In the 1920s, Justice Benjamin Cardozo compared property rights to bundle of firewood. This was a concept that had developed over time. In late 1700s, William Blackstone wrote that property ownership is “that sole and despotic dominion which one man claims and exercises over the external things of the world in total exclusion of the right of any other individual in the universe.” By the early 20th century it was clear that Blackstone’s definition didn’t completely fit reality. While you can keep trespassers off your property, you can’t tell the county tax collector that you have despotic dominion over your property to his exclusion. We also need roads and and power lines. Your landlocked neighbor may also need one small stick in your bundle, so he can access his property. The right to harvest timber is one of your sticks.
It is well established that trees start out as part of the land to which they are attached. The South Carolina Supreme Court once called standing timber “a part of the land, so much as the soil itself.” Common law has traditionally treated a timber interest as interest in real property. Timber was part of the real estate until severed, at which time it became personal property. As we will see, that has changed over time.
North Carolina timber law has been developing for more than a century. The Gatlin Pocosin is about 40 miles northeast of where I am sitting as I write this. In 1898, the Gatlin Pocosin was owned by R. H. Gatlin and is wife. They sold 7 million board feet of timber that year to G. M. Serpel for $1.50 per thousand board feet (MBF). I don’t know what log rule they were using, and I haven’t figured out what $1.50 in 1898 would be in 2019 dollars. But I think it would be very low. Before Mr. Serpel could cut the timber, it was damaged by fire. The Gatlins then entered into a second contract with Mr. Serpel at $1.00 per MBF. The new contract specifically said that if the timber was not cut soon, it would be lost. After Serpel finished harvesting, the Gatlins decided that they were due that extra $0.50. They argued that because Serpel already had an obligation to cut the timber, that the second contract was without consideration. Eventually, the N.C. Supreme Court found that because the original contract was not a conveyance of real property, but an executory contract (one not yet fully performed), the Gatlins were stuck with their second contract.
It is interesting to note that this wasn’t the only real estate dispute that the Gatlins took to the Supreme Court. They also lost the other one. Perhaps the most important lesson from Gatlin v. Serpel is that although a clear and well-drafted contract is important, it is better to do business with people who won’t sue you than “win” several years later in the appellate courts.
Gatlin and Serpel entered into a per unit contract. This type of contract gives the buyer the right harvest timber. Title to the timber – and risk of loss - does not shift to the buyer until it is cut. In contrast, a timber deed conveys a present estate of absolute ownership in timber for a certain time period. There is a title transfer, and risk of loss shifts to the buyer. When the timber deed expires, title reverts back to the landowner.
The development of commercial law in the United States, and timber law specifically, involves a British fashion designer from the late 19th and early 20th century. Lucy, Lady Duff-Gordon entered into a contract that assigned the right to market her professional name to her advertising agent, Otis Wood. The contract gave him the exclusive right to place her endorsements on the designs of others. In return he would receive one-half of the profits. Lady Duff-Gordon decided to start making endorsements without Wood’s knowledge – and without paying him. He sued her for his share of the profits. She argued that they did not have a valid contract because he didn’t promise to do anything. Therefore, there was no consideration. But the New York Court of Appeals didn’t like her theory. So, in 1917, they created the Implied Promise Doctrine. The Court said that the law had “outgrown its primitive state of formalism when the precise word was the sovereign talisman, and every slip was fatal.” It then implied a promise to use reasonable efforts. We will see this concept engrained into commercial law as time goes on.
By the mid-20th century, commercial transactions often involved the laws of more than one state. In the 1940s, the National Conference of Commissioners on Uniform State Laws and the American Law Institute began working on a Uniform Commercial Code (“UCC”) to harmonize state laws governing commercial transaction. It was first published in 1952, and has now been adopted, at least in part, by all 50 states. One of the purposes of Article 2 of the UCC is to facilitate the formation of contracts. Section 2-204 says that “[a] contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.”
