Business Law Chapter 48 Homework Constructive Delivery Does Not Confer Actual Possession

subject Type Homework Help
subject Pages 9
subject Words 5044
subject Authors Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller

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In August 1992, in Columbus-America Discovery Group, Inc. v. Atlantic Mutual Insurance Co., 974 F.2d
450 (4th Cir. 1992), the U.S. Court of Appeals for the Fourth Circuit overturned the decision. Holding that the
lower court incorrectly applied the law of finders, the appellate court applied the law of salvage. Under that
interpretation, finders generally must return found property and receive compensation as a reward. Thus, the
more than two dozen insurance companies that filed claims for the sunken gold would be entitled to it. The
United States Supreme Court declined to review the appellate court’s ruling.
What impact do your students think that this decision will have on “treasure hunting”?
IV. Bailments
A bailment is created when personal property is delivered (without title) under an agreement that the
property be returned to the bailor or otherwise disposed of according to its owner’s directions.
1. Personal Property Requirement
Bailments involving tangible items (jewelry, cattle, autos, and the like) are more frequent than
bailments of intangible personal property (promissory notes, shares of stock, and so on.
2. Delivery of Possession
Delivery in this context requires (1) surrender of exclusive possession and control and (2) knowing
acceptance of the property. A coat flung over a chair in a restaurant by a patron does not qualify,
nor does jewelry in the pocket of a coat left with the attendant in a coatroom.
a. Physical versus Constructive Delivery
Delivery may be actual or constructive (giving a key to a safe-deposit box).
b. Involuntary Bailments
An involuntary bailment can occur accidentally or by mistake (e.g., finding lost property).
No written agreement is required for bailments of less than one year (that is, the Statute of Frauds does
not apply). A bailment requires the return of bailed property to the bailor or a third person, or provides
for disposal by the bailee. The agreement presupposes that the bailee will return the goods originally
given by the bailor (unless they were fungible).
V. Ordinary Bailments
The distinguishing feature among the different types of bailments is which party receives the benefit.
This is a gratuitous bailmentit involves no consideration. The bailee owes only a slight duty of care and
liability extends only to gross negligence.
In this situation, the bailee owes a duty to exercise the utmost care and will be liable for even slight
A bailment for hire, or a commercial bailment, involves compensation. The bailee must use ordinary
care. Liability extends to ordinary negligence.
1. Right of Possession
A bailee has a right to temporary control and possession, which permits the bailee to recover from
third persons for damage or loss to the property.
2. Right to Use Bailed Property
A bailee has a right to use the property for the purpose of the bailment.
3. Right of Compensation
A bailee has a right to be compensated, reimbursed for expenses, or both. To enforce these rights,
a bailee has a right to place an artisan’s lien on the property.
4. Right to Limit Liability
A bailee has a right to limit liability by type of risk, monetary amount, or both. The limits
Must be called to the attention of the bailor.
Cannot be against public policy.
1. The Duty of Care
A bailee must take proper care of the property during the bailment. As noted above, the three types
of bailments demand different degrees of care (the trend is toward enforcement of a reasonable
standard of care). Failing to exercise appropriate care is tortious.
The Duty of Care
Cases considering the imposition of liability in a bailment relation include the following.
International Turbine Services, Inc. v. VASP Brazilian Airlines, 278 F.3d 494 (5th Cir. 2002) (an aircraft
engine lease unambiguously placed the cost of repairing engine damage caused by the failure of an “on-
condition” part on the lessee according to a term that obligated the lessee to repair and maintain the engine
and bear the risk of loss and damage “from any and every cause whatsoever,” with the only exception being
the lessor’s responsibility for scheduled maintenance of time-controlled and on-condition parts).
Wausau Insurance Co. v. All Chicagoland Moving and Storage Co., 333 Ill.App.3d 1116, 777 N.E.2d
1062, 268 Ill.Dec. 139 (2 Dist. 2002) (a bailee moving company was negligent and therefore liable for damage
to the bailor’s electron microscope, which was dropped to the floor of the bailee’s warehouse while in its
Bobb Chevrolet, Inc. v. Jack’s Used Cars, L.L.C., 148 Ohio App.3d 97, 772 N.E.2d 171 (10 Dist. Franklin
2002) (a bailee, having accepted a shipment of used cars from the bailor for potential sale, afforded at least
the same care to the bailor’s cars as the bailee did to its own inventory under extraordinary circumstances,
and thus the bailor could not recover from the bailee for a negligent bailment, when the bailor’s cars were
unloaded in an elevated section of the bailee’s lot, rising floodwaters damaged all of the vehicles in the lot,
and the lot had not flooded during a hurricane in the previous thirty years).
