Hobby Panic in 2009

[Archive]

Posted By: PC

The answer is somewhat complicated, and very technical, but here's the short version ...

Generally speaking, while a "consignor" (e.g., a collector seeking to sell by placing a card with an auction house) technically retains title to the goods (cards) consigned to/with a "consignee" (e.g., the auction house), if the consignee (auction house) filed for Ch. 11 then the goods (cards) consigned become part of the bankrupt consignee's "estate", and would then be available to satisfy the debts owed to the consignee's secured creditors.

Therefore, if the consignor has not perfected its consignment security interest (by filing a UCC-1 in the right jurisdiction that identifies the goods he consigned), and the consignee (auction house) then goes bankrupt, the consignor is pretty much out of luck ... he is treated as an unsecured creditor by the bankruptcy court, and will probably get nothing if the consignee has any secured debt outstanding. The cards he consigned could be sold by the bankruptcy trustee to pay off the auctioneer's secured creditors first, such as a bank or other lender to the auction house that has an "all assets" type lien on the assets of the action house (assuming that the bank's lien has been "perfected" by filing UCC-1s, which is the case 99.9999% of the time).

[Disclaimer: I'm assuming that individual consignors to auction houses would be treated the same way that suppliers/consignors to other companies/manufacturers would be treated. For example, a supplier of grain to a food company would likely have filed UCC-1s to perfect its consignor's security interest in the grain it supplies from time to time to the food company, so that it would be compensated for the value of the grain being held by the food maker if/when the food maker filed for Ch. 11 protection.]


Note also that in bankruptcy, there is something worse than being an unsecured creditor -- "equity" is last in line, after secured creditors and unsecured creditors.