Field warehouse receipts, collateral or no collateral


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Field warehouse receipts, collateral or no collateral
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United States -- Bureau of Agricultural Economics
Yohe, H. S
United States -- Dept. of Agriculture
United States -- Bureau of Agricultural Economics
s.n. ( Washington )
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oclc - 509013109
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Bureau of Agricultural Economics




H. S. Yohe, In Charge,
Administration U. S. Warehouse Act 4'

Washington, D. C.
March 1937

4^ 1% 'q32- "
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Collateral or No Collateral

.. .o m .........

4E.214MfiSd --

In the administration of the United States Warehouse Act, the Bureau

of Agricultural Economics of the United States Department of Agriculture,

which is charged with its administration, receives many inquiries regarding

field warehousing. They come from processors and merchandisers of agricultural

products, from growers cooperative associations, and from bankers and other

lending institutions which extend credit on the basis of warehouse receipts

covering agricultural products as collateral.

These inquiries reveal a deplorable lack of knowledge of the basic

principles of warehousing that must be observed if warehouse receipts are to

constitute sound collateral. The purpose of this discussion is to supply

the apparent need for a fairly comprehensive statement of the principles

involved in field warehousing as they relate to the extension of credit.


Collateral or No Collateral

The storing of agricultural products is not new. Usually the storing of agricultural
products in public warehouses is for one of two purposes--for future need or for credit.
Frequently storage is for both purposes, especially on the part of merchandisers and proc-
essors of agricultural products. During the past fifteen years in many agricultural pro-
ducing areas there has been an increasing tendency on the part of the producers themselves
to store for both purposes.

When products are stored for credit purposes it has been the general rule that such
products should be surrendered to the custody of someone wholly independent of the one who
stores. The person with whom products are stored is generally called a warehouseman. When
goods are stored with a warehouseman he issues to the storer a receipt which is generally
termed a warehouse receipt. It is symbolical of the products themselves. It is this ware-
house receipt which the storer offers to his banker or lender as collateral for a loan.


The collateral value of warehouse receipts depends upon several factors, the prin-
cipal of which are:

(1) Suitability of the warehouse or storage facility for storing the product;

(2) Responsibility of the warehouseman;

(3) Competency of the warehouseman and his assistants to properly care for the product
while in storage;

(4) Authority of law under which the receipt is issued;

(5) Information on the warehouse receipt itself which will give to the lender a
concise yet comprehensive description of the product and thereby enable him to form an
opinion of its fair market value;

(6) Terms of the warehouse receipt in general;

(7) Whether there is bonded responsibility back of the receipt, and, if so, by whom
the bond is written, for the benefit of whom, with whom the bond is lodged, under what
conditions it may be realized upon by the holder of the receipt, and what action such re-
ceipt-holder must take to realize upon the bond;

(8) Whether the receipt represents a bona fide relationship of bailor and bailee
between the storer and the warehouseman and one under which the warehouseman and his rep-
resentatives or his local custodians are completely and wholly independent of the storer

(9) The character and extent of disinterested supervision exercised over the ware-


It is hardly necessary to comment in detail upon these various elements save the
fifth and the eighth. As to the fifth factor, it is of course obvious that since the ware-
house receipt represents the product stored in the warehouse it should contain such informa-
tion as will convey to anyone to whom the receipt is offered for collateral purposes a fair,
honest, and impartial description of the products themselves so as to enable one to form an
opinion of the fair value of the product, and to identify it. This becomes all the more
important when the storer seeks credit at some distance from the warehouse.

One of the first questions asked of a person seeking a loan by anyone engaged in
commodity financing is: What is the commodity you propose to give as security? In the
opinion of some lenders certain commodities are bankable or proper collateral. To other
lenders these same commodities would not constitute proper collateral. Hence, when a loss
is desired on products or commodities in storage, it is important that the warehouse receipts
covering such commodities clearly recite just what the commodities are which the receipts

Obviously, a receipt that conveys no information as to the quantity, quality, grade,
or condition of the product, or that fails to state what the product actually is, does not
inform the lender on points that are essential to making a fair and sound loan. It does not
enable the lender to tell whether the product is even a proper subject for collateral. Re-
ceipts that recite that the warehouseman received a certain number of cases or bales or
packages "said to contain" canned tomatoes or wool or fancy cigar-leaf tobacco give neither
the storer nor the lender an index as to the value of the product represented by the receipt.
And receipts which merely acknowledge that the warehouseman has received a certain number of
cases or bales or packages and then recite "contents unknown" are not only of less value,
but are a clear attempt on the part of the warehouseman to escape all liability so far as
the commodity is concerned.

Under either the receipts which recite "contents unknown" or "said to contains" so
far as the warehouseman is concerned and his liability to deliver a specific product, the
cases or packages covered by the receipts might be filled with sawdust or mere trash.

To a lender who has given no more than superficial thought to making loans on the
basis of warehouse receipts as collateral, any receipt that contains such statements as
"said to contain" or "contents unknown" must have no appeal whatever as collateral.

The eighth factor -- a bona fide relationship of bailor and bailee between the de-
positor and the warehouseman, or the creation of a completely disinterested custodianship -
is always desirable in the financing of warehoused products, and it is essential in a field
warehousing arrangement. Only to the extent that the warehouseman is wholly independent of
the storer is there a disinterested custody of the product.

