Midori Shimamoto, &c., et al.,
Appellants,
v.
S&F Warehouses, Inc., et al.,
Respondents.
et al.,
Defendants.
2002 NY Int. 124
On this appeal we consider whether plaintiff-merchant
can maintain an action under UCC 7-210 for damages allegedly
caused by defendants' conduct in the sale of commercial goods in
order to satisfy a lien for unpaid warehouse charges. We agree
with the Appellate Division that there was insufficient evidence
of willful conduct to hold defendants liable for conversion
damages under UCC 7-210(9). However, a question exists as to
whether defendants may be held liable for a non-willful violation
Between 1980 and 1981, plaintiff's decedent, Bart Schwartz, a textile importer and owner of plaintiff corporation Ultra Cashmere House, Ltd., imported more than 60,000 yards of ultra cashmere -- a synthetic suede-like fabric. On its arrival from Italy, the material was stored at a bonded Brooklyn warehouse not a party to this action. When a dispute arose between Schwartz and the warehouse over an alleged loss of several cartons of fabric, the United States Customs Service, which holds an as-yet unpaid lien for customs duties, requested that defendant S&F Warehouse store the material in its bonded Brooklyn Navy Yard warehouse. In November 1986, defendant S&J Trucking transported the material to its affiliate S&F Warehouse. Plaintiff agreed to pay $640.80 per month for storage of the material; the agreement also capped defendant's liability for damages to the goods at 100 times the monthly storage fee. Plaintiff's account thereafter fell into arrears.
In 1991, the warehouse retained defendant law firm
Simon, Meyrowitz, Meyrowitz & Schlussel to collect unpaid storage
fees. The law firm, in turn, hired defendant FES Auctions, Inc.
to satisfy the lien by selling the goods. FES prepared a
"Notice of Sale on Lien," addressed to Schwartz at a Manhattan
address, which stated that S&F Warehouse claimed a lien in excess
The auctioneer forwarded a copy of the notice to the law firm, which did not review it for compliance with UCC requirements before FES mailed it. After advertising the sale in the September 9th and 16th issues of American Banker, a daily publication of limited circulation, the auctioneer conducted a sale on September 24, 1991 at the law firm offices. With no other prospective buyers in attendance, the auctioneer entered and accepted a bid of $25,000 on behalf of S&F Warehouse. No money was exchanged; S&F merely obtained a bill of sale, becoming title owner of the goods. Two days after the sale Schwartz appeared at defendant law offices inquiring after his goods and was informed that the fabric had been sold at auction to the warehouse defendants. Schwartz did not attempt to settle his warehouse account or recover the goods.
Plaintiff commenced this action in Supreme Court
The Appellate Division reversed, vacating the directed
verdicts against the warehouse and trucking defendants and in
favor of the law firm (257 2 334 [1999]). In its view, UCC 7-
210(1) imposed a requirement of reasonableness on the sale of
Focusing on the requirement in UCC 7-210(9) of a
"willful violation" before liability for conversion damages could
attach, the Appellate Division observed that among the few
authorities that had considered the question of willfulness,
subsection 9 called for a reckless disregard for the requirements
of the statute or a deliberate unwillingness to ascertain those
requirements. The Appellate Division further determined that
although the preparation of a notice of lien sale without
reference to plaintiff's right to challenge the lien in court
might be deemed inadvertent, it could not be deemed willful.
Finally, the Appellate Division dismissed the claims against all
the individually named defendants and reversed the jury's award
of damages. Although the court noted a number of other
deficiencies in the notice, such as the failure to publish the
telephone number or address of the law office where the sale was
to take place, ultimately the court determined that "UCC 7-210(1)
Before the second trial began, the law firm and warehouse defendants moved to dismiss plaintiff's remaining claims on the grounds that plaintiff failed to demand return of the goods. Citing I.C.C. Metals, Inc. v Municipal Warehouse Co. (50 2 657 [1980]) and Claflin v Meyer (75 NY 260 [1878]), Supreme Court held that a demand for return of goods was a condition precedent to commencement of an action. Since plaintiff failed to satisfy this condition, Supreme Court dismissed the remaining claim for negligence. The Appellate Division affirmed for the reasons stated by Supreme Court (288 2 150 [2001]). We granted plaintiff leave to appeal (97 2 613 [2002]), bringing up for review the most recent Appellate Division order as well as the prior nonfinal orders of that court, and now modify.
