Consignment the Wrong Way: Recovery Still Possible

Trade creditors enter into consignment arrangements with their financially distressed customers to increase the likelihood of payment of their claims. The best practice for a consignment goods seller, known as the consignor, is to satisfy all the requirements contained in Article 9 of the Uniform Commercial Code (“UCC”) governing consignments. A consignor that “dots its i’s and crosses its t’s” by satisfying these requirements obtains a first and prior interest in its consigned goods. A noncompliant consignor risks being treated as a general unsecured creditor.

However, consignors that fail to comply with UCC Article 9 can take much comfort from the 2017 decision of the United States Bankruptcy Court in Delaware, in In re TSAWD Holdings, Inc., formerly known as Sports Authority. The bankruptcy court refused to grant judgment in favor of Sports Authority’s secured lender, Wilmington Savings Fund Society, FSB (“WSFS”), which had sought a declaration that it had a prior perfected security interest in Sports Authority’s inventory, senior to the rights of a consignor that had failed to file a UCC financing statement describing its consigned goods. The court denied WSFS’ motion and permitted the litigation to continue. The court found an issue of fact existed over whether the consignment arrangement was a true consignment not governed by UCC Article 9, and not requiring the consignor to file a UCC financing statement.

This decision opens the door for consignors that fail to follow UCC Article 9’s consignment requirements to obtain at least some recovery on their consignment claims.