Page 10 - Corporate Restructuring & Bankruptcy

S10 | MONDAY, JUNE 13, 2016 | Corporate Restructuring & Bankruptcy
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Consigned Goods
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That is, for the purpose of determining a creditor’s rights to consigned goods, the consignee has the same rights that the con- signor has if
1. the consignee possesses the consigned goods, and
2. the consignor does not have a per- fected security interest that has priority over the creditor’s rights.
A debtor, as debtor-in-possession, is a creditor for purposes of Article 9;14 therefore, §9-319 applies for the purpose of determin- ing rights to consigned goods. Further, if a consignor does not have a senior, perfected security interest in the goods that it consigned to the debtors, then
1. the debtors would be deemed to have the same rights to the goods as that of the consignor,
2. the debtors, as debtors-in-possession, would have the rights of a hypothetical lien creditor, and
3. those rights would have priority over the consignor’s rights (including the consignors’ claimed retention of title15), which would constitute an unperfected security interest.
Consignments Intended as Security
But even if a transaction is not a “consign- ment,” as §9102(a)(20) defines it, it could nonetheless be a “consignment intended for security,”16 which is also subject to Article 9.17 As noted in the Official Comment:
Sometimes parties characterize trans- actions that secure an obligation (other than the bailee’s obligation to return[] bailed goods) as “consignments.” These transactions are not “consignments” as contemplated by Section 9109(a)(4). This Article applies also to these transactions, by virtue of Section 9109(a)(1). They cre- ate a security interest within the meaning of the first sentence of Section 1201(37).18
The draftsmen added that Article 9 “does not apply to bailments for sale that fall out- side the definition of “consignment” in §9102 and that do not create a security interest that secures an obligation.”19 Therefore, the argu- ment that a transaction is not a “consignment” under §9102(a)(20) is irrelevant if the transac- tion created a security interest.
Under the U.C.C., a security interest is cre- ated if the parties intended the transaction to have effect as security. The parties’ intent is determined by considering all the documents and circumstances related to the transaction, especially its “economic realities.”20 As Judge Howard C. Buschman noted in Ide Jewelry, “[t]o paraphrase Shakespeare’s words, a secured transaction by any other name is still a secured transaction.”21
Applying those principals, Judge Buschman analyzed whether a transaction was, in fact, a consignment intended for security. He identi-
fied five facts that would support a finding that a consignment was intended as security:
1. The consignee set prices.
2. The consignor billed the consignee when the goods were shipped.
3. The consignee commingled the pro- ceeds from sales of the consignor’s goods with the proceeds from the sales of its goods.
4. The consignee mixed the consignor’s goods with its goods.
5. The consignor purported to retain title to the goods until the consignee paid for them.
He also identified seven facts that could support a contrary finding:
1. The consignor retained control over prices.
2. The consignee could not sell any of the goods unless the consignor consented to the price.
3. The consignor could recall the goods. 4. The consignee would receive a com- mission and not the profits from any sale. 5. The consignee’s goods and the con- signor’s goods were segregated.
6. The consignor could inspect the con- signee’s records and the goods them- selves.
7. The consignee had no duty to pay the consignor for the goods unless they were sold.
Though finding that the agreements were ambiguous as to the intended function of the transaction, Judge Buschman concluded that the transaction was intended as security because
1. the consignor delivered the goods to the consignee, so that they could be sold,
2. the consignee was permitted to sell the goods without the consignor’s permission,
3. there was no indication that the con- signor retained any control over prices, and 4. there was no evidence that the consignee
received a commission.
The court seemed to conclude that the con-
signment was intended as security because the consignee was not subject to the con- signor’s authority; that is, the court implicitly reasoned that agency is an important part of a consignment.
There is a strong indication that the trans- actions between the debtors and the con- signors in Sports Authority were intended as security. For one, the contracts governing the transactions
1. classified the transactions as “consign- ments,” as §9102(a)(20) of the U.C.C. defines them, and
2. invited the consignors to file UCC-1 financing statements.
That the consignors kept title to, rather than another interest in, the consigned goods is of no moment: Any “interest in personal property or fixtures [that] secures payment or performance of an obligation,” even if the interest is title, is a “security interest.”22 In other words, consignments are still subject to Article 9 even if the consignors retained title,
provided the retention of title was intended merely to serve as security, which appears to be the case in Sports Authority.
