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Court Negates Revised Article 9
The law of consignment sales of goods ' under which merchandise is delivered by a seller (a “consignor”) to another person (a “consignee”) to hold for sale to a third party ' has long been a source of confusion and uncertainty for both consignors (seeking to protect their rights to their consigned goods) and creditors of the consignee (seeking to satisfy their claims against the consignee and its assets). Prior to the enactment in 2001 of revised Article 9 (“Revised Article 9″) of the Uniform Commercial Code (UCC), the treatment of consignment sales had straddled both Article 2 of the UCC, which covers the sale of goods, and Article 9 of the UCC, which covers the creation and perfection of a security interest in goods. The drafters of Revised Article 9 sought to eliminate this confusion by removing all regulation of consignment sales from UCC Article 2, and lodging all regulation of consignments under the UCC (to the extent not covered by common law) squarely within UCC Article 9. However, the recent Bankruptcy Court decision in the case of In re Morgansen's Ltd., 302 B.R. 784 (Bankr. E.D.N.Y., Oct. 14, 2003) would, if sustained on appeal, negate many of the improvements introduced by Revised Article 9 and wreak havoc on the treatment of consignment sales of consumer goods and other “true” consignments not expressly covered by Revised Article 9.
Consignments Under Revised Article 9
A true “consignment” (to the extent governed by, and as defined in, Revised Article 9) is deemed to create a purchase money security interest (“PMSI”) in the consigned goods in favor of the consignor (UCC Sections 9-103(d) and 1-201(37)), so that a consignor who fails to file a UCC financing statement against the consignee with respect to the consigned goods risks losing its rights in the goods to a trustee in bankruptcy or a secured party having a perfected security interest in the consignee's inventory. Although the pre-2001 version of the UCC had also provided a consignor with a security interest in the consigned goods, these security interests were not expressly designated as PMSIs (putting in doubt the status of these interests vis-a-vis holders of prior perfected liens on inventory), and the rights of the consignee's creditors in the consigned goods were covered by both former Section 2-326(3) of the UCC article on sales, as well as by several sections of UCC Article 9. The drafters of Revised Article 9 attempted to rationalize this dichotomy by deleting the references to consignment sales from former UCC Section 2-326(3), and adding new UCC Section 9-102(a)(20) to define the types of consignments to be covered by UCC Article 9, as well as new UCC Sections 9-103(d) and 9-319 to specify the perfection and priority of these Article 9 consignments vis-a-vis trustees in bankruptcy and other competing security interests.
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