Buyer's Insolvency

Assume that the seller has entered into a contract with the buyer, but after entering into that contract the seller learns that the buyer is insolvent and will not be able to pay for the goods. A question becomes whether seller at that point must deliver the goods to the buyer and then later sue when buyer fails to pay, or instead whether seller can avoid delivering the goods entirely. UCC 2-702 addresses this question.

Where the seller discovers the buyer to be insolvent he may refuse delivery, or if necessary, stop delivery of goods that have already been delivered to the carrier service. (For the specifics on stopping delivery see rule 2-705)

Sometimes, however, the seller will not discover the insolvency until the buyer has already received the goods. In such instances, the seller may reclaim the goods upon demand made within 10 days after the receipt. Note that if misrepresentation of solvency has been made to the seller in writing within three months before delivery, then the ten day limitation does not apply.

Also very important for purposes of the MBE is that the seller's right to reclaim goods is subject to the rights of a buyer in ordinary course or other good faith purchaser for value. In other words, if the buyer has sold the goods to a bona fide purchaser ("BFP"), then seller will be required to seek other remedies from buyer, as the ability to reclaim the goods will have been lost upon that sale.