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Stopping goods in transit or reclaiming goods after delivery: Are these strategies you can use or are they just something lawyers talk about? Read on for the answers.
The Scenario
A good customer, which has consistently paid all your invoices on time, has just placed a new order and, based on the favorable payment history, you release the goods for shipment. The customer is located in Florida, and you shipped from your facility in California. However, the day after you shipped, you are informed that this good customer has financial problems. The customer is insolvent and will probably not be able to pay for this shipment of goods.
Questions
- What, if anything can you do?
- What if the goods have already been delivered?
- If the invoice is marked FOB California or FOB Florida, would either these make a difference?
- Is there a difference if your creditor has already filed bankruptcy?
Discussion
The Law governing the relationship between buyers and sellers of goods is the Uniform Commercial Code (UCC). The UCC was adopted by each of the individual states and may vary from state to state. The discussion contained in this column is in general terms and may vary from state to state. Under the UCC, when you discover that a buyer is insolvent, you can stop the delivery of goods which are in transit (UCC 2-705). So, in this situation you can stop the goods that are enroute from California to Florida.
The Impact of FOB
When the goods have already been delivered to the buyer's location you can still recover them by making a demand for recovery within 10 days of the goods' delivery (UCC 2-702). FOB (short for "free on board") identifies which party is responsible for the shipment of the goods. In and of itself this does not address who has title to the goods and, without identifying when title passed, would not have any effect on this problem.
 If you discover that your customer has filed for bankruptcy, you can demand the return of your goods in writing (see Bankruptcy Code, Section 546). This demand must be made within 10 days of the goods having been delivered.
Making a Reclamation
If you discover that your customer has filed for bankruptcy, you can demand the return of your goods in writing (see Bankruptcy Code, Section 546). This demand must be made within 10 days of the goods having been delivered.
This reclamation seems straight forward, but, alas, it is not: the recovery is subject to the jurisdiction of the Bankruptcy Court. The Court may decide the goods are needed for the restructuring of the debtor, in which case you should be granted a priority for payment in the bankruptcy proceedings rather than the return of the goods.
Be aware that many buyers will have a UCC filing on file in the State in which they are located or even where they do business, which will grant their lenders a security interest in their inventories of finished goods and raw materials.
These filings will generally have a clause that gives the lender a security interest in "after acquired property." These words grant the lender a security interest in the goods shipped from California to Florida, effective when title passes to the buyer. Your only chance of recovering the goods is to strictly comply with the notification requirements of the UCC and the Bankruptcy Code.
An Ounce of Prevention...
While you should be knowledgeable about and have the ability to execute reclamation demands to recover your goods, it is most important to recognize problems before they occur. When the dollars justify it, always stay current regarding the financial condition of your customers. Today's good customer could very well be the problem customer of tomorrow. In addition, UCC searches should be done and redone on a routine basis in the states where goods are shipped. Knowing how sound your customers are is as important today as it has ever been.
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