When a customer files for bankruptcy, sellers may wonder if they can stop the shipment of goods. While the Bankruptcy Code does not explicitly permit this, the Uniform Commercial Code (UCC) provides guidelines under Sections 2-702, 2-703, and 2-705. Sellers can stop shipment if the buyer is insolvent or has failed to pay for the goods on time. However, they must instruct the carrier or bailee not to release the goods, and this instruction should be in writing.

The automatic stay, which comes into effect when a company files for bankruptcy, does not prevent a seller from stopping unpaid goods in transit. Courts have ruled that even in FOB shipping arrangements, where the buyer takes title once the goods leave the seller’s possession, the seller can still stop the shipment until the buyer has actual physical possession. Sellers should be aware that stopping shipment may forfeit their right to an administrative expense claim for goods delivered within 20 days before or after the bankruptcy filing.

To navigate these complexities, sellers should consult with experienced bankruptcy counsel to ensure compliance with any court orders and to determine the best course of action. Acting quickly is crucial, as the window between shipment and delivery can be very short. Additionally, while stopping shipment does not violate the automatic stay, other prepetition collection activities would require relief from the stay. Read the full article here.