Richard C. Maxwell

Richard C. Maxwell
Principal

A recent Court of Appeals decision reinforces the need for a consignor to file a financing statement to protect its interest in the consigned goods and the proceeds from the sale of those goods. The case is In re Pettit Oil Company, 2019.

Pettit Oil was a distributor of petroleum products. Pettit Oil entered into an agreement with a petroleum seller which would deliver fuel to various locations owned by Pettit. Ownership of the fuel remained with the petroleum seller. When a customer purchased the consigned fuel, Pettit would send the customer an invoice which provided that payment was to be made directly to the petroleum seller. Pettit and the petroleum seller had an agreement whereby any invoices paid by a customer to Pettit rather than to petroleum seller would be turned over to the petroleum seller.

Unfortunately, the petroleum seller never filed a financing statement to perfect its interest in the consigned goods. And, of course, Pettit filed for bankruptcy.

When Pettit filed for bankruptcy it had possession of the consigned fuel, cash from some of the sold fuel, and accounts receivable for fuel that had been sold, but for which payment had not been made. Pettit’s bankruptcy trustee was awarded the fuel, the cash, and the accounts receivable because, in bankruptcy, the lien of the bankruptcy trustee came ahead of the unperfected lien of the petroleum seller.

Even though ownership of the fuel remained with the petroleum seller, under section 9-319 of the Uniform Commercial Code, a consignor must file a financing statement to protect its interest in the consigned goods against the claims of other creditors of the consignee who, like the bankruptcy trustee, have a lien against the inventory of the consignor.

Most business persons are familiar with the need to file a financing statement to perfect their security interest in collateral. However, a consignor, like the petroleum seller, may think an agreement that says the consignor retains title to the consigned goods protects it and the consigned goods. Such a mistake can result in a big loss.

If you are consigning goods, (1) make sure your consignment agreement provides that you are authorized to file a financing statement, and (2) make sure you file a financing statement in the proper place.