Surety Relationship in the Agricultural Commodity Storage ...

THE SURETY RELATIONSHIP IN THEAGRICULTURAL COMMODITY STORAGE

CONTEXT AND GRAIN INDEMNITYFUNDS: A JURISDICTIONAL SURVEY

PETER E. KARNEY & JOHN F. FATINOt

I. INTRODUCTION ................................... 44A. The Case for Commentary ....................... 44B. An Overview of the Rules of Sales and

W arehousing .................................... 46C. The Surety Relationship ......................... 48D. Bankruptcy and the State Surety

Requirem ents ................................... 50II. THE FEDERAL APPROACH ........................ 51

A. Federal Warehouse Provisions ................... 511. Statutes ..................................... 512. Regulations .................................. 553. Practice pointers ............................. 56

B. Packers and Stockyards Act ..................... 581. Statutes ..................................... 58

(a) General provisions ...................... 58(b) Live poultry ............................. 61

2. Regulations .................................. 62(a) General bonding provisions ............... 62(b) Market agency, dealer, and packer

bonds .................................... 62(c) Proceeds of sale .......................... 64(d) General practices ........................ 65(e) Access by the Secretary .................. 65(f) Records regarding live poultry ............ 65(g) Credit term s ............................. 66(h) Rules of practice ......................... 66(i) General policy statements ................ 66

III. THE JURISDICTIONS .............................. 66A . Illinois .......................................... 67

1. Statutes ..................................... 672. Case law .................................... 70

t Peter E. Karney, member of the bar of Illinois, and John F. Fatino, member ofthe bars of Iowa and Minnesota. Mr. Karney is a vice-chair of the Fidelity-Surety LawCommittee of the Section on Torts and Insurance Practice of the American Bar Associa-tion. Mr. Fatino is a member of Whitfield & Eddy, PLC in Des Moines, Iowa. The opin-ions expressed herein are solely those of the authors.

42 CREIGHTON LAW REVIEW [Vol. 40

B . Indiana ......................................... 711. Statutes ..................................... 712. Case law .................................... 73

C . Iow a ............................................ 731. Statutes ..................................... 73

(a) Grain dealers ............................ 73(b) Bargaining agents ....................... 76(c) W arehouses .............................. 76

2. Case law .................................... 77(a) Common law and issues peculiar to

Iow a statutes ............................ 77(b) Procedural issues ........................ 78(c) Surety law in jury instructions ........... 79(d) Dam ages ................................ 79(e) Interest .................................. 79(f) Preservation of error and appellate

practice .................................. 80D . K ansas .......................................... 80

1. Statutes ..................................... 802. Case law .................................... 81

E . M innesota ....................................... 831. Statutes ..................................... 83

(a) Grain buyers ............................. 83(b) Warehouse operators ..................... 87

2. Case law .................................... 89(a) Statutory interpretation and the

com m on law ............................. 89(b) The successive bonding dilemma ......... 92(c) Coverage for independent truckers ....... 94(d) How Chapter 223 works .................. 94(e) Delivery as a defense to surety ........... 95(f) Evidentiary issues ....................... 96

F . M issouri ........................................ 961. Statutes ..................................... 96

(a) Grain dealers ............................ 96(b) W arehouses .............................. 101

2. Case law .................................... 103(a) The common law and the Missouri

statutes .................................. 103(b) Trial practice ............................ 104(c) Interest .................................. 105(d) Attorney fees ............................ 105

G . N ebraska ....................................... 1051. Statutes ..................................... 105

(a) Grain dealers ............................ 105

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(b) W arehouses .............................. 1062. Case law .................................... 110

(a) Contract formation ....................... 110(b) Inapplicability of the discretionary

function ................................. 111(c) How the statute works ................... 114(d) Interest .................................. 115(e) Surety law ............................... 115(f) Administrative procedure and the due

process claim ............................ 115(g) Appellate practice ........................ 115(h) Statutory interpretation .................. 116

H . North Dakota ................................... 1161. Statutes ..................................... 116

(a) Grain warehouses ........................ 116(b) Grain buyers ............................. 119

2. Case law .................................... 121(a) The common law and the statute ......... 121(b) The claimant ............................ 121(c) The surety and the principal ............. 122(d) The surety and the roving grain buyer .... 122(e) The surety and the banker ............... 122(f) Conversion ............................... 122(g) Invalid defenses ......................... 122(h) Dam ages ................................ 123(i) Contribution and subrogation ............ 123(j) Interest .................................. 123(k) The surety and the bankruptcy wrinkle... 123(1) Laches as an equitable defense ........... 124

I. South Dakota ................................... 1241. Statutes ..................................... 124

(a) W arehouses .............................. 124(b) Grain dealers ............................ 127

2. Case law .................................... 129(a) Surety coverage .......................... 129(b) Interest .................................. 130

J. W isconsin ....................................... 1301. Statutes ..................................... 130

(a) Grain dealers ............................ 130(b) Grain warehouses ........................ 132(c) Recovery proceedings .................... 132

2. Case law .................................... 133IV. CONCLUSION ..................................... 133

CREIGHTON LAW REVIEW

I. INTRODUCTION

The following Article discusses the federal and subject state juris-dictions" statutory schemes for the regulation of those engaged in thestorage of grain and related agricultural commodities and the require-ments each of the jurisdictions imposes concerning surety bonds orother types of surety arrangements for such transactions. Each of thejurisdictions treats these matters differently both in terms of applica-ble statutory regulations and scope/types of coverage required. Eachjurisdiction's statute is somewhat unique; albeit case law from otherjurisdictions can enlighten counsel and the courts when interpreting aparticular statute or surety relationship in a given situation.

This Article will analyze the materials based upon an introduc-tion and an examination of the applicable federal statutes and regula-tions. Finally, the subject state jurisdictions' statutes and case lawwill be examined.

A. THE CASE FOR COMMENTARY

The topic is worthy of scholarly commentary as the courts, practi-tioners, producers, and the community alike can find themselves deal-ing with the ramifications of a failed agricultural storage facility. Ithas been estimated that at any one time at least five percent of allgrain storage facilities are experiencing financial difficulties. 2 The"ripple effect" of a grain storage facility failure can easily cause re-lated failure of other producers. As grain storage is generally deemedto be "open storage,"-i.e., the same types of grain from multiple pro-ducers are commingled in common bins-hundreds of other producersare impacted by the failure and concomitant delay when a facilityfails.3 This same causation would apply to any agricultural commod-ity that is stored by a party other than the producer.

While a myriad of causes exist for the failure of a grain storagefacility, a discussion of each of those causes is beyond the scope of thisArticle. Suffice it to say, however, that the primary reason why suchfacilities fail is poor record keeping.4 In the long run, poor recordkeeping contributes to a net shortage of grain from which a financiallystrapped operator cannot recover. 5 Thus, grain shortages are the "pri-mary symptom of elevator insolvency."6 Given the impact on the com-

1. Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota,South Dakota, and Wisconsin.

2. Tom H. Connolly & Charles R. Beach, Grain Elevator Insolvency: State Lawand Bankruptcy Law Considerations, 19 COLO. LAw. 635, 635 (1990).

3. Connolly & Beach, 19 COLO. LAw. at 635.4. Id.5. Id.6. Id.

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A JURISDICTIONAL SURVEY

munity as a whole, it would appear that the exercise of the state'spolice powers would be appropriate in this arena.7

In addition, counsel must contemplate the actual nature of therelationship between the producer and the facility. Generally speak-ing, a storage facility may provide two separate services to producers.The first service is where the facility acts as a grain dealer whereinthe operator engages in certain transactions such as cash or creditsales and commodity futures.8 However, this depends upon a particu-lar jurisdiction's regulatory scheme.

The other service involves holding the commodity for the produceras a warehouse. For instance, some state statutes contemplate that asale has not taken place between the producer and the facility; in-stead, grain storage contracts are considered "true bailments ... andthe depositors are thereby considered tenants in common of the com-mingled grain held in open storage."9 The same result could bereached under the case law as well.' 0 The latter category of service iscalled a "commercial bailment agreement."" Those jurisdictions thatregulate grain banks treat the relationship between a grain bank anda depositor as controlled by the common law of bailment.12

Similar problems are experienced by those who have sold grainbut have not been paid before the facility shuts down. The problemsare largely those of proof and lack of sufficient funds to pay all of thedepositors. If the facility agreed to purchase the grain directly, the"sales 'contract' may be written or oral, and may be based upon noth-ing more than a telephone conversation with the depositor. When theshutdown or bankruptcy finally arrives, many depositors that sold tothe elevator may be unpaid or may have been paid with checks thatlater are dishonored." 13

These problems are compounded by the fact that the operator of afacility must also secure a line of operating capital. Needless to say,the commodity itself is the operator's greatest asset because, generally

7. Michael D. Love, Note, A Survey of Current Issues and Legislation ConcerningGrain Elevator Insolvencies, 8 J. CORP. L. 111, 114 (1982) (discussing impact of grainoperator insolvencies on farm communities and on financial institutions).

8. Roger Dunekacke, Note, Grain Elevator Insolvencies and Help for the Producer:An Examination of the Bankruptcy Act of 1984, 64 NEB. L. REV. 463, 464 (1985). Thisservice is commonly known as "merchandising." See also Love, Note, 8 J. CORP. L. at118-19.

9. Connolly & Beach, 19 COLO. LAw. at 636 (citing COLO. REV. STAT. § 12-16-207as derived from the Uniform Commercial Code).

10. Love, Note, 8 J. CORP. L. at 117 n.66.11. Dunekacke, Note, 64 NEB. L. REV. at 465 (discussing the commercial need for

such facilities and the economic factors that encourage such facilities).12. Duxbury v. Spex Feeds, Inc., 681 N.W.2d 380, 386 (Minn. Ct. App. 2004) (citing

Torgerson v. Quinn-Shepherdson Co., 201 N.W. 615, 616 (Minn. 1925)).13. Connolly & Beach, 19 COLO. LAW. at 637.

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speaking, the operator's fixed assets would be insufficient to collater-alize a loan.' 4 In turn, the operator's lenders will not finance the oper-ation without "receiving warehouse receipts covering sufficient grainto secure a loan."15

Accordingly, this Article will examine the federal statutoryscheme for grain warehouses and operators of packing and stock yardfacilities.1 6 Further, this Article will examine the various jurisdic-tions' approaches to the imposition of a surety relationship on thoseentities which engage in the storage of grain and other agriculturalcommodities.17

B. AN OVERVIEW OF THE RULES OF SALES AND WAREHOUSING

Before embarking on a case that involves a dispute concerning thestorage of agricultural commodities and bonds written in connectionwith the endeavor, counsel will want to closely examine her state'sadopted version of the Uniform Commercial Code concerning the re-quirement of a writing for the sale of goods.1 8 Counsel should alsostudy when title passes to goods.1 9 A purchaser acquires all of theinterest held by the transferor unless there was a transfer of a limitedinterest.20 After all, a commodity is a good within the meaning of theUniform Commercial Code, 21 and whether a transaction is covered bythe Uniform Commercial Code is a question of law.22

Further, in the absence of contrary statutory language that regu-lates the warehousing of agricultural commodities, the Uniform Com-mercial Code will most likely govern the transaction under thewarehousing provisions of Article Seven. 23 Needless to say, counselwill also want to examine the subject statute and any written evidenceof a surety relationship.

At the same time, a short discussion concerning "warehouse law"or "documents of title" as described by the drafters of the UniformCommercial Code is warranted. Ordinarily, a warehouse is liable for

14. Love, Note, 8 J. CORP. L. at 120.15. Id. This may be critical because of cash needs during particular seasons. Id.16. See infra notes 64-228 and accompanying text.17. See infra notes 229-1012 and accompanying text.18. U.C.C. § 2-201 (amended 2003). See, e.g., IOWA CODE ANN. § 554.2201 (West

2001).19. U.C.C. § 2-401 (amended 2003). See, e.g., IOWA CODE ANN. § 554.2401 (West

2001). See also Connolly & Beach, 19 CoLo. LAw. at 638 (discussing impact under Colo-rado law).

20. U.C.C. § 2-403 (amended 2003).21. U.C.C. § 2-105(1) (amended 2003). See, e.g., IOWA CODE ANN. § 554.2105(1)

(West 2001).22. Duxbury, 681 N.W.2d at 386 (citing Valley Farmers' Elevator v. Lindsay Bros.,

Co., 398 N.W.2d 553, 556 (Minn. 1987)).23. See infra notes 26-39 and accompanying text.

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damage to goods in its possession only if the warehouse fails to useordinary care, that is, a "failure to exercise care ... that a reasonablycareful person would exercise under similar circumstances."2 4 If thedamages could not have been avoided even if reasonable care wasused, the warehouse is not liable. 25 Also, damages may be limitedunder the warehouse receipt or the parties' storage agreement. 2 6

However, under no circumstances may the warehouse limit its liabil-ity for conversion. 2 7 Similarly, specifications may be placed in thewarehouse receipt concerning "reasonable" provisions for the "timeand manner of presenting claims and commencing actions based onthe bailment . *... ,28

The Uniform Commercial Code also contains provisions concern-ing the purchase of a document of title, which represents goods heldby the warehouse. The Uniform Commercial Code provides that whena document of title, other than a bill of lading, is purchased in goodfaith, the purchaser may recover "damages caused by the nonreceiptor misdescription of the goods" unless "the document conspicuously in-dicates that either the issuer does not know" the contents or the pur-chaser has notice of the fact.2 9

Like the provisions for the sale of goods, Article Seven of the Uni-form Commercial Code contains a provision for the essential terms ofa warehouse receipt. 30 However, in the case of agricultural commodi-ties stored under a statute that requires a bond, "a receipt issued forthe goods is deemed to be a warehouse receipt even if issued by a per-son that is the owner of the goods and is not a warehouse."3 1

Iowa's adoption of section 7-202 of the Uniform Commercial Codecontains additional provisions that are noteworthy. First, if applica-ble, the receipt must reflect in its printed or written terms that the"receipt is issued for goods of which the warehouse operator is owner,either solely or jointly or in common with others .... ,,32 Second, thereceipt must contain a "statement of the amount of advances madeand of liabilities incurred for which the warehouse operator claims a

24. U.C.C. § 7-204(a) (amended 2003); See, e.g., IOWA CODE ANN. § 554.7204(1)(West 2001).

25. Id.26. U.C.C. § 7-204(b); See, e.g., IOWA CODE ANN. § 554.7204(2).27. Id.28. U.C.C. § 7-204(c); See, e.g., IOWA CODE ANN. § 554.7204(3).29. U.C.C. § 7-203 (amended 2003). See, e.g., IOWA CODE ANN. § 554.7203 (West

2001).30. U.C.C. § 7-202 (amended 2003). See, e.g., IowA CODE ANN. § 554.7202 (West

2001).31. U.C.C. § 7-201(2) (amended 2003). See, e.g., Iowa Code Ann. § 554.7201(2)

(West 2001).32. IOWA CODE ANN. § 554.7202(2)(h).

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lien or security interest."33 Moreover, a "warehouse operator may in-sert in the receipt any other terms which are not contrary to the provi-sions of this chapter and do not impair the warehouse operator'sobligation of delivery ... or duty of care."3 4

Furthermore, the Uniform Commercial Code addresses the nego-tiable nature of the warehouse receipt. According to the 2001 andprior versions of section 7-104 of the Uniform Commercial Code, "awarehouse receipt, bill of lading or other document of title is negotia-ble" if the goods are deliverable to the bearer or the "order of a namedperson" or when the instrument concerns international trade and theinstrument runs to a person so named or its assign. 35 It is againstthis back drop that the various statutory schemes set out to changethe paradigm regarding agricultural commodity storage.

C. THE SURETY RELATIONSHIP

At the same time, in order to be an effective counselor and advo-cate, counsel must have a basic knowledge of the vocabulary and legalrelationships that are the foundation of a surety agreement. While adetailed analysis of a surety relationship and the myriad of settings inwhich the device is used are the subject of many authoritative trea-tises, the definitions employed and the concepts underlying the rela-tionship are common regardless of the enterprise in which the deviceis used. Moreover, the legal concepts are critical to an understandingof the balance of this Article. At the same time, the relationship willbe distinguished from the traditional notion of insurance. 3 6

A surety relationship is a tripartite one involving a principal, anobligee, and a surety.3 7 The concept is an ancient one with historicalantecedents that date to 2750 B.C. when agreements were made ontablets. 38 The Bible warns against the practice. 39 The practice was

33. § 554.7202(2)(i).34. § 554.7202(3).35. U.C.C. § 7-104 (2001) (amended 2003). See, e.g., Iowa Code Ann. § 554.7104

(West 2001). The language of section 7-104 of the Uniform Commercial Code wasamended in 2003, but the commentary reflects that the section 9till deals with "com-modity paper." See U.C.C. § 7-104 cmt. (amended 2003).

36. However, certain state statutes may define insurance to include the practice ofsuretyship, which often leads to confusion of the terminology and mixed results withrespect to certain causes of action and statutory remedies. See, e.g., Benjamin B. Ullem& John F. Fatino, Defeating the Bad Faith Claim Against the Miller Act Surety, FIDEL-ITY & SURETY L. COMMIIrEE NEWSL. (ABA/Tort Trial and Insurance Practice Section),Summer 2003, at 10-11. See also William H. Woods, Historical Development of Surety-ship, in THE LAw OF SURETYSHIP 2-37 (Edward G. Gallagher ed., 1993) (discussing theproblems that have arisen from applying principles of insurance law to the suretyagreement).

37. Woods, supra note 36, at 2-1.38. Id. at 2-2.39. Id. at 2-3.

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used in ancient Greece, was observed by Roman law, continued acrossthe continent, was cemented in English jurisprudence, and made itsway to the newly formed colonies.40 Evidence of the release of asurety dating back to 1050 A.D. exists in Nuremberg, Germany.4 1 A"surety" is a person or entity "who contracts to answer for the debt ordefault of another."4 2 "The principal is the primary obligor, the obli-gee is the person to whom the principal and the surety owe a duty andthe surety is the secondary obligor."4 3 A contract of suretyship mustbe in writing.44

Unlike insurance, a surety essentially extends credit to its princi-pal in that the surety will make good on any loss or failure of perform-ance by the principal to a person or entity known as the obligee, thatis, the person to whom the "obligation" of performance or other condi-tion is owed. (The obligation, of course, depends upon the surety's un-dertaking - e.g., performance or payment bond, bid bond, notary bond,etc.)

Suretyship is also unlike insurance in that it is not based uponthe premise that the surety will suffer a loss from an actuarial stand-point.4 5 Underwriting for a surety bond is different from the under-writing used for a traditional insurance product.4 6 The surety'spromise is only triggered when the principal fails to perform. 47 Inturn, the surety will only suffer a loss if the principal is unable toreimburse the surety.48 As such, surety underwriting is based uponthe technical competency and financial wherewithall of the princi-pal. 49 Therefore, as the surety has access to information to validatethe decision to extend such credit, evidence of any "appreciable likeli-hood of default" during the underwriting process will lead to a rejec-tion of the opportunity to issue a particular bond.5 0 Insurance, on theother hand, spreads the risk of loss over its customers by assuming

40. Id. at 2-4 to 2-23.41. HANS THIEME, NUREMBERG CITY GUIDE 10-11 (1995). A special thank you to

Simone Siegler for bringing this information to the attention of the authors.42. Edward G. Gallagher, Introduction, in THE LAW OF SURETYSHIP, supra note 36,

at 1-1. See also State v. Bi-States Constr. Co., 269 N.W.2d 455, 458 (Iowa 1978) (cita-tion omitted) ("A contract of suretyship is usually, in general terms, defined as a con-tract to answer for the debt, default, or miscarriage of another").

43. Gallagher, supra note 42, at 1-1.44. Id. See, e.g., IOWA CODE ANN. § 622.32 (West 1999).45. EMMETr J. VAUGHAN & THERESE M. VAUGHAN, FUNDAMENTALS OF RISK AND IN-

SURANCE 608 (7th ed. 1996).46. For a discussion concerning underwriting practices of surety underwriters, see

Timothy Martin, Using the Underwriter's File in Litigation, FOR THE DEFENSE, Sept.2002, at 39.

47. Gallagher, supra note 42, at 1-1.48. Id.49. Id.50. Id.

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that a certain number of losses will occur and charges the premiumsto all of its customers accordingly. In any event, the surety's liabilityis limited to the penal sum of the bond.5 1

Additionally, unlike a surety, an insurer has no right to proceedagainst its insured in the event the insured caused a loss. This resultfollows because the insurer "has the primary obligation to pay and hasno recourse against the insured."5 2 Instead, a surety has a right toproceed against its principal and other individuals who agreed to in-demnify the surety in the event the surety should incur any cost, ex-pense, or loss. The actual scope of the duty to indemnify will bedetermined by the actual language employed in the surety's indemnityagreement. Generally speaking, the indemnity agreement is executedprior to issuance of any bonds by the surety on the principal's behalf.This will, of course, depend upon the actual underwriting and proce-dures for issuance of bonds by a given surety.

D. BANKRUPTCY AND THE STATE SURETY REQUIREMENTS.

In order to expedite the resolution of claims arising out of the fail-ure of commodity storage facilities, Congress enacted 11 U.S.C. § 557as part of the federal bankruptcy code. 53 Section 557 places specificduties upon the bankruptcy trustee. 54 Other provisions of the bank-ruptcy code relate to agricultural storage facilities. 55

A trustee in bankruptcy is to move swiftly once the bankruptcycourt invokes the section.56 To that end, notwithstanding the bank-ruptcy court's jurisdiction over a facility, there still is a role for stategrain regulators to assist in the process. Some suggest that "the con-siderable expertise of state agricultural authorities can be of greathelp to the trustee during this initial phase."5 7

51. Lynn M. Schubert, Modern Contract Bonds-An Overview, in THE LAW OFSURETYSHIP, supra note 36, at 3-1. However, as discussed, infra, there are exceptions tothe proposition.

52. Gallagher, supra note 42, at 1-1. See also AID Ins. Co. v. United Fire & Cas.Co., 445 N.W.2d 767, 771 (Iowa 1989) (insurer has no right of subrogation against itsinsured).

53. Connolly & Beach, 19 CoLo. LAW. at 636. See also id. (discussing prior case lawin effect that, in part, caused Congress to adopt section 557). For an excellent discus-sion of case law that has developed since the farm crisis of the 1980s, see Randy Rogers,Current Developments in Agricultural Bankruptcies and Insolvencies, 5 DRAKE J. AGRiC.L. 137 (2000).

54. For additional commentary concerning the available procedures under section557, see Connolly & Beach, 19 CoLo. LAw. at 636-37. See also Dunekacke, Note, 64 NEB.L. REV. at 474-75.

55. See 11 U.S.C. § 546(d) (2000), amended by Pub. L. No. 109-8, 119 Stat. 105,177, 182, 199 (2005) (limitation of avoiding powers of trustee); See also id. § 507(a)(5)(A)(priority claims).

56. Connolly & Beach, 19 COLO. LAw. at 637.57. Id.

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In the bankruptcy context, a strong argument can be made thatthe penal sum of the surety bond is not property of the bankruptcyestate. 58 Such a result seems the only logical conclusion in that thepenal sum of the bond is payable to the obligee (read as a given state'sDepartment of Agriculture) only upon the default of the principal andprovided that the obligee has acted in accordance with the terms of thebond. 59 In short, the penal sum of the bond never comes into posses-sion of the debtor and is only due upon the debtor's default.

With respect to state regulatory schemes, the goal is "to protectthe grain producer above all. Their prevailing objective is to dis-tribute the assets of the insolvent elevator as quickly as possible."60

Nonetheless, counsel must be mindful of the interaction betweenstate court proceedings and bankruptcy court. Findings in the stateproceeding can preclude further litigation in bankruptcy court. Forinstance, a debtor's issuance of warehouse receipts to a creditor repre-senting the purchase of grain and soybeans when the warehouse doesnot have sufficient inventory to permit the creditor to redeem the re-ceipts may result in a finding that the debt is non-dischargeable under11 U.S.C. § 523(a)(2)(A). 6 1 The state court findings will prevent therelitigation of a state court fraud finding arising out of misrepresenta-tion of warehouse receipts because of the doctrines of collateral estop-pel and res judicata.6 2 At the same time, a bankruptcy court will notre-examine the result that arises from the invocation of the FifthAmendment in a state court proceeding (with resultant adverse infer-ence from the state tribunal).6 3

II. THE FEDERAL APPROACH

A. FEDERAL WAREHOUSE PROVISIONS

1. Statutes

The federal government of the United States has established astatutory scheme for the regulation of warehouses that store agricul-tural commodities. 6 4 The Act is generally known as the United StatesWarehouse Act ("Warehouse Act").6 5 The determination of liability

58. Rogers, 5 DRAKE J. AGRIC. L. at 141 (citing In re Hallmark Builders, Inc., 205B.R. 974 (Bankr. M.D. Fla. 1996)).

59. Bi-States Constr. Co., 269 N.W.2d at 458 (a bond is construed according to thelaw of contracts).

60. Love, Note, 8 J. CORP. L. at 115.61. In re White, 315 B.R. 741, 748-49 (Bankr. D. Neb. 2004).62. White, 315 B.R. at 746-48.63. Id. at 747-48.64. See 7 U.S.C. §§ 241-254 (2000).65. Implementation of the United States Warehouse Act, 67 Fed. Reg. 50778 (Aug.

