Have You Ever Signed a Consignment and Security Agreement from a Diamond Vendor?

Thank you for all the comments and advice. I haven't signed the UCC
as of yet because I had a couple of questions and wanted a lawyer
to look over it. I have sent the UCC to a family lawyer. I'll keep
you updated. David thanks about the asset goods info.

I read with interest all of the comments and suggestions that have
been made. Some are right on point, some contain minor
inaccuracies, and some are completely false. I have been practicing
law for over 25 years, primarily in the area of secured
transactions, with a concentration on the UCC and the diamond and
jewelry industry, since I spent 10 years in the diamond industry
prior to my practice of law. If you really want to get an accurate,
comprehensive, legal understanding of the UCC, its impact on the
jewelry industry, and the truly unique services my firm provides,
visit us on the web at: Ucc4jewelers.com.

There are several legal “instruments” being described
and some blurring of their purposes and intent is apparent. UCC-1
gives the Vender legal standing in court among other creditors.
This just puts the court/legal system on notice that the vendor has
certain rights in the event of a bankruptcy. Courts apply a
date-of-filing priority to UCC creditors; the earliest UCC gets
first priority in recovery of money owed. The Retailer does not
have to sign or consent to the filing of a UCC. The PMSI process
takes the Vendor to the front of the creditor line in bankruptcy
court. This ONLY applies to recovery of the Vendor’s
merchandise and receipts for goods sold. Without a
“perfected” PMSI process, a Vendor may lose all rights
to his consignment/memo goods and receipts to a priority creditor
based solely on a creditor’s date of UCC-1 filing. Typically
a bank has the first UCC-1 filing which gives them first bite at
everything in the store that is not legally excluded. A PMSI
letter, part of the PMSI process, goes to all parties that have
filed a UCC the names the Retailer as the legal debtor. Again, the
Retailer does not have to sign or consent to the process. The UCC
and PMSI processes only apply to bankruptcy court proceedings where
the interests of the Retailer are represented by a court appointed
trustee. A Consignment and Security Agreement contractually defines
the business agreement between the Vendor and Retailer. This is the
document that spells out the terms and conditions of how the vendor
intends to do business and protect his merchandise while it is in
the retailer’s custody. As David commented, this is where the
Vendor does his best to insure that in any imaginable circumstance,
the Vendor is compensated for merchandise placed with the Retailer
for resale. Most of the conditions are common sense business
practices such as proper fire and loss insurance coverage, sale and
payment processing, etc. Additional conditions may be added or
negotiated to insure the best interests of both parties. This
Agreement is typically the only point of legal contention between
Vendor and Retailer. Merchandise sent on consignment/memo for
resale always has the potential for a very bad outcome for the
Vendor. Unfortunately bad outcomes are increasingly common. Sales
made, cash collected, and the Vendor put on slow pay puts Vendors
in the unwanted position financing the Retailer’s business.
The Vendor then doesn’t have the merchandise to sell
elsewhere and no cash flow from goods sold. So don’t be
surprised if more Vendors amend and update their agreements.

There are several legal “instruments” being described
and some blurring of their purposes and intent is apparent. UCC-1
gives the Vender legal standing in court among other creditors.
This just puts the court/legal system on notice that the vendor has
certain rights in the event of a bankruptcy. Courts apply a
date-of-filing priority to UCC creditors; the earliest UCC gets
first priority in recovery of money owed. The Retailer does not
have to sign or consent to the filing of a UCC. The PMSI process
takes the Vendor to the front of the creditor line in bankruptcy
court. This ONLY applies to recovery of the Vendor’s
merchandise and receipts for goods sold. Without a
“perfected” PMSI process, a Vendor may lose all rights
to his consignment/memo goods and receipts to a priority creditor
based solely on a creditor’s date of UCC-1 filing. Typically
a bank has the first UCC-1 filing which gives them first bite at
everything in the store that is not legally excluded. A PMSI
letter, part of the PMSI process, goes to all parties that have
filed a UCC the names the Retailer as the legal debtor. Again, the
Retailer does not have to sign or consent to the process. The UCC
and PMSI processes only apply to bankruptcy court proceedings where
the interests of the Retailer are represented by a court appointed
trustee. A Consignment and Security Agreement contractually defines
the business agreement between the Vendor and Retailer. This is the
document that spells out the terms and conditions of how the vendor
intends to do business and protect his merchandise while it is in
the retailer’s custody. As David commented, this is where the
Vendor does his best to insure that in any imaginable circumstance,
the Vendor is compensated for merchandise placed with the Retailer
for resale. Most of the conditions are common sense business
practices such as proper fire and loss insurance coverage, sale and
payment processing, etc. Additional conditions may be added or
negotiated to insure the best interests of both parties. This
Agreement is typically the only point of legal contention between
Vendor and Retailer. Merchandise sent on consignment/memo for
resale always has the potential for a very bad outcome for the
Vendor. Unfortunately bad outcomes are increasingly common. Sales
made, cash collected, and the Vendor put on slow pay puts Vendors
in the unwanted position financing the Retailer’s business.
The Vendor then doesn’t have the merchandise to sell
elsewhere and no cash flow from goods sold. So don’t be
surprised if more Vendors amend and update their agreements.

