Can an auction firm use your auction consignment as collateral for a debt, based on future revenues

Longacre

This might be an irrelevant question, because I am sure that all of the auction houses are on solid footing, particularly given the bull market that we have been experiencing. However, let’s say that you consigned your entire collection at an auction firm (which is worth a significant amount), and the coins are in the process of being cataloged. You have also signed a standard consignment agreement.

I have not seen a standard consignment agreement in a while, but I hear they are pretty complicated. Does anyone know if there are any prohibitions against the auction house using your auction consignment as collateral for a debt, in particular using the expected future revenue streams from your consignment as security? I assume the once you have signed the consignment agreement, you really cannot revoke the contract. Therefore, it seems logical that a bank (assuming that they know how hot the coin market is), would be willing to loan the auction house cash based on the underlying value of your coins (the consignment), as that value factors into the expected commission that the auction house will receive from the sale.

Does anyone know if this type of financial dealing is allowed? Does a consignor have a right to ask about this? What happens if the auction house fails, or it cannot cover on another debt that it has with the bank?

Res

Auction House Bankruptcy

Looks like you get listed with all of the other creditors

WTCG

To answer the question in the title, the answer is yes. Auction companies can consider a dealer's consignments as leveraged collateral for unpaid debts.

Longacre

<< <i>To answer the question in the title, the answer is yes. >>






Do you know how prevalent this practice is in the coin industry?

WTCG

<< <i>

<< <i>To answer the question in the title, the answer is yes. >>






Do you know how prevalent this practice is in the coin industry? >>



I can't say for sure how prevalent this practice is but I know of several dealers who do this with auction companies. Cash advances issued against consignments are much more common.

ColonialCoinUnion

<< <i>This might be an irrelevant question >>



I think this is the perfect title for your upcoming autobiography.

IGWT

I don't see how an auction house could pledge my coins any more than they could pledge my house as security for repayment of a loan (unless there is some whacky provision in the consignment agreement conveying an interest in the coins). But businesses often use receivables (what you're calling a "future revenue stream") as collateral.

Longacre

<< <i>I don't see how an auction house could pledge my coins any more than they could pledge my house as security for repayment of a loan (unless there is some whacky provision in the consignment agreement conveying an interest in the coins). But businesses often use receivables (what you're calling a "future revenue stream") as collateral. >>




Can the consignor buyback provision create some form of security interest that the auction house has in the coins themselves?

ajia

This might be an irrelevant answer, but...
What would happen if the coins don't sell?
I have never consigned coins before, so I really don't know what the fee's would be to just consign.
Also, I do know of buy-backs because there is no minimums for some auctions houses, so what would they place as a value on the 'collateral'?
Retail? Wholesale?
In a bull market I guess that's not a problem, but in a bear market??

Take a large loan on consigned coins, then they don't sell!

Are the seller(s) SOL?

Res

<< <i>This might be an irrelevant answer, but...
What would happen if the coins don't sell?
I have never consigned coins before, so I really don't know what the fee's would be to just consign.
Also, I do know of buy-backs because there is no minimums for some auctions houses, so what would they place as a value on the 'collateral'?
Retail? Wholesale?
In a bull market I guess that's not a problem, but in a bear market??

Take a large loan on consigned coins, then they don't sell!

Are the seller(s) SOL? >>



I would say that the person who loaned you the money would be SOL.

IGWT

Can the consignor buyback provision create some form of security interest that the auction house has in the coins themselves?

I wouldn't be surprised to see a contract provision by which the consignor grants an interest in the coins to secure payment of a buy-back fee. And, if I were a Wall-Street type, I'd bundle those security interests and write some derivatives contracts.

Edited to add: Whatever happened to our big financial plans to write and sell insurance against bodybags and downgrades?

Longacre

<< <i>Edited to add: Whatever happened to our big financial plans to write and sell insurance against bodybags and downgrades? >>




Lehman was going to place those securities for us, but look what happened now.

RYK

<< <i>

<< <i>This might be an irrelevant question >>



I think this is the perfect title for your upcoming autobiography. >>



Ouch!

TahoeDale

No, the consigned coins and the potential commissions to be made will never form a part of a financial statement, to be used as collateral for borrowing by the consignee company.

That said, the auction house has the right to use proceeds from the sale to offset any liabilities of the consignor.

291fifth

Maybe it's time for consignees to start reading the auction house's contract terms very carefully.

Also,how do you know what kind of financial health the auction house is in? Is there any way to check on this through an outside source?

SanctionII

Ahem. If I may respond to Longacre's question.

Once a consignee has possession of the consigned goods, the consignee has the raw power to hypothecate those goods as collateral for a debt of the consignee. Such a hypothecation would be governed (in the USA) by the version of the Uniform Commercial Code in effect in the state where the consignee, goods and lender are located [of if they are in multiple states, the law of the forum selected by the parties to the hypothecation]. If the consignee delivers possession of the goods to the lender, the lender has a security interest in the hypothecated goods by virtue of provisions in Article 9 of the Commercial Code which govern the creation and perfection of security interest. This type of security interest, which is dependent on the lender having physical possession of the collateral, means that formal paperwork otherwise required to create and perfect a security interest in personal property (i.e. Security Agreement and a UCC-1 Financing Statement filed with the approriate governmental entity) is not required.