5, 2002).

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under a federal warehouse bond is governed by federal law and notstate law.6 6 The Farm Service Agency of the United States Depart-ment of Agriculture maintains a website concerning the WarehouseAct.67

The Warehouse Act is meant to reach agricultural products thatare stored for interstate or foreign commerce. 68 As used in the Ware-house Act, "'agricultural product' means an agricultural commod-ity..., including a processed product of an agricultural commodity."6 9

A "warehouse" is a structure or other storage facility approved by theSecretary in which agricultural products are "stored or handled for thepurposes of interstate or foreign commerce." 70

It is the prerogative of the Secretary of Agriculture to specifywhich types of agricultural products may be subject to warehouse li-censing under the Warehouse Act.7 1 Likewise, the Secretary has theauthority to "prescribe the duties of a warehouse operator" licensedunder the Warehouse Act. 7 2 This power includes the authority to con-duct examinations and audits of persons that engage in the businessof storing agricultural products subject to the Warehouse Act, stateagencies that regulate the storage of agricultural products, and anycommodity exchange. 73

Congress specifically authorized the Secretary to issue licensesfor the operation of warehouses when "the Secretary determines thatthe warehouse is suitable for the proper storage of the agricultural"products and, in turn, "the warehouse operator agrees, as a conditionof the license, to comply with the" Warehouse Act and regulationspromulgated thereunder. 7 4 At the same time, the Secretary has theauthority to license other persons engaged in the process of storage,including those that inspect, sample, classify, and weigh such prod-ucts.7 5 Nonetheless, Congress has authorized the Secretary to "coop-erate with officers and employees of a State who administer or enforce

66. 7 C.F.R. § 735.1 (2005).67. FSA: Commodity Operations, http://www.fsa.usda.gov/FSA/ (follow "Commod-

ity Operations" hyperlink; then follow "Warehouse Services" hyperlink; then follow"United States Warehouse Act" hyperlink) (last visited Nov. 21, 2006).

68. Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 229-30 (1946); see also In reFarmers Coop. Ass'n, 8 N.W.2d 557, 562 (S.D. 1943); see also Edward R. Bacon GrainCo. v. City of Chicago, 59 N.E.2d 689, 693 (Ill. App. Ct. 1945). The system does notpreclude the application of local regulations provided the local regulations do not runafoul of the federal requirements.

69. 7 U.S.C. § 241(1) (2000).70. § 241(10).71. Id. § 242(b).72. § 242(g).73. § 242(i)(1)-(3); see also § 242(1).74. § 242(j)(1)-(2).75. § 242(k)(1)(A)-(D).

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State laws relating to warehouses, warehouse operators, weighers,graders, inspectors, samplers, or classifiers" and enter cooperative ar-rangements with such states.76

As a condition of obtaining a license under the Act, the applicantmust file with the "Secretary a bond, or provide such other financialassurance as the Secretary determines appropriate, to secure the per-son's performance of the activities so licensed or approved." 77 Withrespect to the "surety," the surety or other financial institution must"be subject to service of process in lawsuits or legal actions on the bondor other financial assurance in the State in which the warehouse islocated."78 In addition, the Secretary, upon a determination that apreviously approved bond or other financial assurance is insufficient,may require additional bonds or other financial assurance. 79

Congress has specifically provided for the rights of third partiesagainst the bond.

Any person injured by the breach of any obligation arisingunder this Chapter for which a bond or other financial assur-ance has been obtained... may sue with respect to the bondor other financial assurance in a district court of the UnitedStates to recover the damages that the person sustained as aresult of the breach.8 0

A warehouse operator "may commingle agricultural products in amanner approved by the Secretary."8 ' Yet, a warehouse operator"shall be severally liable to each depositor or holder for the care andredelivery of the share of the depositor and holder of the commingledagricultural product to the same extent and under the same circum-stances as if the agricultural products had been stored separately."8 2

The surety cannot avoid liability when the principal fails to complywith the Warehouse Act.8 3

A warehouse operator, when requested by the depositor, is re-quired to issue a receipt in the form prescribed by the Secretary.8 4 Areceipt cannot be issued unless the product was "actually stored in thewarehouse at the time of the issuance of the receipt."8 5 The Secretaryhas the authority to require the recording of additional information on

76. § 242(m)(1)-(2).77. Id. § 245(a); see also 7 C.F.R. § 735.14 (2006).78. 7 C.F.R. § 735.14(e); see also 7 U.S.C. § 245(b).79. 7 U.S.C. § 245(c).80. § 245(d).81. Id. § 248(a).82. § 248(b).83. Farmers Elevator Mut. Ins. Co. v. Jewett, 394 F.2d 896, 899-900 (10th Cir.

1968).84. 7 U.S.C. § 250(a) (2000).85. § 250(b).

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the receipt.8 6 Unless the Secretary allows otherwise by regulation,additional receipts may not be issued for the same agricultural prod-uct when there are presently outstanding and uncanceled warehousereceipts for the product,8 7 nor may other duplicate documents be is-sued under such circumstances.88

The warehouse operator has a duty of prompt delivery of the agri-cultural product upon demand made by "the holder of the receipt" or"the person that deposited the product," if no receipt has been is-sued.8 9 At the same time, there is an obligation that payment is toaccompany demand.90 That is, "[p]rior to delivery of the agriculturalproduct, payment of the accrued charges associated with the storageof the agricultural product, including satisfaction of the warehouse-man's lien, shall be made if requested by the warehouse operator."9 1

Whether the statute has been met is a jury question. 9 2

The Secretary of Agriculture is authorized, following notice andopportunity for hearing, to "suspend or revoke any license . . .for amaterial violation of, or failure to comply with, any provision" of theWarehouse Act or the applicable regulations.9 3 This power includesthe authority to suspend a license prior to hearing.9 4 Judicial reviewof final agency action rests only in the district courts of the UnitedStates.9 5 The Secretary is also empowered to issue civil monetarypenalties for noncompliance with the Warehouse Act or theregulations.

96

The Warehouse Act enumerates which information maintained bythe Secretary is public9 7 and further prohibits employees of the De-partment of Agriculture from divulging "confidential business infor-mation" obtained during warehouse examinations or obtained duringother functions performed as part of their duties. 98 Yet the Ware-house Act does not define the term "confidential businessinformation."

Federal courts have exclusive jurisdiction over any dispute underthe Warehouse Act without regard to the citizenship of the parties or

86. § 250(c).87. § 250(d)(1).88. § 250(d)(2).89. Id. § 251(a)(1)-(2); see also 7 C.F.R. § 735.110 (2006).90. 7 U.S.C. § 251(b).91. Id.92. Schilling v. Book, 405 N.E.2d 824, 829 (Ill. App. Ct. 1980).93. 7 U.S.C. § 252(a) (2000); see also 7 C.F.R. § 735.6 (2006).94. 7 U.S.C. § 252(b).95. § 252(d)(1).96. Id. § 254; see also 7 C.F.R. at § 735.5 (2006).97. 7 U.S.C. § 253(a)-(b) (2000).98. § 253(b).

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the amount in controversy. 99 Congress specifically articulated thatnothing in the Warehouse Act was to preclude the enforceability ofany arbitration agreement that would otherwise be enforceable underTitle 9 of the United States Code. 10 0

2. Regulations

The adoption of the new regulations pursuant to the Grain Stan-dards and Warehouse Improvement Act of 2000 ("Act") has not beenwithout controversy. 10 1 The regulations issued under the new Act donot state the exact language to be contained in the bond.102 Instead,the regulations now merely require a bond or other financial assur-ance.' 0 3 Nonetheless, the obligations undertaken by the entity pro-viding financial assurance are quite clear. 10 4

On the other hand, the warehouse can provide a certificate thatdocuments "participation in, and coverage by, an indemnity or insur-ance fund... established and maintained by a State... which guar-antees depositors of the licensed warehouse full indemnification forthe breach of any obligation of the licensed warehouse operator underthe terms of the Act."'0 5

At the same time, the operator must comply with insurance poli-cies for the warehouse and the products stored in the facility. 10 6 Also,the operator has an obligation to comply with the duty of care imposedby the relevant licensing agreement. 10 7

Should the warehouse exceed its storage capacity, the warehouseis to immediately notify the Secretary of the situation.'0 8 Moreover,the regulations address the procedures which inspectors, samplers,classifiers, and weighers must comply with when acting in suchcapacities. 10 9

99. Id. § 255(a).100. § 255(b).101. Jerry Perkins, Iowa Targets Elevator Rule; State Officials Say Changing Regu-

lation Puts Farmers at Risk, DES MOINES REG., Jan. 4, 2003, at D1. In addition to Iowa,letters from other states regarding rescission of state regulation under the new federalregulations were signed by the following states: Colorado, Georgia, Idaho, Illinois, Loui-siana, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio and South Da-kota. Jerry Perkins, Regulations Hamper Protection of Elevators, DES MOINES REG.,Sept. 29, 2002, at M1.

102. Compare 7 C.F.R. § 736.13 (2002) (stating exact language required for thebond), with 7 C.F.R. § 735.14 (2005) (failing to state the exact language required for thebond).

103. 7 C.F.R. § 7 35.14(a); Id. § 735.102(a).104. § 735.102(a)(1)-(2).105. § 735.102(a)(4).106. Id. § 735.104.107. Id. § 735.105.108. Id. § 735.106(a).109. Id. §§ 735.200-.202.

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In the event the warehouse is not covered by the federal Act, thewarehouse must look to section 7-202 of the U.C.C. for its form for thewarehouse receipt. 1 10 The overwhelming number of warehouses thatare subject to state rather than federal regulation reflects that stateregulated elevators are much more common; yet it remains the choiceof the elevator as to whether it will be federally or state licensed.1 1 '

3. Practice pointers

At least one author has described several pragmatic considera-tions that arise under the federal Act.1 12 While the discussion focuseson an earlier edition of the Act and the regulations, the discussionremains instructive, as many of the obligations still exist.

First, under the Act, the warehouse has a duty to inspect, grade,and weigh grain before a receipt may be issued. 1 13 Next, the ware-house has a mandatory obligation to issue receipts, which must alsocomply with the applicable federal forms, for all grain stored in thewarehouse. 1 14 Moreover, should the warehouse redeliver the grain tothe depositor, the warehouse must both capture the original receiptand cancel it on its face and within the records of the warehouse. 1 15

Also, the warehouse must deliver out grain in accordance with thegrade of delivered grain. 116 This duty is described as follows: "Inother words, if Farmer Jones deposited 10,000 bushels of No. 4 oats,the warehouseman is obligated to deliver out to Farmer Jones 10,000bushels of No. 4 oats."117 This is called a "quantity settlement."118

110. Love, Note, 8 J. CORP. L. at 120.111. Id. at 121.112. See Bruce Gillman, A Primer on Handling Surety Claims under the United

States Warehouse Act: A Venture into the Unknown, SURETY CLAIMS INST. (1997). Whilethe article discussed the predecessor statute and regulations, many of the same dutiesand obligations still exist. However, they have been recodified because of the GrainStandards and Warehouse Improvement Act of 2000, Pub. L. No. 106-472, 114 Stat.2058, adopted on November 9, 2000. See also Implementation of the United StatesWarehouse Act, 67 Fed. Reg. 50,783-790 (Aug. 5, 2002) (adopting 7 C.F.R. Part 735).The old act expired on August 1, 2001. Grain Standards and Warehouse ImprovementAct of 2000, Pub. L. No. 106-472, § 202(c)(2), 114 Stat. 2058.

113. Gillman, supra note 112, at 5 (citing former 7 U.S.C. § 256 & 7 C.F.R.§ 736.19). See 7 C.F.R. § 735.300(b)(3) (2006).

114. Gillman, supra note 112, at 5-6 (citing former 7 U.S.C. §§ 259-60 & 7 C.F.R.§§ 736.30, .18, .26). See 7 C.F.R. § 735.300(a)(3).

115. Gillman, supra note 112, at 6. See 7 U.S.C. § 251(c)-(d) (2000). See also 7C.F.R. § 735.300(b)(5), (7), (8), (9).

116. Gillman, supra note 112, at 7-8. The scope of the duty under the new Act isunclear, as the language has changed; yet, a duty to measure such qualities still exists.See, e.g., 7 C.F.R. § 735.300(b)(3). See also 7 U.S.C. § 249(b) (2000) (duty to redeliver"kind, quality, and grade called for by the receipt . .

117. Gillman, supra note 112, at 8.118. Id.

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The reader will further note the unique obligation this places upon thewarehouse.

Conversely, if the warehouse only has No. 3 oats on hand whenthe farmer wants the No. 4 oats, "the warehouseman can offer FarmerJones the better oats, but if this is acceptable to Farmer Jones, he isonly entitled to a lesser number of bushels sufficient to give him thedollar equivalent of ten thousand bushels of No. 4 oats."1 19 This isdefined as a "quality settlement."120

It is worth noting, however, in order for the surety to be liable,"the warehouseman must have acted in his capacity as a warehouse-man-not [in] his capacity as a grain dealer."' 2 ' In short, the "FederalWarehouse Bond does not cover the warehouseman's transactions as alicensed grain dealer under state law."12 2 This result should still fol-low despite the adoption of the new Act and regulations; the languagestill exists that the bond or financial assurance only secures the per-son's compliance with the Act. 123

From a practical stand point, once the surety or counsel for thesurety learns of a claim, the surety should act promptly. As describedby one commentator, the first task is to "get on the phone and call thewarehouseman's bank and the state and federal regulators as soon aspossible ... ."124 From a practical standpoint, given the proximity tostate regulators, this should probably be the first call made. 12 5

Then, the surety or its representative should examine all availa-ble records as quickly as possible. 12 6 Counsel should ask for "copies ofall inspection reports and all other pertinent documents, including allnotes from any statements they may have taken from the warehouse-man's employees and from the loan officers at the warehouseman'sbank."1 2 7 In that regard, counsel will want to pay particular attentionto the "daily position records, financial statements, collateral registerand all storage contracts." 128 Thereafter, counsel should examine theregulators' own reports to the extent they are available. 12 9 Oncecounsel has the factual backdrop, she can easily deal with the docu-ments submitted in support of the claim. 130

119. Id.120. Id.121. Id. at 20.122. Id. at 20 (citing In re Julien Co., 44 F.3d 426, 431 (6th Cir. 1995)).123. 7 C.F.R. § 735.14(a) (2006).124. Gillman, supra note 112, at 20.125. Id. at 21.126. Id. at 20.127. Id. at 21.128. Id.129. Id.130. Id.

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Particularly when dealing with the claims submitted by a bank,"it is imperative for the surety's attorney to examine all bank recordsregarding loans to the warehouseman. . . ."131 Then counsel will wantto interview the loan officer. 132 Once those interviews have been com-pleted, or in the case of claims submitted by parties other than thebank, counsel will then want to interview the "claimant, the ware-houseman, his manager and inspector, his accountant, his loan officer,[and] the state and federal inspectors .. "133

B. PACKERS AND STOCKYARDS ACT

1. Statutes

(a) General provisions

The practitioner should immediately note that the Warehouse Actdoes not cover livestock by its own definition. 13 4 Instead, Congresshas established a separate statutory scheme for the regulation of theanimal livestock industry. 13 5 Under the Packers and Stockyards Act,Congress has decreed that livestock acquired by cash sales and "allinventories of, or receivables or proceeds from meat, meat food prod-ucts, or livestock products derived therefrom, shall be held by suchpacker in trust for the benefit of all unpaid cash sellers of such live-stock until full payment has been received by such unpaid sell-ers .... ,,136 Any packer whose average annual purchases are not inexcess of $500,000 is exempt from the section. 137

Under the Packers and Stockyards Act, the unpaid seller loses thebenefit of the trust unless the seller, when unpaid, sends written no-tice to the packer and files the notice with the Secretary of Agricul-tural or, in the event of a dishonored instrument, within fifteen daysof receiving notice of the dishonored payment. 138 Of course, the salescomponent is not the only trigger for the Act; the actual sale must bedeemed "in commerce."' 3 9

131. Id. at 21-22.132. Id. at 22.133. Id,134. 7 U.S.C. § 241 (2000).135. Compare 7 U.S.C. § 241 (defining various terms such as warehouse and ware-

house operator), with 7 U.S.C. § 182 (2000 & Supp. IV 2004) (defining various termsunder the Packers and Stockyards Act including "meat food products," "livestock," "live-stock products," "poultry," "poultry product," and "swine contractor").

136. 7 U.S.C. § 196(b) (2000) (emphasis added).137. Id.138. Id.139. Id. § 183.

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20061 A JURISDICTIONAL SURVEY 59

A similar statutory scheme exists for poultry. 140 Average annualsales in excess of $100,000 trigger the poultry statute. 141 A similarnotice requirement exists for a notice of nonpayment to the Secretaryof Agriculture and the live poultry dealer.1 42

The Secretary may require bonds from every market agency,every packer, except those whose average annual purchases are not inexcess of $500,000, and dealers under such rules and regulations asthe Secretary may issue. 14 3 In addition, the Secretary has the powerto suspend registration if the bond requirement is not met or issuecease and desist orders if the entity is insolvent.144

A "market agency" is defined as "any person engaged in the busi-ness of (1) buying or selling in commerce livestock on a commissionbasis or (2) furnishing stock yard services .. ".."145 In contrast, a"dealer" is "any person, not a market agency, engaged in the businessof buying or selling in commerce livestock, either on his own accountor as the employee or agent of the vendor or purchaser." 146

Beyond the duty to pay for livestock acquired, Congress has im-posed upon the stockyard owner the obligation to regulate the stock-yard "in a just, reasonable, and nondiscriminatory manner, toprescribe rules and regulations and to require those persons engagingin... the purchase, sale, or solicitation of livestock.., to conduct theiroperations in a manner which will foster, preserve, or insure an effi-cient, competitive public market."147 If one fails to comply with thisChapter

relating to the purchase, sale, or handling of livestock, thepurchase or sale of poultry, or relating to any poultry growingarrangement or swine production contract, he shall be liableto the person or persons injured thereby for the full amount ofdamages sustained in consequence of such violation. 148

The liability may be enforced in either an action brought to the Secre-tary or by suit in the United States District Court of competent juris-diction.' 49 The provisions of the Act are cumulative to the existingcommon law and statutory remedies and are not to be construed to "inany way abridge or alter the remedies now existing .. "150

140. Id. § 197(b).141. Id.142. § 197(d).143. Id. § 204.144. Id.145. Id. § 201(c).146. § 201(d).147. Id. § 208(b).148. Id. § 209(a).149. § 209(b).150. Id.


The Secretary has broad powers to hear complaints under theAct. 151 A complainant need not have suffered direct damage to initi-ate a complaint before the Secretary.152 Persons who have prevailedbefore the Secretary with respect to a complaint against a defendant,if unpaid, may bring suit in the district court. The Secretary's ordershall be prima facie evidence of the facts, and, if the petitionerprevails, the petitioner may recover reasonable attorney fees. 15 3

The Secretary has the power to prescribe rates and practices toprevent discrimination between intrastate commerce and interstatecommerce. 154 The Secretary also has the power to prevent unfair, dis-criminatory, or deceptive practices. 155 Pursuant to such authority,the Secretary may assess civil penalties of not more than $10,000 perviolation. 15 6 Furthermore, failure to obey orders of the Secretaryunder 7 U.S.C. §§ 211, 212, or 213 shall result in a fine of $500 peroffense per day.15 7 Likewise, the Secretary, the Attorney General, oran injured party may apply for an injunction to enforce the Secretary'sorders.15

8

Congress, in adopting the Packers and Stockyards Act, sought toforeclose any potential respondeat superior argument. Congress com-manded that

[w]hen construing and enforcing the . . . Chapter, the act,omission, or failure of any agent.., acting for or employed byany packer . . . within the scope of his employment or office,shall in every case also be deemed the act, omission, or failureof such packer ... as well as that of such agent .... 159The Secretary of Agriculture is specifically authorized to request

temporary injunctions or restraining orders when the Secretary hasreason to suspect that any person subject to the Act has "failed topay . . . or has failed to remit to the person entitled thereto the netproceeds from the sale" of certain enumerated products and commodi-ties.160 Likewise, the Secretary has the authority to request tempo-rary injunctions or restraining orders when a person has operatedwhile insolvent. 16 1 The Secretary may also act when the person does

151. Id. § 210(a).152. § 210(d).153. § 210(f).154. Id. § 212.155. Id. § 213.156. § 213(b).157. Id. § 215(a).158. Id. § 216.159. Id. § 223.160. Id. § 228a(a).161. § 228a(b).

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not have a bond. 162 Of course, the purpose of the statute is to addressthe responsibility of the packer to pay for the purchase of livestock. Apurchaser of livestock has a statutory duty to promptly pay for thepurchase of livestock.16 3 "Each packer, market agency, or dealerpurchasing livestock shall, before the close of the next business dayfollowing the purchase of livestock and transfer of possession thereof,deliver to the seller.., the full amount of the purchase price ....Nonetheless, the parties may agree, subject to the conditions pre-scribed by the Secretary, to waive such requirements. 16 5 Delay inpayment and attempts to delay payment are deemed an unfair prac-tice under the Act. 16 6

Federal law specifically provides that no state or territory of theUnited States may enforce any regulation "with respect to bonding ofpackers or prompt payment by packers for livestock .... " 167 However,the statute allows that the state may enforce requirements that do notconflict with the Act or its regulations.168

(b) Live poultry

Live poultry is subject to a similar requirement concerningprompt payment.

Each live poultry dealer obtaining live poultry ... in a cashsale shall, before the close of the next business day followingthe purchase of poultry, and each live poultry dealer ob-taining live poultry ... shall, before the close of the fifteenthday following the week in which the poultry is slaughtered,deliver ... the full amount due to such cash seller or poultrygrower on account of such poultry. 16 9

Delays and attempts to delay the payment of funds are deemed anunfair practice under the Act. 1 70 Under the Act, "a cash sale means asale in which the seller does not expressly extend credit to thebuyer."'171

Similarly, the Secretary of Agriculture is authorized, wheneverthe Secretary believes a violation of sections 197 or 228b-1 has oc-curred or is ongoing, to conduct a hearing, issue cease and desist or-

162. § 228a(c).163. Id. § 228b.164. § 228b(a).165. § 228b(b).166. § 228b(c).167. Id. § 228c.168. Id.169. Id. § 228b-l(a).170. § 228b-1(b).171. § 228b-1(c).

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ders, and impose civil penalties. 17 2 Judicial review of the order lies inthe United States Court of Appeals for the circuit in which the livepoultry dealer has its principle place of business. 173 The Court of Ap-peal's jurisdiction is exclusive. 17 4 Violations of a final order are sepa-rate offenses, for each day on which the violation occurs, withadditional fines. 175

2. Regulations

The Department of Agriculture set out the Packers and Stock-yards Act regulations at 9 C.F.R. Part 201.

(a) General bonding provisions

The surety on these bonds must be a surety company approved bythe Treasury Department of the United States "for bonds executed tothe United States; and which has not failed or refused to satisfy itslegal obligations under bonds issued under said regulations." 176 Anyentity required to maintain a surety bond may execute either a bondor a bond equivalent. 177 The bond equivalent may be a trust fundagreement in fully negotiable instruments of the United States, a fed-erally insured deposit, or an account which is readily convertible tocurrency. 178 The equivalent may also be a trust agreement under anirrevocable standby letter of credit. 179 Further, the bond and trustfund agreements must be filed on forms approved by theDepartment.'

8 0

(b) Market agency, dealer, and packer bonds

The regulations also require specific bonds for market agencies,packers, and dealers. "Every market agency, packer, and dealer ...except packer buyers registered as dealers to purchase livestock forslaughter only, shall execute and maintain a reasonable bond onforms approved by the Administrator .. ."181 The bond must containthe "condition clauses."1 8 2 Moreover, the bond must be "applicable tothe activity or activities in which the person or persons propose to en-gage, to secure the performance of obligations incurred by such mar-

172. Id. § 228b-2(a)-(b). This section concerns poultry.173. Id. § 228b-3(a).174. § 228b-3(h).175. Id. § 228b-4.176. 9 C.F.R. § 201.27(a) (2006).177. § 201.27(b).178. § 201.27(b)(1).179. § 201.27(b)(2).180. § 201.27(d).181. Id. § 201.29(a).182. Id. See infra notes 192-98 and accompanying text.

