St. Paul Fire & Marine Ins. Co. v. Commodity Credit Corp.

• Decision Date: 04 June 1981
• Docket Number: No. 78-3537,78-3537
• Citation: 646 F.2d 1064
• Parties: ST. PAUL FIRE & MARINE INSURANCE COMPANY and Boston Insurance Company, Plaintiffs, v. COMMODITY CREDIT CORPORATION, United Farmers Marketing Assn. and George Cochran, Defendants, UNITED STATES of America, Counterplaintiff-Appellant, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY and Boston Insurance Company, Counterdefendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1064

646 F.2d 1064

ST. PAUL FIRE & MARINE INSURANCE COMPANY and Boston

Insurance Company, Plaintiffs, v. COMMODITY CREDIT CORPORATION, United Farmers Marketing Assn. and George Cochran, Defendants, UNITED STATES of America, Counterplaintiff-Appellant, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY and Boston

Insurance Company, Counterdefendants-Appellees.

No. 78-3537.

United States Court of Appeals Fifth Circuit.

June 4, 1981.

Leonard Schaitman, Appellate Staff, John F. Cordes, Civil Div. Dept. of Justice, Washington, D. C., for counterplaintiff-appellant.

Marian Mayer Berkett, New Orleans, La., Donald M. Hunt, Lubbock, Tex., for St. Paul Fire & Marine Ins. Co.

Appeal from the United States District Court for the Northern District of Texas.

Before ALVIN B. RUBIN, HENDERSON and REAVLEY, Circuit Judges.

HENDERSON, Circuit Judge.

Our task in this appeal is to review the decision of the district court that two sureties, St. Paul Fire & Marine Insurance Company (St. Paul) and Boston Insurance Company (Boston) were released from their obligations on certain bonds because of the actions of the creditor, Commodity Credit Corporation (CCC). The duties arising from these bonds are at issue. The trial court held that St. Paul was released on its September, 1963 and January, 1964 bonds and Boston was relieved on its January, 1964 bond when CCC condoned impairment of collateral in which the sureties would have an interest by virtue of subrogation to CCC's rights as creditor of United Farmers Marketing Association (UFMA). As additional grounds for discharge on bonds that each surety issued in January, the court concluded that they were invalid because 1) the loss occurred prior to their issuance; and 2) the creditor failed to inform the sureties of an unknown material risk at the time the bonds were issued. ¹ The trial judge also determined that if there was liability CCC could not recover prejudgment interest and the sureties would be entitled to certain offsets. On appeal, the government urges us to disregard the district court's findings of fact as merely mistaken legal inferences and to reverse the judgment in favor of the sureties as a matter of law.

The facts, as correctly articulated on the first appearance of this case in our court, are as follows:

"St. Paul Fire & Marine Insurance Company (St. Paul) and Boston Insurance Company (Boston) sued Commodity Credit Corporation (CCC) seeking a declaration of no liability on three bonds assuring performance by United Farmers Marketing Association (UFMA) of its obligations under a 1963 Cotton Cooperative Loan Agreement executed between UFMA and CCC. St. Paul and Boston were sureties on the three bonds; UFMA, an agricultural cooperative organized in Lubbock, Texas, was the principal; and CCC was the obligee. CCC counterclaimed for $265,000.00, the aggregate face amount of the three bonds, charging that UFMA's failure to redeem 3,421 bales of cotton, released to UFMA under trust receipts, was a breach of the 1963 Agreement. By answer St. Paul and Boston denied liability on the principal grounds that they guaranteed only performance of the 1963 Loan Agreement and that UFMA's failure to redeem was a breach of the trust agreement, not the 1963 Loan Agreement. The sureties also interposed additional so-called 'affirmative' defenses. The district court found that (the) sureties guaranteed only performance of the 1963 Loan Agreement, that UFMA's failure to redeem was a breach of the trust receipt agreement under which the bales were released to UFMA, and that the rights and duties created by the trust receipt agreement were not incorporated by reference into the 1963 Loan Agreement. Since it found the sureties' primary defense a good one, the court did not consider the 'affirmative' defenses. Accordingly, the District Court ruled that CCC take nothing on the counterclaim and granted (the) sureties their requested declaratory relief

The Commodity Credit Corporation is an administrative agency of the United States created by Congress '(f)or the purpose of stabilizing, supporting, and protecting farm income and prices, of assisting in the maintenance of balanced and adequate supplies of agricultural commodities and of facilitating the orderly distribution of agricultural commodities.' As pertinent to this appeal, CCC effectuates cotton price supports by making nonrecourse loans to individual cotton producers in accordance with 7 U.S.C. § 1425, taking cotton as security The cotton is stored in approved commercial warehouses, which issue warehouse receipts against the bales. When the loan matures the farmer may elect to pay the debt and redeem the cotton. Alternatively, since CCC's only recourse is against the collateral, the farmer may allow the cotton to pass to CCC upon loan maturity and retain his loan proceeds. The government explains that if cotton prices rise above the loan level, the farmer usually will market the cotton and realize the profit. If cotton prices fall he simply does not redeem the cotton. Thus the farmer is assured as a minimum the loan value for his cotton.

