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229 FEDERAL RESERVE BOARD WASHINGTON address official correspondence to the federal reserve board X-7255 September 24, 1932. SUBJECT: Warehouse R e c e i p t s S e c u r i n g Bankers* A c c e p t a n c e s , Dear S i r : I i n c l o s e h e r e w i t h f o r youx i n f o r m a t i o n a copy of a l e t t e r which t h e Board i s a d d r e s s i n g to t h e e x e c u t i v e v i c e p r e s i d e n t o f t h e L a w r e n c e W a r e h o u s e Company o f San F r a n c i s c o w i t h r e f e r e n c e to the question whether c e r t a i n warehouse r e c e i p t s p r o p o s e d t o h e i s s u e d "by t h a t company f o r g o o d s s t o r e d i n c e r t a i n warehouses l e a s e d from t h e Southern Idaho Bean Growers C o o p e r a t i v e A s s o c i a t i o n would comply w i t h t h e r e q u i r e ments o f t h e F e d e r a l R e s e r v e A c t and t h e B o a r d ' s R e g u l a t i o n s w i t h r e s p e c t t o w a r e h o u s e r e c e i p t s s e c u r i n g "bankers' a c c e p t a n c e s drawn t o f i n a n c e t h e s t o r a g e of r e a d i l y m a r k e t a b l e s t a p l e s , t o g e t h e r w i t h a copy of an o p i n i o n rendered by t h e Board's Counsel i n t h i s c o n n e c t i o n under date of August 4 , 1931. The d e s i r a b i l i t y o f p u b l i s h i n g a r u l i n g o n t h i s q u e s t i o n i n t h e F e d e r a l R e s e r v e B u l l e t i n , which would r e c i t e the f a c t s upon which the c o n c l u s i o n s of the Board a r e based but would not mention the name o f t h e w a r e h o u s e company i n q u e s t i o n , i s now u n d e r c o n s i d e r a t i o n by t h e Board. In t h i s connection, you are requested to advise X-7255 w 2 •* t h e Board, w h e t h e r , a c c o r d i n g t o y o u r i n f o r m a t i o n , member b a n k s i n y o u r d i s t r i c t a r e e n g a g e d i n g r a n t i n g a c c e p t a n c e c r e d i t s on t h e "basis o f w a r e h o u s e r e c e i p t s i s s u e d u n d e r c i r c u m s t a n c e s s i m i l a r t o t h o s e d e s c r i b e d i n t h e i n c l o s e d o p i n i o n o f C o u n s e l ; and t h e B o a r d would a l s o a p p r e c i a t e an e x p r e s s i o n of your v i e w s a s t o t h e a d v i s a b i l i t y o f p u b l i s h i n g a r u l i n g on t h i s s u b j e c t i n t h e F e d e r a l Reserve B u l l e t i n . Very t r u l y y o u r s , Chester Morrill, Secretary. Inclosures. TO ALL FEDERAL RESERVE ^JEIJTS. 2 3 0 23:1 X-7255-a September 2 3 , 1952. Mr. J . Van G a r t m e l l , E x e c u t i v e V i c e P r e s i d e n t , L a w r e n c e W a r e h o u s e Company, 1 North L a S a l l e S t r e e t , Chicago, I l l i n o i s . Dear S i r : R e f e r e n c e i s made t o t h e B o a r d ' s l e t t e r o f November 2 5 , 1931, w i t h r e s p e c t to the q u e s t i o n p r e s e n t e d t o i t b y t h e Department of A g r i c u l t u r e a s t o whether c e r t a i n warehouse r e c e i p t s proposed t o b e i s s u e d b y y o u r company f o r g o o d s s t o r e d i n c e r t a i n w a r e h o u s e s l e a s e d f r o m t h e S o u t h e r n I d a h o B e a n Growers C o o p e r a t i v e A s s o c i a t i o n w o u l d c o m p l y w i t h t h e r e q u i r e m e n t s o f t h e F e d e r a l R e s e r v e A c t and the Board's r e g u l a t i o n s with r e f e r e n c e t o warehouse r e c e i p t s s e c u r i n g b a n k e r s ' a c c e p t a n c e s drawn t o f i n a n c e t h e s t o r a g e o f r e a d i l y marketable s t a p l e s . As y o u w e r e a d v i s e d i n t h a t l e t t e r , n o t w i t h s t a n d i n g t h e f a c t t h a t y o u r company h a s w i t h d r a w n i t s r e q u e s t f o r a r e c o n s i d e r a t i o n by t h e Department of A g r i c u l t u r e of c e r t a i n q u e s t i o n s p e r t a i n i n g t o i t s o p e r a t i o n s , t h e Board has c o n t i n u e d i t s c o n s i d e r a t i o n of the q u e s t i o n w h e t h e r such warehouse r e c e i p t s comply w i t h the r e q u i r e m e n t s o f t h e F e d e r a l R e s e r v e A c t and t h e B o a r d ' s r e g u l a t i o n s , b e c a u s e i t a p p e a r s t h a t some o f t h e F e d e r a l r e s e r v e b a n k s may h a v e discounted or purchased bankers' acceptances secured by r e c e i p t s i s s u e d u n d e r s i m i l a r c i r c u m s t a n c e s and t h a t y o u r company h a s a d v e r t i s e d t h a t " C r e d i t s b a s e d on L a w r e n c e Warehouse Company f i e l d w a r e house r e c e i p t s are e l i g i b l e f o r rediscount a t Federal reserve banks." Mr. J , Van O a f t m e l l X-7255-a In c o n n e c t i o n w i t h i t s i n v e s t i g a t i o n of t h i s matter tho F e d e r a l Reserve Board has c o n s u l t e d w i t h s e v e r a l of the F e d e r a l r e s e r v e b a n k s and h a s c a r e f u l l y c o n s i d e r e d t h e i n f o r m a t i o n f u r n i s h e d b y y o u r company and i t s a t t o r n e y s and t h e a r g u m e n t s made b y them t o g e t h e r with information r e c e i v e d from other s o u r c e s . After s t u d y i n g a l l i n f o r m a t i o n r e c e i v e d on t h i s s u b j e c t , t h e F e d e r a l Reserve Board i s of t h e o p i n i o n t h a t b a n k e r s ' a c c e p t a n c e s i s s u e d a g a i n s t r e c e i p t s s u c h a s t h o s e p r o p o s e d t o b e i s s u e d i n t h e name o f y o u r company u n d e r t h e a r r a n g e m e n t e n t e r e d i n t o b e t w e e n y o u r company and t h e S o u t h e r n I d a h o B e a n G r o w e r s ' C o o p e r a t i v e A s s o c i a t i o n are not e l i g i b l e for rediscount at Federal reserve banks; b e c a u s e i t i s d o u b t f u l whether such r e c e i p t s comply w i t h the r e q u i r e ment o f S e c t i o n 1 3 o f t h e F e d e r a l R e s e r v e A c t t h a t w a r e h o u s e r e c e i p t s s e c u r i n g b a n k e r s ' a c c e p t a n c e s drawn t o f i n a n c e t h e s t o r a g e o f r e a d i l y marketable s t a p l e s must convey or s e c u r e t i t l e t o such s t a p l e s and b e c a u s e s u c h r e c e i p t s do n o t , i n t h e B o a r d ' s j u d g m e n t , comply w i t h t h e requirement of S e c t i o n XI of the B o a r d ' s R e g u l a t i o n A t h a t w a r e h o u s e r e c e i p t s s e c u r i n g s u c h b a n k e r s ' a c c e p t a n c e s must b e " i s s u e d by a p a r t y independent o f tho customer." In g i v i n g e x p r e s s i o n t o t h i s o p i n i o n , the Board i s n o t u n d e r t a k i n g t o p a s s upon t h e m e r i t s of f i e l d warehousing i n g e n e r a l , e i t h e r a s c o n d u c t e d b y y o u r company o r a s c o n d u c t e d b y a n y o t h e r company, and t h e B o a r d ' s o p i n i o n r e l a t e s s o l e l y t o w a r e h o u s e r e - X-7255' Mr. J . Van C a r t m e l l c e i p t s such a s t h o s e proposed t o bo i s s u e d under the arrangement e n t e r e d i n t o b e t w e e n y o u r company and t h e S o u t h e r n I d a h o B e a n Growers C o o p e r a t i v e A s s o c i a t i o n . Very t r u l y y o u r s , Chester Morrill, Secretary. c o :: zr 1 d 2 t i n fiCAED To The F e d e r a l R e s e r v e B o a r d gran Mr. Tftyatt, G e n e r a l C o u n s e l X-7255-b Date August 4 , 1931. S u b J e c t : Warehouse r e c e i p t s i s s u e d "by L a w r e n c e Warehouse Company o f San F r a n c i s c o . On J u n e 1 0 , 1 9 3 1 , a l e t t e r was r e c e i v e d f r o m t h e D e p a r t m e n t of A g r i c u l t u r e i n q u i r i n g whether c e r t a i n warehouse r e c e i p t s a r i s i n g out o f f i e l d w a r e h o u s i n g arrangements o f t h e Lawrence Warehouse Company o f S a n F r a n c i s c o w o u l d m e e t t h e B o a r d ' s r e q u i r e m e n t t h a t hankers' a c c e p t a n c e s i s s u e d a g a i n s t the s t o r a g e of r e a d i l y marketable s t a p l e s tie s e c u r e d "by w a r e h o u s e r e c e i p t s i s s u e d b y a p a r t y i n d e p e n d e n t of the customer. She Lawrence Warehouse Company h a s a p p l i e d t o t h e D e p a r t m e n t o f A g r i c u l t u r e f o r l i c e n c e s u n d e r t h e U n i t e d S t a t e s Warehouse A c t ; t h e D e p a r t m e n t h a s d e n i e d t h e l i c e n s e s on t h e g r o u n d t h a t t h e p l a n d o e s n o t p r o v i d e d i s i n t e r e s t e d c u s t o d i a n s h i p ; t h e m a t t e r i s now "before t h e D e p a r t m e n t u p o n a r e q u e s t f o r r e c o n s i d e r a t i o n ; a n d t h e Lawrence Warehouse Company h a s t o l d t h e D e p a r t m e n t t h a t i t s w a r e h o u s e r e c e i p t s i s s u e d u n d e r s i m i l a r c i r c u m s t a n c e s a r e a c c e p t e d w i t h o u t q u e s t i o n tgr t h e F e d e r a l R e s e r v e Bank o f San F r a n c i s c o . The l e t t e r f r o m t h e D e p a r t m e n t s t a t e s t h a t , i n a d m i n i s t e r i n g t h e Warehouse A c t , t h e D e p a r t m e n t h a s c o n s i s t e n t l y e n d e a v o r e d t o h a v e w a r e h o u s i n g a r r a n g e m e n t s a p p r o v e * b y i t comply w i t h t h e F e d e r a l R e s e r v e Board's r e g u l a t i o n s w i t h r e f e r e n c e to bankers' acceptances i s s u e d a g a i n s t w a r e h o u s e r e c e i p t s ; and i t i s on t h i s g r o u n d t h a t a r u l i n g b y t h e F e d e r a l R e s e r v e Board i s r e q u e s t e d . The B o a r d t r a n s m i t t e d c o p i e s o f t h e D e p a r t m e n t ' s l e t t e r t o Governor C a l k i n s o f t h e F e d e r a l R e s e r v e Bank o f San F r a n c i s c o a n d t o Mr. E . R. K e n z e l , D e p u t y Governor o f t h e F e d e r a l R e s e r v e Bank o f New 5.725W) - £ *York a n d Chairman o f t h e S t a n d i n g C o m n i t t e e on B a n k e r s ' A c c e p t a n c e s , w i t h a r e q u e s t f o r t h e i r v i e w s ; a n d "both o f t h e m e x p r e s s e d t h e v i e w t h a t s u c h warehouse r e c e i p t s comply w i t h t h e B o a r d ' s r e g u l a t i o n s . As a r e s u l t of r e q u e s t s f o r a d d i t i o n a l i n f o r m a t i o n w h i c h I made o f Mr. A . C. Agnew, C o u n s e l f o r t h e F e d e r a l R e s e r v e Bank o f San F r a n c i s c o , t h e La-wrence Warehouse Company l e a r n e d t h a t t h e B o a r d was c o n s i d e r i n g t h i s q u e s t i o n a n d Mr. J . Van C a r t m o l l , E x e c u t i v e V i c e P r e s i d e n t o f t h a t Company, c o n f e r r e d a t l e n g t h w i t h Mr. V e s t and t h e u n d e r s i g n e d a n d s u b m i t t e d l e n g t h y d o c u m e n t s d e s c r i b i n g i n d e t a i l and d e f e n d i n g t h e warehouse company's methods of o p e r a t i o n . Mr. Van C a r t m e l l h a s a l s o s e n t a t e l e g r a m t o t h e B o a r d r e q u e s t i n g t h a t , b e f o r e i s s u i n g any r u l i n g a d v e r s e t o the Lawrence Warehouse Company, t h e B o a r d g r a n t h i m a h e a r i n g . I n a l e t t e r a d d r e s s e d t o me u n d e r d a t e o f J u l y 3 1 , 1 9 3 1 , Mr. R o b e r t H. B e a n , E x e c u t i v e S e c r e t a r y o f t h e A m e r i c a n A c c e p t a n c e Council, said: understand t h a t t h e Board has i n d i c a t e d i t s I n t e n t i o n o f h o l d i n g a h e a r i n g on t h i s m a t t e r s o m e t i m e t h i s F a l l . I am s u r e y o u u n d e r s t a n d t h e C o u n c i l ' s d e e p i n t e r e s t i n ' t h i s m a t t e r and I a s k t h a t y o u w i l l k e e p me i n f o r m e d a s t o t h e d a t e o f t h e h e a r i n g s o t h a t we can a t t e n d and be of any a s s i s t a n c e t o t h e Board i n getting this question d e f i n i t e l y adjusted." Under d a t e o f J u l y 1 7 , 1 9 3 1 , Mr. W i l s o n V. L i t t l e , E x e c u t i v e S e c r e t a r y o f t h e A m e r i c a n Warehousemen's A s s o c i a t i o n , a l s o a d d r e s s e d a l e t t e r t o me e x p r e s s i n g a g r e a t i n t e r e s t i n t h i s s u b j e c t and e x p r e s s i n g t h e hope t h a t I would "concur w i t h o t h e r n o t e d c o u n s e l i n r e a f f i r m i n g the e l i g i b i l i t y of p r o p e r l y i s s u e d f i e l d warehouse r e c e i p t s f o r purposes of r e d i s c o u n t by the F e d e r a l Reserve Banks.'1 X-7255-Wt> *- 3 W p A s T I O N PRESENTED. The q u e s t i o n p r e s e n t e d f o r t h e B o a r d ' s c o n s i d e r a t i o n may b e s t a t e d c o n c i s e l y a s f o l l o w s : Whether w a r e h o u s e r e c e i p t s i s s u e d i n t h e name o f a n i n d e p e n d e n t w a r e h o u s e company f o r g o o d s s t o r e d on t h e ^ p r e m i s e s o f t h e "bailor l e a s e d t o t h e w a r e h o u s e company, t h e s o l e c u s t o d i a n o f w h i c h i s a n e m p l o y e e o f t h e " b a i l o r , who h a s "been t r a n s f e r r e d t e m p o r a r i l y t o t h e e m p l o y o f t h e w a r e h o u s e company a n d e x p e c t s t o "be e m p l o y e d a g a i n "by t h e " b a i l o r , a r e w a r e h o u s e r e c e i p t s " c o n v e y i n g or s e c u r i n g t i t l e | f w i t h i n t h e meaning of S e c t i o n 13 of t h o F e d e r a l R e s e r v e A c t , a n d a r e " i s s u e d "by a p a r t y i n d e p e n d e n t o f t h e c u s t o m e r , " w i t h i n t h e m e a n i n g o f S e c t i o n XI o f t h e B o a r d ' s R e g u l a t i o n A J s o t h a t "bankers * a c c e p t a n c e s s e c u r e d "by s u c h w a r e h o u s e r e c e i p t s w i l l "be e l i g i b l e f o r a c c e p t a n c e "by member "banks a n d f o r r e d i s c o u n t "by F e d e r a l r e s e r v e "banks. OPINION. I h a v e r e a d e v e r y word of e v e r y document i n t h e a t t a c h e d f i l e ; I h a v e g i v e n t h i s s u b j e c t t h o r o u g h , c a r e f u l and i m p a r t i a l c o n s i d e r a t i o n ; while I have not attempted to read every case ever decided, I have s t u d i e d e n o u g h o f tlip r e c e n t c a s e s t o s a t i s f y me a s t o t h e p r e s e n t s t a t u s of t h e l a w on t h i s s u b j e c t ; and I am o f t h e o p i n i o n t h a t : (1) The d e c i s i o n s on t h i s s u b j e c t a r e i n s u c h c o n f l i c t t h a t t h e r e i s no c e r t a i n t y t h a t t h e v a l i d i t y of any l i e n a t t e m p t e d t o be c r e a t e d by t h e p l e d g e of s u c h warehouse r e c e i p t s w i l l bo s u s t a i n e d by t h e c o u r t s ; a n d i t c a n n o t bo s a i d w i t h c e r t a i n t y t h a t t h e s e w a r e h o u s e r o c o i p t s comply w i t h t h e requirement of S e c t i o n 13 o f t h e F e d e r a l Reserve Act t h a t warehouse r e c e i p t s securing bankers' acceptances drawn t o f i n a n c e t h e s t o r a g e of r e a d i l y m a r k e t a b l e s t a p l e s must X-725&*b - 4 - A "convey or s e c u r e t i t l e " t o such s t a p l e s ; and (2) telle tile a r e i s s u e d i n t h e name o f a w a r e - h o u s e company w h i c h i s i n d e p e n d e n t o f t h e "borrower, t h e a c t u a l c u s t o d i a n o f t h e g o o d s and t h e p e r s o n u p o n w h o s e c e r t i f i c a t i o n t h e r e c e i p t s a r e i s s u e d i s s o much u n d e r t h e i n f l u e n c e o f t h e b o r r o w e r t h a t t h e s e warehouse r e c e i p t s can not he s a i d to he " i s s u e d by a p a r t y i n d e p e n d e n t o f t h e c u s t o m e r " w i t h i n t h e m e a n i n g o f S e c t i o n XI of the Board's R e g u l a t i o n A. EECOMMMDATI PITS. B e f o r e t h e B o a r d r u l e s on t h i s s u b j e c t , howeveir, I r e s p e c t f u l l y recommend: (1) T h a t t h e r e p r e s e n t a t i v e s o f t h e L a w r e n c e Warehouse Company b e g i v e n a h e a r i n g on t h i s s u b j e c t ; (2) That Mr. H . S . Yohe and Mr. C.W. K i t c h e n o f t h e D e p a r t - ment o f A g r i c u l t u r e , Mr. R o b e r t H. B e a n , E x e c u t i v e S e c r e t a r y o f t h e A m e r i c a n A c c e p t a n c e C o u n c i l , a n d Mr. W i l s o n V. L i t t l e , E x e c u t i v e S e c r e t a r y o f t h e A m e r i c a n Warehousemen's A s s o c i a t i o n , b o n o t i f i e d o f t h e h e a r i n g a n d i n v i t e d i;o a t t e n d ; q-nd (3) T h a t c o p i e s of t h i s o p i n i o n b e s e n t t o G o v e r n o r C a l k i n s and Mr. K e n z o l and t h a t t h e y b e i n v i t e d t o s u b m i t t h e i r comments i n w r i t i n g a n d t o a t t e n d , or h a v e a r e p r e s e n t a t i v e a t t e n d , t h e h e a r i n g , i f t h e y c a r e t o do s o . Proposed l e t t e r s t o oach of t h e s e i n t e r e s t e d p a r t i e s a r e r e s p e c t f u l l y submitted herewith. THE FACTS. The f o l l o w i n g a r e t h e f a c t s a s s t a t e d i n t h e l e t t e r f r o m t h e Department of A g r i c u l t u r e : X-725&-13 "The Lawrence 7 a r $ i o u a e Coapitny o f San F r a n c i s c o h a s a p p l i e d t o t i l l s d e p a r t m e n t ioi 1 l i c e n s e u n d e r t h e Warehouse A c t f o r t h e o p e r a t i o n o f s e v e r a l w a r e h o u s e s owned "by t h e S o u t h e r n I d a h o B e a n G r o w e r s ' C o o p e r a t i v e A s s o c i a t i o n , Twin F a l l s , I d a h o . These houses are located at f i v e d i f f e r e n t p o i n t s i n southern I d a h o . The w a r e h o u s e s a r e l e a s e d t o t h e L a w r e n c e W a r e h o u s e Comp a n y f o r t h e p u r p o s e o f s t o r i n g t h e a s s o c i a t i o n ' s "beans. I n t h o o p e r a t i o n o f t h e s e w a r e h o u s e s t h e w a r e h o u s e company w i l l n o t s e n d m?n f r o m i t s home o f f i c e t o t a k e c h a r g