Memos on Your Mind? Expert Advice on Diamond Consignment
- In consignment (memo) transactions, suppliers retain ownership until sale, bearing most of the financial risk while merchants hold goods temporarily.
- Suppliers must file a UCC-1 to perfect their security interest and protect consigned goods from claims in merchant bankruptcy.
- Insurance naming the supplier as loss payee is essential to cover risks like theft or damage during consignment, especially amid rising diamond and metal prices.
Sara Yood, senior counsel at the Jewelers Vigilance Committee (JVC), answers common questions about consignment transactions.
What is a memo?
In the jewelry industry, a memo transaction, also known as consignment, allows a party to hold a supplier’s product for a specified period while a buyer is sought. The merchant pays for it only if a sale is made; otherwise, at the end of the specified period, the product is returned to the supplier.
Who assumes most of the risk?
Most of the risk falls on the supplier, who is in effect lending the merchant the agreed upon cost of the goods.
What can the supplier do to minimize the risks?
Like all credit transactions, the consignment must be documented correctly, as required by law, or it will be deemed unenforceable — that is, unsecured. This means the supplier must “put the world on notice” of its security interest in the loan by making a Uniform Commercial Code (UCC-1) filing to secure the consigned goods.
What is the benefit of filing a UCC-1?
While goods are on memo, the law may give the merchant the same rights and title to them as the supplier has. This becomes important if the merchant fails to pay for the memo items or enters bankruptcy proceedings while in possession of the goods.
In that case, bankruptcy courts will ask whether the supplier properly perfected its consignment by filing the UCC-1. If not, the goods — or any proceeds from them — may be used to satisfy the merchant’s debts.
Banks and other secured creditors of the bankrupt merchant will be first in line to collect — and the supplier will be at the back of the queue.
Does the UCC-1filing cover only the initial shipment?
The agreement can be drafted so it covers the initial delivery as well as subsequent deliveries of the consigned goods. If the terms of the consignment are changed, depending on the changes and the parties’ relationship, either a new or an amended agreement will be required. The merchant should always be sure to have the consignee sign the memo.
Does the merchant need insurance?
Yes. One area of concern is the possibility of loss, theft or damage while the goods are in the merchant’s possession. Before consigned goods are delivered, insurance should be in place, naming the supplier as the loss payee, to protect against these risks.
If the price of precious metals and diamonds rises while the memo is outstanding, the risk of loss increases, and so the level of insurance should increase as well.
Image: Shutterstock
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