Filing requirement extends to proceeds in consignments

A ruling in the Ninth Circuit Court of Appeals reminds us that regardless of whether the consignor and the consignee intend to transfer title, when a consignor fails to file a UCC-1 registration statement, its property rights in the goods will be extinguished, and its claim to proceeds of the goods will be limited to that of an unsecured creditor.

What you need to know

• In In re Pettit Oil Company (the Debtor), the bankruptcy trustee disputed the claims of fuel supplier IPC (USA), Inc. (IPC), in consigned fuel and cash proceeds held by the Debtor at the time of filing of the bankruptcy petition.
• The court affirmed the ruling that the transaction was a consignment, and because IPC had not filed a UCC-1, the trustee’s rights in the fuel and proceeds were superior to those of IPC.
• This decision is a reminder that whether the transaction is described as a lease, bailment, or consignment, notice to the world by way of filing a registration statement is the best way to protect an interest in property and its proceeds.
  • We frequently see situations in which sellers of goods assume their transactions are not consignments under the UCC, but regardless of how it is characterized, the best practice is to file the registration statement.

Background

Transactions where goods are delivered to a third party for the purpose of sale are known as consignments, which are treated as secured transactions under Article 9 of the Uniform Commercial Code (the UCC). On physical delivery of goods, the third party (or consignee) is vested with the same rights that the owner (or consignor) of the goods has in those goods, enabling the consignee to sell the goods to third parties free and clear of other claims. The consignor retains title, but its rights in those goods are limited to those of a creditor of the consignee.

In In re Pettit Oil Company (the Debtor), the bankruptcy trustee disputed the claims of fuel supplier IPC (USA), Inc. (IPC), in fuel and cash proceeds held by the Debtor at the time of filing of the bankruptcy petition. The court affirmed on appeal the lower court’s ruling that the transaction was a consignment, and because IPC had not filed a UCC-1 registration statement, the trustee’s rights in the fuel and the proceeds were superior to the rights of IPC. Because the text of section 9-318(a) of the UCC is clear with respect of the Debtor’s rights in the goods themselves, but not with respect to proceeds, the parties focused on the question of who had superior rights in the proceeds from the sale of the fuel.

The court held that the rules of perfection and priority that apply to the fuel also apply to the proceeds of that fuel. IPC argued in favor of a strict reading of section 9-318(a) which omits the word “proceeds”. Ultimately the court found that disallowing a claim in the goods while allowing a claim in the proceeds would be inconsistent, and we agree.

One of the fundamental tenets of Article 9 is that notice to the world (by way of filing a registration statement) is the best way to protect an interest in property and its proceeds. This applies to blanket security interests, consignments of fuel and metal and bailments of tolled goods. We are frequently asked to negotiate agreements that blend one or several of these types of transactions, but regardless of how it is characterized, the best practice is to file the registration statement.