2. Duty to Return Bailed Property
A bailee must surrender or dispose of the property at the end of the bailment. Failing to return the
property is conversion or a breach of contract (unless the property is lost through no fault of the
bailee, which the text mentions).
3. Lost or Damaged Property
If property is destroyed, lost, damaged, or stolenunless this occurs through no fault of the
baileeconversion or negligence is presumed.
Case 48.3: Zissu v. IH2 Property Illinois, L.P.
Pavel and Aise Zissu lived in an apartment in Chicago, Illinois, owned by IH2 Property Illinois, L.P. IH2
obtained an order from an Illinois state court for possession, allowing the owner to evict the tenants. A Cook
County sheriff executed the order. After IH2 gained possession of the apartment, its agents moved the Zissus’
personal property outside. The property was stolen or damaged. The Zissus filed a suit in a federal district
court against IH2, alleging that the defendant had been negligent in the course of its bailment of the Zissus’
property. The defendant filed a motion to dismiss.
The court denied the motion. In Illinois, a duty of care arises when a landlord chooses to act as a bailee
with respect to a tenant’s property, which occurred here when IH2’s took possession of the apartment and its
contents (the Zissus’ personal property). And, by pleading the facts of this case, the Zissus sufficiently alleged
claims for the existence of a bailment and negligence.
Notes and Questions
How could IH2 have avoided or at least reduced the cost of its liability? To avoid or reduce the cost
of liability for the Zissus’ stolen and damaged personal property, IH2 might have moved the items to storage,
or the landlord might have left the property in the apartment and simply changed the locks. IH2 might also
have obtained an insurance policy to cover such contingencies as loss or damage to property in these
circumstances. Of course, the firm might also have included a notice in its lease with its tenants limiting its
liability by type of risk or monetary amount (but in the facts of this case, where the loss or damage occurred
as a direct result of the landlord’s conduct, it is unlikely that such a clause would be construed in the
landlord’s favor).
1. Bailor’s Duty to Reveal Defects
A bailor’s principal duty is to provide the bailee with goods free from hidden defects that could injure
the bailee. Failing to notify the bailee of defects is negligence
In a mutual-benefit bailment, the bailor must notify the bailee of defects that the bailor could
have discovered with reasonable diligence.
In a bailment for the sole benefit of the bailee, however, a bailor must notify a bailee only of
known defects.
2. Warranty Liability for Defective Goods
Courts have applied warranties of fitness to bailments for hire, and UCC Article 2A extends implied
warranties of merchantability and fitness for a particular purpose to bailments whenever those
bailments include rights to use the bailed goods.
VI. Special Types of Bailments
Special bailments include those in which a bailee’s duty of care is extraordinary (liability is absolute), as
generally in cases involving common carriers and innkeepers. Warehouse companies have the same duty of
care as ordinary bailees; but like carriers, they are subject to extensive coverage of federal and state laws,
including UCC Article 7.
1. Strict Liability Applies
A common-carrier contract of transportation creates a mutual-benefit bailment, but a common
carrier is held to a standard of care based on strict liability.
2. Limitations on Liability
This liability may be limited to an amount stated in the shipment contract.
Like ordinary bailees, warehouse companies are liable for loss or damage to property resulting from
1. Limitations on Liability
A warehouse company can limit its liability, but the bailor must be given the option of paying an
increased storage rate for an increase in the limit.
2. Warehouse Receipts
Unlike ordinary bailees, a warehouse company can issue a document of title, such as a warehouse
receipt. These documents, which may be negotiable or nonnegotiable, are subject to UCC Article 7.
Warehouse Receipts, Other Documents of Title, and UCC Article 7
Due negotiation under the Uniform Commercial Code (UCC) requires that the purchaser of a document of
title take it in the regular course of business or financing [UCC 7501]. Although UCC 7501 was con-
solidated from a variety of provisions of old uniform acts and rewritten to reflect the effect of cases decided
under those provisions, the requirement of “regular course of business or financing” was a new concept. The
drafters’ view of this concept is explained in the following excerpt from UCC 7–501, Comment 1.
