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mainly with branch banks or other closely associated institutions. Comparing the two documents from the viewpoint of cancellation and of recourse, it was observed above that the letter of credit is usually irrevocable and allows the drawing of drafts practically without recourse on the beneficiary. However the authority is usually revocable in form and the issuing bank generally retains the right of recourse to the drawer. Last, the fundamental distinction lies in the fact that the authority is not the evidence of a bank credit. Banks at times erroneously describe their authorities as "credits," but this instrument in no sense is the undertaking of the issuing institution. While the letter of credit imposes the burden of financing the transaction upon the bank, the authority places this obligation upon the importer himself. In the first place, the accreditee is given the right to draw on the importer, and as time bills are usually made, these in consequence become trade acceptances. Because of the superior credit standing of the drawees, bankers' acceptances under letters of credit may be freely sold in the open market. The holder of these bills is able to dispose of them in any money center which offers the lowest rate, and so the cost of financing the entire enterprise may be materially lowered. The owner of bills drawn under an authority does not possess this freedom of action, since the drafts are made not on a bank but on a merchant. Therefore, it is as a rule quite impossible to find a buyer outside of the bank advising the authority and so these bills are carried by the Far Eastern bank. Because these limitations are more or less variable, the charge for trade bill made under authorities must necessarily be fixed in this document. This rate rose as high as 9 per cent, but after the middle of 1921 the maximum was reduced to 8 per cent.

From the above observation it must be clear that the authority to purchase gives rise to a trade bill which has practically no market, and is therefore a non-liquid asset in the holding bank's portfolio. In general, the authority to purchase is an unsatisfactory instrument in financing foreign trade, and is gradually being superseded even in Far Eastern trade by the letter of credit.

CHAPTER IX

THE TRUST RECEIPT

I. Meaning of the Trust Receipt. In financing an export or an import transaction through a letter of credit or an authority to purchase, a bank, as indicated in previous chapters, bases its extension of credit not only on the personal responsibility of the parties but likewise on the security found in the merchandise itself. The bank usually assumes legal ownership of this property by holding warehouse receipts or bills of lading evidencing title to the goods. The documents, and in fact the goods themselves, thus serve as security for the loan which the bank has granted to the borrower. At some stage in the transaction it is necessary for the borrower to obtain possession of the goods in order to market them and the bank wishes to offer every assistance to the borrower in disposing of the goods in order to facilitate the ultimate payment of the loan. The bank is thus confronted with the problem of releasing the documents representing the merchandise and at the same time of retaining title to the property underlying its loan. The bank seeks to accomplish these two conflicting ends by having the borrower sign a document known as a "trust receipt." In this instrument the borrower acknowledges the receipt of certain goods which are surrendered to him for a specified purpose. Although the borrower obtains actual possession of the property, the legal title is still retained by the bank and this fact is definitely stated in the trust receipt. It thus becomes more than a mere receipt of the goods, for it is also a formal recognition of the bank's ownership of the goods. In fact, a trust receipt has little or no value at law and cannot properly be used by a bank in any transaction where the borrower at any stage has had legal title to the goods. The trust receipt regards the borrower as agent and the bank as principal without disturbing the additional relationship of debtor and creditor between these two parties arising from the loan extended to the former by the latter (see form 14).

II. Use of the Trust Receipt.-The trust receipt is used by

a bank when it surrenders control over property which is serving as collateral for a loan. Large city banks granting call loans to brokers who pledge stocks and bonds find it necessary in the course of the daily business to return these securities to the borrowers for the purpose of enabling them to make sales. To guard against possible losses, the banks usually require the brokers to sign instruments which are called trust receipts. In a similar manner these instruments are also used by banks when they relinquish their control over cotton, grain, and other commodities which have been pledged as collateral for loans. Detailed consideration of the use of the trust receipt will be confined to the financing of transactions in foreign trade in which field the trust receipt has its widest and truest application.

