Consignments and Reclamation Rights: Documentation, UCC Rules, and Treatment in Bankruptcy

Description

Suppliers often provide goods to retailer merchants on a consignment or sale basis. In doing so, they should be aware of the UCC rules governing consignments and reclamation rights and their treatment in bankruptcy. Disputes among consignors, sellers, inventory lenders, and bankruptcy debtors frequently arise in retail and other bankruptcy cases. Such disputes can be mitigated if consignors and sellers of goods take steps to protect their rights and interests.

Whether a particular consignment falls within the UCC definition is a critical issue. If a consignment falls outside of the UCC definition, common law rules apply, and the consignor, as the owner of the goods, usually prevails as to the goods over the claims and interests of creditors or a bankruptcy trustee of the consignee. If a consignment falls within the UCC, the consignor needs to take the same steps as an inventory purchase-money secured party to perfect its interest and prevail over a competing inventory secured lender's security interest.

UCC Section 2-702(2) codifies reclamation, the seller's right to take back goods sold on credit terms to an insolvent buyer. If the buyer files for bankruptcy before a seller exercises its UCC remedies, the seller must look to Section 546(c) of the Bankruptcy Code to enforce its reclamation rights. A seller might also pursue an administrative expense claim under Section 503(b)(9) in certain circumstances. Counsel must have a thorough understanding of the reclamation and other remedies available, given the facts and circumstances.

Listen as our authoritative panel discusses proper documentation of a consignment of goods and steps for perfection and priority under the UCC, if applicable. The panel will also discuss reclamation rights procedures under the UCC and in bankruptcy proceedings as well as best practices.