Adam v. State

• Decision Date: 15 January 1986
• Docket Number: No. 84-950,84-950
• Parties: Robert D. ADAM, et al., Appellees, v. STATE of Iowa, Appellant.
• Court: Iowa Supreme Court

Page 716

380 N.W.2d 716

Robert D. ADAM, et al., Appellees, v. STATE of Iowa, Appellant.

No. 84-950.

Supreme Court of Iowa.

Jan. 15, 1986.

Thomas J. Miller, Atty. Gen., Brent R. Appel, Deputy Atty. Gen., John R. Scott, Sp. Asst. Atty. Gen., and Catherine L. Winslow, Asst. Atty. Gen., for appellant.

James P. Hoffman, Keokuk, and James Walker, Bloomington, Ill., for appellees.

Considered en banc.

UHLENHOPP, Justice.

This appeal involves the State's challenge to judgments of the district court holding the State liable for damages resulting from negligent licensing and inspecting of a grain elevator by the Iowa State Commerce Commission (ICC).

Plaintiffs are grain producers who sold grain to and stored grain with Prairie Grain Company, a corporation located in Stockport, Iowa. Prairie Grain was a licensed grain dealer and warehouse for agricultural products pursuant to chapters 542 and 543 of the Iowa Codes of 1975 and following. ICC was charged with administering the provisions of those chapters including licensing and inspecting grain dealers and grain warehouses.

ICC received reports that Prairie Grain was issuing insufficient funds checks. On January 31, 1980, ICC conducted a special investigation in response. On the same date Raymond Keller, the elevator's principal operating officer, committed suicide. An in-depth investigation of Prairie Grain disclosed substantial shortages of grain inventory. Bankruptcy proceedings were instituted shortly. Plaintiffs lost heavily on account of their grain stored at the facility.

The trial court found that the special investigation disclosed: "[Prairie Grain] underreported its obligations in 1975 by at least 39,000 bushels of corn and at least 67,000 bushels of soybeans. In April, 1979, Prairie Grain underreported its obligations by at least 341,000 bushels of corn, and at least 258,000 bushels of soybeans. By February, 1980, Prairie Grain had shortages of at least 1,338,000 bushels of corn and 588,000 bushels of soybeans."

Plaintiffs filed suit on August 21, 1980. In all, nine defendants were called to answer for their part in Prairie Grain's failure and plaintiffs' losses. The present appeal is one of several to reach this court arising out of the losses. One of the prior appeals was an interlocutory challenge by the State from the district court's denial of summary judgment in this litigation, Adam v. Mt. Pleasant Bank & Trust Co., 340 N.W.2d 251 (Iowa 1983). In that appeal we rejected the State's assertion that it was immune from suit under the "misrepresentation" exception in section 25A.14(4) of the tort claims act.

Plaintiffs' claims against the State were tried to the court beginning March 20, 1984. A claim of willful and wanton misconduct authorizing punitive damages was withdrawn from consideration at the close of the plaintiffs' evidence, pursuant to section 25A.4 of the Code. In the remaining negligence claim plaintiffs alleged ICC breached several duties owed them and thereby proximately caused their losses. These breaches included negligent failure to inspect as often as required, negligent inspections, and negligent failure to adopt rules.

We of course view the evidence in the light most favorable to the judgment for plaintiffs. RET Corp. v. Frank Paxton Co., 329 N.W.2d 416, 419 (Iowa 1983).

As found by the trial court, the purpose of chapters 542 and 543 of the Code is "to protect grain producers who sell grain to or deposit grain at Iowa grain elevators." As the court also found, grain regulatory officials including ICC have known for years that the usual sequence of events preceding financial failure of an elevator is

for the elevator to get into cash flow problems due to commodity speculation losses or some other reason, to sell depositor's grain in order to meet cash obligations, and to repeat this sequence until financial collapse. Usually a number of years pass.... [D]uring this time elevator management underreports its grain obligations to the Iowa Commerce Commission.

................................................................................

* * *

Underreporting of grain obligations has been a major method used by elevator management to avoid detection by examination officials in those elevator failures that have involved the largest number of producers.

Prairie Grain's failure fit this pattern.

