LINCOLN, Neb. (DTN) -- Two surety companies that have paid farmer claims in the Hansen-Mueller Co. Chapter 11 bankruptcy case are seeking priority over BMO Bank to millions of dollars in disputed grain proceeds, arguing in bankruptcy court the money should be used to reimburse bond payments made to farmers.

BMO is a secured creditor in the U.S. Bankruptcy Court of Nebraska and loaned more than $50 million to the Omaha-based grain company.

The surety companies that bonded Hansen-Mueller -- Harco National Insurance Company and International Fidelity Insurance Company -- argue in a court filing on Monday that grain sale proceeds held by Hansen-Mueller should not be treated as bankruptcy estate assets available to lenders and creditors.

The court is being asked to determine who has superior claim to Hansen-Mueller's remaining grain proceeds and cash -- the sureties, the secured lender BMO Bank, or the bankruptcy estate.

"The surety is the only party here who is actually paying money to the grain producers," Harco and International Fidelity said in a brief filed this week.

"When there is not enough money to pay everyone, those whose labor and materials generated that money in the first place should receive priority over general creditors and debtors who breached their obligations. The people whose labor and materials generated the funds at issue are the grain producers."

The surety companies said Hansen-Mueller "agreed to hold certain proceeds in trust" and that as a result, "certain grain proceeds never became part of the bankruptcy estate."

TRUST FUND CREATED?

Hansen-Mueller countered in a brief filed in response this week, that the disputed funds remain subject to BMO's liens and that "none of the producer claims prevailed over BMO's properly perfected first-priority liens on substantially all of the debtor's assets."

Right now, the most significant issue standing in the way of Hansen-Mueller filing a Chapter 11 plan is the outstanding claims with its surety companies.

The bonds from the surety companies essentially guarantee Hansen-Mueller's debts and obligations, but the bankruptcy court has yet to determine the amount of the claims of those companies.

As a result, Hansen-Mueller last week asked for an extension of the deadline to file a plan from Sept. 15, 2026, to Nov. 16, 2026.

In Chapter 11 cases, a debtor will typically owe surety companies reimbursement for paid claims, cash collateral, outstanding premiums and legal expenses.

BOND CLAIMS PAID

The surety companies indicate that they've already made bond payments and face additional claims in multiple states.

Payments have been made in Nebraska, Missouri and North Dakota, and claims have been received from farmers in Iowa, Colorado, South Dakota, Louisiana, Mississippi and Alabama, according to a brief filed by the surety companies.

In addition, those companies are asking the court for discovery to trace where grain-related funds went and to determine whether trust funds were misused.

"The sheer volume of unpaid grain producers suggests that the debtor did misappropriate funds," the sureties told the court.

Hansen-Mueller argues that the general indemnity agreement did not create a trust fund so the surety companies lack perfected interests.

What's more, Hansen-Mueller said the surety companies did not demand that funds be segregated.

SUPREME COURT CASE

The legal arguments made by the surety companies are not new.

In Pearlman v. Reliance Insurance Co., the U.S. Supreme Court in 1962 held that the surety company in the case was entitled to reimbursement from contract funds that otherwise would have been awarded to the bankrupt contractor.

In that case the court ruled the fund "never became a part of the bankruptcy estate."

That Supreme Court ruling is at the heart of the sureties' argument in the Hansen-Mueller case.

Courts that have later applied the Supreme Court's decision to other cases have required surety companies to have actually paid underlying claims before subrogation rights are addressed.

Subrogation rights allow an insurance company to essentially step into the shoes of a policyholder to pursue reimbursement of a claim.

Hansen-Mueller pointed out in its brief this week that the surety companies previously admitted their subrogation rights had not yet matured.

When it comes to the surety companies' trust fund arguments, courts have been split on whether general indemnity agreements create trust funds. Courts also have been split on whether the agreements assign rights to grain proceeds to surety companies.

Read more on DTN:

"Hansen-Mueller Seeks Ch. 11 Extension," https://www.dtnpf.com/…

Todd Neeley can be reached at todd.neeley@dtn.com

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