In re Hipp, Inc., Bankruptcy No. 284-20080

• Decision Date: 24 March 1987
• Docket Number: Adv. No. 284-2024,Bankruptcy No. 284-20080,284-2025 and 284-2031.
• Citation: 71 BR 643
• Parties: In re HIPP, INC., Debtor. Thomas J. GRIFFITH, Trustee for Hipp, Inc., Plaintiff, v. LAWRENCE SYSTEMS, INC. OF MASS., Defendant. Thomas J. GRIFFITH, Trustee for Hipp, Inc., Plaintiff, v. OLES GRAIN CO., Lawrence Systems, Inc. of Mass., Defendant. Thomas J. GRIFFITH, Trustee for Hipp, Inc., Plaintiff, v. Joe HIPP, Star Elevator, Inc., Oles Grain, and Lawrence Systems, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Texas

71 B.R. 643 (1987)

In re HIPP, INC., Debtor.

Thomas J. GRIFFITH, Trustee for Hipp, Inc., Plaintiff, v. LAWRENCE SYSTEMS, INC. OF MASS., Defendant.

Thomas J. GRIFFITH, Trustee for Hipp, Inc., Plaintiff, v. OLES GRAIN CO., Lawrence Systems, Inc. of Mass., Defendant.

Thomas J. GRIFFITH, Trustee for Hipp, Inc., Plaintiff, v. Joe HIPP, Star Elevator, Inc., Oles Grain, and Lawrence Systems, Inc., Defendants.

Bankruptcy No. 284-20080, Adv. Nos. 284-2024, 284-2025 and 284-2031.

United States Bankruptcy Court, N.D. Texas, Amarillo Division.

March 24, 1987.

Thomas J. Griffith, Lubbock, Tex., trustee-in-bankruptcy.

Floyd D. Holder, Jr., Lubbock, Tex., for trustee.

Linda Coffee, Palmer, Palmer & Coffee, Dallas, Tex., for Oles Grain.

Richard D. Ladd, Maguire, Vanderpool & Ladd, Pampa, Tex., for Lawrence and Phoenix.

William H. LaFont, LaFont, Tunnell, Formby, LaFont & Hamilton, Plainview, Tex., for Creditors Committee in Hipp, Inc.

Russell L. Munsch, Decker, Hardt, Kopf, Harr, Munsch & Dinan, Dallas, Tex., for Robert H. Tolar, Trustee-in-Bankruptcy for Oles Grain.

Philip R. Russ, Amarillo, Tex., for Joe Hipp.

MEMORANDUM OF OPINION

JOHN C. AKARD, Bankruptcy Judge.

The matters before the Court involve a series of Adversary Proceedings filed in 1984 between Thomas J. Griffith (as Trustee-in-Bankruptcy for Hipp, Inc.), Oles Grain Company, Inc., the Trustee-in-Bankruptcy for Oles Grain Company, Inc. and Lawrence Systems of Mass., Inc. (Lawrence).

In conjunction with these matters, the Court also heard a Motion to be Relieved from the Automatic Stay filed by Phoenix Grain, Inc. (Phoenix) which alleged it is the holder of two notes originally executed by Hipp, Inc.

In Adversary No. 284-2031, Joe Hipp and Star Elevator, Inc. were original parties Defendant. During the course of the trial on this matter, a settlement was announced between Thomas J. Griffith, Trustee for Hipp, Inc., Joe Hipp and Star Elevator, Inc. which removed the latter as Defendants in No. 284-2031 and settled No. 284-2041.¹

At the commencement of the hearing, the Trustee-in-Bankruptcy for Oles Grain Company filed a Motion for Continuance which was overruled. The Court also relieved the automatic stay in the Oles Grain Company case so that the Trustee could proceed as a party Defendant in these Adversary Proceedings.

Statement of Facts

The Hipp family was active in the grain elevator business in the Panhandle of Texas for approximately 50 years. At all times material to these proceedings, Joe Hipp was the sole shareholder and principal officer of Hipp, Inc. (Hipp). Hipp's principal elevator was in Tulia, Texas with other elevators located at Claytonville, Nazareth, Vigo Park, and Kress, Texas. In 1985, the lienholder on the Claytonville elevator received relief from the automatic stay and foreclosed on that property.

Although Hipp owned and operated the elevators, the bonded warehouseman was Lawrence. Until 1982, Lawrence had an employee, Carl Tidwell, on the premises of Hipp. He was selected and his salary established by Hipp, but he was paid by Lawrence. Mr. Tidwell testified that in 1982 Lawrence changed its program so that he became an employee of Hipp, but was designated Lawrence's agent. Mr. Tidwell was a dual agent and had responsibilities both to Hipp and to Lawrence. He was authorized to buy and sell grain for Hipp and was authorized to sign checks on the Hipp account. As Lawrence's agent, Mr. Tidwell's duties were to open and close the elevator daily and to supervise the issuance of warehouse receipts issued by Lawrence as the bonded warehouseman. In this connection he also supervised the weighing, storage and removal of grains. The testimony showed that, as a practical matter, these procedures were not followed.

