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

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"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.

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"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?

Make your decision; then click on "next" below for the court's decision.

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.