Getting Caught in the Consignment Cross-Fire
Q: I recently consigned for sale my replica 1962 Ferrari to a Beverly Hills auto dealer. Unknown to me, the dealer owed his bank money. Now the bank, Capital Bank in Century City, has foreclosed on the dealer and attached his assets--including my car. I still have the “pink slip,” but the bank has my car and refuses to give it back. I’m an innocent third party to this mess. Can the bank really do this? --M.S.
A: Yes, as your lawyers have no doubt already told you, the bank is well within its legal rights to do exactly what it has done. Theoretically, the bank, armed with the appropriate court order, could even sell your car and use the proceeds to pay off the debt owed by the auto dealer.
On the surface, this answer flies in the face of common sense and decency. After all, why should you, an admittedly innocent third party to whatever disagreement exists between the car dealer and his bankers, get caught in their cross-fire? The answer is that you didn’t have to get caught at all.
Sections 9114 and 2326 of the state Uniform Commercial Code detail the conditions for consigning merchandise to brokers for sale and provide an easy escape from the mess you now face. The law says the consignor should file a UCC-1 statement proclaiming that the consigned merchandise belongs to him, not to the broker. The UCC-1 form is completed and filed before the broker is given the goods to sell.
What good is a simple piece of paper? The statement puts broker’s creditors on notice that they can not attach that asset in the event of a financial or legal dispute. According to Hydee Feldstein, a Los Angeles bankruptcy lawyer, the form is designed to protect lenders making business loans to businesses that both sell new and consigned goods. The goal is to prevent misunderstandings about the health of a business on which lenders are making commercial loans by notifying them that at least some merchandise in the dealer’s possession does not belong to him and should not be taken as evidence that his business is thriving.
Of course, this UCC-1 form explanation comes far too late to save you any anguish. You obviously never filed one. But that doesn’t mean you have no hope of recovering your car. The law allows you two other avenues to reclaim your car without throwing yourself at the mercy of the bank. You can claim that the consigned merchandise is personal, household property designed for daily use. (This might be a tough argument to make for a replica vintage Ferrari.) Or you can attempt to demonstrate that it was “generally” known by creditors that the business was “substantially” dealing in consigned goods, and that the bank should have known it as well.
This latter point is not easy to prove. According to Feldstein, you must show that the dealer’s consignment operations were so well established that creditors would “generally” know to include that factor in their loan-making process.
Even if you can’t squeeze through the law’s loopholes, all is not lost. According to Lonnie Umbenhower, a senior vice president of Capital Bank, the bank is not interested in depriving you of your property. Umbenhower says the bank continues to hold your Ferrari, as it is entitled to do, because the matter has not gone to court. However, he observed that once the mess between the bank and auto dealer is untangled, your car will likely be returned.
Figuring the Taxes on Mutual Fund Sale
Q: Twenty years ago, I purchased 100 shares of a mutual fund for $1,000. Over the years, I paid income taxes on the dividends, although I never received any cash. Now I plan to redeem my shares, which are worth more than $6,000. Will I have to pay taxes on my gain? --J.L.K.
A: Determining a taxable gain following the sale of mutual fund shares--or any appreciated asset--is simply a matter of deducting your taxable basis in the property from its sales price.
But determining your taxable basis could be tricky. If you had never paid any taxes on the annual dividends, your basis would be the $1,000 you originally paid. However, you’ve been paying taxes on your gains for the last 20 years, and in the process you have increased your taxable basis in the fund.
To compute your current taxable you must go back through your records and add up all the taxable income your account has generated. Then add that amount to your original $1,000 investment.
For example, let’s say that over the years your account has generated taxable income of $4,000. Then your tax basis in the fund is $5,000. If you sell your stake in the fund for $6,000, then you would have a taxable gain of $1,000 upon the sale.
This procedure is decidedly different from computing your taxable gain from the sale of common shares you receive from stock splits, as the following question illustrates.
How Stock Splits Affect Taxable Basis
Q: In 1952, we bought 20 shares of Mobil Oil for $1,122.50. Over the years, our holdings have grown to 168 shares due to stock splits. These shares are now worth $9,912. How will we be taxed when we sell the shares? --F.K.
A: Your taxable basis in the shares you hold now is your original $1,122.50 investment. If you sell the shares for $9,912, you would be liable for taxes on the $8,790 gain.
In this case, the number of shares you hold is completely irrelevant. What counts is the amount of money you put into the investment (your taxable basis) and what that investment nets you upon its sale.
