An interim court order entered in the Sears Holdings Chapter 11 bankruptcy case recognizes that vendors of memo merchandise retain ownership of consigned items, avoiding another lengthy court fight over the issue.

The arrangement lets Sears sell consigned merchandise in the 142 stores it plans to close as part of its reorganization. However, it says the company must also segregate the proceeds of those sales into a separate fund for consignment vendors, and that those funds can’t be claimed by secured or first-priority creditors.

“All parties’ rights as to the priority of any security interest or other interest in consignment merchandise and the proceeds thereof are preserved,” said the order, filed Oct. 26 in Southern District of New York bankruptcy court, following negotiations and a court hearing. “Any properly perfected, noticed and valid consignment interest, as defined under the Uniform Commercial Code (UCC), in consignment merchandise … shall not be subject to any debtor-in-possession liens or adequate protection liens.”

Last week, two diamond and jewelry companies, Rosy Blue and Vijay Gold, filed objections to Sears’ plan to close 142 stores. The vendors complained that they have consigned items in those stores and that Sears was attempting to sell their merchandise “whether they own it or not.” They were soon joined by at least three other vendors with items on memo at Sears or Kmart.

Yet, unlike the Whitehall Jewelers and Sports Authority bankruptcies, where the interest of consignment vendors was challenged and litigated at length, Sears’ lawyers immediately said they “understood” the vendors’ objections and worked with their counsel toward a negotiated solution.

The difference, according to lawyers experienced in these cases: Sears plans to keep operating, whereas Whitehall Jewelers and Sports Authority both ended up liquidating.

Sears Holdings, which also owns the Kmart department store chain, filed for Chapter 11 on Oct. 15.

(Image courtesy of Sears Holdings)

Rob Bates

JCK News Director