A Bank's Security Interest Can Be Trumped by the Seller's Right of Stoppage in Transit
 
December 22, 2004
 
Michael Weissman - Chicago

On January 24, 2002, Trico Steel Co., L.L.C. contracted to buy 35,000 metric tons of basic pig iron from Cargill, Incorporated. The contract provided that Cargill was to ship the pig iron to New Orleans. Since Trico’s facility was in Decatur, Alabama, it contracted with Celtic Marine Corporation to transport the pig iron from New Orleans to Decatur. Celtic, in turn, subcontracted the job to Volunteer Barge & Transportation.

Trico’s contract with Celtic provided that Trico was responsible for loading the pig iron in New Orleans and unloading it when it arrived in Decatur. Trico assumed all responsibility for freight charges. Volunteer was liable for any loss during transport.

When the pig iron arrived in New Orleans, Trico immediately sold 10,000 tons. On March 7, 2001, the remaining 25,000 tons were loaded by stevedores hired by Trico onto barges headed for Decatur. Volunteer issued two non-negotiable bills of lading to Celtic. At this point things began to happen.

While the pig iron was in transit to Decatur, Cargill learned that Trico was insolvent. On March 23, 2001 Cargill sent Celtic a letter advising that the goods were to be stopped in transit. Cargill followed up with a similar letter on March 26, 2001.

Trico filed a petition for relief under Chapter 11 of the Bankruptcy Code on March 27, 2001. Cargill sent Celtic another letter on March 29, 2001, stating that it was exercising its right of stoppage in transit.

Cargill requested a determination from the bankruptcy court that no disposition of the pig iron would be made. Later, by agreement of the parties, the pig iron was sold to a third party and the proceeds placed in an escrow account.

Then JP Morgan Chase intervened asserting that it had a security interest in all of Trico’s property based on a security agreement dated November 30, 1995. The issue before the court became whether Cargill’s right of stoppage trumped JP Morgan’s security interest or vice versa.

In In re Trico Steel Company, L.L.C. 282 B.R. 318 (Bkrtcy. D. Del. 2002), the court ruled that Cargill had properly exercised its right of stoppage and that a properly exercised right of stoppage in transit trumped a duly-perfected security interest.

JP Morgan argued that under the applicable provisions of the Uniform Commercial Code (UCC) receipt of the contested goods by the purchaser cuts off the seller’s right of stoppage and that Trico had received the goods before Cargill sent its notice. The alleged receipt occurred, said JP Morgan, when the stevedores hired by Trico unloaded the pig iron. But the Court said the stevedores “were to do nothing more than facilitate the transport of the pig iron.” And furthermore, that “receipt” meant actual physical possession of the goods. However, Trico did not have physical possession of the pig iron when Cargill sent its notice of stoppage because the pig iron was still in transit. JP Morgan also asserted that receipt had occurred when the pig iron landed in New Orleans. This assertion was rejected by the Court saying that the place of final delivery of the goods was Decatur, not New Orleans. “The delivery at New Orleans was merely to an intermediary designated to transport the pig iron to Decatur,” said the court.

Finally, JP Morgan contended that Cargill’s right of stoppage was a security interest and since it arose after JP Morgan had perfected its security interest it was junior to JP Morgan’s security interest. But, said the bankruptcy judge, the right of stoppage was not designated as a security interest in the UCC and thus was not subject to the Article 9 rules on priority.

What’s the point? The Trico case was decided under old Article 9 but the provisions of revised Article 9 would mandate the same result. Of course, a secured lender can defeat the right of stoppage by making a cash payment for the goods, but if the lender has previously advanced funds to the purchaser based on the seller’s invoice it would end up advancing twice on the same goods. The most important point to remember is that the right of stoppage in transit is a common law remedy that trumps a duly-perfected Article 9 security interest. Therefore, do not lend on goods in transit unless adequately secured by other collateral.

For more information e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.