Purposes of Changes:
1. * * *
There are two aspects to the usual and normal course of mercantile dealings, namely, the person making
the transfer and the nature of the transaction itself. The first question which arises is: Is the transferor a
person with whom it is reasonable to deal as having full powers? In regard to documents of title the only
holder whose possession appears, commercially, to be in order is almost invariably a person in the trade. No
commercial purpose is served by allowing a tramp or a professor to “duly negotiate” an order bill of lading for
hides or cotton not his own, and since such a transfer is obviously not in the regular course of business, it is
excluded from the scope of the protection of subsection (4).
The second question posed by the “regular course” qualification is: Is the transaction one which is
normally proper to pass full rights without inquiry, even though the transferor himself may not have such rights
to pass, and even though he may be acting in breach of duty? In raising this question, the “regular course”
criterion has the further advantage of limiting, the effective wrongful disposition to transactions whose
protection will really further trade. Obviously, the snapping up of goods for quick resale at a price suspiciously
below the market deserves no protection as a matter of policy: it is also clearly outside the range of regular
Any notice from the face of the document sufficient to put a merchant on inquiry as to the “regular course”
quality of the transaction will frustrate a “due negotiation.” Thus irregularity of the document on its face or
unexplained staleness of a bill of lading may appropriately be recognized as negating a negotiation in
“regular” course.
Innkeepers, and so on, are held to a strict liability standard with respect to property brought into the
rooms by guests. In most states, innkeepers can avoid strict liability by providing a safe in which guests
may keep their valuables. Statutes generally cover the liability of innkeepers for items not kept in safes.
This liability ranges from limits on dollar amounts to no liability in the absence of negligence.
1. Ask students whether they have ever found valuable lost or abandoned property. Did they attempt to
locate the owner or notify the police? Did they keep the property for themselves?
2. Ask students to discuss any bailment situations about which they have personal knowledge in which one
or both parties breached its duties under the bailment agreement. How was the matter resolved? What
damages were paid to the injured party to resolve the dispute?
3. Ask students to discuss whether the movement toward a single standard of ordinary care for bailments is
sensible in view of the fact that there are three types of bailment agreements. Will such a standard actually
protect the interests of persons involved in bailments that benefit either the bailor or bailee exclu-
4. Starting with the often stated notions “possession in nine-tenths of the law” and “finders keepers, losers
weepers,” ask students to consider the accuracy of these statements in light of the principles set out in this
Cyberlaw Link
How might the principles of personal property and bailments apply to software? How might these
principles apply in the context of cyberspace (to software downloaded over the Internet, for
1. What is the difference between tangible and intangible personal property? Tangible personal
propertysuch as a radio or a carhas physical substance while intangible personal propertysuch as stocks and
2. What are the three requirements for an effective gift? In order to create a valid gift, the donor must first
3. How may a gift be delivered to a donee when physical delivery is impossible due to the nature of the
gift itself? Because some objects cannot be physically delivered, a symbolic or constructive delivery will be suffi-
4. What is the difference between mislaid, lost and abandoned property? Mislaid property is property that
has been voluntarily placed somewhere by the owner and then inadvertently forgotten. When mislaid property is
found, the owner of the place where the property was mislaid becomes the caretaker of the property because it is
highly likely that the true owner will return to reclaim his or her property. Property that is involuntarily lost, by contrast,
5. What is the difference between actual delivery and constructive delivery in creating a bailment?
Actual delivery involves transferring physical possession of an item to a bailee so that the bailee has exclusive
possession and control over the item. Constructive delivery, by contrast, is an implied or symbolic delivery in which
6. Is it possible to deliver a gift of personal property over the Internet? Explain. Of course, it is possible,
although not in all cases. Online delivery of personal property, when possible, would usually fall into the category of
7. Do bailees have the right to limit their bailment liability? Yes. Bailees can limit their bailment liability by
type of risk, by monetary amount, or both, so long as these limitations are called to the attention of the bailor and the
limitations are not against public policy. Whether notice is effective will depend on the prominence of the notification
8. Discuss the two basic duties of a bailee. The bailee must take proper care of the property and surrender
or dispose of the property at the end of the bailment. A bailee’s failure to exercise appropriate care in handling the
9. How may a bailor satisfy his duty to provide the bailee with goods that are free from hidden defects
that could injure the bailee? In a mutual-benefit bailment, the bailor must notify the bailee of all known defects and
10. Are innkeepers and hotel owners strictly liable when their guests lose personal property on the
premises? Under the common law, innkeepers and hotel owners were held to a strict liability standard with respect
to property brought into the rooms by guests. Today, only those persons who provide lodging to the public for
1. Many states have estray statutes that encourage finders of lost property to report their findings by providing
2. Obtain several types of bailment agreements and ask students to examine their exculpatory clauses to see
whether they attempt to protect the bailee from negligence and other wrongful acts or simply make reference to the
standard common law exceptions to strict liability.