e o f t h e l e a s e d premises hut w i l l t r a n s f e r t o i t s p a y r o l l present employees of t h e c o o p e r a t i v e a s s o c i a t i o n , p a y i n g them t h e same s a l a r y a s t h e y a r e now r e c e i v i n g f r o m t h e a s s o c i a t i o n ; The e x p e c t a t i o n i s t h a t t h e s e e m p l o y e e s w i l l "be r e - e m p l o y e d "by t h e a s s o c i a t i o n a t t h e c l o s e o f t h e s t o r a g e s e a s o n or when t h e b e a n s h a v e "been r e moved f r o m s t o r a g e . T h i s p e r i o d of employment w i l l n a t u r a l l y v a r y irlth t h e time r e q u i r e d t o market t h e c r o p . Except f o r s u c h l o c a l e m p l o y e e s who w i l l s e r v e a s r e p r e s e n t a t i v e s o f t h e L a w r e n c e Warehouse Company t h e warehouseman w i l l h a v e no o n e i n charge of the premises, hut representativ3S of i t s d i s t r i c t o f f i c e which i s located at Portland w i l l v i s i t the premises for p e r i o d i c a u d i t s . Those warehouses a r e l e a s e d from t h e a s s o c i a t i o n a t a n o m i n a l r e n t a l and t h e a s s o c i a t i o n r e i m b u r s e s t h e w a r e h o u s e company u n d e r c o n t r a c t r i t h t h e company f o r a l l e x p e n s e s i n c l u d i n g s a l a r y o f c u s t o d i a n , c o s t o f "bonds, s a l a r i e s and e x p e n s e s o f a u d i t o r s , and a l s o pays a monthly s t o r a g e f e e , "This arrangement i s s o l e l y f o r t h e purpose of o b t a i n i n g c r e d i t f o r t h e c o o p e r a t i v e a s s o c i a t i o n w i t h a minimum o f i n t e r f e r e n c e w i t h the u s u a l o p e r a t i o n s of the a s s o c i a t i o n . " Governor C a l k i n s r e p o r t s , i n p a r t , a s f o l l o w s : "We " b e l i e v e t h e s t a t e m e n t s c o n t a i n e d i n t h e l e t t e r o f t h o Department of A g r i c u l t u r e a r e c o r r e c t i n s o f a r a s tliey e x p l a i n t h e s i t u a t i o n , "but a r e p r o b a b l y somewhat i n c o m p l e t e . T h e r e i s no q u e s t i o n i n our m i n d s t h a t t h e l e a s e s e x e c u t e d b y t h e Lawrence W a r e h o u s e Company u n d e r i t s f i e l d w a r e h o u s i n g p l a n a r e bona f i d e l e a s e s , and t h a t a l l t h e n e c e s s a r y p r e c a u t i o n s a r e t a k e n t o i s o l a t e t h e goods a c c e p t e d i n s t o r a g e and t o m a i n t a i n p h y s i c a l c o n t r o l t h e r e o f . W h i l e i t i s t r u e t h a t t h e men p l a c e d i n c h a r g e o f t h i s o p e r a t i o n a r e , i n some c a s e s , f o r m e r e m p l o y e e s o f t h e a s s o c i a t i o n o r company i n q u e s t i o n , t h e y b e c o m e b o n a f i d e e m p l o y e e s o f t h e Lawronco Warehouse Company a n d a r c p l a c e d u n d e r bond b y t h i s company o f a t l e a s t $ 5 , 0 0 0 , a n d a r e a l s o c o v e r e d u n d e r a s u p e r i m p o s e d b l a n k e t b o n d o f $ 1 0 0 , 0 0 0 . An employment c o n t r a c t i s e n t e r e d i n t o w h i c h g i v e s t h e L a w r e n c e Warehouse Company t h e r i g h t t o d i s p e n s e w i t h t h e i r s e r v i c e s a t a n y t i m e . T h e i r c o m p e n s a t i o n i n s u r a n c e i s p a i d b y t h o Warehouse Company, and t h o Warehouse Company i s r e s p o n s i b l e f o r t h e i r s a l a r y r e g a r d l e s s of a n y a g r e e m e n t b e t w e e n t h o w a r e h o u s i n g company a n d the a s s o c i a t i o n . "A f u r t h e r i m p o r t a n t p o i n t i n t h e i r o p e r a t i o n , a s we v i e w i t , i s the f a c t that such employees are not permitted t o i s s u e wareh o u s e r e c e i p t s nor t o a u t h o r i z e r e l e a s e s , t h i s o p e r a t i o n b e i n g c a r r i e d o n i n a c e n t r a l o f f i c e o f t h e Warehouse Company b y •» 5 — e x e c u t i v e s o f t h e Company. 2 3 9 " I t i s , o f c o u r s e , , t r u e t h a t t h r o u g h c o l l u s i o n "between t h e r e p r e s e n t a t i v e o f t!he W r e l i o u S 6 Company a n d t h e owner o f t h e p l a n t » t h e g o o d s titight "be a b s t r a c t e d , o r f a l s e r e p o r t s made concerning t h e goods i n s t o r a g e . This r i s k i s p r e s e n t i n any f o r m o f w a r e h o u s i n g a n d , i n our o p i n i o n , i s n o more a p t t o o c c u r u n d e r t h e L a w r e n c e Warehouse Company's p l a n t h a n i n a n y o t h e r p l a n . T h i s company m a i n t a i n s a c o m p l e t e a u d i t i n g s y s t e m o f t h e i r own and conducts p e r i o d i c a l checks of a l l i t s a g e n t s , which not only check u p a n d v e r i f y t h e g o o d s s t o r e d , b u t a l s o c h e c k u p and m a i n t a i n a u n i f o r m l y h i g h standard of o p e r a t i o n throughout a l l of t h e i r wareh o u s e s . The Lawrence Warehouse Company h a s t e e n o p e r a t i n g u n d e r t h i s p l a n f o r a number o f y e a r s and h a s "built u p a c o n s i d e r a b l e b u s i n e s s . A l l our d e a l i n g s w i t h them h a v e i n d i c a t e d t h a t t h e y a r e f u l l y c o n v e r s a n t w i t h t h e o b l i g a t i o n s and d u t i e s o f a warehouseman and f u l l y r e a l i z e t h a t s u c c e s s i n t h e i r b u s i n e s s i s dependent upon t h e i r s t r i c t adherence to proper warehousing e t h i c s . "We h a v e n o t h e s i t a t e d t o a c c e p t t h e i r r e c e i p t s a s c o l l a t e r a l i n connection with notes o f f e r e d f o r rediscount and, while we w o u l d n o t n o r m a l l y know w h o s e w a r e h o u s e r e c e i p t s w e r e h e l d b y a bank a c c e p t i n g d r a f t s a g a i n s t r e a d i l y m a r k e t a b l e s t a p l e s i n s t o r a g e , we do know t h a t a g o o d many o f our P a c i f i c C o a s t b a n k s i s s u e a c ceptances against their r e c e i p t s . " From f u r t h e r i n f o r m a t i o n I h a v e o b t a i n e d f r o m Mr. Agnew, C o u n s e l t o the. F e d e r a l R e s e r v e B a n k o f San F r a n c i s c o and. f r o m Mr. J . Van C a r t m e l l , E x e c u t i v e V i c e P r e s i d e n t o f t h e Lawrence Warehouse Corapnay, h o w e v e r , i t a p p e a r s that : 1. The b o n d s c o v e r i n g t h e c u s t o d i a n a r e o r d i n a r y f i d e l i t y b o n d s i s s u e d t o p r o t e c t t h e w a r e h o u s e company a g a i n s t a n y l o s s e s r e s u l t i n g t o i t f r o m t h e w r o n g f u l a c t s o f i t s e m p l o y e e s and do n o t g i v e a r i g h t o f a c t i o n a g a i n s t t h e b o n d i n g company t o t h e h o l d e r s o f w a r e h o u s e r e c e i p t s who may suffer similar losses; 2. The L a w r e n c e Warehouse Company o p e r a t e s a b o u t 5 0 0 f i e l d warehouses i n t h e S t a t e s o f C a l i f o r n i a , Oregon, Washington, Michigan, I d a h o , W i s c o n s i n , I o w a , M i s s o u r i , A r k a n s a s , P e n n s y l v a n i a , Hew Y o r k , a n d Maryland, although, o n l y 250 t o 300 o f t h e s e warehouses a r e i n a c t u a l o p e r a t i o n at any one time; 3. The f i n a n c i a l s t a t e m e n t o f t h e Lawrence Warehouse Company X-7255-b - 7- 240 i n d i c a t e s o n l y a b o u t $ 3 0 0 , 0 0 0 riot w d r t h l ahd t h e e l i m i n a t i o n o f c e r t a i n q u e s t i o n a b l e i t e m s would ldfove t h e Company v e r y l i t t l e , i f a n y , a c t u a l n e t Worth $ a n d 4. W h i l e t h e w a r e h o u s e r e c e i p t s a r e i s s u e d "by a "branch o f f i c e o f t h e Warehouse Company i n a n o t h e r c i t y , t h e "branch m a n a g e r s r e l y u p o n w r i t t e n s t a t e m e n t s s i g n e d "by t h e manager o f t h e c o o p e r a t i v e a s s o c i a t i o n a n d b y t h e l o c a l c u s t o d i a n o f t h e w a r e h o u s e , who i s a f o r m e r e m p l o y e e o f t h e c o o p e r a t i v e a s s o c i a t i o n and may s t i l l b e p e r f o r m i n g s e r v i c e s f o r t h e cooperative association. From s t a t e m e n t s s u b m i t t e d on b e h a l f o f t h e Lawrence Warehouse Company, i t a p p e a r s t h a t i t s p l a n o f o p e r a t i o n c o n t e m p l a t e s t h a t t h e g o o d s w i l l be p h y s i c a l l y s e g r e g a t e d i n s e p a r a t e b u i l d i n g s or i n p o r t i o n of b u i l d i n g s p a r t i t i o n e d o f f f o r t h a t p u r p o s e and l o c k e d w i t h t h e w a r e h o u s e comp a n y ' s own l o c k s ; t h a t c o n s p i c u o u s s i g n s s h o w i n g t h a t t h e w a r e h o u s e company i s i n charge of the premises w i l l b e p l a c e d b o t h o u t s i d e and i n s i d e of tho p r e m i s e s ; t h a t the warehouse company's s t a c k cards w i l l b e p l a c e d u p o n e v e r y s t a c k o f g o o d s ; a n d t h a t a l l p r e c a u t i o n s w i l l b o t a k e n t o comp l y w i t h t h e l e g a l requirement t h a t t h e warehoused goods bo p h y s i c a l l y s e g r e g a t e d f r o m o t h e r g o o d s and s u f f i c i e n t l y p l a c a r d e d t o g i v e n o t i c e t o tho world t h a t t h e y a r e i n tho p o s s e s s i o n of t h e warehouse and not i n t h o p o s s e s s i o n of the d e p o s i t o r . There i s reason t o b e l i e v e , however, t h a t those p r e c a u t i o n s a r e not always s t r i c t l y adhered t o . For f u r t h e r d e t a i l s , t h e Board's a t t e n t i o n i s i n v i t e d t o the s t a t e m e n t s i n t h e a t t a c h e d f i l e s u b m i t t e d b y Mr. J . V a n C a r t m e l l , E x e c u t i v e V i c e P r e s i d e n t o f t h e J a w r e n c e Warehouse Company, d e s c r i b i n g i n d e t a i l t h e g e n e r a l m e t h o d s o f f i e l d w a r e h o u s i n g a d o p t e d b y t h a t company a n d i t s X-7255-Td p mm 0 mm s p e c i f i c a r r a n g e m e n t f o r w a r e h o u s i n g t h e "beans o f t h e S o u t h e r n I d a h o B e a n Growers' A s s o c i a t i o n * T h e s e d o c u m e n t s w i l l b e d i s c u s s e d i n more d e t a i l e l s e w h e r e i n t h i s memorandum. THE BOARD'S JURISDICTION. The f i f t h and s i x t h p a r a g r a p h s o f S e c t i o n 1 3 o f t h e F e d e r a l R e s e r v e A c t p r o v i d e , i n s u b s t a n c e > t h a t F e d e r a l r e s e r v e b a n k s may d i s c o u n t b a n k e r s ' a c c e p t a n c e s "which a r e s e c u r e d a t t h e t i m e o f a c c e p t a n c e b y a w a r e h o u s e r e c e i p t o r o t h e r s u c h d o c u m e n t s c o n v e y i n g or s e c u r i n g t i t l e c o v e r i n g r e a d i l y m a r k e t a b l e s t a p l e s " ; and t h e s e c o n d p a r a g r a p h o f S e c t i o n 1 3 a u t h o r i z e s t h e F e d e r a l R e s e r v e B o a r d "to d e t e r m i n e or d e f i n e t h e c h a r a c t e r of paper t h u s e l i g i b l e f o r d i s c o u n t , w i t h i n t h e meaning of t h i s A c t . S e c t i o n XI o f t h e B o a r d ' s R e g u l a t i o n A p r o v i d e s , i n s u b s t a n c e , t h a t , i n o r d e r t o b e e l i g i b l e f o r d i s c o u n t b y a F e d e r a l r e s e r v e bank,- a b a n k e r s ' a c c e p t a n c e drawn t o f i n a n c e t h e s t o r a g e o f r e a d i l y m a r k e t a b l e s t a p l e s m u s t b e s e c u r e d a t t h e t i m e o f a c c e p t a n c e "by a w a r e h o u s e , t e r m i n a l , or o t h e r s i m i l a r r e c e i p t , c o n v e y i n g s e c u r i t y t i t l e t o s u c h s t a p l e s , i s s u e d b y a part.v i n d e p e n d e n t o f t h e c u s t o m e r . " Under t h o s e p r o v i s i o n s o f t h e l a w a n d t h e B o a r d ' s r e g u l a t i o n s , t h e B o a r d lias p u b l i s h e d a number o f r u l i n g s on t h e q u e s t i o n w h e t h e r b a n k ers ' acccptancos secured by warehouse r e c e i p t s i s s u e d under v a r i o u s c i r c u m s t a n c e s a r c e l i g i b l e f o r r e d i s c o u n t b y F e d e r a l r e s e r v e b a n k s , and on February 17, 1931, a d v i s e d t h e Department of A g r i c u l t u r e t h a t warehouse r e c e i p t s i s s u e d under circumstances very similar to those presented i n thi c a s e do n o t m e e t t h e r e q u i r e m e n t s o f t h e B o a r d ' s r e g u l a t i o n . I t i s c l e a r t h a t , under the u s u a l a u t h o r i t y of a d m i n i s t r a t i v e of f i c e r s of t h e Government t o c o n s t r u e t h e a c t w h i c h t h e y a d m i n i s t e r and t h e X-7255-*b 2 4 2 w g L & r e g u l a t i o n s which t h e y have p r o s c r i b e d pursuant t h e r e t o , t h e F e d e r a l Ros e r v e B o a r d h a s t h o r i g h t t o i s s u e a d m i n i s t r a t i v e r u l i n g s on t h i s q u e s t i o n . E v e n i n t h e a b s e n c e of s u c h p o w e r , t h e r i g h t o f t h e F e d e r a l R e s e r v e B o a r d t o e x p r e s s i t s v i e w s on t h i s s u b j e c t T7h.cn r e q u e s t e d b y a d e p a r t m e n t o f t h e Government c o u l d n o t b o q u e s t i o n e d . ADVISABILITY OF RULING- BY FEDERAL RESERVE BOARD. B e c a u s e of the f a c t t h a t the r e q u e s t of t h e Department o f A g r i c u l t u r e f a r a n e x p r e s s i o n o f t h e B o a r d ' s v i e w s on t h i s q u e s t i o n a p p a r e n t l y a r i s e s out of a c o n t r o v e r s y between t h e Department of A g r i c u l t u r e and t h e L a u r e n c e Warehouse Company o v e r t h e q u e s t i o n w h e t h e r t h e Warehouse Company s h o u l d b e l i c e n s e d u n d e r t h e U n i t e d S t a t e s Warehouse A c t , some q u e s t i o n may b e r a i s e d a s t o w h e t h e r i t i s a d v i s a b l e or a p p r o p r i a t e f o r t h e F e d e r a l R e s e r v e B o a r d t o make a r u l i n g on t h i s q u e s t i o n , e s p e c i a l l y i n v i e w o f t h e f a c t t h a t no a c t u a l c a s e i s p r e s e n t e d i n v o l v i n g a n a c t u a l b a n k e r s ' acceptance secured by such r e c e i p t s which i s o f f e r e d to a Federal r e s e r v e bank f o r r e d i s c o u n t . I n v i e w o f t h e f o l l o w i n g f a c t s , h o w e v e r , i t w o u l d scorn d i f f i c u l t f o r t h e Board t o j u s t i f y a r e f u s a l to g i v e t h e Department of A g r i c u l t u r e an e x p r e s s i o n o f i t s v i o w s on t h i s q u e s t i o n : 1. B o t h t h e D e p a r t m e n t o f A g r i c u l t u r e and t h o F e d e r a l R e s e r v e B o a r d h a v e b o o n e n d e a v o r i n g f o r many y e a r s t o r a i s e t h e s t a n d a r d o f w a r e house r e c e i p t s which arc used as c o l l a t e r a l i n o b t a i n i n g c r e d i t from banks and e s p e c i a l l y t o o b t a i n a d h o r c n c c t o t h e p r i n c i p l e o f i n d e p e n d e n t c u s t o d ianship* 2 4 3 X-7255-b >4 1 0 — 2» The D e p a r t m e n t o f A g r i c u l t u r e h a s a l w a y s e n d e a v o r e d t o r e q u i r e t h e w a r e h o u s e s l i c e n s e d "by i t t o c o n f o r m t o t h e B o a r d l e r e g u l a t i o n r e q u i r i n g t h e w a r e h o u s e t o "be i n d e p e n d e n t of t h e "borrower, 3. The D e p a r t m e n t o f A g r i c u l t u r e h a s d e n i e d t h e l i c e n s e a p - p l i e d f o r "by t h e Lawrence Warehouse Company, on t h e g r o u n d t h a t t h o p r o p o s o d a r r a n g e m e n t d o c s n o t p r o v i d e d i s i n t e r e s t e d c u s t o d i a n s h i p ; and 4, In a p p l y i n g f o r a r e c o n s i d e r a t i o n of i t s A p p l i c a t i o n f o r a l i c e n s e , t h o L a w r e n c e Warehouse Company h a s r e p r e s e n t e d t h a t F e d e r a l r e s e r v e "banks a c c e p t t h e i r w a r e h o u s e r e c e i p t s w i t h o u t q u e s t i o n . M o r e o v e r , i t a p p e a r s t h a t c o m m e r c i a l "banks a r c a c c e p t i n g such warehouse r e c e i p t s i n l a r g e q u a n t i t i e s as c o l l a t e r a l f o r loans and a c c e p t a n c e c r e d i t s ; t h a t t h o F e d e r a l r e s e r v e "banks t a k e them w i t h o u t q u e s t i o n ; a n d t h a t t h e Lawrence Warehouse Company i s a d v e r t i s i n g t h a t , " C r e d i t s "based on Lawrence Warehouse Company f i e l d w a r e h o u s e r e c e i p t s a r e e l i g i b l e f o r r e d i s c o u n t a t F e d e r a l r e s e r v e "banks." I f , t h e r e f o r e , t h e B o a r d c o n c u r s i n my v i e w t h a t t h e v a l i d i t y a n d e f f e c t i v e n e s s o f l i e n s a t t e m p t e d t o h e c r e a t e d "by t h e p l e d g e o f s u c h r e c e i p t s a r e v e r y d o u b t f u l , i t w o u l d seem a p p r o p r i a t e f o r t h e B o a r d t o p u b l i s h a r u l i n g on t h i s s u b j e c t f o r t h e g u i d a n c e a n d p r o t e c t i o n o f member "banks and F e d e r a l . r e s e r v e "banks. Such a r u l - i n g , h o w e v e r , s h o u l d n o t name t h e Lawrence Warehouse Company "but s h o u l d merely d e s c r i b e the circumstances under which the warehouse r e c e i p t s arc issued. 