However, just because one has the raw power to do something does not mean that he/she/it has the legal right or authority to do so.

The legal right or authority of the consignee to hypothecate the consigned goods that belong to the consignor would be present or absent based upon the terms of the agreement between the consignor and the consignee for the consignment of the goods to the consignee. The consignment agreements used by big coin auction firms I have seen are (no surprise hear) multiple pages of microscopic fine print legalese created, revised and updated over time by lawyers who labor in the dark, dank, smelly recesses of mega lawfirms, doing transactional work 14 hours per day, never being allowed within a mile of a courtoom. The work product of these, poor, pathetic, enslaved transactional lawyers (consignment agreements) are extremely one sided in favor of the consignee and against the consignor. One could view them as a contract of adhesion. I do not remember if any of the fine print in any such agreement I have seen gives the consignee the legal authority to hypothecate the consigned goods to a lender as security for a debt of the consignee to a lender. It would not surprise me to see such language in one of these consignment agreements.

If such language is not present in a consignment agreement, maybe these agreements will be revised, yet again, to include sach language if any auction house representatives happen to read this thread (in which case Longacre gets the blame since he started the thread).

If a consignee does not have, by agreement with the consignor, the legal authority to hypothecate consigned goods to a lender, does so anyway and defaults on the debt with the result that the lender forecloses on the consigned goods (via public or private sale as authorized by Section 9:504 of the Commercial Code) and sells same (to itself via credit bid or to an outside third party purchaser), a dispute between the consignor (the owner of the consigned goods) and the purchaser at the foreclosure sale over who has paramount title to the goods in question would arise.

The purchaser at the foreclosure sale would claim a paramount title claiming that he/she/it is a bona fide purchaser. The consignor of the goods would claim that the lack of authority by the consignee to hypothecate the goods renders the hypothecation "void" and that all events downstream from the "void" hypothecation, including the foreclosure sale, are also void, even as against a bona fide purchaser, leaving the consignor with paramount title.

An analogy is that title to stolen goods remains with the person who owned the goods at the time they were stolen (i.e. valuable paintings stolen by the Nazis, only to surface 60 years later in a dispute between the current possessor of the paintings and the heirs of the person the paintings were stolen from).

Another analogy is that a forged deed to real property passes no title (i.e. a senior citizen who owns a real property similar in grandeur to the "Longacre Estate", free and clear of debt, has a real estate scam artist research title, forge the owner's name to a deed in front a a corrupt notary while the owner is on a two month European haitus, with the home unoccupied, with the scam artist recording the deed, changing the locks, moving in, listing the property for sale and selling same to innocent buyers who move in two days before the owner returns from London; with a lawsuit being filed to determine ownership and with the court ruling that the forged deed passes no title thereby restoring ownership to the senior citizen, leaving the title insurance company who insured the title of the new buyers holding the bag).

I am sure that unauthorized hypothecations of consigned goods, including coins, have occurred in the past. I further suspect that most the the times when this has happened, either things work out to where no one is hurt, or even if someone is hurt, the dollar amount of the loss is paltry enough that it does not end up in court.

However, imagine if the goods which are hypothecated by the consignee without authority were, for example, the 10 Izzy Switt 1933 Saints, or an 1804 Dollar, or a 1913 Liberty Nickel. If the consignee failed to pay its debt and these coins were sold at a foreclosure sale held by the lender, some serious legal stuff, both criminal and civil, would result. Such a case would be fun for me to handle.

The old saying "Possession is 9/10 of the law" continues to ring true.

Class dismissed.

Longacre

<< <i>Ahem. If I may respond to Longacre's question.

Once a consignee has possession of the consigned goods, the consignee has the raw power to hypothecate those goods as collateral for a debt of the consignee. Such a hypothecation would be governed (in the USA) by the version of the Uniform Commercial Code in effect in the state where the consignee, goods and lender are located [of if they are in multiple states, the law of the forum selected by the parties to the hypothecation]. If the consignee delivers possession of the goods to the lender, the lender has a security interest in the hypothecated goods by virtue of provisions in Article 9 of the Commercial Code which govern the creation and perfection of security interest. This type of security interest, which is dependent on the lender having physical possession of the collateral, means that formal paperwork otherwise required to create and perfect a security interest in personal property (i.e. Security Agreement and a UCC-1 Financing Statement filed with the approriate governmental entity) is not required.

However, just because one has the raw power to do something does not mean that he/she/it has the legal right or authority to do so.

