Trustee Gloms Proceeds of an Unperfected Consignment, Not Just the Goods

If a consignor fails to perfect a security interest by filing a UCC financing statement, a bankruptcy trustee’s judicial lien enables the trustee to avoid the consignor’s interest in proceeds as well as the goods themselves, according to a Ninth Circuit opinion on March 11.

A petroleum supplier provided goods to a retailer on consignment but failed to perfect the consignment by filing a UCC financing statement. When the retailer filed bankruptcy, the consignor conceded that the hypothetical judicial lien under Section 544(a) enabled the trustee to avoid the consignor’s interest in the goods that were on hand on the filing date.

However, the consignor contended that the reference to “goods” in UCC § 9-319(a) meant that its interest in proceeds was superior to the trustee’s. The bankruptcy court didn’t buy the argument, nor did the Bankruptcy Appellate Panel.

The consignor appealed. Sitting by designation on the Ninth Circuit, District Judge Larry A. Burns upheld the lower courts by ruling that the trustee’s hypothetical lien attached to the proceeds as well as the goods themselves.

The outcome turned on the interpretation of UCC § 9-319(a). “[F]or purposes of determining the rights of creditors of . . . a consignee, while the goods are in the possession of the consignee,” the section provides that “the consignee is deemed to have rights and title to the goods identical to those the consignor had . . . .”

Because it had not perfected a purchase money security interest under UCC § 9-103(d), the consignee admitted that the trustee’s hypothetical judicial lien under Section 544(a) allowed the trustee to avoid the consignor’s unperfected interest in the goods. As to proceeds on the filing date, consisting of cash and accounts receivable, the consignor argued that the UCC’s use of “goods,” rather than “goods and proceeds,” meant that the consignee-debtor did not have an interest in proceeds to which the judicial lien could attach.

Judge Burns rejected what he called the consignor’s “strained reading” of Section 9-319. He said the consignor ignored the “numerous references throughout the UCC that treat a consignment as a security interest for all practical purposes.” He said that the “most natural reading” 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.”

Judge Burns pointed to the “reciprocal effect” of UCC § 9-324(b) as the “best example” to show how “a consignor loses priority in the proceeds when it fails to perfect its interest.” The section provides that “a perfected [interest] in inventory has priority over a conflicting security interest in the same inventory . . . and . . . also has priority in identifiable cash proceeds of the inventory.”

Judge Burns therefore held that “the term ‘goods’ in Section 9-319(a) includes proceeds of those goods, and Article 9’s priority and perfection rules apply with equal force to such proceeds.” He bolstered his conclusion by alluding to the “policy rationale” that serves “to protect unwary creditors and prevent ‘secret liens.’”