Unpaid Sellers Stoppage of Delivery and Reclamation Rights Against an Insolvent Buyer: Enhancing Trade Creditor Recovery.

The recent Chapter 11 filing by Heilig-Meyers Company, this country's largest publicly traded furniture retailer, demonstrates the usefulness of the state law remedies of stoppage of delivery and reclamation of goods to trade creditors. Prior to Heilig-Meyers' Chapter 11, some of Heilig-Meyers' trade creditors had refused to deliver goods they had agreed to sell to Heilig-Meyers on credit terms unless Heilig-Meyers paid cash in advance for the goods. Other trade creditors had stopped delivery of goods and refused to release goods in the possession of a carrier unless Heilig-Meyers had paid cash in advance for the goods; and a few trade creditors demanded reclamation of goods that they had recently delivered to Heilig-Meyers.

Some trade creditors who stopped delivery of their goods obtained immediate payment from Heilig-Meyers. They converted from credit to cash in advance payment terms and avoided the risk of nonpayment resulting from Heilig-Meyers' Chapter 11 filing. Trade creditors exercising their reclamation rights also have improved prospects for payment of their claims. Other unsecured trade creditors can only file a proof of claim with the bankruptcy court, and their prospects for recovery are uncertain. In most Chapter 11 filings, unsecured creditors usually receive no recovery, or a minimal recovery, after a long delay on their unsecured claims.

This article explains what a trade creditor must do to successfully stop delivery of, or, reclaim their goods. The payoff for full compliance is receipt of payment for their goods, return of their goods, or, if the buyer is in bankruptcy, a Chapter 11 administrative claim with priority in payment over most other claims. This means a larger and quicker recovery than they would have otherwise realized if they did not take advantage of these state law remedies.

A SELLER'S RIGHT TO STOP DELIVERY OF GOODS

Goods In Seller's Possession

Under state law, a seller in possession of goods may refuse to deliver them to an insolvent buyer other than for cash. This converts the seller's payment terms from credit to cash in advance, or cash on delivery.

A seller has the right to withhold delivery of goods to an insolvent buyer whether or not the buyer is in bankruptcy. If the buyer is not in bankruptcy, the Uniform Commercial Code (UCC) definition of insolvency applies. The UCC relies on either an equity or balance sheet basis for defining insolvency. Under the looser equity definition, a buyer is insolvent when it is unable to pay its obligations in the ordinary course of business or as they come due. Under the far more restrictive balance sheet definition, a buyer is insolvent if its liabilities exceed the fair market value of its assets. If the buyer is in bankruptcy, the more restrictive balance sheet definition of insolvency applies, and it is harder to prove insolvency.