The legal right or authority of the consignee to hypothecate the consigned goods that belong to the consignor would be present or absent based upon the terms of the agreement between the consignor and the consignee for the consignment of the goods to the consignee. The consignment agreements used by big coin auction firms I have seen are (no surprise hear) multiple pages of microscopic fine print legalese created, revised and updated over time by lawyers who labor in the dark, dank, smelly recesses of mega lawfirms, doing transactional work 14 hours per day, never being allowed within a mile of a courtoom. The work product of these, poor, pathetic, enslaved transactional lawyers (consignment agreements) are extremely one sided in favor of the consignee and against the consignor. One could view them as a contract of adhesion. I do not remember if any of the fine print in any such agreement I have seen gives the consignee the legal authority to hypothecate the consigned goods to a lender as security for a debt of the consignee to a lender. It would not surprise me to see such language in one of these consignment agreements.

If such language is not present in a consignment agreement, maybe these agreements will be revised, yet again, to include sach language if any auction house representatives happen to read this thread (in which case Longacre gets the blame since he started the thread).

If a consignee does not have, by agreement with the consignor, the legal authority to hypothecate consigned goods to a lender, does so anyway and defaults on the debt with the result that the lender forecloses on the consigned goods (via public or private sale as authorized by Section 9:504 of the Commercial Code) and sells same (to itself via credit bid or to an outside third party purchaser), a dispute between the consignor (the owner of the consigned goods) and the purchaser at the foreclosure sale over who has paramount title to the goods in question would arise.

The purchaser at the foreclosure sale would claim a paramount title claiming that he/she/it is a bona fide purchaser. The consignor of the goods would claim that the lack of authority by the consignee to hypothecate the goods renders the hypothecation "void" and that all events downstream from the "void" hypothecation, including the foreclosure sale, are also void, even as against a bona fide purchaser, leaving the consignor with paramount title.

An analogy is that title to stolen goods remains with the person who owned the goods at the time they were stolen (i.e. valuable paintings stolen by the Nazis, only to surface 60 years later in a dispute between the current possessor of the paintings and the heirs of the person the paintings were stolen from).

Another analogy is that a forged deed to real property passes no title (i.e. a senior citizen who owns a real property similar in grandeur to the "Longacre Estate", free and clear of debt, has a real estate scam artist research title, forge the owner's name to a deed in front a a corrupt notary while the owner is on a two month European haitus, with the home unoccupied, with the scam artist recording the deed, changing the locks, moving in, listing the property for sale and selling same to innocent buyers who move in two days before the owner returns from London; with a lawsuit being filed to determine ownership and with the court ruling that the forged deed passes no title thereby restoring ownership to the senior citizen, leaving the title insurance company who insured the title of the new buyers holding the bag).

I am sure that unauthorized hypothecations of consigned goods, including coins, have occurred in the past. I further suspect that most the the times when this has happened, either things work out to where no one is hurt, or even if someone is hurt, the dollar amount of the loss is paltry enough that it does not end up in court.

However, imagine if the goods which are hypothecated by the consignee without authority were, for example, the 10 Izzy Switt 1933 Saints, or an 1804 Dollar, or a 1913 Liberty Nickel. If the consignee failed to pay its debt and these coins were sold at a foreclosure sale held by the lender, some serious legal stuff, both criminal and civil, would result. Such a case would be fun for me to handle.

The old saying "Possession is 9/10 of the law" continues to ring true.

Class dismissed. >>





Hey, I'm glad a real lawyer responded (not just a lowly tax lawyer).

Great response!

SanctionII

I deal with these issues on a regular basis in my real estate law practice. The same issues (who owns real property, who has a valid lien on real property and what is the priority of the valid liens on real property) that are present in the real property arena, also exist in the arena of personal property. The rules which exist that apply to resolve real property title and lien disputes also exist, in a similar manner in personal property disputes.

You would think that personal property disputes over title and liens do not land in court as much as real property disputes. This is probably correct, however if you ever look at the UCC Reporter, you would be surprised at how many published appellate court decisions there are that have been issued by the courts of the USA, the fifty states and US territories and possessions covering UCC issues and similar issues arising from pre UCC common law principles of personal property law.

Have you ever pondered the fact that under our system of real property law, the concept of a parcel of real property not being owned by anyone is simply impossible? All real property, wherever located on the earth, is owned by someone (private individual, private business entity or a governmental entity). This even applies to the bottom of the middle of the Atlantic, Pacific, Indian and other oceans and seas of the world. Even this land is owned. It is owned collectively by human kind (as is the moon, at least until the Borg takes it from us).

lava

<< <i>The consignment agreements used by big coin auction firms I have seen are (no surprise hear) multiple pages of microscopic fine print legalese created, revised and updated over time by lawyers who labor in the dark, dank, smelly recesses of mega lawfirms, doing transactional work 14 hours per day, never being allowed within a mile of a courtoom. The work product of these, poor, pathetic, enslaved transactional lawyers (consignment agreements) are extremely one sided in favor of the consignee and against the consignor. >>



I sold coins through Heritage using a simple agreement that even a dark, dank, smelly, poor, pathetic lawyer would understand, and that normal people would understand too.