The importance of a disinterested custodianship of the product grows out of the fact
that when the storer offers his warehouse receipt to the lender as security for a loan he
proposes to pledge the products in the warehouse covered by the warehouse receipt. It is
the products that are the real security. It is essential to the validity of a pledge that
the pledgor surrender possession of the thing pledged. He cannot pledge an article and at
the same time keep it. In other words, so long as the products are pledged as security
for a loan they must remain in the custody and exclusive control of someone other than the
borrower. "The borrower and his collateral are best parted."

r-.* ---

In attempting to establish a disinterested custody the person who desires to borrow
on the products should not content himself with representations of those who wish to serve
him as warehouseman. Nor should he be content with something in the way of warehousing
which he thinks may get by his banker; neither should he attempt short outs to save a little

In testing collateral, the real issue always is: Has there been an absolute and
unequivocal parting on the part of the borrower with possession of the products he proposes
to give as security for the loan? That question the owner of the products can easily de-
termine for himself. All he needs to do is to ask himself and honestly answer the question;
Under the proposed form of warehousing have I at any time access to the products other than
in the presence of the warehouseman and may I at any time exercise any control of the prod-
.ucts? If the answer is in the affirmative to the slightest degree, possibility of trouble
in the warehousing arrangement exists. "The borrower and his collateral are best parted,"
.and there is no absolute and unequivocal parting such as the law contemplates if the borrower
*has access to his collateral at his own pleasure or can exercise any control over it.


The principle of disinterested custodianship is recognized in the Federal Reserve
Act and in the regulations thereunder of the Board of Governors of the Federal Reserve
i: System relating to the eligibility of bankers' acceptance for rediscount by Federal Reserve
S Banks. Section 13 of the Federal Reserve Act requires that a banker's acceptance drawn to
-finance the storage of readily marketable staples shall be "secured at the time of acceptance
by a warehouse receipt or other such document conveying or securing title I/ covering readily
marketable staples Section XI of Regulation A of the Board of Governors requires that "a
banker's acceptance drawn to finance the storage of readily marketable staples shall be
secured at the time of acceptance by a warehouse, terminal, or other similar receipt con-
veying security title to such staples, issued by a party independent of the customer." l/

The requirement of the Federal Reserve Act that such warehouse receipts must convey
or secure title to the products represented by the receipts obviously contemplates that the
accepting bank shall have a lien on such products which is valid and enforceable against
general creditors of the person for whose benefit the acceptance credit is granted. The
regulation of the Board of Governors that such warehouse receipts shall be issued by a party
independent of the customer obviously is intended to require that the actual custody of the
goods shall be maintained by an independent and disinterested party so the bank that holds
the warehouse receipt may be able to identify and obtain possession of the products and thus
enforce its lien without difficulty.

A lien on personal property is of no practical value unless such property can be
found and identified when it becomes necessary to enforce the lien. If custody of the pledged
products is not given to and maintained by a disinterested party, there is grave danger that
the borrower will be able to dispose of or release the products in such manner that innocent
purchasers will acquire good title to them, and the lender's security will thus be entirely
S destroyed.

1/ Underscoring by author.

- 4-


The principle of disinterested custodianship has been repeatedly recognized by the
courts, particularly where there is a conflict of interests. In one leading case the
Supreme Court stated: "In this conflict of interests, the law wisely interposes. It. 'acts
not on the possibility, that, in some cases, the sense of that duty may prevail over the
motives of self-interest, but it provides against the probability in many cases, and the
danger in all cases, that the dictates of self-interest will exercise a predominant in-
fluence, and supersede that of duty." In a New Jersey case the principle was stated thus:
"So jealous is the law upon this point that a trustee may not put himself in a position in
which to be honest must be a strain on him."

Obviously, the person who is seeking credit, and offering stored agricultural om-
modities as collateral, is not a disinterested custodian, and neither is he free from that
conflict of interests to which the Supreme Court referred in the quotation above cited.
As has many times happened, a borrower who attempts to serve as the custodian of the Qal-
lateral places himself in the position where "the dictates of self-interest will exercise a
predominant influence and supersede that of duty."

In the light of these observations, the establishment between the storer of goods and
the warehouseman of a relationship of bailor and bailee, and of complete independence between
the storer and the warehouseman and his agents, becomes all the more indispensable.

These preliminary observations, which apply to the warehousing of agricultural prod-
ucts in the sense that the public, the banking fraternity, and the courts generally think of
warehousing of products that are to be used as collateral for credit purposes, are equally
applicable to a consideration of field warehousing. The same requirements must be observed
if a field warehouse receipt is to stand the acid test to which it will be subjected if a
question is raised as to its validity as collateral.


What is field warehousing? In the last 5 years much has been written on this subject.
Some writers have approached the subject as though they had found a wholly new method of
financing crops while in storage awaiting demand; still others as though they had found a
formula for financing in a big way a man who is entitled to little if any credit. A few
writers have used the subject as a vehicle to attack other approved methods of warehousing
because those methods diverted revenue from those making the attack. Other articles that
were ostensibly about field warehousing gave the uninitiated and uninformed little basic
information on the subject but have complained of alleged evils in subsidiary warehousing,
quite ignoring the fact that subsidiary warehousing is authorized by statute and has met with
court sanction in a number of States. Some of the authors who complained about subsidiary
warehousing ignored the fact that they themselves were engaged in a subsidiary warehouse
operation. Many of the articles on the subject had the earmarks of super-salesmanship, and
an attempt to promote business on a shoe string.

In all that has been written about field warehousing it is regrettable that so few
articles are really informative as to basic facts that are essential to the patrons of
warehousemen and to the lenders who wish to make sound commodity loans. From many
articles that have appeared it is impossible for anyone to draw the essential principles.
Even those who conscientiously seek dependable information have been confused.

