The March 11 opinion by the U.S. Court of Appeals for the Ninth Circuit in IPC (USA). v Kathryn A. Ellis, is a stark reminder to all businesses that sell goods on consignment that the combination of the Bankruptcy Code and the Uniform Commercial Code has virtually eliminated conventional and traditional consignments. In the Ninth Circuit opinion, which would be consistent with 11^th Circuit precedents for Florida bankruptcy courts, the appellate court reiterated the statutory mandate that unless a seller of goods on consignment properly perfects a security interest in the consigned goods, should a bankruptcy or other creditor proceeding ensue, the rights of the consignor will be avoided. The opinion even goes further to provide that not only will the consignor's rights in the consigned goods be avoided, but also the consignor's rights in proceeds from the sale of the consigned goods will be avoided as well.

Section 679.319 of the Florida Statutes provides that for the purpose of determining the rights of creditors of entities that have possession of consigned goods for sale, unless the consignor has perfected a security interest in the consigned goods, including, but not limited to, filing a financing statement with the appropriate Florida authority, the rights of creditors of the entity in possession of the consigned goods will be superior to the rights of any consignor. The placing of the goods in the possession of the consignee gives rights to the consignee to sell the goods, but any reservation of title without a security interest perfection by the consignor is ineffective as to creditors of the consignee. This is reinforced by the definition of “security interest” in Section 671.201 (38) of the Florida Statutes.

Traditionally, especially in certain industries which deal in high value inventory such as jewelry, petroleum products, electronics and appliances, in order to alleviate the need for retail sellers of the inventory to obtain substantial lines of credit in order to maintain adequate inventory on hand, sellers have been willing to enter into a consignment agreement with a retailer under the misapprehension that current law allows the seller to retain title to the consigned goods and have the right to their return or to receive the proceeds of the sale based upon the consignment agreement. In concept, these types of agreements provide mutual benefits for the parties, and help with the free flow of goods to be available for retail sale.

The Uniform Commercial Code, which is applicable throughout the United States, and codified in Florida in chapters 670 through 680 of the Florida Statutes, has substantially modified the rights of parties to a consignment agreement, and in essence has eliminates traditional consignment agreements as they have been known for generations.

Section 541 of the Bankruptcy Code provides that a bankruptcy trustee or a debtor-in-possession obtains all of the interests in the debtor to any form of tangible or intangible assets owned by the debtor. Section 544 the Bankruptcy Code allows the trustee or debtor in possession to avoid any unperfected security interest in assets of the debtor. Thus, in the event that an entity that holds goods on consignment has filed for bankruptcy protection, then a trustee under Chapter 7 or Chapter 11 or the debtor-in-possession under Chapter 11 may avoid the rights of the consignor to the goods on consignment and the proceeds from goods that had been sold while on consignment if the consignor has not perfected a security interest under the provisions of chapter 679 of the Florida Statutes relating to secured transactions.

As of these authors have found from involvement in many bankruptcy cases involving retailers, manufacturers and wholesalers of goods that have traditionally placed inventory with retailers on consignment are woefully unaware of the provisions of the Uniform Commercial Code which in essence eliminate traditional consignments that have been in use for decades. In essence, in order for a consignor to protect its rights under a consignment agreement, the consignor must become a secured creditor of the retailer, and perfect a security interest in the consigned goods. Moreover, if there are prior perfected security interests in the inventory of the retailer, unless the consignor takes the steps required by the Uniform Commercial Code to obtain purchase money security interest priority, even a consignment with a perfected security interest will be subordinate to the prior existing secured creditors.

The ancient adage of “ignorance of the law is no excuse” is particularly applicable in the case of consignments. All parties to such agreements need to be acutely aware of the unique requirements under current law in order to protect the rights of the consignors.

Charles Tatelbaum is a director at Tripp Scott in Fort Lauderdale.

Christina Paradowski is director with the firm and focuses her practice in the areas of creditors' rights, commercial litigation and general civil litigation.