HQ 222265: Transfer of right to withdraw bonded merchandise fromwarehouse.

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 222265

                          July 3, 1990

WAR-2-01/ENT-7-05-CO:R:C:E  222265 PH

CATEGORY:  Warehouse Entry and Withdrawals

Rayburn Berry, Esq.
Givens and Kelly
950 Echo Lane, Suite 360
Houston, Texas 77024

RE:  Transfer of right to withdraw bonded merchandise from
warehouse.

Dear Mr. Berry:

    In your letter of March 26, 1990, as modified by your letters
of May 1, May 8, and June 13, 1990, you request a ruling on the
interpretation of Subpart C of Part 144 of the Customs
Regulations (19 CFR 144.21 et seq.) with regard to the transfer
of the right to withdraw merchandise from a warehouse when the
merchandise which is to be withdrawn is used as collateral to
secure a bank loan.  Our ruling follows.

FACTS:

    Your client in this matter is a bank located in Laredo,
Texas.  You state that Customs-bonded inventory dominates the
stock in trade of many Texas merchants located along the Texas-
Mexican border.  Because it often comprises the bulk of such
merchants' assets, bonded inventory is commonly pledged as
collateral for bank loans.  You indicate that your client often
makes such loans.

    You state that security agreements covering loans which are
collateralized by Customs-bonded merchandise purport to give a
security interest "free of all liens or restrictions, save for
the security interest of the lender (bank)."  You note that such
a security interest cannot actually be given, since the bonded
merchandise is subject to Customs supervision, Customs
requirements as to its transportation, storage, and ultimate
disposition, and a superior Customs lien for duties.  To correct
this problem, your client is preparing a revised security
agreement for use in loan transactions collateralized by bonded
inventory.  This revised security agreement would include various
covenants and warranties recognizing the necessity for
compliance with Customs laws and regulations and expressly
requiring such compliance as a basic predicate for the loan.

    The concern you express relates to the foreclosure/default
provisions under this revised security agreement.  You state that
these provisions need to provide for a Customs-recognized
transfer procedure under which the bank's right to withdraw the
merchandise is established with certainty and irrevocability.
Under the proposed procedures, a borrower who is using Customs-
bonded merchandise as collateral would transfer the right to
withdraw the merchandise to the lender under the procedures in
sections 144.21-144.28, Customs Regulations.  The borrower would
endorse the withdrawal form and issue it (i.e., the withdrawal
form) to the lender with the space for the name of the
transferee left blank (see section 144.23).  In the event of
default or breach of the loan agreement, the lender could insert
its name in the blank space, deposit the withdrawal form and its
bond with Customs, and establish its right to withdraw the
merchandise.

    You request a ruling on the following issues pertaining to
such an arrangement.

ISSUES:

    1.  Will Customs honor the unilateral revocation of a
transfer of a right to withdraw bonded merchandise when the
revocation is by the original transferer of the right to
withdraw after the right to withdraw has been duly executed by
the transferer but before it has been filed with Customs?

    2.  If the response to the first issue is positive, will
Customs recognize the terms of an agreement between the
transferer of a right to withdraw bonded merchandise and the
transferee rendering the right of withdrawal irrevocable at and
from the time of its execution when the parties to the agreement
notify Customs of the agreement at the time it is made and the
withdrawal right is endorsed and agree to exonerate and hold and
save Customs harmless with respect to any reliance by Customs on
the agreement?

    3.  If the response to the first issue is positive, will
Customs recognize the terms of an agreement between the
transferer of a right to withdraw bonded merchandise and the
transferee that the transferee has authority to solely determine,
for purposes of the exercise of the withdrawal power, whether
extinguishment of the indebtedness of the transferer to the
transferee or breach of the loan agreement between the transferer
and the transferee has occurred, when the parties agree that the
right of withdrawal shall remain irrevocable until the transferer
has extinguished his outstanding indebtedness to the transferee?

LAW AND ANALYSIS:

    Generally, under section 557, Tariff Act of 1930, as amended
(19 U.S.C. 1557), any merchandise subject to duty, with certain
exceptions, may be entered for warehousing and may be deposited
in a bonded warehouse at the expense and risk of the owner,
importer, or consignee.  The merchandise may be withdrawn at any
time with 5 years from the date of importation upon compliance
with the applicable requirements.