Conclusion
Despite the fact that Article 9 covers many true consignments (that is, bailments for the pur- pose of sale) and any transaction that creates a security interest in personal property or fixtures by contract; the consignors in Sports Authority contend that Article 9 does not apply to their relationships with the debtors. If Article 9 does, in fact, apply, the consignors appear doomed, for many have failed to properly perfect in accor- dance with Article 9. Future consignors should not repeat this mistake, and they should learn the following lessons from Sports Authority:
1. a consignor should always perfect its interest in consigned goods as if Article 9 applies, and
2. any type of interest, even title, can be a security interest, which must be per- fected under Article 9.
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1. U.C.C. §9109(a)(1).
2. In re Sports Authority Holdings, Case No. 1610527 (MFW) (Bankr. D. Del.).
3. In addition, U.C.C. §2-401(1) provides:
Any retention or reservation by the seller of the title (property) in good shipped or delivered to the buyer is limited in effect to a reservation of a security interest.
4. Brown v. Ferroni (In re Brown), 505 B.R. 638, 647 (E.D. Pa. 2014) (citing U.S. v. Whiting Pools, Inc., 462 U.S. 198, 204-05 (1983)).
5. H.R. REP. NO. 95-595, at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6323; accord S. REP. NO. 95-989, at 50 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5836.
6. 11 U.S.C. §541(a)(1).
7. See, e.g., Marino v. Chrysler Credit, 205 B.R. 897, 899 (Bankr. N.D. Ill. 1997).
8. Westmoreland Human Opportunities, v. Walsh, 246 F.3d 233, 242 (3d Cir. 2001).
9. 440 U.S. 48 (1979).
10. Id. at 55.
11. Even Article 9 defines a “lien creditor” as, among
other things, “a trustee in bankruptcy from the date of the filing of the petition.” U.C.C. §9-102(a)(52).
12. U.C.C. §9109(a)(4).
13. See In re G.S. Distrib., 331 B.R. 552, 561 (Bankr. S.D.N.Y. 2005) (“Article 9 ... applies to a ‘consignment,’ and in determining the Debtor’s rights ..., the starting point of the analysis is §9102(a)(20) ...”
14. Cf. Deere Credit v. Pickle Logging (In re Pickle Log- ging), 286 B.R. 181, 183 (Bankr. M.D. Ga. 2002) (“Under Georgia law, the definition of a lien creditor includes a trustee in bankruptcy. Since a debtor-in-possession ac- quires the same rights and powers as a trustee, a debt- or-in-possession has the status of a lien creditor under Georgia law as well.” (citation omitted).
15. Under U.C.C. §1201(b)(35), “any interest of a con- signor ... in a transaction subject to Article 9” is a “secu- rity interest.” (emphasis added).
16. See In re Morgansen’s Ltd., 302 B.R. 784, 787 (Bankr. E.D.N.Y. 2003) (“The law of consignments is governed by the [U.C.C.], especially sections ... 9-102(a)(20) and ... 2-326 ... The standard approach is first to go to section 9-102(a)(20), and if the transaction does not fit under this section, then to go next to section 2-326; if the trans- action does not fit under section 2-326, then the trans- action falls entirely outside the [U.C.C.], and the Court must then fall back on the common law of bailments and other traditional practices.” (footnote omitted).
17. See Official Comment No. 14 to U.C.C. §9102 (“The definition also excludes ... what have been called “con- signments intended for security.” These “consignments” are not bailments but secured transactions. Accordingly, all of Article 9 applies to them.” (citing U.C.C. §§1201(b) (35), 9109(a)(1)).
18. Official Comment No. 6 to U.C.C. §9109.
19. Id.
20. Underwriters at Lloyds v. Shimer (In re Ide Jewelry
Co.), 75 B.R. 969, 977 (Bankr. S.D.N.Y. 1987) (applying New York law).
21. Id. (citation omitted). 22. U.C.C. §1201(b)(35).
Petition
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10. In re Green Hills Dev. Co., LLC, 741 F. 3d 651, 658 (5th Cir. 2014).
11. See In re TPG Troy, LLC, 793 F.3d 228, 234 (2d Cir. 2015).
12. See In re Paper I Partners, L.P., 283 B.R. 661, 680 (Bankr. S.D.N.Y. 2002); In re Faberge Rest. of Florida, Inc., 222 B.R. 385, 389 (Bankr. S.D. Fla. 1997).
