Dairy Dept. v. Harvey Cheese, Inc.

• Citation: 278 N.W.2d 137
• Decision Date: 12 April 1979
• Docket Number: No. 9541,9541
• Parties: DAIRY DEPARTMENT of North Dakota, State Department of Agriculture, an Agency of the State of North Dakota, Appellant, v. HARVEY CHEESE, INC., Auto-Owners Insurance Company, National Bank of Harvey, Donald P. Pauly and the Bell Importing Co., a Corporation, also known as Bell Import Co., Nick Demetriou and Does I through Z, Inclusive, Appellees. Civ.
• Court: United States State Supreme Court of North Dakota

Page 137

278 N.W.2d 137

DAIRY DEPARTMENT of North Dakota, State Department of

Agriculture, an Agency of the State of North

Dakota, Appellant, v. HARVEY CHEESE, INC., Auto-Owners Insurance Company, National

Bank of Harvey, Donald P. Pauly and the Bell Importing Co.,

a Corporation, also known as Bell Import Co., Nick Demetriou

and Does I through Z, Inclusive, Appellees.

Civ. No. 9541.

Supreme Court of North Dakota.

April 12, 1979.

As Modified April 17, 1979.

John W. Dwyer, Sp. Asst. Atty. Gen., Bismarck, for appellant.

Lamb, Schaefer, McNair & Larson, Fargo, for appellees Harvey Cheese, Inc., and Nat. Bank of Harvey; argued by L. M. Stenehjem, Jr., Fargo.

Pearce, Anderson, Thames & Durick, Bismarck, for appellee Natl. Farmers Organization; argued by Patrick W. Durick, Bismarck.

SAND, Justice.

This case involves the authority of the North Dakota Dairy Department to act as a trustee for the benefit of unpaid dairy producers upon the insolvency of a licensed and bonded dairy processor. ¹ The dairy department appealed from an order determining the sale of inventory, property, and assets of Harvey Cheese, Inc., exceeded the authority of the dairy department and that the proceeds from such sale should be turned over to the United States District Court in Bankruptcy.

Chapter 4-30 of the North Dakota Century Code, entitled "Dairy Products Regulations," provides for the licensing and bonding of dairy processors and sets forth a procedure to be followed by the dairy department upon the insolvency of a licensed processor. In accordance with § 4-30-02 and § 4-30-03, NDCC, Harvey Cheese was licensed by the North Dakota Dairy Department and bonded in the amount of $24,000 for the year 1 July 1976 to 30 June 1977 as a buyer of milk or cream. On 20 June 1977 the president of the National Bank of Harvey notified the dairy department that Harvey Cheese had ceased operations and did not have sufficient funds to pay dairy producers for milk and cream which had been purchased. On 30 June 1977, in accordance with § 4-30-05, NDCC, the dairy department filed a petition with the Burleigh County District Court seeking appointment as trustee for the benefit of dairy producer claimants. Following a hearing, the district court filed an order appointing the dairy department as trustee for Harvey Cheese. The order provided for the trustee to collect Harvey Cheese's surety bond as well as its real and personal property "including but not limited to cash, accounts receivable equipment, supplies, and other assets . . ." for distribution in accordance with law and the order of the court.

In compliance with § 4-30-06, NDCC, the dairy department published notice in the official newspapers of the principal counties in which Harvey Cheese operated. The notice stated that all persons having claims of indebtedness against Harvey Cheese arising out of the purchase of milk or milk products must present such claims to the department within 45 days after the last publication of the notice. The last publication of the notice was made on 18 August 1977, therefore the last day for filing of claims was 3 October 1977. The notice provided that claims not filed by this latter date would be barred from participating in any trust funds marshaled by the dairy department. The department received claims within the 45-day period totaling $97,828.60 from 36 dairy producers.

Following notice sent to the named respondents in this case, the dairy department sold or leased certain perishable and miscellaneous property of Harvey Cheese in the amount of $1,867.26. This sale was approved by the district court on 13 October 1977. The trustee also accumulated cash in the amount of $7,648.33 found on the premises or transferred from the Harvey Cheese bank accounts.