244 X-7255wt> w 11 Mr. Tolio o f t h e D e p a r t m e n t o f Agriculture a l s o a d v i s e s t h a t t h e Lawrcnce Warehouse Company p r o p o s e s t o expand i t s "business "by e n t e r i n g i n t o s i m i l a r a r r a n g e m e n t s f o r f i e l d w a r e h o u s i n g i n many p a r t s of t h e c o u n t r y an,d that i t i s a n x i o u s t o o b t a i n some G o v e r n m e n t a l a p p r o v a l o f i t s plan. [Phis c a s e may, t h e r e f o r e , b e r e g a r d e d a s a t o s t c a s e and t h e B o a r d ' s d e c i s i o n may h a v e a n i m p o r t a n t or f a r - r e a c h i n g r e s u l t . Under t h e s e c i r c u m s t a n c e s , i t w o u l d seem t h a t t h e F e d e r a l R e s e r v e B o a r d s h o u l d bo u n u s u a l l y c a r e f u l not t o approve any p l a n o f w a r e h o u s i n g , t h e r e l i a b i l i t y and l e g a l i t y o f w h i c h i s s u b j e c t t o d o u b t and t h e a p p r o v a l o f w h i c h m i g h t e n c o u r a g e u n s o u n d p r a c t i c e s or m i g h t m i s l e a d member b a n k s t o their injury. I t w o u l d seem t h a t a l l d o u b t s a b o u t t h i s p l a n s h o u l d b e r e s o l v e d on t h e s i d e o f c o n s e r v a t i s m and c a u t i o n . FIELD TuiHEHOUSTITGr IIT GENERAL The g e n e r a l s u b j e c t of f i e l d w a r e h o u s i n g i s n o t on t r i a l h e r e , and I b e l i e v e t h a t t h e B o a r d s h o u l d c a r e f u l l y a v o i d i s s u i n g a n y s t a t e m e n t which would d i s c o u r a g e the development of f i e l d warehouses a l o n g sound l i n e s ; b e c a u s e I b e l i e v e t h a t t h e p r a c t i c e i s of g r e a t e c o n o m i c v a l u e . I n P h i l a d e l p h i a Warehouse Co. v . W i n c h e s t e r , 1 5 6 F e d . 6 0 0 , ( d e c i d e d S e p t e m b e r 5 , 1 9 0 7 ) , t h e a d v a n t a g e s of f i e l d w a r e h o u s i n g w e r e stated as follows: '•The s y s t e m o f ' f i e l d s t o r a g e ' u n d e r w h i c h t h e w a r e h o u s e company l a r g e l y , i f n o t w h o l l y , c o n d u c t s i t s b u s i n e s s , h a s much t o commend i t , i f c a r e b o t a k e n n o t t o m i s l e a d t h e p u b l i c . I t i s b o t h c o n v e n i e n t and e c o n o m i c a l . I t i s p r o m o t i v e o f t h e w e l f a r e o f m a n u f a c t u r i n g a n d commerc i a l industry. It avoids a l l necessity for unreasonably X-7255-t) - 12 - m o v i n g f r o m p l a c e t o p l a c e h e a v y and b u l k y m a t e r i a l . Sound i n d u s t r i a l p o l i c y r e q u i r e s t h a t when c o n d u c t e d with reasonable safeguards for the p u b l i c , i t should b e e n c o u r a g e d , and n o t d i s c o u n t e n a n c e d . " An e x a m i n a t i o n of c e r t a i n c i r c u l a r s i s s u e d b y t h e D e p a r t m e n t of Agriculture which are i n the attached f i l e d i s c l o s e s that the Department i s i n c l i n e d t o e n c o u r a g e f i e l d w a r e h o u s i n g - a n d t o p r e f e r i t t o subsidiary warehousing. Moreover, t h e r e i s a l e t t e r i n t h e a t t a c h e d f i l e l i s t i n g no l e s s t h a n 8 2 f i e l d w a r e h o u s e s a c t u a l l y l i c e n s e d a t t h e p r e s e n t time by t h e Department of A g r i c u l t u r e . The p r a c t i c e o f f i e l d w a r e h o u s e s , h o w e v e r , i s c o m p a r a t i v e l y new; t h e l a w on t h i s s u b j e c t i s n o t a t a l l s e t t l e d ; t h e c o u r t d e c i s i o n s a f f e c t i n g i t a r e i n h o p e l e s s c o n f l i c t ; t h e d e c i s i o n i n e a c h i n d i v i d u a l c a s e seems to depend q u i t e l a r g e l y upon t h e apparent good f a i t h or l a c k of good f a i t h o f the p a r t i e s a n d u p o n t h e c o u r t ' s f e e l i n g a s t o w h e t h e r a g r e a t e r i n j u s t i c e w i l l be done i n that p a r t i c u l a r c a s e by upholding the v a l i d i t y of t h e w a r e h o u s e r e c e i p t s or b y h o l d i n g t h a t t h e y a r e n o t v a l i d ; a n d , i n many of the c a s e s , t h e v a l i d i t y of t h e warehouse r e c e i p t s has depended upon t h e f i n d i n g s of a j u r y or a master as to the p a r t i c u l a r f a c t s i n t h a t c a s e . Under t h e s e c i r c u m s t a n c e s , i t i s i m p o r t a n t t h a t t h e B o a r d n o t i s s u e a n y r u l i n g w h i c h w i l l e n c o u r a g e t h e d e v e l o p m e n t of u n s o u n d or d a n g e r o u s p r a c tices. I n a d e c i s i o n r e n d e r e d November 1 0 , 1 9 3 0 , i n t h e c a s e o f M c G a f f e y Canning Co. v . Bank o f A m e r i c a , 2 9 4 P a c i f i c 4 5 , w h i c h i n v o l v e s t h e w a r e h o u s e r e c e i p t s o f t h e Lawrence Warehouse Company i t s e l f , t h e C a l i f o r n i a D i s t r i c t Court o f A p p e a l s , sums up t h e s i t u a t i o n a s f o l l o w s : °46 X-7255-tf" «. 13 h W a r e h o u s i n g o n t h e p r e m i s e s o f t h e owner p r o p o s i n g t o p l e d g e h i s m e r c h a n d i s e i s e f f e c t i v e when d o n e i n o b e d i e n c e t o l e g a l r e q u i r e m e n t s ; "but when d o n e o n l y f a r e n o u g h t o g e t t h e g o o d s r e p r e s e n t e d "by d o c u m e n t s w i t h o u t r e a l l y g e t t i n g t h e m s t o r e d , t h e d o c u m e n t s a r e "but s c r a p s o f p a p e r . The t e r m " f i e l d w a r e h o u s i n g " i s n o t a t a l i s m a n t o g i v e d o m i n i o n "by e n c h a n t m e n t . T a t i n g e x c l u s i v e n e s s o f p o s s e s s i o n and c o n t r o l a s t h e c r i t e r i o n , we f i n d now a n d t h e n a c a s e w h e r e i t may "be s a i d a s a m a t t e r o f l a w t h a t , t h r o u g h the f i e l d warehouse, open, e x c l u s i v e , and u n e q u i v o c a l p o s s e s s i o n p a s s e d c o n s t r u c t i v e l y t o a p l e d g e e ; and t h e n a g a i n i n o t h e r c a s e s we f i n d t h a t a s a m a t t e r o f l a w t h e p o s s e s s i o n o f t h e warehouseman " t a p e r s away" t o n o t h i n g n e s s . B e t w e e n t h e s e two e x t r e m e s l i e s t h e a g g r e g a t i o n o f c a s e s i n w h i c h t h e f a c t s a r e s u c h t h a t d i f f e r e n t men may w i t h r e a s o n r e a c h o p p o s i n g c o n c l u s i o n s . C a s e s o f t h a t c h a r a c t e r , when t r i e d "by a j u r y , must "be a l l o w e d t o g o u n d e r p r o p e r i n s t r u c t i o n s to t h e j u r y f o r t h e i r determination of the f a c t s i n controversy." I n t h i s o p i n i o n I s h a l l not endeavor t o d i s c u s s a l l of the c a s e s d e a l i n g w i t h t h e l e g a l i t y o f f i e l d w a r e h o u s e s i n g e n e r a l "but s h a l l d i s c u s s o n l y t h o s e c a s e s h a v i n g a d i r e c t "bearing u p o n t h e p r e c i s e question presented for the Board's consideration. For the Board's a d d i - t i o n a l i n f o r m a t i o n on t h i s g e n e r a l s u b j e c t , h o w e v e r , I r e s p e c t f u l l y submit w i t h t h e a t t a c h e d f i l e t h e f o l l o w i n g documents: 1. A copy of t h e important p o r t i o n s of t h e o p i n i o n o f t h e C a l i f o r n i a Court o f A p p e a l s i n t h e c a s e o f M c G a f f e y C a n n i n g Co. v s . Bank o f A m e r i c a , w h i c h c o n t a i n s t h e "best d i s c u s s i o n o f t h e d e c i d e d c a s e s on t h i s s u b j e c t which I have been a b l e t o f i n d anywhere; 2. A memorandum e n t i t l e d , " D e c i d e d C a s e s a s t o V a l i d i t y o f Warehouse R e c e i p t s " , w h i c h was p r e p a r e d b y Mr. V e s t u n d e r d a t e o f J u n e 3 0 , 1 9 3 1 ; and 3. A 92 page "Abstract of Cases I n v o l v i n g F i e l d Warehousing", w h i c h was l o a n e d t o me b y Mr. Yohe and w h i c h h e s a i d was p r e p a r e d b y X~725S-b - 14 - 2 4 7 ' c o u n s e l f o r t h e f e d e r a l i n t e r m e d i a t e C r e d i t Bank a t B e r k e l e y , C a l i f o r n i a . TEE HEQ.UIKSI 'EiITS OF THE LA.T7 M P BEG-ULA.1I0ITS. I n o r d e r f o r a b a n k e r s > a c c e p t a n c e drawn t o f i n a n c e t h e d o m e s t i c s t o r a g e of r e a d i l y marketable s t a p l e s to be e l i g i b l e f o r r e d i s c o u n t by Federal reserve banks: (1) S e c t i o n 13 of the F e d e r a l R e s e r v e Act r e q u i r e s t h a t i t be " s e c u r e d a t t h e t i m e o f a c c e p t a n c e b y a w a r e h o u s e r e c e i p t or o t h e r s u c h document c o n v e y i n g or s e c u r i n g t i t l e covering readily marketable staples"; and (2) S e c t i o n XI o f t h e B o a r d ' s R e g u l a t i o n A r e q u i r e s t h a t i t b e " s e c u r e d a t t h e t i m e o f a c c e p t a n c e b y a w a r e h o u s e , t e r m i n a l , or o t h e r s i m i l a r r e c e i p t , c o n v e y i n g s e c u r i t y t i t l e to such s t a p l e s , i s s u e d by a p a r t y independent of the customer." The r e q u i r e m e n t o f t h e l a w t h a t s u c h w a r e h o u s e r e c e i p t s must c o n v e y or s e c u r e t i t l e t o r e a d i l y m a r k e t a b l e s t a p l e s o b v i o u s l y c o n t e m p l a t e s t h a t t h e a c c e p t i n g bank s h a l l h a v e a l i e n on s u c h s t a p l e s w h i c h i s v a l i d and e n f o r c e a b l e a g a i n s t g e n e r a l c r e d i t o r s o f t h e p e r s o n f o r whose b e n e f i t such a c c e p t a n c e c r e d i t i s g r a n t e d . The r e q u i r e m e n t o f t h e B o a r d ' s r e g u l a t i o n s t h a t s u c h w a r e h o u s e r e c e i p t s b e i s s u e d b y a p a r t y i n d e p e n d e n t of t h e c u s t o m e r o b v i o u s l y i s i n t e n d e d t o r e q u i r e t h a t the a c t u a l custody of the goods be m a i n t a i n e d by an independent and d i s i n t e r e s t e d p a r t y , so t h a t t h e bank h o l d i n g t h e w a r e h o u s e r e c e i p t may b e a b l e t o i d e n t i f y and o b t a i n p o s s e s s i o n o f them . 248 X-7255-b - 15 and t h u s e n f o r c e i t s l i e n , w i t h o u t a n y d i f f i c u l t y . A l i e n on p e r s o n a l p r o p e r t y i s o f no p r a c t i c a l v a l u e u n l e s s s u c h p r o p e r t y c a n "be f o u n d a n d i d e n t i f i e d when i t "becomes n e c e s s a r y t o e n f o r c e t h e l i e n ; a n d , i f c u s t o d y o f t h i g o o d s i s n o t m a i n t a i n e d "by a d i s i n t e r e s t e d p a r t y , t h e r e i s d a n g e r t h a t t h e g o o d s may "be i m p r o p e r l y r e l e a s e d or d i s p o s e d o f . B o t h t h e r e q u i r e m e n t s o f t h e l a w and t h e r e q u i r e m e n t o f t h e B o a r d ' s r e g u l a t i o n s , t h e r e f o r e , a r e i n t e n d e d f o r t h e p r o t e c t i o n of t h e a c c e p t i n g "banks; t h e y a r e o f g r e a t p r a c t i c a l i m p o r t a n c e ; a n d a n y u n s o u n d i n t e r p r e t a t i o n t h e r e o f b y t h e F e d e r a l R e s e r v e B o a r d w o u l d "be l i k e l y t o m i s l e a d member "banks t o t h e i r i n j u r y . VALIDITY OF LIEUS GIVEN BY WAREHOUSE RECEIPTS. I t i s my c o n c l u s i o n , a f t e r a n e x a m i n a t i o n of c a s e s d e c i d e d on somewhat s i m i l a r f a c t s , t h a t no d e f i n i t e s t a t e m e n t may b e made a s t o t h e v a l i d i t y or i n v a l i d i t y o f t h e l i e n a f f o r d e d b y a p l e d g e of t h e w a r e h o u s e r e c e i p t s i s s u e d b y t h e Lawrence W a r e h o u s i n g Company u n d e r t h e f a c t s s t a t e d ; b u t t h e q u e s t i o n i d one u p o n w h i c h t h e r e i s s e r i o u s d o u b t a n d r e a s o n a b l e p r e c a u t i o n w o u l d seem t o demand t h a t s u c h r e c e i p t s s h o u l d n o t be a c c e p t e d by banks which w i s h t o be assured beyond q u e s t i o n of t h e s a f e t y of t h e i r l o a n s . Whether t h e l i e n - g i v e n b y t h e r e c e i p t w i l l b e h e l d v a l i d d e p e n d s i n a l a r g e m e a s u r e on t h e f a c t s w h i c h a r e p r e s e n t e d i n t h e p a r t i c u l a r c a s e w h i c h r e a c h e s t h e c o u r t s and t o some e x t e n t a l s o p e r h a p s on t h e j u r i s d i c t i o n i n which the question a r i s e s . While t h e e s s e n t i a l requirements f o r the c r e a t i o n of a v a l i d l i e n through the p l e d g e of warehouse r e c e i p t s have been p r e s c r i b e d i n 249 X-7255-h - 16 - d i f f e r e n t ways h y s t a t u t e s i n d i f f e r e n t S t a t e s a n d a p p a r e n t l y h a v e n e v e r "been u n i f o r m l y s t a t e d "by t h e c o u r t s , t h o s e g e n e r a l l y r e c o g n i z e d may h e summarized a s f o l l o w s : 1. The w a r e h o u s e r e c e i p t s must h e i s s u e d "by a p e r s o n , f i r m or c o r p o r a t i o n r e g u l a r l y e n g a g e d i n t h e "business o f s t o r i n g t h e g o o d s of others; 2. The warehouseman must t a k e a n d m a i n t a i n a c t u a l p h y s i c a l p o s s e s s i o n of the goods; 3. The p o s s e s s i o n o f t h e warehouseman m u s t h e e x c l u s i v e and unequivocal; 4. The w a r e h o u s e d g o o d s must be s e g r e g a t e d f r o m o t h e r g o o d s of t h e owner w h i c h a x e n o t w a r e h o u s e d ; and 5. The p o s s e s s i o n of t h e warehouseman must h e o p e n a n d n o t o r i o u s s o a s n o t t o m i s l e a d o t h e r c r e d i t o r s o f t h e owners o f t h e g o o d s . A m e r i c a n Can Co. v , E r i e P r e s e r v i n g Co. ( C . C . A . ) 1 8 3 F e d . 9 6 , 98 ( D e c i d e d Nov. 1 4 , 1 9 1 0 ) ; I n r e Rodgers ( C . C . A . ) 1 2 5 F e d , 169 ( D e c i d e d A p r i l 2 2 , 1 9 0 3 ) ; MacDonald v . A e t n a I n d e m n i t y C o . , 9 0 Conn. 4 1 5 , 9 7 A t l * 3 3 2 (Decided April 19, 1916); S e c u r i t y W a r e h o u s i n g Co. v . Hand, 2 0 6 U . S . 4 1 5 , 27 S u p . C t . 7 2 0 , 51 L . E d . 1 1 1 7 , 11 Ann. C a s e s 789 ( D e c i d e d May 2 7 , 1 9 0 7 ) ; M c G a f f e y Canning Co. v . Bank o f A m e r i c a ( C a l i f ) 2 9 4 P a c , 4 5 , 53 ( D e c i d e d November 1 0 , 13?0). I n S e c u r i t y W a r e h o u s i n g Company v . Hand ( C . C . A . ) 1 4 3 F e d . 3 2 , 4 1 , ( D e c i d e d J a n u a r y 2 , 1 9 0 6 ) a f f i r m e d 2 0 6 U . S . 4 1 5 , 27 S u p . C t . 7 2 0 , t h e C i r c u i t Court o f A p p e a l s s a i d : X-7255-b 250 - 17 • ' D e l i v e r y o f p o s s e s s i o n i s t h e v e r y l i f e o f a p l e d g e . ITo m e r e a g r e e m e n t s r e s p e c t i n g p o s s e s s i o n c a n c r e a t e i t . The c o n t r a c t of p l e d g e cannot e x i s t o u t s i d e of the f a c t of change o f p o s s e s s i o n . The p l e d g o r m a s t d i s p o s s e s s h i m s e l f o p e n l y , comp l e t e l y , u n e q u i v o c a l l y and 'without d e c e p t i v e combinations which lead third persons into error as to t h e r e a l possessor o f t h e t h i n g 1 . And t h e p l e d g e e must t a k e a n d m a i n t a i n a n o p e n , e x c l u s i v e and u n e q u i v o c a l p o s s e s s i o n . " I n t h e c a s e o f I n Re R o d g e r s , 1 2 5 F e d . 1 6 9 , 1 7 9 ( d e c i d e d A p r i l 2 2 , 1 9 0 3 and r e v e r s e d o n o t h e r g r o u n d s "by t h e Supreme Court o f t h e U n i t e d S t a t e s ) t h e C i r c u i t Court o f A p p e a l s s a i d : "Actual or symbolical p o s s e s s i o n of p e r s o n a l p r o p e r t y i n t h e p l e d g e e i s e s s e n t i a l t o i t s p l e d g e . I t i s t r u e t h a t when t h e a c t u a l d e l i v e r y i s t o a c a r r i e r or w a r e h o u s e m a n , and b i l l o f l a d i n g or w a r e h o u s e r e c e i p t i s g i v e n t h e r e f o r , t h e t r a n s f e r of t h e instrument and i t s d e l i v e r y t o t h e p l e d g e e i s r e g a r d e d i n t h e law a s d e l i v e r y of p o s s e s s i o n t o t h e p l e d g e e o f t h e p r o p e r t y r e p r e s e n t e d "by t h e i n s t r u m e n t ; b u t i t i s a n e c e s s a r y c o n d i t i o n t o t h e e x i s t e n c e of s u c h s y m b o l i c a l p o s s e s s i o n b y t h e p l e d g e e t h a t t h e p r o p e r t y i t s e l f "be i n t h e p o s s e s s i o n o f some p e r s o n o t h e r t h a n t h e p l e d g o r . Two d i f f e r e n t p e r s o n s c a n n o t "be i n t h e a c t u a l a d v e r s e p o s s e s s i o n o f t h e same p r o p e r t y o r p r e m i s e s a t t h e same t i m e , * * I n M c G a f f e y Canning Company v s . Bank o f A m e r i c a , 2 9 4 P a c i f i c , 4 5 , 5 0 , 5 3 , ( d e c i d e d November 1 0 , 1 9 2 3 ) , a w e l l c o n s i d e r e d c a s e i n v o l v i n g r e c e i p t s o f t h e Lawrence Warehouse Company, t h e C a l i f o r n i a D i s t r i c t Court o f A p p e a l s s a i d : "When t h e r e i s a c t u a l d e l i v e r y o f m e r c h a n d i s e t o a w a r e h o u s e man, w i t h a c t u a l a n d e x p l i c i t c h a n g e o f p o s s e s s i o n , a n d a w a r e h o u s e r e c e i p t i s i s s u e d and d e l i v e r e d t o o n e l e n d i n g money on t h e s e c u r i t y o f t h e m e r c h a n d i s e i n s t o r e , t h e d e l i v e r y of the warehouse r e c e i p t i s t h e l e g a l e q u i v a l e n t of the d e l i v e r y of the merchandise i t s e l f ; but such symbolic p o s s e s s i o n by the p l e d g e e i s dependent f o r i t s e f f i c a c y upon c o m p l e t e a n d a c t u a l , a s d i s t i n g u i s h e d f r o m m e r e l y f o r m a l or c o l o r a b l e , r e l i n q u i s h m e n t of p o s s e s s i o n and c o n t r o l by t h e pledgor." * * * * * * * * * * <1 fX 36-7256-1) «^0. - 18 - ^Merely c o l o r a b l e or c o n s t r u c t i v e c h a n g e o f p o s s e s s i o n a c c o m p l i s h e s n o t h i n g i n f a v o r of a p l e d g e e . T h e r e must h e open, v i s i b l e , unequivocable change of p o s s e s s i o n , m a n i f e s t e d by s u c h s u b s t a n t i a l outward s i g n s a s t o make i t e v i d e n t t o t h e w o r l d t h a t t h e c o n t r o l o f t h e owner h a s w h o l l y c e a s e d , and t h a t a n o t h e r h a s a c q u i r e d , a n d i s openly e x e r c i s i n g , the e x c l u s i v e dominion over the property." I t may b e assumed . f o