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Secured Lender’s Dispositive Motion Denied in Sports Authority’s Consignment Controversy

The United States Bankruptcy Court for the District of Delaware recently denied a secured lender’s motion for partial judgment on the pleadings that the lender’s interest in certain goods took priority over a vendor’s interest in those same goods. In TSA Stores, Inc. v. M J Soffe, LLC (In re TSAWD Holdings, Inc.,), 565 B.R. 292 (Bankr. D. Del. 2017), M J Soffe, LLC sold nearly $5.5 million in goods to The Sports Authority on consignment pursuant to a Pay by Scan Agreement. After filing for bankruptcy, TSA initiated a lawsuit against Soffe seeking declaratory relief in connection with the goods. TSA’s secured creditor, Wilmington Savings Fund Society, FSB, intervened in the lawsuit and filed a motion for partial judgment on the pleadings, arguing that its interest in the goods took priority over Soffe’s interest because Soffe failed to properly perfect its interest in the goods under the UCC. Under the UCC, consignments that satisfy the UCC’s definition must be perfected in accordance with the UCC, while consignments that fail to meet the UCC’s definition are governed by state common and statutory law. Wilmington argued that the relationship between TSA and Soffe constituted a consignment governed by the UCC because the agreement governing the parties’ relationship specifically stated that it was a “consignment” as defined by the UCC. Wilmington further argued that, as a result, its interest in the goods took priority over Soffe’s interest because Soffe failed to properly perfect its interest. Soffe did not dispute that it did not properly perfect its interest. Rather, Soffe claimed that the agreement did not constitute a “consignment” within the meaning of the UCC because TSA’s creditors generally knew that TSA was substantially engaged in selling the goods of others and Wilmington had actual knowledge of the parties’ consignment arrangement. The court agreed with Soffe, holding that the Pay by Scan Agreement’s statement that the parties’ arrangement was a consignment under the UCC was not determinative. The court held that the UCC placed limits on the ability of contracting parties to define their legal relationship, and while parties could vary the effect of certain provisions of the UCC by agreement, they could not redefine otherwise defined terms, such as “consignment.” As a result, it remained an issue of fact as to whether the parties’ relationship constituted a “consignment” within the meaning of the UCC.

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