Lenders' Lien Held to Have Priority in Consigned Goods
In retail bankruptcy cases, disputes occasionally arise between a secured lender and a seller of goods on consignment as to which party has a superior interest in the goods. In a recent decision, the United States Bankruptcy Court for the District of Delaware discussed the priority issue in great depth and ruled in favor of the lenders in the case.
A sporting goods and apparel company filed its Chapter 11 case on March 2, 2016. Earlier, in 2006, a group of lenders extended financing to the company and was granted a second lien in inventory that was perfected by the filing of a financing statement. This second lien became a first lien after the first lienholder was paid in full during the company’s bankruptcy proceeding.
In 2011, a sporting goods manufacturer agreed to sell its goods to the company on consignment. Under the consignment agreement, the manufacturer was entitled to receive 45% of the retail selling price on each sale. The manufacturer did not file a financing statement covering its goods until January 25, 2016. It sent notice of the filing to the predecessor administrative agent for the lending group but did not notify the current agent even though a search of the financing statement records would have disclosed the name and address of the current agent. During the bankruptcy case the Court permitted the company to pay the manufacturer as goods were sold subject to the right of the lenders to seek disgorgement from the manufacturer if the lenders' lien was subsequently held to have priority.
Both the lenders and the manufacturer moved for summary judgment on the lien priority issue. The lenders prevailed in the case as the Court analyzed whether the Uniform Commercial Code filing requirements applied to the arrangement between the company and the manufacturer. Ultimately, the Court decided that the manufacturer did not effectively provide notice of its financing statement to the lenders' administrative agent. Click here for further details on this case and contact Lawrence D. Coppel to discuss.