Individual cotton producers may combine their resources to enhance profits by forming marketing associations as authorized by the Capper-Volstead Act § 1, 7 U.S.C. § 291 For example, an individual producer may elect to tender to the association his warehouse receipts, which evidence cotton stored in approved commercial warehouses, and the association will promptly pay the producer for his receipts the loan value of his cotton. The association then uses the receipts as collateral for CCC-sponsored loans

As the parties point out, until maturity of the loan the individual producer, or the association in appropriate cases, has an equity interest in the cotton that secures the loan

The sale of equity interest by the association was, at least in 1963-64, accomplished in practice by use of trust receipts. CCC would release in trust to the association the warehouse receipts held as loan collateral. The terms of the trust were set out in the trust receipts, which provided in pertinent part:

"(T)he (association) agrees to hold said warehouse receipts and any proceeds therefrom in trust for Commodity Credit Corporation and further agrees to return said warehouse receipts to the bank within 15 days after the date hereof (or such extension of time as may be granted by the Director the New Orleans ASCS Commodity Office), unless the (association) has redeemed the cotton represented by said warehouse receipts in accordance with Section 12 of said Loan Agreement

The intention of this arrangement is to protect and preserve, unimpaired, the lien of Commodity Credit Corporation on said warehouse receipts as security for the obligations of the (association) under said loan agreement." The proceeds realized by the association on the sale of the warehouse receipts would be forwarded to CCC to liquidate the loan and relieve the collateral from trust

Section 12 of the Agreement is central to this appeal. Tracking the regulatory scheme, § 12 specifies UFMA's right to redeem collateral prior to loan maturity:

"12. Redemption of Loan Collateral. Prior to maturity of the loan indebtedness as provided in section 17, the association shall have the right to redeem all or any part of the cotton upon payment to CCC of the loan indebtedness with respect to such cotton as set forth in section 5 hereof, less a fee of 15 cents per bale or accrued interest, whichever is less "

Section 12 further sets out the association's obligations in the event it sold its equity interest prior to redemption of the collateral:

"If the Association sells or permits its members to sell their interest in any cotton pledged to CCC hereunder, it shall redeem such cotton within 15 days from the date of such sale."

Finally, § 12 concludes by referring to the trust receipt method of effecting sale of the association's equity interest:

"CCC may, if it deems it desirable, release warehouse receipts to the Association against trust receipts acceptable to CCC."

Section 10 of the Agreement required the association to furnish a bond guaranteeing that the association would fully discharge all its obligations under the Agreement. Accordingly, UFMA secured from St. Paul and Boston broadly worded performance bonds in the aggregate face amount of $265,000. These bonds were substantively identical and provided in pertinent part:

"WHEREAS, the principal has entered into a 1963 Cotton Cooperative Loan Agreement with CCC dated September 10, 1963 under which CCC has undertaken to make loans on cotton to the principal in accordance with the terms and conditions of that Agreement; and

WHEREAS, the principal is required by the terms of that Agreement to discharge certain obligations in connection with such cotton:

NOW THEREFORE, the condition of this obligation is such that if the principal shall fully and completely discharge all obligations to CCC required by the said 1963 Cotton Cooperative Loan Agreement, or any amendment thereto heretofore or hereafter made, then this obligation to be null and void; otherwise to be and remain in full force and effect.

PROVIDED, HOWEVER, that this bond is executed upon the following express conditions:

(1) This bond shall cover only these obligations of the principal arising under the said 1963 Cotton Cooperative Loan Agreement or any amendments thereto heretofore or hereafter made, which arise during (a specified period).

(2) No extension of time or other waiver or amendment of the terms and conditions of the 1963 Cotton Cooperative Loan Agreement granted to the principal by CCC shall relieve the surety from its obligations hereunder, and the surety waives notice of any such extension, waiver, or amendment."

In accordance with the 1963 Loan Agreement, UFMA tendered cotton to CCC for loans and CCC released warehouse receipts in trust to UFMA. The value of warehouse receipts released to UFMA in trust during the 1963...