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I'm trying to understand What happens in case another block is mined over an uncle block (giving us an uncle chain) - is the first uncle still rewarded or only the latter?

The blue blocks are the main chain, whereas the orange ones are those who were mined separately, and the red arrow is the interaction I'm interested about - which blocks would be acknowledged by B4 and how?

References to code / blog would be much appreciated.

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It is defined in Yellow Paper, section 11.1 Ommer validation.

Uncles are only allowed to be siblings of another block in the main chain.

In your example U2 and B2 are siblings so U2 can be used as uncle. U3 has no sibling in the main chain can cannot be used as uncle.

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