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Stoppage in Transitu: A Shipper's Self Help Remedy
July 28, 2009
In these difficult economic times, shippers may find themselves in the situation where they realize after their goods are in transit that they have shipped valuable inventory to a consignee who is insolvent. If the consignee has not yet paid for the goods, then the shipper may engage in “self help” by directing the carrier not to deliver the goods to the consignee. Upon receipt of such stoppage notice by an authorized employee, the carrier must comply with the shipper’s instruction to stop delivery.
Stoppage in Transitu
Section 2-705 of the Uniform Commercial Code provides that the seller may stop the delivery of goods in the possession of a carrier or other bailee when he discovers that the buyer is insolvent. UCC § 2-705(1). “Insolvent” is defined by the UCC as “(a) having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute; (b) being unable to pay debts as they become due; or (c) being insolvent within the meaning of the federal bankruptcy law.” UCC § 1-201 (23). Where the buyer has filed a bankruptcy petition, at least one court has held that a stoppage notice to the carrier does not violate the automatic stay. See The Nat’l Sugar Refining Co. v. Czarnikow, Inc. (In re The Nat’l Sugar Refining Co.), 27 B.R. 565 (S. D. N.Y. 1983); see also Pester Refining Co. v. Continental Illinois Nat’l Bank and Trust Co. of Chicago, 66 B.R. 801 (Bank. S. D. Iowa 1986) (overturned on other grounds and citing In re The Nat’l Sugar Refining Co.).
To stop delivery, the seller must notify the carrier in time for the carrier to prevent delivery of the goods through reasonable diligence. UCC § 2-705(3)(a). After the stop delivery notification is received, the carrier must hold and deliver the goods according to the seller’s directions, but the seller is liable to the carrier for any ensuing damages or charges. Id. at § 2-705(3)(b).
The seller’s prerogative to stop delivery does not depend on whether the agreement is a shipment or a destination contract. It is exists regardless of whether the buyer or seller has title to the goods when in the hands of the carrier. However, the seller’s right to stop delivery may be cut off if, among other things, the goods (or a negotiable document of title) are in the buyer’s possession. UCC § 2-207 (2); Cargill Inc. v. Trico Steel Co. LLC (In re Trico Steel Co. LLC), 282 B.R. 318, 324 (Bank. D. De. 2002), (holding that receipt means physical possession of the goods, therefore, debtor did not receive the goods when they were delivered to the debtor’s stevedores in New Orleans when the shipping terms were New Orleans CIFFO and the ultimate destination was Decatur).
A carrier that does not obey the shipper’s instruction may be liable for conversion. Cf. Petroleum Products, Inc. v. Mid-America Pipeline Co., 815 F. Supp. 1421, 1424 (D. Kans. 1993). Note, however, that if there are competing claims to the goods, then the carrier may hold the goods until it ascertains the validity of the claims or brings an action to resolve them. UCC §7-704. Consequently, a stoppage in transit order may tie up the goods for a considerable period of time.
A shipper, upon learning of a consignee’s insolvency, is entitled to issue a stoppage notice to the carrier and the carrier is obligated to comply with that notice. The shipper’s right to issue such an order will not be cut off so long as the buyer does not have physical possession of the goods. In the case of competing claims to the goods, the carrier may hold the goods and until it determines who has superior rights or institute a suit to determine to whom delivery of the goods should be made.
This Alert is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2009 Posternak Blankstein & Lund LLP. All rights reserved.