Analysis
Enforcement of what has traditionally been called the "warehouseman's lien" is governed by UCC 7-210. That section provides a self-help mechanism for recovery of delinquent storage charges through the sale of stored goods. The statute details procedures for enforcement of liens on goods stored by a merchant in the course of business, in subsection (1), and enforcement of liens on non-merchant goods in subsection (2); however, notice of UCC 7-211 rights is a requirement for both types of foreclosure sales.[2] The pertinent portion of subsection (1) follows:
"a warehouseman's lien may be enforced by public or private sale of the goods in bloc or in parcels, at any time or place and on any terms which are commercially reasonable, after notifying all persons known to claim an interest in the goods. Such notification must include a statement of the amount due, the nature of the proposed sale and the time and place of any public sale, and, unless the goods are perishable or threaten to decline speedily in value, it shall state that any person claiming an interest in the goods is entitled to bring a proceeding under section 7-211 within ten days of the service of the notice if he disputes the validity of the lien or the amount claimed" (emphasis added).
UCC 7-210(9) describes damages that may be recovered when there has been a failure to comply with other requirements of the section. Specifically, it provides that a warehouse:
"is liable for damages caused by failure to comply with the requirements for sale under this section and in case of willful violation is liable for conversion."
This section defines the circumstances under which two different types of damages are awarded; it does not, however, create two separate causes of action. The violation that gives rise to a cause of action is a failure to comply with requirements of section 7-210. Once the degree of culpability associated with the violation is fixed, the appropriate damages follow. Conversion damages flowing from willful violation under UCC 7- 210(9) are the value of the goods at the time of conversion less any offset for unpaid shipping and storage charges (see 3 White & Summers, Uniform Commercial Code § 28-6, at 317 [Practitioner's 4th ed]). By comparison, actual damages flowing from a violation that is less than willful have been defined as the difference between the amount actually made from the sale of goods and the amount that would have been realized had the sale been commercially reasonable (see 3 White & Summers, Uniform Commercial Code § 28-6, at 317-318 [Practitioner's 4th ed]).
This Court has not previously considered what
constitutes a willful violation for purposes of UCC 7-210(9).
The Appellate Division defined the term as "a grossly reckless
We also agree with the Appellate Division that the evidence at trial was not sufficient to show recklessness on the part of the defendants here. The warehouse and trucking defendants prudently referred collection of their lien to an attorney who, in turn, reasonably hired an auctioneer to perform a sale. The auctioneer, unaware of the specific UCC provisions relating to warehouse lien sales, prepared an outdated "form" notice of sale which did not contain a notice of UCC 7-211 rights. Even the failure of the attorney to review the notice of sale, which is perhaps the most troubling of the lapses that took place here, did not evince the intentional disregard that is at the core of recklessness. Thus, we are left with a possible statutory violation compensable only by "damages caused by failure to comply with the requirements for sale" (see UCC 7- 210[9]).
