In My Legal Opinion….By Leonard M. Weiner, Esq., PhD.

(This is the third in a series of columns that deals with contemporary legal and commercial issues that are currently facing the diamond and jewelry industry and I invite reader email responses and dialogue regarding the issues raised. Please see the previous article).

We left off last time discussing the “Inter-creditor Agreement” that are demanded by many of your customers’ lenders and my suggestion that you not sign. At first glance into creditor agreement seems innocuous, in that it reserves. Your right to maintain an interest in your consignment goods. However, it expressly states that your interest in your consignment goods applies only as long as you’re goods remain on consignment, and that reference to “on consignment” is a matter of legal discussion, and that many bankrupt debtor’s attorney’s have insisted that since the bankrupt as the ability to sell the goods in effect as an interest in those goods and the goods are no longer on “on consignment”. In addition, the into creditor letter agreement makes it clear that until the lender is fully paid, you the other creditor with the consignment interest will not seek to make any claim against the debtor or the interest of the lender.

The bank is relying partially on your consignment goods and noted to extend credit to your customer, by your customer. In that it provides it with additional collateral from the sale of your consignment goods, it is benefiting from your capital assets and should have no right to require you to relinquish your purchase money security priority position on your consignment goods.

Once you have filed your UCC 1 and have complied with all the procedural requirements to get a PMSI, you must keep in mind that your security interest is valid only for the goods that remain in your customers possession and have not been sold to its customer. Therefore, it is imperative that you require sales reports as frequently as possible. You the biweekly, your monthly, that you issue invoices for all goods that of the reported sold, and that you maintain a close watch on how much goods are being extended on consignment, and how much monies are owed to you for goods are ready sold. It is not uncommon for a supplier to set a goal, but perhaps let’s say $100,000 for a particular customer, but because of the drag time between the report. The issuance of the invoice, and the payment, and the request by the customer for additional replenishment of goods sold, that the total amount provided to the customer and outstanding and anyone time is $150,000 or more.

You must keep on top of the outstanding invoices, and the payment terms and insisted to terms. be. complied with. In the event of the bankruptcy any payments that were made to you in the normal course of business under the terms of your consignment agreement will not be recoverable in bankruptcy, but is the payments were made beyond the terms of payment, the trustee in bankruptcy will demand, the return of such payments. For example, if you are agreement with your customer, is that all invoices will be paid within 30 days of the date of receipt by the customer, and you allow him to play. Sometimes 40 days, sometimes 60 days, the court may consider this not in the normal course of business and recoverable by the trustee.

If, after a brief explanation to your customer why you are requesting to file the UCC, your customer insists that he does not allow UCC is to be filed, or refuses to allow you to maintain a lane on your consignment goods, despite the widely accepted practice throughout the entire United States, you should be wary of providing any substantial amount of goods to such customer, and understand that you are totally unsecured and the goods you a providing to such customer are subject to the prior claims of such customer is lender and other creditors.

The UCC was created specifically to protect you, the constant or a new should take every advantage of that right. The filing of such security interest requires a full understanding of how the UCC functions, not generally understood by most attorneys, and have properly filed will provide you with the ability to conduct consignment transactions. Why do I emphasize the fact that the filing of such security interest requires a full understanding of the UCC? Let’s take an example of one of the requirements. The filing in the proper jurisdiction, where wood one file on a corporation that has as main office is located in New York City, and yet is a Delaware corporation? Where does one file on an individual? Where does one file on a foreign corporation that is doing business in United States? (We Will discuss these things, these topics next time.)