Avoca State Bank v. Merchants Mut. Bonding Co.
| Decision Date | 16 March 1977 |
| Docket Number | No. 2-57959,2-57959 |
| Citation | 251 N.W.2d 533 |
| Parties | 21 UCC Rep.Serv. 846 AVOCA STATE BANK, Appellee, v. MERCHANTS MUTUAL BONDING COMPANY, Appellant. |
| Court | Iowa Supreme Court |
Smith, Peterson, Beckman, Willson & Peterson by Frank W. Pechacek, Jr., Council Bluffs, for appellant.
Peters, Campbell & Pearson by Peter J. Peters and Dennis M. Gray, Council Bluffs, and Milton L. Hanson, Avoca, for appellee.
En banc.
This appeal involves the issue of a bank's right to recover damages from a warehouseman's surety on account of issuance of invalid warehouse receipts by the warehouseman. Other cases involving this bond are True v. Merchants Mut. Bonding Co., 251 N.W.2d 543 (Iowa), and Michael v. Merchants Mut. Bonding Co., 251 N.W.2d 531 (Iowa).
In 1971, Claude W. Myler entered into the grain business at Avoca, Iowa. He leased an elevator facility. He had very little capital and financed his operation by borrowing from plaintiff Avoca State Bank, ordinarily posting warehouse receipts or accounts receivable as security. The bank also took a security interest in his assets. Myler also had trucks which he used to transport grain.
Myler would buy grain from farmers and sell it at terminal elevators at a markup, he hoped, of 12 cents per bushel, to cover expenses, transportation, and profit. He trucked some grain directly from the farm to the terminal. Other grain, however, he trucked to his elevator, where he stored it for periods of time while financing it with the bank.
Myler applied to the Iowa Commerce Commission for a license as a warehouseman under chapter 543 of the Iowa Code. This required him to post a warehouseman's bond. Defendant Merchants Mutual Bonding Company signed a bond as surety, and the Commission issued a license. The amount of the bond, as amended, was $52,000. As required by § 543.28 of the Code, Myler established his tariffs (as No. W-3545). See Iowa C.C. Rule 12.17(543), 1971 I.D.R. 127.
Ordinarily Myler would pay farmers for grain by check. If he immediately re-sold grain, he would ordinarily deposit with the bank the check he received from the terminal to cover his own check to the farmer. If however he received the grain into his elevator, he would ordinarily issue a warehouse receipt to himself, as permitted by § 543.20 of the Code, and then pledge the receipt to the bank as security for a loan to cover the check to the farmer. Upon subsequent sale of such grain to a terminal, he would take the terminal's check to the bank to pay off the loan, and pick up the warehouse receipt.
In common with the experience of some other country elevator operators, Farmers Co-op. Elevator, Inc. v. State Bank, 236 N.W.2d 674 (Iowa), Myler went behind. The losses resulted in reduction of grain in the elevator as compared to outstanding warehouse receipts.
This case involves 26 warehouse receipts pledged to the Avoca State Bank as collateral for three unpaid notes the bank now holds. All of the receipts recite that Myler received specified grain for storage. The first receipts are Nos. 78 and 83. Receipt 78 came to the bank as collateral on January 22, 1972, and No. 83 came similarly on February 4, 1972. The evidence does not indicate that at those times the bank had any information Myler's grain supply was depleted as compared to outstanding warehouse receipts. Subsequently receipts 78 and 83 were properly applied by the bank as collateral for other notes, and at the time Myler closed his doors in the fall of 1972 they constituted collateral for a note of $11,640 dated June 26, 1972, one of the three notes the bank now holds.
Between the issuance of Nos. 78 and 83 and issuance of later receipts now held by the bank, relevant events occurred. Following issuance of Nos. 78 and 83, the bank requested additional receipts as collateral for other notes, but the receipts were not forthcoming. The fact was that Myler did not have grain on which to issue receipts. In addition, someone acting for the bank lent Myler $25,000 at one point without getting receipts for collateral.
A conversation then occurred which constitutes the crux of the case as to the remaining warehouse receipts, Nos. 95 through 117. Richard M. Coe was executive vice president of the bank and actually ran it. Janice Tooley was Myler's bookkeeper and actually ran the internal business affairs at the elevator. Tooley took some clothing into an Avoca laundromat, and Coe went there and conversed with her. These two witnesses disagree as to the date and substance of the conversation. Tooley testified:
Q. (Merchants' attorney) Okay. Then would you explain what took place in the laundromat or what happened? A. Well, he came in and he wanted to know or he wondered how come we hadn't gotten these warehouse receipts up there yet. And he wanted to he said that there had better be enough grain to take care of them and I told him there wouldn't be.
