Legislative Update—Revised Article 7
As reported previously, all fifty states and the District of Columbia have adopted the 2003 revisions of Article 7.
As is often the case, there were few cases concerning Article 7 during the reporting period. Two cases cited the code directly and provide some insights into Article 7’s impact. Kloeckner Metals Corp. v. Five Rivers Distribution, LLC involved a claim by a bailor against a warehouse bailee for damages associated with flooding. The parties had a bailment agreement that placed an insurance obligation on the warehouse, that did not limit the warehouse’s liability, and that included a modifications clause, requiring the parties to sign instruments modifying the agreement. The warehouse, however, issued warehouse receipts for the goods stored under their contractual relationship that purported to limit its liability. The receipts also had an integration clause, purporting to extinguish any prior or contemporaneous agreements. The court concluded that the bailment agreement could not be reconciled with the warehouse receipts and determined that the bailment agreement had not been modified by the warehouse receipts. The court cited section 7-204(b) as support for relying on the bailment agreement as a “storage agreement” as it stands on “equal footing” with the warehouse receipt. Moreover, the bailor had not manifested its assent to the modification of the bailment agreement. The court also concluded that the bailment agreement unambiguously placed the risk of loss and an insurance obligation on the warehouse, even as to flooding, through language that required the warehouse to keep the inventory “insured against theft, destruction and other perils customary covered by inventory insurance . . . and to bear all risk of loss with respect to the loss of or damage to the . . . [i]nventory.”
Great Gulf Corp. v. Graham involved a purported transfer of a section 7-209 warehouse lien on a stored aircraft. The assignment was called into question by language that made reference to a separate Minnesota statute giving rise to a “storage lien,” which the parties agreed the transferor did not acquire. The court, however, held that the assignment language—“all of [transferor’s] right, title, and interest in the Aircraft”—was sufficient to transfer the warehouse lien.
Two additional cases are worth mentioning. The first case bears on the basic first-year contracts questions associated with the storage relationship and post-delivery notice of terms. Dolan Mechanical, Inc. v. Thackray Crane Rental, Inc. involved a bailment relationship between a warehouse and a bailor, with a bailor alleging damage associated with the handling of HVAC equipment. Interestingly, the court did not cite the Uniform Commercial Code, even though it apparently governed the parties’ relationship. Nonetheless, the court’s common-law analysis is consistent with the Code, finding that a limitation of liability in the warehouse receipt could limit the warehouse’s liability. A similar result would follow under section 7-204. Notably, the court concluded that the warehouse receipt’s limitation could not cover the first of numerous deliveries of the HVAC units because no receipt was issued until after that delivery. Regarding subsequent deliveries, however, the court concluded that the limitation may apply, if the finder of fact concludes that “the necessary manifestation of consent to the terms of the contract” is present.
The second case involves the enigmatic question of the worth of a warehouse receipt issued by a failed warehouse. In re Express Grain Terminals, LLC addressed a proposed settlement agreement involving a large warehouse that filed for bankruptcy under Chapter 11. A group of farmer-claimants originally elected to participate in a settlement agreement and disclaimed their interests in exchange for attorney’s fees and releases of all claims by the bankruptcy estate. Those claimants later sought to withdraw their election. The court, however, refused to allow them to withdraw and approved the settlement as fair and equitable. Of relevance to this update is the court’s observation that the disclaiming farmers’ claims to grain and grain proceeds through warehouse receipts was so complicated that settlement seemed like a fair outcome: “[T]he Court and all parties understand that the resolution of these issues and claims are wholly dependent on the relationship between § 557 and state law, namely with respect to claims such as bailment, constructive trusts, reclamation, equitable subordination, negotiable and non-negotiable documents of title, and the effect of Articles 7 and 9 of the Mississippi Uniform Commercial Code. Admittedly, the resolution of these claims if litigation presses on is uncertain.” While Article 7 may provide a significant source of stable rights and duties between warehouses and their storage customers, cases like Express Grain Terminals exhibit the limitations of the Uniform Commercial Code.