Consider the 'what ifs'

Rules for approval, consignment
Published : 06/08/12
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Dealers and collectors often find themselves holding someone else’s property.

For example, a coin is sent to a dealer or collector “on approval.” Or an item is sent as a consignment, where the person holding the consigned coin is supposed to find a buyer for the coin (or buy it himself/herself) within a given time.

The ‘what ifs’

In those situations, where the discussions tend to focus on the quality and provenance of the coins, the purchase or sale price, and other crucial items, very little consideration is generally given to “what if” contingencies.

What if another collector (or a dealer) loses your coin on the way home from a coin show, or it is stolen?

What if the non-owner has a creditor who tries to seize assets, including the coin being held on approval or for consignment?

What if there’s a bankruptcy, or coins are lost in the mail from one party to the other?

These are remote contingencies, of course.

It’s worth knowing the rules just in case, and particularly given the fact that in commercial law the parties can almost always adjust the rules by mutual agreement — if they think ahead.

Follow the rules

Rule No. 1: Make sure it’s absolutely clear that the other person doesn’t own your coins.

You may need to prove this if your buyer/agent has a problem.

If the coins are with a dealer, the law is clear that words such as “on consignment,” “on memo” and “title doesn’t pass until paid for” aren’t enough.

If the values are substantial, file a UCC-1 financing statement with the appropriate office in the state where the coins are being sent (usually the secretary of state) identifying the coins and who is holding them.

Do this before the coins leave your possession.

The form is available online in most states and the filing fee is small. An alternative document is a formal consignment agreement, but I still recommend the UCC-1 filing.

Rule No. 2. If the coins are being sent to a dealer for any reason other than sale, make that absolutely clear, in writing, before you send them.

An often overlooked provision of the Uniform Commercial Code is the “entruster rule,” whereby items consigned to a dealer can be sold by the dealer, with the consignor having no right to reclaim them if the dealer reneges on payment.

If, however, the coins are sent only for appraisal or for submission to a grading service, the harsh effect of the “entruster rule” can be mitigated.

Make sure you’re covered by putting in writing any limitations on what can be done with the coins.

Risk of loss

Rule No. 3. Decide in advance who is responsible for shipping costs — and insurance.

Responsibility if a coin is lost, stolen or damaged is called “risk of loss,” and risk of loss is not always with the person holding the coins.

For example, for a sale “on approval,” the seller bears the risk of loss until the buyer agrees to purchase the coins.

This risk of loss would include the risk of in-transit loss to the buyer, loss at the buyer’s premises before the purchase, and loss anywhere along the line if the buyer refuses to buy and returns the coins.

Rule No. 4. When the approval or consignment period ends, make sure to get your coins back (or return coins consigned to you), or make sure an express, written, time extension is signed by both parties.

Remember — get everything in writing!

Armen R. Vartian is an attorney and author of A Legal Guide to Buying and Selling Art and Collectibles.

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