UNITED STATES DEPARTMENT OF AGRICULTURE 
 Bureau of Agricultural Economics 
 
 in 
 
 U.S. ucruoi i^r> i j 
 
 FIELD WAREHOUSE RECEIPTS 
 Collateral or No Collateral 
 
 By 
 
 H. S. Yohe, In Charge, 
 Administration U. S. Warehouse Act -- 
 
 Washington, D. C. 
 March 1937 
 
£o rework 
 
 In the administration of the United States Warehouse Act, the Bureau 
 of Agricultural Economics of the United States Department of Agriculture, 
 which is charged with its administration, receives many inquiries regarding 
 field warehousing. They come from processors and merchandisers of agricultural 
 products, from growers cooperative associations, and from bankers and other 
 lending institutions which extend credit on the basis of warehouse receipts 
 covering agricultural products as collateral. 
 
 These inquiries reveal a deplorable lack of knowledge of the basic 
 principles of warehousing that must be observed if warehouse receipts are to 
 constitute sound collateral. The purpose of this discussion is to supply 
 the apparent need for a fairly comprehensive statement of the principles 
 involved in field warehousing as they relate to the extension of credit. 
 
FIELD WAREHOUSE RECEIPTS 
 Collateral or No Collateral 
 
 The storing of agricultural products is not new. Usually the storing of agricultural 
 products in public warehouses is for one of two purposes — for future need or for credit. 
 Frequently storage is for both purposes, especially on the part of merchandisers and proc- 
 essors of agricultural products. During the past fifteen years in many agricultural pro- 
 ducing areas there has been an increasing tendency on the part of the producers themselves 
 to store for both purposes. 
 
 When products are stored for credit purposes it has been the general rule that such 
 products should be surrendered to the custody of someone wholly independent of the one who 
 stores. The person with whom products are stored is generally called a warehouseman. When 
 goods are stored with a warehouseman he issues to the storer a receipt which is generally 
 termed a warehouse receipt. It is symbolical of the products themselves. It is this ware- 
 house receipt which the storer offers to his banker or lender as collateral for a loan. 
 
 FACTORS THAT MAKE RECEIPTS VALUABLE 
 
 The collateral value of warehouse receipts depends upon several factors, the prin- 
 cipal of which are: 
 
 (1) Suitability of the warehouse or storage facility for storing the product; 
 
 (2) Responsibility of the warehouseman; 
 
 (3) Competency of the warehouseman and his assistants to properly care for the product 
 while in storage; 
 
 (4) Authority of law under which the receipt is issued; 
 
 (5) Information on the warehouse receipt itself which will give to the lender a 
 concise yet comprehensive description of the product and thereby enable him to form an 
 opinion of its fair market value; 
 
 (6) Terms of the warehouse receipt in general; 
 
 (7) Whether there is bonded responsibility back of the receipt, and, if so, by whom 
 the bond is written, for the benefit of whom, with whom the bond is lodged, under what 
 conditions it may be realized upon by the holder of the receipt, and what action such re- 
 ceipt-holder must take to realize upon the bond; 
 
 (8) Whether the receipt represents a bona fide relationship of bailor and bailee 
 between the storer and the warehouseman and one under which the warehouseman and his rep- 
 resentatives or his local custodians are completely and wholly independent of the storer. 
 
 (9) The character and extent of disinterested supervision exercised over the ware- 
 house. 
 
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 It is hardly necessary to comment in detail upon these various elements save the 
 fifth and the eighth. As to the fifth factor, it is of course obvious that since the ware- 
 house receipt represents the product stored in the warehouse it should contain such informa- 
 tion as will convey to anyone to whom the receipt is offered for collateral purposes a fair, 
 honest, and impartial description of the products themselves so as to enable one to form an 
 opinion of the fair value of the product, and to identify it. This becomes all the more 
 important when the storer seeks credit at some distance from the warehouse. 
 
 One of the first questions asked of a person seeking a loan by anyone engaged in 
 commodity financing is: What is the commodity you propose to give as security? In the 
 opinion of some lenders certain commodities are bankable or proper collateral. To other 
 lenders these same commodities would not constitute proper collateral. Hence, when a loan 
 is desired on products or commodities in storage, it is important that the warehouse receipts 
 covering such commodities clearly recite just what the commodities are which the receipts 
 represent. 
 
 Obviously, a receipt that conveys no information as to the quantity, quality, grade, 
 or condition of the product, or that fails to state what the product actually is, does not 
 inform the lender on points that are essential to making a fair and sound loan. It doei not 
 enable the lender to tell whether the product is even a proper subject for collateral. Re- 
 ceipts that recite that the warehouseman received a certain number of cases or bales or 
 packages "said to contain" canned tomatoes or wool or fancy cigar-leaf tobacco give neither 
 the storer nor the lender an index as to the value of the product represented by the receipt. 
 And receipts which merely acknowledge that the warehouseman has received a certain number of 
 cases or bales or packages and then recite "contents unknown" are not only of less value, 
 but are a clear attempt on the part of the warehouseman to escape all liability so far as 
 the commodity is concerned. 
 
 Under either the receipts which recite "contents unknown" or "said to contain," so 
 far as the warehouseman is concerned and his liability to deliver a specific product, the 
 cases or packages covered by the receipts might be filled with sawdust or mere trash. 
 
 To a lender who has given no more than superficial thought to making loans on the 
 basis of warehouse receipts as collateral, any receipt that contains such statements as 
 "said to contain" or "contents unknown" must have no appeal whatever as collateral. 
 
 The eighth factor — a bona fide relationship of bailor and bailee between the de- 
 positor and the warehouseman, or the creation of a completely disinterested custodianship — 
 is always desirable in the financing of warehoused products, and it is essential in a field 
 warehousing arrangement. Only to the extent that the warehouseman is wholly independent of 
 the storer is there a disinterested custody of the product. 
 
 The importance of a disinterested custodianship of the product grows out of the fact 
 that when the storer offers his warehouse receipt to the lender as security for a loan he 
 proposes to pledge the products in the warehouse covered by the warehouse receipt . It is 
 the products that are the real security. It is essential to the validity of a pledge that 
 the pledgor surrender possession of the thing pledged. He cannot pledge an article and at 
 the same time keep it. In other words, so long as the products are pledged as security 
 for a loan they must remain in the custody and exclusive control of someone other than the 
 borrower. "The borrower and his collateral are best parted." 
 
