Protecting a Consignor's Priority Interest in Consigned Goods

September 4, 2019

In a recent decision the U.S. Court of Appeals for the Ninth Circuit addressed the intersection of consignment and bankruptcy. Debtor was a seller of petroleum products. IPC provided debtor with bulk petroleum products on consignment. Because a consignor retains title to the consigned goods until they are sold by the consignee, like many consignors IPC did not bother to file a financing statement to perfect its interest in the consigned goods. As a result, since under Uniform Commercial Code section 9-319 a consignee has only the same interests in consigned goods that the consignor has, and because IPC did not perfect its interest in the consigned fuel, the debtor/consignee’s interest in the fuel also was unperfected, and the bankruptcy trustee’s judicial lien on property of the estate trumped IPC’s interest in the consigned products and the proceeds from the sale of those products.

The real fight in the case was over the cash proceeds from the sale of the consigned goods that were in the possession of the debtor at the time it filed its petition. Although debtor’s arrangement with IPC was for debtor’s customers to pay IPC directly for petroleum they purchased from debtor, many of debtor’s customers continued to pay it directly, and debtor would periodically transfer those payments to IPC. When debtor filed its petition, it had on hand a substantial amount of cash proceeds and accounts receivable for sales it had made to its customers out of the consigned inventory. The trustee sought to avoid all of IPC’s interests in both the consigned inventory and the cash proceeds and accounts receivable.

Under the UCC, as to a consignee’s creditors, a consignee is deemed to have the same rights to consigned goods as the consignor. Since IPC had not perfected its interest in the consigned goods, it conceded that the trustee’s lien had priority over IPC’s interest in the consigned goods, but it vigorously challenged the trustee’s rights as to the cash proceeds and accounts receivable. IPC argued that 9-319 applies only to goods, and cash and A/Rs are not goods. IPC lost at the Bankruptcy Court and the Bankruptcy Appellate Panel, and the Ninth Circuit affirmed. The court closely examined the UCC’s treatment of consignments and held that the term “goods” in 9-319 includes the proceeds of those goods. It also looked at the policy behind 9-319 – primarily to deny priority to secret liens – and determined that cleaving the proceeds of sales of consigned goods from the goods would defeat the goal of protecting subsequent secured parties from being primed by secret liens.

The message here is that businesses that sell goods on consignment should not relax because they retain title to the goods until sold – consignors should perfect a security interest in both the consigned goods and the proceeds from sales of those consigned goods. Consignors also should be diligent in not letting cash proceeds accumulate with consignees. The commercial lawyers at Robison, Curphey & O’Connell are well equipped to assist clients in protecting their interests in consigned goods.

 

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