Opinion ID: 1640458
Heading Depth: 3
Heading Rank: 3

Heading: Surety liability for Banks' claim

Text: The Banks assert that they have a claim against the warehouseman's bonds because VFBA did not faithfully perform its duties as a public warehouseman. See § 60-02-09(4)(a), N.D.C.C. The Banks allege that Millers is liable as surety because VFBA issued warehouse receipts to them without adequate inventory to cover the receipts and because VFBA converted the inventory in violation of the security agreement. In support of their argument, the Banks rely on In re Caldwell Port Elevator Co., Inc., 28 B.R. 669 (Bkrtcy.W.D.La.1982); Avoca State Bank v. Merchants Mut. Bonding Co., 251 N.W.2d 533 (Iowa 1977); and St. Paul Ins. v. Fireman's Fund American Ins., 309 Minn. 505, 245 N.W.2d 209 (1976). These cases are distinguishable. The court in St. Paul Insurance, supra, 245 N.W.2d at 212, 216, did not address the question of whether or not a surety is liable for storage receipts pledged in a loan transaction in return for cash advances. In re Caldwell, supra, 28 B.R. at 670, and Avoca State Bank, supra, 251 N.W.2d at 536, involved situations in which a warehouseman issued warehouse receipts to himself for grain the warehouseman did not have and then pledged the receipts as security for a loan. The issue in those cases of whether a warehouse receipt issued in the name of the warehouseman and held as collateral by a bank constitutes a valid claim against a warehouseman's bond is not an issue in the present case. We have concluded that the warehouse receipts were improperly issued in the name of the Banks, who had neither purchased beans from nor delivered beans to VFBA, and who merely intended the receipts to confirm their security interest in VFBA inventory. A warehouseman's bond is not intended to protect holders of warehouse receipts which are invalid on their face. See Central Nat. Bank of Mattoon v. Fidelity & Deposit Co. of Maryland, 324 F.2d 830 (7th Cir.1963); Central States Corp. v. Trinity Universal Ins. Co., 237 F.2d 875 (10th Cir.1956), cert. denied, 352 U.S. 1003, 77 S.Ct. 561, 1 L.Ed.2d 548 (1957). The Banks also claim that they are entitled to recover from the warehouseman's bonds because VFBA converted its inventory in violation of the security agreement. We disagree. Section 60-02-09(3), N.D.C.C., provides that a warehouseman's bond shall ... [r]un to the state of North Dakota for the benefit of all persons storing or selling grain in such warehouse. [Emphasis added.] Under the plain terms of the statute, it is clear that warehouseman's bonds are not intended to protect all persons who conduct financial transactions with a warehouseman. This court has previously determined that warehouseman's bonds are not for the benefit of the general creditors of the warehouseman. Larkin v. Wheat Growers Warehouse Co., 64 N.D. 491, 494, 253 N.W. 757, 759 (1934). Cf. Dairy Dept. v. Harvey Cheese, Inc., 278 N.W.2d 137 (N.D.1979). We likewise conclude that the bonds are not intended for the benefit of secured creditors of the warehouseman. To extend bond coverage to a secured creditor such as the Banks in this case would effectively reduce the protection available to producers for whose benefit and protection the statute was designed. We hold that the Banks do not have a valid claim against the warehouseman's bonds in the instant case.