THE LAW OF CONSIGNMENTS: HOW SELLING GOODS FOR OTHERS WORKS First Run Broadcast: May 1, 2018 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00a.m. P.T. (60 minutes) In a consignment, a client, the consignor, ships or transfers control of goods to a seller, the consignee, who agrees to market the property and pay over some portion of the sales proceeds to the consignor. The arrangement involves a network of complex rights and obligations among the parties. There are also substantial and often overlooked risks, including that the consignee’s creditors may seek to claim a security interest in the consigned property. If these risks are not properly understood and remedies not carefully considered, the consignor is at substantia risk of loss. This program will provide you to the law of consignments, the substantial UCC Article 9 issues and risks involved, and provide practical tips for drafting effective consignment agreements. • Review of the law of consignments and relationship to secured finance • Structure of common consignment transactions • Parties, rights and obligations – consignor as creditor, consignee as debtor, creditors • Risks of loss to consignor and how it can protect itself against consignee’s creditors • Circumstances when UCC Article 9 does not apply to consignments • Remedies for breach by consignee Speaker: Steven O. Weise is a partner in the Los Angeles office Proskauer Rose, LLP, where his practice encompasses all areas of commercial law. He has extensive experience in financings, particularly those secured by personal property. He also handles matters involving real property anti- deficiency laws, workouts, guarantees, sales of goods, letters of credit, commercial paper and checks, and investment securities. Mr. Weise formerly served as chair of the ABA Business Law Section. He has also served as a member of the Permanent Editorial Board of the UCC and as an Advisor to the UCC Code Article 9 Drafting Committee. Mr. Weise received his B.A. from Yale University and his J.D. from the University of California, Berkeley, Boalt Hall School of Law.
Transcript
THE LAW OF CONSIGNMENTS: HOW SELLING GOODS FOR OTHERS WORKS
In a consignment, a client, the consignor, ships or transfers control of goods to a seller, the
consignee, who agrees to market the property and pay over some portion of the sales proceeds to
the consignor. The arrangement involves a network of complex rights and obligations among the
parties. There are also substantial and often overlooked risks, including that the consignee’s
creditors may seek to claim a security interest in the consigned property. If these risks are not
properly understood and remedies not carefully considered, the consignor is at substantia risk of
loss. This program will provide you to the law of consignments, the substantial UCC Article 9
issues and risks involved, and provide practical tips for drafting effective consignment
agreements.
• Review of the law of consignments and relationship to secured finance
• Structure of common consignment transactions
• Parties, rights and obligations – consignor as creditor, consignee as debtor, creditors
• Risks of loss to consignor and how it can protect itself against consignee’s creditors
• Circumstances when UCC Article 9 does not apply to consignments
• Remedies for breach by consignee
Speaker:
Steven O. Weise is a partner in the Los Angeles office Proskauer Rose, LLP, where his practice
encompasses all areas of commercial law. He has extensive experience in financings, particularly
those secured by personal property. He also handles matters involving real property anti-
deficiency laws, workouts, guarantees, sales of goods, letters of credit, commercial paper and
checks, and investment securities. Mr. Weise formerly served as chair of the ABA Business Law
Section. He has also served as a member of the Permanent Editorial Board of the UCC and as an
Advisor to the UCC Code Article 9 Drafting Committee. Mr. Weise received his B.A. from Yale
University and his J.D. from the University of California, Berkeley, Boalt Hall School of Law.
VT Bar Association Continuing Legal Education Registration Form
Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________
The Law of Consignments: How Selling Goods for Others Works Teleseminar May 1, 2018
1:00PM – 2:00PM 1.0 MCLE GENERAL CREDITS
PAYMENT METHOD:
Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________
VBA Members $75 Non-VBA Members $115
NO REFUNDS AFTER April 24, 2018
Vermont Bar Association
CERTIFICATE OF ATTENDANCE
Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: May 1, 2018 Seminar Title: The Law of Consignments: How Selling Goods for Others Works Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
Consignments and Secured Finance 1
Uniform Commercial Code and Consignments
Steven O. Weise Proskauer Rose LLP – Los Angeles (o) (310) 284-4515 [email protected]
• Application of Article 9 to inventory transactions
• Creation
• Perfection
• Priorities
• PMSIs and consignments
• Proceeds
• Competing Liens
Consignments and Secured Finance 3
What is a "consignment" for purposes of Article 9? • Common law terminology. Black's Law Dictionary:
o Consignment: "1. The act of consigning goods for custody or sale. . . 2. A quantity of goods that are sent somewhere, esp. in a single shipment, usu. to be sold. . . . 4. See bailment for sale. . . ."