r t h e purpose of t h e d i s c u s s i o n of t h i s p a r t i c u l a r p o i n t t h a t t h e Lawrence Warehouse Co. i s r e g u l a r l y e n g a g e d i n t h e b u s i n e s s of s t o r i n g goods of o t h e r s ; t h a t t h e goods a r e p l a c e d e i t h e r i n s e p a r a t e b u i l d i n g s or i n p o r t i o n s o f b u i l d i n g s w h i c h a r e p a r t i t i o n e d o f f f r o m t h e o t h e r p o r t i o n s of s u c h b u i l d i n g s ; t h a t a l l e n t r a n c e s t o s u c h b u i l d i n g s or t h e p o r t i o n s t h e r e o f u s e d a s w a r e h o u s e s a r e s e c u r e l y l o c k e d w i t h t h e w a r e h o u s e m a n ' s own l o c k s ; t h a t t h e w a r e housed goods a r e c o m p l e t e l y s e g r e g a t e d from a l l other goods of t h e d e p o s i t o r ; and t h a t t h e p r e m i s e s a r e s u f f i c i e n t l y d e s i g n a t e d w i t h l a r g e and c o n s p i c u o u s s i g n s s o p l a c e d a s t o g i v e a d e q u a t e n o t i c e t o a l l t h e w o r l d t h a t t h e p r e m i s e s and t h e g o o d s t h e r e i n a r e i n t h e c u s t o d y o f t h e warehouseman and n o t i n t h e c u s t o d y of t h e d e p o s i t o r . (There a r e i n d i c a - t i o n s that sometimes t h e s e p r e c a u t i o n s are not s t r i c t l y adhered t o by the Lawrence Warehouse Company i n a c t u a l p r a c t i c e ; b u t i t may b e assumed t h a t they a r e f o r t h e purpose of t h i s d i s c u s s i o n . ) The D e p a r t m e n t o f A g r i c u l t u r e h a s q u e s t i o n e d t h e method o f t h e Lawrence Warehouse Company, h o w e v e r , b e c a u s e t h e s o l e c u s t o d i a n o f the w a r e h o u s e d g o o d s i s a p e r s o n t r a n s f e r r e d f r o m t h e employ o f t h e d e p o s i t o r t o t h e employ o f t h e w a r e h o u s e company, who e x p e c t s t o b e r e e m p l o y e d by t h e d e p o s i t o r and may c o n t i n u e t o p e r f o r m c e r t a i n s e r v i c e s f o r t h e d e p o s i t o r during t h e p e r i o d of warehousing. This r a i s e s the f o l l o w i n g l e g a l questions: X-7255-b - 19 - 1. Whether i t c a n b e s a i d t h a t t h e warehouseman t a k e s and m a i n t a i n s a c t u a l p h y s i c a l p o s s e s s i o n of t h e goods, i n view of the f a c t that such p o s s e s s i o n i s maintained by a person so c l o s e l y i d e n t i f i e d w i t h , a n d s o much u n d e r t h e i n f l u e n c e o f , t h e d e p o s i t o r , i . e . , w h e t h e r t h e p o s s e s s i o n of s u c h c u s t o d i a n i s t h e p o s s e s s i o n o f t h e w a r e h o u s e company or t h e p o s s e s s i o n of t h e d e p o s i t o r . 2. W h e t h e r t h e p o s s e s s i o n o f t h e warehouseman c a n b e s a i d t o b e e x c l u s i v e , when t h e a c t u a l c u s t o d i a n c a n n o t r e a s o n a b l y b e e x p e c t e d t o r e f u s e t o p e r m i t h i s f o r m e r e m p l o y e r and t h e p e r s o n t o whom he l o o k s f o r f u t u r e employment t o h a v e a c c e s s t o t h e p r e m i s e s w h e n e v e r r e q u e s t e d ; and 3. W h e t h e r t h e p o s s e s s i o n o f t h e w a r e h o u s e company c a n b e s a i d t o b e u n e q u i v o c a l Khen i t i s e x e r c i s e d b y a c u s t o d i a n whom t h e d e p o s i t o r and h i s c r e d i t o r s may r e g a r d a s t h e e m p l o y e e o f t h e d e p o s i t o r r a t h e r t h a n o f t h e warehouseman. I 252 •» 2 0 — Ofr<) ^ O o X-7255-b On t h e s e p o i n t s , and on t h e e n t i r e s u b j e c t o f t h e v a l i d i t y o f w a r e h o u s e r e c e i p t s a r i s i n g o u t of f i e l d w a r e h o u s i n g , t h e law i s i n a v e r y u n s e t t l e d s t a t e ; t h e d e c i s i o n s o f t h e c o u r t s a r e i n c o n f l i c t ; and n o d e f i n i t e c o n c l u s i o n can be e x p r e s s e d w i t h any r e a l a s s u r a n c e t h a t i t w i l l be s u s t a i n e d by the c o u r t s i n any g i v e n c a s e . The c a s e o f U n i o n T r u s t Co. v . W i l s o n , 1 9 8 U.S» 5 3 0 ; 2 5 S u p . C t . 7 6 6 , ( d e c i d e d May 2 9 , 1 9 0 5 ) i s o f t e n c i t e d a s a c a s e i n w h i c h t h e Supreme Court o f t h e U n i t e d S t a t e s s u s t a i n e d t h e l e g a i l i t y o f f i e l d w a r e h o u s i n g . The q u e s t i o n p r e s e n t e d h e r e was not p r e s e n t i n t h a t c a s e , however, because t h e w a r e h o u s e company i t s e l f a c t u a l l y h e l d t h e o n l y k e y s t o t h e w a r e h o u s e a n d , w h e n e v e r t h e owner d e s i r e d a c c e s s t o t h e g o o d s , t h e w a r e h o u s e company h a d t o s e n d a man t o u n l o c k t h e w a r e h o u s e . Moreover, three of t h e j u s t i c e s of the Supreme Court d i s s e n t e d f r o m t h e m a j o r i t y o p i n i o n s u s t a i n i n g t h e v a l i d i t y of t h e w a r e h o u s e r e c e i p t s ; and Mr. J u s t i c e H o l m e s , who w r o t e t h e m a j o r i t y opinion, qualified i t as follows: "We d e a l w i t h t h e c a s e b e f o r e u s o n l y . Ifo d o u b t t h e r e a r e o t h e r c a s e s i n which the e x c l u s i v e power of t h e s o - c a l l e d b a i l e e g r a d u a l l y t a p e r s away u n t i l we reach t h o s e i n u h i c h the c o u r t s have hold as matter o f l a w t h a t t h e r e was n o a d e q u a t e b a i l m e n t . " The f o l l o w i n g l a n g u a g e of t h e C i r c u i t Court of A p p e a l s i n t h e c a s e o f I n r e C i n c i n n a t i I r o n S t o r e Company, 1 6 7 F e d . 4 8 6 , 4 9 2 , (decided Febru- ary 2 2 , 1909) i s f r e q u e n t l y c i t e d i n support of t h e p r o p o s i t i o n t h a t a f i e l d warehouseman may u t i l i z e a n e m p l o y e e o f t h e owner o f t h e g o o d s f o r his custodian: "Nor i s t h e f a c t t h a t t h e c u s t o d i a n was a n e m p l o y e o f t h e b r i d g e company, and i n i t s s o l e p a y , n e c e s s a r i l y i n c o n s i s t e n t w i t h h i s l a w f u l l y and e f f e c t u a l l y a c t i n g a s t h e r e p r e s e n t a t i v e o f t h e b a n k , ana w i t h h i s p o s s e s s i o n b e i n g regarded i n law as t h a t of the bank." T h a t , h o w e v e r , w a s a c a s e i n w h i c h t h e C i r c u i t Court o f A p p e a l s * 21 - X-7255-T) s u s t a i n e d the v a l i d i t y of c e r t a i n p r e f e r e n t i a l claims o f a bank a g a i n s t a b a n k r u p t b r i d g e company, b a s e d p a r t l y u p o n t h e w r i t t e n a s s i g n m e n t o f moneys due t h e b r i d g e company u n d e r i t s c o n t r a c t f o r t h e c o n s t r u c t i o n o f t h e b r i d g e and p a r t l y u p o n a p l e d g e o f c e r t a i n s t r u c t u r a l i r o n w h i c h was s e t a s i d e , e a r m a r k e d , and p l a c e d u n d e r t h e c u s t o d y o f o n e o f t h e b r i d g e c o m p a n y ' s emp l o y e e s , a p p o i n t e d b y t h e bank a s i t s c u s t o d i a n . I t was. n o t a e a s e i n v o l v - ing warehouse r e c e i p t s but i n v o l v e d an attempt t o p l e d g e t h e goods t h e n s e l v e s d i r e c t t o the bank. Moreover, the court s a i d : "A c h a n g e o f p o s s e s s i o n t o t h e e x t e n t o f f u r n i s h i n g n o t i c e t o t h i r d persons becomes immaterial, a s no r i g h t s of such t h i r d persons have intervened." I n t h e c a s e o f Love v . E x p o r t S t o r a g e Co. ( 0 . 0 . A . ) 1 4 5 F e d . 1 , ( d e c i d e d F e b r u a r y 1 , 1 9 0 6 ) a l u m b e r company l e a s e d i t s p r e m i s e s t o a w a r e h o u s e company and t h e w a r e h o u s e company i s s u e d r e c e i p t s a g a i n s t t h e l u m b e r s t o r e d on t h e p r o m i s e s . The w a r e h o u s e company w a s e n g a g e d i n w a r e h o u s i n g b u s i n e s s t h r o u g h o u t s e v e r a l s t a t e s b u t h a d n o w a r e h o u s e o f i t s own. In arranging f o r warehousing of t h e lumber i n q u e s t i o n i t s e n t i t s S t a t e a g e n t t o t h e p r e m i s e s t e m p o r a r i l y , and p i l e s o f l u m b e r wore numbered, d e s i g n a t e d and p l a c a r d e d b y t h i s a g e n t and b y a n e m p l o y o o o f t h e l u m b e r company. This e m p l o y e e w a s d e s i g n a t e d a s c u s t o d i a n f o r t h e w a r e h o u s e company and i t w a s p r o v i d e d b y c o n t r a c t t h a t h o s h o u l d bo p a i d § 1 p e r month f o r h i s s e r v i c e . He a c t u a l l y r e c e i v e d n o t n i n g , h o w e v e r , e x c e p t h i s w a g e s f r o m t h e l u m b e r company. The c u s t o d i a n w a s b o n d e d i n t h e amount o f $ 5 , 0 0 0 . The l u m b e r company was r e q u i r e d t o p a y c o m p e n s a t i o n f o r s t o r a g e o f t h o l u m b e r , and t o r e i m b u r s e t h e s t o r a g e company f o r a l l e x p e n s e s c o n n e c t e d w i t h t h e s t o r age. The c u s t o d i a n w a s s t i l l s u b j e c t t o i n s t r u c t i o n s f r o m h i s s u p e r i o r on t h e p r e m i s e s , b u t n o r e g u l a r b u s i n e s s o f t h o company v a c t r a n s a c t e d t h e r e a f t e r the s t o r a g e c o n t r a c t was e n t e r e d i n t o . The w a r e h o u s e r e c e i p t s 22 w e r e p l e d g e d with, t h e b a n k a s s e c u r i t y f o r a l o a n . X-7255-b After the bankruptcy of t h e l u m b e r company i t b e c a m e m a t e r i a l t o d e t e r m i n e t h e v a l i d i t y Of t h e w a r e h o u s i n g a r r a n g e m e n t and o f t h e l i e n c r e a t e d b y t h e r e c e i p t s . The c o u r t u p - h e l d the v a l i d i t y of t h e l i e n , t a k i n g the p o s i t i o n t h a t t h e r e had b e e n a s u f f i c i e n t d e s i g n a t i o n o f t h e s t o r e d l u m b e r , and s a i d : " I t i s unimportant t h a t a t the t i m e of h i s appointment d s c u s t o d i a n h e w a s t h e s e r v a n t o f t h e hardwood company and c o n t i n u e d s u c h a f t e r h i s a p p o i n t m e n t and r e c e i v e d n o o t h e r p a y t h a n t h e w a g e s p a i d h i m b y t h e hardwood company * • ' * . I t i s w e l l s e t t l e d i n c a s e s of t h i s s o r t t h a t t h e w a r e h o u s e m a n may a c q u i r e and h o l d e x c l u s i v e c o n t r o l and p o s s e s s i o n o f t h e g o o d s i n s u c h a way and u n d e r s u c h c i r cumstances." T h a t c a s e was d e c i d e d i n 1 9 0 6 , h o w e v e r , and o t h e r c a s e s d e c i d e d s i n c e t h a t d a t e show c l e a r l y t h a t t h e l a w on t h i s p o i n t i s n o t w e l l s e t t l e d . I n t h e c a s e o f Dunn v . T r a i n , 125 F e d . 2 2 1 , 2 2 4 , ( d e c i d e d S e p t e m b e r 2 9 , 1903) t h e C i r c u i t Court of Appeals s a i d : "We a r e n o t aware o f a n y a b s o l u t e r u l e o f l a w w h i c h w o u l d r e n d e r a c t u a l p o s s e s s i o n and d o m i n i o n i n o p e r a t i v e , and a p l e d g e i n v a l i d b e c a u s e t h e k e e p e r s e l e c t e d t o p r o t e c t t h e p r o p e r t y was i n the employ of t h e p l e d g o r . " T h i s , h o w e v e r , was a n o t h e r c a s e i n v o l v i n g a p l e d g e o f g o o d s t h e m s e l v e s d i r e c t t o t h e c r e d i t o r ; and jao w a r e h o u s e r e c e i p t s w e r e i n v o l v e d . I n t h e c a s e o f P h i l a d e l p h i a Warehouse Co. v . W i n c h e s t e r , 1 5 6 F e d , 6 0 0 , ( d e c i d e d S e p t e m b e r 5 , 1 9 0 7 ) w h e r e a f i e l d w a r e h o u s i n g a r r a n g e m e n t was e n t e r e d i n t o and a d e q u a t e p r e c a u t i o n s w e r e t a k e n t o p u t t h e p u b l i c on n o t i c e t h a t t h e g o o d s w o r e i n t h e p o s s e s s i o n of a warehouseman b u t t h e a c t u a l c u s t o d i a n o f t h e g o o d s was t h e t r e a s u r e r of t h e p l e d g o r company, t h e c o u r t d e f i n i t e l y h e l d t h a t the law does not render an o f f i c e r or agent of t h e pledgor incompetent t o be the c u s t o d i a n of t h e p l e d g e d p r o p e r t y , where t h e p a r t i e s s o a g r e e ; b u t t h i s was a d e c i s i o n o f a t r i a l c o u r t , n o a p p e a l was - 25 - X-7255-b t a k e n , and t h e d e c i s i o n i s not o f any g r e a t v a l u e a s a p r e c e d e n t . The c a s e o f A m e r i c a n Can Co. v . E r i e P r e s e r v i n g C o . , 1 7 1 F e d . 5 4 0 , 5 4 8 , ( D e c i d e d F e b r u a r y 2 0 , 1 9 0 9 ) , 1 8 3 F e d . 9 6 , ( D e c i d e d November 1 4 , 1 9 1 0 ) w h i c h a p p a r e n t l y i s r e l i e d u p o n v e r y s t r o n g l y b y t h e L a w r e n c e Warehouse Comp a n y as s u s t a i n i n g t h e v a l i d i t y o f i t s r e c e i p t s , i s a l s o o f v e r y d o u b t f u l value as a precedent. I t was r e a l l y a combination of s e v e r a l c a s e s . I n one o f t h e s e c a s e s ( 1 7 1 F e d . 5 4 8 ) , w h e r e g o o d s o n t h e p r e m i s e s o f t h e P r e s e r v i n g Company w e r e c o n s p i c u o u s l y marked a s b e l o n g i n g t o a bank and t h e b a n k e m p l o y e d an e m p l o y e e o f t h e P r e s e r v i n g Company a s i t s c u s t o d i a n and t h r o u g h h i m e x e r c i s e d e x c l u s i v e d o m i n i o n and c o n t r o l o v e r t h e p r o p e r t y , t h e t r i a l c o u r t s u s t a i n e d t h e v a l i d i t y o f t h e p l e d g e , and s a i d t h a t , "There was no l e g a l o b j e c t i o n t o t h e employment o f Wode b y t h e b a n k a s c u s t o d i a n o f t h e p r o p e r t y o r t o t h e s t o r i n g of t h e p r o p e r t y i n t h e d e f e n d a n t ' s w a r e house." I n a n o t h e r o f t h e s e c a s e s ( 1 7 1 F e d . 5 4 0 ) , where a w a r e h o u s e company u n d e r t o o k t o w a r e h o u s e g o o d s on p r e m i s e s l e a s e d f r o m t h e P r e s e r v i n g Company, e m p l o y e d t h e P r e s e r v i n g Company's s u p e r i n t e n d e n t t o a c t a s i t s c u s t o d i a n , a n d f a i l e d t o s e g r e g a t e and earmark t h e g o o d s , t h e t r i a l c o u r t h e l d t h a t no v a l i d p l e d g e was c r e a t e d , s i n c e t h e p l e d g o r n e v e r p a r t e d w i t h t h e p o s s e s s i o n of t h e p r o p e r t y ; but s a i d t h a t , "It i s n o t i n t e n d e d t o hold t h a t t h e p r o p e r t y p l e d g e d a s c o l l a t e r a l s e c u r i t y may n o t b e s t o r e d b y t h e p l e d g e e a t s u c h p l a c e a s h e s e l e c t s , or t h a t t h e w a r e h o u s i n g company c a n n o t d e s i g n a t e as c u s t o d i a n an employee of the p l e d g o r . " On a p p e a l , b o t h c a s e s w e r e c o n s i d e r e d t o g e t h e r and b o t h d e c i - t s i o n s were a f f i r m e d (185 Fed. 9 6 ) . The C i r c u i t Court o f A p p e a l s , h o w e v e r , did not e x p r e s s l y adopt the view of the t r i a l court t h a t t h e r e i s no l e g a l o b j e c t i o n t o t h e employment o f an e m p l o y e e o f t h e p l e d g o r a s t h e c u s t o d i a n 257 ~ 24 - X-7255-b o f t h e p l e d g e e o r o f t h o warehouseman w h o s e r e c e i p t s a r o p l e d g e d . On t h e contrary, the court said: "Warehouse r e c e i p t s w o u l d g i v e c o n s t r u c t i v e p o s s e s s i o n of goods a c t u a l l y warehoused; b u t i t i s p l a i n t h a t t h e w a r e h o u s i n g company d i d n o t m a i n t a i n a warehouse i n any proper s e n s e , b e c a u s e i t had no e x c l u s i v e and u n e q u i v o c a l p o s s e s s i o n . There i s n o p r e t e n s e t h a t e i t h e r S h e r i d a n o r Wode wore w a r e h o u s e m e n a t a l l . Y e n n i v . McNamee, 4 5 II.Y. 6 1 4 . T h e r e f o r e t h e h o l d e r s o f t h e s e r e c e i p t s who had n o a c t u a l p o s s e s s i o n had n o c o n s t r u c t i v e p o s s e s s i o n e i t h e r . The Bank o f N o r t h C o l l i n s h a s , however, b e e n found both by the s p e c i a l master and t h e j u d g e o f t h o C i r c u i t Court t o h a v e a c t u a l l y s e t a p a r t and marked and k e p t i n i t s own c u s t o d y t h e g o o d s d e s c r i b e d i n i t s r e c e i p t s w h i c h r e m a i n e d u n d i s t u r b e d down t o t h o t i m e r e c e i v e r s w e r e a p p o i n t e d . Wo w i l l a d o p t t h e c o n c l u s i o n o f the court below as t o i t s claim a l s o because i t did have a c t u a l p o s s e s s i o n and a v a l i d l i e n . " I n S e c u r i t y W a r e h o u s i n g Co. v . Hand ( C . C . A . ) 145 F e d . 3 2 , ( d e c i d e d * J a n u a r y 2 , 1 9 0 6 ) a f f i r m e d 8 0 6 U . S . 4 5 , 27 S u p . C t . 