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Corporate Restructuring & Bankruptcy | MONDAY, JUNE 13, 2016 | S3
2. consignments that are intended as security.
In either case, an interest in the con- signed goods that could have priority over title would be—contrary to the consigners’ position—property of the estates.3
Property of the Estate
Section 541 of the Bankruptcy Code defines what is property of the estate, and its aim is to “includ[e] as much property as possible in the ... estate.”4 In general, §541(a)(1), which Congress intended to be “broad” in scope,5 includes “all legal and equitable interests of the debtor in property as of the commence- ment of the case.”6
Yet the consignors have asserted that the consigned goods are not property of the estates. Generally, this assertion is flawed because, even if the consignors retained title to the consigned goods by agreement, “property” comprises a “bundle of rights,” or interests, only one of which is title.7 “Analysis under 541[] ... must begin by focusing directly on the specific interests claimed to constitute ... property [of the estate].”8 Therefore, the consignors have failed to focus on:
1. Which of the bundled rights are prop- erty of the estate, and
2. whether those rights are superior to the consignors’ rights, even if those rights include the retention of title.
In Butner v. United States,9 the U.S. Supreme Court held that “[p]roperty interests are cre- ated and defined by state law[] [u]nless some federal interest requires a different result.”10 Therefore, even title is immaterial if state law—for example, the U.C.C.—
1. provides debtors, either as consignees or debtors-in-possession, with rights to the consigned goods, and
2. subordinates title to the debtors’ rights.
Debtors-in-Possession as Third Parties Under 11 U.S.C. §544(a)
The objecting consignors have argued that Article 9 does not govern consignor-consignee relationships; however, their focus on the debtors’ status as consignees is misplaced because the debtors are also debtors-in- possession. As such, the debtors generally have the rights of a trustee, including those under §544(a)(1) of the Bankruptcy Code, which provides:
(a) The trustee shall have, as of the com- mencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists.
Simply put, each debtor has the rights of a third party—that is, a hypothetical lien credi- tor11—and Article 9 could govern the priority of such creditor’s and consignor’s rights.
Consignments Under Article 9
As stated earlier, the scope of Article 9 is broad. Under §9109(a), it applies to, among other things, a “consignment.”12 At common law, a consignment—that is, a true consign-
At common law, a consign- ment—that is, a true consignment—is just a bail- ment for the purpose of sale.
ment—is just a bailment for the purpose of sale; however, §9102(a)(20) sets forth a nar- rower definition:
(20) “Consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant for the pur- pose of sale and:
(A) The merchant:
(i) deals in goods of that kind under a
name other than the name of the person making delivery;
(ii) is not an auctioneer; and
(iii) is not generally known by its credi- tors to be substantially engaged in selling the goods of others;
(B) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery;
(C) the goods are not consumer goods immediately before delivery; and
(D) the transaction does not create a secu- rity interest that secures an obligation.
Though subject to challenge, the transac- tions between the debtors and consignors appear to be “consignments” under this definition (and the agreements among the consignors and the debtors are in fact identi- fied as “consignments.”)
If a transaction is a “consignment” under §9-102(a)(20), then Article 9, including §9319, applies.13 Section 9319 defines the rights of a consignee for the purpose of determining the rights of its creditors:
(a) [Consignee has consignor’s rights.] Except as otherwise provided in subsec- tion (b), for purposes of determining the rights of creditors of, and purchasers for value of goods from, a consignee, while the goods are in the possession of the consignee, the consignee is deemed to have rights and title to the goods identi- cal to those the consignor had or had power to transfer.
(b) [Applicability of other law.] For pur- poses of determining the rights of a credi- tor of a consignee, law other than this Article determines the rights and title of a consignee while goods are in the consignee’s possession if, under this part,
a perfected security interest held by the consignor would have priority over the rights of the creditor. » Page S10