Can the bank seize these goods, even though the creditor and supplier agreed they were on consignment?

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

“We just heard you’re going to be selling off inventory from Claire’s Concrete, Inc.,” said Florence Sherman of FirstRate Concrete.

“That’s right,” replied Joe Kaplan of WestEnd Bank. “We had a security interest in all of Claire’s inventory.”

“Well, a lot of the raw materials Claire’s had belonged to us,” Sherman said. “We sent them materials on consignment. If they didn’t sell, we could take them back. Or, if we needed material manufactured into specific forms, we had Claire’s do the work, and we paid for it. So, we’ll be taking those materials back.”

“I see no indication that those materials belonged to you,” Kaplan replied.

“Look on the inventory sheets. Some of the materials have ‘FR’ in front of them. That means they belong to us.”

“But I can’t tell by looking in the warehouse which material is which,” Kaplan complained. “You didn’t post a sign. I didn’t find any UCC filing that identified your interest in any of these materials.”

“We didn’t have to file under the UCC,” Sherman snapped. “Claire’s knew which goods were which, and we had a firm understanding that our goods were to be kept separate from theirs.”

“Do you have this agreement in writing?” Kaplan inquired.

“No, it was an understanding,” Sherman stressed.

“Well, if you wanted to protect your interest in your raw materials, you should have identified them,” Kaplan repeated. “As a secured creditor, I must be able to come in and decide what goods belong to whom. The way things look, it appears everything belongs in Claire’s inventory. We’re going on with the sale.”

Can WestEnd Bank sell all the raw materials?

Yes they can.

Under the UCC, if goods are “delivered to a person for sale and such person maintains a place of business at which he deals in goods of the kind involved, under a name other than the name of the person making the delivery, then with respect to claims of creditors of the person conducting the business the goods are deemed to be on sale or return.”

Therefore, when Sherman shipped raw materials to Claire’s, they became part of Claire’s inventory since Claire’s dealt in the same goods as the type Sherman shipped.

Had Sherman wanted to protect her company’s interest, she should have either posted a sign near those specific raw materials to evidence her company’s interest in the goods or she should have filed a security interest. Because she did not take either step, the court found the bank had priority, and ruled that all of the raw materials belonged to the bank.

This article originally appeared in Credit Today, the leading publication for the credit professional.
Click here for Special CMA Member $10 Trial!

Thanks to CreditScape Spring Sponsors!

 

CMA wishes to recognize our event sponsors for CreditScape. Without their help, this event would not have been possible.

Thanks to these leading companies in the credit community.

 

AGA Adjustments
Contact: Sam Fensterstock
www.agaltd.com
888-496-1600
Services: Commercial Collections

Ansonia Credit Data
Contact: Bill Weiss, Kathleen Dasal
www.AnsoniaCreditData.com
855-ANSONIA (267-6642)
Services: Portfolio Monitoring, Credit Reports

Bectran
Contact: Eric Lee
www.bectran.com
888-791-6620
Services: Online Credit Applications, Document Management

Credit2B
Contact: Joe Chin
www.credit2b.com
212-279-3300
Services: Customer Onboarding, Risk Protection, Analytics, Benchmarks

CreditPoint Software
Contact: Charlie Pilkington
https://creditpointsoftware.com
918-376-9440
Services: Credit Risk Analysis Software, Online Credit Applications, Commercial Collections Software

Dade Systems
Contact: Bill Zayas
www.dadesystems.com
855-418-2786
Services: Virtual Payment Processing Solutions

Dun & Bradstreet
Contact: Bob O’Brien
www.dnb.com
973-921-6370
Services: Credit Reports

Esker
Contact: Dan Caple
www.esker.com
800-368-5283
Services: Accounts Receivable Software

HighRadius
Contact: Sally Huynh
www.highradius.com
281-968-4473
Services: Accounts Receivable Software

IAB
Contact: Diana Crowe
www.iabllc.com
630-537-0840
Services: Deduction Management Services

NCS
Contact: Jerry Bailey
www.ncscredit.com
800-826-5256
Services: UCC Filing Services

Skyminder
Contact: Mike Lindenmuth
www.skyminder.com
813-636-0981
Services: International Credit Reports

United TranzActions
Contact: Michael Williams, Dean Middleton
www.UnitedTranzActions.com
800-858-5256
Services: Payment Processing, Credit Card
Processing, Virtual Lockbox

Vantiv
Contact: Matt Fluegge
www.vantiv.com
608-834-2539
Services: Payment Services

Construction Industry – Pitfalls to Avoid

For the most part, the construction industry is struggling through lean times. According to the U.S. Department of Commerce’s U.S. Census Bureau report for May, for the first five months of 2008, construction spending totaled $416.6 billion, 5.1% below the total for the same period last year. Residential construction spending continues to
topple, dipping to $378.9 billion in May, 1.6% below April and 26.9% below May 2007. Private construction spending as a whole has shed almost 10% year-over-year.
With standards remaining tight in the credit markets, the impacts are being felt the length of the value chain. There is a trickle-down effect from the creditors to developers, from the developers to the builders—who are sitting on a
large inventory of homes—and from the builders down to the subcontractors. In his CMA-sponsored teleconference “Pitfalls to Avoid in Being a Subcontractor on a Construction Site,” Byron Saintsing, partner, Smith Debnam Narron Wyche Saintsing & Myers, LLP, shared a wide range of information from lien claims and payment bonds to
bankruptcy issues to help subcontractors and other construction site partners keep their heads above water during difficult times.

“The market out there today, at least on the residential side, is in pretty bad shape and I think everyone knows that,” said Saintsing. “If you are dealing with and are selling to a subcontractor that’s on the residential side of the market, chances are that they have hit some bumps in the road and if they haven’t, they’re going to.”

First and foremost, Saintsing suggested maintaining high credit standards. There is often pressure from the sales department when sales are down to ask credit departments to cut corners, extend terms, create special terms and simply relax standards across the board, but from the credit managers’ perspective, this is the time to remain firm.

“Now is not the time to loosen your credit standards,” stated Saintsing. “If you do, I’m afraid you’ll see your bad debt write-offs continue to go up, not down.”

Saintsing recommended that credit professionals examine their documentation and make sure contracts are
being properly executed. If they are taking collateral, they want to take a look at things like proof of delivery, verification of where that collateral is and they want to make sure that their UCC-1 financing statements are properly filed. Customers need to be examined to determine what kind of ability they have to repay the credit that’s being extended to them. Due diligence needs to be practiced with credit and trade references, as well as with financial statements and credit reports.

“You want to take extra precautions in this environment to verify who your customers are and what kind of entity
they are,” explained Saintsing. “You really do need to know on the front end who you are dealing with and what their ability to pay is. The time to ask those questions is not on the back end when you have a payment problem.”

There are legal avenues available if payment problems do occur. For example, if a bankruptcy has been
filed, or imminent, credit managers are eligible for reclamation rights under the Uniform Commercial Code. Non-bankruptcy law reclamation rights state that creditors have 10 days after their customers received
goods of sale to give notice of reclamation if the customer was insolvent when they received them.

“That’s not very much time, so reclamation rights, in the real world, are hard to assert,” said Saintsing. “It’s easy for a lawyer like me to say, ‘Sure, go file a reclamation notice.’ But in the real world, not many people are paying within 10 days, so it makes it tough to use reclamation rights. But they are available.”

Of course, mechanic’s liens on private projects and payment bonds on public projects are courses of action as well. But because statutes vary from state to state, credit departments need to have resources that specify all the nuances to ensure they are eligible to recover what’s due to them. CMA has tools to give detailed information on each state’s procedures and policies.