- 3 - 
 
 In attempting to establish a disinterested custody the person who desires to borrow 
 on the products should not content himself with representations of those who wish to serve 
 him as warehouseman. Nor should he be content with something in the way of warehousing 
 which he thinks may get by his banker; neither should he attempt short cuts to save a little 
 cost. 
 
 In testing collateral, the real issue always is: Has there been an absolute and 
 unequivocal parting on the part of the borrower with possession of the products he proposes 
 to give as security for the loan? That question the owner of the products can easily de- 
 termine for himself. All he needs to do is to ask himself and honestly answer the question: 
 Under the proposed form of warehousing have I at any time access to the products other than 
 in the presence of the warehouseman and may I at any time exercise any control of the prod- 
 ucts? If the answer is in the affirmative to the slightest degree, possibility of trouble 
 in the warehousing arrangement exists. "The borrower and his collateral are best parted," 
 and there is no absolute and unequivocal parting such as the law contemplates if the borrower 
 has access to his collateral at his own pleasure or can exercise any control over it. 
 
 REQUIREMENT OF FEDERAL RESERVE ACT AND REGULATIONS 
 
 The principle of disinterested custodianship is recognized in the Federal Reserve 
 Act and in the regulations thereunder of the Board of Governors of the Federal Reserve 
 System relating to the eligibility of bankers' acceptances for rediscount by Federal Reserve 
 Banks. Section 13 of the Federal Reserve Act requires that a banker's acceptance drawn to 
 finance the storage of readily marketable staples shall be "secured at the time of acceptance 
 by a warehouse receipt or other such document conveying_pr securing _title 1/ covering readily 
 marketable staples " Section XI of Regulation A of the Board of Governors requires that "a 
 banker's acceptance drawn to finance the storage of readily marketable staples shall be 
 secured at the time of acceptance by a warehouse, terminal, or other similar receipt con- 
 veying security title to such staples, issued by. a party independe nt of the customer." 1/ 
 
 The requirement of the Federal Reserve Act that such warehouse receipts must convey 
 or secure title to the products represented by the receipts obviously contemplates that the 
 accepting bank shall have a lien on such products which is valid and enforceable against 
 general creditors of the person for whose benefit the acceptance credit is granted. The 
 regulation of the Board of Governors that such warehouse receipts shall be issued by a party 
 independent of the customer obviously is intended to require that the actual custody of the 
 goods shall be maintained by an independent and disinterested party so the bank that holds 
 the warehouse receipt may be able to identify and obtain possession of the products and thus 
 enforce its lien without difficulty. 
 
 A lien on personal property is of no practical value unless such property can be 
 found and identified when it becomes necessary to enforce the lien. If custody of the pledged 
 products is not given to and maintained by a disinterested party, there is grave danger that 
 the borrower will be able to dispose of or release the products in such manner that innocent 
 purchasers will acquire good title to them, and the lender's security will thus be entirely 
 destroyed. 
 
 1/ Underscoring by author. 
 
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 DISINTERESTED CUSTODIAN PRINCIPLE RECOGNIZED BY COURTS 
 
 The principle of disinterested custodianship has been repeatedly recognized by the 
 courts, particularly where there is a conflict of interests. In one leading case the 
 Supreme Court stated: "In this conflict of interests, the law wisely interposes. It acts 
 not on the possibility, that, in some cases, the sense of that duty may prevail over the 
 motives of sel f-interest , but it provides against the probability in many cases, and the 
 danger in all cases, that the dictates of self-interest will exercise a predominant in- 
 fluence, and supersede that of duty." In a New Jersey case the principle was stated thus: 
 "So jealous is the law upon this point that a trustee may not put himself in a position in 
 which to be honest must be a strain on him." 
 
 Obviously, the person who is seeking credit, and offering stored agricultural com- 
 modities as collateral, is not a disinterested custodian, and neither is he free from that 
 conflict of interests to which the Supreme Court referred in the quotation above cited. 
 As has many times happened, a borrower who attempts to serve as the custodian of the col- 
 lateral places himself in the position where "the dictates of self-interest will exercise a 
 predominant influence and supersede that of duty." 
 
 In the light of these observations, the establishment between the storer of goods and 
 the warehouseman of a relationship of bailor and bailee, and of complete independence between 
 the storer and the warehouseman and his agents, becomes all the more indispensable. 
 
 These preliminary observations, which apply to the warehousing of agricultural prod- 
 ucts in the sense that the public, the banking fraternity, and the courts generally think of 
 warehousing of products that are to be used as collateral for credit purposes, are equally 
 applicable to a consideration of field warehousing. The same requirements must be observed 
 if a field warehouse receipt is to stand the acid test to which it will be subjected if a 
 question is raised as to its validity as collateral. 
 
 FIELD WAREHOUSING 
 
 What is field warehousing? In the last 5 years much has been written on this subject. 
 Some writers have approached the subject as though they had found a wholly new method of 
 financing crops while in storage awaiting demand; still others as though they had found a 
 formula for financing in a big way a man who is entitled to little if any credit. A few 
 writers have used the subject as a vehicle to attack other approved methods of warehousing 
 because those methods diverted revenue from those making the attack. Other articles that 
 were ostensibly about field warehousing gave the uninitiated and uninformed little basic 
 information on the subject but have complained of alleged evils in subsidiary warehousing, 
 quite ignoring the fact that subsidiary warehousing is authorized by statute and has met with 
 court sanction in a number of States. Some of the authors who complained about subsidiary 
 warehousing ignored the fact that they themselves were engaged in a subsidiary warehouse 
 operation. Many of the articles on the subject had the earmarks of super-salesmanship, and 
 an attempt to promote business on a shoe string. 
 
 In all that has been written about field warehousing it is regrettable that so few 
 articles are really informative as to basic facts that are essential to the patrons of 
 warehousemen and to the lenders who wish to make sound commodity loans. From many 
 articles that have appeared it is impossible for anyone to draw the essential principles. 
 Even those who conscientiously seek dependable information have been confused. 
 
