Mitchellville Co-op. v. Indian Creek Corp.

• Decision Date: 26 February 1991
• Docket Number: No. 90-536,90-536
• Citation: 469 N.W.2d 258
• Parties: MITCHELLVILLE COOPERATIVE, Appellee, v. INDIAN CREEK CORPORATION, Appellant.
• Court: Iowa Court of Appeals

Page 258

469 N.W.2d 258

MITCHELLVILLE COOPERATIVE, Appellee, v. INDIAN CREEK CORPORATION, Appellant.

No. 90-536.

Court of Appeals of Iowa.

Feb. 26, 1991.

Curt N. Daniels, Mingo, for appellant.

Mark C. Feldmann of Beving, Swanson & Forrest, P.C. and Douglas A. Haag of Patterson, Lorentzen, Duffield, Timmons, Irish, Becker & Ordway, Des Moines, for appellee.

Heard by DONIELSON, P.J., and HAYDEN and HABHAB, JJ.

DONIELSON, Presiding Judge.

Indian Creek Corporation ¹ is a family farm corporation engaged in raising hogs. The president and principal shareholder in Indian Creek is Curt Daniels, who has degrees in law and veterinary medicine. Indian Creek is a member of the Mitchellville Cooperative (Co-op) and has shares of common and class B preferred stock which amount to $84,558.27. Indian Creek also purchases hog feed from the Co-op on an open account.

The Co-op brought this suit claiming that $114,492.21 was due from Indian Creek on its open account. Indian Creek filed an affirmative defense and counterclaim based on the doctrine of setoff, claiming that the debt should be set off against the value of its stock. The district court determined that the Co-op's rules did not provide for such a setoff and that Indian Creek failed to prove an equitable right to such a remedy. The court entered judgment against Indian Creek for $114,492.21, plus interest. Indian Creek now appeals.

Indian Creek contends that the Co-op breached its fiduciary duty to Indian Creek as a shareholder by failing to disclose material facts concerning a conflict of interest. During the same time that the Co-op sold hog feed to Indian Creek it also sold hog feed to Land-O-Lakes Cooperative, which is an agricultural cooperative in competition with Indian Creek. Indian Creek also believes that the Co-op should have informed it that a setoff would not be available.

Indian Creek argues that the Co-op had a fiduciary duty to provide an equitable program to redeem deferred dividends held by the Co-op. Indian Creek was required to pay income taxes on these deferred dividends, but then was not able to realize the income.

Indian Creek contends that the Co-op breached its fiduciary duty by engaging in unfair competition when it did not seek Indian Creek's consent to its business arrangement with Land-O-Lakes. Indian Creek states that Land-O-Lakes profited from its purchases from the Co-op, and that Land-O-Lakes then used the income to compete with Indian Creek.

Finally, Indian Creek contends that as a result of the Co-op's breach of fiduciary duty, its claim for setoff was a mature tort claim, and the court erred in not granting it the equitable remedy of setoff.

The crux of the present case is the question of the right of a cooperative member to setoff its cooperative stock against a mature debt owed to the coop. The Iowa Supreme Court has not previously had the occasion to address this issue, thus it is incumbent upon us to determine the purpose of the cooperative under Iowa law, and under what conditions an individual or corporation may redeem preferred stock and offset this amount against a current debt owed to the cooperative.

Iowa Code chapter 499 (1989) sets forth the rules upon which cooperatives may operate in Iowa. Section 499.2 defines an agricultural cooperative as an association "formed to produce, grade, blend, preserve, process, store, warehouse, market, sell, or handle an agricultural product * * *." Pursuant to this section, a cooperative may also "purchase, produce, sell, or supply machinery, petroleum products, equipment, fertilizer, supplies, business services, or educational service * * *." Sections 499.7 and 499.36 provide that the cooperative may conduct business and carry on operations under the management of a board of directors. The cooperative may limit its dealings to members only, and must not conduct more than one half the value of business done with nonmembers. Iowa Code § 499.3.