720 (May 2 7 , 1 9 0 7 ) , a k n i t t i n g company l e a s e d a p o r t i o n of i t s p r e m i s e s t o a w a r e h o u s e company and t h e l a t t e r * i s s u e d w a r e h o u s e r e c e i p t s a g a i n s t t h e g o o d s o f t h e k n i t t i n g comp a n y s t o r e d on s u c h l e a s e d p r e m i s e s . The l e a s e d p r e m i s e s w o r e s e p a r a t e d f r o m the remainder of t h e b u i l d i n g b y a s l a t t e d e n c l o s u r e p r o v i d e d w i t h a door which was l o c k e d w i t h a p a d l o c k on w h i c h was s t a m p e d , i n s m a l l l e t t e r s , t h e f a c t t h a t t h o p r e m i s e s w e r e t h o s e o f t h e w a r e h o u s e company. T h e r e w a s , howc-vcr, no adequate d e s i g n a t i o n or marking of t h e goods nor of t h e l e a s e d p r e m i s e s showi n g t h a t t h e w a r e h o u s e company had p o s s e s s i o n . The c u s t o d i a n s i n c h a r g e o f t h e w a r e h o u s e g o o d s w e r e e m p l o y e e s o f t h e k n i t t i n g company. All expenses i n c i d e n t t o t h e s t o r i n g a r r a n g e m e n t wore c o l l e c t e d f r o m t h e k n i t t i n g company. The l e a s e was f o r a n o m i n a l sum o n l y . The c u s t o d i a n T s s a l a r y up t o $ 5 p e r month was r e i m b u r s e d b y t h e k n i t t i n g company. The k e y t o t h e s l a t t e d e n - c l o s u r e was k e p t b y t h e c a s h i e r of t h e k n i t t i n g company, t h e c u s t o d i a n , on a r i n g w i t h o t h e r k e y s u s e d i n t h e b u s i n e s s of t h e k n i t t i n g company; t h i s 258 » 25 - X-7255-b bunch o f k e y s was a c c e s s i b l e t o t h e manager o f t h e k n i t t i n g company d u r i n g the c a s h i e r ' s absence. The C i r c u i t C o u r t o f A p p e a l s h e l d t h a t t h i s w a s n o t a p u b l i c w a r e h o u s e w i t h i n t h e m e a n i n g o f t h e W i s c o n s i n l a n and f u r t h e r t h a t t h e a r r a n g e m e n t d i d not g i v e a v a l i d p l e d g e to t h e h o l d e r s of t h e r e c e i p t s . The c o u r t s a i d : "So f a r f r o m t h e s e c u r i t y c o m p a n y ' s m a i n t a i n i n g an o p e n , e x c l u s i v e , u n e q u i v o c a l p o s s e s s i o n d u r i n g t h e two y e a r s t h i s a r r a n g e m e n t w a s c a r r i e d o n , i t s e e m s t o u s t h a t t h e s e c u r i t y comp a n y m i g h t a s w e l l h a v e b e e n e l i m i n a t e d , a n d t h e k n i t t i n g company h a v e e m p l o y e d i t s own s t o c k k e e p e r s and s h i p p i n g c l e r k s a s c u s t o d i a n s f o r i n t e n d i n g l e n d e r s , d i r e c t l y , i n s t e a d of i n d i r e c t l y through t h e s e c u r i t y company." I n a f f i r m i n g t h e d e c i s i o n o f t h e C i r c u i t Court o f A p p e a l s , t h e S u preme C o u r t o f t h e U n i t e d S t a t e s s a i d : »* * * T h e r e was s c a r c e l y a s e m b l a n c e o f an a t t e m p t a t s u c h c h a n g e o f p o s s e s s i o n f r o m t h e h a n d s o f t h e k n i t t i n g comp a n y t o t h e h a n d s o f t h e w a r e h o u s i n g company. A c t u a l p o s s e s s i o n o f t h e p r o p e r t y i n q u e s t i o n w a s e x e r c i s e d b y and e x i s t e d w i t h t h e k n i t t i n g company s u b s t a n t i a l l y t h e same a f t e r t h e i s s u i n g o f t h e r e c e i p t s as b e f o r e . I t i s a t r i f l i n g w i t h words t o c a l l the v a r i o u s t r a n s a c t i o n s b e t w e e n t h e k n i t t i n g company and t h e w a r e h o u s i n g company a t r a n s f e r o f p o s s e s s i o n f r o m t h e f o r m e r t o t h e l a t t e r . T h e r e was r e a l l y j\q d e l i v e r y , and no c h a n g e o f p o s s e s s i o n , c o n t i n u o u s o r o t h e r w i s e . The a l l e g e d c h a n g e w a s a mere p r e t e n s e , a sham." I n M c G a f f e y Canning Co. v . Bank o f A m e r i c a , 2 9 4 P a c . 4 5 , 5 3 , ( d e c i d e d November 1 0 , 1 9 3 0 ) a c a s e i n v o l v i n g t h e Lawrence Warehouse Company i t s e l f , t h e C a l i f o r n i a D i s t r i c t Court of A p p e a l s s a i d : "The a p p o i n t m e n t o f t h e owner, o r o n e o f h i s s t a f f , a s a w a r e h o u s e m a n ' s c u s t o d i a n of g o o d s s t o r e d , , w h i l e n o t conclusively i n e f f e c t u a l , is nevertheless a circumstance to g i v e p a u s e , and m u s t b e c a r e f u l l y w e i g h e d i n c o n n e c t i o n w i t h the other f a c t s i n evidence." I n t h e c a s e o f MacPonald v . A e t n a I n d e m n i t y C o . , 90 Conn. 4 1 5 , 97 A t l . 3 3 2 , 3 3 4 , ( d e c i d e d A p r i l 1 9 , 1 9 1 6 ) a w a r e h o u s e company was e n g a g e d i n t h e b u s i n e s s of f i e l d warehousing; i t warehoused t h e goods of the b a i l o r 259 - 26 - X-7255-b upon premises l e a s e d from the b a i l o r and issued warehouse r e c e i p t s t o the b a i l o r , who pledged thorn as c o l l a t e r a l s e c u r i t y f o r c r e d i t obtained by him. Apparently t h e b a i l o r continued i n c o n t r o l of t h e premises and goods t h e r e i n with the r i g h t to s e l l the goods, provided he continued ready t o meet the demand of t h e holder of the r e c e i p t ; b u t , j u s t b e f o r e the a p p o i n t ment of a r e c e i v e r , t h e warehouse company entered and took a c t u a l possession of t h e goods. Because the warehouse company had taken a c t u a l possession of the goods, the court upheld the v a l i d i t y of the l i e n c r e a t e d by t h e pledge of the warehouse r e c e i p t ; b u t , i n d i s c u s s i n g the s i t u a t i o n e x i s t i n g p r i o r to the t a k i n g of a c t u a l possession by the warehouse company, t h e Supreme Court of Connecticut s a i d : "The custodian remained an employe of t h e pledgor, and any p o s s e s s i o n he nay have had was t h a t of h i s employer; the repayment to h i s employer of the comp e n s a t i o n paid him as custodian i n d i c a t e s t h i s . " Likewise, in any case i n which t h e Lawrence Warehouse Company employs as i t s custodian an employee of the cooperative marketing a s s o c i a t i o n , t h e courts may hold t h a t the warehouse company had no e x c l u s i v e and unequivocal possession of t h e goods and t h a t , t h e r e f o r e , the pledge of i t s warehouse r e ceipt does not c r e a t e a v a l i d l i e n , e s p e c i a l l y in view of the f a c t t h a t t h e Lawrence Warehouse Company r e q u i r e s t h e cooperative marketing a s s o c i a t i o n to reimburse i t f o r the s a l a r y paid t o t h e custodian. There i s no c e r t a i n t y t h a t the c o u r t s w i l l adopt t h i s view; but there i s such a grave danger of i t t h a t i t would seem i n a d v i s a b l e f o r the Federal Reserve Board t o approve of such warehouse r e c e i p t s as complying with the requirements of t h e F e d e r a l Resorve Act and t h e Board's r e g u l a t i o n s . most the Board can do i s t o guess a t what the c o u r t s may hold; and i f i t guesses wrong, i t may mislead member banks t o t h e i r i n j u r y . The - 27 - X-7255-b . PRACTICAL QUESTION AS TO INDEPENDENCE OF CUSTODIAN. Even i f i t could bo said without question t h a t the warehouse r e c e i p t s issued by t h e Lawrence Warehouse Corapany under t h e circumstances described above convey or secure t i t l e to thu goods covered thereby and, t h e r e f o r e , ccciply with the requirement of Section 15 of t h e Federal Reserve Act, I am c l e a r l y of the opinion t h a t they do not comply with the requirement of t h e Board's r e g u l a t i o n s t h a t warehouse r e c e i p t s securing bankers' acceptances drawn t o f i n a n c e the storage of r e a d i l y marketable s t a p l e s must be "issued by a p a r t y independent of the customer." I t i s t r u e t h a t they a r e issued i n the name of the Lawrence Warehouse Company which i s supposedly independent of the borrower; but the a c t u a l custodian of the goods i s so much under t h e i n f l u e n c e of the borrower t h a t t h e purpose of the r e g u l a t i o n i s d e f e a t e d , This requirement of the r e g u l a t i o n i s based upon the f a c t t h a t a l i e n on p e r s o n a l p r o p e r t y i s of no p r a c t i c a l value u n l e s s i t i s poss i b l e t o i d e n t i f y and s e i z e t h e goods whenever i t becomes necessary t o enforce t h e l i e n ; and, u n l e s s the goods a r e in t h e hands of a p a r t y independent of the borrower, they ray be d i s s i p a t e d or wrongfully d i s posed of and i t may be impossible t o enforce the l i e n . While nominally on the pay r o l l of t h e warehouse company, the custodian of the goods i s a former employee of t h e cooperative a s s o c i a t i o n ; he expects to be placed again on the pay r o l l of the cooperative a s s o c i a t i o n as soon as the s t o r a g e season c l o s e s ; and, while he may draw his. pay from the warehouse company, he knows t h a t i t w i l l be reimbursed by t h e cooperative. I t i s n a t u r a l f o r him to continue to regard t h e cooperative 2m 261 — 28 — X—7255—b a s s o c i a t i o n as h i s r e a l employer and as t h e one to whom h i s a l l e g i a n c e and r e s p o n s i b i l i t y a r e due. Under such circumstances, he would n a t u r a l l y be i n c l i n e d t o accommodate the cooperative a s s o c i a t i o n i n any emergency, and, i f the o f f i c e r s of t h e a s s o c i a t i o n should request the r e l e a s e of c e r t a i n goods, urging t h a t the custodian could get t h e r e c e i p t s covering t h e goods a t a l a t e r d a t e , i t i s not u n l i k e l y t h a t in many cases the custodian would comply; and the r e c e i p t s might or might not be forthcoming l a t e r . His f u t u r e means of l i v e l i h o o d would depend upon r e t a i n i n g the good w i l l of the manager of t h e cooperative marketing a s s o c i a t i o n and he could not reasonably be expected t o be as independent nor as s t r i c t i n h i s p e r formance of h i s d u t i e s t o the warehouse company and the h o l d e r s of the warehouse r e c e i p t s as could be a person not so s i t u a t e d , Whatever may be the t h e o r e t i c a l requirements of the arrangement as t o the complete c o n t r o l and custody of the goods by the warehouseman, t h e r e f o r e , i t i s obvious t h a t in f a c t the cooperative a s s o c i a t i o n w i l l be i n a p o s i t i o n t o e x e r c i s e c o n t r o l over the goods through c o n t r o l of i t s former employee, and t h a t the a s s o c i a t i o n i n such cases may have unlimited access to t h e goods i n s t o r a g e . Under such circumstances, i t i s apparent t h a t the warehouseman w i l l not a c t u a l l y be independent of the cooperative a s s o c i a t i o n ; because the warehouse company must r e l y upon i t s l o c a l custodian, and he i s not independent of the a s s o c i a t i o n . Both Governor Calkins and the Laurence Warehouse Company argue t h a t the r i s k t h a t t h e goods w i l l bo a b s t r a c t e d or a f a l s e r e p o r t made concerning the goods i n s t o r a g e always e x i s t s and t h a t t h i s may always 262 - 29 - X-7255-b be accomplished through c o l l u s i o n between, the r e p r e s e n t a t i v e of the warehouse company and t h e owner of t h e goods; but i t i s obvious t h a t t h i s i s not so l i k e l y t o happen when the custodian of the goods i s a t r u l y independent person as i t i s where the custodian of the goods i s so much under the i n f l u e n c e of the borrower. As was s a i d by Mr. Wilbert Ward, A s s i s t a n t Vice P r e s i d e n t of the n a t i o n a l City Bank of New York, i n an address b e f o r e the Association of Reserve City Bankers, a t New Orleans, L a . , March 15, 1928: "No b a r r i e r of l e g a l s o p h i s t r y w i l l prevent the servant from hearing h i s paymaster's v o i c e " . This p r i n c i p l e has been recognized r e p e a t e d l y by the c o u r t s in cases d e a l i n g with t r u s t e e s h i p ; but I s h a l l quote only two s h o r t passages from the c o u r t ' s opinions as i l l u s t r a t i n g the p o i n t . In Michoud v . Girod, 4 How. 505, The Sup,, Ct. of t h e U.S. s a i d : " I n t h i s c o n f l i c t of i n t e r e s t s , the law wisely i n t e r p o s e s . I t a c t s not on the p o s s i b i l i t y , t h a t , i n some cases, the sense of t h a t duty may p r e v a i l over the motives of s e l f - i n t e r e s t , but i t provides against the p r o b a b i l i t y i n many c a s e s , and the danger i n a l l c a s e s , t h a t the d i c t a t e s of s e l f - i n t e r e s t , w i l l e x e r c i s e a predominate i n f l u e n c e , and supercede t h a t of duty." In S t a a t s v. Bergen, 17 E . J . Equity 554, Chief J u s t i c e Beasley s a i d : "So j e a l o u s i s the law upon t h i s p o i n t , t h a t a t r u s t e e nay not put himself i n a p o s i t i o n i n which t o be honest must be a s t r a i n on him." When the custodian of the goods depends f o r h i s f u t u r e employment and h i s means of l i v e l i h o o d upon t h e good w i l l of t h e borrower and knows t h a t the s a l a r y paid t o him by the warehouse company i s being reimbursed by the borrower, t h e r e i s a r e a l danger t h a t i t would be too much of a s t r a i n on X-7255-1 — 30 him t o r e f u s e a r e q u e s t of the borrower t o r e l e a s e the goods on a promise t h a t the warehouse r e c e i p t s m i l l be presented i n a few -lays. The Department of A g r i c u l t u r e advises t h a t , as a m a t t e r of f a c t , the requirements of the Lawrence Warehouse Company arrangement are not always s t r i c t l y observed; and t h a t , i n one case which came t o the Department* s a t t e n t i o n , i t was found t h a t goods warehoused by t h i s company had been withdrawn from s t o r a g e without the surrender of the warehouse r e c e i p t s covering them. Viewing t h i s warehousing plan from the standpoint of the cooperat i v e a s s o c i a t i o n whose goods are warehoused, i t appears t h a t , i n substance, the warehouse company does not propose a c t u a l l y t o operate the warehouse i t s e l f but proposes to lend i t s name or endorsement t o these warehousing o p e r a t i o n s , a c c e p t i n g the l e g a l r e s p o n s i b i l i t y f o r the s a f e custody of the goods s t o r e d t h e r e i n and providing supervision and i n s p e c t i o n of the warehoused goods from a d i s t a n c e , but leaving the a c t u a l o p e r a t i o n of the warehouse t o persons who, while t e c h n i c a l l y i n the employ of the warehouse, are a c t u a l l y s u b j e c t to the i n f l u e n c e of the cooperative a s s o c i a t i o n whose goods are s t o r e d . Much emphasis i s l a i d upon the f a c t t h a t the custodian of the goods i s bonded i n each case i n the amount of $5,000 and t h a t t h e r e i s a superimposed blanket bond of $100,000. These bonds, however, are f o r the p r o t e c t i o n of the warehouse company i t s e l f and do not of themselves p r o t e c t the holders of the warehouse r e c e i p t s f o r any l o s s e s which they may s u f f e r . The holders would have no r i g h t of a c t i o n against the bonding company f o r l o s s e s i n c u r r e d , and i t i s conceivable t h a t i n emergencies the warehouse company might permit the bonds to lapse or the bonding company might Digitizedp o s s i b l y cancel for FRASER the bonds. X-7255-Td - 31 The f a c t i s a l s o emphasized t h a t warehouse r e c e i p t s a r e not issued by the l o c a l custodian but by the r e g i o n a l o f f i c e s of the company and t h a t withdrawals may be e f f e c t e d only upon i n s t r u c t i o n s from a regional o f f i c e . The r e g i o n a l o f f i c e , however, i s s u e s warehouse r e c e i p t s upon the b a s i s of a statement from the owner and a r e p o r t from the l o c a l custodian as t o the goods which have been received i n s t o r a g e . Accordingly, the f a c t t h a t the r e g i o n a l o f f i c e a c t u a l l y i s s u e s the r e c e i p t s i s of l i t t l e importance so f a r as 1?he question under c o n s i d e r a t i o n i s concerned; because the company must n e v e r t h e l e s s r e l y upon the honesty and good f a i t h of the l o c a l c u s t o d i a n . While the Lawrence Warehouse Company claims t h a t i t w i l l not employ as i t s custodian the manager or any r e s p o n s i b l e o f f i c e r or even a large stockholder or r e l a t i v e of an o f f i c e r or stockholder of the d e p o s i t o r , the f a c t i s t h a t i n the only two decided cases we have d e a l i n g with t h e t r a n s a c t i o n s of t h a t company, McGafYey Canning Co. v . Bank of America and the Topper-Rnewbow c a s e , the s o - c a l l e d custodian of the Lawrence Warehouse Company, remained i n the employ of the d e p o s i t o r . I n one case he was the manager of the d e p o s i t o r company and i n the other case he was the nephew of the owner of the d e p o s i t o r company. Moreover, one of the chief advantages claimed by the Lawrence Warehouse Company f o r i t s system of f i e l d warehouses i s t h a t i t i n t e r f e r e s as l i t t l e as p o s s i b l e with the a c t i v i t i e s of the d e p o s i t o r . EXCUSES FOR FAILURE TO HAVE INDEPENDENT CUSTODIAN. I asked Mr. J . Van Cartmell, Executive Vice P r e s i d e n t of the 265 X-7255-t -> 32 -*• * Lawrence Warehouse Company, why t h a t company does not place i n charge of i t s f i e l d warehouses i t s own employees who would be independent of the depositor. He r e p l i e d , (1) t h a t i t would i n t e r f e r e too much with the op- e r a t i o n s of the d e p o s i t o r , (2) t h a t i t would add too much expense to the plan, and (3) t h a t i t i s d i f f i c u l t to f i n d independent custodians s u f f i c i e n t l y f a m i l i a r with the b u s i n e s s of the canneries and cooperative marketing a s s o c i a t i o n s and of the grade and q u a l i t i e s of the goods s t o r e d . In a telephone conversation which I had with him on t h i s s u b j e c t , on J u l y 24, 1931, Mr. Ralph M e r r i t t argued t h a t i t would be impossible t o comply with the Board*s requirements regarding independent custodianship i n so f a r as the R a i s i n Growers* Association i s concerned; because t h e r e are about 35 f i e l d warehouses s t o r i n g r a i s i n s and t h e r e are no men who know the grades of r a