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Contracts • Remedies for Unexcused Non-Performance
K#153
Legal Definition
A seller can reclaim goods from a buyer only when: (1) the buyer was insolvent at the time it received the goods; (2) the seller demands return of the goods within 10 days of receipt (or, if the buyer expressly in writing represented solvency before delivery, within a reasonable time); and (3) the buyer still has the goods at the time of demand.
Plain English Explanation
In a perfect world, a seller provides perfect goods, and a buyer provides a timely payment. However, in the real world there are situations where a seller sends goods to a buyer shortly before the buyer goes out of business or bankrupt. This creates a weird grey area re: ownership of the goods and ability to get them back, since they aren't paid for, but they may be misplaced during the chaos of a company restructuring itself. In other words, what the law is trying to do here is help a seller avoid becoming just another creditor after money from a bankrupt company and, instead, try to get them their stuff back and undo the deal.
In such scenarios, a buyer has the right to reclaim their goods when:
(1) The buyer went broke when it received the goods;
(2) If the seller makes a demand for the return of the goods within 10 days (this requirement is waived if you can prove the buyer misrepresented their financial position in order to get the goods); and
(3) The buyer still has the goods at the time of demand (they can't return what they no longer have, and if they were sold, the seller just becomes a creditor that has to go after the buyer like any other creditor).
In such scenarios, a buyer has the right to reclaim their goods when:
(1) The buyer went broke when it received the goods;
(2) If the seller makes a demand for the return of the goods within 10 days (this requirement is waived if you can prove the buyer misrepresented their financial position in order to get the goods); and
(3) The buyer still has the goods at the time of demand (they can't return what they no longer have, and if they were sold, the seller just becomes a creditor that has to go after the buyer like any other creditor).
Hypothetical
Hypo 1: Sam sells scarves. Bob runs a small fashion store at the mall. Bob is a horrible business person. He's been getting closer and closer to going bankrupt each month, and yet he keeps trying to make it work. Bob believes Sam's scarves would bring in more customers, so he places an order for 1,000 scarves from Sam with payment due in 90 days. Sam is a careful seller so before he accepts the order, he visits Bob's store and see's how empty it is and how few customers there are. Sam calls Bob up and asks if he's sure 1,000 scarves are a good decision right now. Bob assures Sam that everything is fine and to please rush order the scarves. Sam sends the scarves. A couple weeks later, Sam checks up on Bob's store to see that how poorly it is doing and see's a "Going out of Business" sign hung in the window next to his scarves. Sam immediately sends a demand for the return of the scarves. Bob says, "Woah, woah, we agreed I have 90 days to pay you for them." Result: These facts make it clear that Bob was insolvent when he made the order, and that he misled Sam about his financial stability. As such, because the goods are still in Bob's store, Sam can reclaim them even though it took him longer than 10 days to demand them back.
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