The trial court made several findings of fact concerning ICC's inspections of Prairie Grain. ICC employed only one examination procedure to detect underreporting, "Grain Records Audit Step No. 12". As the trial court found, "That step requires the examiner to select at random eight different scale tickets from the numerical file of those scale tickets issued since the date of the last examination. The examiner must then check to see if the delivery of grain reflected by that scale ticket had been recorded on a customer account." The examiner must select the tickets to avoid manipulation by elevator management.

The court found that in 1977 the ICC examiner was at Prairie Grain on July 21st through the 26th. Of eight scale tickets selected for examination, two were dated July 22, 1977, one was dated June 1, two were dated May 31, two were dated May 6, and one was dated January 18. The examiner testified he personally selected these scale tickets.

In 1978 the examiner arrived June 15, 1978, and departed June 20. He did not himself select the scale tickets, and only seven scale tickets were selected. Of these tickets selected by elevator personnel--allegedly selected at random--four were dated June 16 which was one day after the examination started, two were dated June 14, and one was dated June 12.

In 1979 the examination involved seven scale tickets. What was to be a random selection of scale tickets for an entire year resulted in a sampling of tickets from the months of February, March, and April.

Based on the testimony of the secretary at Prairie Grain, the trial court found that "none of the Iowa Commerce Commission examiners who were at Prairie Grain in 1977, 1978, or 1979 made a random selection of the scale tickets for step 12 from the numerical file of scale tickets issued since the last examination." The court also found that the tickets were selected and tendered by Raymond Keller rather than the ICC examiners. An ICC employee's subsequent retrospective study of the sale tickets previously examined showed that the examiners failed to conduct additional investigations despite obvious inadequacies in customer account records. Further, "[i]t would not have been possible to conduct a proper warehouse examination and not have noticed the fabrication of the Daily Position Records."

ICC also failed to check adequately the financial statements of Prairie Grain, as the assets did not equal the liabilities and the listings of assets did not correspond with financial analysis summary sheets. These financial statements were prepared by Prairie Grain employees. ICC provided no explanation for how its examiners found the financial statements acceptable. As found by the trial court, "The evidence shows that grain regulatory officials ... had known for more than ten years before the financial failure of Prairie Grain that financial statements prepared by the licensed applicant were inferior, in terms of providing the agency with credible financial data regarding the license, to C.P.A. audited financial statements."

Despite ICC's practice of conducting special examinations of grain warehouses when information regarding financial problems was received, it failed to follow this practice in September 1979 when it received a call concerning rumors of financial problems and grain shortages at Prairie Grain. The head of the grain warehouse division explained to the caller that he had not heard of such information and that the latest examination in April 1979 did not disclose any problems. Nothing more was done in response to the call. He did however testify that he was aware ICC examiners were not adequately trained or qualified to carry out investigation procedures.

After trial the court held for the producers in the respective sums they had lost (less the amounts they received from the bankruptcy trustee) together with interest from entry of judgment and costs. The State appealed asserting several propositions.

I. Exemption sections 542.14 and 543.38. Section 542.14 of the grain dealer's act and section 543.38 of the warehouse act provide:

Nothing in this chapter shall be construed to imply any guarantee or obligation on the part of the state of Iowa, or any of its agencies, employees or officials, either elective or appointive, in respect to any agreement or undertaking to which the provisions of this chapter relate.

The State contends that these provisions are liability disclaimers and reinstate the State's immunity with regard to negligence claims under chapters 542 and 543. The trial court found that this language relates to the agreements and undertaking which the Commission was authorized to enter into such as those provided for specifically in Section 543.2 of the Code [contracts with federal government regarding inspections].... [T]he very words "guarantee obligation, agreement and undertaking" are all the language of contract and not of tort. The Court finds that the legislature did not intend to alter the State's tort liability for the Commission's negligence under the Iowa Tort Claims Act by inserting the above language in the Grain Dealer and Warehouse Act.

This court, however, is the final arbiter of the meaning of these provisions. American States Insurance Co. v. Estate of Tollari, 362 N.W.2d 519, 521 (Iowa 1985). We are not bound by a trial court's statutory construction, as such construction presents a question of law. Asmann v. Board of Trustees, 345 N.W.2d 136, 138 (Iowa 1984). Our goal here is to determine the legislature's intent in enacting sections 542.14 and 543.38. See Hansen v. State, 298 N.W.2d 263, 265 ...