LINCOLN, Neb. (DTN) -- Two bonding companies in the Hansen-Mueller Co.'s Chapter 11 bankruptcy case lost their battle on about $7.9 million in claims to grain proceeds, after a federal bankruptcy court in Nebraska ruled on Monday the companies have no rights to the proceeds.

For Hansen-Mueller's financier BMO Bank, the judge's ruling against Harco National Insurance Company and International Fidelity Insurance Company will free up about $3.9 million BMO held in a reserve account. BMO loaned more than $50 million to the Omaha-based company.

The bonding companies argued that disputed grain proceeds should be used to reimburse bond payments made to farmers, and that the general indemnity agreement with Hansen-Mueller created a trust fund for those proceeds.

During arguments, the surety companies pointed to previous court cases in the construction industry that dealt with their issue.

"As the debtor's counsel aptly stated, the surety is trying to fit a square peg into a round hole," U.S. Bankruptcy Judge Thomas L. Saladino said in his order.

"Under the indemnity agreement as written, there are no funds to which the surety can claim a legal or equitable interest. Construction contractors bonded for specific projects encompass a different scope of risk than bonds mandated by state and federal licensing requirements for grain dealers to conduct business."

The bonding issue was the main barrier to Hansen-Mueller moving forward with filing a Chapter 11 plan.

The company has a motion pending before the U.S. Bankruptcy Court of Nebraska to extend an already passed exclusivity deadline from September to November.

Extending that deadline would prevent creditors and other parties from filing competing bankruptcy plans.

The bonding companies had argued that they stand in the place of farmers who have outstanding claims in the bankruptcy case.

"As to the grain producers, the debtor argues the surety cannot exercise its subrogation rights because the bond amounts paid are less than the amount of the claims held by the producers, so the producers will never be paid in full, thereby preventing the surety from stepping into their

shoes to recover from the debtor," Saladino said in the order.

"Nevertheless, those liability releases and subrogation rights do not improve the surety's overall position. The grain producers into whose shoes the surety is stepping are unsecured creditors. This court has not awarded any producers a right to the grain or its proceeds. In fact,

previous orders -- which are now final -- found that the producers did not retain any interest in the grain or its proceeds."

Read more on DTN:

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

"Hansen-Mueller Sureties Face Scrutiny," https://www.dtnpf.com/…

"Neb. Grain Company Files Chapter 11," https://www.dtnpf.com/…

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

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