If you are a seller of goods, there are certain provisions of the Uniform Commercial Code which you should be aware of and which can be advantageous where your buyer becomes insolvent shortly after delivery of your goods. As we will see, prompt action is required to preserve your rights.
Section 2609 of the Code provides that a contract for sale of goods imposes an obligation on each party that the expectation of the other party of receiving performance will not be impaired. In other words, if you are a seller of goods, you have a right to payment. As a buyer, you have a right to delivery of the goods. Section 2609 goes on to provide that when reasonable grounds for insecurity arise with respect to the performance of the other party, you can demand in writing adequate assurance of performance, and if you are not satisfied with the response, you can suspend your performance. By way of example, if you have agreed to sell 500 widgets for a total price of $50,000, and your buyer fails to make the first payment as agreed, you can demand assurance of performance, and if you do not receive satisfactory comfort, you can suspend further deliveries.
Another important remedy contained in the Uniform Commercial Code is set forth in Section 2702. If you discover that your buyer is insolvent you can refuse to deliver goods except for cash on delivery. In addition, where you discover that your buyer has already received goods from you on credit while insolvent, you may reclaim the goods upon demand provided that the demand is made within 10 days after the goods are delivered. If your buyer has misrepresented its financial condition in writing within 3 months before delivery of the goods, the 10-day limitation does not apply. The right to reclaim goods of an insolvent buyer becomes important where your buyer files for bankruptcy protection shortly after receiving your goods. By sending a notice of reclamation and seeking to reclaim your goods, you will enhance the possibility that your claim in the bankruptcy case will be elevated to a status higher than that of an unsecured creditor.
The key to a successful reclamation is to monitor the financial condition of your customer closely and to act promptly when it becomes apparent that your customer’s financial condition is impaired. Better to get your goods back rather than be left with an unsecured claim in a bankruptcy.
— Kevin Palmer