......... :==



There is nothing new or mysterious about field warehousing. Reference to decisions
of courts show that the subject has been before the courts for the last 40 years, if not

The principles involved in public warehousing in the generally accepted meaning of
the term are well known. They have been established by a long line of judicial decisions.
Field warehousing, being but an off-shoot of public warehousing, is governed by the same
principles of law and finance. In the apparent attempt to advance the theory that a new
method of financing has been developed, no claim is made that new principles have been
developed. Rather, the claim is made that new procedures and methods have been originated.

It is an apparent attempt to short-cut established rules and principles, while at the
same time professing that the established rules and principles of public warehousing are
being observed in everyday operation. To the extent that these make-believe observations
and short-cuts and shams are injected into field warehousing, to that extent are the ware-
house operations and the warehouse receipts issued thereunder likely to fail when a real
legal test is applied.

Field warehousing is a plan to store on the premises of the owner the very products
on which he desires to effect a loan at the least cost to himself The motive back of any
field-warehousing arrangement, as far as the storer is concerned, is a desire on his part to
enlarge his credit. In other words, he endeavors to place his products in a position that
will enable him to pledge them as collateral to a loan. Almost without exception as soon as
the credit need passes the field-warehouse arrangement also passes.

Placing the products in a credit or collateral position could be accomplished by
placing them in storage in a public warehouse, 1-"t there might not be a public warehouse in
the town in which the owner of the products operates. Moreover, the owner of the products
frequently owns or controls a warehouse or storage facility. The very nature of his business
frequently obliges him to have storage facilities. Naturally he wants to use them to great-
est advantage. Again, he may wish to avoid unnecessary freight hauls. Further, he may feel
that he can make sales and shipments to greater advantage from his own warehouse facility
than from some other warehouse.

Field warehousing is seldom resorted to except by merchandisers or processors of
products. Therefore, growers of agricultural products do not use this system of warehousing
as individual producers. They generally store in public warehouses if they wish to use
warehouse receipts for financing purposes. However, a group of growers such as a cooperative
association may use field warehousing, but only when the association has a warehouse of its
own that it desires to use.

The principal users of field warehousing in the agricultural field are canners of
fresh fruits and vegetables, some grain merchants who have their own elevators, crushers of
cottonseed, a few sugar and rice dealers, and some growers' cooperative associations whose
members produce grain and fresh fruits and vegetables for canning or other purposes.

In a field-warehousing plan that will stand the crucial test, the merchant (or the
. growers' association) leases his warehouse to a party who is in no way interested in or re-
lated to the merchant (or the growers' association), to operate it as a public warehouse.

The lessee takes complete charge and control of the building by virtue of a valid lease.
He receives the lessor's products in storage just as he would receive the products of a
farmer or any other storer In other words, the lessee the warehouseman must assume
full responsibility for the operations of the warehouse. The only relation between the
warehouseman and the owner of the warehouse should be that of lessor and lessee, and bailor
and bailee if the lessor stores products in the warehouse.

In some parts of the country it is not uncommon for a warehouseman who operates in
some city to lease a number of warehouses at a number of different points throughout a State,
or several States, and operate these on the principle of field warehousing.

Field warehousing is sound if proper precautions are taken scrupulously to establish
and to maintain the relationship of bailor and bailee. This means a meticulous observance
of all the legal requisites essential to such a relation. Short-cuts on the plea of lowering
costs have no place in field warehousing. The principle of disinterested custodianship must
be strictly observed. It will not do for a warehouseman to lease a building and then let
the lessor or employees of the lessor who may wish to store therein run the warehouse and
conduct it just the same as before the lease arrangement was made.

In sound field warehousing the lessee must exercise complete control and dominion
at all times over the warehouse and the products stored therein. This does not necessarily
mean that the lessor must be denied access to the warehouse at all times, but it does mean
that he must be denied access except in the presence of the lessee or his duly constituted
agent, as in the case of other public warehouses. The mere leasing of premises to another
who represents himself as a warehouseman and as in charge of the building will not in itself
suffice. And recording of the lease, even if there is a statutory requirement for the rec-
ordation, in and of itself will not give validity to the warehouse receipts. Recording is
only an attempt to give notice that the premises have temporarily passed from the real owner
to another. But if the recording is not required by law, such recordation is not even con-
structive notice.

In sound field warehousing the warehouseman must take and must maintain actual pos-
session of the building and the goods at all times. Such possession must be exclusive and
unequivocal, and open and notorious, so that other creditors of the owner of the goods may
not be misled. A sufficient number of signs of such size as readily to attract the notice
of the public, clearly indicating that the premises are in the control of the warehouseman,
must be placed inside and outside the buildings or premises. They should appear at all
points of entry and exit to the premises.

But all the leases, recorded or not, and all the signs, large or small, inside and
outside of the warehouse, will not serve to save the receipts from fatal legal attack if it
can be shown that collateral and supplemental agreements existed between the warehouseman
and the owner of the property, which were in violation of well-established legal principles.
Again, if at any time the validity of the receipts should be attacked it would probably
be disastrous if it could be established that the storer whose receipts are in question had
a key that permitted him free access to the warehouse.

Moreover, it would be most unfortunate for the lender as holder of such collateral
if it were shown, as is frequently the case, that the storer not only had a key to the ware-
house, but that he entered at his pleasure, and sampled and inspected the goods in the
presence of prospective buyers, when neither the warehouseman nor his local custodian was
present. That is not the kind of open, notorious, unequivocal, and exclusive control that
the law contemplates.


