Consignment Creditors, Give Back the Money

Sports Authority Consignment Creditors, Give Back the Money!

Consignment creditors in the Sports Authority bankruptcy have been dealt a crushing blow with the Court’s recent decision: Sports Authority was not “substantially engaged” in consignment sales. What does the decision mean? The non-UCC-filing-creditors who relied on the argument that Sports Authority commonly engages in consignment sales are now unsecured creditors.

*womp womp*

Quick Back Story

When Sports Authority filed for bankruptcy protection in 2016, big name creditors (e.g. Nike & Under Armour) with big dollar credit lines (e.g. $40M+) didn’t seem overly concerned with the lack of UCC filings to secure the credit lines.

Two reasons the creditors may have been lulled into a false sense of security:

  1. A classic case of “too big to fail” and
  2. Some experts believed these creditors would successfully retain rights to collateral or proceeds, based on the argument that Sports Authority is commonly known to participate in consignment sales.

We now know, of course, that Sports Authority was certainly not too big to fail. And thanks to the recent bankruptcy court decision, we also know that Sports Authority was not commonly engaged in consignment sales.

What the Bankruptcy Court Said

In its recent decision, the bankruptcy court conceded there is no bright-line rule for determining whether a business is substantially engaged in consignment. However, in previous cases, courts have held that 20% or more of the business’s inventory must be consigned goods.

In this case, it was determined Sports Authority’s inventory was comprised of only 14% of consigned goods.

“…the Debtors never “substantially engaged” in consignment transactions. WSFS and the Debtors stipulated that at no point, pre-or-post petition, did the Debtors’ total inventory include more than 14% of consigned goods.”

“…the threshold for substantial engagement is met only if consigned goods comprise “20% or more” of the value of the Debtors’ inventory.”

“Be a Good Sport and Give ‘Em Back!”

So, What Happens to The Funds Given to Those Consignment Creditors? “Be a Good Sport and Give ‘Em Back!”

OK, sportsmanship isn’t driving this decision, the court order is. In their review of the court’s decision, authors Michael Shiner and Maribeth Thomas, in Protecting a Consignor’s Interests in Retail Bankruptcy, advised that the court ordered the consignors to repay the funds.

“Judge Mary F. Walrath issued an opinion…that requires a consignor of goods to disgorge payments [i.e. repay] received from the debtor after the commencement of its chapter 11 bankruptcy case, with the disgorged funds to be paid to the secured lender.”

Consignment & UCC Article 9

Are you required to file a UCC when selling on consignment? Required, no. Recommended, yes.

Before you opt out of filing a UCC, you should understand what constitutes a consignment under Article 9. Here’s the definition of consignment under Article 9-102:

Consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant 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;
(ii) is not an auctioneer; and
(iii) is not generally known by its creditors to be substantially engaged in selling the goods of others;

(B) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery;
(C) the goods are not consumer goods immediately before delivery; and
(D) the transaction does not create a security interest that secures an obligation.

Does your transaction not meet Article 9’s definition of consignment?

“If a consignment does not satisfy the requirements of Section 9-102(a)(20), the relationship between the consignor and consignee is governed by common law and the interest of the consignment seller would prevail over the interest of secured creditors.” – Authors Michael Shiner and Maribeth Thomas

Why File a UCC if Selling on Consignment?

Because the law allows you to secure your goods! A simple consignment agreement is often viewed by the courts as a “secret lien” and may not be enough to protect you if your debtor defaults or files for bankruptcy protection, as there is no legal/recorded document identifying your title to the goods provided to the debtor.

If the debtor files for bankruptcy protection, the inventory the debtor has on hand is gathered up and sold off to pay creditors (secured creditors first and then the unsecured creditors). Without the UCC filing identifying you as a secured creditor and specifically identifying your goods, the inventory you supplied automatically becomes property of the estate.

Get Your Head in the Game: File a UCC

If selling on consignment,

  • execute a security agreement and
  • ensure it includes clear identification of inventory,
  • search for existing secured creditors & notify those creditors of your security interest,
  • file the UCC-1 in the appropriate jurisdiction(s) – if possible, and
  • file the UCC prior to the debtor taking possession of the inventory.

We’re here to help!

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