i s i n s except the men i n the employ of the R a i s i n Growers* A s s o c i a t i o n . I n other words, he s a i d t h a t the r a i s i n growers have i n t h e i r own employ a l l the men who have any knowledge of t h i s s u b j e c t . The answer t o these arguments i s t h a t the problem of f i n d i n g competent men t o conduct t h i s business on behalf of the warehouse company i s a business problem which the warehouse company must solve f o r i t s e l f ; and the f a c t t h a t i t may be a d i f f i c u l t business problem i s no reason why the Federal Reserve Board should s a c r i f i c e an important p r o v i s i o n of i t s r e g u l a t i o n s designed f o r the p r o t e c t i o n of i t s member banks. A mimeographed c i r c u l a r e n t i t l e d "Acceptable ' F i e l d * or •Custodian* Set-ups f o r Warehousemen l i c e n s e d or Applying f o r Licenses under the United S t a t e s Warehouse A c t , * issued by the Department of A g r i c u l t u r e under date of March 21, 1928, which i s i n the a t t a c h e d f i l e , contains the following r e quirement on t h i s s u b j e c t : 366 - 33 - X-7255-b "7. A c u s t o d i a n o r manager o f t h e w a r e h o u s e s h a l l n o t r e c e i v e a n y p a r t o f h i s s a l a r y o r w a g e s f r o m any p e r s o n d e p o s i t i n g goods i n t h e warehouse, nor s h a l l he be s u b j e c t t o r e c e i v i n g i n s t r u c t i o n s from anyone c o n c e r n i n g t h e b u s i n e s s o f t h e w a r e h o u s e e x c e p t f r o m t h e warehouseman. He n e e d n o t b e a f u l l - t i m e e m p l o y e e "of t h e warehouseman b u t h e s h a l l n o t b e a p a r t o r a f u l l - t i m e e m p l o y e e o f any d e p o s i t o r who owns o r i s i n t e r e s t e d i n a n y o f t h e g o o d s i n t h e w a r e h o u s e . He c a n n o t perform any s e r v i c e s f o r such d e p o s i t o r e i t h e r f o r compensat i o n o r o t h e r w i s e . I n o t h e r w o r d s , t h e c u s t o d i a n o r manager must b e a b s o l u t e l y i n d e p e n d e n t o f e v e r y d e p o s i t o r . A t e m p o r a r y i n d e p e n d e n c e c a n n o t b e c o n s i d e r e d ; t h a t i s , an e m p l o y e e o f a d e p o s i t o r may n o t b e e n g a g e d f o r t h e p e r i o d o f t h e l e a s e and t h e n t h e r e a f t e r r e t u r n t o t h e employ o f t h e d e p o s i t o r . " Notwithstanding t h i s requirement, which I b e l i e v e i s s t r i c t l y e n f o r c e d , t h e r e i s e n c l o s e d i n t h e a t t a c h e d f i l e a l e t t e r a d d r e s s e d t o me by Mr. Yohe u n d e r d a t e o f J u l y 2 5 , 1 9 3 1 , l i s t i n g 8 2 f i e l d w a r e h o u s e s w h i c h a r e now l i c e n s e d and d o i n g b u s i n e s s u n d e r t h e U n i t e d S t a t e s W a r e h o u s e A c t . T h i s would seem t o d e m o n s t r a t e t h a t i t i s n o t i m p o s s i b l e t o c o m p l y w i t h t h e r e q u i r e m e n t of the Board's r e g u l a t i o n t h a t warehouse r e c e i p t s u n d e r l y i n g bankers' accepta n c e s m u s t be i s s u e d b y p a r t i e s i n d e p e n d e n t o f t h e b o r r o w e r . STATEMENT SUBMITTED BY LAWRENCE WAREHOUSE COMPANY. Mr. J . Van Cartmell, Executive Vice President of t h e Lawrence Warehouse Company, has f i l e d with me s e v e r a l l e t t e r s d e s c r i b i n g t h e f i e l d warehouse o p e r a t i o n s of t h e Lawrence Warehouse Company in general and the plan proposed t o be operated f o r t h e Southern Idaho Bean Growers' Association in p a r t i c u l a r . A l l of t h e s e l e t t e r s a r e r e s p e c t f u l l y submitted herewith f o r the Board's information. He e m p h a s i z e s t h e s t a t e m e n t t h a t t h e Lawrence W a r e h o u s e Company i s an i n d e p e n d e n t p u b l i c warehouseman w h i c h h a s s u c c e s s f u l l y c o n d u c t e d f i e l d w a r e h o u s i n g o p e r a t i o n s f o r a number o f y e a r s ; t h a t t h e p r e m i s e s t o b e u s e d a s w a r e h o u s e s w i l l b e l e a s e d f r o m t h e Bean Growers' A s s o c i a t i o n u n d e r b o n a 3 6 7 - 34 - X-7255-b f i d e l e a s e s which are duly recorded? t h a t they w i l l be completely p a r t i t i o n e d off from o t h e r p a r t s of the b u i l d i n g in which they are l o c a t e d ; t h a t Lawrence Warehouse Company signs w i l l be conspicuously placed on t h e outside of t h e b u i l d i n g s and on t h e i n s i d e of the buildings5 'that the Lawrence Warehouse Company locks w i l l be placed on a l l doors t o the premises used f o r warehouse purposes; t h a t a l l commodities warehoused f o r t h i s account w i l l be conspicuous!, placarded with t h e Lawrence Warehouse Company's stack cards; and t h a t any person approaching t h e premises or the commodities can r e a d i l y see t h a t the goods are warehoused and are n o t i n the possession of the cooperative a s s o c i ation . I f f a i t h f u l l y adhered t o , t h e s e p r e c a u t i o n s a r e s u f f i c i e n t t o s a t i s f y the u s u a l l e g a l requirements t h a t t h e warehouseman's possession must be open and notorious and s u f f i c i e n t t o p l a c e c r e d i t o r s upon n o t i c e t h a t the goods are in t h e possession of a warehouseman and not i n t h e possession of t h e d e p o s i t o r . The p r i n c i p a l question b e f o r e the Board, however, i s whether the a c t u a l custodian of the goods i s independent of t h e d e p o s i t o r who d e s i r e s t o borrow a g a i n s t t h e warehouse r e c e i p t s . On t h i s question, Mr. Van Cartmell say.. "The Lav/rence Warehouse Company has not d e f i n i t e l y decided who i t w i l l employ as i t s Bonded F i e l d Warehouse Custodian (Bonded Agent) a t each of the f i v e l o c a t i o n s r e f e r r e d t o , but a n t i c i p a t e s employing one of the former employees a t each l o c a t i o n of the s u b s i d i a r y warehouse company of the Southern Idaho Bean Growers' A s s o c i a t i o n , which i s now o p e r a t i n g the warehouses. However, The Lawrence 7/arehouse Company w i l l n o t employ the p r e s e n t manager of the s u b s i d i a r y warehouse company, as we are advised he i s an o f f i c e r and d i r e c t o r of t h e Southern Idaho Bean Growers' A s s o c i a t i o n , and The Lawrence Warehouse Company does n o t employ as a F i e l d Warehouse Custodian (Bonded Agent) or a F i e l d Warehouse Watchman, an o f f i c e r , d i r e c t o r or stockholder of t h e d e p o s i t o r of commodities." From the d e s c r i p t i o n of the Lawrence Warehouse Company's method of 268 - 35 u. X-725C-b operating f i e l d warehouses f u r n i s h e d to Die by IJr. Van Cartmell, i t would seem t h a t ; i f the plan i s r i g i d l y adhered to i n a l l r e s p e c t s , t h e r e would be no l e g a l o r p r a c t i c a l o b j e c t i o n to i t , except f o r the f a c t t h a t the a c t u a l custodian of the goods i s not s u f f i c i e n t l y independent of the d e p o s i t o r who proposes t o borrow money a g a i n s t the r e c e i p t s issued by the Lawrence Warehouse Company. This i s a very important exception, however, and i n my opinion i t r e n d e r s such warehouse r e c e i p t s u n r e l i a b l e as c o l l a t e r a l both from a l e g a l standpoint and from a p r a c t i c a l s t a n d p o i n t . The Lawrence Warehouse Company places g r e a t emphasis upon the f a c t t h a t i t s r e c e i p t s are accepted as c o l l a t e r a l by numerous l a r g e commercial banks. I t i s p o s s i b l e , however, t h a t these banks do not know t h a t the a c t u a l custodian of the goods i s a former employee of the d e p o s i t o r who pledges the warehouse r e c e i p t s as c o l l a t e r a l and the banks, without making t h e i r own independent i n q u i r i e s , may be r e l y i n g upon statements by the company t o the e f f e c t t h a t , "The Lawrence Warehouse Company places each of i t s f i e l d warehouses i n the custody of a "bpnded Laurence Warehouse Company employee." Moreover, from the f a c t s s t a t e d by the c o u r t s i n the McG-affey Canning Company case and the Topper Khewbow case, which are discussed e l s e where i n t h i s memorandum, i t appears t h a t the Lawrence Warehouse Company does not always f a i t h f u l l y adhere t o the course of business described i n i t s c i r c u l a r s and i n t h e b r i e f s submitted to me by Mr. Van Cartmell. OPINIONS OF COUNSEL FOR LAWRENCE WAREHOUSE COMPANY. The a d v e r t i s i n g c i r c u l a r s of the Lawrence Warehouse Company quote the conclusions expressed by counsel r e t a i n e d by the warehouse company f o r the purpose of giving advisory opinions t o the warehouse company as t o the l e g a l i t y of i t s methods and v a l i d i t y of the warehouse r e c e i p t s i s s u e d by i t , and, of course, a l l of the opinions quoted are f a v o r a b l e t o the warehouse \\ 269 36 - company; X-7255-b As u s u a l i n such opinions, however, i t may be assumed t h a t they a r e based upon h y p o t h e t i c a l statements of f a c t submitted to counsel by the warehouse company„ which d e s c r i b e i t s system of warehousing i n i t s most favorable l i g h t . One of t h e s e opinions was by Hon. Owen J . Roberts, now an Associate J u s t i c e of the Supreme Court of the United S t a t e s , and a copy of h i s opinion i s i n the a t t a c h e d f i l e . I t i s based upon a h y p o t h e t i c a l statement of f a c t s and upon the f o l l o w i n g statement r e g a r d i n g the custodians of the warehouses: ii* * * 'if the bonded agent be a former employee of the manufacturer oo? s t o r e r of the goods, he i s t r a n s f e r r e d to the pay r o l l s of your company, i s p a i d a subs t a n t i a l s a l a r y by your company, and i s under the cont r o l and supervision of your company only." In the case now under c o n s i d e r a t i o n , however, i t appears t h a t the custodians w i l l not be under the c o n t r o l and supervision of t h e warehouse company only, but w i l l continue to perform s e r v i c e s f o r the cooperative a s s o c i a t i o n and w i l l look to i t f o r f u t u r e employment. CASES INVOLVING THE LA.WRSKCS WAREHOUSE COMPAHY. While the Board i s not c a l l e d upon to pass upon the m e r i t s of the e n t i r e p l a n of o p e r a t i o n of the Lawrence Warehouse Company, t h e r e p r e s e n t a t i v e s of t h a t company have f i l e d lengthy documents s e t t i n g f o r t h i n d e t a i l the a l l e g e d m e r i t s and advantages of t h i s plan; and, i f they a r e granted a h e a r i n g , they undoubtedly w i l l e l a b o r a t e on t h i s s u b j e c t a t g r e a t l e n g t h . The Board should^not l o s e s i g h t of the f a c t t h a t the sole questions presented f o r i t s consideration are: 1. Whether, on the f a c t s submitted by the Department of A g r i c u l - t u r e , t h e warehouse r e c e i p t s of the Lawrence Warehouse Company may be said t o convoy or secure t i t l e , a s r e q u i r e d by Section 13 of the Federal Reserve Act; and 270 - 37 2. X-7255-b Whether t h e y may be s a i d t o b e i s s u e d b y a p a r t y i n d e p e n d e n t o f t h e b o r r o w e r , a s r e q u i r e d b y S e c t i o n XI o f t h e B o a r d ' s R e g u l a t i o n A. As a m a t t e r o f g e n e r a l i n f o r m a t i o n , h o w e v e r , i t no d o u b t w i l l b e o f i n t e r e s t t o t h e B o a r d t o know s o m e t h i n g a b o u t t h e d e c i d e d c a s e s a f f e c t i n g t h e Lawrence Warehouse Company i t s e l f # THE MC GAZFSY CAMING- COMPANY CASE. I n t h e c a s e o f M c G a f f e y Canning Co. v . Bank o f A m e r i c a , 2 9 4 P a c . 4 5 , d e c i d e d November 1 0 , 1 9 3 0 , b y the C a l i f o r n i a D i s t r i c t Court o f A p p e a l , a c r e d i t o r s o u g h t t o a t t a c h c e r t a i n g o o d s i n one o f t h e f i e l d w a r e h o u s e s o f t h e Lawrence Warehouse Company; t h e Bank o f A m e r i c a , w h i c h h e l d w a r e h o u s e r e c e i p t s f o r s u c h g o o d s , i n t e r v e n e d ; t h e S h e r i f f r e l e a s e d t h e g o o d s t o t h e Bank o f A m e r i c a when t h e a t t a c h i n g c r e d i t o r r e f u s e d t o f u r n i s h h i m a n i n d e m n i t y bond; t h e Bank o f A m e r i c a s o l d t h e g o o d s and a p p l i e d t h e p r o c e e d s i n l i q u i d a t i o n o f i t s l o a n ; a n d t h e a t t a c h i n g c r e d i t o r b r o u g h t s u i t a g a i n s t t h e Bank o f A m e r i c a , t h e Lawsence Warehouse Company and t h e S h e r i f f , f o r c o n v e r s i o n . The t r i a l Court g r a n t e d a n o n - s u i t ( i . e . , d i s m i s s e d t h e c a s e ) and a n a p p e a l was t a k e n t o t h e C a l i f o r n i a D i s t r i c t Court o f A p p e a l , w h i c h h e l d t h a t t h e r e was jaot s u c h a t r a n s f e r o f p o s s e s s i o n f r o m t h e C a n n i n g Comp a n y t o t h e w a r e h o u s e eorapany t h a t i t c o u l d b e s a i d a b s o l u t e l y a s a m a t t e r o f l a w t h a t t h e r e was a n a c t u a l , o p e n , v i s i b l e , a n d u n e q u i v o c a l c h a n g e o f p o s s e s s i o n and t h a t , t h e r e f o r e , t h e d e c i s i o n o f t h e t r i a l c o u r t m u s t b e r e v e r s e d and t h e c a s e remanded f o r a t r i a l b e f o r e a j u r y . The d e f e n d a n t s s o u g h t a r e v i e w o f t h e d e c i s i o n o f t h e c o u r t o f a p p e a l s ; b u t t h e Supreme Court o f California denied i t . I u n d e r s t a n d t h a t t h e c a s e i s now p e n d i n g t r i a l on t h e m e r i t s and p r o b a b l y w i l l b e t r i e d a g a i n d u r i n g S e p t e m b e r , 1 9 3 1 , u n l e s s i t i s s e t t l e d out of c o u r t . - 38 - X-7255~b The c o u r t d e s c r i b e d t h e w a r e h o u s i n g t r a n s a c t i o n a s f o l l o w s : "In c o n s i d e r i n g t h i s q u e s t i o n i t w i l l be n e c e s s a r y t o h a v e i n mind t h e c i r c u m s t a n c e s s u r r o u n d i n g t h e d e a l i n g s b e t w e e n t h e p a r t i e s . , The c a n n i n g b u s i n e s s o f t h e V e n t u r a County Canning Company was c a r r i e d on i n a w o r k s h o p or f a c t o r y a t Camarillo, r e n t e d from the C a l i f o r n i a F r u i t C o n f e c t i o n Company, w h i c h c o n d u c t e d i t s b u s i n e s s on t h e o t h e r s i d e o f a wooden p a r t i t i o n i n t h e same b u i l d i n g . The r e n t p a y a b l e b y t h e c a n n i n g company was 12^ c e n t s p e r c a s e , and i t s o u t p u t f o r t h e c a n n i n g s e a s o n was a b o u t 5 0 , 0 0 0 c a s e s . A man named P a c e , e m p l o y e d b y t h e c a n n i n g company, s e r v e d a s i t s cookroom f o r e m a n and s u p e r i n t e n d e d t h e c a n n i n g o p e r a t i o n s , a t a s a l a r y o f $60 p e r week, "With t h e c o n s o n t o f i t s l a n d l o r d , t h e c a n n i n g company, on J u n e 2 8 , 1 9 2 3 , s u b l e t i t s e n t i r e s h o p , on a month t o month t e n a n c y , t o t h e Lawrence Warehouse Company, a t a r e n t o f $ 1 p e r m o n t h , f o r w a r e h o u s e p u r p o s e s . T h i s l e a s e was r e c o r d e d July 28, 1923. " N o t w i t h s t a n d i n g t h i s s u b l e a s e t h e c a n n i n g company c o n t i n u e d t o c o n d u c t i t s b u s i n e s s i n t h e shop a s b e f o r e , u s i n g d u r i n g t h e a p r i c o t s e a s o n 150 t o 200 e m p l o y e e s . Pace c o n t i n u e d t o a c t a s c o o k r o o m f o r e m a n ; and a t t h e same t i m e h e a c t e d a l s o a s t h e s o l e r e p r e s e n t a t i v e o f t h e Lawrence Warehouse Company on t h e p r e m i s e s . I n f a c t , h e drew h i s s a l a r y o f $ 6 0 a w e e k f r o m t h e w a r e h o u s e company, a n d t h a t company t h e n r e n d e r e d a b i l l f o r t h e amount t o t h e c a n n i n g company. P r a c t i c a l l y a l l P a c e ' s t i m e was g i v e n t o s u p e r i n t e n d e n c e of the canning p r o c e s s e s . At n i g h t an e m p l o y e e o f t h e c a n n i n g company s l e p t on a c o t i n a c u b b y - h o l e above a small o f f i c e p a r t i t i o n e d o f f from the shop, and during t h e n i g h t t h e p r e m i s e s w i t h i t s c o n t e n t s were i n h i s caa?e. "When t h e qans had b e e n f i l l e d and were r e a d y f o r s t a c k i n g , t h e y w e r e moved on t r u c k s t o a n o t h e r p a r t o f t h e shop a n d s t a c k e d b y s k i l l e d e m p l o y e e s o f t h e c a n n i n g company, i n r o w s s e t a b o u t f o u r and a h a l f f e e t a p a r t , a n d r e a c h i n g t o t h e c e i l i n g . At the time of t h e attachment t h e r e were t h r e e or f o u r such s t a c k s i n p l a c e . Frames made o f s l a t s were p l a c e d a r o u n d t h e s e v e r a l s t a c k s f o r t h e p u r p o s e o f s e p a r a t i n g t h e m and s i m p l i f y i n g t h e c o u n t . The c a n n i n g w a s d o n e a t t h e n o r t h end o f t h e s h o p and t h e s t o r a g e a t t h e s o u t h e n d . There was n o t h i n g t o s e p a r a t e the canning department from the s t o r a g e department e x c e p t an i n t e r v e n i n g space about f i f t e e n f e e t i n w i d t h , "As t h e c a s e s w e r e s t a c k e d , t h e y w e r e i n v e n t o r i e d b y P a c e who k e p t t h e r e c o r d s . He t h e n i s s u e d n o n n e g o t i a b l e w a r e h o u s e r e c e i p t s f o r t h e Lawrence Warehouse Company. The f o r m u s e d was a n a c k n o w l e d g m e n t o f r e c e i p t f o r s t o r a g e ' f o r a c c o u n t o f , and t o b e d e l i v e r e d upon t h e w r i t t e n o r d e r , w i t h o u t s u r r e n d e r o f t h i s r e c e i p t , t o Bank o f A m e r i c a , Los A n g e l e s . * " R e f e r r i n g t o t h e s e r e c e i p t s , Heck* o n e o f t h e p a r t n e r s i n t e r e s t e d i n t h e c a n n e r y , s a i d i n h i s t e s t i m o n y * 'We jumped i n t h e c a r , a s s o o n a s we g o t them, and w e n t t o L o s A n g e l e s , and — 3 9 •» X-7255-b " t o t h e Bank o f A m e r i c a , a n d g o t a l l t h e money we c o u l d . 