Gerald Carter, an employee of Lawrence, generally supervised numerous warehouses of various types in the Texas Panhandle. He testified that the company's established procedures were seldom followed in practice. Mr. Carter stated that normally he visited the elevators about four times a year to measure the grain on hand. Mr. Tidwell reported weekly to Mr. Carter's office in Amarillo on grains stored and warehouse receipts issued. It is quite obvious that Mr. Tidwell could not fully supervise elevator operations at five scattered locations.

In order to be a public warehouseman (and thus be able to issue negotiable warehouse receipts), Lawrence was required to comply with the United States Warehouse Act, 7 U.S.C. § 241 et seq. and the Texas Agriculture Code § 14.001 et seq. Following a December, 1983 inspection by the United States Department of Agriculture (USDA), that agency withdrew Lawrence's authority to operate public grain storage warehouses due to grain shortages in the Hipp elevators.² Mr. Tidwell stated that the customers of the Hipp elevators were not advised of the USDA's action and that signs indicating that the elevators were being operated by Lawrence remained in place. Apparently it was "business as usual" and Lawrence was not called upon to issue negotiable warehouse receipts because the USDA's action took place in December rather than during harvest.

The December, 1983 inspection and measurement conducted by the USDA revealed substantial shortages in the quantity of grain stored in the Hipp elevators. Additionally, much of the grain stored was below the quality represented by the warehouse receipts. Mr. Carter testified that he "requested" Mr. Hipp to make up the deficiencies. Each report prepared by Lawrence contained a column for "Company-Owned Grain." That grain was not owned by Lawrence (although the report would indicate that it was) but by Hipp.

Methods which could be used to cure the grain shortages included:

a. Additional grain purchased by Hipp could be placed in the elevator without reflecting any increase in the storage. Apparently this was done in some instances, but not many.

b. Additional grain purchased by Hipp could be placed in the elevator, and shown as "Company-Owned Grain." This would reduce the shortage because "Company-Owned Grain" was considered available to fulfill the warehouse receipt requirements.

c. Hipp could purchase grain from a farmer who had it stored in the elevator. This grain would then be shifted from the "Grain Owed to Third Parties" column, to the "Company-Owned Grain" column.

Lawrence had to put up a bond in order to become a public warehouse. Any losses by the bonding company were charged to Lawrence. Lawrence, in turn, had an agreement with Hipp whereby Hipp would be responsible for any grain storage losses. The obligations of Hipp to Lawrence were personally guaranteed by Joe Hipp.

Mr. Carter testified that from time to time Lawrence had noted shortages in the Hipp elevators. In May, 1983 a measurement by Lawrence of the Hipp elevators showed shortages. Shortages were also shown after a measurement made in June, 1983 by the Commodity Credit Corporation. As a result of these shortages, on June 22, 1983 Lawrence got Hipp to execute a Deed of Trust on all of the elevators to secure Hipp's performance under its contracts with Lawrence.

The testimony showed that during the months of January, February, and March, 1984, Hipp conducted an active program to cover these losses. Additional losses were discovered in February, 1984 when it was revealed that 11 million bushels of wheat which Hipp had alleged was stored in another company's warehouse, were found to be missing. Several farmers and elevator operators testified that they sold grain to Hipp during this period for which they never received payment. In some instances, the grain delivered to Hipp was to be paid for later; in others, warehouse receipts were surrendered but the farmers were never paid; and in still others, Hipp checks were returned for insufficient funds. One warehouseman testified that in the Fall of 1983 and early 1984 he paid Hipp more than $988,000.00 in prepayments for grain to be delivered. Neither the grain nor the warehouse receipts representing the grain were ever delivered to him by Hipp.

At the First National Bank of Tulia, Hipp overdrafts approximated $1,600,000.00. This was the result of the Bank giving immediate credit on various Hipp deposits which were later dishonored.

Hipp filed its petition in bankruptcy on April 11, 1984, but that gets ahead of our story. One can easily imagine the anxious concern of Lawrence and the pressure it brought to bear on Mr. Hipp during the months just prior to the bankruptcy filing. The testimony indicated that in March, 1984, there were three employees of Lawrence on the Hipp premises at one time. On March 30, 1984, a flurry of negotiations and transactions concluded with the execution of a number of documents. These included:

a. A lease of the elevators in Tulia, Nazareth, Vigo Park, and Kress (the four elevators) to Oles Grain Company (Oles Grain).

b. A lease of the Claytonville elevator from Star Elevator, Inc. to Oles Grain.³ The lease provided for payments of $10,000.00 quarterly from Oles Grain to Star Elevator, Inc.

c. A cancellation agreement between Hipp and Lawrence which provided in great detail for measurement of the grain in the elevators, both as to quantity and quality, and for repayment of any shortages by Hipp to Lawrence.

d. A note from Hipp payable to Lawrence in the sum of "$1,860,000.00 or such lesser amount as is advanced under the Settlement Agreement" (Lawrence Note). The note was payable on demand and if no demand, on November 1, 1984.

e. Subleases of the warehouses from Oles Grain to Lawrence so that Lawrence could remain as the warehouseman and Oles Grain could operate the warehouses f. An assignment of the Lawrence Note from Lawrence to Oles Grain.

g. An unsecured note from Oles Grain and David Oles, individually, to Lawrence in the principal amount of $900,000.00. The note provides for no interest and no payments until 1991, when $175,000.00 is due. Two other installments of $175,000.00 each are due in 1992, 1993

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