Navigating Consignment Rights Before Bankruptcy

Consignment arrangements can be complex, especially when a consignor seeks to protect their interests before a bankruptcy filing. Under the Uniform Commercial Code (UCC), consignors must follow specific procedures to perfect their security interest in consigned goods, elevating their status from unsecured to secured creditors. This process involves filing a UCC financing statement and providing a Purchase Money Security Interest (PMSI) notice to ensure priority over other creditors. Failure to perfect these interests can result in losing priority to the consignee’s creditors or a bankruptcy trustee.

Understanding Consignment and UCC Requirements

A consignment typically involves a vendor delivering goods to a customer for sale, with payment deferred until the goods are sold. The UCC defines consignment transactions and outlines the requirements for consignors to retain superior interest in consigned inventory. These include ensuring the goods’ value exceeds $1,000 at delivery and filing a financing statement in the correct jurisdiction. Additionally, consignors must send a PMSI notice to conflicting interest holders to maintain priority.

Key Takeaways for Consignors

Consignors should be aware that consigned goods held by a debtor for resale are generally part of the debtor’s bankruptcy estate. To avoid being relegated to unsecured creditor status, consignors must diligently perfect their security interests and notify existing creditors with blanket inventory liens. Proper documentation, UCC-1 filing, and advance notification are crucial steps to safeguard consignment rights. Consulting with experienced counsel is essential to ensure full protection of consignor rights.

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