Footnote 6: On Maine’s border with Canada, in February 2005, U.S. Border Patrol agents spotted a
snowmobile driving up some nearby railroad tracks. The snowmobile’s tracks indicated an illegal drive into Canada.
Shortly afterwards, two employees of the railroad gave the agents a large duffel bag containing U.S. currency, which
the employees averred to have found. A test indicated the scent of drugs on the bag. The United States filed a
complaint in a federal district court against the $165,580 under federal statutes that provide for the forfeiture of money
involved in illegal drug deals and the transporting of unreported cash out of the United States. The two railroad
employees contested the claim.
In United States v. One Hundred Sixty-Five Thousand Five Hundred Eighty Dollars ($165,580) in U.S.
Currency, the court denied the employees’ claim. They had not complied with state law procedures for claiming an
interest in lost property. Even if they had, however, “[f]ederal statutory law grants the United States Government an
ownership interest in the cash * * * . The law provides that * * * illicit cash is forfeited to the Government and the
There was a third party involved in this case, Shortly after the USBP agents confiscated the bag of cash, a
snowmobiler who identified himself as Allen Gagnon approached and made conversation, though without mentioning
the unconcealed bag in the agents’ possession. Later, the snowmobiler claimed the bag, describing its contents
accurately. Unable to satisfactorily account for the source of the money, however, or to logically explain its presence
in the bag and in the woods, this individual did not respond to the government’s complaint and was held in default).
If Madore and LaPointe had placed the duffel bag in their car, and the law enforcement officials had
found it there and impounded the car with the cash, could Madore and LaPointe have successfully claimed
ownership of the car? Yes. At least, their interest would have been founded on more than mere possession, and
they would have had standing to challenge a government claim to the vehicle, because title to it would have been in
their names.”
A federal statute provides an “innocent owner” defense, under which: “[a]n innocent owner's interest in
property shall not be forfeited.” An “owner” is defined as someone with an ownership interest, not someone “with only
a general unsecured interest, or claim against, the property or estate of another.” Could Madore and LaPointe
successfully claim ownership of the cash under this statute? No. The court explained that “[a]t best, even if
Could the claimants have successfully argued that because they briefly possessed the currency, they
had an ownership interest in it? Explain. No. “[U]nexplained naked possession of cash,” as the court described it,
is not enough to establish standing to challenge the government’s forfeiture claim. “[T]he Claimants merely came
upon the money as the result of a fortuitous incident. While they might have briefly possessed the currency, mere
naked possession does not rise to the level of an ownership interest.” The court cited as similar a case in which a
cabdriver was held not to have an interest in a suitcase full of cash found by the police’s drug-sniffing dogs in the
trunk of his taxi.
If the claimants had refuted the government’s assertion that the cash was “illicit,” would the result in
this case have been different? Why or why not? Yes. The claimants conceded that they had no evidence to refute
the contention that the cash was illicit. The court acknowledged that if they had, “this would be a different case. Under
the standard analysis [however] the Government established probable cause that the property was used to facilitate a
violation of federal criminal law. Once this burden [was] met, the burden shift[ed] to the claimant[s] to establish a
defense to the forfeiture,” which they could not do.
Footnote 14: Michael Straub of Treiber & Straub, Inc., in Wisconsin chose to return a diamond ring to
Norman Silverman Co. in California via United Parcel Service, Inc. (UPS), and, through, arranged the
shipment. On the Web site, a customer has to click on two on-screen boxes to agree to “My UPS Terms and
Conditions.” Among these terms, UPS and its insurer, UPS Capital Insurance Agency, Inc., limit their liability and the
In Treiber & Straub, Inc. v. United Parcel Service Inc., the U.S. Court of Appeals for the Seventh Circuit
affirmed. The carrier’s disclaimer was sufficiently prominent and repeated several times, which ensures “clear and
reasonable notice” of the terms, to which a customer has to click twice in agreement. Besides, if UPS accepted
If Straub had arranged for the shipment of the ring in a face-to-face transaction and UPS had not
provided a copy of its shipping terms and conditions, would the court have ruled differently? Probably. The
Are UPS's terms different from the terms of Federal Express Corp.? No, at least not according to the
If Straub had claimed that he had not read the terms, would the result in this case have been
Did the fact that Treiber and UPS contracted online affect the outcome in this case? What does that

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