|Business Credit Law and Regulations
Stopping Goods in Transit... An Overlooked Remedy
Stopping goods in transit is an important remedy for sellers when they have discovered they have sold goods to an insolvent buyer, whether or not the credit terms have expired
The Right to Stop Goods in Transit
The common law right of stoppage is reflected and expanded in Article 2 of the Uniform Commercial Code (UCC). The UCC expands the rights of a seller to stop goods in transit where the goods are in the hands of other bailees, such as a carrier or warehouseman. However, once the goods have been received by the buyer, the right of stoppage is lost.
Under the UCC, a seller may stop goods in transit in two instances, where the debtor is insolvent or where the buyer repudiates or fails to pay prior to delivery.
The Mechanics of Stopping Goods in Transit
The seller gives notice of stopping goods to the buyer with a stop order or stop notice. The notice should be given to the carrier or bailee. Under the UCC, the seller's right to stoppage is lost upon the buyer's receipt of goods. Receipt is defined under the UCC as physical possession. Stoppage of goods does not consider when title passes.
The seller loses its rights to stop goods in transit upon an acknowledgment by a warehouseman that it is holding the goods in favor of the buyer. The warehouseman is in constructive possession of the goods in favor of the buyer.
The seller also loses its right to stop goods when a carrier acknowledges that it holds the goods for the buyer by reshipping them pursuant to the buyer's directions. Likewise, a carrier's acknowledgment as a warehouseman terminates the seller's right to stop delivery. The seller's stoppage of goods in transit does not bar the seller from recovering damages for costs of stoppage and redelivery.
Stoppage in Transit Under the Bankruptcy Code
Courts generally recognize the right of the seller to stop goods in transit after the buyer has filed bankruptcy. However, the seller should seek relief from the automatic stay prior to selling the goods.
Stopping goods in transit should not be considered a preference, as the buyer did not have an interest in the goods. If the seller stops goods in transit and the buyer files bankruptcy, the seller may be required to file a motion to compel the buyer to assume or reject the executory contract.