## Facts

- Downey Creations, LLC (Downey) bought and sold diamonds and jewelry and commonly arranged “trunk shows,” where it sold jewelry to consumers at special events for retail jewelers.
- Regions Bank, N.A. (Regions) financed Downey, and Downey granted Regions a blanket security interest in all of Downey’s inventory.
- Regions perfected its security interest by filing a UCC financing statement before most of the supplier-jewelers filed anything.
- A group of jewelry suppliers delivered jewelry to Downey “on memorandum” for sale at trunk shows, with the expectation that Downey would remit sale proceeds (often less a commission) and return unsold items.
- The suppliers either did not file UCC financing statements covering their delivered goods or filed only after Regions had already perfected.
- Downey failed to return or pay for certain jewelry delivered by the suppliers.
- The suppliers filed an involuntary bankruptcy petition against Downey; the case proceeded as a bankruptcy case after entry of an order for relief and conversion to Chapter 11.
- The suppliers sought to recover the jewelry and proceeds, arguing the deliveries were common-law bailments and that the goods never became part of the bankruptcy estate subject to Regions’s lien.
- Downey (and Regions) responded that the transactions were consignments governed by Revised UCC Article 9, making the suppliers’ interests subject to Article 9 perfection and priority rules.
- Downey moved for partial summary judgment. In response, the suppliers pointed to evidence that 50 of Downey’s 91 creditors knew Downey sold goods belonging to others, arguing the “generally known by its creditors” exclusion from Article 9’s consignment definition applied.

## Issues

1. Whether the suppliers’ “on memorandum” deliveries of jewelry to Downey for trunk-show sales were consignments governed by Revised UCC Article 9, rather than common-law bailments.
2. If the transactions were Article 9 consignments, whether Regions’s earlier-perfected inventory security interest had priority over suppliers who failed to perfect (or perfected after Regions).
3. Whether Downey was “generally known by its creditors to be substantially engaged in selling the goods of others,” so that the deliveries fell outside Article 9’s definition of “consignment.”

## Decision

- The court held that, for most suppliers, the deliveries to Downey for resale met the statutory definition of a consignment under Revised UCC Article 9, even though the parties used “memorandum” terminology and the suppliers characterized the arrangements as bailments.
- Treating those consignments as Article 9 transactions, the court concluded the suppliers’ interests were unperfected or junior because they did not file financing statements before Regions perfected its inventory lien.
- The court ruled that Regions’s prior perfected security interest in Downey’s inventory took priority over the suppliers’ unperfected or later-perfected consignment interests in the jewelry and related proceeds.
- On the “generally known by its creditors” exclusion, the court determined the record did not establish that exclusion as a matter of law for most suppliers.
- The court granted Downey’s motion for partial summary judgment as to all suppliers except Disons Gems, Inc. and J.I.I.C., Inc. d/b/a South American Imports.
- As to Disons and J.I.I.C., the court found a genuine dispute of material fact concerning the “generally known” exclusion and denied summary judgment as to those two suppliers.

## Legal Principles

- Revised UCC Article 9 applies to a transaction that meets the statutory definition of “consignment,” even if the parties describe the arrangement as “on memorandum” or a bailment.
- An Article 9 consignor is treated as holding a security interest in the consigned goods; to protect that interest against the consignee’s secured creditors, the consignor generally must perfect by filing a UCC financing statement.
- A lender with a properly perfected, earlier-filed security interest in a debtor’s inventory generally has priority over unperfected or later-perfected consignment interests in the same goods and their proceeds.
- The exclusion for a consignee “generally known by its creditors to be substantially engaged in selling the goods of others” requires broad creditor awareness; proof that some creditors know may be insufficient.
- Summary judgment is improper where evidence creates a genuine dispute of material fact on an element controlling whether Article 9 applies to the disputed deliveries.

## Conclusion

The bankruptcy court treated most “on memorandum” jewelry deliveries to Downey for trunk-show resale as consignments governed by Revised Article 9, which meant the suppliers needed to perfect their interests by filing; because most did not file before Regions perfected its blanket inventory lien, Regions had priority in the jewelry and proceeds, and Downey obtained partial summary judgment against those suppliers, while fact disputes about the “generally known” exclusion prevented summary judgment as to Disons Gems, Inc. and J.I.I.C., Inc. d/b/a South American Imports.


In re Downey Creations, LLC, 414 B.R. 463 (2009)