IN RE COLONIAL DISTRIBUTING COMPANY

• Decision Date: 03 December 1968
• Docket Number: No. 67-28.,67-28.
• Citation: 293 F. Supp. 1235
• Parties: In the Matter of COLONIAL DISTRIBUTING COMPANY, Bankrupt.
• Court: U.S. District Court — District of South Carolina

293 F. Supp. 1235

In the Matter of COLONIAL DISTRIBUTING COMPANY, Bankrupt.

No. 67-28.

United States District Court D. South Carolina.

December 3, 1968.

Roy D. Bates, of Marchant, Bristow & Bates, Columbia, S. C., for trustee.

E. N. Brandon, Asst. Atty. Gen. of South Carolina, Columbia, S. C., for William L. Harrelson, Commissioner of Agriculture.

HEMPHILL, District Judge.

Review of the Special Master in Bankruptcy's findings supporting the trustee's objection to the claim of South Carolina Department of Agriculture is sought in this forum.¹ The claim² was initially made by Commercial Bank and Trust Company along with Carolina National Bank of Columbia. The State of South Carolina has paid these claims and has taken an assignment of any rights the bank might have had under the warehouse receipts.

Prior to bankruptcy, on September 17, 1959, the Bankrupt leased its warehouse property to the South Carolina Department of Agriculture. This is the property on which the Bankrupt stored and distributed its liquors. A recorded real property lease remained in effect until February 1967 at which time the State took possession of the warehouse and liquors therein. Dorothy B. Bass served as warehouse manager by appointment of the State Agriculture Department but received her salary from the Bankrupt. Loans on the stock of the Bankrupt were made by the two banks who in turn took warehouse receipts and demand promissory notes.

A hearing was held on September 8, 1967, to determine the validity of the claim of the banks and the objections of the trustee.

The trustee's objection³ to the claim was based on the alleged lack of valid warehouse receipts pledged to the banks. His position is that there was no exclusive possession by the warehouse manager sufficient to constitute a definite sequestration. He further asserts that the goods were commingled in the warehouse indiscriminately without regard to the warehouse receipts; and takes the position that the statutory requirements of the Uniform Warehouse Receipts Act (S.C.Code 69-162) were not met in that the receipts did not show whether the goods would be delivered to bearer or to a specified person or his order nor did there appear on the receipt a rate of charge. The trustee insists that subsequent possession by the State would not cure the invalidity of the warehouse receipts because the goods were not fungible.⁴

The State, by its brief of February 2, 1968, positions that the receipts were negotiable, representing the goods themselves, thereby avoiding any need to segregate the goods under warehouse receipts; accordingly, it was not necessary to have possession. Further positions taken by the State were that the language of the receipts satisfied the statutory requirement of § 69-162(4)⁵; that failure to state the rate charged was not fatal to validity; and that goods under warehouse receipts were fungible by custom and by commodity, and as such, could properly be commingled.⁶ This would buttress the State's position that subsequent possession by locking up the warehouse would give it a secured interest in the liquor equivalent to the value of the warehouse receipts. A final position taken by the State is that its lease was recorded giving constructive notice and from this any interested party could come to the Department of Agriculture and determine that the goods were under warehouse receipts.

The Special Master in Bankruptcy rendered his findings on April 8, 1968. He found that there was no recording of the security interest of the State as required by S.C.Code Ann. (1962) Section 60-101 and Section 57-308, incumbent on the State to validate its claim through the use of field warehousing.⁷ From this he determined, under the field warehousing law, that the State had not maintained such exclusive possession of the goods under receipt as would breathe life into an otherwise invalid field warehouse (receipt) financing arrangement. The only elements indicating possession on the part of claimant were "No Smoking" signs over the name of the South Carolina Department of Agriculture, the existence of the recorded lease, and the appointment of a warehouse manager who signed the receipts issued against the goods. He found, with these exceptions, that possession and control was exclusively in the hands of the Bankrupt with the exception of certain periodical checks by the State.

The Special Master did not make a specific finding of fact relative to the issue of insolvency at the time when the transfer is claimed to have taken place by possession. He did find, however, that the State took possession of the warehouse in February, 1967, after an inventory revealed a shortage of goods under receipts. Not crucial to the issues before this reviewing authority is the conclusion that there was reasonable cause to believe that the Bankrupt was insolvent at this time. See General Electric Credit Corporation v. Davis, 224 F. 2d 322 (4th Cir. 1955). The record further supports the finding that the Bankrupt was in fact insolvent in February, 1967.

