Unperfected Consignors Be Warned: You Could Lose Your Goods and Proceeds

Trade creditors enter into consignment agreements with their customers for various reasons. Some do so as a matter of standard practice in industries where a consignment arrangement will help the customer avoid burdensome working capital needs due to the high costs associate with the relevant product (such as petroleum). Others use consignment arrangements as a means of protecting themselves when supplying goods to financially distressed customers. In any event, a consignment seller (known as a consignor) provides goods to its customer (known as a consignee) with the expectation that the consignor retains an ownership interest— and, therefore, will maintain a priority interest—in the consigned goods.

A consignor should “dot its i’s and cross its t’s” by satisfying all of the requirements contained in Article 9 of the Uniform Commercial Code (“UCC”) governing consignments as a matter of best practice. This will ensure that the consignor will enjoy prior rights to its consigned goods over the rights of a secured lender with a blanket security interest in the consignee’s goods and the rights of a bankruptcy trustee as a judgment lien creditor under the Bankruptcy Code. However, a consignor that fails to satisfy the UCC’s perfection requirements risks being treated as a general unsecured creditor in the event the consignee files for bankruptcy.