## Facts

- The National Sugar Refining Co. (National) agreed to buy 6,550 long tons of raw sugar from C. Czarnikow, Inc. (Czarnikow) under two contracts dated August 12 and August 26, 1981, with September delivery.
- On August 27, 1981, Czarnikow notified National that sugar then aboard the vessel M/V *Edispsos* would satisfy the contracts, and the court stated that title passed to National at that time.
- Czarnikow held the negotiable bill of lading while the sugar remained in transit and had not been physically delivered to National.
- On September 3, 1981, National filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of New York.
- After the bankruptcy filing and before delivery, Czarnikow invoked its Uniform Commercial Code right of stoppage in transit based on National’s insolvency and sought court action requiring National to assume or reject the contracts and, if assumed, to provide adequate assurance of payment.
- Bankers Trust Company (Bankers) asserted a secured-creditor interest that could affect entitlement to the sugar or its proceeds.
- On September 21, 1981, the bankruptcy court ruled that Czarnikow, as an unpaid seller, could stop the sugar in transit and could dispose of it in a commercially reasonable manner, retaining the proceeds pending a later determination of whether Bankers or Czarnikow had the superior right to those proceeds.
- On November 9, 1981, the bankruptcy court denied National’s motion for reconsideration.
- National appealed to the U.S. District Court for the Southern District of New York, challenging both the stoppage authorization and the denial of reconsideration.

## Issues

1. Whether an unpaid seller may exercise the UCC right of stoppage in transit after the buyer has filed Chapter 11, where title has passed but the goods remain in transit and the seller controls the bill of lading.
2. Whether recognizing and enforcing stoppage in transit in these circumstances is inconsistent with the Bankruptcy Code, including the automatic stay and the debtor-in-possession’s rights in estate property.
3. Whether the bankruptcy court properly authorized the seller to sell the goods in a commercially reasonable manner and hold the proceeds pending resolution of a priority dispute with an asserted secured creditor.

## Decision

- The district court affirmed the bankruptcy court’s September 21, 1981 order permitting Czarnikow to exercise stoppage in transit.
- The district court affirmed the bankruptcy court’s authorization for Czarnikow to dispose of the sugar in a commercially reasonable manner and retain the proceeds pending later priority rulings.
- The district court affirmed the bankruptcy court’s November 9, 1981 denial of National’s motion for reconsideration.
- The court rejected National’s argument that passage of title and the Chapter 11 filing eliminated Czarnikow’s stoppage rights where delivery had not occurred and the seller still had control over the shipment documents.

## Legal Principles

- Under the UCC (including the stoppage-in-transit remedy), an unpaid seller may stop delivery upon discovering the buyer’s insolvency if the goods are still in transit and the buyer has not taken possession, even if title has passed.
- Bankruptcy does not give the debtor (or the estate) greater rights in property than the debtor had under nonbankruptcy law; the estate generally takes property subject to existing state-law limits and seller remedies.
- A seller’s stoppage-in-transit remedy can be recognized in bankruptcy when the debtor’s right to receive the goods was, at the petition date, subject to the seller’s stoppage rights under applicable commercial law.
- Bankruptcy courts may permit liquidation of goods in a commercially reasonable manner and hold proceeds where doing so preserves value, while leaving final entitlement to the proceeds for later adjudication among competing claimants (such as an unpaid seller and an asserted secured creditor).

## Conclusion

*In re National Sugar Refining Co.* held that Czarnikow, an unpaid seller that still controlled the shipment through the bill of lading while the sugar remained in transit, could exercise stoppage in transit after National filed Chapter 11, could sell the sugar in a commercially reasonable manner, and could retain the proceeds subject to later determination of priority between Czarnikow and Bankers; the district court affirmed both the stoppage/sale order and the denial of reconsideration.


In re National Sugar Refining Co., 27 B.R. 565 (1983)