    Paragraph (b) of section 557 provides, in pertinent part,
that:

        The right to withdraw any merchandise entered in
        accordance with [this section] may be transferred
        upon compliance with regulations prescribed by
        the Secretary of the Treasury and upon the filing
        by the transferee of a bond in such amount and
        containing such conditions as the Secretary of
        the Treasury shall prescribe. ... Such transfers
        shall be irrevocable, shall relieve the
        transferer from all [C]ustoms liability with
        respect to obligations assumed by the transferee
        under the bond herein provided for, and shall
        confer upon the transferee all rights to the
        privileges provided for in this section and in
        [19 U.S.C. 1562 and 1563] which were vested in
        the transferer prior to the transfer.  ...  A
        transferee may further transfer the right to
        withdraw merchandise, subject to the provisions
        of this subsection relating to original
        transfers.

    The Customs Regulations issued under this provision are found
in 19 CFR 144.21-144.28.  These regulations provide, in pertinent
part, that:

        [T]he right to withdraw all or part of
        merchandise entered for warehouse may be
        transferred by appropriate endorsement on the
        withdrawal form, provided that the transferee
        files a bond ....   Upon the deposit of the
        endorsed form, properly executed, and the
        transferee's bond with [Customs], the transferer
        and his sureties shall be relieved from all
        undischarged liability.  [Section 144.21.]

        Transfer of the right to withdraw merchandise ...
        shall be established by an appropriate
        endorsement on the withdrawal form by the person
        primarily liable for the payment of duties before
        the transfer is completed ....  [Section 144.22.]

        A holder of a withdrawal form so endorsed [i.e.,
        endorsed in blank under section 144.23, as
        discussed above in the FACTS portion of this
        ruling] and otherwise fully executed may insert
        his own name in the blank space, deposit such
        form and his transferee's bond with [Customs],
        and thereby establish his right to withdraw the
        merchandise.  [Section 144.23.]

        Either the transferer or the transferee may
        deposit the endorsed withdrawal form and the
        transferee's bond with [Customs].  [Section
        144.25.]

        The right of a transferee to withdraw the
        merchandise may not be revoked by the transferer
        but may be retransferred by the transferee.
        [Section 144.26.]

    Accordingly, the transfer of a right to withdraw bonded
merchandise is irrevocable.  However, before a transfer of the
right of withdrawal becomes irrevocable, it must be completed
(i.e., it must exist, or be such a transfer, under the
appropriate Customs laws and regulations).  It is clear from the
provisions quoted above that the transfer is only completed after
proper endorsement of the appropriate withdrawal form, filing of
the appropriate bond for the transferee, and deposit of the en-
dorsed withdrawal form with Customs.  Thus, although the trans-
fer of a right to withdraw bonded merchandise is irrevocable, it
does not become irrevocable until it (i.e., the transfer) is
completed (i.e., until the properly endorsed withdrawal form and
the transferee's bond are deposited with Customs).

    The first issue you raise contemplates that Customs would
honor the attempted revocation of something that, for Customs
purposes, does not exist (i.e., the transfer of a right to
withdraw before the transfer was completed).  We note that
although the procedures in 19 CFR 144.21-144.28 for transfer of a
right to withdraw are quite comprehensive, Customs has no
authority or procedures for so acting.  Since the transfer of a
right to withdraw does not exist for Customs purposes until it is
completed, Customs will not honor an attempted revocation of such
an uncompleted transfer.

    Because the answer to the first issue you raise is negative,
we are not addressing the second and third issues, consistent
with your request.

HOLDING:

    Customs will not honor the unilateral revocation of a
transfer of a right to withdraw bonded merchandise when the
revocation is by the original transferer of the right to withdraw
after the right to withdraw has been duly executed by the
transferer but before it has been filed with Customs because, for
Customs purposes, the transfer of the right to withdraw does not
exist until it is completed (i.e., until the properly endorsed
withdrawal form and the transferee's bond are deposited with
Customs).

                              Sincerely,


                              John Durant
                              Director, Commercial
                              Rulings Division