1. Exchange of Documents.-The use of the trust receipt in facilitating the exportation of goods may be illustrated by tracing the course of a shipment of cotton. An Atlanta bank has extended a loan to a merchant on a warehouse receipt evidencing a certain number of bales of cotton stored in a local warehouse. The merchant sells the cotton to a Liverpool concern and in order to move the goods it is necessary for the seller first to have the warehouse receipts which the lending bank holds in its files. The bank obtains a trust receipt from its customer and gives him the warehouse receipts. The cotton is then withdrawn from the warehouse and placed on freight cars for transportation to the seaboard. The borrower thus has temporary possession of the goods but the bank usually limits this period of time to only a few days and requires the immediate delivery of the railroad bills of lading. The trust receipt thus facilitates the movement of the goods to market by replacing warehouse receipts with bills of lading. A further exchange of documents is necessary when the goods arrive at the seaport. Here the trust receipt is again employed, for the Atlanta Bank usually forwards the railroad bills of lading to its New York correspondent which releases these documents so that the forwarding agent may transfer the goods from the railroad to the steamer. When this is done the ocean bills of lading are tendered to the bank which then cancels the second trust receipt.

2. Storage in Warehouse.-While the exchange of documents is the sole use of the trust receipt in export transactions, the instrument has a wider employment in import dealings where it

is used for the following purposes: storage of goods in a warehouse, sale to known or unknown purchaser, conversion into manufactured form. Assume that a San Francisco Bank has issued its letter of credit to finance an importation of silk from Japan. The seller places the goods on board a vessel bound for America and his bank forwards the drafts with the accompanying documents to its correspondent in San Francisco for presentation to the bank which has opened the credit. These papers are usually sent by a mail steamer and so normally arrive before the merchandise itself. The drawee bank, on accepting the drafts, receives the documents. They are released on a trust receipt to the importer in order that he may be prepared to enter the goods at the custom house as quickly as possible on their arrival.

Whether the documents are given to the importer before or after the entry of the goods, the next step is to place them in a warehouse. If there is any doubt concerning the credit standing of the importer, the bank may retain the documents and itself warehouse the goods in its own name. But this task is usually performed by the importer who on signing a trust receipt is given the shipping documents representing the goods and warehouses them in his own name.

The importer is not always free in choosing the warehouse for the goods, as the bank may determine this selection. Since the lending bank is still the real owner of the goods, it will insist upon storage in a reliable warehouse. The bank is usually satisfied with the selection of a warehouse if conducted in compliance with the provisions of the Warehouse Act of 1916, which has tended to standardize the conditions for storing staple commodities.

The bank must also be certain that the warehouse is not controlled by the borrower. If such connection exists, the security of the bank's loan might become impaired, for the borrower would have free access to the goods, even though he did not possess the documents. Let us trace the consequences arising from a situation where a bank has not taken the proper precaution of ascertaining the relation between warehouse and borrower. Assuming that he has obtained possession of the goods on a trust receipt and has stored them with a company under his control, he is in a position to sell the goods and obtain the proceeds

fraudulently without holding the documents. If he goes into bankruptcy the bank is then confronted with the difficult task of recovering its claims. It is highly probable that these claims would not be regarded as superior to those of general creditors of the borrower and so the bank would be compelled to bear a proportionate loss. This eventuality is recognized in the ruling of the Federal Reserve Board which classes an acceptance as an unsecured loan if based on goods stored in a warehouse controlled by the borrower. The ruling in full reads as follows:

"If an acceptance is secured by shipping documents which are surrendered by the acceptor for a trust receipt which permits the purchaser of the goods to retain control of the goods, the accepting bank can not be said to be secured 'by some other actual security,' as provided in Section 13 of the Federal Reserve Act. A trust receipt, however, which does not permit the purchaser to procure control of the goods, may properly be said to be actual security within the meaning of the act.

The attached correspondence raises the question whether a national bank may accept drafts in excess of 10 per cent of its capital and surplus in a case where it appears that, though shipping documents are attached at the time of acceptance, those documents are thereafter delivered to the purchaser under a trust receipt, the goods being taken up at once by milling concerns.

Section 13 provides that no member bank shall accept for any one person, company, firm, or corporation in excess of 10 per cent of its paid-up and unimpaired capital and surplus, unless the bank is secured 'either by attached documents or by some actual security growing out of the same transaction as the acceptance.'

The question to be determined, therefore, is whether a trust receipt is an 'actual security' in the sense contemplated by the act. This question has been considered before by the Federal Reserve Board, and it has been generally understood that a trust receipt which permits the purchaser of the goods to obtain control of those goods either for milling or other purposes is not an actual security within the meaning of the act, and that, therefore, acceptances secured by such trust receipts come within the 10 per cent limitation imposed by Section 13.

A different situation results, of course, in any case where the trust receipt is of such a character as not to permit the purchaser to gain control of the goods as where they are held for the account of the acceptor by some person, warehouse, or corporation independent of the borrower.

It is the opinion of this office that in the case presented in the at

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