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ket agency, packer or dealer."18 3 Operations shall not be conductedunless there is a bond on file and in effect. 184

However, a person who works both as a market agency and as adealer may be covered by one bond.' 8 5 Yet, a "person operating as amarket agency selling on a commission basis and as a market agencybuying on a commission basis or as a dealer shall file and maintainseparate bonds. .".."186 "Each market agency and dealer whose buy-ing operations are cleared by another market agency shall be namedas clearee in the bond filed and maintained by the market agency reg-istered to provide clearing services."18 7

In addition, a packer that purchases livestock directly or through"an affiliate or an employee or a wholly-owned subsidiary... shall fileand maintain a reasonable bond."18 8 A packer that maintains awholly-owned subsidiary or an affiliate to buy livestock shall sepa-rately register as a packer buyer apart from the parent packing firm,but "the required bond shall be maintained by the parent packerfirm."l8 9

Bond coverage turns on the status of the entity, which may in-clude a market agency selling, a market agency buying, a marketagency acting as a clearing agency, or a packer. 190 The requiredamount of bond coverage is determined by a regulatory formula. 19 1

The regulations define the condition clauses of the bond.' 9 2 Con-dition number one requires that "[w]hen the principal sells livestockfor the accounts of others," the principal shall pay the amount due tothe person less any lawful charges. 193 Condition number two applies"[wihen the principal buys livestock for his own account or for the ac-counts of others." 19 4 Under this condition, the principal must pay thepurchase price for all livestock and keep such funds safe and properlydisburse funds which come into the principal's hands. 19 5 Conditionclause number three governs when the principal "clears other regis-trants buying livestock" and is responsible for the obligations of otherregistrants. 196

183. 9 C.F.R. § 201.29(a).184. Id.185. § 201.29(b).186. Id.187. § 201.29(c).188. § 201.29(d).189. Id.190. Id. § 201.30.191. Id.192. Id. § 201.31.193. § 201.31(a).194. § 201.31(b).195. Id.196. § 201.31(c).

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Condition clause number four governs when the principal buyslivestock on his own behalf while acting as a packer. 197 Under thatscenario, the "principal shall pay when due to the person or personsentitled thereto the purchase price of all livestock purchased by saidprincipal for his own account."198

Also, each bond or bond equivalent must contain a provision thatany person damaged by the "failure of the principal to comply withany condition clause" may bring suit to recover, even if the partybringing the suit is "not a party named in the bond or bondequivalent."19 9

Any claim for recovery on the bond or the equivalent must be filedin writing with the surety, trustee, or the Administrator. 20 0 Upon re-ceipt of a claim, whichever party receives the claim is to notify theothers.20 1 The regulations provide that the surety or the trustee shallnot be liable on any claim if it is not filed in writing within sixty daysfrom the date of the transaction at issue and a suit thereon is "com-menced less than 120 days or more than 547 days from the date" onwhich the transaction was based.20 2 The bond or bond equivalentsmay not be used to pay for the legal expenses, salaries or fees "forlegal representation of the surety or the principal."20 3 The regula-tions specify the means by which market agency, dealer, and packerbonds may be terminated.20 4

(c) Proceeds of sale

The regulations also define the means and manner of calculationof payments to consignors and shippers.20 5 The regulations sharplyprohibit the payment of net proceeds to persons other than the con-signors and shippers unless certain conditions are met.20 6

The regulations further define payment for livestock as being"trust funds" and place the concomitant obligation upon the regulatedentities to establish custodial accounts. 20 7 "Each payment that a live-stock buyer makes to a market agency selling on commission is a trust

197. § 201.31(d).198. Id.199. Id. § 201.33(a).200. § 201.33(b).201. Id.202. § 201.33(d).203. § 201.33(e).204. Id. § 201.34.205. Id. § 201.39.206. § 201.39(a).207. Id. § 201.42.

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fund. Funds deposited in custodial accounts are also trust funds."20 8

The regulations specify the requirements for custodial accounts. 20 9

At the same time, the regulations define the means and mannerby which payment and accounting for livestock and live poultry mustbe made.2 10 Similar regulations exist for market agencies. 2 1 1

(d) General practices

The requirements for scale tickets and the weighing of feed areestablished in the agency's rules.2 12 In addition, the regulations es-tablish standards for scales, accurate weights, and the operation ofweighing livestock.2 13 Finally, prohibitions regarding a number oftrade practices exist.2 14

The regulations provide for the inspection of brands.2 15 When anassociation or agency is granted the authority to inspect brands, itmust register as a market agency, but it is exempt from the bondingrequirements.

2 16

(e) Access by the Secretary

The regulations require that each stockyard owner, marketagency, dealer, packer, and live poultry dealer shall, "upon proper re-quest," allow the Secretary or the Secretary's designee to examinerecords pertaining to the business that is subject to the Act.2 17 How-ever, no employee or agent of the United States shall make factsknown that were obtained as a result of the inspection without theconsent of the regulated entity except to other employees or agents ofthe United States or by a court of competent jurisdiction. 2 18

(f) Records regarding live poultry

Specific provisions address the record keeping obligations of livepoultry growers and sellers.2 19 These include instructions for theweighing of live poultry.2 20

208. § 201.42(a).209. § 201.42(b)-(g).210. Id. § 201.43.211. Id. §§ 201.44-.45.212. Id. § 201.49.213. Id. §§ 201.71-.82.214. Id. §§ 201.53-.61, .67-.70.215. Id. § 201.86.216. § 201.86(b).217. Id. §§ 201.94-.95.218. Id. § 201.96.219. Id. § 201.100.220. Id. § 201.108-1.

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(g) Credit terms

The regulations set out the exact requirements for the sale of live-stock to a packer on credit, including the requirements for a writtenacknowledgement. 2 2 1 This can be excepted based on the lack of salesvolume.

2 22

(h) Rules of practice

Part 202 of Title 9 of the Code of Federal Regulations governs therules of practice under the Act. The rules address rate proceedingsand reparation proceedings.

(i) General policy statements

The Secretary has specifically set out a document retention policyfor packers, live poultry, stockyard owners, market agencies and deal-ers under the Packers and Stockyards Act. 2 2 3 The outside length oftime for retention of records appears to be two years unless the partyreceives notice in writing from the Administrator that specifiedrecords shall be retained for a longer period of time.2 24

Another general policy statement addresses insolvency. The testfor insolvency under the Packers and Stockyards Act is "whether aperson's current liabilities exceed his current assets." 22 5 The generalpolicy statement further defines the term and its discrete subparts. 22 6

Finally, the general policy statement addresses the mailing ofchecks for livestock purchases for slaughter.2 2 7 The statement is de-signed to provide the terms for notification of the purchaser when anindividual is not present at the time of the sale and would insteadprefer payment by the mailing of a check.2 28

III. THE JURISDICTIONS

The National Association of State Departments of Agriculture hasprepared tables comparing various licensing, bonding and audit re-quirements under grain and commodity related programs for a num-ber of jurisdictions. 22 9 The document can be of assistance when

221. Id. § 201.200.222. Id.223. Id. § 203.4.224. § 203.4(a)-(c).225. Id. § 203.10(a).226. § 203.10(b)-(e).227. Id. § 203.16.228. Id.229. National Association of State Departments of Agriculture, Survey of States:

Grain and Commodity Related Laws and Programs, http://www.nasda.org/nasda/nasda/legislative.regulatory/warehousetaskforce/Chart.pdf (last visited Jun. 12, 2005).

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comparing various state programs (including those not analyzed inthis Article) on specific issues.

A. ILLINOIS

1. Statutes

The Illinois Department of Agriculture has broad control of"surety" and trust funds. Specifically, Illinois Compiled Statute sec-tion 205/205-410(b) provides:

The Department has the power to control surety bonds andtrust funds and to establish trust accounts and bank accountsin adequately protected financial institutions, to hold moniesreceived by the Director of Agriculture when acting as trus-tee, to protect the assets of licensees for the benefit of claim-ants, to accept security from licensees to collateralizelicensees' financial deficiencies (and that security shall besecondary to surety bonds in the collection process), to acceptcollateral and security in lieu of or in addition to a commer-cial surety bond, and to collect and disburse the proceeds ofthose bonds and trust funds when acting as trustee on behalfof claimants without responsibility for the management andoperation of discontinued or insolvent businesses, thosefunds, or additions to those funds in which the State of Illi-nois has no right, title, or interest.2 30

Moreover, the Department is statutorily authorized to hold hear-ings, to identify and verify claimants and claim amounts, and to col-lect the proceeds of surety bonds and other moneys. 2 3 1 A "claimant" isany person "who is unable to secure satisfaction of financial obliga-tions due from a person subject to regulation by the Department, inaccordance with the applicable statute or regulation and the time lim-its provided for in that statute or regulation, if any . . ."232 The Illi-nois statute is not merely limited to "grain" but instead includes thefollowing:

the Illinois Egg and Egg Products Act;the Personal Property Storage Act;the Livestock Auction Market Law;the Illinois Pesticide Act;the Weights and Measures Act;the Illinois Livestock Dealer Licensing Act;the Slaughter Livestock Buyers Act; andthe Illinois Feeder Swine Dealer Licensing Act. 233

230. 20 ILL. COMP. STAT. ANN. 205/205-410(b) (West 2001).231. 205/205-410(c).232. 205/205-410(a).233. Id.

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Likewise, the Act specifically enumerates what constitutes afailure.

"Failure" under the Acts cited in the definition of "claimant"contained in this Section means any of the following:(1) An inability to financially satisfy claimants in accordancewith the applicable statute or regulation and the time limitsprovided for in that statute or regulation, if any.(2) A public declaration of insolvency.(3) A revocation of a license and the leaving of an outstandingindebtedness to claimants.(4) A failure to pay claimants in the ordinary course of busi-ness and when a bona fide dispute does not exist between thelicensee and the customer.(5) A failure to apply for renewal of a license.(6) A denial of a request for renewal of a license.(7) A voluntary surrendering of a license. 23 4

The Department's trust account is what drives the system. It isfrom the trust account that the Department takes funds to disburse toclaimants. 23 5 As discussed, infra, surety bonds are no longer a criticalpart of the Illinois process. 23 6 Instead, Illinois places an assessmenton licensees, applicants, first sellers of grain to grain dealers, andlenders. 23 7 Yet, the Illinois process is instructive.

With the specific reference to grain, Illinois has created a GrainIndemnity Trust Account under the auspices of the Director of the Illi-nois Department of Agriculture.2 38 "[A] person may not engage in thebusiness of buying of grain from producers, or storing of grain for com-pensation, in the State of Illinois without a license issued by the De-partment" or the federal government. 2 39

With respect to specific storage issues, Illinois defines classes ofwarehousemen. 240 A "'Class I warehouseman' means a warehouse-man who is authorized to issue negotiable and non-negotiable ware-house receipts."24 1 A "'Class II warehouseman' means awarehouseman who is authorized to issue only non-negotiable ware-house receipts." 24 2 Grain dealers, on the other hand, buy grain fromproducers. 24 3 Licensing is governed by Article 5 of the Grain Code.24 4

234. Id.235. 205/205-410(d).236. See infra notes 267-72 and accompanying text.237. See 240 ILL. CoMP. STAT. ANN. 40/5-30 (West 2005).238. Id. 40/1-10.239. Id. 40/5-5(a).240. 40/1-10.241. Id.242. Id.243. Id.244. See id. §§ 40/5-5 to -35.

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For purposes of the statute, a "claimant" includes parties thathave written evidence of a storage obligation or that possess evidenceof a sale at an Illinois location and remain unpaid. 24 5 Entities thathave loaned money to a warehouse that was to receive a warehousereceipt as collateral fall within the definition of claimant if the condi-tions of the statute are met.2 46

"W'hen grain is delivered to a warehouseman at a location wheregrain is also purchased, the licensee shall give written evidence of..."the delivery of grain that shall indicate "whether the grain is deliveredfor storage or for sale."24 7 In the absence of acceptable evidence of asale, the grain will be considered in storage. 248

Illinois has, by statute, set out the requirements for the ware-house receipt. 2 49 In turn, the warehouse may require a bond of thedepositor in the event of a lost or destroyed warehouse receipt. 250

Also, the Illinois statute requires that a warehouse receipt issued forcollateral purposes by a warehouse first be issued by the warehouse toitself.

2 51

Upon a licensee's failure, the Department will process theclaims. 25 2 The Illinois statute contemplates published notice alongwith notice by mail to each potential claimant.2 53 The notice mustcontain the statutorily required information. 2 54 Claims must be filedby the "claim date," which is ninety days after the "failure of the licen-see" or "[seven] days from the date notice was mailed to the claimant ifthe date notice was mailed to that claimant is on or before the claimdate."25 5 Also, the statute requires that the first date of publicationbe within thirty days of the date of the failure.2 5 6 Likewise, themailed notice must be sent within sixty days of the failure.2 5 7

In theory, claimants are entitled to 100% reimbursement unlessinsufficient assets exist, in which case the claim is paid on a pro rata

245. 40/1-10; see also id. 40/30-5.246. 40/1-10.247. Id. 40/10-25(a).248. Id.249. 40/10-25(d)(1)-(5).250. 40/10-25(k).251. 40/10-25(1).252. Id. 40/25-5. See id. 40/1-10 (defining "failure"); see also 20 ILL. COMP. STAT.

ANN. 205/205-410(a) (West 2001) (defining "failure" in a similar fashion, except thatfailure under the Warehouses Act, Chapter 240, does not include the test of financialinability to "satisfy claimants in accordance with the applicable statute orregulation .. ").

253. 240 ILL. COMP. STAT. ANN. 40/25-5(a).254. 40/25-5(a)(1)-(4).255. 40/25-5(a)(4)(A)-(B).256. 40/25-5(b)(1).257. 40/25-5(b)(3).

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basis "out of the net proceeds of the liquidation of grain assets . . ."subject to a statutory cap.2 58 However, if delivery and pricing werenot completed 160 days before the failure, the claimant is entitled to85% of the valid claim up to a statutory maximum. 259 In the case of aprice-later contract, the latter date of execution of the contract or thedate of delivery will govern, and this must not have occurred morethan 365 days "before the date of the failure" in order to receive com-pensation. 2 60 Producers who sold on a price-later contract that wasnot final by the time of the failure are to be paid 85% of the claim, upto statutory maximum, if either the delivery or execution of the agree-ment occurred no more than 365 days prior to the failure. 26 1

On the other hand, the statute bars certain types of claims.Claims filed by producers who completed pricing of their grain in ex-cess of 160 days before the date of the failure are barred. 2 62 Secondly,the statute bars claims filed by producers for grain sold on price-latercontracts if the latter date of execution of the contract or the date ofthe delivery of the grain took place more than 365 days prior to thedate of the failure. 26 3

Furthermore, claims are allowed to be filed under the Illinois stat-ute by secured parties of the producer and are deemed to be claimsfiled by a producer under the statute.26 4 The statute sets a maximumpayout of one million dollars per claimant. 265

2. Case law

As discussed, infra, the statutory scheme has changed with re-spect to the use of a surety in Illinois. This statute is intended to onlyreimburse at the eighty-five percent level claimants whose claims arenot supported by warehouse receipts or who are grain merchandis-ers.26 6 In essence, the new Illinois Act dispenses with the require-ment of surety bonds or certificates of deposit because under thatsystem claimants were not being paid late; they were not being paid atall. 26 7 Thus, there is no reason to interpret the Act in the manner

258. Id. 40/25-10(a).259. 40/25-10(d).260. 40/25-10(e).261. Id.262. 40/25-10(g)(1).263. 40/25-10(g)(2).264. 40/25-10(i).265. 40/25-10(j).266. Adams Farm v. Doyle, 727 N.E.2d 638, 643 (Ill. App. Ct. 2000).267. Adams Farm, 727 N.E.2d at 642 (discussing the argument advanced by the

Director of Agriculture that under prior law that required dealers to keep surety bondsor certificates of deposit, merchandising claimants received only 13% of their loss, whilewarehouse claimants recovered just 19% of the loss).

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that would lift merchandising claimants' recovery above eighty-fivepercent.2 68 Those claims that are subject to the eighty-five percentcap include price-later contracts wherein the title passes to the dealer,but the price is not fixed until some later time.2 69 Indeed, the Depart-ment of Agriculture argued that the speculation inherent in price-later contracts had "been the primary reason for elevator failures."2 70

Accordingly, the Illinois "legislature rationally chose to limit coverageunder the Act on these price-later contracts." 2 7 1 "With the adoption ofthe Act in 1983, surety bonds were no longer used for the protection ofgrain producers, who instead were afforded protection from the Insur-ance Fund, maintained by assessments on grain dealers."2 72

B. INDIANA

1. Statutes

Indiana's Code requires that once the Indiana Grain Buyers andWarehouse Licensing Agency has determined that a grain buyer orwarehouse has defaulted on payments or otherwise failed, the Boardof the Indiana Grain Indemnity Corporation is to determine the valueof the claims, authorize payment of money from the fund to compen-sate claimants, collect money through subrogated claims against anysurety bonds, and borrow money in the event there is insufficientmoney to cover valid claims. 2 73 In the event that the fund is insuffi-cient to pay all valid claims, the Board is authorized to grant priorityof payment of all of the claims in the order the claims were approved"as valid" by the Board.27 4

In order to obtain a grain bank license or a warehouse license, anindividual shall either post a bond, letter of credit, or cash deposit. 275

The statute also sets out a requirement for minimum positive networth for grain banks, warehouses, grain buyers, and buyer-ware-houses.2 76 Indiana segregates between grain bank license/warehouselicenses, grain buyers' licenses, and buyer warehouse licenses. 2 7 7 Aperson applying for two or more licenses on the basis of two or morefacilities in Indiana "may give a single bond, letter of credit, or cash

268. Id. at 643.269. Id.270. Id. (citation omitted).271. Id.272. Id. at 644.273. IND. CODE § 26-4-6-8(1)-(4) (West 1999); see id. § 26-4-1-3 (defining "Agency");

see also id. § 26-4-1-4 (defining "Board").274. § 26-4-6-8(6) (emphasis added).275. Id. § 26-3-7-10(a).276. Id. § 26-3-7-16(a)(1)-(5).277. § 26-3-7-10(a)(1)-(3).

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deposit to satisfy the requirements of this chapter ... "27s Further,an applicant for a license must demonstrate proof of insurance on allgrain that might be in the licensee's facilities for "full market valueagainst loss by fire, internal explosion, lightning, and windstorm."2 7 9

Any deficiency in the minimum positive net worth may be cor-rected "by adding to the amount of the bond, letter of credit, or cashdeposit."280 Similarly, the Director is authorized to accept, instead ofa letter of credit, single cash deposit, or bond, an amount that consistsof a combination of any of the three. 28 1 The Director has the authorityto request an additional bond or cash. 2 8 2

The licensee cannot cancel an approved bond until the Directorhas provided prior written approval for cancellation and has receiveda substituted security.283 Likewise, the surety may cancel a bond onlyafter ninety days from the day the surety mailed the notice of the in-tent to cancel by either certified or registered mail to the Director.28 4

A licensee may be subject to automatic suspension for failure to "file anew bond, letter of credit, or cash deposit within the ninety dayperiod."

28 5

Also, a licensee may be subject to revocation in the event that thebond or cash deposit is not maintained.2 86 "The suspension shall con-tinue until the licensee complies with the bonding and insurancerequirements ."287

Indiana has specifically defined by statute how liens against theassets of the licensee arise.28 8 The statute divides the lien holdersinto two classes: lenders and claimants. 28 9 The lien attaches, in thecase of a claimant, when the grain is delivered for sale, storage, orbailment.290 The lien will also attach at the beginning of the storageobligation. 29 1 In the case of a lender, the lien attaches when the fundsare advanced by a lender.29 2 A lien granted by this section terminatesupon the licensee discharging the lien.29 3

278. § 26-3-7-10(f).279. Id. § 26-3-7-12(a).280. § 26-3-7-10(i)-(j).281. § 26-3-7-10(1).282. § 26-3-7-10(k), (m).283. Id. § 26-3-7-14(a).284. Id.285. § 26-3-7-14(b)(1).286. § 26-3-7-14(b)(3).287. § 26-3-7-14(b).288. Id. § 26-3-7-16.8.289. § 26-3-7-16.8(a)(1)-(4).290. § 26-3-7-16.8(b)(1).291. § 26-3-7-16.8(b)(2).292. § 26-3-7-16.8(b)(3).293. § 26-3-7-16.8(c).

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Upon the failure of a licensee, the lien granted by the section isassigned to the agency. 2 94 Consequently, the Director has the exclu-sive authority to "allocate and prorate the proceeds of the grain as-sets."2 95 However, the Director can assign the lien. 29 6 The statutehas its own priority scheme. 297 Suffice it to say that a lender or aclaimant with a receipt for grain owned or stored by the licensee haspriority over other claimants.2 98

2. Case law

Under Indiana case law, the doctrine of laches is available as adefense when a party fails to give timely notice of its claim.2 9 9

C. IOWA

1. Statutes

(a) Grain dealers

Iowa regulates "grain dealers," which as part of the definitionmust meet the threshold of purchases of more than one thousandbushels or more of grain from a producer in a calendar month.30 0

There are a number of exceptions to the definition.30 1

Under Iowa law, a grain dealer must have a license.30 2 Iowa alsorequires that in order to obtain a grain dealer license, a person post asurety bond, which varies based upon the type of license. 30 3 Undercertain circumstances, the condition can be met by maintaining cur-rent assets equal to 100% of current liabilities. 30 4 An irrevocable let-ter of credit may be used in lieu of a bond.30 5

Upon termination, revocation, or cancellation of the grain dealer'slicense, any claims against the grain dealer must be made in writingand filed with the grain dealer and the issuer of the bond or irrevoca-ble letter of credit and the Department of Agriculture and Land Stew-ardship within 120 days after the termination, revocation, orcancellation. 30 6 Failure to timely make the claim constitutes waiver

294. § 26-3-7-16.8(d).295. § 26-3-7-16.8(e).296. § 26-3-7-16.8(g).297. § 26-3-7-16.8(f).298. § 26-3-7-16.8(f)(1)-(3).299. Stiefel v. Farmers' State Bank, 168 N.E. 30, 33 (Ind. Ct. App. 1929).300. IOWA CODE ANN. § 203.12 (West 2000); IOWA CODE ANN. § 203.1(10) (West

Supp. 2006).301. See § 203.1(10)(a)-(j).302. Id. § 203.3.303. § 203.3(4)-(5), (7).304. § 203.3(4)(c), (5)(c).305. § 203.3(4)-(5), (7), (8). See also § 203.1(1).306. Id. § 203.12.

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of the claim against the issuer, grain depositors, and the Sellers In-demnity Fund, but based upon the plain language of the statute, fail-ure to make a timely claim does not relieve the grain dealer fromliability to the claimant. 30 7

The Iowa statute expressly provides for the creation and perfec-tion of liens on grain dealer assets when the seller has not receivedfull payment for the grain.308 The lien arises when the "warehousereceipts or other written evidence of ownership" are surrendered andterminates "when the liability of the grain dealer to the seller hasbeen discharged."30 9

Upon application of the Department, the district court may ap-point the Department as the receiver if the grain dealer's license hasbeen revoked or suspended or if the grain dealer has engaged in or ispresently engaging in business without obtaining a license.3 10 TheDepartment may make plans for disposition of the grain dealer assets,continue the operation of the business on a temporary basis, or takeany other course of action that would serve the interest of interestedsellers. 3 11 Such receivership actions are not deemed contested casesunder the Iowa Administrative Procedures Act.3 12 The statute re-quires that the issuer of either the bond or the letter of credit be joinedas a party in the receivership proceeding. 313

If the district court approves the sale of the grain, the Departmentshall appoint a merchandiser. 3 14 The sale of grain "shall proceed inthe same manner" as grain liquidated under a receivership for an ag-ricultural warehouse. 3 15 The Department is entitled to reimburse-ment from the grain dealer's assets "for costs directly attributable tothe receivership." 3 16 If the plan involves distribution of cash proceeds,the district court must approve the distribution.3 17

Likewise, under Iowa law, a grain dealer may not purchase grainon a credit-sale contract basis except as allowed by the Iowa Code.3 18

The Iowa Code sets out the required contents of a credit-salecontract.

3 19

307. Id.308. Id. § 203.12A.309. § 203.12A(3).310. Id. § 203.12B(2)(a).311. § 203.12B(2)(b).312. § 203.12B(5).313. § 203.12B(6).314. § 203.12B(7).315. § 203.12B(8) (citing IOWA CODE § 203C.4).316. Id.317. Id.318. Id. § 203.15(1).319. § 203.15(2)(a)-(f).

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Title to all grains sold on a credit-sale basis "is in the purchasingdealer as of the time the contract is executed," unless the parties agreeotherwise. 3 20 In the event of a "revocation, termination, or cancella-tion of the grain dealer's license, the payment date for all credit-salecontracts" is advanced to a date not later than thirty days after theeffective date of the revocation, termination, or cancellation. 32 1 Un-priced grain shall be priced as of the effective date of the revocation,termination, or cancellation.3 22 In the event of the sale of the graindealer's business to another licensed dealer, credit-sale contracts maybe assigned to the new purchaser. 3 2 3

According to Iowa law, "a grain dealer shall not purchase grain oncredit-sale contract during any time period in which the grain dealerfails to maintain fifty cents of net worth for each outstanding bushel ofgrain purchased under credit."3 24 Under those circumstances, thedealer "may maintain a deficiency bond or an irrevocable letter ofcredit in the amount of two thousand dollars for each one thousanddollars or fraction thereof of deficiency in net worth."3 25 A dealer thatholds a federal or state warehouse license and "does not have a suffi-cient quantity or quality of grain to satisfy the warehouse operator'sobligations" shall not buy grain through credit-sale contracts to cor-rect the shortfall.3 26

Moreover, in order to engage in credit-sale contracts, the graindealer must meet at least one additional condition: submission of thelast financial statement submitted to the Department "accompaniedby an unqualified opinion based upon an audit performed by a certi-fied public accountant" or, in the alternative, the grain dealer engag-ing in credit-sales contracts must file "a bond with the Department inthe amount of one hundred thousand dollars payable to the Depart-ment."3 2 7 The bond is to be used to indemnify sellers for losses result-ing from breach of credit-sale contracts. 328 This bond is in addition toany other bonds required by Chapter 203.329

The bond required by this section may not be canceled by the is-suer unless ninety days have passed following notice to the Depart-ment and the principal by certified mail.3 30 This procedure may be

320. § 203.15(3).321. Id.322. Id.323. Id.324. § 203.15(4)(a).325. Id.326. § 203.15(4)(b).327. § 203.15(4)(c)(1)-(2).328. § 203.15(4)(c)(2).329. Id.330. § 203.15(4)(c).

