As we enter 2003, many manufacturers, suppliers, jobbers, and distributors are looking at consignments as a way to bolster sales, dispose of accumulated inventory, or raise funds by liquidating surplus assets. Frequently, credit-strapped retailers and re-sellers are proposing consignments as a means of obtaining or retaining some inventory.
Ownership: Not What It's Cracked Up To Be
Along with death and taxes, most people think that their ownership of property is one constant in an ever-changing universe. Many believe that their property rights cannot be taken from them unless they voluntarily sell or give the property away or lose the property pursuant to a judicial procedure (e.g. enforcement of liens). Unfortunately, that blithe assumption is proving to be very expensive for those who have goods placed on consignment.
The Consignment Rule
Under the Uniform Commercial Code ("UCC"), a non-consumer who delivers goods to another on consignment has a significant risk of losing those goods to the holder of a security interest in similar goods owned by the consignee. In lay terms, a party that brings goods to another to sell on consignment may risk losing the goods to a secured lien holder of the selling party. Delivery makes the goods part of the secured party's collateral. If the goods are still on consignment at the time of any foreclosure, repossession, or bankruptcy involving the consignee, the goods could be lost pursuant to the foreclosure process.
Steps To Protect Your Property on Consignment
This is not to say that consignment is not a favored or valid way to sell that accumulated inventory, but you must take affirmative action to protect your property rights. You must:
- File a UCC financing statement before the goods are delivered under consignment;
- Obtain a UCC search before delivery, showing the filed financing statement and all prior filings;
- Determine what prior filers claim a security interest in goods of the type to be consigned, and give each prior filer written notice stating that goods will be delivered on consignment, describing them by item or type; and
- Take appropriate steps to ensure that the notice is received prior to delivery of the goods for consignment.
Safe Harbor for Consumer Goods or Goods Less Than $1,000
This rule does not apply to consumer goods consigned by the consumer or to goods consigned with a value of less than $1,000 at the time of delivery. It may be possible to properly plan the consignment to meet one of these safe harbors.
Defend Yourself if Poor-Planning Leads to Judicial Action
In the event that the proper planning steps were not followed or were defective, or if the reliance on a safe harbor was unwarranted, all is not lost. The consignor can establish that the consignee is generally known by his creditors to be substantially engaged in selling goods belonging to others. The proof must be the knowledge of the consignee's creditors, not the knowledge or expectation of other consignors. Because it would be simply impractical to investigate these issues prior to delivering goods under consignment, no potential consignor should ever rely upon the assumption that there will be proof to satisfy this potential exception.
Conclusion
Every non-consumer delivering goods for purposes of sale to someone in the business of selling goods of that kind should take the steps outlined above for filing and notice. Failure to follow those steps will render the ownership of those goods subject to any security interest given by the consignee in similar goods of the consignee or seizure by a bankruptcy trustee. If those steps are not followed, the consignor must risk the expense and be able to prove in court that the consignee was generally known to its creditors to be substantially engaged in the business of selling the goods of others. The exercise will be expensive in any event, and the necessary proof may simply not be available.
If you would like to protect or make the most of your business assets, or have any questions, please contact your attorney or any of the Business attorneys at Bullivant Houser Bailey PC.