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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with regard to the transfer of the right to withdraw merchandise from a warehouse when the merchandise which is to be withdrawn is used as collateral to secure a bank loan.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

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