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 FIELD WAREHOUSING GOVERNED BY PUBLIC WAREHOUSE PRINCIPLES 
 
 There is nothing new or mysterious about field warehousing. Reference to decisions 
 of courts show that the subject has been before the courts for the last 40 years, if not 
 longer. 
 
 The principles involved in public warehousing in the generally accepted meaning of 
 the term are well known . They have been established by a long line of judicial decisions. 
 Field warehousing, being but an off-shoot of public warehousing, is governed by the same 
 principles cf law and finance. In the apparent attempt to advance the theory that a new 
 method of financing has been developed, no claim is made that new principles have been 
 developed. Rather, the claim is made that new procedures and methods have been originated. 
 
 It is an apparent attempt to short-cut established rules and principles, while at the 
 same time professing that the established rules and principles of public warehousing are 
 being observed in everyday operation. To the extent that these make-believe observations 
 and short-cuts and shams are injected into field warehousing, to that extent are the ware- 
 house operations and the warehouse receipts issued thereunder likely to fail when a real 
 legal test is applied. 
 
 Field warehousing is a plan to store on the premises of the owner the very products 
 on which he desires to effect a loan at the least cost to himself. The motive back of any 
 field-warehousing arrangement, as far as the storer is concerned, is a desire on his part to 
 enlarge his credit. In other words, he endeavors to place his products in a position that 
 will enable him to pledge them as collateral to a loan. Almost without exception as soon as 
 the credit need passes the field-warehouse arrangement also passes. 
 
 Placing the products in a credit or collateral position could be accomplished by 
 placing them in storage in a public warehouse, but there might not be a public warehouse in 
 the town in which the owner of the products operates. Moreover, the owner of the products 
 frequently owns or controls a warehouse or storage facility. The very nature of his business 
 frequently obliges him to have storage facilities. Naturally he wants to use them to great- 
 est advantage. Again, he may wish to avoid unnecessary freight hauls. Further, he may feel 
 that he can make sales and shipments to greater advantage from his own warehouse facility 
 than from some other warehouse. 
 
 Field warehousing is seldom resorted to except by merchandisers or processors of 
 products. Therefore, growers of agricultural products do not use this system of warehousing 
 as individual producers. They generally store in public warehouses if they wish to use 
 warehouse receipts for financing purposes. However, a group of growers such as a cooperative 
 association may use field warehousing, but only when the association has a warehouse of its 
 own that it desires to use. 
 
 The principal users of field warehousing in the agricultural field are canners of 
 fresh fruits and vegetables, some grain merchants who have their own elevators, crushers of 
 cottonseed, a few sugar and rice dealers, and some growers' cooperative associations whose 
 members produce grain and fresh fruits and vegetables for canning or other purposes. 
 
 In a field-warehousing plan that will stand the crucial test, the merchant (or the 
 growers' association) leases his warehouse to a party who is in no way interested in or re- 
 lated to the merchant (or the growers' association), to operate it as a public warehouse. 
 
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 The lessee takes complete charge and control of the building by virtue of a valid lease. 
 He receives the lessor's products in storage just as he would receive the products of a 
 farmer or any other storer. In other words, the lessee — the warehouseman — must assume 
 full responsibility for the operations of the warehouse. The only relation between the 
 warehouseman and the owner of the warehouse should be that of lessor and lessee, and bailor 
 and bailee if the lessor stores products in the warehouse. 
 
 In seme parts of the country it is not uncommon for a warehouseman who operates in 
 seme city to lease a number of warehouses at a number of different points throughout a State, 
 or several States, and operate these on the principle of field warehousing. 
 
 Field warehousing is sound if proper precautions are taken scrupulously to establish 
 and to maintain the relationship of bailor and bailee. This means a meticulous observance 
 of all the legal requisites essential to such a relation. Short-cuts on the plea of lowering 
 costs have no place in field warehousing. The principle of disinterested custodianship must 
 be strictly observed. It will not do for a warehouseman to lease a building and then let 
 the lessor or employees of the lessor who may wish to store therein run the warehouse and 
 conduct it just the same as before the lease arrangement was made. 
 
 In sound field warehousing the lessee must exercise complete control and dominion 
 at all times over the warehouse and the products stored therein. This does not necessarily 
 mean that the lessor must be denied access to the warehouse at all times, but it does mean 
 that he must be denied access except in the presence of the lessee or his duly constituted 
 agent, as in the case of other public warehouses. The mere leasing of premises to another 
 who represents himself as a warehouseman and as in charge of the building will not in itself 
 suffice. And recording of the lease, even if there is a statutory requirement for the rec- 
 ordation, in and of itself will not give validity to the warehouse receipts. Recording is 
 only an attempt to give notice that the premises have temporarily passed from the real owner 
 to another. But if the recording is not required by law, such recordation is not even con- 
 structive notice. 
 
 In sound field warehousing the warehouseman must take and must maintain actual pos- 
 session of the building and the goods at all times. Such possession must be exclusive and 
 unequivocal, and open and notorious, so that other creditors of the owner of the goods may 
 not be misled. A sufficient number of signs of such size as readily to attract the notice 
 of the public, clearly indicating that the premises are in the control of the warehouseman, 
 must be placed inside and outside the buildings or premises. They should appear at all 
 points of entry and exit to the premises. 
 
 But all the leases, recorded or not, and all the signs, large or small, inside and 
 outside of the warehouse, will not serve to save the receipts from fatal legal attack if it 
 can be shown that collateral and supplemental agreements existed between the warehouseman 
 and the owner of the property, which were in violation of well-established legal principles. 
 Again, if at any time the validity of the receipts should be attacked it would probably 
 be disastrous if it could be established that the storer whose receipts are in question had 
 a key that permitted him free access to the warehouse. 
 
 Moreover, it would be most unfortunate for the lender as holder of such collateral 
 if it were shewn, as is frequently the case, that the storer not only had a key to the ware- 
 house, but that he entered at his pleasure, and sampled and inspected the goods in the 
 presence of prospective buyers, when neither the warehouseman nor his local custodian was 
 present. That is not the kind of open, notorious, unequivocal, and exclusive control that 
 the law contemplates. 
 
