Opinion ID: 1640458
Heading Depth: 2
Heading Rank: 2

Heading: Validity of Banks' Claim

Text: The Banks contend that the district court erred in determining that they did not have a valid claim against the trust fund or the warehouseman's bonds. VFBA received a line of credit from the Banks. The Banks took a security interest in VFBA's inventory, accounts, and contract rights. As the loan funds were disbursed, VFBA prepared and delivered warehouse receipts to the Banks. During September 1982, VFBA sold its Portland warehouse to the Portland Farmers Elevator Company and its Buxton warehouse to the Central Valley Bean Co-op. Because beans were stored in each of these structures at the time of sale, three additional warehouse receipts were issued by the other warehousemen to VFBA. Each receipt contains an endorsement from VFBA to the Banks. The Banks contend that the warehouse receipts received from VFBA, the three warehouse receipts issued by other warehousemen to VFBA and endorsed to the Banks, and the security agreement with VFBA, all constitute valid claims against the trust fund and the warehouseman's bonds.
Upon the insolvency of a grain warehouseman, a trust fund is created for the redemption of outstanding storage receipts of such warehouseman .... § 60-04-02, N.D.C.C. A warehouse receipt may only be issued upon the actual delivery of grain to the warehouse for storage. § 60-02-16(1), N.D.C.C. In State ex rel. Public Service Commission v. R.F. Gunkelman & Sons, Inc., 219 N.W.2d 853 (N.D.1974), this court held that where a party purchases grain from a warehouseman without taking delivery and receives warehouse receipts as evidence of the sale, the warehouse receipts are valid claims against an insolvent warehouseman, even though the receipt holder did not actually deliver grain to the warehouse in return for the receipts. However, that case does not alter the fundamental principle that the party to whom the warehouse receipt is issued must have an ownership interest in the grain described on the warehouse receipt. An ownership interest is not synonymous with a security interest. See § 41-01-11(37)(1-201), N.D.C.C. Section 41-09-02(1)(a)(9-102), N.D.C.C., provides that a secured transaction is [a]ny transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper, or accounts. The test for determining if a particular transaction falls within the purview of Chapter 41-09, N.D.C.C., is whether or not the transaction is intended to have effect as security. Production Credit Ass'n of Minot v. Melland, 278 N.W.2d 780, 786 (N.D.1979). If that intent can be gleaned from the four corners of the instruments in question, the determination is a question of law for the court to decide. Wallwork Lease & Rental v. JNJ Investments, 303 N.W.2d 545 (N.D.1981); State Bank, Etc. v. All-American Sub, Inc., 289 N.W.2d 772 (N.D.1980). The titles or labels attached to the documents by the parties are not conclusive. All-American Sub, Inc., supra . The warehouse receipts issued to the Banks specifically state that they were issued as collateral or security for the $3,400,000 line of credit. The Banks' pleadings in connection with the insolvency proceedings state that the warehouse receipts... were given as collateral for a loan. The Banks have not asserted in this proceeding that they delivered grain to the warehouse in exchange for the receipts, that they paid for the beans reflected on the receipts, or that they paid fees for the storage of the beans. It is clear from the undisputed evidence that the warehouse receipts submitted by the Banks in support of their claim were only intended to serve as security for the loan to VFBA. Thus, the Banks' warehouse receipts were invalid because they did not have an ownership interest in the beans.
With regard to the three warehouse receipts issued by other warehousemen to VFBA which were endorsed to the Banks, we agree in essence with the district court's analysis and resolution of the issue: Portland Farmers Elevator Company and Central Valley Bean Co-op had no statutory authority or legal basis to issue such warehouse receipts. The warehouse receipts are `paper transactions' at most which created on paper a property interest that did not exist. The issuance of the warehouse receipts was not done in conformity to statutes. The beans presumably stored were already burdened by scale tickets to the claimants hereinbefore described. VFBA had no authority to endorse over warehouse receipts except as to beans over and beyond its own storage liability. In a circuitous and bootstrap transaction, VFBA could not by endorsement of storage tickets issued by other warehouses defeat the ownership interest of producers having beans stored in VFBA itself. Having no title to such beans by Portland and Central, the warehouse receipts are a nullity. Having no title in such beans by VFBA, the warehouse receipts are a nullity. The warehouse receipts all being a nullity, the endorsement becomes a nullity. A transferee can acquire no greater title than its transferor had. 41-02-48 NDCC. The trial court correctly concluded that the warehouse receipts issued by VFBA to the Banks and the warehouse receipts issued to VFBA and endorsed by it to the Banks were a nullity. Those receipts did not change the Banks' status from that of a secured creditor to that of a receipt holder. Consequently, the Banks were not entitled to share in trust fund assets.
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.
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.
The Banks contend that because VFBA's inventory included almost 8,500 hundred weight of black turtle beans, and because all of the producer claims filed with the PSC were for pinto beans, the Banks have a valid claim to the black turtle bean inventory. We disagree. Section 60-04-02(1), N.D.C.C., states that the trust fund shall consist of [a]ll the grain in said warehouse. In R.F. Gunkelman & Sons, Inc., supra, grain had been processed by the warehouseman prior to the insolvency. This court ruled that in order to effectuate the purpose of Chapter 60-04, N.D.C.C., those assets were properly considered grain and includable in the trust fund for the benefit of receipt holders. The same rationale applies in the present case. We conclude that the trust fund consists of not only the type and quality of grain represented by claims filed by producers, but all of the grain remaining in the warehouse at the time of insolvency. Therefore, the black turtle beans were properly included in the trust fund assets.