manufacturer files for Chapter 7 bankruptcy on January 5, 2017 and Manufacturer had not paid Supplier at that time than Supplier’s will have following rights and remedies:-

1. Right to Reclaim Goods :- A seller’s right to reclaim goods sold on credit or on cash terms .   To reclaim goods, the seller must show:

(i) the goods were sold to the buyer;

(ii) the buyer received the goods while insolvent; and

(iii) the seller demanded the goods within ten days of the buyer’s receipt of the goods. Where the buyer has misrepresented its solvency to the seller within three months before delivery of the goods, the ten-day rule does not apply.

2. . Right to Stop or Refuse Delivery :- A seller may also stop delivery in transit or refuse to make new shipments unless the buyer agrees to:

(i) pay cash in advance or cash on delivery, and

(ii) pay for all the goods previously delivered. As noted, the right to stop delivery or refuse to take and ship new orders is unaffected by the buyer’s attempt to resell the goods to a good faith purchaser for value (as in a direct ship scenario).it provides that a buyer acquires only voidable title (e.g., title that is voidable upon the exercise of a seller’s stoppage, withholding, or reclamation rights until the seller’s deadline to exercise remedies has expired. If the buyer fails to properly pay for the goods, the seller may void title by exercising its remedies

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