## Facts

- Fabers, Inc. operated as a retail carpet merchant and received multiple shipments of Oriental rugs from Mehdi Dilmaghani & Company, Inc. for sale in Fabers’ store beginning in 1971.
- The parties used a written “consignment” agreement stating that title remained with the dealer until paid, Fabers could sell only above invoice price, sale proceeds belonged to the dealer and were to be held in trust and remitted, and the rugs were held at Fabers’ risk.
- The rugs bore labels identifying Dilmaghani as the source, and Fabers ran advertising describing the rugs as offered “by special arrangement” with Dilmaghani.
- No financing statement was filed to perfect any interest in the rugs.
- Fabers was adjudicated bankrupt; the bankruptcy trustee treated the rugs as property of the estate.
- Dilmaghani petitioned in the bankruptcy proceeding for return of the rugs, arguing they remained the consignor’s property under a “true consignment.”
- The trustee opposed, asserting the arrangement was a consignment creating a security interest governed by U.C.C. Article 9 and, because it was unfiled, was subordinate to the trustee.

## Issues

1. Whether the purported consignment was a “true consignment” outside U.C.C. Article 9, so that the rugs were not part of the bankruptcy estate.
2. If Article 9 applied, whether the consignor’s failure to file left its interest unperfected and subordinate to the bankruptcy trustee as a lien-creditor equivalent.

## Decision

- The court held the transaction was subject to U.C.C. Article 9 as a consignment creating a security interest, notwithstanding contractual “retention of title” language.
- Because no financing statement was filed, the consignor’s interest was unperfected.
- The trustee, exercising bankruptcy priority equivalent to that of a lien creditor, had superior rights to the rugs.
- The rugs were treated as part of the bankruptcy estate rather than being returned outright to the consignor.

## Legal Principles

- Courts classify transactions by commercial substance rather than labels; “title remains in consignor” language does not prevent Article 9 treatment when the arrangement functions as inventory financing.
- Goods delivered to a merchant for retail sale may be treated as subject to Article 9 consignment rules to protect creditors who reasonably assume displayed inventory is owned by the merchant.
- A consignor who falls within Article 9 must perfect (typically by filing) to obtain priority over the consignee’s creditors.
- In bankruptcy, the trustee can defeat an unperfected security interest by asserting priority comparable to that of a hypothetical lien creditor as of the bankruptcy filing.

## Conclusion

The court concluded that the rug “consignment” operated as an Article 9 security interest, and the consignor’s failure to file left it unperfected; therefore, the bankruptcy trustee had priority and the rugs remained in the bankruptcy estate.


In re Fabers, Inc., 12 U.C.C. Rep. Serv. 126 (D. Conn. 1972)