Opinion ID: 1640458
Heading Depth: 3
Heading Rank: 4

Heading: Priorities concerning inventory

Text: The Banks assert that, as a secured creditor, they are entitled to the $271,400 in proceeds obtained through the PSC's sale of VFBA's inventory. The Banks have no claim to that portion of VFBA's inventory which represents beans held for storage. When a public warehouseman accepts grain for storage, such delivery shall be a bailment and not a sale of the grain so delivered, and [i]n no case shall the grain so stored be liable to seizure upon process of any court in any action against such bailee, except in an action by an owner of such warehouse receipt to enforce the terms thereof. § 60-02-25, N.D.C.C. A much closer question arises with regard to the competing interests of the Banks and the unpaid sellers of beans in the remaining inventory of VFBA. Upon the insolvency of a grain warehouseman, a trust fund consisting of [a]ll the grain in said warehouse is established for the redemption of outstanding receipts. § 60-04-02(1), N.D.C.C. In State ex rel. Public Service Commission v. R.F. Gunkelman & Sons, Inc., 219 N.W.2d 853, 859 (N.D.1974), this court held that because the purpose of the trust fund is to insure that farmers storing or selling grain in an insolvent warehouse receive payment for that grain to the fullest extent possible, assets of the insolvent warehouseman should be considered grain includable in the trust fund whenever reasonable. In In re Gotham Provision Co., Inc., 669 F.2d 1000 (5th Cir.), cert. denied sub nom. First State Bank of Miami v. Gotham Provision Company, Inc., 459 U.S. 858, 103 S.Ct. 129, 74 L.Ed.2d 111 (1982), the Fifth Circuit Court of Appeals was faced with an analogous issued which arose under the trust provisions of the Packers and Stockyards Act of 1921, 7 U.S.C. § 181 et seq. [3] In that case, a bank entered into a financing arrangement with Gotham whereby the bank would advance funds and take as collateral a security interest in Gotham's inventories, accounts receivable, and proceeds from the sale of meat. Gotham filed for bankruptcy, leaving a substantial loan balance due to the bank. Several livestock producers who had made cash sales to Gotham had not been paid. An escrow fund was created for the collection of Gotham's accounts receivable. The livestock producers claimed that their interest in the escrow fund was superior to that of the bank. The court agreed, stating: [W]e believe that if a lender could defeat the § 206 [7 U.S.C. § 196] trust merely by taking a security interest in inventories and receivables, the clear intention of Congress would be thwarted and the trust provision of the Act would be reduced to a nullity. We hold that so long as cash sellers remain unpaid for their livestock sold to a packer subject to § 206, that packer must hold his inventories, accounts receivable and proceeds derived from cash sales for the benefit of the cash sellers until such time as they are fully paid. Where the packer has given a lender a security interest in inventories and receivables that are subject to the § 206 trust, the unpaid cash sellers have priority over those assets and may recover the proceeds of those receivables to the extent of the outstanding balance on the cash sales. In re Gotham Provision Co., Inc., supra, 669 F.2d at 1009-1010. [Footnote omitted.] Likewise, we do not believe the Legislature intended that the trust provisions of § 60-04-02, N.D.C.C., could be defeated by a lender taking a security interest in an insolvent grain warehouseman's inventory. The purpose of Chapter 60-04, N.D.C.C., is to aid receipt holders in redeeming their receipts for as close to their full value as possible. Construing this legislation with a view to effecting its objects and to promoting justice [§ 1-02-01, N.D.C.C.], we conclude that the valid receipt holders had priority over the Banks to VFBA's inventory.