Remarketing: Ensuring Your Equipment Cannot Be Seized By Creditors

• Published date: 22 March 2022
• Subject Matter: Finance and Banking, Financial Services, Leasing
• Law Firm: Womble Bond Dickinson
• Author: Ms Shari B. Domow Bacsardi and Dillon A. Redding

by Scott Chait, Shari Bascardi & Dillon Redding Vol. 49 No. 1 2022

Remarketing equipment with an agent occurs frequently in the equipment finance industry, but it comes with legal risk. Scott Chait, Shari Bacsardi and Dillon Redding discuss the risks and benefits of successful equipment remarketing that is UCC compliant.

Retaining the services of an agent to remarket equipment is one of the more routine occurrences in the equipment finance and leasing industry, yet many may be surprised to learn it is fraught with potentially enormous legal risk ' the loss of the equipment to a creditor of the remarketer. This article will briefly highlight the legal risk and, more importantly, recommend steps you should take to ensure your equipment is not subject to potential seizure by the remarketer's creditors.

Upon a default and repossession, or at the end of a lease term, equipment finance and leasing companies will routinely retain the services of third-party vendors to remarket and sell the equipment on the lessor's behalf. While the lessor maintains ownership of the equipment until it is ultimately sold, the remarketer will usually take possession to conduct the services.

During this period of possession, a lessor's equipment could potentially be subject to a claim by the remarketer's creditors, particularly in cases where applicable law would deem the relationship between the lessor and remarketer to be one of 'consignment.' This is especially concerning in certain cases, such as vendor financing, where the remarketer is not outwardly in the business of remarketing equipment or selling equipment on behalf of others.

Assuming you have an "Article 9 consignment," a creditor of the remarketer could have a "superior interest" in your equipment, unless certain steps are taken that mirror the necessary steps to perfect a purchase money security interest (PMSI) in inventory.¹ That, of course, means on or before delivery of the equipment to the remarketer, you must: file a financing statement against the remarketer, conduct a Uniform Commercial Code (UCC) search against the remarketer and then issue "PMSI Inventory Letters" to any of the remarketer's creditors of record who have a conflicting security interest in the equipment.

In doing so, keep in mind some useful practice tips:

1. It's not required to use the term "security interest" or "consignment" in your PMSI Inventory Letters² (i.e., "...has or expects to acquire a purchase money security interest in and to the following inventory..." versus "...has delivered or expects to deliver goods, properly described, on consignment...").³
2. When filing your UCC-1, make sure to select consignor/consignee, not secured party/debtor.
3. Get an acknowledgment that you will be filing and issuing the letters, especially considering that the UCC rules of attachment which, among other things, require a signed writing, may apply⁴ as between the parties.⁵

What exactly is a consignment and how might a remarketing scenario trigger it? Properly understood, a consignment is a bailment ' a...