o Consign: "1. To transfer to another's custody or charge. 2. To give (goods) to a carrier for delivery to a designated recipient. 3. To give (merchandise or the like) to another to sell, usu. with the understanding that the seller will pay the owner for the goods from the proceeds."
o Bailment for sale: "A bailment in which the bailee agrees to sell the goods on behalf of the bailor; a consignment."
Consignments and Secured Finance 4
Consignments
• Consignments (UCC § 9-102) include any transaction, that involves delivery of goods to a merchant for purposes of sale:
o Distinguish transaction that is a ‘sale’
o Not a ‘consign ment’ even if buyer has a right to return in the absence of default by the seller (UCC § 2-326)
Consignments and Secured Finance 5
Bailments
• Article 9 does not apply to ‘bailments’ for sale that are not ‘consignments’ – § 9-109, Comment 6
o Bailments for processing, not followed by a sale by the processor – not a ‘consignment’
o Other law determines rights of creditors of bailee – § 9-319(b)
o When is there "too much" processing?
• Generally, for non-consignment bailment, creditors of bailee cannot reach the goods
o See generally, Restatement of the Law (Fourth) (Preliminary Draft), Chapter 15 (Bailment)
Consignments and Secured Finance 6
What is a ‘consignment’ for purposes of Article 9 (con’t)?
• A common law ‘consignment’ is not an Article 9 ‘consignment’ is not an Article 9 ‘consignment’ if the transaction is consignment in form, but security interest in substance
Consignments and Secured Finance 7
Consignments
• If transaction is a delivery for sale, then it’s a ‘consignment’ if:
o the merchant:
• deals in goods of that kind under a name other than the name of the person making the delivery
• is not an auctioneer, and
• is not generally known by its creditors to be substantially engaged in the selling of goods of others;
o the aggregate value of each delivery of goods exceeds $1,000;
o the goods are not consumer goods immediately before delivery; and
o the transaction does not create a security interest that secures an obligation
Consignments and Secured Finance 8
Consignments (§ 9-109(a)(4))
• Consignment creates a ‘security interest’
(§ 1-201(b)(35))
• Consignor is ‘secured party’
(§ 9-102(a)(74))
• Consignee is ‘debtor’
(§ 9-102(a)(28)
Consignments and Secured Finance 9
Consignments - Scope of Article 9
•Assume that we have a “consignment” as defined in 9-102(a)(20).
•Article 9 applies – 9-109(a)(4).
•Normal attachment rules apply.
o Rights in or power to transfer collateral – 9-319(a)
o Value being given
o Authenticated security (consignment) agreement
•Normal perfection rules apply.