The words used by a court in an outstanding case may not be passed over lightly:

"Delivery of possession is of the very life of the pledge.
No mere agreements respecting possession can create it. The
contract of pledge cannot exist outside of the fact of change of
possession. The pledgor must dispossess himself openly, com-
pletely, unequivocally, and 'without deceptive combinations
which lead third persons into error as to the real possessor
of the thing', and the pledgee must take and maintain an open,
exclusive, and unequivocal possession."

In another celebrated case the court said:

"The general law of pledging requires possession and cannot
exist without it. Merely colorable or constructive change
of possession accomplishes nothing in favor of a pledgee. There
must be open, visible, unequivocal change of possession mani-
fested by such substantial outward signs as to make it evident
to the world that the control of the owner has wholly ceased,
and that another has acquired; and is openly exercising the ex-
clusive dominion over the property."

There is no room for make-believe, pretense or sham in field warehousing. No stronger
language could be used to condemn an intent to make one believe that a disinterested custody
existed when it did not in fact, than was used in a celebrated case in which the court said:

"There was really no delivery and no change of possession,
continuous or otherwise. The alleged change was a mere pre-
tense, a sham."

Nor is the collateral value of receipts improved by a statement thereon that they are
issued in conformity with the Uniform Warehouse Receipts Act. That Act has no administrative
provisions. It relates merely to the form of the receipt to be issued. Even when a receipt
complies in every respect with Utat Act it leaves much to be desired fiom a collateral
standpoint. In fact, a receipt issued in full compliance with that statute ordinarily fails
completely to give information to the lender as to what the commodity is that the receipt
represents, or its condition, or quality, or quantity.

Each lot of goods covered by a receipt, unless stored on a fungible basis, must be
segregated from goods of others, including other goods of the owner, and the lots must be
so marked as to permit identification readily on the basis of the information appearing on
the warehouse receipt.

Warehouse receipts must be issued by a party independent of the customer. This does
not mean the mere perfunctory signing of warehouse receipts by the president or other of-
ficial of a warehouse company. A receipt is issued by and in the name of the warehouseman,
whether he be an individual, a partnership, or corporation. It is the warehouseman as such
who must issue the receipts. He is supposed to be the real custodian and the only custodian
of the goods, and his warehouse receipts represent that he alone is the custodian. Therefore,
regardless of legal fictions, sound business principles dictate that he should be wholly
independent of the storer, and in no way related to the storer financially, by stock owner-
ship in a storing corporation, or by virtue of interlocking directorates or officials, or
by blood or kin relationships.

- 8 -


Who may he a custodian? The answer is simple. Anyone who is competent to care for
the goods that are to be stored, who is honest, and who is independent of the storer in every

When a warehouseman operates more than one field warehouse he uses at each building
or warehouse a custodian who is supposed to be his agent, and his only. This custodian is
the key man. He may make or defeat the whole operation. It is essential that he should be
as free and disinterested of any storer as the warehouseman himself. The degree to which
he is disinterested may determine the validity of the receipts themselves.

What are the requirements of a custodian? These the United States Department of
Agriculture has outlined in Service and Regulatory Anncuncements No 136, (B.A.E.), Sections
5 and 6, issued September, 1932. After years of experience in this field and careful ob-
-,rvation of what actually takes place in every-day operation in field warehousing, and after
careful and exhaustive study of adjudicated cases, the Department is convinced that these
requirements are the minimum that should be exacted Anything short of that is fraught with

It is always highly important that the custodian arrangement be carefully scrutinized
for the custodian is the key man. He is the man who controls. If he fails, all fails. No
lender can afford to take any representations on this subject unless they be by wholly dis-
interested parties who are competent to investigate. Repeatedly the attempt has been made
to convey the impression under certain field-warehousing set-ups that the custodian is in-
dependent of the borrower and that he is solely the warehouseman's own employee. The fol-
lowing is quoted from an article that recently appeared in print:

"Loans secured by field warehouse'receipts covering cur-
rently salable merchandise are made by many large commercial
banks. The bank cannot take physical charge of the goods offered
as collateral, so some device is needed to give the bank the
protection of the value of the merchandise. Field warehousing
provides the means of getting this protection by providing a way
of placing the goods in the hands of a disinterested and inde-
pendent third party. The third party in this case is the ware-
house company operating what is known as 'field warehouses.' *

"Goods and chattels are in the possession and charge of the
warehouse company which maintains a distodian on the premises
where the gocds are stored. This custodian is properly bonded
and supervised by the warehouse company."

The word "device" here is in itself suggestive. Webster defines it as "anything
fanciful and ingeniously conceived, a scheme." No device is needed to give the banker
protection for the merchandise. Public warehousing has been in existence for years and
generally gives a degree of disinterested custodianship equal to the best system of field

The custodian is an integral and vital part of any field warehousing operation. To
zay that he is -onded and is supervised by the warehouse company does not lend any more
A'eight to the legality of his appointment, nor does it establish that he is a proper person
to serve as custodian.


- 9 -

Bonding at its best is a relative term But it might be well to scrutinize the terms
of the bond to see what it covers, in whose favor it runs, under what conditions the holder
of the receipt can recover, whether the surety is financially responsible, whether one might
bp obliged to incur heavy expense or even a trip abroad in trying to recover, the maximum
amount of recovery possible, and how many operations of the same warehouseman are subject
to the same bond.

It is always in order to investigate the custodian carefully. What does he know
about caring for the goods in storage? What is his reputation? What has been his past con-
nection? Has he been in the employ of the storer in the warehouse, or the borrower? If so,
when, and what were his duties? By whom is he now employed, and who pays him? If he has
been taken from the employ of the borrower on the eve of the creation of the warehousing
arrangement, and transferred to the warehouseman's pay roll, this should cause one to pause,
for, as one lender who has wide experience in commodity financing expressed it: "No barrier
of legal sophistry will prevent the servant from hearing his pay-master's voice Legal
transfer means little so long as economic dependence continues."

