## Facts

- Southeastern Farmers Grain Association, Inc. owned a grain-storage facility leased and operated by Farmers Grain Elevator, a state-licensed public warehouse operated by L. C. Woodcock.
- As part of a financing arrangement, Southeastern deposited grain with the warehouse, received negotiable warehouse receipts, and pledged those receipts to Branch Banking & Trust Co. as collateral for loans.
- Woodcock issued 13 new negotiable warehouse receipts (Nos. 974–986) for large quantities of corn despite a substantial grain shortage; the receipts were not supported by grain on hand.
- The bank received the 13 receipts in exchange for surrendering 16 older receipts it held.
- The 13 receipts were payable “to Southeastern or order” but were not properly indorsed by Southeastern.
- The bank knew the receipts lacked proper indorsement and knew of serious irregularities, including a likely grain shortage, but relied on the receipts as collateral.
- After Southeastern became insolvent and the grain shortage was confirmed, the bank sought to recover on the receipts and to shift the loss to state officials, the warehouseman, and sureties.

## Issues

1. Whether the bank acquired the 13 negotiable warehouse receipts by “due negotiation” under UCC Article 7 (G.S. 25-7-501, -502) despite the lack of Southeastern’s indorsement.
2. Whether the bank could qualify as a good-faith purchaser without notice when it knew of defective indorsement and substantial irregularities concerning the grain backing the receipts.
3. Whether cancellation of the 16 old receipts during the exchange ratified issuance of the 13 new receipts or estopped the warehouse from denying their validity against the bank.
4. Whether the bank could impose liability on the warehouseman, state officials, or sureties based on rights associated with due negotiation.

## Decision

- The Supreme Court of North Carolina, on rehearing, affirmed judgment for defendants.
- The court held the bank did not take the 13 receipts by due negotiation because the receipts ran “to Southeastern or order” and were never indorsed by Southeastern as required for negotiation.
- The court further held the bank could not satisfy the “good faith without notice” condition for due negotiation because it had actual knowledge of defective indorsement and serious irregularities, including a substantial shortage.
- Because there was no due negotiation, the bank was only a transferee and acquired no greater rights than Southeastern.
- The court rejected the bank’s effort to use ratification/estoppel theories arising from cancellation of the old receipts to shift the loss to the warehouse, public officials, or sureties.
- The rehearing opinion curtailed earlier statements suggesting broader relief for the bank (including theories effectively treating the warehouseman and surety as primarily liable to the bank).

## Legal Principles

- A negotiable document of title running “to the order” of a named person is negotiated only by that person’s indorsement and delivery; without indorsement, a transferee does not obtain holder-by-due-negotiation status.
- “Due negotiation” requires purchase for value, in good faith, and without notice of defenses or claims; actual knowledge of defects or substantial irregularities defeats that status.
- A transferee who does not take by due negotiation generally takes only the transferor’s rights and cannot obtain superior rights to goods or proceeds.
- Equitable doctrines such as ratification and estoppel will not be applied to shift losses to others where the claimant knowingly proceeded despite clear irregularities in the documentary transaction.

## Conclusion

The court held the bank could not enforce special Article 7 protections because the receipts were not properly negotiated and the bank took them with notice of serious defects; as a mere transferee, it stood in the borrower’s position and could not shift the loss from fraudulent, unbacked receipts to the warehouse, state officials, or sureties.


Branch Banking & Tr. Co. v. Gill, 293 N.C. 164, 237 S.E.2d 21 (N.C. 1977)