Consignment

BY JAY WINSTON, WINSTON & WINSTON, P.C.

The jewelry is delivered to the retailer with instructions to sell the goods at the best price available, and to pay for them when he sells. No invoice is sent. The retailer may keep the jewelry for 6 months and then must return it if it is not sold. The retailer was entitled to 25% of the sale price. Is this a true consignment, or is it creating a security interest – which requires a financing statement to be filed and a security agreement to be executed.

When goods are delivered to a consignor to sell on consignment, the party delivering the goods, the consignee, often is not fully aware of the criteria that the courts use to create a consignment. In some instances, the agreement between the consignee and the consignor may turn a simple consignment into a security interest. If a security interest is created and the consignee does not protect his rights by filing a financing statement and having a security agreement executed, the consignee may find that he does not have a consignment and therefore cannot exercise the rights afforded to a consignee.

The issue of whether a transfer of property is a consignment or a secured transaction presents itself many times before the courts. Usually, the courts rely on the intent of the parties, and where the question of intent is involved, the decision is subject to a review of the facts of each transaction.

In one case, the court stated that the intent is to be determined by an objective standard that considers the economic realities of the transactions rather than the actual intent of the parties. The court relied on four criteria that they felt would determine that the purpose of the transaction was to create a security interest and not a consignment:

The setting of the resale price by the consignee.
Billing the consignee upon shipment.
Commingling of proceeds or failure to keep proper accounts by the consignee.
Mixing consigned goods with goods owned by the consignee.

In contrast, certain factors indicate that the parties intend a true consignment:

Consignor retained control over the resale price of the consigned property.
Possession was delivered with authority to sell only upon the consent of the consignor.
The consignor may recall the goods.
The consignee was to receive a commission and not a profit on the sale.
The consigned property was segregated from other property of the consignee.
The consignor was entitled to inspect sales records and the physical inventory of the goods in the consignee’s possession.
Consignee has no obligation to pay for the goods unless the goods are sold.

The criteria set by the courts seem to be sound, but unfortunately, many of the courts evaluate these transactions on a case-by-case basis and try to balance these factors to arrive at what they feel is a fair and equitable decision with each court selecting one or two criteria as critical and relegating the others as immaterial.

A consignment of goods consists of the consignor delivering the goods to the consignee for the purpose of selling the goods. The consignor still owns the goods. The rights of creditors as to consigned goods is covered in UCC 2-326;

Section 2-236: Sale on Approval and Sale or Return; Consignment Sales and Rights of Creditors.

(1) -Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is

(a) -a sale on approval if the goods are delivered primarily for use, and

(b) -a sale or return if the goods are delivered primarily for resale.

(2) -Except as provided in subsection (3), goods held on approval are not subject to the claims of the buyer’s creditors until acceptance; goods held on sale or return are subject to such claims while in the buyer’s possession.

(3) -Where goods are delivered to a person for sale and such person maintains a place of business at which he deals in goods of the kind involved, under a name other than the name of the person making delivery, then with respect to claims of creditors of the person conducting the business the goods are deemed to be on sale or return. The provisions of this subsection are applicable even though an agreement purports to reserve title to the person making delivery until payment or resale or uses such words as ñon consignment or ñon memorandum. However, this subsection is not applicable if the person making delivery

(a) -complies with an applicable law providing for a consignor’s interest or the like to be evidenced by a sign, or

(b) -establishes that the person conducting the business is generally known by his creditors to be substantially engaged in selling goods of others, or

(4) -Any or return term of a contract for sale is to be treated as a separate contract for sale within the statute of frauds section of this Article (Section 2-201) and as contradicting the sale aspect of the contract within the provisions of this Article on parol or extrinsic evidence (Section 2-202).

Prior to the enactment of this section of the Uniform Commercial Code, creditors of the consignee (who receives the goods on consignment) could not rely on consigned goods in possession of the consignee because the title of the consignor (who delivers the goods on consignment) was superior to the claim of the creditor. The purpose of enacting the statute is to allow a creditor to attach a lien against property of a third person, which is in the consignee’s possession on consignment, and to permit the creditor to treat such property as if it were owned by the consignee under certain circumstances.

Subdivision 3 spells out three separate and distinct exceptions and the purpose of the exceptions is to allow the consignor to protect himself by showing that the creditor had no right to assume that the goods were owned by the consignee. If the interest of the consignor is displayed by a sign or similar means identifying the consignor’s interest in the property or if the filing provisions of the article on secured transactions that involves the filing of a financing statement is used, the consignor may protect its interest. An issue is where the person conducting the business is generally not known by the creditors to be substantially engaged in selling the goods of others, but the creditor had actual knowledge that the goods were subject to a consignment. In several states, the courts have held that the creditor’s actual knowledge of the consignment before becoming a creditor is sufficient to meet the requirements of the exceptions set forth in Section 2-326; and the consignor will prevail.

The minority view is that the creditor’s knowledge of the debtor’s possession of consigned property is totally irrelevant and the consignor’s interest is junior to the creditor.

As a general statement, where there is no evidence that the consignee’s creditors are generally aware that the consignee is engaged in selling goods on consignment, the consignor (who delivers the goods to the consignee for the purposes of selling the goods on consignment) is bound to file a financing statement to prevent their property from becoming subject to the claims of the consignee’s creditors.