Article 2 of the Uniform Commercial Code (“UCC”) grants unpaid goods sellers the right to stop delivery of goods or reclaim goods sold to a financially distressed customer, depending on whether the customer had received the goods. However, reclamation rights have been eviscerated as a result of the enactment of the 2005 amendments to the Bankruptcy Code and prior and subsequent court decisions that have subordinated reclamation rights to a secured lender’s floating inventory lien.
A seller’s stoppage of delivery rights can be far more potent than the more problematic reclamation rights. A recent decision by the United States Bankruptcy Court for the District of Delaware, in O2Cool, LLC v. TSA Stores, Inc., et al., continues to tip the scales in favor of an unpaid seller’s stoppage of delivery rights. The court held that a goods seller’s proper exercise of its stoppage of delivery rights may trump a secured lender’s floating lien on inventory because stoppage of delivery rights—unlike reclamation rights—are not subordinate to a floating lien on a debtor’s inventory.Click here to view the full article