Legal Question in Business Law in California

Re: Consignment Inventory

This is a very complex topic and the law distinguishes three categories of transaction between wholesaler and retailer (or between consignor and retailer);

1. Goods delivered by a merchant on approval for possible use by the consignee;

2. Goods delivered by a merchant for sale or return by another merchant; and

3. Goods that were acquired by a consumer (rather than a merchant) which the consumer acquired originally for personal use but now wants to dispose of - the traditional idea of a consignment shop for secondhand clothes, for example.

See Commercial Code section 2326 subsections (1)(a), (1)(b), and (4), respectively.

In categories 1 and 3, the goods are not subject to the claims of the buyer's creditors; under category 2, however, (called "sale or return"), the goods are subject to claims of the potential buyer's creditors while in the potential buyer's possession.

What you are doing is probably a category 2 sale-or-return transaction. The commentary of the Uniform Commercial Code (UCC) committee indicates that a "consignor" on a sale-or-return (category 2) deal could protect itself from claims of the consignee's creditors under the filing provisions of Division 9 of the UCC.

So, I would suggest using a UCC-1 financing statement as well as making sure that your agreements with the consignee/retailer include a security agreement or other language specifying your retention of a security interest in all consigned merchandise.