Article 7: Documents of Title

Legislative Update—Revised Article 7

As reported previously, all fifty states and the District of Columbia have adopted the 2003 revisions of Article 7.

Case Update

Leasing a warehouse is a different enterprise than hiring a warehouse to store one’s goods. Such was the case in Davis Construction Supply, LLC v. Merchants Transfer Co., where the plaintiff was pursuing a claim against a warehouse under section 7-204 for damage to gypsum board it had stored in one of the defendant’s warehouses. The key distinguishing characteristics were the plaintiff’s acquisition of control of the premises and the lack of any relinquishment of possession or control of the goods. The documentation language was also more typical of a leasehold, though it mentioned “warehousing” and the use of the premises as a “warehouse.” To the court, however, the plaintiff could not place such “thaumaturgical powers” on that language. The plaintiff leased space to store its own goods and, as such, could not pursue a claim under Article 7.

Limiting liability in a document of title is allowed under section 7-204 (warehouse liability) and 7-309 (carrier liability). Under section 7-204(b), a liability limit is generally effective, subject to the bailor’s ability to increase the amount in a contemporaneous record, in which case the warehouse can charge higher rates. Under section 7-309(b), a liability limit is effective only “if the carrier's rates are dependent upon value and the consignor is afforded an opportunity to declare a higher value and the consignor is advised of the opportunity.” These provisions were both at issue in Waters v. Delaware Moving & Storage, Inc. There, a homeowner contracted with a moving and storage company to move, store, and return her household goods while her house was being repaired. The relationship with the moving company was instigated by the contractor who was repairing the home. The homeowner was unsatisfied with the services that were rendered, claiming the moving company had caused $53,757 of damage to her household goods. The moving contract, however, limited the moving company’s liability to $20,000 unless a different amount was chosen on the form presented to the customer. No higher amount was indicated. In a lengthy opinion, the court concluded that the liability limitation was effective under the U.C.C., specifically section 7-309(b), and rejected several common-law claims to the contrary, many of which make the case a good read for a Contracts student.

California is showing some signs of struggle with Fabrique Innovations, Inc. v. Etiwanda Logistics, Inc., in which the court limited the scope of a warehouse lien under section 7-209 by requiring that there be “a reasonable relationship between the goods withheld and the charges owed.” In the absence of such a relationship, storers can demand that warehouses release their goods, at least to the extent that the value of the goods withheld exceeds the balance of charges owed. The court in Xport Forwarding LLC v. Mesitis DWC LLC. raises serious questions about the scope, if not the validity, of that opinion.

The dispute in Xport Forwarding centered on a warehouse lien for unpaid storage charges for 985 pallets of gloves and 23 pallets of masks. The storer claimed the goods were worth more than $9,000,000, while the warehouse claimed they were worth somewhere around $200,000. The warehouse refused to release the goods and planned to sell them to recoup the $448,087.94 it was owed. It notified the storer and the storer’s purported customers to ensure compliance with section 7-210(b). After settlement negotiations fell through, the storer filed for a temporary restraining order in state court, asking that the court restrain the warehouse from selling the goods and order it to release “all but 45 pallets of [the storer's] goods.” The warehouse removed the case to federal court.

In assessing the storer’s likelihood of success, the court “declines to follow Fabrique’s reasoning and analysis of the relevant statutory provisions.” To the court, Fabrique “conflated what the lien is against with what the lien is for,” especially considering section 7-210’s provisions, including the treatment of any balance of sale funds and warehouse liability in the event of non-compliance. The court also explored the history of this provision and concluded that any restrictions found in these sections should pertain to the amount of goods that can be sold, rather than the amount of goods that can be retained.

The court, however, reasoned that even if it followed Fabrique, it would find the present case distinguishable on the facts. The reasonable relationship existed, given “the variability in glove value and the unpredictable nature of a public auction.”

A warehouse lien under section 7-209 made an appearance in Great Gulf Corp. v. Graham. In 2013, Great Gulf had a vintage aircraft flown from Anchorage to a location in Minnesota, en route to Toronto. The aircraft needed repairs and, though a series of unfortunate characters and events, it ended up being stored in Minnesota until 2019. By then, it had fallen into disrepair and had no commercial value. At that point, Pentel, “a wealthy pilot and aviation enthusiast” set his sights on it. Pentel took it and started working on it. He also started working to gain ownership. Pentel instituted state-court litigation to claim the aircraft as lost or unclaimed property, and he acquired any interests that the mechanic and the storer of the aircraft had through documents purporting to assign their liens.

