Sports Authority Files Flood of Suits to Invalidate Vendors' Rights

Last week, The Sports Authority, Inc. and certain of its affiliates (“TSA”) filed adversary complaints against approximately 160 trade vendors in the U.S. Bankruptcy Court for the District of Delaware (the “Court”). TSA, which filed for Chapter 11 protection on March 2, is attempting to use the complaints to invalidate vendors’ purported consignment rights. If successful, trade vendors that believed themselves to be protected as a consignor would be relegated to unsecured creditor status.

Trade vendors in a variety of industries routinely enter into consignment agreements, whereby inventory is “consigned” to a third-party for sale to its customers. Title to the inventory remains with the consignor and transfers only at the point of sale. Rather than be entitled to profits from the sale of the inventory, the consignee receives a commission from sale and turns over the remaining proceeds to the consignor. While there are a number of benefits that run with a consignment relationship, vendors must be careful when both negotiating the consignment agreement and when perfecting its rights.

In TSA, the debtors are attempting to nullify the vendors’ retention of title. TSA is also asserting that the affected vendors failed to properly perfect their consignment rights and even if the Court finds that the consignment interests were properly perfected, TSA’s secured lender’s interest in the consigned inventory is senior to the consignors’ interests. Accordingly, TSA seeks a declaratory judgment against each of the affected vendors that their consignment rights and security interests are either invalid or subordinate. This would allow it to sell that inventory in the ordinary course of business and without regard to the consignment relationship.

It is important to note that not all consignment agreements are equal, and a determination of the validity and perfection of a consignor’s rights depends upon a host of factors (plain language of the agreement, the conduct of the consignee, whether the consignor perfected its interest through a UCC-1 financing statement or by operation of state common law, etc.).

Whether affected by one of the Sports Authority lawsuits or if commonly selling goods by consignment, creditors should pay attention to these matters. Ensure your agreements and subsequent perfection of your company’s interests have been conducted properly.

- Brian Jackiw, Esq. and Thomas Fawkes, Esq., Goldstein & McClintock LLP

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