The lien foreclosure process of section 7-210 does not,
I.C.C. Metals, Inc. v Municipal Warehouse Co., relied
on by the courts below, does not compel such a requirement (see
, 50 NY2d 657 [1980]). The issue in I.C.C. Metals was whether a
contractual limitation on a warehouse's liability could be given
effect where the plaintiff established entitlement to summary
judgment on a claim of conversion. In that case, the plaintiff
stored three lots of an industrial metal worth $100,000,
receiving warehouse receipts containing a limitation of the
defendant warehouse's liability. When plaintiff requested one of
the lots back, defendant admitted the entire bailment had been
More significantly, I.C.C. Metals involved claims for common law negligence and conversion. Unlike this case, I.C.C. Metals did not involve a warehouse lien, much less an attempt to enforce one, or this unique statutory cause of action for improper foreclosure. Schwartz v Capital Liquidators, Inc. (984 F.2d 53 [2d Cir 1993]) likewise involved a claim for common law conversion. We perceive no need to add a requirement of a demand for return of goods into a case involving a statutory cause of action based on a failure to comply with the statutory foreclosure process in UCC 7-210. To the extent plaintiff is entitled to damages here, it is for the warehouse's failure to follow the requirements of the statute. Moreover, the policy considerations that make a demand appropriate for a claim of common law conversion are not present in the context of UCC 7- 210.
Plaintiff also contends that the failure to include notice of section 7-211 rights in the notice of sale was a violation of current subsection (1) requirements. Defendants candidly admit this failure. As commentators have noted, the notice requirement in UCC 7-210(1) is a strict one (see 3 White & Summers, Uniform Commercial Code § 28-6, at 314-316 [Practitioner's 4th ed]).[3] Even if a failure to comply with this requirement violates some right, a plaintiff still must plead and prove that the violation caused damages. Here plaintiff has failed to demonstrate how the omission of section 7-211 rights caused damage since the existence of the lien is conceded.
However, plaintiff has also alleged that the
foreclosure was not conducted in a commercially reasonable
manner. Plaintiff has not had the opportunity to establish that
fact and, if established, his actual damages caused thereby.
Thus, remittal is necessary. In order to establish entitlement
to damages, plaintiff is obliged to show how some aspect of the
sale rendered it commercially unreasonable, resulting in lower
proceeds than a commercially reasonable sale would have produced
(see, 3 White & Summers, Uniform Commercial Code § 28-6 at 317-
318 [Practitioner's 4th ed]). Proof of the value of the
Accordingly the order of the Appellate Division should be modified, without costs, the complaint against the law firm and warehouse defendants reinstated and the matter remitted to Supreme Court for further proceedings in accordance with this Opinion and, as so modified, affirmed.
Like the courts below, I would grant defendants summary judgment because plaintiffs failed to tender the outstanding storage fees and demand return of their goods. That is clearly the better, and correct, result in the present circumstances -- where the commercial warehouseman was the sole bidder, bought the 60,000 yards of ultra cashmere at a price less than the value of the lien and, even after the sale, itself retains the goods.
This is the first case in which we are called upon to
construe UCC 7-210. It is not, however, the first case in which
a warehouseman is accused of conducting a warehouse sale
improperly, and therefore misappropriating plaintiffs' goods.
Such cases arose under General Business Law section 118, the
predecessor to UCC 7-210 (see e.g. Lake v Dye, 232 NY 209 [1921];
Maritime World Corp. v Grefe Steel Warehouse Corp., 154 NYS 2d
684 [Sup Ct, Trial Term, NY County 1956]). As those cases
illustrate, courts likened the bailor's cause of action to a
claim for conversion, although that term did not appear in
General Business Law section 118 (see Lake, 232 NY at 212;
Maritime, 154 NYS at 685). They did so because they recognized
the cause of action as one based on an alleged interference with
As those cases further illustrate, courts assessing the conduct of warehouse sales routinely drew on the common law to fill gaps in the existing legislative scheme. For example, in Lake we used common law precedents to determine the measure of damages. We also recognized that while the statutes creating warehouse sale procedures were enacted in derogation of the common law, it would be "unreasonable" to expect warehousemen advertising such sales to list the items offered in as much detail as the bailors inevitably wished. And we brushed aside a bailor's arguments based on a discrepancy between the warehouse sale date on the notice to him and the date on the public announcement -- for we recognized that this discrepancy did not harm the plaintiff under the circumstances. In short, we construed the statute with sensitivity to commercial reality. And we did so with considerably less statutory encouragement than we have today -- for unlike UCC 7-210, General Business Law section 118 did not explicitly authorize courts to apply a rule of reason to any aspect of a disputed warehouse sale.