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 The words used by a court in an outstanding case may not be passed over lightly: 
 
 "Delivery of possession is of the very life of the pledge. 
 No mere agreements respecting possession can create it. The 
 contract of pledge cannot exist outside of the fact of change of 
 possession. The pledgor must dispossess himself openly, com- 
 pletely, unequivocally, and 'without deceptive combinations 
 which lead third persons into error as to the real possessor 
 of the thing', and the pledgee must take and maintain an open, 
 exclusive, and unequivocal possession." 
 
 In another celebrated case the court said: 
 
 "The general law of pledging requires possession and cannot 
 exist without it. * * * Merely colorable or constructive change 
 of possession accomplishes nothing in favor of a pledgee. There 
 must be open, visible, unequivocal change of possession mani- 
 fested by such substantial outward signs as to make it evident 
 to the world that the control of the owner has wholly ceased, 
 and that another has acquired; and is openly exercising the ex- 
 clusive dominion over the property." 
 
 There is no room for make-believe, pretense or sham in field warehousing. No stronger 
 language could be used to condemn an intent to make one believe that a disinterested custody 
 existed when it did net in fact, than was used in a celebrated case in which the court said: 
 
 "There was really no delivery and no change of possession, 
 continuous or otherwise. The alleged change was a mere pre- 
 tense, a sham. " 
 
 Nor is the collateral value of receipts improved by a statement thereon- that they are 
 issued in conformity with the Uniform Warehouse Receipts Act. That Act has no administrative 
 provisions. It relates merely to the form of the receipt to be issued. Even when a receipt 
 complies in every respect with that Act it leaves much to be desired fiom a collateral 
 standpoint. In fact, a receipt issued in full compliance with that statute ordinarily fails 
 completely to give information to the lender as to what the commodity is that the receipt 
 represents, or its condition, or quality, or quantity- 
 Each lot of goods covered by a receipt, unless stored on a fungible basis, must be 
 segregated from goods of others, including other goods of the owner, and the lots must be 
 so marked as to permit identification readily on the basis of the information appearing on 
 the warehouse receipt. 
 
 Warehouse receipts must be issued by a party independent of the customer. This does 
 not mean the mere perfunctory signing of warehouse receipts by the president or other of- 
 ficial of a warehouse company. A receipt is issued by and in the name of the warehouseman, 
 whether he be an individual, a partnership, or corporation. It is the warehouseman as such 
 who must issue the receipts. He is supposed to be the real custodian and the only custodian 
 of the goods, and his warehouse receipts represent that he alone is the custodian. Therefore, 
 regardless of legal fictions, sound business principles dictate that he should be wholly 
 independent of the storer, and in no way related to the storer financially, by stock owner- 
 ship in a storing corporation, or by virtue of interlocking directorates or officials, or 
 by blood or kin relationships. 
 
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 THE CUSTODIAN 
 
 Who may be a custodian? The answer is simple. Anyone who is competent to care for 
 the goods that are to be stored, who is honest, and who is independent of the storer in every 
 sense. 
 
 When a warehouseman operates mere than one field warehouse he uses at each building 
 or warehouse a custodian who is supposed to be his agent, and his only. This custodian is 
 the key man. He may make or defeat the whole operation. It is essential that he should be 
 as free and disinterested of any storer as the warehouseman himself. The degree to which 
 he is disinterested may determine the validity of the receipts themselves. 
 
 What are the requirements of a custodian? These the United States Department of 
 Agriculture has outlined in Service and Regulatory Announcements No 136, (B.A.E.), Sections 
 5 and 6, issued September, 1932. After years of experience in this field and careful ob- 
 servation of what actually takes place in every-day operation in field warehousing, and after 
 careful and exhaustive study of adjudicated cases, the Department is convinced that these 
 requirements are the minimum that should be exacted. Anything short of that is fraught with 
 danger. 
 
 It is al. ays highly important that the custodian arrangement be carefully scrutinized 
 for the custodian is the key man. He is the man who controls. If he fails, all fails. No 
 lender can afford to take any representations on this subject unless they be by wholly dis- 
 interested parties who are competent to investigate. Repeatedly the attempt has been made 
 to convey the impression under certain field-warehousing set-ups that the custodian is in- 
 dependent of the borrower and that he is solely the warehouseman's own employee. The fol- 
 lowing is quoted from an article that recently appeared in print: 
 
 "Loans secured by field warehouse " receipts covering cur- 
 rently salable merchandise are made by many large commercial 
 banks. The bank cannot take physical charge of the goods offered 
 as collateral, so some device is needed to give the bank the 
 protection of the value of the merchandise. Field warehousing 
 provides the means of getting this protection by providing a way 
 of placing the goods in the hands of a disinterested and inde- 
 pendent third party. The third party in this case is the ware- 
 house company operating what is known as 'field warehouses.' * * * 
 
 "Goods and chattels are in the possession and charge of the 
 warehouse company which maintains a dustodian on the premises 
 where the goods are stored. This custodian is properly bonded 
 and supervised by the warehouse company." 
 
 The word "device" here is in itself suggestive. Webster defines it as "anything 
 fanciful and ingeniously conceived, a schen-.e." No device is needed to give the banker 
 protection for the merchandise. Public warehousing has been in existence for years and 
 generally gives a degree of disinterested custodianship equal to the best system of field 
 warehousing. 
 
 The custodian is an integral and vital part of any field warehousing operation. To 
 that he is '.onded and is supervised by the warehouse company does not lend any more 
 weight to the legality of his appointment, nor does it establish that he is a proper person 
 to serve as custodian. 
 
■- 9 - 
 
 Bonding at its best is a relative term. But it might be well to scrutinize the terms 
 of the bond to see what it covers, in whose favor it runs, under what conditions the holder 
 of the receipt can recover, whether the surety is financially responsible, whether one m'.ght 
 be obliged to incur heavy expense or even a trip abroad in trying to recover, the maximum 
 amount of recovery possible, and how many operations of the same warehouseman are subject 
 to the same bond. 
 
 It is always in order to investigate the custodian carefully. What does he know 
 about caring for the goods in storage? What is his reputation? What has been his past con- 
 nection? Has he been in the employ of the storer in the warehouse, or the borrower? If so, 
 when, and what were his duties? By whom is he now employed, and who pays him? If he has 
 been taken from the employ of the borrower on the eve of the creation of the warehousing 
 arrangement, and transferred to the warehouseman's pay roll, this should cause one to pause, 
 for, as one lender who has wide experience in commodity financing expressed it: "No barrier 
 of legal sophistry will prevent the servant from hearing his pay-master's voice. Legal 
 transfer means little so long as economic dependence continues." 
 