Q. Who first started talking about well, first of all, what was your answer to his statement? A. That there wouldn't be enough grain?
Q. Yes. A. I just told him there wouldn't be.
Q. There wouldn't be enough grain? A. To take care of them. . . .
Q. And how was it that you happened to tell him that there was a shortage? A. Just by his asking me. . . .
Q. (Bank's attorney) Mrs. Tooley, when you and Mr. Myler's son, Jim, took the warehouse receipts No. 95 through 117 down and delivered them to Mr. Coe at the bank, you didn't tell him at that time that there was no grain to cover or the warehouse receipts were false or anything of that nature, did you? A. Well, no, I didn't, because he knew it already then.
Coe, however, associated the conversation with a warehouse receipt as collateral for a loan of $8000. The Commerce Commission disapproved the warehouse receipt because the grain was stored in an unbonded quonset. Coe testified regarding the laundromat conversation:
Q. (Bank's attorney) And then what happened? A. Well, I went in and asked her what was the trouble and she said that they had a warehouse receipt there that was under that was in the quonset hut down there and they had to have it back to pay off so that their bonded warehouse receipts would be okay, and then she said, "But there isn't any grain out in the quonset." And I said, "Well, that doesn't sound right, but all I have to do is call the Commerce Commission to find out exactly what there is," but I said, According to my records, he was in there on the 18th. I took a new financial statement which was dated February the 18th on which he stated that he had warehouse grains stored in the warehouse on which it was bonded, total value of warehouse grains of $76,000.00, and that he had grain down in the warehouse or the quonset valued at $98,356.00. And I said to him at the time, I said, "Red, your girl says you don't have any grain down there." He said, "Well, she don't really know what's going on only half of the time."
(The trial court on motion struck the last remark.)
Coe testified further:
Q. (Merchants' attorney) Okay. Now specifically speaking, the matter of the conversation in the laundromat, what records are you referring to as to that? A. That's no record as far as I am concerned. It's just my memory of the happenings when I discovered that there was a twenty-five thousand dollar loan without warehouse receipts and Janice said there wasn't any grain to cover it. I immediately started getting a new financial statement to find out if that was true. And when I had been assured by Mr. Myler by his financial statement, I assumed that there was some error.
Subsequent to the laundromat conversation, Myler issued warehouse receipts Nos. 94, 95 through 104, and 105 through 117. No grain existed for issuance of these receipts. Tooley, who customarily signed receipts, signed No. 94 but refused to sign the rest. Myler did so. He pledged them all to the bank. Receipt 94 became the alleged collateral for notes. Subsequently the bank applied that receipt as collateral for a note for $5100 dated August 14, 1972, which the bank now holds the second of the bank's present three notes. Receipts 95 through 117 became the alleged collateral for the previously unsecured note of $25,000 and a note for $19,200. Subsequently those receipts were applied by the bank as collateral for a note of $44,200 dated August 15, 1972 the third of the notes the bank now holds. The principal of the three unpaid notes thus amounts to $60,940.
Myler continued to render required monthly reports to the Commerce Commission as to his grain in the elevator. Tooley, at Myler's insistance, falsified those reports to show much larger quantities of grain than existed.
This condition of affairs went on for several months, with Myler doing business with farmers, terminals, and the bank. But he did not pull out of his bad condition and a very substantial shortage of grain existed. By September 1972, Myler simply could not pay grain sellers in the course of business. About September 14, 1972, the bank called in the Commerce Commission to investigate the situation. The Commission discovered the shortage, and Myler had to close his doors.
Thereafter the bank instituted insolvency proceedings against Myler which are not relevant to this case.
The bank then commenced the present action against Merchants on its bond, as did other claimants. The basis of the bank's claim is that Myler violated his duties as warehouseman with respect to the warehouse receipts the bank holds by issuing the receipts upon nonexistent grain. Merchants denied liability and the parties tried the case to a jury. The jury found for the bank in the amount of the bond, the trial court entered judgment accordingly, and Merchants appealed. Myler's undisputed liability is not involved in the appeal.
The Code of 1971 was in effect at the time of the events here, and unless otherwise stated our references are to that Code.
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