Warehouse Receipts under the Commercial Code

California’s Commercial Code in Division 7 deals with documents of title. Chapter 2 concerns warehouse receipts and special provisions. Section 7201 allows a warehouse receipt to be issued by any warehouse. If goods, including distilled spirits and agricultural commodities, are stored under a statute requiring a bond against withdrawal or a license, a receipt issued for the goods is deemed to be a warehouse receipt even if issued by a person that is the owner of the goods and is not a warehouse.

Section 7202 states that a warehouse receipt need not be in any particular form. Also, a warehouse is generally liable for damages caused to a person injured by its omission for nine specified items. A warehouse may insert in its receipt any terms that are not contrary to the provisions of this code and do not impair its obligation of delivery or its duty of care. Any contrary provision is ineffective.

Section 7203 specifies a party to or purchaser for value in good faith of a document of title, other than a bill of lading, that relies upon the description of the goods in the document may recover from the issuer damages caused by the nonreceipt or misdescription of the goods, except to the extent that either of two specified conditions exist.

Section 7204 provides a warehouse is liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances. Unless otherwise agreed, the warehouse is not liable for damages that could not have been avoided by the exercise of that care.

Damages may be limited by a term in the warehouse receipt or storage agreement limiting the amount of liability in case of loss or damage beyond which the warehouse is not liable. Such a limitation is not effective with respect to the warehouse’s liability for conversion to its own use..

Section 7205 says a buyer in the ordinary course of business of fungible goods sold and delivered by a warehouse that is also in the business of buying and selling such goods takes the goods free of any claim under a warehouse receipt even if the receipt is negotiable and has been duly negotiated.

Section 7206 allows a warehouse, by giving notice to the person on whose account the goods are held and any other person known to claim an interest in the goods, to require payment of any charges and removal of the goods from the warehouse at the termination of the period of storage fixed by the document of title or, if a period is not fixed, within a stated period not less than 30 days after the warehouse gives notice. If the goods are not removed before the date specified in the notice, the warehouse may sell them.

If a warehouse in good faith believes that goods are about to deteriorate or decline in value to less than the amount of its lien within the time provided, the warehouse may specify in the notice given any reasonable shorter time for removal of the goods and, if the goods are not removed, may sell them at public sale held not less than one week after a single advertisement or posting.

In addition, a warehouse is required to deliver the goods to any person entitled to them upon due demand made at any time before sale or other disposition. A warehouse may satisfy its lien from the proceeds of any sale or disposition under this section but cannot hold the balance for delivery on the demand of any person to which the warehouse would have been bound to deliver the goods.

Section 7207 states that, unless the warehouse receipt provides otherwise, a warehouse is required to keep separate the goods covered by each receipt so as to permit at all times identification and delivery of those goods. However, different lots of fungible goods may be commingled.

Section 7208 provides, if a blank in a negotiable tangible warehouse receipt has been filled in without authority, a good-faith purchaser for value and without notice of the lack of authority may treat the insertion as authorized. Any other unauthorized alteration leaves any tangible or electronic warehouse receipt enforceable against the issuer according to its original tenor.

Section 7209 says a warehouse has a lien against the bailor on the goods covered by a warehouse receipt or storage agreement or on the proceeds in its possession for charges for storage or transportation, including demurrage and terminal charges, insurance, labor, or other charges, present or future, in relation to the goods, and for expenses necessary for preservation of the goods or reasonably incurred in their sale pursuant to law.

If the person on whose account the goods are held is liable for similar charges or expenses in relation to other goods whenever deposited and it is stated in the warehouse receipt or storage agreement that a lien is claimed for charges and expenses in relation to other goods, the warehouse also has a lien against the goods covered by the warehouse receipt or storage agreement or on the proceeds thereof in its possession for those charges and expenses, whether or not the other goods have been delivered by the warehouse.

A warehouse may also reserve a security interest against the bailor for the maximum amount specified on the receipt for charges. A warehouse’s lien for charges and expenses or a security interest is also effective against any person that so entrusted the bailor with possession of the goods that a pledge of them by the bailor to a good-faith purchaser for value would have been valid. However, the lien or security interest is not effective against a person that before issuance of a document of title had a legal interest or a perfected security interest in the goods and that did not fulfill the specified conditions. And, a warehouse loses its lien on any goods that it voluntarily delivers or unjustifiably refuses to deliver.

Section 7210 allows a warehouse’s lien to be enforced by public or private sale of the goods, in bulk or in packages, at any time or place and on any terms that are commercially reasonable, after notifying all persons known to claim an interest in the goods. Notification may be made by mail, personal service, or verifiable electronic mail. The notification must include specified information. This section also defines how a warehouse sells “in a commercially reasonable manner.”

A warehouse may enforce its lien on goods, other than goods stored by a merchant in the course of its business, only if the five specified requirements are satisfied. Before any sale, any person claiming a right in the goods may pay the amount necessary to satisfy the lien and the reasonable expenses incurred in complying with this section. In that event, the goods may not be sold, but must be retained by the warehouse subject to the terms of the receipt and this division.

A purchaser in good faith of goods sold to enforce a warehouse’s lien takes the goods free of any rights of persons against which the lien was valid, despite the warehouse’s noncompliance with this section. A warehouse may satisfy its lien from the proceeds of any sale pursuant to this section, but is required to hold the balance, if any, for delivery on demand to any person to which the warehouse would have been bound to deliver the goods.