Consignments and Secured Finance 10
Rights in the collateral or power to transfer (§ 9-203(b)(2))
• Consignee has ‘power’ to transfer consignor’s rights to a creditor of the consignee, unless the consignor would have Article 9 priority over the transferee creditor
o Applies to voluntary and involuntary transferees of consignee
Consignments and Secured Finance 11
Rights in the collateral or power to transfer (§ 9-203(b)(2))
• This means that consignor:
o Should make sure that it has a perfected security interest in the consigned goods, and
o Purchase-money priority if the consignee has an existing inventory secured party
Consignments and Secured Finance 12
Consignments
• If a consignment exists, then consignor must comply with rules applicable to perfect a security interest
o Security agreement
o Value
• Financing statement
• If consignor does not (and comply with any purchase-money requirements), then the goods in the consignee’s possession are subject to the lien of the consignee’s lender or lien creditor
o If lien attaches while goods are in consignee’s possession, it remains attached even if goods are returned to consignor
Consignments and Secured Finance 13
Security agreement
• ‘Grant’ of security interest (§ 9-203(b)(3)(A))
• Consignment or sales language ‘creates or provides’ for ‘security interest’ in consignment and sales transactions
Consignments and Secured Finance 14
Consignments
• Steps that consignor must take:
o File a UCC financing statement
o Send written notice of security interest to all existing third parties that hold a conflicting security interest in the goods (i.e., the consignee’s secured creditors)
• Notice (a) states that borrower has or expects to acquire a purchase money security interest in inventory and (b) describes the inventory placed on consignment
• Notice must be received within five years before the consignee receives the inventory
Consignments and Secured Finance 15
Consignments - Scope of Article 9
• For priority, if the consignee has an existing secured party with a security interest in after-acquired property, inventory purchase-money security interest rules apply – 9-103(d)
o Perfection - 9-324(b)(1)
o Notification to other inventory secured parties of record – 9-324(b)(2) and (4)
o Duration of effectiveness of notification – 9-324(b)(3)
o Limited proceeds priority
o Impact of 9-319(b)
Consignments and Secured Finance 16
Purchase-money security interest
• If there is an existing secured party with a perfected security interest in the consignee’s assets, then consignor must also comply with rules applicable to a purchase money security interest (UCC §9-324)
• If consignor does not, then the goods in the consignee’s possession are subject to the lien of the consignee’s secured party or lien creditor
Consignments and Secured Finance 17
Effect on consignee’s secured party
• Enforcement – UCC § 9-601(g)
• Rights of the secured party of the consignee (describing its collateral as collateral ‘owned’ by the consignee):
o Kraken Invs. Ltd. v. Jacobs (In re Salander-O’Reilly Galleries, LLC) (Salander II), No. 14 CV 3544 (VB), 2014 WL 7389901 (S.D.N.Y. Nov. 25, 2014), rev’g, Jacobs v. Kraken Invs. Ltd. (In re Salander-O’Reilly Galleries, LLC) (Salander I), 506 B.R. 600 (Bankr. S.D.N.Y. 2014).
• Security interest in proceeds automatically attaches if security interest has attached to original collateral (§ 9-203(f))
• Security interest may ‘detach’ after 20 days if certain requirements are not met (§ 9-315)
• Priority addressed below
Consignments and Secured Finance 19
Proceeds
• Perfected if security interest in original collateral was perfected (§ 9-315(c))
• May lose perfection after 20 days if certain requirements are not met (§ 9-315(d))
• Priority issues discussed below
Consignments and Secured Finance 20
Priority in proceeds (§ 9-322(b)–e))
• Generally follow priority of original collateral
• Special rules for non-temporal priority (§ 9-322(c))
Consignments and Secured Finance 21
Other priority issues
• Purchase-money security interests
o Consignments
• Proceeds
o Accounts
o Chattel paper (§ 9-330(b) & (c))
o Deposit accounts (§ 9-327(1))
Consignments and Secured Finance 22
Purchase-money security interests (§ 9-324)
• Goods only (§ 9-103(a)(1)) • Inventory
o Notice to earlier secured party before deliver (§ 9-324(b))
o File before deliver (§ 9-324(b)(1)) • Related software • Application to consignments
Consignments and Secured Finance 23
Priority in proceeds – accounts (proceeds of inventory)
• Secured party with security interest only in ‘inventory’ junior as to proceeds that are accounts to another secured party that earlier filed as to ‘accounts’
• Secured party with security interest only in ‘inventory’ senior as to proceeds that are accounts to another secured party that later filed as to accounts
Consignments and Secured Finance 24
Consignments
• Notice is effective for 5 years
• Needs to be ‘refreshed’ if consignee’s secured creditors would otherwise win under ‘first to file’ rule
Consignments and Secured Finance 25
Enforcement
• Part 6 of Article 9 does not apply to consignor’s rights to recover the goods (UCC § 9-601(g)