The words of one court on this point also deserve careful consideration:

"The appointment of the owner, or one of his staff, as a
warehouseman's custodian of goods stored, while not conclusively
ineffectual, is nevertheless a circumstance to give pause, and
must be carefully weighed in connection with the other facts in

In another case the court remarked:

"The custodian remained an employee of the pledgor and any
possession he may have had was that of his employer."

Even if the warehouseman pays the custodian's salary a serious question would arise
if it were established that the custodian is the same person who served as custodian or
warehouse clerk for the borrower before the field warehouse arrangement was ever entered
into, that he receives the same salary that he did from the borrower, that the warehouseman
requires the storer or borrower to reimburse him for the salary of the custodian, and Lhat
it is understood by the custodian and storer that when need for the field-warehouse arrange-
ment ceases the custodian will return to the employ of the storer. These facts would un-
doubtedly be referred to the jury in case of court action. Such facts could give rise to a
serious question as to whether the field warehouseman ever had that exclusive and unequivocal
possession of the goods that the law contemplates.

In considering this relationship of custodian and former employee the following
language taken from a comprehensive opinion on field warehousing should arrest attention:

"Actual change of possession means existing in fact, and
truly and absolutely carried out, as opposed to formal, po-
tential, virtual, or theoretical change The proof required
to show actual change of possession is not measured by any fixed
set of rules. Dependence must be placed upon the facts and
S......... circumstances of each particular case; and usually the deter-
.: mination must rest upon the finding of the court or the jury
after hearing the evidence adduced on both sides."

- 10 -

The question as to whether an employee who has been transferred from the rolls of the
borrower, or storer, in a field warehouse to the pay roll of the field warehouseman is a
proper person to serve as custodian for a warehouseman who would issue receipts ooveriag
readily marketable staples which would be attached to bankers' acceptance as collateral,
under the Federal Reserve Board's rules was referred by the Department of Agriculture to the
Board of Governors of the Federal Reserve System The Board's opinion appeared in-the Fed-
eral Reserve Bulletin of March 1933 as follows:

"The Federal Reserve Board has had occasion to consider
the question whether receipts proposed to be issued by a ware-
house company under a certain field warehojusing arrangement
would comply with the requirements of the Federal Reserve Act
and the board's regulations with reference to warehouse re-
ceipts securing bankers acceptance drawn to finance the stor-
age of readily marketable staples.

"The following are the principal facts upon which the
board's consideration and conclusion with respect to this ques-
tion were based: It was proposed that premises, which were
situated in several different localities should be leased to
the warehouse company for the purpose of warehousing certain
products owned by the lessor. It was understood that the ware-
housed products would be properly segregated from other goods
on the premises in separate buildings or in portions of build-
ings partitioned off for that purpose and locked with the ware-
house company's own locks and that conspicuous signs giving
notice that the products thus segregated were in the custody of
the warehouseman would be placed both inside and outside the
premises. In the operation of these warehouses, howeyerr the
companY was not to detail men already in its employ to take
charge of the leased premises, but for this purpose was to trans-
fer to its payroll emplovaees of the lessoE, paying them the same
salAry that they were receiving from the lessorj: at the time
of the transfer. It was expected that these employees would
be reemployed by the lessor at the close of the storage season
or when the products had been removed from storage; but the
warehouse company was to have the right to terminate their
selyices at any time. These local custodians were to be the
nl rLepresentatives of the company at the warehouses: but
periodical audits were to be made by auditors sent from the
district office of the company which was located at a consider-
able distance from the proposed warehouses. l/ The premises were
to be leased at a nominal rental only and the lessor, in addition
to paying a monthly storage fee., was to reimburse the warehouse
company for all expenses, including the compensation of the
sutodians, the salaries and expenses of auditors, and the costs
of the bonds which were to be required of the custodians. A
local custodian was not to be permitted to issue warehouse re-
ceipts or to authorize releases, but these functions were to be

/ Underscoring by author.

11 -

performed at the district office of the warehouse company upon
the basis of statements signed by the custodian and a represent-
ative of the lessor.

"In order for a banker's acceptance drawn to finance the
domestic storage of readily marketable staples to be eligible
for rediscount by Federal Reserve Banks: (1) section 13 of the
Federal Reserve Act requires that it be 'secured at the time of
acceptance by a warehouse receipt or other such document convey-
ing or securing title covering readily marketable staples';
and (2) Section XI of the board's Regulation A requires that it
be 'secured at the time of acceptance by a warehouse, terminal
or other similar receipt, conveying security title to such sta-
ples, issued by a party independent of the customer.'

"The requirement of the law that such warehouse receipts
must convey or secure title to readily marketable staples ob-
viously contemplates that the accepting bank shall have a lien
on such staples which is valid and enforceable against general
creditors of the person for whose benefit such acceptance credit
is granted. Among the requirements generally recognized as es-
sential to the creation of a valid lien through the pledge of
warehouse receipts are that the warehouseman must take and main-
tain actual physical possession of the goods and that his pos-
session must be exclusive and unequivocal. Under the arrangement
above described, however, the actual possession of the goods
would be maintained by persons closely identified with the owner
of the goods and naturally subject to his influence. Such a
custodian, who might be regarded by the owner and his creditors
as the employee of the owner rather than of the warehouseman,
probably would find it difficult to deny access to the premises
of his former employer and the person to whom he looks for fu-
ture employment. In the circumstances it is open to serious
question whether the pledge of receipts issued under the ar-
rangement described would fulfill the requirements for the
creation of a valid lien.