The state-court litigation resulted in a default judgment. When Great Gulf learned of the situation, it unsuccessfully sought to vacate the judgment in the state trial court. It filed an appeal and filed a separate lawsuit in federal court. That lawsuit, among other things, included a claim of conversion. Pentel also asserted his warehouse lien as a counterclaim, seeking a declaration that it existed. For purposes of this update, the most important observations involve, first, the section 7-209 lien’s existence and, second, the means of assignment. Such liens arise by operation of law, so long as the goods remain in the warehouse’s possession. The U.C.C. does not provide for assignment of such liens, even to subsequent possessors. However, according to the court, the following language was sufficient to assign the lien: “[the storage facility] hereby transfers and assigns to Buyer . . . any and all other right, title and interest [the storage facility] may have in the Aircraft.” Given Pentel’s possession of the aircraft and the lien assignment, it appears at least plausible that Pentel now stands in the position of a warehouse with regard to the aircraft, holding no greater rights than the warehouse from which he acquired it.

Interestingly, the existence of the lien ultimately proved unimportant to the case. Even though Great Gulf still owned the aircraft, it could not recover for conversion because it provided no evidence of damages caused by Pentel’s possession of it. Perhaps Pentel will someday use section 7-210 to gain ownership. For now, Pentel is restoring Great Gulf’s aircraft. The case involves a striking amount of litigation for a worthless vintage aircraft.

Section 7-209 also made an appearance in bankruptcy court in In re Iron. There, a company called Black Iron attempted to argue that the bankruptcy court erred by rejecting its argument that it was not required to relinquish property to a creditor who owed it storage costs for mining equipment, asserting warehouse status under the U.C.C. and claiming it had a lien under section 7-209. Black Iron argued that its lien arose on “goods covered by a warehouse receipt or storage agreement,” specifically invoices that it sent the creditor. The court rejected the argument because it was raised only on appeal and involved no assertion of plain error. Although the invoices were in the record, the absence of any argument in the bankruptcy court was dispositive.

Section 7-404 made a brief appearance in another bankruptcy case, In re Silver, involving a defunct pawn shop that attempted to avoid a secured creditor’s reach by selling and conveying its pawn loans to a related pawn shop. When a creditor claimed the recipient converted the loans (and the goods securing them), the recipient argued that it was a bailee and, thus, protected by section 7-404. The court rejected those claims, noting that the pawned loans were either sold to the recipient or provided as part of a secured non-recourse loan (i.e., “pawned pawn loans”). In either event, a bailment relationship was not created.

A brief mention of the Carriage of Goods by Sea Act (COGSA) is sometimes included in this update, given its preemptive effect. COGSA applies to international shipments of goods to or from ports of the United States. By its terms, its coverage extends from the time goods are loaded onto a ship to the time they are unloaded. However, it can be extended beyond those points, and carriers often do this to protect themselves from liability while goods are being loaded and unloaded. In Jeanty v. Antillean Marine Shipping, Corp., the court was faced with a dispute concerning a Mack truck that was to be shipped from Florida to Haiti. After receiving the truck, the carrier issued a warehouse receipt that incorporated by reference terms and conditions contained in the carrier’s bill of lading. That carrier’s standard bill of lading included an extension of COGSA to the period before loading the truck on the ship. The truck was never loaded on the ship and, instead, was sold by the carrier. No bill of lading was ever issued for the truck.

The case originated in state court and was removed to federal court based on the carrier’s COGSA argument. Once the disposition of the truck was discovered, the shipper moved to remand the case to state court, given the absence of a federal question and an insufficient amount in controversy to support diversity jurisdiction. The court addressed whether the warehouse receipt’s reference to the carrier’s bill of lading was sufficient to incorporate its standard form bill of lading and accompanying provisions, which included the COGSA extension. It stated the goods were received “subject to the terms and conditions contained in the Carrier's regular form Bill of Lading and Tariff now in use.” The court concluded this was enough, given the trade usage of issuing bills of lading and the carrier’s legal obligation to issue them. As a result, the incorporated terms included the terms that would have been included in the bill of lading had it been issued. The court therefore denied the motion to remand.

Finally, a case from California, Neptune Management Corp. v. Cemetery & Funeral Bureau, illustrates a fresh limitation on Article 7’s goal of making documents of title the equivalent of goods in commercial transactions. Under California law, funeral service providers must retain funds in trust for the benefit of purchasers of pre-need agreements. These agreements involve the up-front payment for funeral services and goods that may occur many years before the service is provided. As a result, the trust is required to protect purchasers. That law, however, has an exception for funds that are paid for goods that have been delivered to the customer. A funeral home in California attempted to establish delivery by issuing warehouse receipts for goods that were fully paid for, thus avoiding its obligation to hold the funds in trust. In Neptune Mgmt. Corp., the court interpreted the statute to require actual physical delivery and upheld a citation issued to the funeral home by the Cemetery and Funeral Bureau. The court did not cite Article 7 of the UCC, but for some purposes, a document of title may not be an effective substitute for the goods.