Consignment the Wrong Way: The Unfortunate Plight of the Unperfected Consignor

A trade creditor seeking to mitigate the risk of nonpayment of its claim may opt to enter into a consignment arrangement with a distressed customer. A creditor that 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. A creditor that fails to satisfy the UCC’s consignment requirements risks forfeiting any prior rights to its consigned goods and being relegated to asserting a low priority general unsecured claim against its customer.

The Chapter 11 bankruptcy cases of The Sports Authority Holdings, Inc. and its affiliated debtors (collectively, “Sports Authority”) have provided numerous examples of how consignment-related disputes ultimately play out when litigated before a bankruptcy court. Recently, on April 12, 2019, the United States Bankruptcy Court for the District of Delaware, in TSA Stores, Inc. et al. v. Sports Dimension Inc. a/k/a Body Glove (“Sports Dimension”), ruled against one of Sports Authority’s trade vendors that had failed to timely perfect its consignment interest. The court’s decision illustrates the many hurdles and pitfalls facing a non-compliant consignor that fails to “dot its i’s and cross its t’s” when selling goods on consignment.