 The words of one court on this point also deserve careful consideration: 
 
 "The appointment of the owner, or one of his staff, as a 
 warehouseman's custodian of goods stored, while not conclusively 
 ineffectual, is nevertheless a circumstance to give pause, and 
 must be carefully weighed in connection with the other facts in 
 evidence. " 
 
 In another case the court remarked: 
 
 "The custodian remained an employee of the pledgor and any 
 possession he may have had was that of his employer." 
 
 Even if the warehouseman pays the custodian's salary a serious question would arise 
 if it were established that the custodian is the same person who served as custodian or 
 warehouse clerk for the borrower before the field warehouse arrangement was ever entered 
 into, that he receives the same salary that he did from the borrower, that the warehouseman 
 requires the storer or borrower to reimburse him for the salary of the custodian, and that 
 it is understood by the custodian and storer that when need for the field-warehouse arrange- 
 ment ceases the custodian will return to the employ of the storer. These facts would un- 
 doubtedly be referred to the jury in case of court action. Such facts could give rise to a 
 serious question as to whether the field warehouseman ever had that exclusive and unequivocal 
 possession of the goods that the law contemplates. 
 
 In considering this relationship of custodian and former employee the following 
 language taken from a comprehensive opinion on field warehousing should arrest attention: 
 
 "Actual change of possession means existing in fact, and 
 truly and absolutely carried out, as opposed to formal, po- 
 tential, virtual, or theoretical change. The proof required 
 to show actual change of possession is not measured by any fixed 
 set of rules. Dependence must be placed upon the facts and 
 circumstances of each particular case; and usually the deter- 
 mination must rest upon the finding of the court or the jury 
 after hearing the evidence adduced on both sides." 
 
- 10 - 
 
 The question as to whether an employee who has been transferred from the rolls of the 
 borrower, or storer, in a field warehouse to the pay roll of the field warehouseman is a 
 proper person to serve as custodian for a warehouseman who would issue receipts covering 
 readily marketable staples which would be attached to bankers' acceptances as collateral, 
 under the Federal Reserve Board's rules war, referred by the Department of Agriculture to the 
 Board of Governors of the Federal Reserve Sy~tem. The Board's opinion appeared in the Fed- 
 eral Reserve Bulletin of March 1933 as follows: 
 
 "The Federal Reserve Board has had occasion to consider 
 the question whether receipts proposed to be issued by a ware- 
 house company under a certain field warehousing arrangement 
 would comply with the requirements of the Federal Reserve Act 
 and the board's regulations with reference to warehouse re- 
 ceipts securing bankers acceptances drawn to finance the stor- 
 age of readily marketable staples. 
 
 "The following are the principal facts upon which the 
 board's consideration and conclusion with respect to this ques- 
 tion were based: It was proposed that premises, which were 
 situated in several different localities should be leased to 
 the warehouse company for the purpose of warehousing certain 
 products owned by the lessor. It was understood that the ware- 
 housed products would be properly segregated from other goods 
 on the premises in separate buildings or in portions of build- 
 ings partitioned off for that purpose and locked with the ware- 
 house company's own locks and that conspicuous signs giving 
 notice that the products thus segregated were in the custody of 
 the warehouseman would be placed both inside and outside the 
 premises. In the operation of these warehouses, however, the 
 company was not to detail m en already in its employ to tak e 
 ch arg e of the leased premises^, but for this purpose was to t rans - 
 fe r to its payroll employees of th e lessor^, pay ing them the s ame 
 salary tha t they were rec eiving from the lessor at th e time 
 of the transfer. It was expected that th ese employees would 
 be reemp loy ed by t he le sso r at the close of .the storag e season 
 or when the products had been removed f rom sto rag e ; but the 
 warehouse company wa s to hav e the r igh t to terminate their 
 services at any tim e . These local custodian s were to be the 
 only rep re sen tative s of th e co mpany at the wareh ou se s; but 
 periodical aud its were to be m ade by auditors sent from the 
 distric t offic e of the company which was located at a consid er- 
 able. disiance from the propo sed wareho uses . 1/ The premises were 
 to be leased at a nominal rental only and the lessor, in addition 
 to paying a monthly storage fee, was to reimburse the warehouse 
 company for all expenses, including the compensation of the 
 sutodians, the salaries and expenses of auditors, and the costs 
 of the bonds which were to be required of the custodians. A 
 local custodian was not to be permitted to issue warehouse re- 
 ceipts or to authorize releases, but these functions were to be 
 
 i/ Underscoring by author. 
 
- 11 - 
 
 performed at the district office of the warehouse company upon 
 the basis of statements signed by the custodian and a represent- 
 ative of the lessor. 
 
 "In order for a banker's acceptance drawn to finance the 
 domestic storage of readily marketable staples to be eligible 
 for rediscount by Federal Reserve Banks: (1) section 13 of the 
 Federal Reserve Act requires that it be 'secured at the time of 
 acceptance by a warehouse receipt or other such document convey- 
 ing or securing title covering readily marketable staples'; 
 and (2) Section XI of the board's Regulation A requires that it 
 be 'secured at the time of acceptance by a warehouse, terminal 
 or other similar receipt, conveying security title to such sta- 
 ples, issued by a party independent of the customer. ■ 
 
 "The requirement of the law that such warehouse receipts 
 must convey or secure title to readily marketable staples ob- 
 viously contemplates that the accepting bank shall have a lien 
 on such staples which is valid and enforceable against general 
 creditors of the person for whose benefit such acceptance credit 
 is granted. Among the requirements generally recognized as es- 
 sential to the creaticn of a valid lien through the pledge of 
 warehouse receipts are that the warehouseman must take and main- 
 tain actual physical possession of the goods and that his pos- 
 session must be exclusive and unequivocal. Under the arrangement 
 above described, however, the actual possession of the goods 
 would be maintained by persons closely identified with the owner 
 of the goods and naturally subject to his influence. Such a 
 custodian, who might be regarded by the owner and his creditors 
 as the employee of the owner rather than of the warehouseman, 
 probably would find it difficult to deny access to the premises 
 of his former employer and the person to whom he looks for fu- 
 ture employment. In the circumstances it is open to serious 
 question whether the pledge of receipts issued under the ar- 
 rangement described would fulfill the requirements for the 
 creation of a valid lien. 
 