13. See In re Euro-Am. Lodging Corp., 357 B.R. 700, 712- 13 (Bankr. S.D.N.Y. 2007) (citing cases); In re Amanat, 321 B.R. 30, 38 (Bankr. S.D.N.Y. 2005) (concluding that based on “the respect to be afforded State default judgments un- der Second Circuit law, there is support for a per se rule in this Circuit” but finding that even under the alterna- tive “objective standard” the debtor failed to overcome the presumption of validity of the [default] judgment.”). But see Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 438 (4th Cir. 2004) (holding that the existence of an unstayed final judgment does not necessarily end the bona fide dispute inquiry).
14. In re Euro-Am. Lodging Corp., 357 B.R. 700, 713 (Bankr. S.D.N.Y. 2007) (quoting Crown Heights Jewish Cmty. Council, Inc. v. Fischer (In re Fischer), 202 B.R. 341, 350 (E.D.N.Y. 1996)).
15. Id;. see In re Euro-Am. Lodging Corp., 357 B.R. at 713 (finding that the alleged debtor was not generally paying its debts as they became due where the petitioning cred- itor’s claim represented 90 percent of alleged debtor’s total debts); In re Amanat, 321 B.R. 30, 40 (Bankr. S.D.N.Y. 2005) (finding that the alleged debtor was not generally paying its debts as they became due where “the aggre- gate sum that [the alleged debtor] owes to [the petition- ing creditors]) is more than 65% in amount of his total debt, including his $2.8 million mortgage, and over 87% of [the alleged debtor’s] unsecured debt.”).
16. See, e.g., In re Mountain Dairies, Inc., 372 B.R. 623, 636 (Bankr. S.D.N.Y. 2007) (dismissing the involuntary petition because the sole petitioning creditor’s claim was in bona fide dispute, but concluding that even of the claim was not in dispute “this Court would be compelled to abstain pursuant to 11 U.S.C. §305 because this is es- sentially a two-party dispute for which the parties have adequate remedies in state court.”).
17. In re Fischer, 202 B.R. 341 (E.D.N.Y. 1996) (rejecting the “almost per se” rule); In re Euro-American Lodging Corp., 357 B.R. 700, 728 (Bankr. S.D.N.Y. 2007); In re EM Equipment, LLC, 504 B.R. 8 (Bankr. D. Conn. 2013) (grant- ing an involuntary petition filed by a sole creditor, reject- ing the “almost per se” rule and citing Fischer with ap- proval). But see In re Huggins, 380 B.R. 75, 83 (Bankr. M.D. Fla. 2007) (applying the “almost per se” rule).
18. See 11 U.S.C. §305(a); In re Monitor Single Lift I, Ltd., 381 B.R. 455, 465 (Bankr. S.D.N.Y. 2008) (setting out seven factor test for abstention).
19. In re Selectron Mgmt. Corp., No. 10-75320-DTE, 2010 WL 3811863, at *6 (Bankr. E.D.N.Y. Sept. 27, 2010); In re Mountain Dairies, Inc., 372 B.R. 623, 636 (Bankr. S.D.N.Y. 2007).
20. In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 335 (3d Cir. 2015) (Forever Green); In re Concrete Pump- ing Serv., Inc., 943 F.2d 627, 629 (6th Cir. 1991) (affirming decisions of the bankruptcy court and district court in granting involuntary petition where petitioning creditor filed the petition for the purpose of avoiding a preferen- tial transfer). See also In re Zais Inv. Grade Ltd. VII, 455 B.R. 839, 848 (Bankr. D.N.J. 2011) (involuntary bankruptcy proper in order to reject executory contract under Bank- ruptcy Code); In re B.D. Int’l Discount Corp., 13 B.R. 635, 638-39 (Bankr. S.D.N.Y. 1981) (transfer of substantial as- sets to insiders and third parties established special cir- cumstances to allow bankruptcy by sole creditor).
21. 11 U.S.C. §303(i)(1); In re TPG Troy, LLC, 793 F.3d 228, 235 (2d Cir. 2015).
22. 11 U.S.C. §303(i)(2).
23. In re Bayshore Wire Products Corp., 209 F.3d 100 (2d Cir. 2000).
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