Rights acquired in absence of due negotiation; effect of diversion; stoppage of delivery.

A transferee of a document of title, whether negotiable or nonnegotiable, to which the document has been delivered but not duly negotiated, acquires the title and rights that its transferor had or had actual authority to convey. In the case of a transfer of a nonnegotiable document of title, until but not after the bailee receives notice of the transfer, the rights of the transferee may be defeated: By those creditors of the transferor which could treat the transfer as void under § 28:2-402 or § 28:2A-308; By a buyer from the transferor in ordinary course of business if the bailee has delivered the goods to the buyer or received notification of the buyer’s rights; By a lessee from the transferor in ordinary course of business if the bailee has delivered the goods to the lessee or received notification of the lessee’s rights; or As against the bailee, by good-faith dealings of the bailee with the transferor. A diversion or other change of shipping instructions by the consignor in a nonnegotiable bill of lading which causes the bailee not to deliver the goods to the consignee defeats the consignee’s title to the goods if the goods have been delivered to a buyer in ordinary course of business or a lessee in ordinary course of business and, in any event, defeats the consignee’s rights against the bailee. Delivery of the goods pursuant to a nonnegotiable document of title may be stopped by a seller under § 28:2-705 or a lessor under § 28:2A-526, subject to the requirements of due notification in those sections. A bailee that honors the seller’s or lessor’s instructions is entitled to be indemnified by the seller or lessor against any resulting loss or expense. “Rights”. Section 1-201. “Purchaser”. Section 1-201. “Notification” Section 1-202. “Lessee in ordinary course”. Section 2A-103. “Honor”. Section 1-201. “Goods”. Section 7-102. “Good faith”. Section 1-201 [7-102]. “Duly negotiate”. Section 7-501. “Document of Title”. Section 1-201. “Delivery”. Section 1-201. “Creditor”. Section 1-201. “Consignor”. Section 7-102. “Consignee”. Section 7-102. “Buyer in ordinary course of business”. Section 1-201. “Bill of lading”. Section 1-201. Definitional Cross References: “Bailee”. Section 7-102. Point 5: Section 1-202. Point 4: Sections 2-705 and 7-403(a)(4). Point 3: Sections 7-303, 7-403(a)(5) and 7-404. Point 2: Sections 2-403 and 2A-304. Cross References: Point 1: Sections 2-403 and 7-506. 5. Section 1-202 gives the bailee protection, if due diligence is exercised where the bailee’s organization has not had time to act on a notification. 4. Subsection (d) gives the carrier an express right to indemnity where the carrier honors a seller’s request to stop delivery. 3. Subsection (c) is in part a reiteration of the carrier’s immunity from liability if it honors instructions of the consignor to divert, but there is added a provision protecting the title of the substituted consignee if the latter is a buyer in ordinary course of business. A typical situation would be where a manufacturer, having shipped a lot of standardized goods to A on nonnegotiable bill of lading, diverts the goods to customer B who pays for them. Under pre-Code passage-of-title-by-appropriation doctrine A might reclaim the goods from B. However, no consideration of commercial policy supports this involvement of an innocent third party in the default of the manufacturer on his contract to A; and the common commercial practice of diverting goods in transit suggests a trade understanding in accordance with this subsection. The same result should obtain if the substituted consignee is a lessee in ordinary course. The extent of the lessee’s interest in the goods is less than a buyer’s interest in the goods. However, as against the first consignee and the lessee in ordinary course as the substituted consignee, the lessee’s rights in the goods as granted under the lease are superior to the first consignee’s rights. Subsection (b)(2)&(3) require delivery of the goods. Delivery of the goods means the voluntary transfer of physical possession of the goods. See amended 2-103. 2. As in the case of transfer—as opposed to “due negotiation”—of negotiable documents, subsection (a) empowers the transferor of a nonnegotiable document to transfer only such rights as the transferor has or has “actual authority” to convey. In contrast to situations involving the goods themselves the operation of estoppel or agency principles is not here recognized to enable the transferor to convey greater rights than the transferor actually has. Subsection (b) makes it clear, however, that the transferee of a nonnegotiable document may acquire rights greater in some respects than those of his transferor by giving notice of the transfer to the bailee. New subsection (b)(3) provides for the rights of a lessee in the ordinary course. A necessary part of the price for the protection of regular dealings with negotiable documents of title is an insistence that no dealing which is in any way irregular shall be recognized as a good faith purchase of the document or of any rights pertaining to it. So, where the transfer of a negotiable document fails as a negotiation because a requisite indorsement is forged or otherwise missing, the purchaser in good faith and for value may be in the anomalous position of having less rights, in part, than if the purchaser had purchased the goods themselves. True, the purchaser’s rights are not subject to defeat by attachment of the goods or surrender of them to the purchaser’s transferor (contrast subsection (b)); but on the other hand, the purchaser cannot acquire enforceable rights to control or receive the goods over the bailee’s objection merely by giving notice to the bailee. Similarly, a consignee who makes payment to its consignor against a straight bill of