The April 4, 2016 WurstCaseScenario discussed issues raised in the Chapter 11 of The Sports Authority (“TSA”) and the risks of failing to properly perfect interests in consigned goods under Article 9 of the UCC. The TSA estate benefitted from the errors of intended consignors when what was intended to be consigned inventory was actually property of the TSA estate.
Today we are looking at another issue in the TSA bankruptcy affecting the rights to goods but this time our attention turns from Article 9 to Article 2.
O2Cool manufactured and distributed consumer cooling products originated in China and sold goods to TSA F.O.B. origin. TSA utilized a complicated supply, delivery and logistics chain. O2Cool sent a number of Stop Shipment Notices pursuant to UCC 2-705 to Yusen Logistics (Hong Kong) Inc. (“YLHK”), which provided origin cargo management and customs house brokerage services for TSA as well as to OOCL (USA), Inc., an agent for the carrier, Orient Overseas Container Line Limited.
The UCC states that a seller may stop goods from being delivered to a buyer when the seller discovers that the buyer is insolvent and the goods are still in a carrier’s or bailee’s possession. This right to stop shipment exists until the buyer receives the goods. “Receipt” occurs when the buyer or the buyer’s designated representative takes actual physical possession of the goods. Goods that are in a common carrier’s possession for delivery to the buyer have not been received by the buyer. A seller’s right to stop goods from being delivered persists until the goods reach their final place of delivery.
TSA’s Bankruptcy Court concluded that because the goods were not yet in the physical possession of TSA when O2Cool sent the Stop Shipment Notices, O2Cool had the right to stop shipment of the goods.
The court’s reasoning was that because O2Cool had delivered the goods to YLHK and the goods were still in transit, when O2Cool sent the Stop Shipment Notices a common carrier, and not the buyer, was in possession of the goods. Thus, O2Cool’s right to stop shipment continued until the goods were in the physical possession of TSA and not when title passed.
The Court next turned to whether notice was given to the proper party.
The UCC provides that a seller has the right to stop delivery of goods upon discovering that a buyer is insolvent, and that a seller may stop shipment by notifying the bailee so as to “enable the bailee by reasonable diligence to prevent delivery of the goods. The UCC defines a bailee as “a person that by a warehouse receipt, bill of lading, or other document of title acknowledges possession of goods and contracts to deliver them.”
In this case YLHK was not listed as a carrier on the bills of lading and after it received the Stop Shipment Notices, YLHK notified O2Cool that it was neither a carrier nor in possession of the goods.
Article 2 of the UCC states that “a carrier who has issued a non-negotiable bill of lading is not obliged to obey a notification to stop received from a person other than the consignor”. Consignor is defined as “a person named in a bill of lading as the person from which the goods have been received for shipment”. Here Orient Overseas issued non-negotiable bills of lading showing another company as “the person from which the goods have been received for shipment.” Thus, the Court concluded that OOCL was not required to obey O2Cool’s Stop Shipment Notices.
Result: The Stop Shipment Notice was not effective and TSA owns the goods. Victory for TSA and its secured lenders and a loss to O2Cool and its secured lenders.
Lesson: Secured transactions under Article 9 of the UCC often depend on the workings of other UCC sections such as Article 2.