Chapter 4 of Division 7 concerns warehouse receipts and bills of lading and their general obligations. Section 7401 says that the obligations imposed by this division on an issuer apply to a document of title even if any of four specified conditions are met.

Section 7402 provides a duplicate or any other document of title purporting to cover goods already represented by an outstanding document of the same issuer does not confer any right in the goods, except as provided in the case of tangible bills of lading in a set of parts, overissue of documents for fungible goods, substitutes for lost, stolen, or destroyed documents, or substitute documents issued. The issuer is liable for damages caused by its overissue or failure to identify a duplicate document by a conspicuous notation.

Section 7403 requires a bailee to deliver the goods to a person entitled under a document of title if the person complies with existing law, unless and to the extent that the bailee establishes any of the seven specified conditions. A person claiming goods covered by a document of title will satisfy the bailee’s lien if the bailee requests or if the bailee is prohibited by law from delivering the goods until the charges are paid.

Section 7404 specifies a bailee that in good faith has received goods and delivered or otherwise disposed of the goods according to the terms of a document of title or pursuant to this division is not liable for the goods even if either specified condition is met.

Chapter 5 concerns warehouse receipts and bills of lading and their negotiation and transfer. Section 7501 provides that the five specified rules apply to a negotiable tangible document of title. In addition, it specifies that the three specified rules apply to a negotiable electronic document of title. And, endorsement of a nonnegotiable document of title neither makes it negotiable nor adds to the transferee’s rights.

Section 7502 provides a holder to which a negotiable document of title has been duly negotiated acquires title to the documents and goods, as well as rights accruing under agency or estoppel laws, and the direct obligation of the issuer to hold or deliver the goods according to the terms of the document. Also, title and rights acquired by due negotiation are not defeated by any stoppage of the goods represented by the document of title or by surrender of the goods by the bailee and are not impaired even if any of three specified conditions are met.

Section 7503 states that a document of title confers no right in goods against a person that before issuance of the document had a legal interest or a perfected security interest in the goods and that did not deliver or entrust the goods to the bailor or the bailor’s nominee with specified powers, or acquiesce in the procurement by the bailor or its nominee of any document.

In addition, title to goods based upon an unaccepted delivery order is subject to the rights of any person to which a negotiable warehouse receipt or bill of lading covering the goods has been duly negotiated. That title may be defeated to the same extent as the rights of the issuer or a transferee from the issuer.

Section 7504 provides a transferee of a document of title, whether negotiable or nonnegotiable, to which the document has been delivered but not duly negotiated, acquires the title and rights that its transferor had or had actual authority to convey. In the case of a transfer of a nonnegotiable document of title, until but not after the bailee receives notice of the transfer, the rights of the transferee may be defeated one of four specified methods.

In addition, a diversion or other change of shipping instructions by the consignor in a nonnegotiable bill of lading which causes the bailee not to deliver the goods to the consignee defeats the consignee’s title to the goods if the goods have been delivered to a buyer in ordinary course of business or a lessee in ordinary course of business and, in any event, defeats the consignee’s rights against the bailee.

Section 7505 says the endorsement of a tangible document of title issued by a bailee does not make the endorser liable for any default by the bailee or previous endorsers.

Section 7506 provides the transferee of a negotiable tangible document of title has a specifically enforceable right to have its transferor supply any necessary indorsement, but the transfer becomes a negotiation only as of the time the indorsement is supplied.

Section 7507 specifies that, if a person negotiates or delivers a document of title for value, the transferor, in addition to any warranty made in selling or leasing the goods, warrants to its immediate purchaser only that three conditions are met.

Section 7508 states that a collecting bank or other intermediary known to be entrusted with documents of title on behalf of another or with collection of a draft or other claim against delivery of documents warrants by the delivery of the documents only its own good faith and authority even if the collecting bank or other intermediary has purchased or made advances against the claim or draft to be collected.

Section 7509 explains that, whether a document of title is adequate to fulfill the obligations of a contract for sale, a contract for lease, or the conditions of a letter of credit is determined.

Chapter 6 deals with warehouse receipts and bills of lading and miscellaneous provisions related to documents of title. Section 7601 specifies that, if a document of title is lost, stolen, or destroyed, a court may order delivery of the goods or issuance of a substitute document and the bailee may without liability to any person comply with the order.

If the document was negotiable, a court may not order delivery of the goods or issuance of a substitute document without the claimant’s posting security, unless it finds that any person that may suffer loss as a result of non-surrender of possession or control of the document is adequately protected against the loss. If the document was nonnegotiable, the court may require security. The court may also order payment of the bailee’s reasonable costs and attorney’s fees in any action under this subdivision.

Section 7602 states that, unless a document of title was originally issued upon delivery of the goods by a person that did not have power to dispose of them, a lien does not attach by virtue of any judicial process to goods in the possession of a bailee for which a negotiable document of title is outstanding unless possession or control of the document is first surrendered to the bailee or the document’s negotiation is enjoined.

Also, the bailee may not be compelled to deliver the goods pursuant to process until possession or control of the document is surrendered to the bailee or to the court. A purchaser of the document for value without notice of the process or injunction takes free of the lien imposed by judicial process.

Section 7603 explains that, if more than one person claims title to or possession of the goods, the bailee is excused from delivery until the bailee has a reasonable time to ascertain the validity of the adverse claims or to commence an action for interpleader. The bailee may assert an interpleader either in defending an action for non-delivery of the goods or by original action.