This article originally ran in the July issue of JCK.
Shanu Singh Guliani, owner of Shanu’s Fine Jewelry, Pembroke Pines, Fla., and a blogger for JCKonline.com, was surprised when a supplier asked her to sign a consignment and security agreement.
“I had never seen this kind of form in my life,” she says. The supplier explained he needed her signature to file a Uniform Commercial Code form for goods she had received on consignment. That confused her even more. “I didn’t know what these things were,” she says.
Now she—and many other jewelers—are finding out. With the retail situation still uncertain, and UCCs a big issue in bankruptcies like Whitehall’s and Friedman’s, more vendors are filing UCC1s to secure their consignment goods and asking jewelers to sign the formal agreements required for their filing.
Jewelers shouldn’t fear these actions, says Cecilia Gardner, president and chief executive officer of Jewelers Vigilance Committee, who appeared at a forum on UCCs at The JCK Show ~ Las Vegas. “A lot of retailers think that when manufacturers file UCC1s, that it’s some sign of a lack of trust or a sign of concern regarding their creditworthiness,” Gardner says. “They shouldn’t be concerned. It’s a sign that their business partners are acting in a responsible way, and they should take comfort from that.”
UCCs are filed by manufacturers with the jeweler’s state secretary of state. They give the manufacturer a security interest in their consignment goods in the case of a bankruptcy. This has become important to manufacturers in light of recent bankruptcies where lenders laid claim to consignment goods.
More information on UCCs can be found at jvclegal.org and ucc4jewelers.com.
UCCs: What You Should Do
Retailers should keep the following in mind regarding UCCs:
Have a lawyer look at anything you sign. For a manufacturer to file a “perfected” UCC, the retailer must sign a consignment or security agreement. Sometimes the memo itself contains the appropriate language. “There are major variations in the texts of these agreements,” notes Leonard M. Weiner, a New York attorney who started the site ucc4jewelers.com. “They should be reviewed by an attorney who is familiar with these issues.”
Check whether the agreement violates any covenants with your bank. UCCs can contain language that allows manufacturers to lay claim to the proceeds of sales of their consigned merchandise. This conflicts with some bank agreements, which generally give the banks first lien on all inventory and receivables. “If you are borrowing money you have standard language against permitted liens and encumbrances,” says Dionne Kenyon, president of Jewelers Board of Trade. “So if somebody files a UCC, the retailer could find themselves in violation of a loan covenant. The bank may say ‘I don’t want these issues.’”
This is generally resolved by having the UCC description include the consigned merchandise only, and not the proceeds from its sale, says Weiner.
Periodically check whether suppliers have filed UCCs for your company. Retailers are not necessarily notified when a manufacturer files a UCC. But you can find this information on your state secretary of state’s Web site. (UCCs are supposed to be filed in the state in which the jeweler is legally organized.)
“Manufacturers might be filing UCCs who don’t have the authorization to do so,” Weiner notes. “That could impact you if you are applying for a loan at the bank.”
In addition, if you cease doing business with a company, make sure the company files a termination of the filing, Weiner says.