lading can thereby acquire the position of a good faith purchaser of goods under provisions of the Article of this Act on Sales ( Section 2-403), whereas the same payment made in good faith against an unendorsed order bill would not have such effect. The appropriate remedy of a purchaser in such a situation is to regularize its status by compelling indorsement of the document (see Section 7-506). Purposes: 1. Under the general principles controlling negotiable documents, it is clear that in the absence of due negotiation a transferor cannot convey greater rights than the transferor has, even when the negotiation is formally perfect. This section recognizes the transferor’s power to transfer rights which the transferor has or has “actual authority to convey.” Thus, where a negotiable document of title is being transferred the operation of the principle of estoppel is not recognized, as contrasted with situations involving the transfer of the goods themselves. (Compare Section 2-403 on good faith purchase of goods.) This section applies to both tangible and electronic documents of title. Changes: To include cross-references to Article 2A and for style. Prior Uniform Statutory Provision: Former Section 7-504. “Rights”. Section 1-201. “Purchaser”. Section 1-201. “Notification”. Section 1-201. “Honor”. Section 1-201. “Goods”. Section 7-102. “Good faith”. Section 1-201. “Duly negotiate”. Section 7-501. “Document”. Section 7-102. “Delivery”. Section 1-201. “Creditor”. Section 1-201. “Consignor”. Section 7-102. “Consignee”. Section 7-102. “Buyer in ordinary course of business”. Section 1-201. “Bill of lading”. Section 1-201. Definitional Cross References: “Bailee”. Section 7-102. Point 4: Sections 2-705 and 7-403(1)(d). Point 3: Sections 7-303 and 7-403(1)(e). Point 2: Section 2-403. Cross References: Point 1: Sections 2-403 and 7-506. 5. Section 1-201(27) gives the bailee protection, if due diligence is exercised, similar to that found in the third paragraph of Section 33, Uniform Bills of Lading Act, where the bailee’s organization has not had time to act on a notification. 4. Subsection (4) gives the carrier an express right to indemnity where he honors a seller’s request to stop delivery. 3. Subsection (3) is in part a reiteration of the carrier’s immunity from liability if it honors instructions of the consignor to divert, but there is added a provision protecting the title of the substituted consignee if the latter is a buyer in ordinary course of business. A typical situation would be where a manufacturer, having shipped a lot of standardized goods to A on nonnegotiable bill of lading, diverts the goods to customer B who pays for them. Under orthodox passage-of-title-by-appropriation doctrine A might reclaim the goods from B. However, no consideration of commercial policy supports this involvement of an innocent third party in the default of the manufacturer on his contract to A; and the common commercial practice of diverting goods in transit suggests a trade understanding in accordance with this subsection. 2. As in the case of transfer—as opposed to “due negotiation”—of negotiable documents, subsection (1) empowers the transferor of a nonnegotiable document to transfer only such rights as he himself has or has “actual authority” to convey. In contrast to situations involving the goods themselves the operation of estoppel or agency principles is not here recognized to enable the transferor to convey greater rights than he actually has. Subsection (2) makes it clear, however, that the transferee of a nonnegotiable document may acquire rights greater in some respects than those of his transferor by giving notice of the transfer to the bailee. A necessary part of the price for the protection of regular dealings with negotiable documents of title is an insistence that no dealing which is in any way irregular shall be recognized as a good faith purchase of the document or of any rights pertaining to it. So, where the transfer of a negotiable document fails as a negotiation because a requisite indorsement is forged or otherwise missing, the purchaser in good faith and for value may be in the anomalous position of having less rights, in part, than if he had purchased the goods themselves. True, his rights are not subject to defeat by attachment of the goods or surrender of them to his transferor [Contrast subsection (2) ]; but on the other hand, he cannot acquire enforceable rights to control or receive the goods over the bailee’s objection merely by giving notice to the bailee. Similarly, a consignee who makes payment to his consignor against a straight bill of lading can thereby acquire the position of a good faith purchaser of goods under provisions of the Article of this Act on Sales ( Section 2-403), whereas the same payment made in good faith against an unindorsed order bill would not have such effect. The appropriate remedy of a purchaser in such a situation is to regularize his status by compelling indorsement of the document (see Section 7-506). Purposes of Changes and New Matter: 1. Under the general principles controlling negotiable documents, it is clear that in the absence of due negotiation a transferor cannot convey greater rights than he himself has, even when the negotiation is formally perfect. This section recognizes the transferor’s power to transfer rights which he himself has or has “actual authority to convey.” Thus, where a negotiable document of title is being transferred the operation of the principle of estoppel is not recognized, as contrasted with situations involving the transfer of the goods themselves. (Compare Section 2-403 on good faith purchase of goods.) Changes: Generally rewritten; Subsection (3) is new. Prior Uniform Statutory Provision: Section 34, Uniform Sales Act; Sections 41(b) and 42, Uniform Warehouse Receipts Act; Sections 32(b) and 33, Uniform Bills of Lading Act.