In re M. Paolella & Sons, Inc.

The debtor was the largest wholesale distributor of tobacco products in the Delaware Valley. The debtor and MNC Commercial Corp. entered into a financing agreement that provided a line of credit secured by virtually all of the debtor’s assets. These security interests were perfected by filings. The financing agreement was asset-based in that it provided the debtor with a line of credit determined by a formula whereby the debtor could borrow against 85% of eligible accounts receivable and 60% of eligible inventory. In May 1985, the debtor and MNC discussed plans to liquidate debtor’s assets. Robert Stewart, MNC’s president, was aware of the plan. In expectation of an orderly liquidation, Michael Paolella began informing certain tobacco companies that he would not be renewing personal loan guarantees. He did not inform these companies, however, of his liquidation plans. American Tobacco had previously obtained a letter of credit from the debtor. The letter required that American Tobacco be given notice if the letter was to be canceled or not renewed. On January, 1986, MNC notified the debtor that the loan was in default and requested immediate repayment of the entire balance.