This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 578.— A customer, who is a produce dealer and warehouseman, has advances secured by assignments under section 74, and by warehouse receipts given by other warehousemen. He sells us certain bills of exchange on English houses, these being secured by warehouse receipts (his own and others) which are to be retained here by us until the goods are ordered forward by drawees. Out of the proceeds or purchase price of the bills he pays off his advances.
When the goods are ordered forward by the drawees we are to exchange the warehouse receipts for the bills of lading, and send them on to be surrendered on payment of the drafts. We hold a written promise from our customer that he will give security under section 74, or by transferring to us warehouse receipts or bills of lading for any advances we make him.
(1) Seeing that new money for the bills of exchange does not pass from us to him, except by way of credit on a previous indebtedness, are the warehouse receipts attached thereto validly acquired, apart from the written promise ?
(2) Is the party's own warehouse receipt a valid security, and if not, are we under any obligation to the drawees in respect thereto?
(3) Would the bills of lading received in exchange for the warehouse receipts be validly acquired ?
Answer.— (1) The question assumes that the bills were sold to the bank. If so, the rights of the bank are limited to its rights as holders of these bills, and of the security with them. We think there is no doubt that the securities in such ease be validly acquired. The purchase of a bill of exchange drawn by a customer on another party, with documents attached, is a new transaction, notwithstanding that the proceeds of the draft are used to pay off a previous indebtedness.
(2) Under the Bank Act a warehouse receipt must be given by a person not the owner of the goods. The customer's own receipt, therefore, covering his own goods, would not be a valid security in the hands of the bank. The bank would not, however, be under any obligation to the drawees with respect to the security, unless it should make a statement or representation which might be held to amount to a warranty, or unless there were fraud on the part of the bank.
(3) The bills of lading received in exchange for the valid warehouse receipts would be validly acquired, but we do not think that sub-section 2 of section 75 could be relied on in so far as the bill of lading is substituted for an invalid warehouse receipt. As regards the latter, the bank's rights depend on the written promise referred to. If this is sufficient to cover the acquisition of the bill of lading after the negotiation of the bill of exchange, it would no doubt be a valid security in the hands of the bank.