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modified if an adequate replacement bond is procured. 33 1 If a replace-ment bond has not been procured within sixty days following notice,the Department shall automatically suspend the dealer's license.33 2

Failure to file a replacement bond within thirty days after the suspen-sion shall result in revocation of the grain dealer's license.33 3 The De-partment may suspend the right of a grain dealer to purchase grain ona credit-sale basis based upon the failure to meet other enumeratedconditions.3 34 Finally, a licensed grain dealer that purchases grain ona credit-sale contract basis must obtain from the seller a signed ac-knowledgment, on forms prescribed by the Department, "stating thatthe seller has received notice that grain purchased by credit-sale con-tract is not protected by the grain depositors and sellers indemnityfund."33 5

(b) Bargaining agents

Iowa used to separately regulate "bargaining agents" who are in-dividuals or entities "who bargain with buyers for the sale of grain foragricultural producers," but the statute was repealed. 33 6

(c) Warehouses

Iowa also maintains a statutory scheme for the regulation ofwarehouses for agricultural products. 3 37 This statute also providesfor oversight by the Department and for the appointment of the De-partment as a receiver. 3 38 Likewise, this statute also requires bondsor letters of credit for issuance of a license.3 39 The statute also defineswhen liens arise on the warehouse operator's assets.3 40

At the end of the day, both grain dealers regulated under Chapter203 and warehouses regulated under Chapter 203C are participantsin the Grain Depositors and Sellers Indemnity Fund establishedunder Chapter 203D.34 1 The fund arises from a per-bushel fee on pur-chased grain from licensed warehouses and grain dealers. 34 2 A statu-tory lien may be enforced against the assets of a licensee. 3 43

331. Id.332. Id.333. Id.334. § 203.15(5)(a)-(g).335. § 203.15(6).336. IOWA CODE ANN. § 203A.1 (West 2000), repealed by 2003 Iowa Acts 135.337. See generally IOWA CODE ANN. §§ 203C.1-203C.40 (West 2000 & Supp. 2006).338. §§ 203C.2-203C.3.339. § 203C.6.340. § 203C.12A.341. Id. §§ 203.4, 203C.12.342. Id. § 203D.3.343. Id. § 203D.5A.

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The board of the fund reviews and makes a determination as tothe validity of claims filed.34 4 The statute defines how claims aremade, determined, and paid.3 45 Nonetheless, nothing in Chapters 203,203C, or 203D creates any guarantee or obligation on behalf of theState of Iowa. 34 6

2. Case law

(a) The common law and issues peculiar to the Iowa statutes

As the Iowa Supreme Court observed in Avoca State Bank v.Merchants Mutual Bonding Co.,3 47 a grain elevator operates underone of two basic roles. 348 Either the elevator buys and sells grain,making it a grain dealer, or it acts as a storer of grain, making it awarehouse. 34 9 Nonetheless, in either role the operator "can work con-siderable financial harm upon the public, and the legislature has en-deavored to provide the public a measure of protection."3 50 In AvocaState Bank, the court examined the issue of whether a bank could re-cover on a warehouse's bond for issuance of invalid warehouse re-ceipts.3 5 1 The Iowa Supreme Court rejected the argument that thebond required by the Code covers only a conversion of existing grainby a warehouse. 35 2 Instead, the Iowa Supreme Court declared that itwas not willing to isolate coverage of the bonds to a "conversion-typesituation."3 53 An elevator acting as a warehouse is liable for the non-receipt of the goods when a warehouse receipt is issued.3 5 4 The courtthus held that, "if a warehouseman issues a warehouse receipt forgrain which he does not have, he breaches his duty of faithful perform-ance as a warehouseman, and his bond covers."3 55 Applying the pre-vailing case law to the grain situation, the bond covers when theelevator:

did not have the grain on which [it] issued receipts that [it]pledged to the bank. If [it] had the grain and disposed of itwithout the receipts, the bond covers. If [it] did not have the

344. Id. § 203D.4(2).345. Id. § 203D.6.346. Id. §§ 203.14, 203C.38, 203D.7.347. 251 N.W.2d 533 (Iowa 1977).348. Avoca State Bank v. Merchs. Mut. Bonding Co., 251 N.W.2d 533, 538 (Iowa

1977).349. Avoca State Bank, 251 N.W.2d at 538.350. Id.351. Id. at 535. A warehouse bond was required under the then existing Iowa Code

Chapter 543, which was later codified into Chapter 203C.352. Id. at 539.353. Id.354. Id.355. Id. (citations omitted).

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grain and issued the receipts and pledged them to the bankwithout notice, the bond covers.3 56

The next issue the Iowa Supreme Court addressed in Avoca StateBank was the requirement of a formal demand upon the warehouse.Iowa law does not require a demand be made upon the warehouse forgrain stored pursuant to the receipts when no grain exists to fill thereceipts.

35 7

In the same case, the Iowa Supreme Court also addressed the is-sue of the rule at common law concerning a bank's ability to recoveragainst the bond when the surety alleges that the bank knew therewas insufficient grain but nonetheless took the documents as secur-ity.3 58 The issue is one of fact.3 59 Based upon the record in the case,the bank's argument went further. The bank maintained that nothingwas recoverable under the receipts but instead looked to the bond be-cause the receipts themselves were wrongfully issued and were inva-lid.360 Under that scenario, the bank could recover under the bond.3 6 1

However, if the bank knew the title documents were invalid whenthey were received, a different result would follow. As announced bythe Georgia Supreme Court, "if the transaction was a mere scheme bywhich the warehouse... undertook to obtain from the bank funds forits own use.., and if the bank knew the character of the transactionat the time.., the surety.., of the warehouse.., would not be liableto the bank. .".. 362

On the same day Avoca State Bank was decided, the Iowa Su-preme Court held in two related cases that the warehouse's bondunder then-existing Chapter 543 did not cover a cash sale of grain.3 63

(b) Procedural issues

The limitations period for filing of claims starts upon the date theorder is affirmed by the agency and not the date upon which the ad-ministrative law judge's proposed order should issue.3 64 Payment of

356. Id. at 540 (citations omitted).357. Id. (citations omitted).358. Id. at 541-42.359. Id. at 541.360. Id.361. Id. (citations omitted).362. Id. at 541-42 (citing Nat'l Bank of Wilkes v. Md. Cas. Co., 146 S.E. 739, 749

(1929)); Cf Farmers Coop. Elevator, Inc. v. State Bank, 236 N.W.2d 674 (Iowa 1975)(bank may offset checking account balance of elevator against outstanding maturednotes without liability for tortious interference with prospective business advantage inabsence of evidence showing that bank acted to destroy or injure elevator).

363. True v. Merchs. Mut. Bonding Co., 251 N.W.2d 543, 544 (Iowa 1977); Michaelv. Merchs. Mut. Bonding Co., 251 N.W.2d 531, 533 (Iowa 1977).

364. Vennerberg Farms, Inc. v. IGF Ins. Co., 405 N.W.2d 810, 811 (Iowa 1987).

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the full amount of the bond to the state discharges the surety even ifthere may be other potential claimants.36 5

(c) Surety law in jury instructions

In Avoca State Bank, the surety complained on appeal that thedistrict court erred in not cautioning the jury that it was not a surety,guarantor, or insurer of the owner's notes to the bank.3 66 In the highcourt's view, there was no need for a cautionary instruction becausethe district court "narrowed the case to one major issue . . . and fo-cused the jurors' attention on that issue."367 Therefore, based on thediscretion a trial court has to submit cautionary instructions, therewas no error in light of the fact that such an instruction would inter-ject confusion concerning an unrelated issue. 3 68

Nonetheless, one can question whether the Iowa Supreme Courtwould reach the same conclusion today. The decision predates theadoption of the Iowa Rules of Evidence. 36 9 Since the rules have beenadopted, counsel could certainly argue that Iowa Rule of Evidence5.411 provides a basis to exclude evidence of a surety. 3 70 At the veryleast, the decision sends a strong signal to attorneys who representsurety companies to take a hard look at the decision whether to bifur-cate the proceeding. 3 7 1

(d) Damages

Avoca State Bank also addresses the measure of damages. Thevalue of pledged grain is "the highest price between the time of thewrong and the commencement of the suit."3 7 2

(e) Interest

Likewise, interest earned on the sale of grain proceeds is distrib-uted to the claimants rather than used as an offset against the

365. Iowa State Commerce Comm'n v. IGF Ins. Co., 309 N.W.2d 445, 447-48 (Iowa1981).

366. Avoca State Bank, 251 N.W.2d at 541.367. Id.368. Id. (citation omitted).369. IowA R. EVID. (Official Comment - 1983). The Iowa Rules of Evidence took

effect on July 1, 1983.370. See IOWA R. EVID. 5.411; see also FED. R. EVID. 411. At least one federal circuit

court has held that the federal rule would preclude evidence of a fidelity bond underFederal Rule of Evidence 411. Garnac Grain Co. v. Blackley, 932 F.2d 1563, 1570 (8thCir. 1991).

371. Benjamin B. Ullem & John F. Fatino, Evidence of a Surety Found to be Inad-missible Under Fed. R. Evid. 411 and Recent Successful Attempts to Bifurcate Proceed-ings Involving Sureties, THE CRITICAL PATH (The Defense Research Institute, Inc.,Construction Law Committee), Fall 1997, at 4-6.

372. Avoca State Bank, 251 N.W.2d at 541 (citations omitted).

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surety's liability.3 73 In the event a supersedeas bond is filed by thesurety on appeal, interest may be recoverable under the supersedeasbond from the date of the trial court's judgment. 374

(f) Preservation of error and appellate practice

Harmless error analysis will be applied in actions involving asurety. When the trial court incorrectly instructs the jury, a new trialwill not be granted if the jury verdict is not a result of the mistakeninstruction.

3 75

From a procedural standpoint, when the surety asserts error onappeal, it must, like any other litigant, demonstrate to the appellatecourt that it assigned error on the point before the district court.37 6

Failure to do so leaves the appellate court nothing to review. 37 7

D. KANSAS

1. Statutes

Kansas, by statute, gives the Secretary of Agriculture authority toregulate security requirements for licensed warehouses.3 78 Thispower includes the ability to require a bond to cover any shortage incommodities by a licensed warehouse for "outstanding receipts andscale tickets" after notice to require the warehouse to do any of thefollowing: "(1) [clover any existing shortage; (2) give additional bond orletter of credit; (3) submit to any further examination the Secretarymay require."3 79 The Secretary may impose any or all of the require-ments.380 Failure to comply may result in the issuance of a court or-der authorizing the Department of Agriculture to take "immediatepossession of and maintain the commodities, records, and property" ofthe warehouse. 38 1

373. Iowa State Commerce Comm'n v. Manilla Grain Terminal, Inc., 362 N.W.2d562, 564-65 (Iowa 1985).

374. Iowa State Commerce Comm'n v. IGF Ins. Co., 309 N.W.2d at 449.375. Avoca State Bank, 251 N.W.2d at 541. The trial court incorrectly instructed

the jury that the verdict could have been $52,000, the amount of the bond, or less whenactual loss exceeded the penal sum of the bond and "[uinder the record, a finding thatthe beans and corn were worth less than $52,000 could not stand." Id. Since the juryreturned a verdict of $52,000, no reversible error occurred. Id.

376. Michael, 251 N.W.2d at 533.377. Id. See also Iowa State Commerce Comm'n v. Manilla Grain Terminal, Inc.,

362 N.W.2d at 564 (noting the surety failed to preserve error on appeal when objectionat trial court was to the number of hours involved in a staff attorney fee claim but thesurety asserted on appeal that recovery of any staff time was an improper receivershipexpense and court did not have authority to order reimbursement from surety).

378. KAN. STAT. ANN. § 34-2,104(a) (2000). See also id. § 34-223(n).379. § 34-2,104(a)(1)-(3).380. § 34-2,104(a).381. Id.

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From a procedural standpoint, the Department of Agriculture'spetition must be verified.38 2 The defendant may answer within tendays, and a hearing is to be set within fifteen days. 3 8 3

Once in possession, the Secretary is to give notice of the proceed-ing to the surety or issuer of the letter of credit on behalf of the ware-house and holders of all receipts and scale tickets. 38 4 If the audit orinvestigation reveals a shortage of the commodity, the Secretary is tonotify the warehouse, the surety or financial institution, and deposi-tors of the approximate amount of the shortage. 38 5

On the other hand, if the warehouse is insolvent or cannot pay allclaims, then the Department may liquidate the business or requestappointment of a receiver. 38 6 The statute specifically addresses thepowers and temporal limitations placed on the receiver. 38 7

Kansas has also declared that receipt provisions that providegrain receipts are not negotiable and void.38 8 Warehouse receipts areto be issued only upon actual delivery of grain, and no receipt may beissued for a quantity greater than that which was received. 38 9

New receipts are to be issued when part of the grain covered by anexisting receipt is delivered; such new receipt must state that it repre-sents the balance of the original receipts, the old receipt shall be can-celed, and reflect the specified statutory data.3 90 In any event, oncegrain has been delivered in its entirety, the receipt shall be marked as"canceled" and include the date and name of the individual who can-celed the same.3 9 1

A public warehouse has an obligation to insure stored grain witha "reliable insurance company" and failure to do so triggers liability onthe bond.3 92

2. Case law

There is at least one Kansas case of note, and its teaching is in-structive. In Appalachian Insurance Co. v. Betts,3 93 Appalachian In-surance Company of Providence sued Betts and his surety arising out

382. Id. See also § 34-223(o).383. § 34-2,104(b).384. § 34-2,104(c).385. Id.386. § 34-2,104(d).387. § 34-2,104(d)-(g).388. Id. § 34-244.389. Id. § 34-246(a).390. § 34-246(b)-(c).391. § 34-246(c).392. Id. § 34-236(a).393. 518 P.2d 385 (Kan. 1973).

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of a shortage of grain.3 9 4 Appalachian alleged that Commodity CreditCorporation had entered into grain storage agreements with Betts. 3 95

Ultimately, upon withdrawal of the grain, a shortfall was discoveredand demand was made upon Betts for the value of the shortage. 39 6

Commodity Credit Corporation then made demand upon Appalachianfor payment of the loss pursuant to an insurance policy that Appalach-ian had issued to cover certain risks in connection with the storage ofgrain.3 97 Appalachian paid the claim and then became subrogated tothe rights of Commodity Credit Corporation against Betts and itssurety.

398

The defendants moved to dismiss on the basis that federal courtshave exclusive jurisdiction over the claim because of 15 U.S.C.§ 714b(c). 39 9 The statute essentially provided that Commodity CreditCorporation could only sue and be sued in federal court. The districtcourt agreed with Appalachian. 40 0 The district court's rationalerested on the fact that the statute provided that the CommodityCredit Corporation may sue or be sued in federal court; thus, "exclu-sive original jurisdiction" rested in those courts. 40 1 The district courtfurther reasoned that if the Commodity Credit Corporation was lim-ited to federal court, so was the subrogee. 40 2

The Kansas Supreme Court reversed the district court's deci-sion.40 3 The court reasoned that as Commodity Credit Corporationhad been compensated for its entire loss, Commodity Credit Corpora-tion no longer had any financial interest in the case and was no longerthe real party in interest.40 4 Moreover, the court did not construe sec-tion 714b(c) as narrowly as the district court in light of the fact thatfederal courts are courts of limited jurisdiction and state courts, underthe United States Constitution, are not so limited unless otherwiserestricted by Congress. 40 5 Yet, in federal diversity cases, the subrogeemay stand on its own citizenship. 40 6 It follows therefore, that the sub-rogee is not limited to the same forum to which its subrogor may havebeen limited.40 7 Consequently, the Kansas Supreme Court held Ap-

394. Appalachian Ins. Co. v. Betts, 518 P.2d 385, 386 (Kan. 1973).395. Appalachian Ins. Co., 518 P.2d at 386.396. Id.397. Id.398. Id.399. Id. (citing 15 U.S.C. § 714b(c)).400. Id. at 386-88.401. Id. at 386-87.402. Id. at 387.403. Id. at 388.404. Id. at 387.405. Id. at 387-88 (citations omitted).406. Id. at 388 (citations omitted).407. Id. (citations omitted).

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palachian could maintain an action in state court even if its subrogorcould not.40

Previously, the Kansas Supreme Court held that a growing imma-ture wheat crop is not such personal property as can be disposed of onattachment or execution. 40 9 On another occasion, the Kansas Su-preme Court determined that directors of a defunct elevator cannot besued in their individual capacities by a creditor.4 10 Consequently,claims by a creditor of retention of an employee who is "unworthy oftrust" by a creditor fail to state a cause of action.4 1 1

The United States Court of Appeals for the Tenth Circuit has heldthat the Kansas statute and the bond will not protect persons whoenter into transactions that do not involve the actual delivery ofgrain.4 12 Thus, when based upon record evidence that demonstratedunregistered receipts had been issued for grain that was not in thewarehouse, no judgment could be had on the bond.4 13

Finally, the Kansas Supreme Court has held that statutory termsshall be read into a bond; conditions that are not required by the stat-ute are stricken as surplusage. 4 14

E. MINNESOTA

1. Statutes

(a) Grain buyers

Minnesota requires that the application for a grain buyer's licensemust be filed with the Commissioner of Agriculture and licenses is-sued before any grain is purchased.4 1 5 Minnesota provides for threecategories of grain buyer's licenses: "private grain warehouse opera-tor's license," "public grain warehouse operator's license," and "inde-pendent grain buyer's license."4 16 Buying grain without a license is amisdemeanor. 4 17 Also, the applicant must identify "all grain buyinglocations owned or controlled" by the buyer and all vehicles the buyeruses to transport purchased grain.4 18

408. Id.409. Blattler v. Westerman, 286 P. 217, 218 (Kan. 1930) (citations omitted).410. Speer v. Dighton Grain, Inc., 624 P.2d 952, 961 (Kan. 1981).411. Speer, 624 P.2d at 961.412. Cent. States Corp. v. Trinity Universal Ins. Co., 237 F.2d 875, 877-79 (10th Cir.

1956).413. Cent. States Corp., 237 F.2d at 879.414. Stevens v. Farmers Elevator Mut. Ins. Co., 415 P.2d 236, 240 (Kan. 1966) (cita-

tions omitted).415. MINN. STAT. ANN. § 223.17(1) (West 2003 & Supp. 2006); see also id. § 223.16(3)

(defining "Commissioner").416. § 223.17(1)(a)-(c).417. Id. § 223.18.418. § 223.17(1).

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Licenses must be renewed annually.4 19 The Commissioner is re-quired to set fees for inspections at the necessary levels to pay theexpense of enforcing and administering the program. 4 20 The Minne-sota legislature thereby created the Grain Buyers and Storage Ac-count in the Agricultural Fund.42 1 Money collected pursuant tosections 223.15-.19 is to be paid to the state treasury, then credited tothe Grain Buyers and Storage Account, where it will be reap-propriated by the Commissioner for administration and enforcementof sections 223.15-.22.422 The Commissioner may adopt rules to carryout the statutes. 42 3

At the same time, the Minnesota legislature has determined thatprior to a grain buyer's license being issued, the applicant "must filewith the commissioner a bond in a penal sum" to be prescribed by theCommissioner in an amount not less than required by the statutoryformula.4 2 4 The statute is determined by the gross annual purchasesand ranges in penal sums from $10,000 to $150,000.425 Nonetheless,first-time applicants for a grain buyer's licenses shall file $50,000bonds which are to remain in effect for the first year of the licenses,and thereafter the bonds may be adjusted as set out in the statute.42 6

The bonds must be in favor of the State of Minnesota as the obligee. 42 7

The statute specifically contemplates that an applicant may, inlieu of a bond, deposit with the commissioner:

cash, a certified check, a cashier's check, a postal, bank, orexpress money order, assignable bonds or notes of the UnitedStates, or an assignment of a bank savings account or invest-ment certificate, or an irrevocable bank letter of credit ... inthe same amount as would be required for a bond.4 28

With respect to a cash sale, which is part of a multiple shipmentsale, the "buyer shall tender payment to the seller.., not later than10 days after the sale of that shipment . . 429 However, "when theentire sale is completed, payment shall be tendered not later than theclose of business on the next day, or within 48 hours, whichever islater."4 30 For other cash sales of grain, the buyer shall tender pay-

419. § 223.17(2).420. § 223.17(3).421. Id.422. Id.423. Id. § 223.19.424. § 223.17(4).425. § 223.17(4)(a)-(h).426. § 223.17(4).427. Id. § 223.16(2).428. § 223.17(4).429. § 223.17(5).430. Id.

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ment to the seller in cash, check, or wire or mail "funds to the seller'saccount in an amount of at least 80% percent of the value of the grainat the time of delivery."4 3 1 A grain buyer is statutorily required to"complete final settlement as rapidly as possible through ordinarydiligence ."

4 32

According to Minnesota law, "no grain buyer may refuse topurchase grain from a producer solely because the producer is notbonded or is not licensed by the Commissioner .... ,,433 However, "anyproducer who buys grain from other producers shall be licensed andbonded as required by [Chapter 223] .,434

In order to facilitate the Commissioner's determination of the cor-rect amount of the bond, a licensee must submit to the Commissionerannual financial statements that are prepared in accordance with gen-erally accepted accounting principles. 4 35 The financial statementmust include at least all of the following: a balance sheet; a statementof profit and loss; a statement of retained earnings; a statement ofchange in financial position; and a "statement of the dollar amount ofgrain purchased in the previous fiscal year. .. -436 At the same time,the financial statement must be accompanied by a "compilation re-port... that is prepared... in accordance with standards establishedby the American Institute of Certified Public Accountants."437 Fi-nally, the financial statement must be accompanied by a certification,under penalty of peijury, of the chief executive officer or a designeethat the financial statement accurately depicts the financial conditionfor the period of time the statement is intended to cover.4 38 In theevent the assets of the licensee exceed $500,000,000, a financial state-ment need not be filed, but the licensee must still provide the Commis-sioner with a certified net worth statement. 43 9 The financialstatements are considered "private or nonpublic data."440

If an applicant fails to furnish financial statements, the Commis-sioner may refuse to issue the license.44 1 If a licensee fails to furnish

431. Id.432. Id.433. § 223.17(5a).434. Id.435. § 223.17(6).436. § 223.17(6)(a)(1)-(5).437. § 223.17(6)(b).438. § 223.17(6)(c).439. § 223.17(6).440. Id. See John F. Fatino, Public Employers and E-Mail: A Primer for the Practi-

tioner and the Public Professional, 23 N. ILL. U. L. REV. 131, 140-43 (2003) (discussingthe Minnesota public records statute).

441. § 223.17(6a)(a).

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the financial statements, the Commissioner can either refuse to renewthe license or suspend the license. 44 2

The statute authorizes the Commissioner to refuse to issue a li-cense or renew it when the Commissioner, based on the financialstatement or other financial information, determines that the licenseeor applicant is not financially able to operate the business. 4 43 The en-tity may, in turn, request an administrative hearing within fifteendays of the Commissioner's decision. 44 4

Minnesota also provides a statutory process for resolution of bondand contract claims.4 4 5 A producer who claims to be damaged by abreach of contract for the purchase of grain is to file a claim with theCommissioner.4 4 6 The claim must be filed within 180 days of the pur-ported breach.4 4 7 If the Commissioner determines the claim is valid,the Commissioner may immediately suspend the license.4 48 The li-censee must request an administrative hearing within fifteen days;otherwise the Commissioner is directed to revoke the license.4 49

The bond required by this section shall provide for payment of anyloss caused by the failure of the grain buyer to pay "upon the owner'sdemand, the purchase price of grain sold to the grain buyer... includ-ing loss caused by failure to pay within the time required."4 50 Thelegislature has determined that the bond "shall be conditioned uponthe grain buyer being duly licensed" as set out in Chapter 223.451 TheCommissioner is to determine whether the claim as filed is valid andnotify the claimant of that decision.4 52 The aggrieved party is allowedto appeal the Commissioner's determination. 45 3 When a contestedcase proceeding is not filed, or following the issuance by the Commis-sioner of a final order, "the surety company shall issue paymentpromptly to those claimants entitled to payment."45 4 The Commis-sioner can apply to the district court to appoint a trustee and managethe operations of the defaulting grain buyer. 4 55 If the grain buyer isliable to multiple producers and the amount of the bond is insufficientto pay the claims of all of the producers, the bond proceeds "shall be

442. Id.443. § 223.17(6a)(b).444. § 223.17(6a)(c).445. § 223.17(7).446. Id.447. Id.448. Id.449. Id.450. § 223.17(8)(a).451. Id.452. § 223.17(8)(b).453. Id.454. Id.455. Id.

