Jetrader - Autumn 2015 - 47

Disposition: Disposition concerns how
the inventory, including flow-through,
will be managed. Consignees usually have
their own inventory, which itself may be
financed. The consignee should be required
to segregate the consignor's inventory to
ensure that it remains free of general inventory and landlord liens. The parties must
apportion risk of loss while the inventory
is in transit and storage. Guidelines must
be established for inventory to be recertified, repaired or scrapped following
tear down. The consignor should be able to
review scrap and repair decisions. Disposal
of scrap material should be monitored
to ensure proper regulatory compliance,
including proper destruction as required.
The consignee's scrap procedures should
be reviewed. Special attention should be
paid to the disposition of material subject
to trade restrictions-whether the material
is serviceable or not.
For repairable material, the parties
should agree to an approved list of qualified repair facilities. Repair costs are
typically reimbursed to the consignee
through the consignment receivables, and
controls should be established on pricing
and mark-ups with audit rights established.
For all material, whether sold, leased or
exchanged, customer creditworthiness
guidelines must be established, including an allocation of which party takes the
credit risk for collections and enforcement.
Measurement: Measures for inventory turn, repair times, repair costs and,
ultimately, revenue must be established
in order to set compensation and confirm the overall success of the program.
Compensation is typically split on a preagreed basis, front weighted in favor of
the consignor until further balanced as
revenue milestones are achieved. Repair
and other agreed costs incurred by the
consignee are charged against revenue and
reimbursed "off the top." For this reason,
controls should be established to ensure
integrity of the compensation plan. The
parties can agree to appropriate consequences if targets aren't met.
Wind-up: Any consignment agreement
must address wind-up, whether due to a
termination or fulfillment of the program.
Even if the program runs its course, there
will be material awaiting disposition. A preagreed wind-up plan can help to eliminate
surprises and contentious allocation of costs

and risks, particularly for inventory that
is in the process of being repaired, sold
or exchanged. Inventory will naturally be
in far flung locations, possibly across the
globe. The consignor must remain focused
on preservation of its interest in title to the
inventory and assurance that the property
hasn't become subject to liens not just of
the consignee, but of repair agents happy to
retain possession until payment is received.
Consignment programs can be win-wins
if efficiently and effectively managed and
permit resource constrained owners to

tap into the growing end-of-life market.
Addressing these framework issues will help
to ensure success.
Don Mitchell is a partner with the law firm of
Smith, Gambrell & Russell, LLP, and concentrates his practice in U.S. and cross-border
aviation equipment finance transactions and
litigation. Please email any questions, comments or suggestions for future topics to:
dmitchell@sgrlaw.com.
©2015 Donald B. Mitchell

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