Consignments under U.C.C. Article 9

Consignments under U.C.C. Article 9

SUMMARY: As the economy continues to weaken across all sectors, consignment arrangements may become more attractive to dealers. In the typical consignment, the consignor is a manufacturer of goods that wishes to sell them in the market. The consignee is a dealer in such goods and offers to try to sell the consignors goods to customers.

ARTICLE: Ordinarily, retail dealers buy their inventory from a wholesaler or manufacturer. To finance the acquisition of their inventory, they often either buy the inventory on credit from their supplier or obtain a loan from a third party lender. The financer will typically take a security interest in the inventory being purchased by the dealer. No matter what the source of the financing, the dealer will own its own inventory and will be obligated to repay its financer, whether or not the dealer can sell the inventory to its customers.

As the economy continues to weaken across all sectors, consignment arrangements may become more attractive to dealers. In the typical consignment, the consignor is a manufacturer of goods that wishes to sell them in the market. The consignee is a dealer in such goods and offers to try to sell the consignors goods to customers. Thus, the consignor delivers goods to the consignee for resale. If the consignee sells goods to a customer, the consignee then remits the sale proceeds to the consignor minus the consignees selling or brokerage commission.

In some cases, it is difficult on the surface to distinguish consignments from typical inventory financing arrangements. There are two distinctive qualities of consignments that set them apart from ordinary secured lending transactions involving inventory. First, in a consignment, the consignor holds title to the consigned to the consigned goods until they are sold to a buyer, at which time title to the goods passes directly from the consignor to the ultimate buyer. In the standard inventory financing arrangement, the dealer holds title to the inventory, and the creditor has only a security interest in it. Second, in a true consignment, the consignee has no payment obligation to the consignor unless it resells the consigned goods. If the consignee cannot resell the goods, it may return the unsold goods to the consignor without payment. In contrast, the dealer in a classic inventory financing transaction must pay its financer whether or not it is able to resell the inventory to customers.

As a result of these differences, some dealers in a shaky economy may prefer to take goods on consignment from their suppliers and thereby avoid the risk of not being able to resell the goods. There are three types of consignments recognized under the Uniform Commercial Code: Article 9 consignments, Article 2 consignments, and (by omission from the Code) common law consignments....

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For more information on setting up Article 9 secured transactions, subscribers should see Margit Livingston, A Rose by Any Other Name Would Smell as Sweet (Or Would It?): Filing and Searching in Article 9s Public Records, 2007 B.Y.U. L. Rev. 111 (2007); Margit Livingston, Certainty, Efficiency, and Realism: Rights in Collateral under Article 9 of the Uniform Commercial Code, 73 No. Car. L. Rev. 115 (1994); Raymond T. Nimmer, Ingrid Michelsen Hillinger, & Michael G. Hillinger, Commercial Transactions: Secured Financing (LexisNexis, 3rd ed. 2003); William H. Lawrence, William H. Henning, & R. Wilson Freyermuth, Understanding Secured Transactions (LexisNexis, 4th ed. 2007).