Should consignors perfect their security interest by filing a financing statement? - Lien Solutions

Should consignors perfect their security interest by filing a financing statement?

The debtor, a distributor of bulk petroleum products, entered into a consignment agreement with IPC. Under the agreement, IPC delivered fuel to the debtor–consignee (“Pettit”) for sale to consignee’s customers. Pettit filed for bankruptcy. At the time of the filing of bankruptcy, Pettit had had some of the consignor’s unsold fuel on hand, as well as proceeds from sold fuel (cash and accounts receivables—that is balances owed by customers that had not yet been paid) and which had not yet been remitted to the consignor.

As with all “true” consignments, ownership of the fuel remained with IPC until it was sold, at which time title transferred to the purchaser.
The Trustee commenced this proceeding, seeking the value of the fuel, cash proceeds and accounts receivables for the benefit of the bankruptcy estate. IPC argued that the bankruptcy court erred in concluding that the Trustee’s interest in the cash and accounts receivables was superior to IPC’s. The Trustee maintained that IPC’s interest in the fuel, cash and accounts receivables was subordinate to the Trustee’s because IPC hadn’t filed a financing statement or otherwise perfected its interest. The Court noted that Article 9-319 (a), (b)of the UCC informs this issue:

(a) [Consignee has consignor’s rights.]
Except as otherwise provided in subsection (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 identical to those the consignor had or had power to transfer.

(b) [Applicability of other law.]
For purposes of determining the rights of a creditor 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.
This provision means that even though a consignee doesn’t truly own the consigned goods, the UCC treats the consignee as having an ownership interest. The parties agree that IPC’s unperfected security interest in the fuel is subordinate to the Trustee’s judicial lien.
Nonetheless, IPC argues that even if its interest in the fuel is subordinate to that of the Trustee, its interest in the cash and accounts receivable is superior to that of the Trustee.

IPC bases this argument on the fact that since the drafters of 9-319 said “goods” instead of “goods and proceeds,” 9-319 cannot dictate the rules regarding the proceeds of the goods. The Court found this a strained reading of 9-319 as it ignores numerous references throughout Article 9 that treat a consignment as a security interest for all practical purposes. The court referenced various sections of the code to make its point: U.C.C. § 9-102(a)(73)(C) (defining “secured party” to include a “consignor”); U.C.C. § 1-201(b)(35) (defining “security interest” to include “any interest of a consignor”); U.C.C. § 9-102(a)(12)(C) (defining “Collateral” to mean “the property subject to a security interest ” that includes “goods that are the subject of a consignment”).

The most natural reading of these provisions, continued the Court, is that a consignor’s interest in goods (and the related proceeds) is a security interest for all purposes—including for purposes of perfection and priority—unless the U.C.C. specifically says otherwise.

Moreover, the Court found, citing precedent, the “goods” provision of section 9-319 can’t be read in a vacuum. “We must interpret the statute as a whole, giving effect to each word and making every effort not to interpret a provision in a manner that renders other provisions of the same statute inconsistent, meaningless or superfluous.” United States v. Neal, 776 F.3d 645, 652 (9th Cir. 2015)

Finally, the Court said “a ruling that ‘proceeds’ are outside the scope of the perfection rules would disrupt the delicate balance the U.C.C. drafters struck between the interests of consignors and the interests of the consignee’s other creditors. IPC has not provided a convincing basis for disrupting this intended balance.”

The lesson to be learned is that consignors should perfect their security interest by filing a financing statement.