"The requirement of the board's regulations that warehouse
receipts securing bankers acceptance be issued by a party in-
dependent of the customer contemplates that the actual custody
of the goods shall be maintained by an independent and disin-
terested party, so that the bank holding the warehouse receipt
may be able to identify and obtain possession of the goods and
thus enforce its lien without any difficulty. A lien on personal
property is, of course, of no practical value unless such prop-
erty can be found and identified when it becomes necessary to
enforce the lien; and. if custody of the goods is not maintained
by a disinterested party, there is danger that the goods may be
improperly released or disposed of. In the case under considera-
tion, whatever may be the theoretical requirements as to the

-12 --

control and custody of the goods by the warehouseman, it is
obvious that in fact the warehouseman would not be independent
of the owner; because the warehouse company would have to rely
upon its local custodians and they would not be independent of
the owner.

"After carefully considering this question and studying
all information received on the subject, the Federal Reserve
Board expressed the opinion that bankers' acceptance issued
against receipts, such as those proposed to be issued under the
circumstances above described, are not eligible for rediscount
at Federal Reserve Banks; because it is doubtful whether such
receipts comply with the requirement of section 13 of the Federal
Reserve Act that warehouse receipts securing bankers' acceptance
drawn to finance the storage of readily marketable staples must
convey or secure title to such staples, and because such re-
ceipts do not, in the board's judgment, comply with the require-
ment of section XI of the board's regulation A that warehouse
receipts securing such bankers' acceptance must be 'issued by
a party independent of the customer.'

"In giving expression to this opinion, the Federal Reserve
Board did not undertake to pass upon the merits of field ware-
housing in general, either as conducted by the warehouse company
in question or as conducted by any other company: and the board's
opinion relates solely to warehouse receipts such as those pro-
posed to be issued under the facts of the arrangement as above

Under every set of circumstances care must always be taken to avoid a set of facts
which would cause a court to comment as one court did in an outstanding field warehousing

"The transaction is not changed by the form of the agree-
ment under which it is cloaked. We are to look at the real
purpose of the contract and not to the form or name given it
by the parties."

In another case the United States Supreme Court stated:

"When there is conscious control, the intent to exclude, and
the exclusion of others, with access to the place of custody as
of right, these are all the elements of possession in the fullest

"We deal with the case before us only. No doubt there
are other cases in which the exclusive power of the so-called
bailee gradually tapers away until we reach those in which the
courts have held as a matter of law that there was no adequate
bailment. So, different views have been entertained where the
owner has undertaken to constitute himself a bailee by issuing


13 -

a receipt. We may concede, for purposes of argument, that all
the forms gone through in this case might be emptied of sig-
nifiance by a different understanding between the parties,
which the form intended to disguise."

In a most comprehensive case the court used this language:

"Warehousing on the premises of the owner proposing to
pledge his merchandise is effective when done in obedience
to legal requirements; but when done only far enough to get
the goods represented by documents without really getting them
stored, the documents are but scraps of paper The term 'field
warehousing' is not a talisman to give dominion by enchantment.
Taking exclusiveness of possession and control as the criterion
we find now and then a case where it may be said as a matter of
law that, through the field warehouse, open, exclusive, and
unequivocal possession has passed constructively to a pledgee;
and then again in other cases we find that as a matter of law
the possession of the warehouseman 'tapers away' to nothingness.
Between these two extremes lies the aggregation of cases in
which the facts are such that different men may with reason
reach opposing conclusions. Cases of that character, when tried
by a jury, must be allowed to go under proper instructions to
the jury, for their determination of the facts in controversy."


The law on field warehousing is now so well defined that if those who attempt to
render service in this field will make an honest effort to observe the limitations laid
down in well-considered cases, and not attempt short-cuts with a view to accommodating
prospective clients or stores, it should seldom if ever be necessary to submit the question
of validity of receipts to a cort, or the facts to a jury. What lender can afford to take
a chance of submitting his loan collateral to a jury to determine whether the facts sur-
rounding its creation give it legality.

The easiest course might be to follow the suggestion of a warehouseman, or the wishes
and appeals of the banker's borrowing client. But the safest course is to follow well-es-
tablished legal principles. A banker has a higher duty than merely to loan money. He too
is a trustee of the property and interests of others. His first duty is that of a faithful
servant to his trust, and he can be faithful to that trust when he lends money on field-
warehouse receipts as collateral only as he makes it his business to ascertain what actual
methods of operation prevail at the warehouse and how closely they square with well-estab-
lished principles.

The experience of the Department of Agriculture is that the word of no interested
party should be taken on this subject. Repeatedly it has found instances where stores,
in spite of representations to the contrary, were carrying keys to the warehouses, had free
access to the warehouses, and operated to all intents and purposes just as freely as they did
before the alleged bailor-baillee relationship was undertaken. It has found cases where,
in spite of statements to the contrary, the custodian was an employee of the storer, or at
best had been transferred temporarily to the pay roll of the warehouseman with the definite
understanding that when the warehouse arrangement was terminated his services with the
warehouseman would cease. Such facts would be damaging evidence to submit to any jury.

14 -

Eternal vigilance is the price that the banker must pay if he wants to feel reason-
ably certain of the safety of his commodity loans collateralized by field-warehouse receipts.

In the administration of the United States Warehouse Act, when the Department of
Agriculture came to consider field warehousing it was found necessary to superimpose special
regulations upon its regular commodity regulations that are applicable to warehousemen who
operate in the usual manner of public warehousemen.

