Legal Question in Business Law in New Jersey

Sold a business, buyer goes bankrupt, securities not there

My company sold a health club business to an individual that presented a union pension as security (65,000 dollars). The new owner also agreed that the equipment would be held as security and a UCC lien was placed upon the equipment. My company held the financing and the new owner was making monthly payments.

The new owner took a loan on the equipment and allowed another UCC lein in violation of the contract. The new owner then traded in the equipment for new equipment in violation of the contract and the UCC lien on both parties. The new owner has filed for bankruptcy, the pension fund will not honor the signed over pension security, the new owner was aware of this just days after signing contracts. Bankruptcy court locally is not even reading objections to the bankruptcy filing. What actions should I take? All contracts / agreements were prepared by a lawyer and appear very clear. Arbitration is included in the contract. The new owner submitted no books (never had them?) but appears capable of making payments.

Asked on 7/14/02, 11:11 am

2 Answers from Attorneys

Glenn Reiser LoFaro & Reiser, LLP

Re: Sold a business, buyer goes bankrupt, securities not there

So long as your UCC-1 was filed properly and was effective on the date of the equipment transfer then you could bring an action to avoid the conveyance to the party that accepted the trade-in from the new owner. A new lender that accepts collateral that is subject to a properly perfected UCC-1 lien takes that collateral subject to the lien. Thus, you could still enforce the lien against your collateral by also bringing an action for replevin against the third party demanding the return of your collateral.

Also, you have an action for fraud against your debtor for breaching your security agreement and violating the UCC-1. Presuming that your debtor has filed a Chapter 7 bankruptcy proceeding here in New Jersey, you have a very limited period of time to file an Adversary Proceeding - 60 days from the date of the creditors' meeting.

The pension issue is a bit more difficult to offer any suggestions without performing some legal research beforehand. Generally, creditors cannot attach or execute upon pension or retirement plans under New Jersey law. However, that answer might be different here, where your debtor actually pledged his pension as security. So long as New Jersey law does not probibit such a contractual provision as being unlawful, then you should be able to enforce the contract in bankruptcy court. The success of your case depends on whether you actually perfected your UCC-1 lien.

If you would like to speak with me about bringing a case against the relevant parties, please contact me at (201) 498-0400.

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Answered on 7/15/02, 9:38 am
Glen Chulsky Law Office of Glen H. Chulsky

Re: Sold a business, buyer goes bankrupt, securities not there

It sounds as though the new owner has engaged in fraud. Fraud may be a basis to attack the bankruptcy. You may have to file an adversary proceeding in the bankruptcy court against the new owner. If you would like further info, please feel free to call me at 973-479-5814.

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Answered on 7/14/02, 8:10 pm

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