The economic impacts of the COVID-19 pandemic have had a lasting effect on the timing of supply chain deliveries.  Because of these delays in supply chain deliveries, or a manufacturer’s inability to fill customer orders in a timely manner, buyers have been canceling product orders while they are in transit.  At the same time, shipping companies may be unable to secure customers for canceled orders and ultimately end up with unsellable inventory.  This results in excess inventories being stored or warehoused for prolonged periods of time, either because, the goods cannot be sold, or because the owner of the goods has gone out of business.  In some cases, the goods stored at the warehouse simply may not be worth the outstanding amount owed to the warehouse operator.  In all of these circumstances, clients may stop paying their storage costs, forfeit or otherwise abandon their goods at warehouse facilities.  When this happens, it is important for warehouse operators to know what they can do to mitigate their losses.

Luckily, California law has mechanisms in place to protect warehouse operators and get them out of this unfortunate situation. 

I.                   Warehouse Liens

Under California law, the operator of a warehouse has a lien against goods stored in their facilities for any charges incurred in connection with that product.  Cal. Com. Code § 7209(a). Most anyone that stores goods in return for compensation qualifies, even if it is not your primary business.  This means that if you receive compensation for storing client goods, you generally have the right to hold your client’s goods until they make any overdue or unmade payments.

The only requirement is that you need to have either a “warehouse receipt” or a “storage agreement” related to your storage of the product.  A warehouse receipt is not a particular form or document.  In fact, it can take nearly any format and does not even require specific information in it.  Documentation created with the assistance of counsel is most likely to protect your rights as a warehouse operator, but nearly any document that provides evidence of the storage agreement between you and your client can be enough to create a lien over the specific product listed in the warehouse receipt.  For this reason, nearly every warehouse operator can invoke their right to a warehouse lien over the specific product stored in that agreement.

Typically a warehouse lien only extends to the specific product listed in the individual warehouse receipt.  This means that if a customer stores two products at your facilities (Products A & B), your lien on any debts owed for the storage of Product A is only over product A, and your lien on any debts owed for the storage of Product B is only over product B.  However, through careful drafting by a knowledgeable professional, a warehouse receipt can be designed to cause the lien to extend to other products that the client stores at your facilities, even those listed on other receipts (i.e. a lien for storage costs for product B also extend to product A). In order to extend the scope of the products under the lien, specific language must be included in the warehouse receipt or storage agreement.  Having this specific language is critical to protecting your interests as a warehouse operator.  As markets change, the price of specific goods may drastically drop.  Thus, if your lien is tied to a specific product, as opposed to all of your customers’ products being stored, your lien may be worth significantly less.

II.                Liens and Abandoned Goods

Assuming you have a valid warehouse lien as described above, the next question is what can you do when your client does not pay or abandons goods at your premises?  The short answer is that you can force your client to retrieve the goods and pay any outstanding debts. If they do not comply, sell the goods yourself.

Under the California Commercial Code, a warehouse owner has the right to demand payment and retrieval of goods stored at their facilities.  Unless your agreement with the client states a specific termination date for your agreement, you are typically only required to give 30-days’ notice to your client.    There are exceptions that permit shorter notice for certain products that may rapidly decline in value or are otherwise hazardous.  If you need to dispose of products on a faster timeframe, discuss with counsel to determine if an exception is applicable. Your client must comply with the demand to remove the products.  If they do not, you may have the right to sell the goods on their behalf and recuperate any amounts owed to you from those proceeds.

Under Section 7210 of the California Commercial Code, a warehouse’s lien “may be enforced by public or private sale of the goods” so long as the price at which you give appropriate notice and the sale terms are “commercially reasonable.”  Because this is a very precise process, it is highly recommended that you contact counsel to assure that you do not run afoul of any rules and open yourself up to liability. 

Even if you comply with the rules and notice requirements in the Commercial Code, it is important that you continue to take great care when handling the client’s goods throughout this process.  Although you may be selling the product, you may continue to be liable for any decrease in the value of the goods caused by your negligence. 

If you are experiencing issues with, or have concerns over, abandoned goods and unclaimed inventories, please feel free to contact the author of this article or the attorneys in the firm’s Business & Commercial Litigation group at Atkinson Andelson Loya Ruud & Romo with any questions.

This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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