 "The requirement of the board's regulations that warehouse 
 receipts securing bankers acceptances be issued by a party in- 
 dependent of the customer contemplates that the actual custody 
 of the goods shall be maintained by an independent and disin- 
 terested party, so that the bank holding the warehouse receipt 
 may be able to identify and obtain possession of the goods and 
 thus enforce its lien without any difficulty. A lien on personal 
 property is, of course, of no practical value unless such prop- 
 erty can be found and identified when it becomes necessary to 
 enforce the lien; and, if custody of the goods is not maintained 
 by a disinterested party, there is danger that the goods may be 
 improperly released or disposed of. In the case under considera- 
 tion, whatever may be the theoretical requirements as to the 
 
- 12 - 
 
 control and custody of the goods by the warehouseman, it is 
 obvious that in fact the warehouseman would not be independent 
 of the owner; because the warehouse company would have to rely 
 upon its local custodians and they would not be independent of 
 the owner. 
 
 "After carefully considering this question and studying 
 all information received on the subject, the Federal Reserve 
 Board expressed the opinion that bankers' acceptances issued 
 against receipts, such as those proposed to be issued under the 
 circumstances above described, are not eligible for rediscount 
 at Federal Reserve Banks; because it is doubtful whether such 
 receipts comply with the requirement of section 13 of the Federal 
 Reserve Act that warehouse receipts securing bankers' acceptances 
 drawn to finance the storage of readily marketable staples must 
 convey or secure title to such staples, and because such re- 
 ceipts do not, in the board's judgment, comply with the require- 
 ment of section XI of the board's regulation A that warehouse 
 receipts securing such bankers' acceptances must be 'issued by 
 a party independent of the customer.' 
 
 "In giving expression to this opinion, the Federal Reserve 
 Board did not undertake to pass upon the merits of field ware- 
 housing in general, either as conducted by the warehouse company 
 in question or as conducted by any other company; and the board's 
 opinion relates solely to warehouse receipts such as those pro- 
 posed to be issued under the facts of the arrangement as above 
 described. " 
 
 Under every set of circumstances care must always be taken to avoid a set of facts 
 which would cause a court to comment as one court did in an outstanding field warehousing 
 case: 
 
 "The transaction is not changed by the form of the agree- 
 ment under which it is cloaked. We are to look at the real 
 purpose of the contract and not to the form or name given it 
 by the parties. " 
 
 In another case the United States Supreme Court stated: 
 
 "When there is conscious control, the intent to exclude, and 
 the exclusion of others, with access to the place of custody as 
 of right, these are all the elements of possession in the fullest 
 sense. 
 
 "We deal with the case before us only. No doubt there 
 are other cases in which the exclusive power of the so-called 
 bailee gradually tapers away until we reach those in which the 
 courts have held as a matter of law that there was no adequate 
 bailment. So, different views have been entertained where the 
 owner has undertaken to constitute himself a bailee by issuing 
 
- 13 - 
 
 a receipt. We may concede, for purposes of argument, that all 
 the forms gone through in this case might be emptied of sig- 
 nifiance by a different understanding between the parties, 
 which the form intended to disguise." 
 
 In a most comprehensive case the court used this language: 
 
 "Warehousing on the premises of the owner proposing to 
 pledge his merchandise is effective when done in obedience 
 to legal requirements; but when done only far enough to get 
 the goods represented by documents without really getting them 
 stored, the documents are but scraps of paper. The term 'field 
 warehousing ' is not a talisman to give dominion by enchantment. 
 Taking exclusiveness of possession and control as the criterion 
 we find now and then a case where it may be said as a matter of 
 law that, through the field warehouse, open, exclusive, and 
 unequivocal possession has passed constructively to a pledgee; 
 and then again in other cases we find that as a matter of law 
 the possession of the warehouseman 'tapers away' to nothingness. 
 Between these two extremes lies the aggregation of cases in 
 which the facts are such that different men may with reason 
 reach opposing conclusions. Cases of that character, when tried 
 by a jury, must be allowed to go under proper instructions to N 
 the jury, for their determination of the facts in controversy." 
 
 CONCLUSION 
 
 The law on field warehousing is now so well defined that if those who attempt to 
 render service in this field will make an honest effort to observe the limitations laid 
 down in well-considered cases, and not attempt short-cuts with a view to accommodating 
 prospective clients or storers, it should seldom if ever be necessary to submit the question 
 of validity of receipts to a court, or the facts to a jury. What lender can afford to take 
 a chance of submitting his loan collateral to a jury to determine whether the facts sur- 
 rounding its creation give it legality. 
 
 The easiest course might be to follow the suggestion of a warehouseman, or the wishes 
 and appeals of the banker's borrowing client. But the safest course is to follow well-es- 
 tablished legal principles. A banker has a higher duty than merely to loan money. He too 
 is a trustee of the property and interests of others. His first duty is that of a faithful 
 servant to his trust, and he can be faithful to that trust when he lends money on field- 
 warehouse receipts as collateral only as he makes it his business to ascertain what actual 
 methods of operation prevail at the warehouse and how closely they square with well-estab- 
 lished principles. 
 
 The experience of the Department of Agriculture is that the word of no interested 
 party should be taken on this subject. Repeatedly it has found instances where storers, 
 in spite of representations to the contrary, were carrying keys to the warehouses, had free 
 access to the warehouses, and operated to all intents and purposes just as freely as they did 
 before the alleged bailor-baillee relationship was undertaken. It has found cases where, 
 in spite of statements to the contrary, the custodian was an employee of the storer, or at 
 best had been transferred temporarily to the pay roll of the warehouseman with the definite 
 understanding that when the warehouse arrangement was terminated his services with the 
 warehouseman would cease. Such facts would be damaging evidence to submit to any jury. 
 
- 14 - 
 
 Eternal vigilance is the price that the banker must pay if he wants to feel reason- 
 ably certain of the safety of his commodity loans collateralized by field-warehouse receipts. 
 