The UCC also specifically says that a contract for the sale of timber to be cut is a contract for the sale of goods whether the timber “is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties by identification effect a present sale before severance.” That means that when you enter into a contract for timber, it is a sale of goods, even though the trees have not yet been cut.
In the past, it took a saw to make timber personal property. Now it only takes a signature. There are obvious overlaps between property law and commercial law. The UCC recognizes this and specifies that contracts for the sale of timber are subject to third-party rights provided by law relating to real estate records. It also specifies that a contract for the sale of goods may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer’s rights under the contract for sale.
Several states’ appellate courts have weighed in on the overlaps. In Feliciana Bank & Trust v. Manuel & Sessions, L.L.C, a Mississippi logger argued that timber that it cut pursuant to a contract was not subject to a deed of trust on the property because timber is a good and the lender had not filed a UCC financing statement. The Mississippi Court of Appeals held that a prior-recorded deed of trust was sufficient to provide a security interest in the timber. In Epstein v. Coastal Timber Co., Inc., the South Carolina Supreme Court also confirmed that the UCC provision making standing timber personal property when identified in a contract does not cancel the effect of a mortgage or lien on timber that is already recorded in the real estate records. However, the South Carolina Supreme Court specified that any security interest later recorded on timber to be cut under a contract of sale would be junior to any existing interests.
In early September 1996, Hurricane Fran damaged thousands of acres of timberland and created a glut of timber on the market in Eastern North Carolina. On November 11 of that year, A.V. and Grace Eason signed a per unit contract giving Fordham Timber Company the right to “all timber and pulpwood located on all lands owned by Mr. A.V. Eason and being located in Johnston County, N.C.” The contract gave Fordham until June 1, 1997 to cut the timber. Instead of reducing his price like Mr. Gatlin, Mr. Eason just called another buyer. He entered into a second agreement with American Woodland Industries (“AWI”) on February 7, 1997. AWI recorded its contract with the Johnston County Register of Deeds and then started cutting.
The trial court found that Fordham’s contract was valid, as did the Court of Appeals. But the North Carolina Supreme Court reversed. The Court acknowledged that “[t]he Uniform Commercial Code applies more liberal rules governing the formation of contract than the rules applied under traditional common law.” But then it said those rules didn’t apply because Fordham didn’t have an obligation to cut the timber.
That was also the case with the Gatlin contract back in 1898. The Court said that because it was an executory contract, Serpel didn’t have an obligation to cut the timber. But a lot had changed over the last 100 years. Wood v. Lucy, Lady Duff-Gordon had created the Implied Promise Doctrine, which eventually ended up in Section 1-203 of the UCC. The UCC now specifically implies a duty of good faith. If Fordham had an implied duty of good faith, then he was supposed to cut the timber. If he was supposed to cut the timber, then the original contract was a bilateral contract supported by consideration.
But the North Carolina Supreme Court relied on a 1986 ruling by the Fourth Circuit Court of Appeals in Fisher v. Elmore that said an option to cut timber is not regulated by the UCC until the option is exercised. Because Fordham did not make an advance payment, the court characterized the per unit contract as a failed attempt to create an option to purchase the timber. AWI entered into an almost identical contract but made a refundable advance payment. The court said that the deposit AWI paid the Easons “was consideration to guarantee AWI’s rights in the Easons’ timber from 10 February 1997 until 7 February 1999.” The court viewed the refundable deposit as sufficient consideration to create a valid option. AWI exercised its option by moving onto the land and beginning to cut the timber. The court based this on Section 2-204(1) of the Uniform Commercial Code, the N.C. version of which “[a] contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.”
All of this leads to the conclusion that the characterization of timber is difficult and the terms of the contract matter. In every case mentioned above, the courts examined the language in the contracts. Many landowners believe that per unit contracts do not require the level of care that timber deeds require and are willing to sign any timber sale contract, as long as there is no cost. Landowners who regularly sell timber have explained to me that they simply will not pay for a contact every time they sell their timber. That will probably work out most of the time. But sometimes you end up in court. When a timber sale ends up in litigation, there are no winners. Every timber sale deserves the attention of an attorney who understands the transaction.