1 "As r e c e i p t s w e r e i s s u e d , s t a c k c a r d s o f t h e Lawrence Warehouse Company were p l a c e d on t h e s t a c k s , a h o u t s i x f e e t from the f l o o r , each s p e c i f y i n g the a i s l e , , stack, a n d mark, and g i v i n g t h e d a t e , l o t number, and q u a n t i t y . T h e s e c a r d s b o r e , a l s o , t h e s t a t e m e n t , , ' W a r e h o u s e d t o Bank of America.' "When f r u i t was t o "be m a r k e t e d , a r e l e a s e w a s i s s u e d f r o m t h e Los A n g e l e s o f f i c e o f t h e Lawrence Warehouse Company on o r d e r o f t h e Bank o f A m e r i c a ; a n d , upon d e l i v e r y o f t h e r e l e a s e t o P a c e , w i t h d r a w a l of t h e q u a n t i t y d e s i g n a t e d f o l l o w e d . The c a n s v/ere t h e n l a b e l e d , p a c k e d i n c a s e s , a n d s h i p p e d b y t h e c a n n i n g company t o f i l l o r d e r s o b t a i n e d t h r o u g h b r o k e r s , who a p p e a r t o h a v e a s s u m e d r e s p o n s i b i l i t y to the bank f o r the proceeds of s a l e . "The c a n n i n g company r e a l l y p a i d P a c e ' s s a l a r y ; and t h o u g h t h e w a r e h o u s e company, a c c o r d i n g t o t h e s u b l e a s e , was c h a r g e d t h e n o m i n a l r e n t o f $ 1 p e r m o n t h , t h e r e was a n a c c o m p a n y i n g a g r e e m e n t o b l i g a t i n g t h e c a n n i n g company t o p a y t h e w a r e h o u s e company f o r i s s u i n g r e c e i p t s t h r e e c e n t s p e r c a s e f o r the f i r s t 5 0 , 0 0 0 c a s e s and l e s s e r amounts f o r a d d i t i o n a l q u a n t i t i e s . "No s i g n o f t h e V e n t u r a County Canning Company s e e m s t o h a v e b e e n d i s p l a y e d on t h e b u i l d i n g . T h e r e w a s a s i g n o f t h e C a l i f o r n i a F r u i t C o n f e c t i o n Company on t h e o u t s i d e , a n d a s i g n o f t h e Lawrence Warehouse Company i n s i d e t h e s h o p n e a r t h e s o u t h e n d . While Mr. Heck s a i d t h e w a r e h o u s e company h a d two o f i t s s i g n s on t h e o u t s i d e , h i s c o - p a r t n e r , Mr. C l a r k e , s a i d t h e r e was n o n e on t h e o u t s i d e t o h i s knowledge. For purposes of n o n s u i t the t e s t i m o n y o f Heck on t h i s p o i n t m a s t b e d i s r e g a r d e d . " , The Court t h e n s t a t e d t h e p o i n t u p o n w h i c h i t s d e c i s i o n t u r n e , follows: " I f , under t h e f a c t s of t h i s c a s e , t h e r e was a t r a n s f e r o f p o s s e s s i o n f r o m t h e c a n n i n g company t o t h e w a r e h o u s e company o f s u c h e x c l u s i v e c h a r a c t e r t h a t i t m u s t b e d e c l a r e d , a s a m a t t e r o f l a w , t h a t t h e r e was i n d i s p u t a b l e c o m p l i a n c e w i t h t h e r e q u i r e m e n t s o f s e c t i o n 3 4 4 0 , C i v i l Code, t h e n t h e j u d g m e n t o f n o n s u i t was p r o p e r l y e n t e r e d ; b u t i f a c o n t r a r y c o n c l u s i o n was r e a s o n a b l y d e d u c i b l e f r o m t h e e v i d e n c e , t h e c a s e s h o u l d have b e e n a l l o w e d t o go t o the j u r y a s the t r i e r s of the f a c t s . " t '••••yo (<»• i O , 40 * X-7255-b A f t e r i n d u l g i n g i n t h e b e s t d i s c u s s i o n o f t h e d e c i d e d c a s e s on t h i s s u b j e c t w h i c h I h a v e "been a b l e t o f i n d a n y w h e r e , t h e c o u r t c o n c l u d e d a s follows: " I n t h e d i s u c s s i o n i n w h i c h we h a v e i n d u l g e d , we a r e n o t Ibe b e u n d e r s t o o d a s i n t i m a t i n g a r y o p i n i o n u p o n t h e q u e s t i o n w h e t h e r t h e c i r c u m s t a n c e s i n e v i d e n c e d o , o r do n o t , show a c h a n g e o f p o s s e s s i o n s a t i s f y i n g t h e l a w . As i s s a i d i n B y r n e s v . Moore, 9 3 C a l . 3 9 3 , 3 9 4 , 2 9 P . 7 0 ; ' E v e r y c a s e o f t h e k i n d h e r e i n v o l v e d h a s i t s own p e c u l i a r f e a t u r e s , and must b e d e t e r m i n e d on t h e p a r t i c u l a r f a c t s w h i c h s u r r o u n d t h e g i v e n t r a n s a c t i o n or t r a n s f e r . ' We h o l d m e r e l y t h a t t h e c i r c u m s t a n c e s a r e n o t such t h a t i t can be s a i d a b s o l u t e l y a s a m a t t e r o f l a w t h a t t h e r e was an a c t u a l , o p e n , v i s i b l e , and • u n e q u i v o c a l c h a n g e o f p o s s e s s i o n . The p l a i n t i f f was t h e r e f o r e e n t i t l e d to the submission of the f a c t s to the j u r y f o r t h e i r v e r d i c t on t h i s p o i n t u n d e r a p p r o p r i a t e i n s t r u c t i o n s a s t o t h e r u l e s of law by which they should be guided." While the m a t t e r i s thus l e f t to be t r i e d by a j u r y , under p r o p e r i n s t r u c t i o n s i n the court, the f o l l o w i n g passages from the opinion of the D i s t r i c t Court o f A p p e a l s i n d i c a t e q u i t e c l e a r l y t h e c h a r a c t e r o f t h e i n s t r u c t i o n s which should be given to the jury: "Whether w a r e h o u s i n g i s c a l l e d ' f i e l d w a r e h o u s i n g ' o r b y a n y o t h e r name, i t c a n n o t be e f f e c t i v e l y c o n d u c t e d i n t h i s s t a t e without compliance with the law a s d e c l a r e d i n s e c t i o n 3 4 4 0 o f t h e C i v i l Code. M e r e l y c o l o r a b l e c o n s t r u c t i v e change of p o s s e s s i o n accomplishes n o t h i n g i n f a v o r of a p l e d g e e . T h e r e must b e o p e n , v i s i b l e , u n e q u i v o c a l c h a n g e o f p o s s e s s i o n , m a n i f e s t e d b y s u c h s u b s t a n t i a l outward s i g n s a s t o make i t e v i d e n t t o t h e w o r l d t h a t t h e c o n t r o l o f t h e owner h a s w h o l l y c e a s e d , and t h a t a n o t h e r h a s a c q u i r e d , and i s o p e n l y e x e r c i s i n g , the e x c l u s i v e dominion over the p r o p e r t y . * * * " A c t u a l c h a n g e o f p o s s e s s i o n means e x i s t i n g i n a c t , and t r u l y a n d a b s o l u t e l y c a r r i e d o u t , a s o p p o s e d to f o r m a l , p o t e n t i a l , v i r t u a l , or t h e o r e t i c a l change. * * * The p r o o f r e q u i r e d t o show a c t u a l c h a n g e o f p o s s e s s i o n i s n o t measured by any f i x e d s e t of r u l e s . Dependence must b e p l a c e d ujpon t h e f a c t s and c i r c u m s t a n c e s o f e a c h p a r t i c u l a r c a s e ; and u s u a l l y t h e d e t e r m i n a t i o n must r e s t upon t h e f i n d i n g o f t h e c o u r t o r t h e j u r y a f t e r h e a r i n g - 41 - X-7255-b "The e v i d e n c e a d d u c e d on b o t h s i d e s . * * * "The a p p o i n t m e n t o f t h e owner, o r one o f h i s s t a f f , a s a warehouseman's c u s t o d i a n of goods s t o r e d , w h i l e not conclusively i n e f f e c t u a l , i s nevertheless a circumstance t o g i v e p a u s e , and m a s t b e c a r e f u l l y w e i g h e d i n c o n n e c t i o n with the other f a c t s in evidence. * * * "In t h i s case a f o r e i g n element i s introduced "by t h e i n t e r j e c t i o n o f t h e w a r e h o u s e company b e t w e e n the p l e d g o r and t h e p l e d g e e . I f the l o a n s had been made w i t h o u t r e s o r t t o w a r e h o u s e r e c e i p t s , and t h e f r u i t h a d b e e n s t a c k e d a n d k e p t on t h e p r e m i s e s a s shown i n t h e evidence, w i t h Pace as custodian f o r the bank, t h e r e would t h e n have been the simple q u e s t i o n whether the p l e d g e e had been p l a c e d i n a c t u a l e x c l u s i v e p o s s e s s i o n and c o n t r o l . I n s t e a d of a c t u a l p o s s e s s i o n the bank c l a i m s to have o b t a i n e d symbolic p o s s e s s i o n by v i r t u e of the warehouse r e c e i p t s ; b u t t h e s e r e c e i p t s c a n h a v e no v i r t u e , u n l e s s t h e w a r e h o u s e comr p a n y h a d t h e same a c t u a l and e x c l u s i v e p o s s e s s i o n and dominion which would have boon e s s e n t i a l t o the p r o t e c t i o n of t h e bank, i f i t had a c t e d i n d e p e n d e n t l y i n r e l i a n c e on t h e g o o d s i n s t e a d o f on t h e r e c e i p t s . " As a p p l i e d t o t h e q u e s t i o n now b e f o r e t h e B o a r d , two c o n c l u s i o n s may b e r e a c h e d w i t h r e f e r e n c e t o t h e w a r e h o u s e r e c e i p t s i n v o l v e d i n t h e M c G a f f e y Canning Company c a s e : (1) That the v a l i d i t y of any l i e n c r e a t e d b y the p l e d g e o f s u c h r e c e i p t s i s e x t r e m e l y d o u b t f u l ; and (2) That t h e r e was no s e m b l a n c e o f i n d e p e n d e n t custodianship. The Lawrence Warehouse Company s t a t e s t h a t t h e M c G a f f e y 27 X»7255-4) 42 - c a s e a r o s e u n d e r t h e p r o c e d u r e f o l l o w e d "by t h a t company d u r i n g t h e y e a r 1 9 2 3 and t h a t , s i n c e t h a t t i m e t h e company, h a s a d o p t e d many a d d i t i o n a l s a f e g u a r d s and r e f i n e m e n t s i n f i e l d w a r e h o u s i n g w h i c h o f f e r much g r e a t e r s a f e g u a r d s to the p a r t i e s concerned than under i t s former p r o c e d u r e . The p r o c e d u r e d e s c r i b e d i n t h e u n p u b l i s h e d f i n d i n g s o f t h e s p e c i a l m a s t e r i n t h e r e c e n t c a s e o f W i l l i a m H. Moore, J r . , T r u s t e e i n B a n k r u p t c y o f Topper-Knewbow v . P a c i f i c F i n a n c e C o r p o r a t i o n and Lawrence Warehouse Company, c o p i e s o f w h i c h a r e i n t h e a t t a c h e d f i l e , h o w e v e r , was j u s t a s b a d i n my o p i n i o n a s t h e p r o c e d u r e a d o p t e d i n t h e M c G a f f e y c a s e , e x c e p t t h a t t h e r e was a b e t t e r s e g r e g a t i o n of the g o o d s . Both cases are a l i k e i n t h a t t h e a c t u a l c u s t o d i a n o f t h e g o o d s was a p e r s o n who r e m a i n e d i n t h e e m p l o y o f t h e d e p o s i t o r and who was more u n d e r t h e i n f l u e n c e o f t h e d e p o s i t o r t h a n u n d e r t h e i n f l u e n c e o f t h e w a r e h o u s e company. TEE TO??ER~KNEWBOW CASE. The Topper-Knewbow c a s e a r o s e i n 1 9 3 0 a n d may p r o p e r l y b e t a k e n a s a n e x a m p l e o f t h e m e t h o d s a c t u a l l y u s e d b y t h e L a w r e n c e Wareh o u s e Company a t t h e p r e s e n t t i m e . The w a r e h o u s i n g a r r a n g e m e n t was s e t up J u n e 1 0 , 1 9 2 9 ; t h e Topper-Knewbow Company w e n t i n t o b a n k r u p t c y dueli n g t h e month o f March, 1 9 3 0 ; a n d t h e s p e c i a l m a s t e r ' s r e p o r t was r e n d e r e d December 1 1 , 1 9 3 0 . 276 r 43 X-fSBSr* n The f i n d i n g s o f t h e s p e c i a l m a s t e r may b e summarized a s follows: The Topper-Knewbow Company a p p l i e d t o t h e P a c i f i c F i n a n c e C o r p o r a - t i o n f o r a l o a n o f $ 2 0 , 0 0 0 and was t o l d t h a t i t m a s t p l e d g e w a r e h o u s e r e c e i p t s f o r $30,000 worth of merchandise. The Topper-Knewbow Company t h e n r e - moved c e r t a i n w o o l e n g o o d s f r o m i t s workrooms on t h e f o u r t h a n d f i f t h f l o o r s o f t h e b u i l d i n g w h i c h i t o c c u p i e d w i t h o t h e r t e n a n t s t o a room on t h e t h i r d floor. I t l e a s e d t o t h e Lawrence Warehouse Company t h e room i n w h i c h t h e s e g o o d s were p l a c e d a n d t h e Lawrence Warehouse Company p l a c e d i t s l o c k and s i g n on t h e o n l y d o o r t h e r e t o . The Lawrence Warehouse Company e m p l o y e d a s i t s c u s t o d i a n , one Hat K l i t n i c k , a n e m p l o y e e o f t h e T o p p e r Knewbow Company r and t u r n e d t h e k e y s o v e r t o h i m . The L a w r e n c e Warehouse Company i s s u e d w a r e h o u s e r e c e i p t s f o r t h e g o o d s and t h e P a c i f i c F i n a n c e C o r p o r a t i o n made a l o a n t o t h e Topper-Knewbow Company a g a i n s t t h e p l e d g e of such r e c e i p t s . Goods w e r e f r e q u e n t l y removed t o t h e c u t t i n g room o f t h e Topper-Knewbow Company and c l o t h i n g was m a n u f a c t u r e d t h e r e f r o m , b u t i t appears t h a t o t h e r goods were s u b s t i t u t e d f o r the goods so removed. ( I t d o e s n o t a p p e a r w h e t h e r t h e c o n s e n t o f t h e w a r e h o u s e company t o s u c h r e m o v a l s and s u b s t i t u t i o n was o b t a i n e d ; b u t Mr. Van C a r t m e l l t o l d me t h a t t h e w a r e h o u s e company h a d t o p a y t h e f i n a n c e company $ 3 2 0 0 f o r g o o d s w h i c h were m i s s i n g * and o b t a i n e d r e i m b u r s e m e n t f r o m t h e b o n d i n g c o m p a n y . ) The Warehouse Company p a i d K l i t n i c k $ 8 0 p e r month b u t h e c o n t i n u e d t o work f o r t h e Topper-Knewbow Company and e n d o r s e d h i s p a y c h e c k e a c h month o v e r t o t h e Topper-Knewbow Company w h i c h d e p o s i t e d i t t o i t s own a c c o u n t , a l t h o u g h t h i s was n o t known t o t h e Lawrence Warehouse Company. Klitnick s o m e t i m e s d e l e g a t e d h i s a u t h o r i t y and p e r m i t t e d o t h e r e m p l o y e e s o f t h e 277 > 44 ~ X-7255-b Topper-Knewbow Company t o h a v e a c c e s s t o t h e w a r e h o u s e . The s p e c i a l m a s t e r c o n c l u d e d t h a t t h i s was a p u b l i c warehouse; t h a t t h e w a r e h o u s e company t o o k a c t u a l p h y s i c a l p o s s e s s i o n o f t h e g o o d s ; t h a t s u c h p o s s e s s i o n was o p e n , n o t o r i o u s and e x c l u s i v e ; and t h a t t h e w a r e house r e c e i p t s were v a l i d . T h e r e f o r e , when t h e Topper-Knewbow Company w e n t i n t o b a n k r u p t c y and l i t i g a t i o n e n s u e d b e t w e e n t h e t r u s t e e s r e p r e s e n t i n g t h e g e n e r a l c r e d i t o r s and t h e P a c i f i c F i n a n c e Company w h i c h h e l d t h e w a r e h o u s e r e c e i p t s , t h e m a s t e r h e l d t h a t t h e P a c i f i c F i n a n c e Company h a d a v a l i d l i e n and was e n t i t l e d t o t h e g o o d s a n d t h e U n i t e d S t a t e s D i s t r i c t Court approved t h i s f i n d i n g . The l e g a l i t y o f t h e l i e n was t h u s s u s t a i n e d ; b u t i t a p p e a r s t h a t p a r t of the goods were not t h e r e ; and, under the p r a c t i c e p e r m i t t e d , i t i s e n t i r e l y p o s s i b l e t h a t none o f them w o u l d b e t h e r e . Moreover, i t i s pe2>- f e c t l y o b v i o u s t h a t i n t h i s c a s e , i t c o u l d n o t be s a i d t h a t t h e r e was any r e a l independent c u s t o d i a n s h i p of the warehoused g o o d s . FINANCIAL RESPONSIBILITY OF LAWRENCE WAREHOUSE COMPAUY. I t may b e c o n t e n d e d t h a t , s i n c e t h e Lawrence Warehouse Company i s i n d e p e n d e n t o f t h e b o r r o w e r and a c c e p t s f u l l l e g a l r e s p o n s i b i l i t y f o r the goods r e p r e s e n t e d by i t s warehouse r e c e i p t s , the f a c t t h a t the a c t u a l c u s t o d i a n o f t h e g o o d s i s n o t i n d e p e n d e n t of t h e b o r r o w e r i s u n i m p o r t a n t ; b e c a u s e t h e Lawrence Warehouse Company w o u l d b e l i a b l e t o t h e h o l d e r o f a n y w a r e h o u s e r e c e i p t who i s damaged b y a f a i l u r e t o d e l i v e r t h e g o o d s t o h i m upon p r e s e n t a t i o n o f t h e r e c e i p t , The v a l u e o f t h e l e g a l r e s p o n s i - b i l i t y o f t h e Lawrence Warehouse Company, h o w e v e r , d e p e n d s u p o n i t s financial responsibility* 278 w 45 « X-7255-b On t h i s s u b j e c t a b a l a n c e s h e e t o f t h e Lawrence Warehouse Company a s o f December 3 1 , 1 9 3 0 , f u r n i s h e d , t o Mr. Agnew b y t h a t company a n d e n c l o s e d i n t h e a t t a c h e d f i l e , w o u l d seem t o s p e a k f o r i t s e l f . It l i s t s the follow- i n g a s s e t s and l i a b i l i t i e s : LAJTBEIICE WAREHOUSE COMPAFT. BALANCE SHEET DECEMBER 31 1 9 5 0 A S S E T S : Cash Notes Receivable Accounts Receivable Supplies Equipment Real E s t a t e & Improvements Stocks & Misc. Investments Prepayments • B r a n c h D e v e l o p m e n t Cost •Leaseholds •Good W i l l 14 5 166 12 149 21 5 59 129 77 50 $ 061 608 956 743 481 373 238 474 439 500 000 79 44 54 06 59 29 00 38 53 00 00 90 60 7 127 000 024 211 390 240 141 000 000 868 00 92 00 93 CO 01 00 00 76 $ 6 9 1 6 7 6 62 L I A B I L I T I E S : Motes Payable Audited Vouchers & A c c t g . Payable Deferred L i a b i l i t i e s A c c o u n t s w i t h A f f i l i a t e d Cos. D e f e r r e d Revenue C r e d i t s Reserve f o r Depreciation *Common S t o c k O u t s t a n d i n g •Preferred Stock Outstanding •Surplus $ 105 100 100 101 $ 6 9 1 8 7 6 62 A t t e n t i o n i s i n v i t e d t o t h e s o - c a l l e d a s s e t s marked w i t h a s t e r i s k s . 