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An Unresolved Issue at the Intersection of Consignment and Bankruptcy Law Decided

It always amazes me when, after more than a half-century of Uniform Commercial Code (“UCC”) jurisprudence, an issue one thinks would arise quite commonly appears never to have been decided in a reported case.  Such an issue was recently decided by the U.S. Court of Appeals for the Ninth Circuit in an adversary proceeding in the Pettit Oil Co. Chapter 7 case.[1]

If a consignor of goods in a transaction that satisfies all of the requirements of UCC Section 9-102(20)(A)-(D), and is therefore a “true” consignment,[2] fails to act as if it were a purchase-money secured party and does not perfect its interest accordingly, and its consignee becomes a debtor under the Bankruptcy Code, the bankruptcy trustee’s “strong-arm” powers under Section 544(a)[3] would result in the avoidance of the consignor’s interest in the goods just as an unperfected security interest of the ordinary variety.[4]  This much was not controversial at least by the time the consignor got to the Bankruptcy Appellate Panel and the Court of Appeals.

But what about the proceeds of the goods that were in the possession of the debtor on the petition date, cash and accounts receivable arising from pre-petition sales of the goods?  The voidability of the consignor’s interest in the proceeds is the issue that I would have assumed was as settled as the voidability of its interest in the goods themselves.  I would have been mistaken.

The consignor did not have much to go on in arguing that proceeds should be treated differently from the goods themselves.  But it did maybe have the language of one of the key sections of the UCC, namely 9-319, which subtly but unmistakably provides that a “true” consignor failing to perfect as if it were a secured creditor will be treated as if it were an unperfected secured creditor of the ordinary variety, which makes it vulnerable to strong-arm avoidance.  UCC Section 9-319(a), in the space of a few lines, uses the word “goods” three times but never “proceeds” or a synonym.

The consignor’s argument based on Section 9-319 did not persuade the Bankruptcy Court, the BAP (which was unanimous) or the Court of Appeals (which was also unanimous), based on other language in Article 9 and its policy rationales.  A bankruptcy trustee exercising her strong-arm powers had thus avoided the interest of an unperfected consignor in both goods and proceeds to exactly the same extent as if it had been an unperfected inventory secured creditor of the more ordinary variety.

One aspect of the Court of Appeals decision that somewhat troubles me is its lack of subtlety when treading in the minefield of consignments.  The UCC Permanent Editorial Board may have been practicing puckish understatement when it recently wrote that “some reported cases and articles suggest that, despite the clarification [effected by the 1998 revision of the UCC], the law of consignments remains puzzling to some of the lawyers and judges who have grappled with it.”[5]  Not every transaction that is, or might have been labelled by the parties as, a consignment requires security interest-type perfection to withstand a bankruptcy trustee’s attack, and the Court of Appeals did not itself canvas the elements of the definition of a true consignment found in UCC § 9-102(20).  The right result was reached (the consignor had conceded, after all, that its consignment interest in the goods that remained in the possession of the consignee-debtor was avoidable as a result of its failure to perfect), but I fear that statements in the decision that could have been more nuanced will find their way into briefs and other decisions in a “puzzling” manner.

 

[1]  IPC (USA), Inc. v. Ellis (In re Pettit Oil Co.), 2019 U.S. App. LEXIS 7085* (9th Cir. March 11, 2019), aff’g 575 B.R. 905 (Bankr. 9th Cir. 2017), aff’g 2016 Bankr. LEXIS 3895* (Bankr. W.D. Wash. 2016).

[2]  Why “true”?  There are consignments that generally conform to the UCC definition but fail under one or another particular requirement (e.g., the merchant-consignee fails to “not [be] generally known by its creditors to be substantially engaged in selling the goods of others”), and there are transactions that don’t even come close but are styled as consignments by the parties.  This blogger has identified at least six types of transactions that are, or are often labelled as, consignments.

[3]  All citations to Sections that are not identified as sections of the UCC refer to sections of the Bankruptcy Code, Title 11 of the U.S. Code.

[4]  I.e., “a security interest that secures an obligation.”  UCC § 9-102(20)(D).

[5]  Permanent Editorial Board for the Uniform Commercial Code, PEB Commentary No. 20 Consignments (Jan. 24, 2019), at 1.