Teaching Bailments

At this point in my Agricultural Law course, the students and I wade into warehouse laws and Article 7 of the UCC. Each year I question the utility of this exercise, but each year I am assured by the experience. This year is one good example.
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First, the historical development of warehouse regulation teaches students a lot about one good role for economic regulation: keeping the avenues of trade open. The natural monopolies that emerge from the geography associated with relatively few ports and terminals, as well as the cartels that existed in the mid 1800s in Chicago, are important aspects of understanding the history of this body of regulation. Mix in a little constitutional law upholding state regulation, Munn v. Illinois, 98 U.S. 113 (1876), and some federal regulation in the form of the Warehouse Act, 7 U.S.C. sec. 412 et. seq., and the ensuing preemption question, Rice v. Santa Fe Elevator Corp. 331 U.S. 218 (1947), and more recent cases still fighting with that question, Staple Cotton Cooperative Assoc. v. D.G.& G. Inc., 503 F. Supp. 2d 1217 (E.D. Mo. 2007), and the lesson about why regulation exists and how it exists within our federal system emerges.

From there, Article 7's emergence and its interaction with the warehouse laws reveals a level of complexity and, perhaps, some problems with state regulation. Specifically, the relationship between the UCC and warehouse laws tells us something about how state legislatures may, at times, fail to consider the impact of uniform laws when they adopt them. Or, at least, they may fail to fully integrate different regulations concerning the same subject. This is accomplished by considering the UCC's text and its application in specific cases.

Those cases, in turn, provide enlightening stories of producers engaging in commerce only to find an intermediary warehouse that has "gone belly up," as I like to put it. And the fights, of course, tell us much about the nature of operations and the stakeholders at issue. This figure is my classroom visual depiction of what is going on. From hedging to speculating, and from buyers and sellers (including all manner of marketing arrangements) to storers and secured creditors for everyone, I find it a useful and complex exercise.

Take for example, the buyer of grain from a warehouse that receives a negotiable document of title in return for payment. Under Article 7, and perhaps under Article 2, of the UCC, most people would agree that the buyer is entitled to delivery and perhaps should be regarded as a bailor with respect to the grain now in storage. Indeed, if the purchaser would take delivery of the commodity, drive around the block, and redeposit the grain, there would be little question that bailment had been established and that the bailor was a storer of grain. However, some courts have concluded that this bailor can only take advantage of warehouse laws' protection (an entitlement to a pro-rata share of remaining stored goods and, perhaps, bond proceeds) when they can show and actual deposit of grain that they owned. That is, the purchaser does not qualify, despite the general notion under Article 7 that the title to the goods is wrapped up in the document that the buyer his holding. See In re Claims Against Atlanta Grain Elevator, 268 Neb. 598 (2004). Of course, some courts disagree. See State ex rel. P. Serv. C. v. R.F. Gunkelman & Sons, Inc., 219 N.W.2d 853 (N.D.1974).

New twists are ever-emerging in the course of classroom discussion. As we covered the Atlanta Grain Elevator case, one observant student pointed out to me a flaw in the court's reasoning with regard to a direct-shipment relationship. Some of the claimants had claimed to be a storer of grain even though they had never brought grain to the defunct elevator. Instead, at the elevator's suggestion, they delivered their grain to some purchasers of grain from the elevator. This set of affairs makes sense--the elevator saves on transportation costs and passes that savings on to the farmers, perhaps in the form of reduced storage charges. The farmers, in return understand that they still own fungible commodities that are in the elevator's present inventory. What should they have done to protect themselves from a shortfall at the elevator? What could they have done to bring themselves within the coverage of the state's warehouse law? The answer the court gave was that they could not qualify for coverage because they never brought their commodities to the warehouse. That, however, tends to elevate form over substance (or at least it could) in much the same manner as denying a storage claim to a buyer who has not yet taken delivery of the goods but has a document of title. Suppose, for example, that the warehouse issued negotiable warehouse receipts to the direct shipper purporting to cover fungible goods in storage. Article 7 would say that such holders are owners in common of the commingled goods in storage (7-207) and that the elevator is required to deliver such goods to the farmers (7-403), regardless of any flaws in the document, including the bailee's ownership at the time of issuance (7-401)(3)). But the court's reasoning seems to take that off the table. In class, of course, the ensuing questions are "Should it?"; "Who are these laws supposed to protect?"; "What does Article 7 mean to the warehouse law?"; and so on.

Finally, we explore the relationships involved in warehouse regulation and identify further liability that can arise within the warehouse and beyond (the infamous Cargill case, which involves a creditor who became a principal to its debtor), and we discuss Article 2's applicability to some of the marketing arrangements that may exist in this arena--forward contracting with open price terms and vague quantity terms, as well as output contracts, in particular. And we leave the area with the looming sense that secured lending is somehow important. We return to that question in the next chapter on operational financing. That, in turn, nicely ties the last few weeks together.

In sum, I tend to find this little corner of the law rich with teaching value. Some may think it mundane or beyond the realm of the "important" stuff in commercial law. But I disagree.