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apportioned among the bona fide claimants."4 56 In any event, thebond is not cumulative from one licensing period to the next, andunder no circumstances, shall the liability on the bond exceed its facevalue.4 5 7

(b) Warehouse operators

Minnesota has also established a similar statutory scheme for thelicensing of grain warehouse operators. 458 An application for a grainwarehouse operator's license shall be filed with the Commissionerprior to the purchase or storage of grain.4 59 The license must be re-newed annually. 460 The fees for inspections, certifications, and li-censes shall be set at levels necessary to pay the costs ofadministering and enforcing the program.4 6 1 Such proceeds shall bedeposited into the Grain Buyers and Storage Account that, in turn,shall be appropriated to the Commissioner for administration and en-forcement. 4 62 Like a grain dealer, an applicant for a public -grainwarehouse license shall file a bond in the penal sum prescribed by theCommissioner by administrative rule and shall be based upon allgrain outstanding on grain warehouse receipts. 46 3

Grain storage warehouses must report to the Commissioner. Bythe tenth day of each month, the public grain warehouse operatormust file with the Commissioner "a report showing the net liability ofall grain outstanding on grain warehouse receipts as of the close ofbusiness on the last day of the preceding month."464 The report isused to determine the penal sum of the bond. 46 5 Should a grain ware-house operator willfully neglect or refuse to file the report for two con-secutive months, the Commissioner may suspend the license subjectto an administrative hearing upon the operator's request. 4 66

The Minnesota legislature has determined that there is a duty onbehalf of a grain warehouse operator to safely store records.4 6 7 Thestatute provides that every "public grain warehouse operator shallkeep in a place of safety, complete and accurate records and accounts

456. § 223.17(8)(c).457. § 223.17(8)(d).458. Id. § 232.22.459. § 232.22(1).460. § 232.22(2).461. § 232.22(3).462. Id.463. § 232.22(4).464. § 232.22(5)(a).465. Id.466. § 232.22(5)(b).467. See § 232.22(5)(c).

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relating to any grain warehouse operated."4 68 The statute identifiesthe exact information the grain warehouse operator is to keep. Thestatute enumerates what the record shall reflect:

each commodity received and shipped daily, the balance re-maining in the grain warehouse at the close of each businessday, a listing of all unissued grain warehouse receipts in theoperator's possession, a record of all grain warehouse receiptsissued which remain outstanding and a record of all grainwarehouse receipts which have been returned forcancellation.

46 9

Furthermore, the operator is to retain "receipts or other docu-ments evidencing ownership of grain" for the duration of the liabilityor for at least a minimum of three years.4 70 At the same time, theoperator must have in the warehouse "at all times" grain of a propergrade and "quantity to meet delivery obligations on all outstandinggrain warehouse receipts."4 7 1

A person claiming damage from the breach of a condition of abond by a licensed warehouse operator must file a claim with theCommissioner setting forth the allegations. 4 72 The claim must befiled within 180 days of the breach of the bond and, if the Commis-sioner believes the claim has validity, the Commissioner may immedi-ately suspend the license of the operator, but the licensee may requestan administrative hearing.4 73

Minnesota further divides the bonds into "condition bonds."4 7 4

The first bond is defined as a "condition one bond."47 5 The bond isconditioned upon the liability of the operator who issued a grain ware-house receipt to the "depositor for the delivery of the kind, grade andnet quantity of grain called for by the receipt."476

The condition two bond is to provide for payment of losses causedby the grain buyer's failure to pay the purchase price of grain sold tothe grain buyer once demanded by the owner.4 77 The bond is "condi-tioned upon the buyer being duly licensed."478 At the same time, thebond does not cover "any transaction which constitutes a voluntaryextension of credit."4 7 9

468. § 232.22(5)(c).469. Id.470. Id.471. § 232.22(5)(d).472. § 232.22(6).473. Id.474. See § 232.22(7).475. § 232.22(7)(a).476. Id.477. § 232.22(7)(b).478. Id.479. Id.

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Upon receiving notification of default, the Commissioner is to de-termine the validity of the claims and notify those parties that havefiled claims. 48 0 An aggrieved party may appeal the Commissioner'sdetermination by commencing a contested case proceeding. 48 1 In theabsence of a contested case proceeding being initiated, or following theissuance of an order in a contested case proceeding, "the surety com-pany shall issue payment to those claimants entitled to payment."48 2

To determine the amount of the liability on a condition one bond,"all grain owned or stored in the public grain warehouse shall be soldand the combined proceeds deposited in a special fund."48 3 Should lia-bility exceed the special fund, the proceeds of the bond and the specialfund are to be "apportioned among the valid claimants on a pro ratabasis."48 4 Yet, the "bond is not cumulative from one licensing periodto the next" and, in no event, shall the maximum liability of the bondexceed its face value for the licensing period.48 5

2. Case law

(a) Statutory interpretation and the common law

Generally speaking, the "Statute of Frauds" as adopted by variousjurisdictions in the United States requires that all contracts of indem-nity and suretyship be in writing. 48 6 In cases involving a surety, therequirement of a writing can be critical to the outcome of the case. InFidelity & Casualty Co. v. Lawlor,48 7 the Cargill Elevator Companyemployed Lawlor as its agent for receipt of grain in Kindred, NorthDakota, and Fidelity & Casualty Company of New York gave a bond tothe Cargill Elevator Company against all acts of dishonesty or fraudcommitted by Lawlor. 48 8

At the end of the one-year period of the bond for which Cargill hadpaid, Lawlor then requested that Fidelity & Casualty Company renewits bond for Lawlor acting in its capacity as an agent at Clifford, NorthDakota. 48 9 The company consented by letter to this arrangement. 4 90

Although the factual dispute that erupted is not clear from the contextof the Minnesota Supreme Court's decision, the court stated thatwhen the bond was sued upon, the bond was a continuous one and

480. § 232.22(7)(c).481. Id.482. Id.483. § 232.22(7)(d).484. § 232.22(7)(e).485. § 232.22(7)(f).486. See § I(C), supra.487. 66 N.W. 143 (Minn. 1896).488. Fid. & Cas. Co. v. Lawlor, 66 N.W. 143, 147 (Minn. 1896).489. Fid. & Cas. Co., 66 N.W. at 147.490. Id.

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"bound the defendants to indemnify plaintiff against any loss by rea-son of its guarantee to the elevator company of Lawlor's fidelity" in-cluding any renewal or extension thereof.49 1 The Minnesota SupremeCourt further held that Lawlor's promise to indemnify Fidelity & Cas-ualty Company was not within the statute of frauds. 49 2 The courtstated "as the defendants consented to continue on the counter bondafter Lawlor's transfer . . . it constituted a waiver of any rights theymight otherwise have had to claim that they were released by reasonof the change .... 493

The Minnesota Supreme Court has also determined in EagleRoller-Mill Co. v. Dillman,4 94 that it is not a defense to the surety thatthe scales and weights used for the measure of grain were neverproved and sealed by the sealer of weights and measures as requiredby the Minnesota statutes.4 95

In McBrady v. Monarch Elevator Co. ,496 the court decided "a pay-ment induced by the fraud of the payee may be recovered." 49 7 How-ever, the proposition is one for the jury to resolve. 498 In CentralMetropolitan Bank v. Fidelity & Casualty Co.,

4 9 9 the court statedwhether a party had actual or constructive notice of a particular factbearing on particular acts, which may or may not constitute a claim, ajury question is engendered. 50 0

Yet a bank, in the ordinary course as a lender, which receives billsof lading as collateral, will not be charged with active supervision ofthe grain company. 50 1 Instead, the obligation falls to the surety: "It isthe business of the surety rather than the obligee to see that the prin-cipal performs the duty which the surety has guaranteed."50 2 Thus,as long as the bank acts in good faith, a bank is under "no active dutyto ascertain whether a loss was probable or to prevent the continuanceof the default .... ",503

According to the court's opinion in Torgerson v. Quinn-Sheperd-son Co.,504 a demand and wrongful refusal to deliver constituted con-

491. Id.492. Id. (citations omitted).493. Id.494. 69 N.W. 910 (Minn. 1897).495. Eagle Roller-Mill Co. v. Dillman, 69 N.W. 910, 911 (Minn. 1897).496. 129 N.W. 163 (Minn. 1910).497. McBrady v. Monarch Elevator Co., 129 N.W. 163, 165 (Minn. 1910) (citation

omitted).498. McBrady, 129 N.W. at 165.499. 198 N.W. 137 (Minn. 1924).500. Cent. Metro. Bank v. Fid. & Cas. Co., 198 N.W. 137, 139 (Minn. 1924).501. Cent. Metro. Bank, 198 N.W. at 139.502. Id.503. Id. (citation omitted).504. 201 N.W. 615 (Minn. 1925).

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version.50 5 In the event of actual conversion, a demand for return ofthe property is not necessary. 50 6

As observed by the Minnesota Supreme Court, Minnesota, byadoption of its statutes, changed the common law rule regarding theintermingling of grain: "The storage of the oats with an agreement toreturn an equal amount in kind though not the identical oats depos-ited constitutes a bailment" and not a sale. 50 7 As a result, the suretydid not succeed on its argument that the elevator was not a warehousebecause of the failure to give a bond and that therefore a sale wascreated (rather than a bailment as required by statute).50 8

Likewise, under the proclamations of the Minnesota SupremeCourt, a surety may not assert the defense that the warehouse failedto issue the prescribed storage ticket; the surety made itself responsi-ble for the performance by the warehouse of all duties imposed upon itby statute.50 9

Minnesota courts construe the bond, together with the statute re-quiring it, as the contract of the parties. 5 10 The failure of the princi-pal to comply with the statute would not be a defense as to the suretybecause the surety bond requires that the surety make good on theobligation of the principal to faithfully perform its duties and "in allrespects, observe and comply with the laws of the state."51 1

In addition, Minnesota case law reflects that parties have hadtheir share of disputes wherein an action was brought to recover thevalue of certain grain and the defendant had undertaken conver-sion.5 12 Under Minnesota law, one who raises and harvests a crop ofgrain while in peaceful possession (even if wrongfully in possession) atthe time of harvest has long been recognized as the owner of thegrain. 5 13 As a result, a tenant who harvested crop soon after the expi-ration of the right of redemption was the owner of the grain.5 14 Itfollows, therefore, that the landlord may maintain a cause of action forconversion of the landlord's share due from the tenant but held byanother.5 15

505. Torgerson v. Quinn-Sheperdson Co., 201 N.W. 615, 616 (Minn. 1925) (citationsomitted).

506. Torgerson, 201 N.W. at 616.507. Id.508. Id. at 617.509. Anderson v. Krueger, 212 N.W. 198, 199 (Minn. 1927).510. Kramer Equity Elevator v. Indem. Ins. Co., 226 N.W. 396, 397 (Minn. 1929).511. Kramer Equity Elevator, 226 N.W. at 398.512. See, e.g., Schuchard v. St. Anthony & Dakota Elevator Co., 222 N.W. 292

(Minn. 1928).513. Schuchard, 222 N.W. at 294.514. Id.515. Id. at 295.

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(b) The successive bonding dilemma

The following discussion concerns one of the greatest dilemmasfacing the courts, sureties, and claimants. The case is instructive eventhough the result has been changed by the legislature. 5 16 In one case,St. Paul Fire and Marine Insurance Company commenced an inter-pleader action "to determine its liability under three public local grainwarehouseman's bonds issued to Lafayette Farm Services, Inc."5 17

Following an audit by the Agricultural Marketing Service of theUnited States Department of Agriculture, Lafayette was found to haveinsufficient grain in storage to satisfy outstanding delivery obliga-tions; Lafayette closed and the entity was placed into receivership. 5 18

Ultimately, claims were served against St. Paul by various holders ofstorage receipts.5 19 The trial court found St. Paul liable under threebonds issued by St. Paul between 1967 and 1970.520

One of the issues on appeal was whether St. Paul, as surety, was"liable under previous bonds which were in effect at the times Lafay-ette was in default."5 2 1 The record reflected that Lafayette had in factbeen in a "short position" during previous bonding periods because ithad concealed certain storage receipts that had been issued.5 22 Asframed by the Minnesota Supreme Court, the issue of whether St.Paul's liability exceeded $140,000.00 (the penal sum of the bond inplace during the year in which the default was discovered) dependedupon whether the warehouseman's bonds that were renewed eachyear were to be viewed as a single continuing contract or as a separatecontract. 52 3 The court discussed the issue as follows:

If viewed as a continuing contract which is kept in force bythe payment of annual premiums, then the surety's liabilityunder the entire contract is limited to its specified amountregardless of when the default occurred. On the other hand,if the bonds are viewed as a series of separate contracts, thenthe surety is liable on each bond up to its stated limit for de-faults which occur during the period each is in force, regard-less of when the loss is actually discovered. 52 4

516. See § III(E)(1)(b), supra.517. St. Paul Ins. Co. v. Fireman's Fund Am. Ins. Co., 245 N.W.2d 209, 211 (Minn.

1976).518. St. Paul Ins. Co., 245 N.W.2d at 211-12.519. Id. at 212.520. Id. at 211, 213.521. Id. at 213.522. Id. at 212.523. Id. at 215.524. Id.

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After noting a split of authority among the jurisdictions, 5 25 theMinnesota Supreme Court summarized the state of the case law:"many courts have concluded that each bond should be viewed as aseparate undertaking by the surety to protect against the defaults ofthe principal which occur during that bonding period."52 6

In response to St. Paul's argument that it should not be held lia-ble on all three bonds because the bond protected only "against lossduring the period," the Minnesota Supreme Court rejected the argu-ment on the same basis that the identical argument had previouslybeen rejected in a case by the United States Court of Appeals for theTenth Circuit.5 27 The Tenth Circuit previously found that the suretywas tied to the statute and the parties' agreement rather than theelements of the tort of conversion at common law.5 28 Once the statutewas violated, the agreement was breached and the obligation on thebond was triggered. 5 29 As the Minnesota Supreme Court concluded,"[w]e fully agree with the court's reasoning . . . [t]herefore, we holdthat St. Paul is liable under its previous bonds for the defaults of itsprincipal." 530 At the same time, the Minnesota Supreme Court hasstated that it will liberally construe "these types of surety bonds inorder that they accomplish their statutory purpose of protecting per-sons who deal with a publicly licensed warehouseman in normal andusual transactions from sustaining loss because of the warehouse-man's defaults."5 3 1 Albeit, the result in this case appears to have beenlegislatively changed.5 32

Similarly, the Minnesota Supreme Court rejected St. Paul's argu-ment that the bond did not protect the seller of grain. 53 3 The courtfound no compelling distinction between a seller and a storer of grain."A seller of grain places the same reliance on the warehouseman'sfaithful performance of its duties as does a storer of grain. If the ware-houseman defaults in its duties, we see no logical reason for excludingthe seller from the protection of the bond."5 34

525. Id. at 215-16.526. Id. at 215 (citations omitted).527. Id. at 216 (citing Gen. Ins. Co. v. Commodity Credit Corp., 430 F.2d 916, 918

(10th Cir. 1970)).528. Id.529. Id.530. Id.531. Id. at 217 (citations omitted).532. MINN. STAT. ANN. §§ 223.17(8)(d), 232.22(7)(f) (West 2003 & Supp. 2006).533. St. Paul Ins. Co., 245 N.W.2d at 216-17.534. Id.

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(c) Coverage for independent truckers

The Minnesota Court of Appeals has determined that when anindependent trucker buys grain from various farmers and resells it toan elevator, a buyer of grain is not liable to the producer for thepurchase price under Minnesota Statute section 336.2-403. 53 5 InSchulter v. United Farmers Elevator, the farmers did not receive pay-ment for their grain and commenced suit on the bond of the eleva-tor.5 36 The elevator maintained that it was a buyer in ordinary courseunder Minnesota Statute section 336.2-403. 53 7 Under Minnesota law,the test of good faith is a subjective rather than an objective one. 538

Thus, based upon the trucker's conduct over time, he had gained areputation in the community that would qualify him as a "merchant"within the meaning of the Uniform Commercial Code as adopted inMinnesota.53 9 Moreover, "the elevator did a lien check on thetrucker."

540

As a result, the Minnesota Court of Appeals concluded that since"the transaction between the trucker and the elevator was a sale withtitle shifting immediately, and because the elevator acted in goodfaith," the provisions of Minnesota Statute section 336.2-402(2) and(3) would apply to the facts of the case. 54 1 As succinctly summarizedby the Minnesota Court of Appeals, "the UCC mandates that the farm-ers not the elevator, bear the loss."542 At the same time, the Minne-sota Court of Appeals rejected the argument that the Grain StorageAct would apply because there was no evidence in the record of a "stor-age agreement between the elevator and the farmers."54 3 Conse-quently, the trial court's grant of summary judgment was proper.5 44

(d) How Chapter 223 works

The Minnesota Court of Appeals has described Minnesota Statutesection 223.17 as creating two types of grain sales.54 5 One is a cashsale where payment is required contemporaneous with the sale.54 6

535. Schulter v. United Farmers Elevator, 479 N.W.2d 82 (Minn. Ct . App. 1991).536. Schulter, 479 N.W.2d at 83-84.537. Id. at 84.538. Id. at 85.539. Id.540. Id.541. Id.542. Id.543. Id. at 86.544. Id.545. In re Claims Against the Grain Buyer's Bond No. 877706-08624237, 486

N.W.2d 466, 468 (Minn. Ct. App. 1992).546. Grain Buyer's Bond No. 877706-08624237, 486 N.W.2d at 468.

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The other type is a voluntary extension of credit sale.54 7 Voluntaryextensions of credit will result in a loss of coverage under the grainbuyer's bond.5 48

Therefore, in the Minnesota Court of Appeal's view, it is irrele-vant whether the seller allows the buyer a grace period "because thebuyer must give written confirmation of credit to the seller before theclose of the next business day or the transaction fails as a creditsale."54 9 In short, mere failure to meet the statutory test for a cashsale, does not automatically create a voluntary extension of creditwith resultant loss of bond coverage. 5 50 Thus, it follows that if thereis a breach of a cash sale grain contract, the grain producer must file aclaim with the Commissioner within 180 days of the breach before theproducer can recover on the bond. 55 1

Moreover, the subsequent incorporation of a principal will not re-lieve a surety of its obligations under the bond.55 2 To allow a surety toavoid coverage based upon the subsequent incorporation of the princi-pal would "thwart the legislature's intent in requiring a grain buyer toobtain a bond."5 53

Multiple shipments are entitled to a different treatment underthe Chapter. The Minnesota Court of Appeals has determined withrespect to multiple shipments pursuant to Minnesota Statute section223.17(5), that payment must be made "within ten days after eachshipment, except that all payments are due within forty-eight hoursafter completion of the entire sale."5 54

(e) Delivery as a defense to surety

In the commodity storage context, like other matters involving asurety, delivery of the bond is a critical component of suretyship andcan constitute a defense by the surety.55 5 In Larson v. NationalSurety Co., the facts demonstrated that the bond had not been deliv-ered at the time the claim arose.55 6 As noted by the Minnesota Su-preme Court, "it is almost an elementary principle laid down in all of

547. Id.548. Id.549. Id. at 469. See also MiNN. STAT. ANN. § 223.175 (West 2003) (specifying con-

tents for written agreement).550. Grain Buyer's Bond No. 877706-08624237, 486 N.W.2d at 469.551. Id. at 470.552. In re Claim Against the Grain Buyer's Bond No. MTC 182, 1995 Minn. App.

LEXIS 825, at *3-*4 (Minn. Ct. App. June 20, 1995).553. Grain Buyer's Bond No. MTC 182, 1995 Minn. App. LEXIS 825, at *4 (citation

omitted).554. In re Claim Against Grain Buyer's Bond of Mischel Grain & Seed, 591 N.W.2d

734, 738 (Minn. Ct. App. 1999) (emphasis in original).555. Larson v. Nat'l Sur. Co., 214 N.W. 507 (Minn. 1927).556. Larson, 214 N.W. at 508 (citation omitted).

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the books that a bond is not 'executed' until it is delivered .... Ittakes effect only from execution, on delivery, and, until delivery, it isnot a contract and is of no further value than the paper upon which itwritten."55 7 Thus, because the bond issued had never been executedand delivered in accordance with the law, it never became "operativefor any purpose because of its nondelivery."55 s

(f) Evidentiary issues

Counsel would be well-advised to remember that in those statesthat have an administrative-type proceeding for resolution of claims,the rules of evidence may not fully apply before an administrativebody. Frequently, hearsay may be admitted in an administrative pro-ceeding, if it is the type of evidence upon which a reasonably prudentperson would rely.5 59 The Minnesota Court of Appeals determinedthat an administrative law judge did not err when it allowed docu-mentary evidence in the form of invoices and receipts to be received asevidence in support of a claim rather than live testimony.5 60

F. Missouni

1. Statutes

Missouri Revised Statute section 276.406 provides that the Direc-tor of the Missouri Department of Agriculture5 6 1 shall be responsiblefor the approval of surety bonds required by sections 276.401-.581.562Moreover, the Director may promulgate rules and regulations to ac-complish the efficient and effective enforcement of the enumeratedstatutes. 56 3 This power includes the authority to conduct administra-tive hearings for the purposes of determining the liabilities of suretieson bonds that have been issued on behalf of grain dealers.56 4

(a) Grain dealers

Missouri law requires that a grain dealer file with the Director asurety bond.56 5 The bond must be in favor of the State of Missouri, as

557. Id. at 506 (citation omitted).558. Id. at 509.559. Grain Buyer's Bond No. MTC 182, 1995 Minn. App. LEXIS 825, at *8-*9. Cf

IOWA CODE ANN. § 17A.14(l) (West 2005) ("A finding shall be based upon the kind ofevidence on which reasonably prudent persons are accustomed to rely for the conduct oftheir serious affairs, and may be based upon such evidence even if it would be inadmis-sible in a jury trial").

560. Grain Buyer's Bond No. MTC 182, 1995 Minn. App. LEXIS 825, at *8-*9.561. Mo. ANN. STAT. § 276.401(3)(12), (14) (West 1993 & Supp. 2006).562. Id. § 276.406(1)(3).563. § 276.406(2)(1).564. § 276.406(2)(8).565. Id. § 276.426(1).

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trustee, "for the benefit of all persons selling grain to the graindealer ."566 The bond shall be conditioned upon the followingfactors:

1. The dealer as a buyer paying to the seller the agreed-upon purchase price of the grain purchased from the sellerwhere title to said grain transferred from the seller to thebuyer within the state of Missouri;5 6 7

2. The grain dealer's faithful performance of his duty as alicensed grain dealer .... 568

3. The bond required by this section shall cover the agreed-upon minimum price of any valid minimum pricecontract ....569

The fourth factor is not so much a "factor" as it is a preclusionfrom coverage under the bond. The statute provides that the bondshall "not cover payment for any promissory note accepted by theseller of grain."5 70

Surety bonds issued under the chapter are effective from the dateof issue and cannot be affected by the expiration of the license periodand "continue in full force and effect until canceled."57 1 Unlike somejurisdictions, Missouri's statute specifically provides that the liabilityof the surety cannot be accumulated:

The continuous nature of a bond, however, shall in no eventbe construed to allow the liability of the surety under a bondto accumulate for each successive licensed period duringwhich the bond is in force, but shall be limited in the aggre-gate to the amount stated on the bond . .. [or] appropriateendorsement or rider. 57 2

The required bond is to be kept in force at all times; failure tomaintain the bond is a basis for license revocation. 5 73 Bonds may notbe canceled without the prior written approval of the Director and thesubstitution of another bond.5 74

The statute also places specific requirements on the surety. Uponthe Director's written demand for payment,

the surety shall either pay over.., the sum demanded up tothe full face amount of the bond, or shall deposit the sum de-manded in an interest-bearing escrow account at the highest

566. § 276.426(2).567. § 276.426(2)(1).568. § 276.426(2)(2).569. § 276.426(2)(3).570. § 276.426(2)(4).571. § 276.426(3).572. Id.573. § 276.426(4).574. Id.

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rate of interest available. When a surety pays the directorupon demand, the director shall either interplead the sum incourt or hold an administrative hearing for the determinationof the liability of the surety, and the validity of claims againstthe bond, and upon the conclusion thereof, the director shalldistribute the bond proceeds accordingly. 5 75

Yet, the surety maintains the right to appeal to the circuit courtfollowing the Director's determination. 5 76 The surety's refusal to paythe sum demanded or failure to "deposit the sum demanded in a inter-est-bearing escrow account at the highest rate of interest available,shall be grounds for withdrawal of the surety's license and authoriza-tion to conduct business in this state. . ." with an additional penalty oftwenty-five percent of the full face amount of the bond plus interest atthe rate of nine percent or higher.5 7 7 Nonetheless, in the event thesurety pays as demanded and the Director ultimately concludes thatthe surety is not liable, the Director is entitled to return to the suretythe sum paid (or a proration of the sum paid plus all accumulatedinterest).