To assist lending agencies in reaching a proper conclusion as to the collateral value
of any field warehouse receipts which may be tendered them, the special regulations ap-
plicable to field warehousemen are appended herewith.

- 15 -


(Approved July 30, 1932)

Department of Agriculture
Washington, D. C,

By virtue of the authority vested in the Secretary of Agriculture by the United
States warehouse act, approved August 11, 1916 (39 U. S. Stat. L., p. 486), as amended,
I, R. W. Dunlap, Acting Secretary of Agriculture, do make, prescribe, publish and give
public notice of the following rules and regulations to be known as the regulations sup-
plementary to the commodity regulations under the United States warehouse act for field
warehousemen, and to be in force and effect until amended or superseded by rules and regula-
tions which may hereafter be made by the Secretary of Agriculture under said act.

5In testimony whereof I have hereunto set my hand and caused the
(official seal of the Department of Agriculture to be affixed, in the
city of Washington, this 30th day of July, 1932.

Acting Secretary.

SECTION 1. Definitions.--For the purposes of these regulations, unless the context
otherwise require, the following terms shall be construed, respectively, to mean:
Paragraph 1. Commodity regulations.--Rules and regulations made under the act by
the Secretary for warehousemen storing certain designated agricultural products.
Par. 2. Field warehouse.--A warehouse that is operated or is to be operated for
the purpose of issuing warehouse receipts representing a disinterested custodianship of
the products stored therein and which is leased from any person having a financial interest
in the products.
Par. 3. Field warehouseman.--Unless otherwise clearly indicated by the context, any
person lawfully engaged in the business of operating a field warehouse as defined in para-
graph 2.
Par. 4. Custodian.--A person appointed or designated by a field warehouseman to
supervise or manage a field warehouse licensed under the act.
Par. 5. Assistant custodian.--A person appointed or designated by a warehouseman
to assist the custodian of a field warehouse in the supervision and management thereof.
SEC. 2. Nothing in these field warehouse regulations shall be construed to conflict
with, or to authorize any conflict with, or in any way impair or limit, the effect or
operation of the commodity regulations issued by the Secretary for warehousemen storing any
specified-product or products, but these regulations shall be considered as supplemental
to all such commodity regulations and to be effective as to all field warehouses arid field
warehousemen operating under the act.
SEC. 3. Applications for licenses to operate field warehouses shall be made in
accordance with the commodity regulations for warehousemen storing the particular agricultur-
al product or products stored or to be stored in the field warehouse.

* L/ These regulations were issued as Service and Regulatory Announcements No. 136 (B.A.E.)

- 16 -

SEC. 4. Compliance with all the preliminary requirements of the commodity regula- |f
tions applicable to the agricultural product or products in question, as well as these
regulations, shall be prerequisite to issuing a license to operate a field warehouse.
SEC 5. There shall be no close relationship, either by blood or marriage, between
the field warehouseman or his custodians and any depositor or the lessor of the field ware-
SEC. 6. Paragraph 1. No employee, either full or part-time, of any depositor, nor
any person who is a close blood or other relative of any person occupying a supervisory or
directing position in the business or organization of any depositor, or closely interested
with any depositor in any business, shall be appointed as a custodian or an assistant Cus-
todian by a licensed field warehouseman: nor shall any person be appointed as a custodian
or an assistant custodian if he has resigned from the employ of any depositor for the purpose
of accepting employment from the warehouseman at the warehouse.
Par. 2. The compensation, or any part thereof, of any custodian, assistant cus-
todians, or any other employee of the warehouseman, if any there be, must be paid by the
warehouseman and not by any depositor. The custodian or assistant custodians need not be
full-time employees of the warehouseman, but shall not be, under any conditions, part or
full-time employees of any depositor of products in the warehouse.
Par. 3. Each person designated by a licensed field warehouseman as a custodian or an
assistant custodian shall file with the bureau a statement, on a form provided by the
bureau for the purpose, setting forth his qualifications and experience in warehouse work,
the occupation or business he has been engaged in during the five years next preceding the
date of the statement, the names of his employers, if any, during such 5-year period, the
names of at least five persons who can vouch for his character and qualifications for the
position, and such other information as the Secretary, or his designated representative,
may require.
Par. 4. No custodian shall accept instructions from anyone other than the ware-
Par. 5. No custodian or assistant custodian shall enter upon his duties as such at a
licensed field warehouse until he has been notified in writing by the bureau that his
appointment has been approved.
SEC. 7. The warehouse space licensed or to be licensed shall be substantially sepa-
rated from other space and shall be kept securely locked or sealed in accordance with
section 15 of these regulations. All keys to locks shall be kept in the possession of the
warehouseman or his authorized agent at all times. In case there is any doubt whether all
keys to the warehouse are in possession of the warehouseman or his agents the warehouseman
shall provide new locks and keys for the warehouse.
SEC. 8. It shall be the duty of a licensed field warehouseman to keep the licensed
field warehouse securely locked at all times except when the warehouseman, the custodian,
or an assistant custodian is present, and no person other than the warehouseman, the cus-
todian, or an assistant custodian shall have access to the licensed warehouse or the products
stored therein except in the presence of and with the consent of such warehouseman, cus-
todian, or assistant custodian Provided, That if any night watchman in the employ of the
owner of the building is required to enter the licensed warehouse under an insurance re-
quirement and his only duties at the warehouse building are those of a night watchman he may
be given 3 key to the warehouse for that purpose, if the approval of the bureau is first
secured and the watchman's service is fully provided for in the field warehouse lease
agreement: Provided further, That the provisions of this section shall not apply in the case
of warehouses where the bin system is in effect as outlined in section 15 of these regula-
tions The warehouseman shall at all times exercise absolute and complete control and
dominion over the licensed warehouse and the products stored therein to the complete exclu-
sion of all parties except as provided herein.

