Today’s solution to a closet full of unworn clothing is to ship it off to companies like The RealReal or thredUP, which take on the task of reselling your items, and then sending you a payout. While this exchange is simple on the consignor’s end, each individual listing created by The RealReal and theadUP represent an unquantified amount of labor associated with unpacking, evaluating, cataloging, authenticating, photographing, pricing, and ultimately, listing the good for sale. To make matters more complicated, each item has a unique combination of factors that determine its resale value, including – but not limited to – brand, style, and condition.
It is this complexity that may be preventing The RealReal and thredUP from profitability, despite growing market demand for secondhand goods. The RealReal’s Q2 2022 results and thredUP’s Q3 2022 results reflect net losses of $53.2 million and $23.7 million, respectively. Additionally, The RealReal’s convertible debt load, which is due in 2025, exceeds its entire corporate valuation. Against this background and with CreditRiskMonitor’s FRISK scores – which measure the probability of a company filing for bankruptcy within 12 months – in mind, both of these companies may be at risk of bankruptcy, and if either were to file for bankruptcy, it is unclear what will happen to the warehouses filled with fashion/luxury goods – both processed and unprocessed – that these companies do not have legal ownership of.
While consignors enjoy the relative frictionless experience of selling the contents of their closets in this manner, an important question remains unanswered: What happens to your stuff if the company goes bust?
What the Law Says
A consignment occurs when a supplier (or consignor) supplies goods to a merchant (or consignee) for sale. The consignor still owns the consigned goods and the consignor acts as an agent to sell those goods. When the goods are sold, the consignor receives the balance of the proceeds, minus a commission for the sale. UCC § 9-109(a)(4) applies to every “consignment,” and under UCC § 9-102(20), “consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and …
In such a case, a consignor would need to file a UCC-1 financing statement to perfect its interest and avoid becoming a low priority general unsecured creditor. However, it seems that a “consignment” exception would apply to the above in the cases of thredUP and The RealReal. Factors indicating that the parties intended a “true” consignment include that the consignor retains control over the sale price, the consignee is given possession with authority to sell only upon consent of the consignor, the consignor may recall the goods at any time, and the consignee is to receive a commission instead of a profit from the sale. This would mean that consignment would be a “security interest” under Article 9 of the UCC, the consignor would not be required to comply with the UCC’s filing and notice provisions, and that the unperfected consignor can prevail over a secured lender.
Unfortunately, the “consignment” exception is heavily fact dependent and would require litigation. It is likely that consigned goods may be sold off as part of a company’s assets to satisfy the claims of other creditors.
Additionally, it is unclear how the UCC would interact with said companies’ consignment agreements. For example, The RealReal’s consignment agreement states: “Your use of our services is at your sole risk. Our consignment, get paid now, and other services are provided on an ‘as is’ and ‘as available’ basis […] The RealReal and its subsidiaries, affiliates, officers, employees, agents, partners, and licensors will not be liable to you for any, indirect, incidental, special, consequential, or exemplary damages or for damages for loss of profits, goodwill, use, data, or for other intangible losses (even if we have been advised of the possibility of such damages) resulting from: (a) the use or the inability to use our services or our website; (b) unauthorized access to or alteration of your transmissions or data; (c) the activities contemplated by this agreement; or (d) any other matter relating to our services or this agreement.”
2nd Time Around
The most instructive example of what could happen to consignors’ goods if The RealReal or thredUP were to file for bankruptcy is the 2017 bankruptcy of 2nd Time Around, a brick-and-mortar chain of consignment stores. In the wake of 2nd Time Around shuttering its stores, consignors were informed that the company could not “commit” to paying individuals whose items were sold prior to a certain date. Many individuals were told that their consigned items had been lost, that they would not be paid, and in some cases, those wronged simply “grabbed merchandise from the shelves as compensation.”
While consignors discussed a lack of transparency in the way the bankruptcy was handled, they at least had physical stores they could try to return to in attempt to get answers. Additionally, there was at least a possibility that consignors knew where their consigned goods were located. In contrast, most consignors with The RealReal (which maintains some brick-and-mortar stores but primarily operates online) and thredUP would have to communicate through customer service agents; it is not clear if individual items would be able to be located within a warehouse that can hold 5.5 million items.
While we can look to the law for guidance, the overall outcome of what would happen to consigned goods if one of these big-name resale companies were to go bankrupt is entirely unclear. It is safe to assume that the inventories of The RealReal and thredUP are massive; in 2021, alone, thredUP reported processing more than 125 million items. In the event of a bankruptcy, both companies might opt to engage in a fire-sale type of situation, selling individuals’ items at rock bottom prices to try to minimize the amount they owe to creditors, which would be allowed under most consignment agreements (“Unless We have agreed otherwise in writing to a specific price at which a specific item must be Sold, We, in our sole discretion, will determine the initial selling price for each item of Consigned Property”).
Additional questions remain. For instance, how would such a company handle a flood of individuals demanding the return of their individual items, which would further increase expenses for an already struggling company? And would a company even be physically able to return said items? Moreover, even if consignors could prevail as plaintiffs, how are they going to collect? And in bankruptcy, would a trustee be required to spend money to make consignors whole?
As a result, consignors should closely monitor the health of online resale platforms that they actively consign with, carefully review all terms of consignment agreements, and understand that the status of their Birkin may be up in the air in the event of a company’s collapse.
Julie Tamerler is a family law, business, and intellectual property attorney.