The Consignment That Wasn't the Seller's to Sell
Ray consigns a restored 1968 pickup to Delta Auction Co. under a written consignment agreement. Ray signs as 'owner' and warrants clear title. Delta advertises the truck, and at auction it sells for $31,000 to buyer Chen, who pays in full and takes the truck. Three weeks later, a bank contacts Delta: the truck was collateral on a defaulted loan, the bank holds a perfected security interest, and Ray had no authority to sell free of it. Chen demands his money back. Delta's agreement with Ray says Ray 'indemnifies Delta against all claims' and that Delta's commission is 10%. Delta has already remitted $27,900 to Ray and retained $3,100. Delta's trust account currently holds only $3,100 from this sale.
1. What are Delta's obligations to Chen, and how does the consignment agreement affect them?
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Delta's contract with Chen is separate from its contract with Ray. If Chen bought with the understanding of clear title and the truck is subject to a perfected security interest, Chen has a strong claim for rescission and return of the $31,000, or for damages. The indemnity clause runs from Ray to Delta; it does not shield Delta from Chen, and it is only as good as Ray's ability to pay. Delta should not tell Chen to 'take it up with Ray.' Delta must evaluate whether it can cure the title defect (e.g., negotiating with the bank) or must refund. The 10% commission does not insulate Delta; a refund obligation is not reduced by the fact that Delta already paid Ray.
2. Delta's trust account holds only $3,100. How should Delta handle the shortfall, and what recordkeeping and fiduciary issues arise?
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Sale proceeds held for others are trust funds. Delta's immediate duty is to make Chen whole to the extent of funds it holds or controls. The $3,100 it retained is clearly available. The $27,900 remitted to Ray is the harder problem: Delta should demand repayment from Ray under the indemnity and, if Ray refuses, pursue him. Delta must not commingle or use other clients' trust funds to cover the shortfall; trust money belonging to other consignors cannot be raided. Delta should document the demand on Ray, preserve the consignment file and title warranty, and consider whether its own pre-sale title check was adequate. Any use of the trust account must be traceable to this transaction, with a ledger showing receipts, the remittance to Ray, the retained commission, and the refund to Chen.