A NEW YORK LAW JOURNAL SPECIAL SECTION Corporate Restructuring & Bankruptcy WWW. NYLJ.COM MONDAY, JUNE 22, 2015 Protecting Consignors’ Interests And Rights to Recover Property BY CARREN B. SHULMAN onsignment is an arrangement between two parties for one to sell the goods C of another. If the goods are sold, a dis- counted sales price is paid to the original seller with the balance to the buyer/con- signee. Many retail industries have used consignment for years, but many are mov- ing towards consignment. Other industries have used consignment and consignment-like relationships, such as “conditional sales.”1 In this uncertain economy, consignment is realizing a resurgence and may be an effec- tive cost saving measure for vendors/con- signees. This article addresses the law on consignment and how consignors protect themselves. Consignment is governed by Article 9 of the Uniform Commercial Code (UCC). §9-109(a)(4). Consignment is defined in UCC §9-102 as: a transaction, regardless of its form, in which a person delivers goods to a mer- chant for the purpose of sale and: (A) the merchant (i) deals in goods of that kind under a name other than the name of the person making delivery; aggregate value of the goods is $1,000 ship rights. To the extent the consignment (ii) is not an auctioneer; and or more at the time of delivery; relationship fails sections (B) or (C) above, there may be a consignment relationship, (iii) is not generally known by its credi- (C) the goods are not consumer goods but it may not be governed by Article 9. See tors to be substantially engaged in selling immediately before delivery; and the goods of others; (D) the transaction does not create a secu- Official Comment to §9-102, No. 14. In such case, the relationship could be governed by (B) with respect to each delivery, the rity interest that secures an obligation. Article 2 (Sale of Goods, §2-326) or common If seller is “not generally known [to be] law, yet nothing prohibits the parties to such CARREN B. SHULMAN, a finance and bankruptcy partner … selling the goods of others,” the person arrangement from filing a lien as a protec- at Sheppard, Mullin, Richter & Hampton in New York, has advised manufacturers and suppliers on supply chain issues delivering the goods (consignor) must file tive measure (in fact such filing should be for more than 20 years. a lien as notice to the world of its owner- considered to protect the seller/consignor’s MONDAY, JUNE 22, 2015 rights). And to the extent consignment is consignor’s goods. Rather than risking a race consignee provides accurate and updated solely to create a security interest, and there- to the finish line, notice of ownership of con- records of sales and receipts is essential. fore fails §9-102(D), it would be a secured signed property is preferred and essential.2 In this age of electronics, consignee should transaction and governed in any event by How does consignor ensure others are on be sophisticated enough to transmit reports Article 9, requiring the filing of a lien. See, e.g., notice of its ownership rights? of sales records timely in electronic format In re Morgansen’s LTD, 302 B.R. 784 (Bankr. • File a lien before or simultaneously with and funds due should be transferred quickly. E.D.N.Y. 2003) (bankruptcy trustee authorized the delivery of consigned goods. • Monitor reports and payment for timeli- to sell consigned property where property The lien should state that the relationship ness and discrepancies. was not subject to Article 9); Livingston on is a consignment relationship and that title A typical consignment relationship will Consignments Under UCC Article 9, by Margit has not passed to consignee (since a lien is require at least monthly reporting of sales of Livingston, 3/10/2009, 2009 Emerging Issues typically filed to denote a security interest consignor’s goods and a statement as to the 3413, Matthew Bender & Company. in goods for which title has passed). More- amounts due to consignor, which should also be Let’s examine consignment in the retail over, the lien should be filed before the goods paid monthly. Thus, there is a constant cycling industry. Countless articles describe the are delivered to avoid any confusion as to of reports, sales and payments such that con- increase and preference for Internet shop- ownership. See §9-317, §9-319 (governing the signor can identify quickly whether there have ping over visiting a retail store. What does rights of consignee vis-à-vis its creditors/pur- been any price changes, fall off in sales, or other this mean for retailers? They need less space, issues requiring immediate attention. less stock, and frequent turnover of prod- Notably, consignment arrangements will uct to keep things “fresh.” A byproduct of Once consignor has ensured that not require consignee to maintain a sepa- the Internet consumer is the growing trend rate bank account for sales. Indeed, for most towards