The dairy department filed a motion on 26 September 1977 requesting approval of an interim distribution of available trust funds to the dairy producers who had filed claims. The district court issued an order to show cause why an interim distribution in accordance with the motion should not be made. A hearing was held on the motion and on 31 October 1977 the district court filed an order directing the $24,000 from bond proceeds be distributed to the dairy producers. The order also directed all persons claiming a secured interest in any of the perishable or miscellaneous properties previously sold by the dairy department, or in any of the inventory and equipment of Harvey Cheese, to notify the department of their claims. The court order authorized the dairy department to transfer to the secured creditors the amounts claimed by those creditors. It directed that if no secured interests were claimed by 1 November 1977, the department could sell the inventory and equipment of Harvey Cheese and the proceeds from this sale and the earlier sale would be "exclusively distributed to the dairy producer claimants for the whole of their claims." The order also stated if the dairy producer claims were fully satisfied, any surplus properties accumulated by the trustee were to be distributed on a pro rata basis to the general creditors of Harvey Cheese.

In a separate order filed on the same day, the district court directed the $7,648.33 of cash that the trustee found on the premises or transferred from the Harvey Cheese bank accounts be distributed to the dairy producer claimants. A motion to reconsider this latter order was filed by the First Bank of North Dakota which alleged the cash represented proceeds from the sale of inventory in which it had a security interest. The trustee and First Bank subsequently reached a compromise on this issue and the motion to reconsider was withdrawn. The trustee also settled what it termed "conversion actions" and the proceeds from these settlements as well as from the earlier sale of miscellaneous property was ordered distributed by court order dated 6 February 1978.

On 27 December 1977, the district court approved the sale of additional miscellaneous property by the trustee in the amount of $105.

In accordance with the order filed on 31 October 1977, the trustee conducted an auction sale of the inventory and equipment of Harvey Cheese. Proceeds realized from this action totaled $26,805. The trustee subsequently filed a request to distribute available proceeds from the auction sale and the second sale of miscellaneous property. On 6 February 1978 the district court issued an order to show cause why such distribution should not be made. At a hearing on the order held 15 February 1978, the National Farmers Organization (NFO) ² appeared and objected to the proposed distribution on the basis that the sale of property and the distribution of proceeds therefrom exceeded the authority of the dairy department. After receiving briefs from the NFO and the dairy department, the district court issued an order on 8 March 1978 stating the sale of inventory, property and other assets of Harvey Cheese, although conducted in a commercially reasonable manner, exceeded the authority of the dairy department. The court suggested application be made by the dairy department to the United States District Court in Bankruptcy to turn over money and assets held by the dairy department. The dairy department filed a motion to reconsider and alter or amend this order. Such motion was denied by order filed on 19 April 1978. The dairy department appealed from both the 8 March and the 19 April orders.

On appeal the dairy department sets forth the following as the issues on appeal:

A. Did the district court err in reversing its previous orders after the appeal period had expired on those orders, and after the dairy department, the creditors, and the dairy producers had relied upon those orders and had taken action consistent with those orders as directed by the district court.

B. Did the dairy department have the authority under Ch. 4-30, NDCC, to proceed against the property and assets of a dairy products processor licensee in order to satisfy the whole of the claims of the dairy producers.

C. Was the National Farmers Organization estopped under the doctrine of laches from participating in the funds marshaled by the dairy department trustee by virtue of not having filed a timely claim.

D. Does the United States District Court in Bankruptcy have jurisdiction over the proceeds and assets of the dairy products processor licensee.

E. Does the dairy department in this case have authority or standing under state or federal law to apply to the United States District Court in Bankruptcy.

I

Because we find the extent of authority of the dairy department in this action is paramount to a consideration of the other issues raised, we will discuss this question first.

Section 4-30-03, NDCC, provides the bond required of a licensed dairy processor shall name the dairy commissioner as obligee but shall be held for the benefit of any dairy producer. Under the provisions of § 4-30-04, this bond, together with the amount recoverable in any cause of action for the conversion of milk or milk products shall constitute a trust fund in the hands of the dairy department for all persons having a cause of action against the licensee on the bond.

Although we have been unable to find any legislative history on the provisions of Ch. 4-30 relevant to this case, it is apparent that the intent of the bonding requirement is to make the dairy processor strictly liable to the extent of the bond in all cases in which the dairy producer is not paid for milk or milk products purchased by the licensed processor. See, Lee v. Tolchinsky, 65 N.D. 292, 258 N.W. 276 (1934); 3 C.J.S. Agriculture, § 167. It is also apparent that the bond is not intended for the benefit of general creditors of the licensee, but only for the protection of those producers who sold milk or milk products to the processor. See, Lee v. Tolchinsky, supra; Larkin v. Wheat Growers' Warehouse Co., 64 N.D. 491, 253 N.W. 757 (1934); State v. Wheat Growers' Warehouse Co., 63...