WurstCaseScenario

I just returned from the largest conference dedicated to connecting online lending platforms, investors, and service providers.  Although the majority of the 4000 attendees were involved in consumer lending there was a significant presence of online commercial lenders.  Many of them are involved in small ticket business lending and it was apparent that a minority appear to be acting like prudent lenders while many others will likely have an expensive education.  Either way we must assume that they will ultimately get it right.

Commercial lending is taking place online and will likely continue to grow.  And, yes, there are online lenders reaching well into the lower end of middle market lending with facilities as large as fifty million dollars.

Some online lenders are partnering with traditional brick and mortar lenders such as Chase, Santander, Capital One, Regions, CIT and others.  P2P (peer to peer), marketplace lending and other variations of Cyber-Lending have sufficiently established themselves and traditional commercial lenders need to recognize that change is well underway.

That is not to say that traditional lenders will be replaced by algorithms.  I strongly doubt that can happen but there are platforms that gather, organize and evaluate due diligence information that the commercial lending community should not ignore.

While some of these novice lenders appear to be on the right track many will likely have an expensive education.  Either way we must assume that they will ultimately get it right.

Of course there will be many failures amongst these startups and near startups but there will be a number of survivors who intend to take the food that feeds the children of traditional lenders.  You are not going to beat them so you better join them.

You all have expensive websites to provide information to those shopping for a lender online.  The challenge is how to get comfortable with using the cloud to engage in a dialogue with borrowers.

I do not believe that the personal judgment calls of commercial lenders will be replaced by a computer.  I do believe, however, that the process will be streamlined by cloud data.

My message is that whether or not  you embrace the CyberLenders they will ultimately grow into dominant players in the lending community.  I would rather work with them as I do with traditional lenders and help them become smarter at what we do.

When Sports Authority filed its Chapter 11 on March 2, 2016, what glared out from the bankruptcy schedules was the extraordinary number of unsecured creditors where the nature of the debt was identified as “consignment and other trade debt.”  It initially appeared that much of the product on Sports Authority’s shelves were consigned goods but that they had not been timely paid, causing their unsecured status.  Not necessarily so.

It turned out that as of the bankruptcy filing, Sports Authority possessed approximately 8.5 million units of consigned goods with an invoice cost to the Debtors of approximately $84 Million.  It appears that many consignment vendors neglected to properly perfect their security interests in the consigned goods by the filing a financing statement and delivering notice to holder or pre-existing liens..

At the onset of the case Sports Authority, relying on consigned goods to keep its stores operating, sought an order authorizing it to continue to sell consigned goods post-petition.  However, they hoped to reserve their rights to challenge the consignment vendors’ interests at a later date.  As a result, consignment vendors fought back.  In the first month of the case, the Debtor brought some 160 adversary complaints challenging the validity of consignment vendors’ claims.

Fortunately for the consignment vendors, Sports Authority needed continued access to consigned goods.  As a result, a quick compromise was reached and submitted to the Court for approval.

All of this could have been easily avoided had the consignment vendors taken simple steps to protect their rights.

Under § 9-102(2), a consignment is a transaction in which a person delivers goods to a merchant for the purpose of sale and the merchant deals in goods of that kind under a name other than the consignor’s.  In addition, the consignor is not generally known by its creditors to be substantially engaged in selling the goods of others.

For a delivery of goods to constitute a true consignment rather than a sale on approval or a sale or return under § 2-326, the consignee will have the same transfer rights and title to the goods that the consignor possessed, notwithstanding the consignee’s otherwise limited interest in the goods.  (§ 9-319(a)).  The consignor must protect its rights to the consigned goods by following the same procedure for perfecting a purchase money security interest in the goods by filing a financing statement pre-delivery.  See § 9-103(d).  Under § 9-317(e), if a consignor files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing.  Finally, in order to avoid being subject to a prior lien, the consignor must give written notice to any pre-existing secured creditor having a lien on inventory.

Of course, a buyer in the ordinary course of business takes its property free and clear of all liens, including a properly perfected purchase money security interest held by a consignor.  (§ 9-320(a)).

Following these simple steps will assure that consigned inventory will remain consigned and not become someone else’s collateral.  Lenders to consignors need to monitor their sales to assure that the lender’s interests follow their collateral.

After years of sharing my views, perceptions and analysis of significant legal events in commercial finance law through my articles,  speeches and informal presentations, I am pleased to unveil WurstCaseScenario, a blog and website dedicated to news and views affecting commercial lending. The purpose of WurstCaseScenario is to regularly bring you current information of legal trends and decisions affecting your business in brief and to the point posts.  I will continue to write more detailed articles for the major  trade publications, however, through WurstCaseScenario we can reach you more quickly with information as it becomes newsworthy after release from the courts.  I look forward to hearing and reading your comments and insights on these pages as well.