UCC Filings: What is Consignment?
We have previously discussed whether you should secure your receivables, under Article 9 of the UCC, via a Blanket Filing or a PMSI Filing and now we would like to discuss consignment filings. First, let’s review consignment.
What is Consignment?
Consignment, according to UCC Article § 9-102 means “…a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale.”
Who is the Consignor?
A person that delivers goods to a consignee in a consignment (i.e. the owner of the goods being delivered)
Who is the Consignee?
A merchant to which goods are delivered in a consignment (i.e. the recipient of the goods being delivered)
“Sale or Return” versus “True Consignment”
There are two recognized types of consignment:
“Sale or Return” where goods are delivered to the Consignee primarily for retail purposes. In this type of Consignment, title passes to Consignee upon delivery, but Consignee remains contractually obligated to return any unused goods.
“True Consignment” where the goods are delivered to be primarily used by the Consignee, but Consignor retains title to the goods. Consignee may either be pulling goods from stock on a need be basis, or might be testing out goods on a trial basis to determine the necessity of the goods.
How Does a True Consignment Work?
The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If and when those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner.
Example of Consignment
- The Goods: Mulch & Fertilizer
- Owner of Goods: The Tractor Folks
- Recipient of Goods: The Garden Supply Guys
In this case, The Tractor Folks have supplied The Garden Supply Guys with mulch and fertilizer. The Tractor Folks own that mulch and fertilizer until The Garden Supply Guys sell the mulch and fertilizer, as needed, to its customers.
If The Garden Supply Guys are unable to sell the mulch and fertilizer, they can return it to The Tractor Folks without any further obligation. (Remember, this is a simple example, and individual agreements may contain different stipulations.)
File UCCs to Protect Your Interest in Consignment
Are you required to file a UCC on a consignment transaction? No. However, we’ve now seen prominent bankruptcy cases (e.g., Sports Authority) where creditors are finding themselves unsecured, receiving pennies on the dollar.
A simple consignment agreement is often viewed by the courts as a “secret lien” and may not be enough to protect you if your customer (aka “the consignee”) defaults or files for bankruptcy protection, as there is no legal/recorded document identifying your title to the goods provided.
If your customer files for bankruptcy protection, the inventory they have on hand is gathered up and sold 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.
Need assistance with filing a UCC on your consignment transactions? Reach out and let us help.
(Originally published April, 2015)