 In the administration of the United States Warehouse Act, when the Department of 
 Agriculture camo to consider field warehousing it was found necessary to superimpose special 
 regulations upon its regular commodity regulations that are applicable to warehousemen who 
 operate in the usual manner of public warehousemen. 
 
 To assist lending agencies in reaching a proper conclusion as to the collateral value 
 of any field warehouse receipts which may be tendered them, the special regulations ap- 
 plicable to field warehousemen are appended herewith. 
 
- 15 - 
 
 REGULATIONS SUPPLEMENTARY TO THE COMMODITY REGULATIONS UNDER 
 THE UNITED STATES WAREHOUSE ACT FOR FIELD WAREHOUSEMEN!/ 
 
 (Approved July 30, 1932) 
 
 Department of Agriculture 
 
 Washington, D, C, 
 
 By virtue of the authority vested in the Secretary of Agriculture by the United 
 States warehouse act, approved August 11, 1916 (39 U. S. Stat. L., p. 486), as amended, 
 I, R. W. Dunlap, Acting Secretary of Agriculture, do make, prescribe, publish and give 
 public notice of the following rules and regulations to be known as the regulations sup- 
 plementary to the commodity regulations under the United States warehouse act for field 
 warehousemen, and to be in force and effect until amended or superseded by rules and regula- 
 tions which may hereafter be made by the Secretary of Agriculture under said act. 
 
 In testimony whereof I have hereunto set my hand and caused the 
 official seal of the Department of Agriculture to be affixed, in the 
 city of Washington, this 30th day of July, 1932. 
 
 fi> %/iL^M/, 
 
 Acting Secretary. 
 
 SECTION 1. Definitions. — For the purposes of these regulations, unless the context 
 otherwise require, the following terms shall be construed, respectively, to mean: 
 
 Paragraph 1. Commodity regulations. — Rules and regulations made under the act by 
 the Secretary for warehousemen storing certain designated agricultural products. 
 
 Par. 2. Field warehouse. — A warehouse that is operated or is to be operated for 
 the purpose of issuing warehouse receipts representing a disinterested custodianship of 
 the products stored therein and which is leased from any person having a financial interest 
 in the products. 
 
 Par. 3. Field warehouseman. — Unless otherwise clearly indicated by the context, any 
 person lawfully engaged in the business of operating a field warehouse as defined in para- 
 graph 2. 
 
 Par. 4. Custodian. — A person appointed or designated by a field warehouseman to 
 supervise or manage a field warehouse licensed under the act. 
 
 Par. 5. Assistant custodian. — A person appointed or designated by a warehouseman 
 to assist the custodian of a field warehouse in the supervision and management thereof. 
 
 SEC. 2. Nothing in these field warehouse regulations shall be construed to conflict 
 with, or to authorize any conflict with, or in any way impair or limit, the effect or 
 operation of the commodity regulations issued by the Secretary for warehousemen storing any 
 specified product or products, but these regulations shall be considered as supplemental 
 to all such commodity regulations and to be effective as to all field warehouses and field 
 warehousemen operating under the act. 
 
 SEC. 3. Applications for licenses to operate field warehouses shall be made in 
 accordance with the commodity regulations for warehousemen storing the particular agricultur- 
 al product or products stored or to be stored in the field warehouse. 
 
 1/ These regulations were issued as Service and Regulatory Announcements No. 136 (B.A.E.) 
 1932. 
 
- 16 - 
 
 SEC. 4. Compliance with all the preliminary requirements of the commodity regula- 
 tions applicable to the agricultural product or products in question, as well as these 
 regulations, shall be prerequisite to issuing a license to operate a field warehouse. 
 
 SEC. 5. There shall be no close relationship, either by blood or marriage, between 
 the field warehouseman or his custodians and any depositor or the lessor of the field ware- 
 house. 
 
 SEC. 6. Paragraph 1. No employee, either full or part-time, of any depositor, nor 
 any person who is a close blood or other relative of any person occupying a supervisory or 
 directing position in the business or organization of any depositor, or closely interested 
 with any depositor in any business, shall be appointed as a custodian or an assistant cus- 
 todian by a licensed field warehouseman: nor shall any person be appointed as a custodian 
 or an assistant custodian if he has resigned from the employ of any depositor for the purpose 
 of accepting employment from the warehouseman at the warehouse. 
 
 Par. 2. The compensation, or any part thereof, of any custodian, assistant cus- 
 todians, or any other employee of the warehouseman, if any there be, must be paid by the 
 warehouseman and not by any depositor. The custodian or assistant custodians need not be 
 full-time employees of the warehouseman, but shall not be, under any conditions, part or 
 full-time employees of any depositor of products in the warehouse. 
 
 Par. 3. Each person designated by a licensed field warehouseman as a custodian or an 
 assistant custodian shall file with the bureau a statement, on a form provided by the 
 bureau for the purpose, setting forth his qualifications and experience in warehouse work, 
 the occupation or business he has been engaged in during the five years next preceding the 
 date of the statement, the names of his employers, if any, during such 5-year period, the 
 names of at least five persons who can vouch for his character and qualifications for the 
 position, and such other information as the Secretary, or his designated representative, 
 may require. 
 
 Par. 4. No custodian shall accept instructions from anyone other than the ware- 
 houseman. 
 
 Par. 5. No custodian or assistant custodian shall enter upon his duties as such at a 
 licensed field warehouse until he has been notified in writing by the bureau that his 
 appointment has been approved. 
 
 SEC. 7. The warehouse space licensed or to be licensed shall be substantially sepa- 
 rated from other space and shall be kept securely locked or sealed in accordance with 
 section 15 of these regulations. All keys to locks shall be kept in the possession of the 
 warehouseman or his authorized agent at all times. In case there is any doubt whether all 
 keys to the warehouse are in possession of the warehouseman or his agents the warehouseman 
 shall provide new locks and keys for the warehouse. 
 