578

No bond may be canceled without notice "via certified mail" to theDirector at Jefferson City, Missouri, and the terms of the bond must sostate.5 79 Cancellation of the bond does not affect the accrued liabilityof the surety or any liability which may accrue before the expiration ofthe statutory-required period prior to cancellation. 58 0 Should thesurety fail to follow the statutory procedures for cancellation, "thebond shall remain in full force and effect until properly canceled." 58

Moreover, failure to obtain a substitute surety in the event of no-tice to the Director of the surety's intent to cancel shall result in theautomatic revocation of the dealer's license if a new bond is not re-ceived "within thirty days of receipt of the notice of intent to can-cel."58 2 If a substitute "bond is not received within sixty days ofreceipt of the notice of intent to cancel," the Director shall revoke thedealer's license and cause an inspection to take place with notice tosellers and claimants via the local news media. 58 3

Contrary to other jurisdictions identified in these materials, Mis-souri recognizes the validity of a verbal or written surety bond binder

575. § 276.426(6).576. Id.577. Id.578. Id.579. § 276.426(7).580. Id.581. Id.582. § 276.426(8).583. Id.

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as being legally effective. 58 4 However, such agreements are not validunless the bond meets the following conditions. First, "[the dealer orprincipal has paid, or has promised to pay the surety an agreed uponor tentatively agreed upon . . . premium" and the surety has agreedupon or "tentatively agreed upon premium or other consideration."58 5

Next, the surety must provide all of the following information: a bondnumber; the amount of the bond; and the bond's effective date.58 6 TheDirector is free to reject a binder depending upon the particularcircumstances .587

The statute also allows for certificates of deposit and letters ofcredit in lieu of an actual surety bond.58 8 When the bank acts in lieuof a surety, it is subject to similar requirements as if it were acting asa surety. 589 On the other hand, the statute allows a grain dealer withsufficient net worth to request relief from the Director that the dealermay only be required to post the minimum $20,000 bond.5 90

A Missouri grain dealer is required to "make payment of theagreed-upon purchase price to the seller of grain upon delivery or de-mand of said seller or his authorized agent, unless a written grainpurchase contract or valid deferred payment contract shall provideotherwise."5 9 1 Under the Missouri statute, it is contemplated that aclass I dealer shall promptly document the agreed-upon purchaseprice of the grain and shall make payment upon demand. 59 2 In theevent that a demand for payment is not made, a class I dealer has theoption of entering the data onto a formal settlement sheet, which mustoccur within thirty days of delivery.5 93 If an account is entered on aformal settlement sheet, "payment shall be made the earlier of de-mand or one hundred eighty days from delivery."59 4 If payment hasnot been made at the conclusion of the 180 day mark, a formal writtencontract shall be executed. 5 95

Likewise, a class II dealer is required to document the agreedupon purchase price of grain and make payment upon demand. 5 96 Aclass II dealer is also required to make use of a formal settlement

584. § 276.426(9).585. § 276.426(9)(1) (emphasis added).586. § 276.426(9)(2)(a)-(c).587. § 276.426(9)(2)(d).588. Id. § 276.431(1)-(2).589. § 276.431(3).590. Id. § 276.441(1).591. Id. § 276.461(1).592. § 276.461(2).593. Id.594. Id.595. Id.596. § 276.461(3).

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sheet if no demand for payment is made. 59 7 Once the account ismarked on a formal settlement sheet, payment must be made eitherupon demand or within 180 days of delivery, whichever first occurs. 598

A class II dealer is prohibited from entering into any type of creditsales contract. 59 9 Persons holding a class III, IV, V, or VI license arenot to enter into any type of credit sales contract.60 0

While a producer may make an oral demand from a dealer, theright to recover under a surety bond shall be based only upon a writ-ten demand to the surety.60 1 Recovery on the bond is not a person'ssole remedy and does not bar a subsequent "civil action based uponrights or obligations arising under the grain purchase contract."60 2

Deferred price contracts are not eligible for recovery from the dealer'ssurety bond.60 3 Deferred price contracts must contain a statementconcerning the absence of bond coverage. The written contract mustspecifically state that the grain dealer is "not required to carry bondon the grain for the benefit of the seller .... 6 0 4

With respect to deferred payment contracts, a class I dealer mustnotify the seller that the class I dealer is required to carry a bond onthe grain for the benefit of the seller only for "twelve months from thedate the contract was entered into," and at the expiration of that time,"payment for the grain becomes a common claim against thedealer."60 5 Nonetheless, should the grain dealer's license be revokedby the Director "all deferred payment agreements executed within thetwelve months prior to revocation shall be deemed priced unpaid obli-gations as of the effective date of the revocation and as such agree-ments are covered by the grain dealer's bond."60 6

Minimum price contracts may also be entered into by a class Idealer. 60 7 However, the written agreement must provide a statementthat the "specified minimum price is covered under the dealer's bondfor the benefit of the seller, for, and only for, twelve months from thedate the contract was entered; and that payment for any subsequentprice gains, if any, is not covered by the bond."60 8 No other type ofdealer may enter into minimum price contracts. 60 9

597. Id.598. Id.599. Id.600. § 276.461(4).601. § 276.461(5).602. § 276.461(6).603. § 276.461(7).604. Id.605. § 276.461(8).606. § 276.461(9).607. § 276.461(10).608. Id.609. Id.

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Upon revocation of a license, all claims shall be filed with the Di-rector against the former licensee and the surety company within 120days after the date of the revocation. 6 10 Failure to timely file a claimdefeats recovery under the bond.6 11

If the Director believes that a dealer is insolvent or "unable tosatisfy the claims of all sellers," the Director may petition the circuitcourt for an ex parte order authorizing the Director to take control ofthe dealer and act as trustee. 6 12 After taking possession, the Directorshall give written notice of the action to the surety and any sellers asshown by the available records. 6 13 The Director, acting as trustee,shall remain in possession "until such time as the dealer or the suretyon the bond shall have satisfied the claims of all sellers" or when thecircuit court orders the surrender of possession.6 1 4 While in posses-sion, the Director is not authorized to operate the dealer's businessnor is the Director liable for any claims that could have arisen fromthe non-operation of the dealer's facility.6 15

(b) Warehouses

Missouri has also established the Director's authority to act underthe Missouri Grain Warehouse Law.6 16 The Director's authority ex-tends to conducting hearings on the liability of sureties that have filedbonds on behalf of licensed warehouses with the Department. 61 7

Before a person may be issued a warehouse license, the person mustfile a bond (other than personal security) with the Director by a suretylicensed to do business in Missouri. 6 18 "The bond shall be in favor ofthe state of Missouri for the benefit of all persons storing grain ...conditioned upon the faithful performance of his duties as a publicwarehouseman relating to the storage of grain."6 19 Storage grain thathas been priced is not covered by the warehouseman's bond.620 Graindeemed storage grain is covered by the bond.6 21

The statute specifically describes what are not defenses upon thebond.

62 2

610. Id. § 276.491(6).611. Id.612. Id. § 276.501(1).613. § 276.501(4).614. § 276.501(5).615. Id.616. Mo. ANN. STAT. § 411.070 (West 2001).617. § 411.070(2)(9).618. Id. § 411.275(1).619. Id.620. Id.621. Id.622. § 411.275(2).

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Neither the issuance of warehouse receipts by a warehouse-man to himself for grain owned in whole or in part by him;the commingling of grain owned by the warehouseman withgrain stored for others or any violation by a warehouseman ofthis chapter or of the regulations ... is a defense .... 623

Indeed, the bond must provide this information.6 24 The bond issuedunder Chapter 411 shall become effective on the date of issue and"shall not be affected by the expiration of the license .. "..-625 Thebond continues in full force and effect until canceled. 62 6 A warehouse,when using multiple bonds, "shall utilize the same corporate suretyfor all bonds required for the operation" of multiple warehouses. 6 2 7

Upon written demand by the Director for payment, the suretymust either pay over the sum demanded up to the penal sum of thebond or deposit the funds in an interest bearing escrow account. 628

Refusal or failure to pay on the behalf of the surety can result in oner-ous consequences.629

Grain warehouse bonds are to contain similar provisions with re-spect to cancellation and substitution of bonds.630 Moreover, verbal orwritten surety bond binders are valid, provided, however, that the doc-uments meet the statutory test.63 1

Certificates of deposit and irrevocable letters of credit may beused to satisfy the requirement of a surety bond under Chapter411.632 Chapter 411 also requires a bank, when acting as the surety,to obey the written demand of the Director.633

Like the provision regarding grain dealers, the Director has simi-lar authority, under the Grain Warehouse Law, upon learning of theinsolvency of a grain warehouse. 634 The Director is required to givewritten notice of the action to the surety and "holders of record."63 5

Similarly, the Director is authorized to retain possession untilsuch time as the surety satisfies all the claims of the depositors. 6 36 No

623. Id.624. Id.625. § 411.275(3).626. Id.627. § 411.275(5).628. § 411.275(7).629. Id.630. § 411.275(8)-(9).631. § 411.275(12).632. Id. § 411.277(1)-(2).633. § 411.277(3).634. Id. § 411.519.635. § 411.519(6).636. § 411.519(7).

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liability attaches to the Director's possession nor must the Directoroperate the facility. 63 7

2. Case law

(a) The common law and the Missouri statutes

When a milling concern handles and stores grain products in theordinary course of its business, it is not a warehouseman, either atcommon law or under the Missouri statutes, because the business isnot engaged in the business of storing or receiving goods.6 38

As previously determined by the Supreme Court of Missouri,there is no basis for a lawsuit against the State of Missouri, the Mis-souri Department of Agriculture, or the Missouri Division of Grain In-spection for deficiencies purportedly committed by the State thattrigger coverage under a surety's bond. 63 9 As stated by the MissouriSupreme Court, "[i]f they are suable entities at all, they partake of thestate's sovereign immunity."64 0 Moreover, the state's interest in bond-ing grain storage facilities is based upon a public interest in maintain-ing the food supply. "The statutes exist, not purely in the interest ofpersons in the grain trade, but principally because of the public's in-terest in an abundant food supply."64 1 It therefore follows that sover-eign immunity was the exact type of doctrine to bar the instant claimsagainst the public fisc. 6 4 2

Under section 411.026(22), which defines interested person, whena company is acting as a custodian of pledged grain and is therebycompensated, the company is operating a public grain warehousewithin the meaning of the statute.6 43 However, under the unique fac-tual circumstances of State ex rel. Kruse v. SLT Warehouse Co., theMissouri Court of Appeals found that the surety was insulated fromclaims by virtue of section 411.491.644 The Missouri Court of Appealsdemonstrated this conclusion by means of a hypothetical situation:

Suppose a grain dealer, after receiving grain from sundryproducers, stores it in a public grain warehouse operated by athird party several miles away. A week later the grain dealerreturns to the warehouse, presents the receipt, and demandsthe grain, which is surrendered by the warehouse. The grain

637. Id.638. Nat'l Bank of Commerce v. Flanagan Mills & Elevator Co., 188 S.W. 117, 121

(Mo. 1916).639. State ex rel. Mo. Dep't ofAgric. v. McHenry, 687 S.W.2d 178, 180-81 (Mo. 1985).640. State ex rel. Mo. Dep't of Agric., 687 S.W.2d at 181.641. Id. at 182.642. Id.643. State ex rel. Kruse v. SLT Warehouse Co., 759 S.W.2d 314, 324 (Mo. Ct. App.

1988).644. State ex rel. Kruse, 759 S.W.2d at 328.

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dealer sells the grain but never pays the producers for it.Could it seriously be argued that the producers have anyclaim against the bond of the third party warehouseman? Webelieve the answer under § 411.491 is clearly no.6 4 5

As the warehouse never assumed any contractual obligationswith the claimants nor had any dealings with the claimants, "therewas never an occurrence of any condition triggering liability to anyclaimant under appellants' public grain warehouseman's bond."6 46

In another case, a corporate surety, as defendant, argued that be-cause an elevator did not continue in business for 180 days, it had nofurther obligation under the bond.6 47 The Missouri high court re-jected the argument, stating: "The bond by its terms, and by reason ofthe statutory requirements, continues in effect until terminated in themanner prescribed by law. No such termination is shown."6 48 Asstated by the court, the circumstance, "even if established, makes nodifference." Both the bond and the statute require the bond continuein effect until terminated as a matter of law.64 9

(b) Trial practice

In the same case, the trial court was correct in rejecting testimonyproffered by the surety, as an offer of proof, that "present and formerofficials of the Missouri Department of Agriculture . . . had consist-ently construed the governing statutes in accordance with" thesurety's contention.6 50 The trial court had sustained an objection tothe testimony.

6 51

While the Missouri Court of Appeals considered the testimonyunder the premise that the testimony should have been received "asevidence to show the construction placed on this statute by the offi-cials in charge of its administration," the Missouri Supreme Courtagreed with the trial court.6 5 2 The statute at the time did not allowthe Department to serve as a tribunal for the adjudication ofclaims. 6 53 As "[statutory and contractual rights are to be adjudicatedby the courts, not by bureaucrats," the testimony was properly ex-

645. Id. at 328-29.646. Id. at 329.647. State ex rel. Neese v. IGF Ins. Co., 706 S.W.2d 856, 860 (Mo. 1986).

648. State ex rel. Neese, 706 S.W.2d at 859 (footnote omitted).649. Id.650. Id. at 858 (footnote omitted).651. Id.652. Id.653. Id.

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cluded.654 Albeit the result here appears to have been legislativelychanged with respect to warehouses. 655

(c) Interest

The Missouri Supreme Court determined that claimants were en-titled to interest from the time their demand was made, even if theinterest would exceed the penal sum of the bond.6 56 In the MissouriSupreme Court's view, the "surety has the use of the money until pay-ment is made and will receive a windfall if excused from payinginterest."657

(d) Attorney fees

Attorney fees are not guaranteed when a surety denies a claim.The Missouri Supreme Court has rejected the argument that claim-ants are entitled to attorney fees because of a surety's conduct in de-nying a claim.658 The court found "[blecause of the novelty of thepoint and the lack of authoritative construction, we are unwilling tosay that the denial of payment was 'without just cause." 659 Likewise,a surety's absence of a basis for denial of a claim will similarly not giverise to a claim for fees under the statute.6 60

G. NEBRASKA

1. Statutes

(a) Grain dealers

Under Nebraska law, all grain dealers in the state must be li-censed by the Public Service Commission.6 6 1 Nebraska also statuto-rily defined the required content of a grain dealer receipt. 66 2

Licensing in Nebraska includes, inter alia, the requirement of securitythat can be a bond issued by corporate surety companies. 66 3

654. Id.655. Compare Mo. ANN. STAT. § 411.070(2)(9) (West 2001) (authorizing Director of

the Missouri Department of Agriculture to conduct hearings and to adjudicate claimsunder chapters 411 and 536), with Mo. ANN. STAT. § 276.501 (West Supp. 2006) (pro-ceedings remain before circuit court).

656. State ex rel. Neese, 706 S.W.2d at 859.657. Id. Nonetheless, section 411.275(6) can have a dramatic impact upon a surety

that fails to perform as requested by the Director.658. Id. at 861.659. Id.660. Id.661. NEB. REv. STAT. ANN. § 75-903 (LexisNexis 2004 & Supp. 2005). See also id.

§ 75-101.662. Id. § 75-904.663. § 75-903(4).

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The bond must be payable to the Public Service Commission "forthe benefit of any producer or owner within this state who filed a validclaim arising from a sale to or purchase from a grain dealer. '6 64 The"security shall be furnished on the condition that the licensee will payfor any grain purchased on demand, not later than thirty days afterthe date of the last shipment of any contract." 66 5 The surety's liability"shall cover purchases and sales made or arranged by the graindealer" for the period of time in which the bond is in place. 6 66

The bond shall be "in continuous force and effect" until termi-nated by the surety.6 6 7 However, the surety's liability is not accumu-lative for successive periods.6 68

In the event the conditions of the security have been violated,6 69

the Commission may demand the security be forfeited and hold theproceeds of the security in an interest-bearing trust account until allclaims have been determined. 6 70 The Commission may also revoke orsuspend the license for failure to comply with the Act or any regula-tions under the Act. 6 71

Should claims exceed the security, the "security shall be distrib-uted pro rata among the claimants." 67 2 If the security is not turnedover in ten days, the Commission may file suit and recover the secur-ity plus interest from the date the demand for the security was made"if the court finds that any claim determined by the commissionagainst the grain dealer's security was valid."67 3

(b) Warehouses

Nebraska has also adopted a Grain Warehouse Act. 6 74 Grainwarehouses are subject to the jurisdiction of the Public Service Com-mission. The term "warehouse" means "any grain elevator, mill, gristmill, building, or receptacle in which grain is held in storage for morethan ten consecutive days."6 75

664. Id. See also § 75-101.665. § 75-903(4).666. Id.667. Id.668. Id.669. Id. § 75-905 (defining that seller shall have no recourse against the security

unless the seller demands payment within thirty days of delivery, negotiates the instru-ment within thirty days of issuance, and notifies the Commission within thirty days ofthe apparent loss).

670. Id. § 75-906.671. Id. § 75-903.01.672. § 75-906.673. Id. (emphasis added).674. Id. § 88-525.675. Id. § 88-526(9).

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Nebraska's statute also attempts to reach those sales that takeplace beyond its borders. A grain "warehouseman" is a person or en-tity that receives or offers to store the grain of another for considera-tion or receives grain for shipment to other points for storage,consignment, or resale, either in or out of the state.6 76

No person shall act as a warehouseman without obtaining a li-cense. 677 Note that additional examinations may be performed by theCommission, and the Commission may charge for such examinationonly when the examination was a follow-through on "irregularitiesfrom the previous examination or if financial conditions warrant addi-tional examinations ."678

The statute provides the Commission with the authority to sharedata with the "United States Government or any of its agencies, in-cluding the Commodity Credit Corporation .... ,,679 Likewise, theCommission may enter into agreements with regulators in borderingstates for examination or licensing purposes; however, the Commis-sion "shall assume all jurisdiction over any warehouseman headquar-tered in Nebraska regarding . . . warehouse activity."680 Yet, awarehouseman "headquartered and licensed in another state whichacquires facilities in Nebraska is under the jurisdiction of the head-quarter state . "681

As part of the application process, each applicant must submit toa criminal record background check and fingerprinting. 68 2 The appli-cation must be accompanied by an "audited or reviewed fiscal year-end financial statement" prepared as required by the statute.68 3 Theapplication must also reveal the "location of the warehouse to be usedby the applicant, its relation to railroad trackage, its capacity, its gen-eral plan and equipment, and its ownership."684 The Nebraska an-nual license fee is driven by the storage capacity in bushels.6 8 5

Additional storage capacity cannot be added without Commission ap-proval. 68 6 The Commission can request additional financialdocuments. 68 7

676. § 88-526(11).677. Id. § 88-527(1).678. § 88-527(2).679. § 88-527(3).680. § 88-527(6).681. Id.682. Id. § 88-528. See also id. § 88-528.01. A felony conviction may bar an

applicant.683. § 88-528.684. Id.685. Id. § 88-529.686. Id. § 88-533.687. Id. § 88-530.01.

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Applicants are also to submit "a bond, a certificate of deposit, anirrevocable letter of credit, United States bonds or treasury notes, orother public debt obligations of the United States .... ,,688 The secur-ity is to be in an amount required by the Commission, but shall not beless than $25,000, and shall run to the

State of Nebraska for the benefit of each person who storesgrain in such warehouse and of each person who holds acheck for purchase of grain stored in such warehouse whichwas issued by the warehouse licensee not more than five busi-ness days prior to the cutoff date of operation of the ware-house, which shall be the date the commission officially closesthe warehouse.

68 9

One license may be used to operate multiple facilities if certainconditions are met.69 0 Licenses must be renewed annually.6 9 1 TheCommission also has the authority to set storage rates69 2 and inspectthe books and records of a licensee.6 93

A surety must be licensed to do business in the state.69 4 The se-curity is conditioned upon sufficient insurance to cover losses to thegrain arising from "combustion, fire, lightning, and tornado." 69 5 Next,the security is conditioned upon delivery of grain in exchange for thereceipt.6 96 Finally, the security is conditioned upon faithful perform-ance of all lawful provisions regarding the storage of grain.6 97

Like some other jurisdictions, the statute specifically addressesthe cumulative nature of the security. "The liability of the surety on abond shall not accumulate for each successive license period which thebond covers. The liability of the surety shall be limited to the amountstated on the bond or on an appropriate rider or endorsement to thebond. "698

Payment for grain is to be made upon demand of the seller, unlessa written or oral contract specifies otherwise. 69 9 At the time of deliv-ery to the warehouse, each licensee is to provide a scale ticket to theowner or consignee of the grain, unless the grain arrived by water orrail.70 0 Within fifteen days following demand, the warehouse is to is-

688. Id. § 88-530.689. Id.690. Id. § 88-531.691. Id. § 88-532.692. Id. § 88-541.693. Id. § 88-542.694. § 88-530.695. Id.696. Id.697. Id.698. Id.699. Id. § 88-534.700. Id. § 88-535.

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sue either a negotiable or nonnegotiable receipt. 70 1 Commission ap-proval is required for the issuance of duplicate negotiable receipts inthe event the document is lost (provided that a bond is delivered).7 0 2

A warehouse licensee can issue receipts to itself for grain that it owns,but such receipts must be registered with the Commission. 70 3

When presented with the receipt and payment for lawful charges,the grain represented by the receipt must be delivered immedi-ately.70 4 If a partial delivery of a unit represented by a receipt ismade, the partial delivery must be shown upon the face of the receiptand acknowledged by the recipient.70 5 Failure to deliver any grainwithin twenty-four hours of demand subjects the warehouse and thesecurity to damages of one cent per bushel per day.70 6 The statutesets out special rules for terminal delivery.7 0 7 However, both partieshave the right to terminate the storage agreement. 70 8

In Nebraska, it is a felony to issue a warehouse receipt for grainthat was not actually received. 70 9 The statute creates a presumptionregarding missing grain. "If at any time there is less grain in a ware-house than outstanding receipts issued for grain, there shall be a pre-sumption that the warehouse ... has wrongfully removed grain... orhas issued receipts for grain not actually received, and has violatedthis section."7 10 Apparently, no reported cases exist challenging theconstitutionality of the presumption. A strong argument could bemade that the presumption required by the statute violates a defen-dant's right to due process. 7 11 The Commission is also allowed to as-

701. Id. § 88-536(1).702. Id. § 88-537. See also id. § 88-538 (requiring that the receipt be marked

duplicate).703. § 88-536(3).704. Id. § 88-540.705. Id.706. Id.707. Id.708. Id. § 88-544.709. Id. § 88-543. Other jurisdictions could reach the same result by means of an

allegation of criminal fraud or false pretenses. See e.g., IOWA CODE ANN. 714.8(1) (West2003) (defining a criminal fraudulent practice as any person who "[miakes, tenders orkeeps for sale any warehouse receipt, bill of lading, or any other instrument purportingto represent any right to goods, with knowledge that the goods represented by suchinstrument do not exist"). Nebraska's statute appears to be unique among the jurisdic-tions under examination, as the statute actually declares the act to be a felony regard-less of the value involved.

710. NEB. REV. STAT. ANN. § 88-543.

711. See Sandstrom v. Montana, 442 U.S. 510 (1979) (holding that a presumptioninstruction in a criminal trial violated the due process clause of the Fourteenth Amend-ment because in a criminal case the burden is on the government to prove every elementof the case beyond a reasonable doubt).

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sess a civil penalty, 7 12 while the warehouse is liable for all damagessuffered by the violation of the Grain Warehouse Act.7 13

Should the need arise, the Commission also has the authority tosuspend or revoke the license. 7 14 The Commission's power also allowsit to close a warehouse. 7 15 As part of the liquidation authority, theCommission may distribute (either in grain or proceeds) the remain-ing grain to all depositors on a pro rata basis. 7 16 If a shortage exists,the Commission may require that all or part of the security be for-feited for subsequent distribution by the Commission following a hear-ing.7 17 The Commission is also authorized to commence a suit indistrict court for the benefit of the depinsitors. 7 18 In any event, thedepositors are paid before the licensee's claims are recognized. 7 19

The warehouse must notify the depositors, in writing, of theamount and type of grain stored.720 Failure to do so is amisdemeanor.

72 1

2. Case law

(a) Contract formation

Courts generallywill not permit a party to avoid a contract into which theparty has entered on the grounds that he or she did not at-tend to its terms, that he or she did not read the documentwhich was signed and supposed it was different from itsterms, or that it was a mere form. 7 2 2

Article Two of the Uniform Commercial Code generally governscontracts involving the sale of grain.723 A contract will not fail forindefiniteness under section 2-305(1) of the Uniform Commercial Code

712. NEB. REV. STAT. ANN. § 88-543.01 (LexisNexis Supp. 2005). Of course, counselwill want to contemplate whether the civil penalty and the imposition of a criminalpenalty for the same act violates the defendant's right to be free from successive punish-ment for the same act. U.S. CONST. amend. V, and related state constitutionalequivalents.

713. NEB. REV. STAT. ANN. § 88-545 (LexisNexis 2003).714. Id. § 88-546.715. Id. § 88-547.716. § 88-547(1).717. § 88-547(2).718. § 88-547(3).719. § 88-547(1).720. Id. § 88-549.721. Id.722. In re Claims Against Atlanta Elevator, Inc., 268 Neb. 598, 617, 685 N.W.2d

477, 493 (2004) (citing Omaha Nat'l Bank v. Goddard Realty, Inc., 210 Neb. 604, 316N.W.2d 306 (1982)).