Hi Shanu... I just went through several of these agreements with
our consignment vendors. I agree with the comments with all the
other responses. It's good for all parties. I'm assuming that you,
like most of the rest of us, are borrowing with a line of credit
from your bank. If so, you may want to ensure that your memo
agreement clearly identifies how the proceeds from the sale of
consigned goods are to be handled - and that the language is
consistent with your Master Loan/LOC agreement. If you aren't
careful, you could end up jeopardizing your loan agreement, or
create a situation where you have unexpected limitations on your
borrowing base. Bank examinations are now focusing on consigned
good UCC filings, and the potential impact on their collateral
positions as it relates to proceeds from consigned sales. Mark

I agree with the comments but encourage you to READ the agreement
closely and feel free to apply a sizable amount of red ink to it.
Having signed about a dozen of these over the last 6 months, I can
tell you that there are subtle differences in them and many are
over-reaching in scope. A few things to note: 1. Make sure the
vendor doesn't use the consignment agreement to protect asset
goods. Often times, they will add a clause that says that if you
don't pay for the memo, then you it gives them certain rights over
the asset goods of theirs you have. That's bogus and I'd strike it.
2. Vendors often try to insert clauses about the number of
inventories that need to be done, insurance notifications, and a
whole host of other administrative clauses that basically make it
impossible to do business OR puts you in immediate default so that
they can pull the goods whenever they see fit. This is not fair.
The agreements, though mostly provided by the trade, should be fair
to both sides. 3. Vendors often add a clause that has the UCC
apply, retroactively, to all existing memo. This is fine, in
principal, but in my mind, it definitely allows me latitude in
demanding certain terms (payment terms, reporting terms) that are
beneficial to our business. In that end, memo can be a great deal
for both sides and it's only fair that vendors are protected.
However, after the nonsense with Whitehall many of the attorneys
have gotten very heavy-handed and I encourage you to stand up and
fight for an agreement you can live with. Good Luck!

Shanu as you've already learned there are many reasons a vendor
needs to have not only signed and fully dclared consignment
agreements along with properly perfected UCC's. Perfected UCC's are
fully filed BEFORE any consignment is shipped to a
retailer/customer of any type. Principally there is a considerable
amount of uncertainty with how varying courts have handled loose
"agreements" bewteen vendors and retail customers... attorneys are
paid to protect their clients interests with moderate regard for
what is right and reasonable, and bankrupcy laws are at times vague
and able to be manipulated to less than appropriate ethical end
results. The first Fortunoff filing in Jan 2008 was a perfect
example of that blatant reality...

Shanu: If you are honest and follow through with the "spirit" of
the memo, you should have no problem signing the agreement. The UCC
basically places the world on notice that certain goods in your
store are the property of the supplier, not yours. Also, any
proceeds from the sale of the memo goods are also the property of
the supplier. This is all fine and part of your "hand shake"
agreement with the supplier. Properly filed UCC's will "perfect"
the supplier's right to the merchandise and puts them ahead of the
banks and other parties for the money owed to the supplier for
unpaid memo goods which the retailer sold. Our banks now require us
to file UCC's on ALL memo shipments. The UCC we file is called a
Purchase Money Security. Traditionally, this only comes into play
in a bankruptcy situation. Unfortunately, this is how business
needs to be done. It is firm protection for the supplier. On a more
positive note to the retailer, those that sign the agreement should
be receiving a better price for the goods, as the supplier's
interests are even more secure now than ever in the past. In
conclusion, this is the proper way to conduct business.

Having been involved in the jewelry industry as a retailer and
consultant for over 45 years, I can tell you that this is the
proper way to do business for both the retailer and the vendor. I
have assisted retailers going through chapter eleven proceedings
and each one wanted to return memo goods to the vendor but were
stopped by the courts. I hope all retailers and vendors sign UCC
agreements concerning their memo programs.

I think this form is a great idea. I have just never seen it until
now. Like Homer--I think handshakes don't do the job.

It's now standard procedure for memo goods -- As a consultant, I
advise all designers/manufacturers to use them. Many have been
using them for years while others are just now realizing how much
they need it. It basically gives the vendor the right to be
compensated for loaning you money (merchandise)and it going out the
window due to a retailer's negligence or mismanagement. Why
wouldn't that be the fair thing to do? Sounds simple to me since
it's their goods to be begin with. Why do you sound like it's
something untowards that they'd want to be paid if you lose their
goods, you sell it but forget to pay for it and keep it from being
one of your bankruptcy assets when you never paid them for it?

I agree with Rob. It's a sign of the times. I think any vendor
nowadays who doesn't do this is being foolish. I know there are
old-timers who are offended by these things, but a handshake
doesn't get you much in bankruptcy court.

Hi, Shanu ... while I see most of this from an outsider's
perspective, I certainly believe these kinds of formal agreements
should be used more often in the industry, not less.