The Special Master further found that the receipts carried absolute title to the goods described but that a prerequisite to this was a need for valid negotiable warehouse receipts, and since there were no such receipts, due, among other things, to the lack of possession⁸ and control of the goods under the receipts, that this would go only to establish the good faith of the lending party. He also found that the State enjoyed no more protection due to its sovereignty than would any other operator of a warehouse system. Therefore the same requirements of validity would apply to the State as would apply to any other warehouse system.

The State filed its objections to the Report of the Special Master which detailed the position the State had taken prior to the Special Master's Report. An August 18, 1968, hearing was held in this court and supplemental brief of the State seeks to buttress its position in that it had possession of all goods prior to the effective date of bankruptcy, which it alleges is March 2, 1967, and therefore had a possessory interest in the goods. In support of this, South Carolina asserts that the goods are fungible and as such there was no necessity to segregate them. The trustee, in reply, relying on the case of Whitney National Bank of New Orleans v. Sandoz, 362 F.2d 605 (5th Cir. 1966) counters that this case stands for the proposition that if the original warehouse receipt was sham or spurious then the defect cannot be cured by subsequent possession and the trustee can maintain his rights as a hypothetical lien creditor under Section 70, sub. c of the Bankruptcy Act.

The universal rule is that the findings of the Referee should be adopted unless clearly erroneous or are not supported by substantial evidence. Joy Manufacturing Company v. Brooks, 224 F.Supp. 537 (S.D.W.Va.1963) aff'd 325 F.2d 721 (4th Cir. 1963). Collier on Bankruptcy § 39.28, Vol. 2, pp. 1514-1528.

The findings of the Special Master, based on the record, in thumbnail form are as follows: that the Bankrupt leased its property to the State on September 17, 1959, that this was the property where Bankrupt received, stored, and distributed its liquors; Dorothy B. Bass served as warehouse manager by appointment of the Commissioner of Agriculture but received her salary and instructions from the Bankrupt; that warehouse receipts were issued on liquors purchased by employees of Bankrupt indicating on the warehouse receipts brand, size, number of cases and value; that these receipts were signed by the warehouse manager without accuracy and without control over the sale or distribution of liquors from the warehouse; that nothing was done to identify the goods under warehouse receipts; that inventory taken by the State was without regard to the specific brands or sizes called for in the receipts; that officers and employees had possession of the keys and had complete control of the goods under receipt and some of the goods were sold to retailers without notations on the receipt, and that the only notice which would indicate that the warehouse was under lease was a sign "No Smoking, South Carolina Department of Agriculture."

From these facts the Special Master disallowed the claim of the State. The State now urges that this court find error with the findings of the Special Master and their application to the law of the case. As the Special Master stated in his opinion, two basic methods exist by which one can perfect a security interest. The usual method is by following the recording statutes of this State.⁹ The second method is the pledge device. This theory of, or method of perfecting a security interest against competing claims of lien creditors is that possession of the collateral is passed to the pledgee. This prevents creditors from being misled. The pledge device is not required to be recorded in South Carolina.¹⁰

The use of field warehouse receipts as a form of financing developed from the pledge theory. Field warehousing is used when it is impractical to move the goods; instead the goods remain on the premises of the manufacturer or merchant (in this case a wholesaler). To make this arrangement effective the goods must be delivered to a warehouseman who is given exclusive possession of the goods. The warehouseman then issues warehouse receipts which evidence the pledge and serve to secure loans made by third persons on faith of the receipts and who look to the deposited goods as/for security. It is simply a matter of having the warehouseman come to the borrower rather than the goods going to the warehouseman. Whitney National Bank of New Orleans v. Sandoz, 362 F.2d 605 (5th Cir. 1966) citing Lawrence Warehouse Company v. McKee, 301 F.2d 4 (5th Cir. 1962); Whitney, Law of Modern Commercial Practices, 938, § 664; Financing Through Field Warehousing, 69 Yale L.J. 663.

The State asserts that the recording of its real property lease on the building...