Do Not Take Consignments Lightly

By Kenneth A. Rosen

In the aftermath of Sports Authority's Chapter 11 bankruptcy, a cautionary tale emerges for consignors who underestimated the importance of filing a UCC-1 to perfect their consignment arrangements. While some vendors emerged unscathed, the risks involved highlight the need for vigilance in securing consigned goods.

When Sports Authority filed for bankruptcy in 2016, it possessed a staggering 8.5 million units of consigned goods valued at $84.8 million. The retailer's failure to make a $20 million payment to bondholders, coupled with increased competition from major retailers, prompted the bankruptcy filing. In the ensuing legal battle, Sports Authority sought to liquidate consigned goods "free and clear," treating unperfected consignment vendors as general unsecured creditors.

The crucial lesson from this case is evident: neglecting to properly perfect a consignment arrangement by filing a UCC-1 can jeopardize a consignor's position. Despite Sports Authority's attempt to categorize unperfected consignors as general unsecured creditors, the bankruptcy court ruled in favor of consignors, emphasizing the unique nature of consignment arrangements.

Consignors, as sellers, must recognize the potential risks associated with consignment deals. The Uniform Commercial Code's (UCC) filing requirements are designed to protect creditors from undisclosed liens, emphasizing the importance of filing a UCC-1 to secure consigned goods properly.

In the aftermath of the Sports Authority case, consignors are urged to take proactive measures to safeguard their interests. Conducting a thorough lien search on consignees ensures awareness of conflicting security interests in consigned goods. Additionally, filing a separate UCC-1 financing statement, explicitly naming the consignor as the secured party, is a crucial step in asserting and maintaining priority.

While the court in the Sports Authority case ruled in favor of consignors, vendors should not rest too comfortably on this decision. The subjective nature of determining whether a retailer is generally known for selling consigned goods underscores the importance of filing a UCC-1 form as a standard practice.

To mitigate risks and fortify consignor positions, industry participants are advised to remain proactive. Consignors should not assume that other creditors are aware of consignment arrangements and, instead, should take the initiative to file UCC-1 forms as a safeguard. In an environment where competition is fierce and market dynamics are ever-changing, securing consignment interests is not just good practice—it's a strategic imperative for the longevity of consignment relationships.