The extensive use of consignment transactions and the providing of extended terms of payment in asset sales accounting to millions of dollars, many times without any security agreements, UCC security filing, or perfected secured collateral, is a unique and troubling element of the industry’s trade practice.

The days when any sale, no matter how large or small, could be concluded by a mere handshake and a “Mazal u Brocha” which literally meant “good luck and blessing,” and in effect meant the transaction was a done deal which could not be reneged upon, have long passed. The sums are too enormous, and the exposure to fraud and loss of one’s entire life’s savings too often occurs with frequent regularity to allow the old practices outdated by the Introduction of the UCC and Its draconian effect on unsecured consignment transactions to continue.

Of particular concern to the diamond and jewelry industry was UCC Article 2, section 2-326, Especially former section 2-326(3) and Article 9-114, which have now been replaced by new provisions of Revised Article 9 Sections -109 (a)(4) 9-103(d); and 9-319. These sections deal with “sale on approval” and “sale on return,” the definitions of each, and how these terms differ from a valid consignment transaction.

Article 9 of the Uniform Commercial Code was amended effective July 1, 2001, as part of a nationwide effort by the National Conference of Commissioners on Uniform State Laws. The amendments made sweeping changes to the law in most states to bring higher certainty and uniformity to financing transactions.

The priority of consignor’s interest as against the rights of lien creditors of the consignee, competing secured parties, and purchasers of the goods from the consignee are determined by reference to the priority rules which are generally applicable to all inventory, such as sections 9-117, 9-122, and 9-324 of Article 9.

It is thus imperative that before one files a UCC-1, one must have a thorough understanding of the UCC. The nature of the transaction (e.g., is it an asset sale, and if so, whether that sale is a cash sale or sale on terms or a consignment) and what the particular applicable UCC requirements are to acquire a super-priority security interest in the goods sold or consigned.

To properly secure consignment inventor and in some cases inventory sold on terms, a purchase money security Interest (“PMS1”), not Just a perfected security interest, will be needed to get a priority position over secured creditors who have filed before the consignor.

Such filing requires full and absolute compliance with the detailed filing and notice requirements and procedures spelled out in the UCC for the PMSI to be effective.