723. Atlanta Elevator, Inc., 268 Neb. at 618, 685 N.W.2d at 493.

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even if the price is unsettled. "In such a case the price is a reasonableprice at the time for delivery if ... nothing is said as to price."7 24

(b) Inapplicability of the discretionary function

In D.K Buskirk & Sons, Inc. v. State,725 nineteen plaintiffsbrought suit against the Nebraska Public Service Commission alleg-ing negligent regulation of Quality Processing, Inc. ("QPI"), a graindealer.72 6 The gravamen of the plaintiffs' allegation was that thePublic Service Commission was negligent in its duty to enforce theNebraska Grain Warehouse Act and the Nebraska Grain DealerAct. 7 27 When QPI filed for bankruptcy in February of 1990, the plain-tiffs, as a group, suffered losses in excess of $400,000.728 QPI had notbeen licensed by the Public Service Commission as a grain warehousepursuant to the Grain Warehouse Act and "was not permitted to ac-cept grain for storage."7 29

The district court sustained the state's motion for summary judg-ment on the basis of the "discretionary function exemption" to the Ne-braska State Tort Claims Act.730 The Nebraska Court of Appealsreversed the order of the district court.7 3 1 The Nebraska SupremeCourt affirmed the decision of the court of appeals "albeit on differentgrounds" from the court of appeals. 73 2

The gist of the state's motion for summary judgment was that in1989 the Grain Warehouse Director for the Public Service Commissionlearned that QPI was engaged in the storage of beans as a graindealer.7 33 Under Nebraska law, as a grain dealer, it could purchasegrain from producers to sell but was not "permitted to accept grain forstorage."734

In an effort to bring QPI into compliance with state law, the Com-mission arranged for the appropriate forms to be sent to QPI. 735 Also,two inspectors were sent to inspect two different storage facilities used

724. Id. (citing Neb. U.C.C. § 2-305(1)(Reissue 2001)).725. 252 Neb. 84, 560 N.W.2d 462 (1997)726. D.K. Buskirk & Sons, Inc. v. State, 252 Neb. 84, 85, 560 N.W.2d 462, 464

(1997).727. D.K. Buskirk & Sons, Inc., 252 Neb. at 85, 560 N.W.2d at 464 (citing NEB. REV.

STAT. § 88-525 et seq. (Reissue 1987 & Cum. Supp. 1990) and NEB. REV. STAT. § 75-901et seq. (Reissue 1990) respectively).

728. Id.729. Id.730. Id. at 87, 560 N.W.2d at 465 (citing NEB. REV. STAT. § 81-8, 219(1)).731. Id. at 88, 560 N.W.2d at 465.732. Id. at 94-95, 560 N.W.2d at 469.733. Id. at 85-86, 560 N.W.2d at 464.734. Id. at 85, 560 N.W.2d at 464.735. Id. at 86, 560 N.W.2d at 464.

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by QPI. 736 QPI then failed to return the application in a timely man-ner.73 7 A public service staff accountant was directed to contact QPI'saccountant to inquire as to the status of the application. 738 QPI laterinformed the Public Service Commission that it had misplaced the ap-plication; another set was sent.7 3 9 Ultimately, QPI's application wassubmitted to the Public Service Commission; however, QPI failed toprovide the necessary financial statements.7 40 QPI never correctedthe omission nor did it purchase all the grain it was holding instorage.

7 4 1

The last straw occurred when the Public Service Commission wasinformed by a deputy sheriff that QPI issued insufficient fundschecks. 74 2 Over two weeks later, the Public Service Commission be-gan proceedings for the suspension of QPI's grain dealer license. 74 3

During this entire period, the Public Service Commission allowed QPIto continue to function as a grain warehouse without a license.7 44

Thereafter, following the suspension of its license, QPI failed.7 45

Thirty-four businesses and individuals filed forty-four claims with thePublic Service Commission seeking a share of QPI's grain dealer'sbond.74 6 Only eight of the claims were allowed, and the bond coveredonly half of the allowed claims.7 47 The majority of the claims weredenied for one of two reasons. 7 48 Either the claim was submitted un-timely or, in the alternative, the claim was based on a contract forgrain storage and not for the sale of grain. 749 The court stated "QPI'sbond could reimburse only those contracts in which QPI acted in itscapacity as a grain dealer."750 The bond did not cover losses caused byQPI's conduct as a "unlicensed grain warehouse." 75 1 Thus, thenineteen individual plaintiffs in D.K Buskirk & Sons, Inc. were thoseindividuals or entities whose claims were denied.7 52

736. Id.737. Id.738. Id.739. Id.740. Id.741. Id.742. Id.743. Id.744. Id.745. Id.746. Id.747. Id., 560 N.W.2d at 464-65.748. Id., 560 N.W.2d at 465.749. Id.750. Id. at 86-87, 560 N.W.2d at 465.751. Id. at 87, 560 N.W.2d at 465.752. Id.

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The state's summary judgment motion was based upon "the dis-cretionary function exception to the State Tort Claims Act."75 3 Thedistrict court granted the summary judgment and stated, in part:

No rules or regulations have been established by the PSC set-ting forth a procedure to be used in issuing a grain warehouselicense to an applicant. No rule or regulation exists whichsays that an application must be filled out and received bythe PSC within 'x' number of days after the PSC becomesaware that a person is operating without the appropriate li-cense. No rule or regulation authorizes [PSC] to allow a per-son to operate as a grain warehouse while the applicationprocess is ongoing. Conversely, no rule or regulation prohib-its [PSC] from trying to work with an operator while attempt-ing to bring it into compliance. 75 4

As the Nebraska Supreme Court stated, "[wihen a statute doesnot prescribe the action to be taken, leaving the agency to make ajudgment and this judgment is based upon social, economic or politicalconsiderations, it will be protected by the discretionary function."75 5

The Nebraska State Tort Claims Act immunizes conduct "based uponan act or omission of an employee of the state . . . based upon theexercise or performance or the failure to exercise or perform a discre-tionary function or duty on the part of a state agency or an employeeof the state, whether or not the discretion is abused." 75 6

Only when the facts are undisputed is the applicability of the dis-cretionary function exemption a question of law. 7 5 7 Consequently, theNebraska Supreme Court found the court of appeals erred in revers-ing the district court's judgment on the grounds that a genuine issueof material fact had been presented, as both sides acknowledged thefacts were undisputed. 7 58

However, the Nebraska Supreme Court continued in its analysisand found the Grain Warehouse Act contained a nondiscretionaryterm when it commanded that the Public Service Commission "'shallenforce the Grain Warehouse Act' . . . and 'no person shall operate awarehouse nor act as a warehouseman without a license issued pursu-ant to the Grain Warehouse Act . . . . 759 The plaintiffs argued thatthe plain language of the statute made its terms mandatory and, as aresult, the Public Service Commission was without discretion in its

753. Id.754. Id.755. Id. at 87-88, 560 N.W.2d at 465 (citations omitted).756. Id. at 89, 560 N.W.2d at 466 (quoting NEB. REV. STAT. § 81-8,219(1)(a)).757. Id. at 90, 560 N.W.2d at 467.758. Id. at 91, 560 N.W.2d at 467.759. Id. at 93, 560 N.W.2d at 468 (quoting NEB. REV. STAT. § 88-545 and NEB. REV.

STAT. § 88-527).

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duty to not allow QPI to act as a grain warehouse in the absence of thelicense.7 60 Thus, "a statute prescribes a clear course of conduct" forthe Public Service Commission. 76 1 Consequently, "the discretionaryfunction exemption is inapplicable."7 62 In short, the statute mandatesthat the Public Service Commission not allow an unlicensed grainwarehouse to operate. 763

(c) How the statute works

On a different occasion, the Nebraska Supreme Court deter-mined, pursuant to Nebraska Revised Statute section 75-905, that noseller of grain can have recourse to a grain dealer's security, unlessthe seller demands payment from the grain dealer within ten days ofthe date of delivery and upon non-payment notifies the Commissionwithin ten days of the apparent loss to be covered under the terms ofthe security.7 64 Furthermore, the statute provides that when grain isdelivered in multiple shipments but comprised of a single contract, theseller must notify the Commission of any apparent loss to be coveredby the security within forty-five days of the date of the first ship-ment.7 6 5 Accordingly, the seller had no recourse to the security whenthe statute was not followed.7 66

The Nebraska Supreme Court also concluded that under the Ne-braska Grain Warehouse Act, the Nebraska Public Service Commis-sion had jurisdiction over public warehouses as limited by thestatutory scheme set out in Nebraska Revised Statute Chapter 88, Ar-ticle 5.767 Nebraska Revised Statute section 88-513(3) provides theCommission the authority to take title to all grain stored and dis-tribute the same on a pro rata basis to all owners. 7 68 The distributioncan be made either in the form of grain or proceeds from the sale ofgrain.7 69 In the alternative, the Commission may bring "a suit.., forthe benefit of owners, depositors, or storers of grain."770 However, in-

760. Id.761. Id. at 94, 560 N.W.2d at 468.762. Id. (citation omitted).763. Id., 560 N.W.2d at 469.764. Fecht v. Quality Processing, Inc., 244 Neb. 522, 523-24, 508 N.W.2d 236, 237

(1993) (citing NEB. REV. STAT. § 75-905(1)(a)-(c) (Reissue 1990)).765. Quality Processing, Inc., 244 Neb. at 524-25, 508 N.W.2d at 237-38 (citing NEB.

REV. STAT. § 75-905(2) (Reissue 1990)).766. Id. at 525, 508 N.W.2d at 238.767. In re Complaint of Fecht, 216 Neb. 535, 539, 344 N.W.2d 636, 639 (1984).768. Complaint of Fecht, 216 Neb. at 540, 344 N.W.2d at 639 (quoting NEB. REV.

STAT. § 88-515(3) (Reissue 1981)).

769. Id.770. Id. (quoting NEB. REV. STAT. § 88-515(3) (Reissue 1981)).

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demnitors on the bond have no standing before the Public ServiceCommission.

7 7 1

(d) Interest

The Nebraska Supreme Court has concluded that the producerdelivering grain to a grain warehouse is entitled to interest from thedate of the last delivery of the grain.77 2

(e) Surety law

While not expressly decided under either the Nebraska GrainWarehouse Act or the Nebraska Grain Dealer Act, the Nebraska Su-preme Court previously found, with respect to a dispute between anelevator company and a railroad, that an indemnity bond executed bya elevator company to protect carriers from losses occasioned by thedelivery of grain was not breached by a proper delivery of a consign-ment nor did the bond protect the carrier from loss resulting from itsown negligence or mistakes.7 7 3

Furthermore, "pro tanto" discharge does not exist under Nebraskalaw.7 74 Nevertheless, the doctrine of subrogation will be recognized inNebraska. 77 5 However, the surety cannot collect attorney fees againstthe indemnitors.776

(f) Administrative procedure and the due process claim

Given the administrative-type hearings that take place to resolvethe claims before a public agency, the elimination of cross-examina-tion does not constitute a deprivation of due process. 7 77

(g) Appellate practice

In Nebraska, the rules of error preservation apply. Failure tochallenge an evidentiary finding from an administrative-type hearingwill result in waiver of the claim on the appeal in the absence of as-

771. Id. at 541, 344 N.W.2d at 640.772. Mintken v. Neb. Sur. Co., 187 Neb. 215, 217, 188 N.W.2d 819, 821 (1971).773. Omaha Elevator Co. v. Chicago, Burlington & Quincy R.R. Co., 104 Neb. 566,

573-74, 178 N.W. 211, 215 (1920).774. Omaha Grain Exch. v. Nat'l Sur. Co., 103 Neb. 820, 824-25, 174 N.W. 426, 427-

28 (1919).775. Omaha Grain Exch., 103 Neb. at 824-25, 174 N.W. at 427-28.776. Havelock Bank of Lincoln v. W. Sur. Co., 217 Neb. 560, 566-67, 352 N.W.2d

855, 859 (1984).777. In re Claims Against Atlanta Elevator, Inc., 268 Neb. 598, 620, 685 N.W.2d

477, 495 (2004).

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signment of error and a specific argument in the brief of the partyalleging the error. 778

Likewise, Nebraska appellate courts will defer to an administra-tive agency's findings of fact. A finding will not be disturbed by anappellate court unless the finding was "arbitrary or unreasonable." 779

(h) Statutory interpretation

With respect to statutory construction in this arena, the doctrineof in pari materia applies. 78 0

H. NORTH DAKOTA

1. Statutes

(a) Grain warehouses

Under North Dakota law, before any license may be issued to apublic warehouseman, the applicant must file a bond that must be in asum of not less than $5,000, be continuous, and run to the State ofNorth Dakota. 78 1 The bond must be conditioned upon the faithful per-formance of the licensee's duties, compliance with the provisions oflaw and rules of the Public Service Commission, and specify the loca-tion of each warehouse covered by the bond.78 2 Failure to keep thegrain insured against specified risks will result in suspension of thelicense.

78 3

The bond must be for the specific purpose of "protecting the hold-ers of outstanding receipts" and cover the costs incurred by the Com-mission in the event of a licensee's insolvency. 78 4 However, the bonddoes not accrue to the benefit "of any person entering into a credit-salecontract with a public warehouseman." 7 85

The liability of the surety on the bond may accumulate "for eachsuccessive annual license renewal period during which such bond is inforce but, for losses during any annual license renewal period, shall belimited in the aggregate to the bond amount stated or changed by ap-propriate endorsement or rider."78 6 The Commission is empowered torequire regular reports from the warehouse. 78 7 In lieu of a surety

778. Atlanta Elevator, Inc., 268 Neb. at 603-04, 685 N.W.2d at 484 (citing Misle v.HJA, Inc., 267 Neb. 375, 382, 674 N.W.2d 257, 263 (2004)).

779. Id. at 610, 685 N.W.2d at 488.780. Id. at 606, 685 N.W.2d at 486 (citations omitted).781. N.D. CENT. CODE § 60-02-09(1)-(3) (2003).782. § 60-02-09(4)-(5). See also id. § 60-02-01(1).783. Id. §§ 60-02-35 to -35.1.784. § 60-02-09(6)(a)-(b).785. § 60-02-09(7).786. § 60-02-09(8).787. Id. § 60-02-24.

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bond, the Commission may accept cash, negotiable instruments, or abond executed by personal sureties if the Commission believes it willprotect the holders of outstanding receipts. 7 8

The statute provides the means by which a surety bond may becanceled. The surety is released from future liability ninety days afternotice is given to the Commission.7 89 Failure to have security andinsurance in place will result in suspension and may result in revoca-tion of the license.7 90 Statutory requirements exist for the closure 79 1

or transfer of a warehouse. 79 2

The statute does not require that the surety information beposted. Instead, only the license must be posted.7 93

North Dakota statutorily defines the content of scale tickets. 79 4

In the event stored grain is purchased by the warehouse, a specificreceipt is required, the format for which is set out in the statute. 79 5

Warehouse receipt and documentation requirements are denominatedper the Code. 79 6 The storage contract must be on the receipt aswell.7 97 Failure to issue a receipt or the issuance of an incorrect re-ceipt is a misdemeanor. 79 8 A warehouse may include a covenantagainst liens in the warehouse receipt. 7 99 In any event, a warehouse isliable to the owner of the grain to deliver the exact "kind, grade, qual-ity, and quantity of grain called for by the warehouse receipt."8 0 0 Thereceiptholder has a "first priority lien" on both the grain contained inthe warehouse and grain owned by the warehouse.8 0 1 The lien is pre-ferred over the liens and security interests of other creditors regard-less of the time in which the creditor's lien attached.8 0 2

The state also tightly regulates credit-sales contracts. The con-tracts may only be entered into as allowed and as defined by thestatute.

8 0 3

788. § 60-02-09(8).789. Id. § 60-02-09.1.790. Id. § 60-02-10.1.791. Id. §§ 60-02-39, 60-02-41.792. Id. § 60-02-40.793. Id. § 60-02-10.794. Id. § 60-02-11.795. Id. § 60-02-13.796. Id. §§ 60-02-14, 60-02-16 (2003 & Supp. 2005). See also id. § 60-02-23.797. Id. § 60-02-17.798. Id. § 60-02-21.799. Id. § 60-02-18.800. Id. § 60-02-22.801. Id. § 60-02-25.1. See also id. § 60-02-36.802. § 60-02-25.1.803. Id. § 60-02-19.1.

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North Dakota, like some other jurisdictions, provides that deliv-ery of grain to a warehouse constitutes a bailment.8 0 4 As such, thegrain is exempt from execution, except in an action by the owner of thesubject grain.8 0 5 The statute also defines how storage contracts ter-minate8 0 6 and the required notice to be provided to the owner.8 0 7 If

the storage contract is renewed, a new receipt must issue.8 0 8

Insolvent warehouses are subject to coverage in a different Chap-ter.8 0 9 The provisions are very similar to those concerning North Da-kota grain buyers, which are discussed infra.8 1L Insolvency is broadlydefined. "A licensee is insolvent when the licensee refuses, neglects,or is unable upon proper demand to make payment for grain pur-chased or marketed by the licensee or to make redelivery or paymentfor grain stored."8 1 '

Upon the insolvency of a warehouse, the Commission is appointedtrustee of the warehouse.8 12 In this proceeding, the surety must bejoined.8 13 The trust includes various assets, claims, and property ofan insolvent grain warehouse.8 14 The trust consists of the followingassets:

1. The grain in the warehouse of the insolvent warehouse-man or the proceeds as obtained through the sale of suchgrain.2. The proceeds, including accounts receivable, from anygrain sold from the time of the filing of the claim that precipi-tated an insolvency until the commission is appointed trusteemust be remitted to the commission and included in the trustfund.3. The proceeds of insurance policies upon grain destroyedin the elevator.4. The claims for relief, and proceeds therefrom, for dam-ages upon any bond given by the warehouseman to ensurefaithful performance of the duties of a warehouseman.5. The claim for relief, and proceeds therefrom, for the con-version of any grain stored in the warehouse.6. Unencumbered accounts receivable for grain sold prior tothe filing of the claim that precipitated an insolvency.

804. Id. § 60-02-25.805. Id.806. Id. § 60-02-30.807. Id. § 60-02-31.808. Id. § 60-02-32.809. N. D. CENT. CODE § 60-04-01 to -10 (2003).810. See infra § III(H)(1)(B) and accompanying text.811. N. D. CENT. CODE § 60-04-02.812. Id. § 60-04-03.813. Id. § 60-04-03.3.814. Id. § 60-04-03.1.

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7. Unencumbered equity in grain hedging accounts.8. Unencumbered grain product assets.8 15

The statute specifically provides that grain on hand is to be sold,and the proceeds are to be included in the trust fund.8 1 6 The Commis-sion has the authority to marshal the trust assets8 1 7 and prosecute orcompromise claims.8 18

The statute restricts the remedies of receiptholders by barringseparate claims for relief upon the warehouse's bond unless certainexceptions are met.8 19 The receiptholder must, after notice, timelyfile a claim or the claim may be barred.8 20

(b) Grain buyers

Grain buyers are also regulated by the Commission8 2 1 and arerequired to be licensed.8 22 Similar to a warehouse, the grain buyer, aspart of the licensing process, must provide a bond8 2 3 and financialstatements.8 2 4 Like the warehouse bond, the grain buyer's bond must"run to the State of North Dakota for the benefit of all persons sellinggrain to or through the grain buyer."8 25 The grain buyer's bond is con-ditioned upon the licensee faithfully performing his duties in compli-ance with the law and regulations concerning grain buyers.8 26

The grain buyer provisions are very similar to the warehouse pro-visions. For instance, the grain buyer statute addresses cancellationof the bond,8 27 posting of the license,8 28 revocation and suspension ofthe license,8 2 9 credit-sale contracts,8 30 and scale ticket contents. 8 3 1

Grain buyers are also subject to record keeping requirements 8 3 2 andare required to make routine reports to the Commission.8 3 3 The grainbuyer is to be insured,8 34 and failure to do so will result in suspension

815. Id.816. Id. § 60-04-03.2.817. Id. § 60-04-06.818. Id. § 60-04-07.819. Id. § 60-04-05.820. Id. § 60-04-04.821. Id. § 60-02.1-1 to -40 (2003 & Supp. 2005).822. Id. § 60-02.1-07.823. Id. § 60-02.1-08.824. § 60-02.1-07.825. § 60-02.1-08(3). Cf Id. § 60-02-09(3) (warehouse bonding obligations).826. § 60-02.1-08(4).827. § 60-02.1-09.828. Id. § 60-02.1-10.829. Id. § 60-02.1-11.830. Id. § 60-02.1-14.831. Id. § 60-02.1-12.832. Id. § 60-02.1-16.833. Id. § 60-02.1-17(1)-(2).834. Id. § 60-02.1-21.

2006]


of the buyer's license.8 35 Liens are statutorily provided to the holdersof scale tickets.8 3 6 The statute also creates a framework in which fa-cilities are closed8 37 or transferred.8 38

Once a licensee becomes insolvent,8 39 upon application or an or-der of the district court,8 40 a trust fund is established by the Commis-sion for the benefit of all claimants and to pay any costs theCommission might incur in administrating the insolvencyproceedings.

8 4 1

The trust fund shall consist of "[nionwarehouse receipt grain...held in storage or the proceeds obtained from the conversion of suchgrain."8 4 2 Also, the fund shall include "[tihe proceeds, including ac-counts receivable, from any grain sold from the time of the filing of theclaim that precipitated an insolvency . . . -s43 The proceeds of anyinsurance policies on destroyed grain are included in the trust.8 44 Theclaims for relief of damages on any bond are also included in thetrust.8 45 This includes a "claim for relief, and proceeds therefrom, forthe conversion of any grain stored in the warehouse."8 46 Moreover,the trust funds shall include, "[ulnencumbered accounts receivable forgrain sold prior to the filing of the claim that precipitated an insol-vency."8 4 7 The fund shall also include unencumbered equity in grainhedge accounts as well as the unencumbered grain product assets.8 48

Claimants do not have a claim for separate relief on the bond orany person converting grain.8 4 9 The surety must be joined as a partyin a proceeding regarding an insolvent grain buyer.8 50 Receipt hold-ers are to be notified by publication and failure to file a claim withinthe time allotted will result in the claim being barred.8 5 1 Albeit,"receiptholders are not parties to the insolvency action unless admit-ted by the court upon a motion for intervention."8 52

835. Id. § 60-02.1-22.836. Id. § 60-02.1-23.837. Id. §§ 60-02.1-25, 60-02.1-27.838. Id. § 60-02.1-26.839. Id. § 60-02.1-28.840. Id. § 60-02.1-29.841. Id. § 60-02.1-30.842. § 60-02.1-30(1).843. § 60-02.1-30(2).844. § 60-02.1-30(3).845. § 60-02.1-30(4).846. § 60-02.1-30(5).847. § 60-02.1-30(6).848. § 60-02.1-30(7)-(8).849. Id. § 60-02.1-33.850. Id. § 60-02.1-31.851. Id. § 60-02.1-32.852. Id.

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The Commission has the authority to prosecute and compromiseclaims.8 5 3 Although, "[u]pon payment of the amount of any settle-ment or of the full amount of any bond, [the Commission may] exoner-ate the person so paying from further liability growing out of theaction."8 54

2. Case law

(a) The common law and the statute

Under the common law of the State of North Dakota, as betweenthe holder of the storage ticket and the warehouseman, there exists abailment.8 5 5 The statutes still require as much:

The holders of warehouse receipts are owners in common ofthe grain in the warehouse up to the quantity required to re-deem the receipts. There is nothing in our statutes which canreasonably be construed as a recognition of an actual author-ity in the warehouseman to sell stored grain required for theredemption of outstanding receipts.8 56

Nonetheless, it is "plain that the ticket holder has no claim or right tothe identical grain stored by him."8 5 7

The authority of the Commission is also quite clear in the caselaw. "The commission is the holder of the receipt for the purpose ofenforcing the storage contract and has all the rights and privileges ofthe party to whom the receipt was issued."8 5 8

(b) The claimant

A recent North Dakota case discusses the definition of "claimant"for purposes of the North Dakota Century Code.8 59 As observed bythe North Dakota Supreme Court, the term "claimant" is not definedin section 60-02.1 of the North Dakota Century Code.8 60 Employingthe plain, ordinary, and commonly understood meaning, the court con-cluded that "[a] 'claimant' is one who claims or asserts a right or de-mand."8 6 1 Thus, "[u]nder the plain meaning of the term, a claimant isa person who asserts a right to payment for grain sold to a licen-

853. Id. § 60-02.1-35(3).854. § 60-02.1-35(4).855. State ex rel. Ertelt v. Daniels, 159 N.W.17, 18 (N.D. 1916).856. Kastner v. Andrews, 194 N.W. 824, 829 (N.D. 1923).857. Stutsman v. Cook, 204 N.W. 976, 981 (N.D. 1925).858. State ex rel. Larkin v. Wheat Growers Warehouse Co., 249 N.W. 718, 723 (N.D.

1933).859. Pub. Serv. Comm'n v. Wimbledon Grain Co., 663 N.W.2d 186, 193-94 (N.D.

2003).860. Wimbledon Grain Co., 663 N.W.2d at 194.861. Id. (quoting Weisgerber v. Workmen's Comp. Bureau, 292 N.W. 627, 630

(1940)).