consignment arrangements, which its ownership rights are protected, retailers that would be impossible. Therefore places less risk on and requires less capital ensuring that consignee provides funds due to consignor may be comingled outlay by the storefront seller. accurate and updated records of with other funds of consignee. Such comin- The hallmarks of a consignment relation- sales and receipts is essential. gling should not present a problem as long ship are: as consignee timely pays when due; another • Title to the goods never vests or passes reason to ensure payments are received to consignee, consignor retains ownership. chasers). This is particularly critical where the monthly. Otherwise, in a liquidity crisis, • A minimum price for the sale of goods, consignee has another lender with a perfected consignor will need to trace the cash from allowing consignor to retain some control security interest over the assets and inven- the sale in order to ensure full payment of over price. tory of the consignee. See §9-324(b) (purchase amounts due. It is, therefore, also important • Consignee usually pays a discounted money security interests over inventory). If that consignor’s lien document specifically price for the goods and retains the balance. the consignee has an existing lender/lienor, state that consignor has a security interest • The agreement is short-lived and termi- consignor should notify that lender/lienor in in the proceeds of any sales of the goods. See nable on notice. compliance with UCC §9-324(b): §9-315 (Secured Party’s Rights on Disposition Form consignment agreements are often • Send consignor’s filed lien to the other of Collateral and in Proceeds).3 very short and uncomplicated. Sounds easy lienholders. Since consignor must rely on reports right? In fact, there are many pitfalls of con- • Deliver the goods to consignee within from consignee to confirm sales of goods, signment arrangements for consignors in five years of delivery of the filed lien, or, said consignor should maintain its own records failing to follow the statutes. another way, update the delivery of the filed and methods of ensuring compliance by con- lien to the competing lienor every five years. signee. For instance, consignor should run Title/Ownership Rights • Describe for the other lienholder the periodic checks on inventory, storage/sale goods consignor is delivering and over which methods and accuracy of reporting. If its Why is it important to put others on notice it will have a lien. goods are sold by consignee in hundreds of of consignor’s ownership rights? Because Existing or competing lienholders should stores, spot checks at key stores or a periodic anyone with a lien on consignee’s inventory be identifiable when consignor searches for review of the consignee’s business records of or a claim against its assets may acquire con- competing liens, however, requiring the con- remaining inventory should allow consignor signor’s goods and dispose of them before signee to notify its lienholders is also rec- to at least confirm that consignee’s systems consignor’s rights may be asserted. Most ommended. Additionally, consignor should are in place and running appropriately. Con- lenders require a lien on collateral. While periodically confirm whether other liens have signee should be a well-run machine if it has consigned goods should not be subject to been filed against consignee that may cover many consignment relationships, and slip- encumbrance by lenders’ liens because the same goods. page could be indicative of liquidity issues consignee lacks title, an unknowing lender or failures of management that should lead (like a good faith buyer), may be unaware Payment/Pricing to a review of the relationship. of consignor’s ownership rights. The same Additionally, consistently checking is true of a landlord who may seize leased Once consignor has ensured that its own- reports will confirm that consignee is meet- store property and unknowingly dispose of ership rights are protected, ensuring that ing the minimum sales price agreed to in the MONDAY, JUNE 22, 2015 contract. A fire sale at consignee’s stores did not comply with local law in or outside be a secured creditor of consignee if all nec- should not result in a below contract dis- of the United States, the consignor may have essary filings were made. Alternatively, an count on consignor’s product. In addition to bigger issues than just nonpayment. Best prac- earmarking claim may be appropriate since raising a red flag as to consignee’s finances, tice also will be to ensure that the consignee sales of consignor’s product would automati- deep discounts on consignor’s product can discloses precisely where the product will be cally have generated the obligation to pay hurt the market for its product with con- dispersed and sold and to have consignee consignor its agreed upon revenue under the signor’s other consignees.