UCC 7-210 departs from its predecessor, General
Business Law section 118, in several respects. First, it
provides a simplified procedure for warehouse sales when the
In adopting these procedures, the drafters doubtless anticipated cases in which a warehouseman would sell bailed goods to a third party to satisfy a lien -- as was already possible under General Business Law section 118 -- and cases in which the warehouseman would buy the goods at a public sale and resell them, or even possibly utilize them. Here, however, the warehouseman has bought the bailed goods, and has neither sold them nor done anything else with them. In these unusual circumstances, we look to related statutory provisions and the common law for guidance.
Article I of the UCC sets forth the Legislature's
intention for the statute to be construed to promote the
continued expansion of commercial practices; presumes a general
Under UCC 7-403, a warehouseman generally must deliver bailed goods to a person entitled to the goods under a warehouse receipt, but is excused from doing so if -- among other possibilities -- the claimant fails to satisfy the bailee's lien upon request (UCC 7-403[2]) or the warehouseman establishes "previous sale or other disposition of the goods in lawful enforcement of a lien * * *" (UCC 7-403[1][c]). Thus, the design of UCC 7-403 contemplates that a lawful warehouse sale may be asserted as a defense under that section when a bailor claims a warehouse has wrongfully withheld goods. It also presupposes that bailors want to possess their goods and will seek to reclaim them from the warehouse if they are still available. UCC 7-210, with its procedures for the conduct of warehouse sales, should be construed to harmonize with this provision.
As commentators have recognized, UCC 7-210 is part of
an integrated statutory scheme, to be read in pari materia with
UCC 7-403:
"Section 7-210(1) and (2) sets forth procedures whereby the warehouseman may foreclose its lien through sale of stored goods. These procedures are designed to protect the owner or other claimant's right to redeem the goods (7-210[3]) as well as to secure the likelihood that a fair price will be realized from the sale foreclosing the warehouseman's specific lien. The warehouseman is not to sell more goods than reasonably necessary to satisfy the warehouseman's claims. Further, 7-403(1)(c) provides that a proper foreclosure sale gives the warehouseman a lawful excuse for non- delivery of the goods sold. The warehouseman must, however, account for any surplus from the sale proceeds under 7-210(6)" (3 White & Summers, Uniform Commercial Code § 28-6, at 314 [4th ed.] [emphasis added]). As the emphasized language recognizes, a violation of UCC 7-210 may take away whatever "lawful excuse" a warehouseman would otherwise have had for non-delivery under UCC 7-403. And, of course, most warehouse sales will result in the goods' passing into the hands of a third party who will hold them "free of any rights of persons against whom the lien was valid" (UCC 7-210[5]), rendering delivery of the goods by the warehouseman impossible and demand by the bailor futile.
But UCC 7-210 was not intended to obviate a request for
the goods when circumstances overwhelmingly suggest that their
return is possible and would occur immediately upon tender.
Under these circumstances, plaintiffs generally should be
required to demand the goods, regardless of whether they style
Footnotes
1 Bart Schwartz died during the pendency of this action. He has been substituted by the administratrix of his estate.
2 Subsequent to this Court's holding in Svendsen v Smith's Moving and Trucking Co., (, 54 NY2d 865 [1981]) which found UCC 7- 210(2) violative of due process in permitting ex parte lien foreclosures against non-merchants without notice, the Legislature amended both subsections (1) and (2) of UCC 7-210 to require notice of section 7-211 rights "to any person claiming an interest in the goods" (see McKinney's 1982 Session Laws, ch 528). As a result, notice of section 7-211 rights is now mandatory in both kinds of warehouse lien foreclosures.
3 Although most states do not require notice of the right to challenge a lien in a special proceeding, to the extent commentators have observed that other notice requirements of this subsection are strictly enforced, the same should also be true of New York's UCC 7-211 notice requirement.