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see . *.".."862 It follows, therefore, that a person entering into creditsale contracts may be eligible to participate in the Commission'strusts funds other than bond proceeds.8 63

(c) The surety and the principal

Under North Dakota law, a judgment for conversion against theprincipal is admissible evidence against the surety.8 64

(d) The surety and the roving grain buyer

Pooling agreements whereby members of a production cooperativeare paid the net proceeds from all sales on a quarterly basis woulddefeat a claim on a "roving grain or hay buyers" bond.8 6 5

(e) The surety and the banker

The North Dakota Supreme Court has also concluded that "ware-house receipts" given by a production association to a bank to securethe bank's line of credit with the association are not warehouse re-ceipts within the meaning of the statute and, consequently, the bankis not entitled to share in the trust fund assets marshaled upon theinsolvency of the warehouse.8 6 6

(f) Conversion

North Dakota has found that conversion may occur when thewarehouse ships out grain and sells it without substituting othergrain, though the default may be cured before demand.8 67 As ac-knowledged by the North Dakota Supreme Court, its holding is differ-ent from that reached on the same point by the South DakotaSupreme Court. 68

(g) Invalid defenses

The North Dakota Supreme Court has previously determined thatwhen the warehouseman fails to produce grain because of a fire that

862. Id.863. Id. at 194, 196.864. State ex rel. Coan v. Plaza Equity Elevator Co., 261 N.W. 46, 50 (N.D. 1935).865. Pub. Serv. Comm'n v. Am. Grain & Cattle, Inc., 281 N.W.2d 48, 49, 51 (N.D.

1979).866. N.D. Pub. Serv. Comm'n v. Valley Farmers Bean Ass'n, 365 N.W.2d 528, 538

(N.D. 1985).867. State ex rel. Harding v. Hoover Grain Co., 248 N.W. 275, 279 (N.D. 1933) (cita-

tions omitted).868. Cf. id. (distinguishing S.D. Wheat Growers' Ass'n v. Farmers' Grain Co., 237

N.W. 723 (S.D. 1931) (wherein South Dakota Supreme Court holds that conversion doesnot take place until failure or refusal to deliver on demand)).

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destroys the stored grain, the warehouseman is liable notwithstand-ing the failure of the parties to reach an agreement with respect to thedegree of care required of the warehouse.8 6 9 Moreover, the failure toconvert scale tickets into storage tickets will not defeat the ware-house's (and ultimately the surety's) liability because the failure to doso is placed upon the warehouse.8 70

Under North Dakota law, it is not a valid defense to a bond claimthat notice of the acceptance of a bond is required in order to make abinding surety contract.8 7 1 Thus, the law of guarantees is inapplica-ble to a delivered surety bond.

(h) Damages

When determining the loss arising from a conversion, the courtwill use the value of the grain on the date of the demand; that is, thedate on which the conversion occurred.8 7 2

(i) Contribution and subrogation

There is no right of contribution among successive sureties, butthe paying surety is subrogated to the rights of its principal.8 7 3

(j) Interest

Interest begins to run on a claim from the date the warehousemanfails to redeem a receipt upon proper demand (that is, the date onwhich the insolvency occurred), rather than the date upon which thedistrict court signs the order that the warehouse is insolvent.8 74

(k) The surety and the bankruptcy wrinkle

The North Dakota Supreme Court has concluded the surety is notliable for damages to the grain when the grain is in the care and cus-tody of the trustee for the bankruptcy estate following the principal'sbankruptcy.

8 75

At a subsequent time, however, the North Dakota Supreme Courtrejected the argument that a surety's liability on a bond is determined

869. Larkin v. Doerr, 255 N.W. 567, 568 (N.D. 1934).870. Larkin, 255 N.W. at 568-69.871. State ex rel. Harding v. Lane, 236 N.W. 353, 355 (N.D. 1931). Cf. § III(E)(2)(e)

supra (discussing case law regarding obligation of delivery of a surety bond).872. Huether v. McCaull-Dinsmore Co., 204 N.W. 614, 620 (N.D. 1925), overruled in

part by Sollin v. Wangler, 627 N.W.2d 159 (N.D. 2001).873. Stutsman, 204 N.W. at 983.874. Valley Farmers Bean Ass'n, 365 N.W.2d at 548 (citing N.D. CENT. CODE §§ 60-

04-09, 60-04-02).875. N.D. Pub. Serv. Comm'n v. Jamestown Farmers Elevator, Inc., 422 N.W.2d

405, 407-08 (N.D. 1988).

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by state law irrespective of the bankruptcy court's determination ofthe grain ownership claim.87 6 Ordinarily, the North Dakota courts"give effect" to bankruptcy court decisions as a matter of comity toavoid the prospect of "state and federal courts . . . reaching differentresults, ultimately resulting in unseemly and unnecessary conflict aseach properly sought to enforce its determinations."8 7 7 In any event,to the extent the surety in North Dakota Public Service Commission v.Central States Grain believed it was entitled to a credit, the surety'sremedy was in the federal bankruptcy proceeding and not in statecourt. In the North Dakota Supreme Court's view the surety was notwithout a remedy; once the surety had paid the receiptholders' claimsit could seek relief from the bankruptcy proceedings and acquire theright of subrogation pursuant to 11 U.S.C. § 509(a).87 8

However, on another occasion, the North Dakota Supreme Courtrejected the argument that the Commission should be required to seekrelief from the bankruptcy court to acquire the proceeds of sunflowerinventories.

8 79

(1) Laches as an equitable defense

The claim on a storage ticket can be barred by the doctrine oflaches.880

I. SOUTH DAKOTA

1. Statutes

(a) Warehouses

South Dakota has defined by statute that delivery of grain to awarehouse is a bailment and not a sale.

If any grain is delivered to any person doing a public grainwarehouse business in this state, and a receipt is issuedtherefor providing for delivery of a like kind, amount andgrade to the holder of the receipt in return, such delivery is abailment and not a sale of the grain so delivered. 8 8 '

Grain held pursuant to a storage receipt is not "liable to seizure uponprocess of any court in any action against the bailee, except an action

876. N.D. Pub. Serv. Comm'n v. Woods Farmers Coop. Elevator, Co., 488 N.W.2d860 (N.D. 1992).

877. Woods Farmers Coop. Elevator, Co., 488 N.W.2d at 863 (citations omitted).878. Id. at 865-66.879. N.D. Pub. Serv. Comm'n v. Cent. States Grain, 371 N.W.2d 767, 774-75 (N.D.

1985).880. State ex rel. Reilly v. Farmers' Coop. Elevator Co., 167 N.W. 223, 225 (N.D.

1918).881. S.D. CODIFIED LAws § 49-43-2 (2004).

[Vol. 40


by the owner or holder of such warehouse receipt to enforce the termsof the same."8 8 2

Upon initial delivery, the warehouse must indicate in a writingwhether the grain should be sold or stored.8 8 3 The statute defines thecontents of the receipt.8 8 4 A warehouse storing its own grain mustcomply with the statute as well.8 8 5

Warehouses are subject to licensing and an application pro-cess.88 6 Pooling agreements between competing companies are pro-hibited.88 7 The Public Utilities Commission also has the authority toinvestigate and set storage rates.8 8 8 Once licensed, warehouses mustmake monthly reports to the Commission.8 8 9

A bond is required for the purpose of protecting those personsstoring the grain with the warehouse.8 9 0 The bond must have a mini-mum value of $25,000 per location and particularly describe the exactlocations of any warehouses to be covered. 8 91 The fact that the bond isissued on a per location basis does not diminish the security availableto depositors. "Such minimum bond amounts . . ." do not "limit thebond coverage available to depositors at any one warehouse location.The entire bond, up to the amount on its face, shall provide coverageto a depositor conducting business at any of the warehouse's loca-tions."8 9 2 Should the surety fail or cease to do business in South Da-kota, by rule, other financial documents may be received instead of acorporate surety bond.8 93

In South Dakota, an injured depositor has the right to sue in thedepositor's own name for damages sustained by the depositor.8 94 Theaction may be brought directly against the surety.8 9 5

In the event that the Public Utilities Commission takes over thefacility, notice is to be given to the surety.8 9 6 Also, an immediate au-dit is to take place.8 9 7

882. Id. § 49-43-3.883. Id. § 49-43-1.884. Id. § 49-43-2.1.885. Id. § 49-43-4.886. Id. § 49-43-5.1.887. Id. § 49-43-33.888. Id. § 49-43-7.889. Id. § 49-43-9.890. Id. § 49-43-5.3.891. Id.892. Id.893. Id. § 49-43-5.5.894. Id. § 49-43-5.7.895. Id.896. Id. § 49-43-5.8(2); see also id. § 49-43-1.1(1).897. § 49-43-5.8(1).

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Once a warehouse license is revoked, terminated, or canceled, anyclaim against the warehouse must be made in writing with the Com-mission, surety and warehousemen within six months of receiving no-tice of any termination, cancellation, or revocation.8 9 8 Failure tomake a claim will relieve the surety of all obligations to the claimants,but such failure to make a claim will not reduce the aggregate liabilityon the bond.8 9 9 The statute defines the specific notice that the Com-mission must provide to the holders of grain storage receipts and scaletickets.90 0 However, the provisions do not apply if a receiver is ap-pointed before the expiration of six months after receiving the cancel-lation, revocation, or termination notice.90 1 The statute alsocommands that, "grain on hand in the public grain warehouse shallfirst be applied to the redemption and satisfaction of outstanding re-ceipts . . ." upon failure or insolvency of the bailee. 90 2

South Dakota's legislation only allows for a one-year storage con-tract.90 3 After the expiration of one year, the product is sold andfunds are provided to the owner (minus storage charges and advances)"upon surrender of the storage receipt."90 4

South Dakota statutorily prohibits a grain warehouse that has is-sued receipts for the storage of grain from denying that the grain rep-resented by the receipt is the property of the person to whom thereceipt was issued.90 5 Under the state's law, the receipt is "conclusiveevidence of the fact that the person to whom the receipt was issued,"or assigned, "is the owner of such grain and is the person entitled tomake surrender of such receipt and receive the grain thereby prom-ised to be delivered."90 6 No modification of the warehouse's liabilitymay be placed on the receipt.90 7

Once the receipt is received by the warehouse, the receipt must bemarked canceled 90 8 and "such grain or an equal quantity of the samegrade, kind and quality shall immediately be delivered .... -909 Will-ful refusal to deliver constitutes theft.9 10 Delivery contrary to the

898. Id. § 49-43-5.9.899. Id.900. Id.901. Id.902. Id. § 49-43-3.903. Id. § 49-43-13.904. Id.905. Id. § 49-43-21.906. Id.907. Id. § 49-43-17.908. Id. § 49-43-18.909. Id. § 49-43-22.910. Id. § 49-43-25.

[Vol. 40


owner's instruction is a misdemeanor. 9 11 Partial deliveries require anew receipt. 9 12

(b) Grain dealers

South Dakota separately regulates grain dealers. A person issubject to both a civil penalty and a misdemeanor for dealing in grainwithout a license.9 13 The Commission has the authority to issue andsuspend licenses9 14 as well as conduct inspections of facilities. 9 15 Li-censes expire annually. 9 16

Reports must be provided to the Commission by the dealer.9 17

Failure to do so constitutes a misdemeanor.9 18 The licensee is alsorequired to post the statutes and rules regarding their conduct. 9 19

Failure to post is also a misdemeanor. 920

Upon receipt of the application and the bond, a license may beissued.9 2 1 The bond must be in a minimum amount of $50,000, whichmay be increased upon order of the Commission.9 22 The bond is condi-tioned upon the "faithful performance of the applicant's obligations asa grain dealer and full and unreserved compliance with the laws" ofSouth Dakota and the Commission's regulations. 9 23 The bond is onlyfor the protection of those selling grain to the grain dealer; credit salesare not covered. 92 4 It is a misdemeanor not to have a bond in place,and each day of operation without the bond constitutes a separateoffense.925

In the event of a credit sale, the payment must be made in accor-dance with the statute and the Commission's regulations. 92 6 Theagreement must also be in writing.9 27

Payment for grain must be upon demand of either the owner oragent. 928 Failure to redeem the receipt or the loss of bond coverage

911. Id. § 49-43-32.912. Id. § 49-43-19. See also id. § 49-43-20 (regarding consolidation).913. Id. § 49-45-1. See supra note 774 and accompanying text (regarding potential

constitutional violation arising from successive punishments).914. § 49-45-1.915. Id. § 49-45-13.916. Id. § 49-45-3.917. Id. § 49-45-14.918. Id.919. Id. § 49-45-20.920. Id.921. Id. § 49-45-7.922. Id. § 49-45-9.923. Id.924. Id.925. Id.926. Id. § 49-45-10.927. Id. § 49-45-11.928. § 49-45-10.

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will result in the Commission requesting a county circuit court to ap-point a receiver that will have the powers and duties provided to it bythe circuit court.9 29 In addition, the Commission must take posses-sion of the facility, conduct an audit, and notify the surety.9 30 Simul-taneously with steps taken by the Commission, the injured party maybring an action against the surety directly to recover damages. 9 31

The state's provision for claims against dealers is almost identicalto the provision regarding warehouses. Once the dealer's license isrevoked, terminated, or canceled, any claim against the dealer mustbe made in writing with the Commission and others; such claim shallbe made within six months after receiving notice of the termination,cancellation, or revocation.9 3 2 Failure to make a claim relieves thesurety of any obligation to the claimant.93 3 Yet, failure of a claimantto make a claim will not reduce the aggregate liability on the bond.9 34

The statute defines the specific notice that the Commission must pro-vide to the holders of scale tickets.9 35 However, if a receiver is ap-pointed before the expiration of six months after receiving thecancellation, revocation, or termination notice, the provisions do notapply.

936

It is noteworthy that the grain dealer statute does not commandthe Commission to use grain on hand to satisfy any outstandingclaims. 93 7 Presumably, this is the case because the grain dealerwould not have grain on hand.

Finally, South Dakota's statute has a unique provision amongthose midwestern states that are the subject of this Article. The stat-ute specifically allows the Commission to contract with the followingSouth Dakota commissions to determine compliance with assessmentand check off requirements: Wheat Commission, Oilseeds Council,Soybean Research and Promotion Council, Corn Utilization Council,and the South Dakota Pulse Crop Council. 935

929. Id. § 49-45-16.930. Id. § 49-45-18(1)-(2).931. Id. § 49-45-17.932. Id. § 49-45-19.933. Id.934. Id.935. Id.936. Id.937. See id. Cf. id. § 49-43-3 (grain on hand shall be applied to satisfy outstanding

receipts).938. S.D. CODIFIED LAWS § 49-45-21 (2006).

[Vol. 40


2. Case law

(a) Surety coverage

While the case of Farmers' Elevator Co. v. Swanson9 39 predatesthe existing South Dakota statutory scheme, the case is nonethelessinstructive. In Farmers' Elevator Co. v. Swanson, F.M. Swanson("Swanson") was employed as a manager and grain buyer. 9 40 Swan-son provided a bond that he would well and faithfully discharge hisduties as a grain buyer with his employer as obligee under thebond.

9 4 1

During his tenure as a grain buyer, Swanson engaged in optionstrading, which resulted in a net loss to the elevator.9 42 Thereafter, hisemployer filed suit on the bond. 94 3 A specific resolution of the elevatorcompany's board of directors that prohibited dealing in options waspresented at trial.944 The situation was compounded when Swanson,in order to make good his loss, settled losses by means of misappropri-ation of moneys and grain held by the employer.9 4 5

In affirming the decision of the trial court, the South Dakota Su-preme Court concluded under the circumstances present in the recordthat Swanson had violated the terms of the bond. 94 6 The evidencesupported the fact that he could not account for the employer's grainand moneys. 9 47 Thus, liability fell upon Swanson and the sureties.9 48

Under South Dakota law, merely being a stockholder and a holderof a storage ticket will not preclude a party from recovering on thebond. 9 4 9 When a party deposits grain prior to issuance of the bondand is aware that the warehouseman has not yet obtained a permit tostore grain, there can be no liability under the bond. 950

While the result may vary from state to state, the South DakotaSupreme Court has determined that a separate bond is not requiredfor each building where grain might be stored by a particular ware-houseman. 9 51 However, the statute now clarifies the requirement. 95 2

939. 146 N.W. 586 (S.D. 1914).940. Farmers' Elevator Co. v. Swanson, 146 N.W. 586, 586 (S.D. 1914).941. Swanson, 146 N.W. at 586.942. Id.943. Id.944. Id.945. Id. The employer's net loss totaled $980. Id.946. Id. at 586-87.947. Id.948. Id. at 586.949. State ex rel. Sommers v. Interstate Sur. Co., 201 N.W. 717, 719-20 (S.D. 1924).950. State ex rel. Vojta v. Deibert, 240 N.W. 332, 334 (S.D. 1932).951. Sommers, 201 N.W. at 720-21.952. S.D. CODIFIED LAWS § 49-43-5.3 (2004).

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(b) Interest

Counsel should also be cautioned that a client may waive its rightto interest by acceptance of the payment of the principal. 9 53

J. WISCONSIN

1. Statutes

Wisconsin regulates a number of agriculturally related storage fa-cilities under the broad notion of "agricultural producer security."954

Wisconsin state law requires the Department of Agriculture, Tradeand Consumer Protection to procure "contingent financial backing tosecure payment" from milk contractors, grain dealers, grain ware-house keepers, and vegetable contractors. 95 5 The balance of this dis-cussion will focus on grain dealers and grain warehouse keepers. 95 6

At the same time, some provisions are common to the statute.The statute requires that the Department procure surety bonds or"contract to provide a cash loan" to a subject fund.9 5 7 To accomplishthis end, the legislature appropriated a start-up loan of $2,000,000 tothe Agricultural Producer Security Fund, which is to be repaid in in-stallments back to the Agrichemical Management Fund.9 58 The Agri-cultural Producer Security Fund is a public trust that securespayments to producers. 95 9

(a) Grain dealers

Grain dealers are not to procure grain from producers unless thedealer is licensed, subject to two exceptions. 960 An entity need not belicensed if it pays cash on delivery for producer grain or the dealeracquires less than $400,000 annually for grain that is used by thedealer for feed or seed.9 6 1 Licenses expire on an annual basis and arenot transferable or assignable.9 62

953. S.D. Pub. Utils. Comm'n v. Barzen Int'l Inc., 479 N.W.2d 910, 912 (S.D. 1992).954. Wis. STAT. ANN. §§ 126.01-.90 (West Supp. 2006).955. Wis. STAT. ANN. §§ 126.06, 126.01(8) (West Supp. 2006). See also § 126.01(5)

(defining contractors).956. See Wis. STAT. ANN. §§ 126.10-.21 (West Supp. 2006) (addressing grain deal-

ers); Wis. STAT. ANN. §§ 126.25-.34 (West Supp. 2006) (addressing grain warehousekeepers).

957. § 126.06(1)(a)-(b).958. Id. § 126.08.959. Id. § 126.05(1).960. Id. § 126.11(1).961. § 126.11(2)(a)-(b).962. § 126.11(2m).

[Vol. 40


The license application is defined by statute. 9 63 The process in-cludes a review of financial information. 96 4 Wisconsin now charges alicense fee. 9 6 5 Once established as a dealer, the dealer must pay an-nual fund assessments. 96 6 It is the annual fund assessments that nowdrive the system.

Simultaneously, if certain conditions apply, the dealer must alsopost security in the form of cash or a surety bond.9 6 7 If a commercialsurety is used, the bond must be made payable to the Department "forthe benefit of grain producers and producer agents."968 The bond maybe canceled only upon permission of the Department or upon ninetydays notice to the Department. 96 9 The Department must physicallyhold the security.970 If security is required under the Code, additionalreports are required by the Department. 97 1 The security may be re-leased as provided for in the Code. 9 72

At the same time, the dealer is required to carry insurance asspecified in the statute.97 3 Grain dealers are required to display thelicense 97 4 and keep certain records. 97 5 The receipt used by the dealeris statutorily defined.9 76 Deferred payment contracts must also be inwriting,9 77 contain a special notice, 97 8 and are subject to a specialassessment.

9 79

The statute also specifies required and prohibited business prac-tices of the grain dealer.98 0 These include a duty of accuracy, timelypayment to producers, and maintenance of a permanent business loca-tion that is open during hours the Chicago Board of Trade is open fortrading.98 1 Meanwhile, a grain dealer may not, inter alia, misrepre-sent the amount of grain delivered or received, falsify records, makefalse statements to the Department or producers, or fail to file security

963. § 126.11(3).964. § 126.11(3)(g). See also id. § 126.13.965. § 126.11(4).966. Id. § 126.15. Wisconsin's system formerly utilized surety bonds exclusively

before the adoption of the new system in 2001. See id. § 126.06.967. Id. § 126.16(4)(a)-(b).968. § 126.16(4)(b)(1).969. § 126.16(4)(b)(3).970. § 126.16(5).971. § 126.16(6).972. § 126.16(8).973. Id. § 126.12(1).974. Id. § 126.11(11).975. Id. § 126.17.976. Id. § 126.18.977. Id. § 126.19(1)-(2).978. § 126.19(4).979. § 126.19(5).980. Id. § 126.20.981. § 126.20(1)-(3).

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(if required). 98 2 On the other hand, the dealer can require that theproducer or the producer's agent disclose the existence of any liens orsecurity interest in the grain. 98 3 Likewise, if the producer contractedto sell at a certain price, the producer cannot refuse to deliver. 98 4

(b) Grain warehouses

Grain warehouse keepers must also be licensed if their capacityexceeds 50,000 bushels of grain stored for others, unless the entityproves it is not holding more than 50,000 bushels.98 5 The grain ware-house is, likewise, subject to an application process along with thesubject fees and surcharges. 98 6 Financial statements must be submit-ted.9 s 7 Insurance also must be maintained.98 8 So too must the ware-house pay assessments into the fund98 9 and post security, if requiredby the statute.9 90 The security requirements are identical to the graindealer provisions. 99 1 The grain warehouse is statutorily required tokeep certain records. 99 2

The warehouse is duty-bound to use the receipt prescribed bystatute.9 9 3 In addition to other duties enumerated in the statute,99 4

the warehouse has a duty to protect the grain from "loss or abnormaldeterioration."9 95 To that end, the warehouse must keep adequateequipment and facilities. 9 96

(c) Recovery proceedings

In Wisconsin, claims against both the dealer and the warehouseare dealt with by means of a recovery proceeding.9 9 7 The claim is trig-gered when a producer or depositor is not paid.9 98 The claim must befiled with the Department within thirty days of the claimant's knowl-

982. § 126.20(4).983. Id. § 126.21(2).984. § 126.21(1).985. Id. § 126.26(1).986. § 126.26(3).987. Id. § 126.28.988. Id. § 126.27.989. Id. § 126.30.990. Id. § 126.31.991. See supra § III(J)(1)(a) and accompanying text.992. WiS. STAT. ANN. § 126.32 (West Supp. 2006).993. Id. § 126.33.994. Id. § 126.34.995. § 126.34(2).996. Id.997. Id. § 126.70.998. § 126.70(1)(a)-(b).

[Vol. 40


edge of the default. 99 9 If the Department believes that others are un-paid, it may provide broader notice to other potential claimants. 0 0 0

Once a claim has been filed, the Department is to review theclaim and, if necessary, disallow it. 0 0 ' Under either circumstance,the Department will issue a proposed decision. 0 0 2 If no objections arefiled, the decision becomes the final decision of the Department; other-wise, upon objection, a public hearing is performed.1 0 0 3

Claims are paid first from the security, if applicable.' 0 0 4 If thecontractor is not a contributor to the fund, then the claims are paidfrom the security on a prorated basis. 0 0 5 If the contractor is both acontributor and has security, the security is used to reimburse thefund when the security exceeds the claims.10 0 6 If the security is insuf-ficient to pay all claims on a contributing contractor, the Departmentis to pay the claimants on a prorated basis. 0 0 7 The claimant is stillentitled, under any scenario, to pursue the contractor.'0 0 8

The statute preserves the surety's right to subrogation against itsprincipal. 10 0 9 However, the surety is obligated to give notice of its de-mand upon the principal to the Department. 1 10

2. Case law

At the time this Article was submitted for publication, Wisconsinhad no published cases discussing Chapter 126 in its present state orformer Chapter 127 (which regulated warehouses prior to the rewriteof Chapter 126). 1 01 1 Nonetheless, the Wisconsin Supreme Court haspreviously determined that a grain buyer can be considered amerchant for purposes of the Uniform Commercial Code (as adoptedin Wisconsin). 0 12

IV. CONCLUSION

The foregoing Article has discussed the obligations imposed uponwarehouses, grain dealers, and various other agricultural enterprises

999. § 126.70(2).1000. § 126.70(3)(b).1001. § 126.70(4).1002. § 126.70(6).1003. § 126.70(7)-(8).1004. Id. § 126.71.1005. § 126.71(2)(a).1006. § 126.71(2)(b).1007. § 126.71(2)(c).1008. § 126.71(4).1009. Id. § 126.73(2).1010. Id.1011. Wis. STAT. ANN. §§ 127.01-.18 (West 2001) (repealed 2002).1012. Cargill, Inc. v. Gaard, 267 N.W.2d 22, 24 (Wis. 1978).

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under both federal and state law. Counsel can benefit from an analy-sis of the various obligations imposed upon all of the players in theindustry. Most of all, counsel's client is well-served when counsel (beit for a claimant or a surety) understands the limits and preconditionsto obtaining surety coverage for such transactions.

Surety Relationship in the Agricultural Commodity Storage ...

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