 SEC. 8. It shall be the duty of a licensed field warehouseman to keep the licensed 
 field warehouse securely locked at all times except when the warehouseman, the custodian, 
 or an assistant custodian is present, and no person other than the warehouseman, the cus- 
 todian, or an assistant custodian shall have access to the licensed warehouse or the products 
 stored therein except in the presence of and with the consent of such warehouseman, cus- 
 todian, or assistant custodian: Provided, That if any night watchman in the employ of the 
 owner of the building is required to enter the licensed warehouse under an insurance re- 
 quirement and his only duties at the warehouse building are those of a night watchman he may 
 be given a key to the warehouse for that purpose, if the approval of the bureau is first 
 secured and the watchman's service is fully provided for in the field warehouse lease 
 agreement: Provided further, That the provisions of this section shall not apply in the case 
 of warehouses where the bin system is in effect as outlined in section 15 of these regula- 
 tions. The warehouseman shall at all times exercise absolute and complete control and 
 dominion over the licensed warehouse and the produces stored therein to the complete exclu- 
 sion of all parties except as provided herein. 
 
- 17 - 
 
 SEC. 9. No misleading name or designation shall be applied to any field wareuouse 
 licensed under the act, but in every case the name shall indicate that the warehouse is 
 being operated as a public warehouse by the warehouseman as lessee. 
 
 SEC. 10. Paragraph 1. Before a license to conduct a field warehouse is granted under 
 the act, the warehouseman shall file with the bureau, in accordance with the requirements 
 of the commodity regulations, a copy of his rules and a schedule of charges; and, in ad- 
 ition, he shall file copies of all contracts and agreements entered into by and between 
 him and any depositor or the lessor of the field warehouse which in any way relate to the 
 establishment, operation, management, or payment of expenses connected with the operation 
 of the warehouse. If there are any agreements or understandings between the lessor of the 
 warehouse and the lessee with respect to any of the aforementioned that have not been reduced 
 to writing, the warehouseman shall file with the bureau a written statement setting forth 
 the substance of such verbal agreements and understandings. 
 
 Par. 2. All warehouses licensed under the act must be operated as public warehouses, 
 and no rules or schedules of charges filed by any warehouseman applying for a license under 
 the act shall be approved by the Secretary, or his designated representative, if it is not 
 clear that the requirements of section 13 of the act can and will be met. 
 
 SEC. 11. Every receipt, whether negotiable or nonnegotiable, issued for products 
 stored in a field warehouse, shall, in addition to complying with the requirements of section 
 . 18 of the act and regulation 4 of the applicable commodity regulations, embody within its 
 printed terms a statement that the warehouseman is lessee of the warehouse. 
 
 SEC. 12. Warehouse receipts for products stored in a field warehouse licensed under 
 the act shall be issued in the town or city where the warehouse is located, except that 
 where two or more licensed field warehouses are operated by a warehouseman receipts for all 
 such warehouses may be issued from a central point, provided such central point is not more 
 than 25 miles distant from the farthest warehouse. In cases where receipts are issued from 
 central points the warehouseman shall, when requested by department representatives, provide 
 transportation for such representatives, when engaged in regular inspection work, to and 
 from such warehouses. 
 
 SEC. 13. No field warehouse license shall be issued by the Secretary, or his desig- 
 nated representative, unless the lessee is wholly disinterested with respect to depositors 
 and the application is supported by the original lease and one copy, dated and signed by the 
 contracting parties, and embodying the following: (a) A definite period of time no L less 
 than one year after the date of execution, (b) a description of the exact space leased to 
 the field warehouseman and a statement that all of such space is to be covered by the 
 license, if issued, and (c) evidence that said lease has been duly recorded in the county 
 where such warehouse is located, except where there is a statutory inhibition against the 
 recording of such leases, and (d) a clause prohibiting the cancellation of the lease or 
 ejecting the warehouseman so long as any receipt issued under the act and the regulations 
 is outstanding. 
 
 SEC. 14. A license to conduct a field warehouse under the act shall not be issued, 
 or if issued, shall not be allowed to remain in effect, if any depositor agrees or has 
 agreed with the warehouseman to indemnify him against loss due to failure of the warehouseman 
 to exercise such care of the products in his custody as a reasonably prudent owner would 
 exercise or as the warehouseman is required to exercise under the act and regulations. 
 
 SEC. 15. In the case of warehouses where approved storage bins have been erected 
 and such bins can be sealed with seals furnished by the department for the purpose, the bins 
 may be licensed and the depositors may, with the consent of the warehouseman, have access 
 to such bins for the purpose of placing goods therein before the seals are affixed and '. afore 
 
UNIVERSITY OF FLORIDA 
 
 I in mil mil ii mil 
 
 3 1262 08921 5148 
 
 - 18 - 
 
 therefrom after the outstanding receipts for all goods in such bin or bins have been sur- 
 rendered to and cancelled by the warehouseman, and the warehouseman or his custodian, or 
 assistant custodian, has broken the seals. Under no circumstances shall anyone other than 
 the licensed warehouseman, the custodian, assistant custodian, or duly appointed employees 
 of the Department of Agriculture in the performance of their official duties, affix any 
 seals to a licensed bin or remove a seal therefrom. Where bins are licensed no receipts 
 may be issued for products stored in any bin until after the seals have been affixed, and 
 no seals may be broken for the purpose of delivering the products until the receipts covering 
 such products have been surrendered and canceled. Seals may be broken to permit inspecting 
 and reasonable sampling of the goods; but such work must be done by the licensed warehouse- 
 man, the custodian, or an assistant custodian, and after inspecting or sampling new seals 
 shall be affixed to the bin. 
 
 SEC. 16. Paragraph 1. Each licensed field warehouseman shall, during the period of 
 his license, maintain suitable signs on the licensed property in such manner as to give 
 ample public notice that such property has been leased by the warehouseman and is controlled 
 and operated by him. Such signs must be of such size and be so affixed to the outside of 
 each licensed building, and at appropriate places within the building, as to attract the 
 attention of and give notice to the public as to the real tenancy, and must be placed at 
 each point of entry to and exit from the licensed space. 
 
 Par. 2. Such signs shall include the following: (a) The name and address of the 
 licensee, (b) the name of the warehouse, (c) the license number of the warehouse, (d) a 
 statement that the warehouseman is lessee, and (e) the words "Public Warehouse." 
 
 Par. 3. Such other wording or lettering as is not inconsistent with the purpose of 
 the act and these regulations and is approved by the bureau may appear in the sign or signs. 
 
 Par. 4. The warehouseman shall not permit signs to remain on his licensed property 
 which might lead to confusion as to the tenancy.