In re M. Paolella & Sons, Inc.

M. Paolella & Sons, Inc. (Paolella), a tobacco wholesaler, financed its business through a line of credit from MNC Commercial Corp. (MNC) secured by essentially all of Paolella's assets, including inventory. As MNC grew concerned about Paolella's solvency and began planning to liquidate its collateral, tobacco companies offered Paolella a special buying program that added nearly $2 million in new inventory in a single month, with MNC auditing all incoming goods. When MNC ultimately stopped advancing funds and demanded possession of its collateral, including the new inventory, the tobacco companies filed an involuntary bankruptcy petition and sought reclamation of the goods. The bankruptcy judge sided with the tobacco companies, finding MNC had not acted in good faith, and MNC appealed.