On March 15 and 16, 2016, the Debtors in the Sports Authority bankruptcy, Case No. 16-10527, filed approximately 161 adversary complaints against consignment vendors.  The purpose of these complaints is to determine the priority and validity of the consignment vendors’ claims of title and their claim to a security interest in the consigned goods.

For any vendors who failed to file a UCC-1 security statement within 30 days of sending goods to Sports Authority, this could prove to be a painful lesson.  According to the Debtors’ argument, the consignment vendors do not have title to the goods: “The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under § 2-401 is limited in effect to a reservation of a ‘security interest.’” Del. Code Ann. tit. 6, § 1-201(35).

If Judge Walrath agrees with this argument, then consignment vendors will have only a security interest, governed by the Uniform Commercial Code as enacted in Delaware and the principles of bankruptcy law.  Pursuant to the Post-Petition Financing order entered in these bankruptcies, the Debtors have given their DIP Lenders a first-lien security interest in all assets not otherwise encumbered by a perfected lien.  This means that for any shipments that were not properly perfected (by filing a UCC-1 statement within 30 days of shipment), the consignment vendors may not have a 1st priority lien.

The Debtors have argued that any attempts at perfection after the 30-day period provided by the UCC is considered a preferential transfer (if made within the 90 days preceding bankruptcy), and should thus be avoidable.

It’s a tricky situation for any vendors who allowed their diligence to wane over the course of a long relationship with Sports Authority.  Whether you are affected directly by this bankruptcy filing or not, you should use this as an opportunity to re-commit to filing UCC-1 financing statements regardless of how good your relationship is with a contract counter-party.  It’s not a matter of whether you trust your counterparty, its a matter of how much you trust their bankers and attorneys…