279 ta 46 - X~7255~b With t h e s e o b v i o u s l y q u e s t i o n a b l e a s s e t s e l i m i n a t e d , the s t a t e m e n t would i n d i c a t e an a c t u a l n e t worth of only $ 4 4 , 9 2 9 , even i f the o t h e r a s s e t s , s u c h a s n o t e s and a c c o u n t s r e c e i v a b l e , a r e a c c e p t e d w i t h o u t q u e s t i o n . I n t h i s c o n n e c t i o n i t must b e remembered t h a t t h e Lawrence Warehouse Company o p e r a t e s a p p r o x i m a t e l y 500 f i e l d w a r e h o u s e s , a l t h o u g h o n l y 2 5 0 t o 3 0 0 a r e i n a c t m l o p e r a t i o n a t a n y one t i m e . A l t h o u g h t h e Lawrence Warehouse Company w o u l d b e l e g a l l y l i a b l e t o a n y p e r s o n h o l d i n g a n e g o t i a b l e warehouse r e c e i p t i s s u e d b y i t , if t h e g o o d s a r e n o t f a i t h f u l l y k e p t and d e l i v e r e d t o s u c h h o l d e r , i t s f i n a n c i a l r e s p o n s i b i l i t y , or r a t h e r i t s f i n a n c i a l a b i l i t y to d i s c h a r g e such l e g a l l i a b i l i t y , i s questionable. I t p l a c e s much e m p h a s i s upon t h e f a c t t h a t e a c h o f i t s c u s t o d i a n s i s b o n d e d i n t h e sum o f $ 5 , 0 0 0 and t h a t t h e r e i s a b l a n k e t b o n d of $ 1 0 0 , 0 0 0 s u p e r i m p o s e d upon s u c h i n d i v i d u a l b o n d s . A l l of t h e s e bonds, however, are m e r e l y f i d e l i t y b o n d s t o p r o t e c t t h e Lawrence Warehouse Company a g a i n s t l o s s e s r e s u l t i n g f r o m t h e f r a u d u l e n t o r d i s h o n e s t a c t s o f i t s own e m p l o y e e s a n d t h e y w o u l d g i v e t h e h o l d e r o f t h e w a r e h o u s e r e c e i p t s no r i g h t o f a c t i o n a g a i n s t t h e b o n d i n g company. I t may b e a r g u e d t h a t t h i s p r o t e c t i o n w o u l d e n a b l e t h e Lawrence Warehouse Company t o p r o t e c t i t s c u s t o m e r s ; b u t , i f t h e Lawrence Warehouse Company s h o u l d g e t i n t o f i n a n c i a l d i f f i c u l t i e s , i t m i g h t f a i l t o p a y t h e premiums on t h e s e b o n d s o r t h e b o n d s m i g h t b e c a n celled. The L a w r e n c e Warehouse Company i s owned and c o n t r o l l e d b y t h e Lawrence Warehouse C o r p o r a t i o n , a h o l d i n g c o r p o r a t i o n w h i c h a l s o owns s e v e r a l o t h e r c o m p a n i e s i n C a l i f o r n i a ; and t h i s h o l d i n g company h a s n o t i f i e d R. G> Dunn & C o . , t h e m e r c a n t i l e c r e d i t a g e n c y , t h a t i t s b o a r d 280 fc» 4ft H X-7S5Ms of d i r e c t o r s h a s a d o p t e d a r e s o l u t i o n t o t h e e f f e c t t h a t t h e c o r p o r a t i o n i s r e s p o n s i b l e f o r t h e i n d e b t e d n e s s o f t h e Lawrence Warehouse Company contracted in the usual course of b u s i n e s s . I t i s v e r y d o u b t f u l , how- e v e r , w h e t h e r t h i s a c t i o n o f t h e d i r e c t o r s of t h e Lawrence Warehouse C o r p o r a t i o n would g i v e r i s e t o a v a l i d l e g a l c l a i m a g a i n s t t h e c o r p o r a t i o n i n f a v o r o f c r e d i t o r s o f t h e Lawrence Warehouse Company* d i f f i c u l t y of compliance with it. S . warehouse a c t . I t a p p e a r s t h a t t h e p r o p o s e d a r r a n g e m e n t b e t w e e n t h e Lawrence Warehouse Company and t h e Idaho Bean Growers r C o o p e r a t i v e A s s o c i a t i o n contemplates that the cooperative a s s o c i a t i o n w i l l not only pay the w a r e h o u s e company a m o n t h l y s t o r a g e f e e , b u t w i l l a l s o r e i m b u r s e t h e w a r e h o u s e company u n d e r c o n t r a c t f o r a l l e x p e n s e s , i n c l u d i n g s a l a r y o f c u s t o d i a n , c o s t o f b o n d , s a l a r i e s and e x p e n s e s of a u d i t o r s . S e c t i o n 13 o f t h e U. S. Warehouse A c t p r o v i d e s a s f o l l o w s : "That e v e r y warehouseman c o n d u c t i n g a w a r e h o u s e l i c e n s e d u n d e r t h i s Act s h a l l r e c e i v e f o r storage t h e r e i n , so f a r as i t s c a p a c i t y p e r m i t s , any a g r i c u l t u r a l p r o d u c t o f t h e k i n d c u s t o m a r i l y s t o r e d t h e r e i n b y h i m w h i c h may b e t e n d e r e d t o him i n a s u i t a b l e c o n d i t i o n f o r w a r e h o u s i n g , i n t h e u s u a l manner i n t h e o r d i n a r y and u s u a l c o u r s e o f b u s i n e s s , w i t h o u t making a n y d i s c r i m i n a t i o n b e t w e e n p e r s o n s d e s i r i n g t o a v a i l t h e m s e l v e s of warehouse f a c i l i t i e s . " I f , t h e r e f o r e , any p e r s o n o t h e r t h a n t h e Idaho Bean Growers C o o p e r a t i v e A s s o c i a t i o n s h o u l d demand i t , t h e Lawrence Warehouse Company would be r e q u i r e d t o r e c e i v e b e a n s f o r s t o r a g e f r o m s u c h o t h e r p e r s o n s ; and i t would be e x t r e m e l y d i f f i c u l t t o work o u t a n y measure o f c o m p e n s a t i o n f o r s u c h s t o r a g e s e r v i c e r e n d e r e d t o p e r s o n s o t h e r than t h e c o o p e r a t i v e ~ 48 - X-7255-b a s s o c i a t i o n which would not v i o l a t e the p r o h i b i t i o n a g a i n s t d i s c r i m i n a t i o n . I f s u c h o t h e r p e r s o n s a r e c h a r g e d a s t o r a g e f e e o n l y , i t w o u l d amount t o a d i s c r i m i n a t i o n a g a i n s t the c o o p e r a t i v e a s s o c i a t i o n ; and, i f such o t h e r p e r s o n s a r e r e q u i r e d t o p a y a m o n t h l y s t o r a g e f e e and a l s o t o r e i m b u r s e t h e w a r e h o u s e company f o r a l l e x p e n s e s i n c l u d i n g s a l a r y o f c u s t o d i a n , c o s t o f b o n d , s a l a r i e s and e x p e n s e s o f a u d i t o r s , e t c . , t h e n t h e c h a r g e s w o u l d seem t o b e e x o r b i t a n t . . In t h i s c o n n e c t i o n , a t t e n t i o n i s i n v i t e d to the f a c t t h a t S e c t i o n 2 5 o f t h e U. S . Warehouse Act a u t h o r i z e s the S e c r e t a r y of A g r i c u l t u r e to r e v o k e t h e l i c e n s e o f a n y warehouseman "upon t h e g r o u n d t h a t u n r e a s o n a b l e o r e x o r b i t a n t c h a r g e s h a v e b e e n made f o r s e r v i c e s r e n d e r e d . " ADVISABILITY OF CONDUCTING A HEARING- OH THIS SUBJECT. On J u l y 2 4 , 1 9 3 1 , t h e B o a r d r e c e i v e d t h e f o l l o w i n g t e l e g r a m f r o m Mr. J . Van C a r t m e l l , E x e c u t i v e V i c e P r e s i d e n t o f t h e Lawrence Warehouse Company: "Understand t h a t the F e d e r a l Reserve Board has been asked f o r a n o p i n i o n on c e r t a i n p h a s e s o f F i e l d Warehouse p r o c e d u r e I d e s i r e to a s k t h a t i n e v e n t any r u l i n g s of the Board would a p p e a r t o b e a d v e r s e t o t h e Lawrence S y s t e m o f f i e l d w a r e h o u s i n g a s o p e r a t e d b y t h e Lawrence Warehouse Company t h a t the Board would a l l o w u s to appear a t h e a r i n g p r i o r to p r o m u l g a t i o n o f new r u l i n g and would a p p r e c i a t e b e i n g n o t i f i e d b y w i r e c a r e o f our C h i c a g o o f f i c e o f t i m e o f h e a r i n g . " A l t h o u g h Mr. V e s t and t h e u n d e r s i g n e d h a v e d i s c u s s e d t h i s s u b j e c t a t g r e a t l e n g t h - w i t h Mr. Van C a r t m e l l and a l t h o u g h h e h a s s u b m i t t e d l e n g t h y documents which are i n the a t t a c h e d f i l e d e s c r i b i n g the methods of the Lawrence Warehouse Company and s u b m i t t i n g a r g u m e n t s i n s u p p o r t o f s u c h m e t h o d s , i t w o u l d seem a d v i s a b l e t o g r a n t t h i s r e q u e s t , i n o r d e r t o f o r e s t a l l ^ 8 3 l|fcj U X-7255-b a n y p o s s i b i l i t y o f a n i n j u s t i c e or c h a r g e s o f i n j u s t i c e . Inasmuch a s t h e F e d e r a l B e s e r v e Banks o f New York and. San F r a n c i s c o h a v e h e r e t o f o r e a c c e p t e d t h e f i e l d w a r e h o u s e r e c e i p t s o f t h e l a w r e n c e Wareh o u s e Company w i t h o u t q u e s t i o n , and h a v e w r i t t e n t h e Board t h a t t h e y c o n s i d e r t h e s e r e c e i p t s u n o b j e c t i o n a b l e . , i t w o u l d seem a d v i s a b l e f o r t h e B o a r d e i t h e r t o g r a n t them a h e a r i n g on t h i s s u b j e c t o r t o s u b m i t t h i s memorandum t o them w i t h a r e q u e s t f o r a f u r t h e r e x p r e s s i o n of t h e i r v i e w s . I f t h e B o a r d d e c i d e s t o c o n d u c t a h e a r i n g on t h i s s u b j e c t , i t w o u l d a l s o seem a p p r o p r i a t e t o i n v i t e Mr. C. W. K i t c h e n and Mr. H. S . Yohe of the Department of A g r i c u l t u r e to a t t e n d the h e a r i n g a s o b s e r v e r s . I do n o t t h i n k , h o w e v e r , t h a t t h e s e g e n t l e m e n w o u l d c a r e t o t e s t i f y a t a n open h e a r i n g or t o p a r t i c i p a t e i n any d e b a t e w i t h t h e r e p r e s e n t a t i v e s of t h e Lawrence Warehouse Company. In view of the i n t e r e s t which they have m a n i f e s t e d i n t h i s q u e s t i o n , i t w o u l d a l s o s e e m a d v i s a b l e t o i n v i t e Mr. B o b e r t H. B e a n , E x e c u t i v e S e c r e t a r y o f t h e A m e r i c a n A c c e p t a n c e C o u n c i l , a n d Mr. W i l s o n V, L i t t l e , E x e c u t i v e ^Secretary o f t h e A m e r i c a n Warehousemen 1 s A s s o c i a t i o n , to a t t e n d such h e a r i n g , PRACTICE OF FEDERAL 3ESEBYE BANKS AS TO CHECKING WAREHOUSE RECEIPTS IDDE3LYING ACCEPTANCE CREDITS. I t i s s u r p r i s i n g that warehouse r e c e i p t s i s s u e d under t h i s p l a n h a v e b e e n a c c e p t e d and a p p r o v e d b y a t l e a s t two o f t h e F e d e r a l B e s e r v e Banks w i t h o u t c o n s u l t a t i o n w i t h t h e F e d e r a l B e s e r v e B o a r d ; and I b e l i e v e t h a t i t would be a d v i s a b l e to i n q u i r e i n t o the q u e s t i o n whether t h e Board i s p r o v i d i n g 283 - 50 - X-7255-b a s u f f i c i e n t c h e c k u p o n t h e d e c i s i o n s made b y t h e F e d e r a l R e s e r v e Banks on t h i s s u b j e c t and w h e t h e r t h e F e d e r a l R e s e r v e Banks a r e i n q u i r i n g w i t h s u f f i c i e n t care i n t o the c h a r a c t e r of warehouse r e c e i p t s a g a i n s t which b a n k e r s 1 a c c e p t a n c e s p u r c h a s e d o r d i s c o u n t e d b y them a r e i s s u e d . S i n c e "bankers 1 a c c e p t a n c e s drawn t o f i n a n c e t h e s t o r a g e o f r e a d i l y marketable s t a p l e s are not e l i g i b l e f o r r e d i s c o u n t by Federal r e s e r v e banks u n l e s s t h e y are secured a t the time of a c c e p t a n c e by wareh o u s e r e c e i p t s c o n v e y i n g g o o d s e c u r i t y t i t l e and i s s u e d b y p a r t i e s i n d e p e n d e n t o f t h e b o r r o w e r s , i t w o u l d seem t h a t , b e f o r e p u r c h a s i n g o r r e d i s c o u n t i n g bankers1 a c c e p t a n c e s secured by warehouse r e c e i p t s , Federal r e s e r v e banks should i n q u i r e a s to the c h a r a c t e r of the u n d e r l y i n g warehouse r e c e i p t s . T h i s would not n e c e s s a r i l y i n v o l v e a s e p a r a t e i n q u i r y a s t o e a c h a c c e p t a n c e , b u t t h e F e d e r a l R e s e r v e Bank o f t h e d i s t r i c t i n which the a c c e p t i n g bank i s l o c a t e d could o b t a i n the n e c e s s a r y i n f o r m a t i o n a s t o e a c h a c c e p t a n c e c r e d i t g r a n t e d and c o u l d p a s s t h e i n f o r m a t i o n a l o n g t o the o t h e r F e d e r a l r e s e r v e banks. T h i s q u e s t i o n c o u l d v e r y w e l l b e r e f e r r e d t o t h e G e n e r a l Committee on B a n k e r s * A c c e p t a n c e s f o r s t u d y and r e p o r t . That Committee c o n s i s t s o f t h e o f f i c e r s o f t h e v a r i o u s F e d e r a l R e s e r v e Banks who p u r c h a s e a c c e p t a n c e s f o r them and p a s s u p o n a l l p r o b l e m s p e r t a i n i n g t o t h i s s u b j e c t . The conn m i t t e e ' s a c t i v i t i e s , a s a whole, s e t the standard of the acceptance p r a c t i c e s of a l l banks in t h i s country. I f t h e members o f t h i s Committee w i l l n o t purchase the a c c e p t a n c e s of p a r t i c u l a r banks, or a c c e p t a n c e s of a p a r t i c u l a r i s s u e , s u c h a c c e p t a n c e s a r e d i s c r i m i n a t e d a g a i n s t i n t h e m a r k e t and t h e r e i s 2 8 4 - si # x-tsss-b l i t t l e i f a n y a d v a n t a g e i s u s i n g them a s a means o f p r o v i d i n g b a n k c r e d i t . T h a t Committee a n d i t s i n d i v i d u a l members, t h e r e f o r e , h o l d t h e k e y t o t h e p r a c t i c a l a d m i n i s t r a t i o n o f t h i s p a r t i c u l a r p r o b l e m ; a n d I be** l i e v e t h a t i t w o u l d b e w e l l w o r t h .while f o r i t t o h a v e a m e e t i n g f o r t h e p u r p o s e o f d i s c u s s i n g and g i v i n g t h o r o u g h r e c o n s i d e r a t i o n t o : (1) The c h a r a c t e r o f w a r e h o u s e r e c e i p t s w h i c h s h o u l d b e deemed a c c e p t a b l e a s a b a s i s f o r b a n k e r s ' a c c e p t a n c e c r e d i t s , and (2) The s t e p s w h i c h s h o u l d b e t a k e n b y t h e F e d e r a l R e s e r v e Banks to a s s u r e t h e m s e l v e s t h a t t h e warehouse r e c e i p t s u n d e r l y i n g d o m e s t i c s t o r a g e a c c e p t a n c e c r e d i t s a r e p r o p e r w a r e h o u s e r e c e i p t s and c o m p l y f u l l y w i t h t h e B o a r d ' s r e g u l a t i o n s and r u l i n g s . I do n o t b e l i e v e t h a t t h e B o a r d ' s c o n s i d e r a t i o n o f t h i s p a r t i c u l a r case should be postponed u n t i l a f t e r such a meeting, because t h a t w o u l d c a u s e t o o much d e l a y ; b u t I do b e l i e v e t h a t t h i s g e n e r a l s u b j e c t s h o u l d b e t h o r o u g h l y c o n s i d e r e d b y t h a t Committee i n t h e n e a r " f u t u r e . CONCLUSION. I a g r e e w i t h t h e o f f i c e r s o f t h e F e d e r a l He s e r v e B a n k s t h a t f i e l d w a r e h o u s i n g a c t u a l l y c o n d u c t e d b y b o n a f i d e warehousemen r e g u l a r l y e n g a g e d i n p u b l i c w a r e h o u s i n g i s mu,ch p r e f e r a b l e t o s u b s i d i a r y w a r e h o u s i n g and I t h i n k i t i s much more l i k e l y t o b e s u s t a i n e d b y t h e c o u r t s . As t h i s p a r t i c u l a r p l a n i s proposed to be operated, however, I t h i n k i t i s f a t a l l y d e f e c t i v e ; b e c a u s e o f t h e f a c t t h a t t h e man a c t u a l l y i n c h a r g e o f t h e w a r e h o u s e i s t a k e n i m m e d i a t e l y f r o m t h e employ o f t h e p e r s o n w h o s e g o o d s a r e s t o r e d and e x p e c t s t o b e r e e m p l o y e d , b y t h a t p e r s o n a t t h e t e r m i n a t i o n o f t h e w a r e h o u s e s e a s o n , , and,, t h e r e f o r e , i s n o t i n f a c t i n d e p e n d e n t b u t i s t o o much s u b j e c t t o t h e i n f l u e n c e o f t h e p e r s o n whose g o o d s a r e s t o r e d . 285 ~ 52 » X-7255-b T h i s company, h o w e v e r , h a s worked o u t many i m p o r t a n t s a f e g u a r d s f o r f i e l d w a r e h o u s e s ; on p a p e r , i t s p l a n l o o k s v e r y g o o d e x c e p t f o r t h e f a c t t h a t i t d o e s n o t employ independent c u s t o d i a n s owing a l l e g i a n c e s o l e l y t o t h e w a r e h o u s e company; a n d I am i n c l i n e d t o b e l i e v e t h a t t h e p l a n w o u l d b e s o u n d , t h e company w o u l d r e n d e r a v a l u a b l e s e r v i c e , a n d t h e r e w o u l d b e no o b j e c t i o n t o i t s w a r e h o u s e r e c e i p t s , i f : (1) The w a r e h o u s e company w o u l d p l a c e i n c h a r g e o f e a c h f i e l d w a r e h o u s e i t s own i n d e p e n d e n t c u s t o d i a n o w i n g a l l e g i a n c e s o l e l y t o t h e w a r e h o u s e company; (2) The w a r e h o u s e company h a d a n a d e q u a t e n e t f i n a n c i a l w o r t h t o s u p p o r t t h e l a r g e number o f f i e l d w a r e h o u s e s f o r w h i c h i t a c c e p t s t h e l e g a l r e s p o n s i b i l i t y ; and (3) I t would a c t u a l l y operate a l l of t h e s e warehouses i n s t r i c t c o n f o r m i t y w i t h t h e p l a n w h i c h i t h a s o u t l i n e d on p a p e r . From a c a r e f u l s t u d y o f a l l t h e d o c u m e n t s i n t h e a t t a c h e d f i l e and a l l o t h e r i n f o r m a t i o n I h a v e b e e n a b l e t o f i n d a b o u t t h i s company, howe v e r , I b e l i e v e t h a t i t s w a r e h o u s e r e c e i p t s a r e n o t now r e l i a b l e c o l l a t e r a l f o r banks and t h a t i t would be i n a d v i s a b l e f o r t h e Board t o i s s u e any r u l i n g which c o u l d be u s e d by t h a t company a s a b a s i s f o r t h e s t a t e m e n t t h a t t h e F e d e r a l R e s e r v e B o a r d h a s a p p r o v e d i t s p l a n or i t s w a r e h o u s e r e c e i p t s , e s p e c i a l l y i n v i e w o f t h e f a c t t h a t bhe company a p p e a r s t o b e a m b i t i o u s t o expand i t s o p e r a t i o n s a l l over the U n i t e d S t a t e s . Respectfully, (Signed) Walter l y a t t Walter Wyatt, General Counsel.
@FedFRASER