... .. .

... .....7 : 17


SSEC. 9 No misleading name or designation shall be applied to any field wartlouse
licensed under the act, but in every case the name shall indicate that the warehouse is
being operated as a public warehouse by the warehouseman as lessee.
SEC. 10. Paragraph 1. Before a license to conduct a field warehouse is granted under
the act, the warehouseman shall file with the bureau, in accordance with the requirements
of the commodity regulations, a copy of his rules and a schedule of charges; and, in ad-
ition, he shall file copies of all contracts and agreements entered into by and between
him and any depositor or the lessor of the field warehouse which in any way relate to the
establishment, operation, management, or payment of expenses connected with the operation
Sof the warehouse. If there are any agreements or understandings between the lessor of the
Warehouse and the lessee with respect to any of the aforementioned that have not been reduced
to writing, the warehouseman shall file with the bureau a written statement setting forth
the substance of such verbal agreements and understandings.
Par. 2. All warehouses licensed under the act must be operated as public warehouses,
and no rules or schedules of charges filed by any warehouseman applying for a license under
the act shall be approved by the Secretary, or his designated representative, if it is not
clear that the requirements of section 13 of the act can and will be met.
SEC. 11. Every receipt, whether negotiable or nonnegotiable, issued for products
stored in a field warehouse, shall, in addition to complying with the requirements of section
18 of the act and regulation 4 of the applicable commodity regulations, embody within its
printed terms a statement that the warehouseman is lessee of the warehouse.
SEC. 12. Warehouse receipts for products stored in a field warehouse licensed under
the act shall be issued in the town or city where the warehouse is located, except that
where two or more licensed field warehouses are operated by a warehouseman receipts for all
such warehouses may be issued from a central point, provided such central point is not more
than 25 miles distant from the farthest warehouse. In cases where receipts are issued from
central points the warehouseman shall, when requested by department representatives, provide
transportation for such representatives, wh'ln engaged in regular inspection work, to and
from such warehouses.
SEC. 13. No field warehouse license shall be issued by the Secretary, or his desig-
nated representative, unless the lessee is wholly disinterested with respect to depositors
and the application is supported by the original lease and one copy, dated and signed by the
contracting parties, and embodying the following: (a) A definite period of time no'. less
than one year after the date of execution, (b) a description of the exact space leased to
the field warehouseman and a statement that all of such space is to be covered by the
license, if issued, and (c) evidence that said lease has been duly recorded in the county
where such warehouse is located, except where there is a statutory inhibition against the
recording of such leases, and (d) a clause prohibiting the cancellation of the lease or
ejecting the warehouseman so long as any receipt issued under the act and the regulations
is outstanding.
SEC. 14. A license to conduct a field warehouse under the act shall not be issued,
or if issued, shall not be allowed to remain in effect, if any depositor agrees or has
agreed with the warehouseman to indemnify him against loss due to failure of the warehouseman
to exercise such care of the products in his custody as a reasonably prudent owner would
exercise or as the warehouseman is required to exercise under the act and regulations
SEC. 15. In the case of warehouses where approved storage bins have been erected
and such bins can be sealed with seals furnished by the department for the purpose, the bins
may be licensed and the depositors may, with the consent of the warehouseman, have access
.to such bins for the purpose of placing goods therein before the seals are affixed and afore
Warehouse receipts are issued by the warehouseman, or for the purpose of removing goods

3 1262 069215

therefrom after the outstanding receipts for all goods in such bin or bian ktJ
rendered to and cancelled by the warehouseman, and the warehouseman or his asi. .
assistant custodian, has broken the seals. Under no circumstances shall anyoune.i.
the licensed warehouseman, the custodian, assistant custodian, or duly appointed.'.:
of the Department of Agriculture in the performance of their official duties, at|.
seals to a licensed bin or remove a seal therefrom. Where bins are licensed no .....
may be issued for products stored in any bin until after the seals have been affh
no seals may be broken for the purpose of delivering the products until the receipts:l.,...,,
such products have been surrendered and canceled. Seals may be broken to permit
and reasonable sampling of the goods; but such work must be done by the licensed wge.1
man, the custodian, or an assistant custodian, and after inspecting or sampling nMl....
shall be affixed to the bin...j ..
SEC. 16. Paragraph 1. Each licensed field warehouseman shall, during the
his license, maintain suitable signs on the licensed property in such manner as
ample public notice that such property has been leased by the warehouseman and is o .....
and operated by him. Such signs must be of such size and be so affixed to the on
each licensed building, and at appropriate places within the building, as to att......
attention of and give notice to the public as to the real tenancy, and must be.
each point of entry to and exit from the licensed space....,,'i
Par. 2. Such signs shall include the following: (a) The name and addrss"Ma.
licensee, (b) the name of the warehouse, (c) the license number of the warehou,.Mi.....
statement that the warehouseman is lessee, and (e) the words "Public Warehouse." ,!!,H,,^
Par. 3. Such other wording or lettering as is not inconsistent with the,.x
the act and these regulations and is approved by the bureau may appear in the sigC ili
Par. 4. The warehouseman shall not permit signs to remain on his licensed.i.MA
which might lead to confusion as to the tenancy. *, -

......................-.. .. .. .. ..-.. ""-

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