A trade creditor can mitigate the risk of dealing with a financially distressed customer by entering into a consignment agreement with its customer. A creditor that “dots its i’s and crosses its t’s” and satisfies all of the requirements for consignment contained in Article 9 of the Uniform Commercial Code (“UCC”) obtains a first and prior interest in its consigned goods. On the other hand, a creditor that fails to satisfy the UCC’s requirements for consignment risks losing its superior interest in its consigned goods and being relegated to holding a low priority general unsecured claim.
That said, certain creditors that fail to follow UCC Article 9’s consignment requirements can invoke a recent decision of the United States Bankruptcy Court in Delaware in the Sports Authority Chapter 11 case, TSA Stores, Inc. v. Performance Apparel Corp. (In re TSAWD Holdings, Inc.), as support for enforcing their consignment rights. The bankruptcy court held that a creditor who had allowed its UCC financing statement to lapse still retained a superior interest in its consigned goods that prevailed over the blanket security interest of Sports Authority’s secured lenders. The court relied on the secured lenders’ actual knowledge of the consignment arrangement when the lenders had made their loans to Sports Authority.Click here to view the full article