Concerning the distribution of earnings, section 499.30 provides that after certain deductions, the annual net earnings of the cooperative are to be allocated to the account of each member in proportion to the business done with the coop. A portion of this dividend must be paid to the members in cash, the remainder to be credited to the members in a revolving fund referred to as deferred patronage dividends, or preferred stock. Iowa Code § 499.33. In the payment of these dividends, section 499.33 provides that prior to other payments of deferred patronage stock, priority of payment or redemption of patronage stock is given to deceased natural persons.

Structured on the language of section 499.33, Article VII, section 1(e) of the Mitchellville Cooperative provides for a method in which its members' preferred stock is to be redeemed. The Articles state that priority is given first to the families of deceased members, and then to retired members over the age of 65, the remaining funds applied to all other members. Article VIII, section 2 provides:

2. The deferred patronage dividends for any year shall have priority over those for any subsequent year, except the directors may, at their discretion, pay deferred patronage dividends of deceased members and members who become ineligible without reference to the order of priority herein prescribed.

Against this backdrop, Indian Creek first contends that the failure of the Co-op to adopt a separate "death" redemption policy for corporations constituted a breach of its fiduciary duty to Indian Creek. As a consequence, Indian Creek seeks to offset its preferred stock against the sum due the Co-op on its open account. Indian Creek's theory is based upon the claim that a corporation is the same as a natural person for purposes of setoff or redemption as provided for in chapter 499. Indian Creek points out that under the Iowa statutes a corporation is discriminated against because it cannot die as a natural person, and such a result is unfair.

In support of its proposition, Indian Creek cites to In re Great Plains Royalty Corp., 471 F.2d 1261 (8th Cir.1973). In Great Plains, two cooperatives refused to refund patronage capital credits to the estate of a defunct, bankrupt corporation. 471 F.2d at 1262-63. Under the bylaws of the cooperatives, all amounts received from patronage in excess of operating costs and expenses were to be credited to the member-patron's account as though these amounts had been refunded to the patron in cash and then returned to the cooperative for inclusion in its capital account. Id. at 1263. The bylaws additionally provided that the cooperative board of directors may retire patronage credits on a first-in, first-out basis. Id. The bylaws permitted an exception to this first-in, first-out rule by allowing early retirement of a patron's credit upon his death, where the board of directors acting under policies of general application approved. Id. The Eighth Circuit held that the bylaws provisions providing for the early retirement of capital credits upon the death of any patron must be construed to apply to the claims of the bankrupt corporation. Id. at 1264. The court based its holding on its interpretation of North Dakota Cent. Code section 10-15-33(4)(b), which provided that discrimination in distributions of net proceeds is prohibited, except as between members and nonmembers in specific situations. Id.

In the case of Schill v. Langdon Farmers Union Oil Co., 442 N.W.2d 408 (N.D.1989), the North Dakota Supreme Court was faced with the question of whether for purposes of retiring patronage credits a legally dissolved corporation was to be afforded the same treatment as a deceased natural person. The Schill court concluded that in the absence of a bylaw provision to the contrary, the corporation would be afforded the same treatment as a natural person. In so holding, the court cited to 16A Fletcher, Cyclopedia Corporations section 8113, noting that the dissolution of a corporation for purposes of retirement of patronage credits "is not different from the death of a natural person." 442 N.W.2d at 411.

Not all states which have considered questions similar to the facts of the present case have followed the line enunciated in Great Plains and Schill. In Richardson v. South Ky. R. Elec. Co-Op., 566 S.W.2d 779, 784 (Ky.Ct.App.1978), the court held that a cooperative was not required to equate the dissolution or bankruptcy of a corporation with the death of a natural person. The court opined that there were several valid reasons for making a distinction between a corporation and a natural individual:

First, the needs of the surviving members of the family of a farmer or other head of household are usually different from the needs of former shareholders of a dissolved corporation. Second, the liquidation of the corporation is not delayed. The capital credit claim of Richardson Flooring can be assigned to its shareholders on a pro rata basis as a part of the liquidation. Third, and most important, there is no reason to prefer the shareholders of Richardson Flooring over other customers of South Kentucky RECC having capital credits for the years through 1971. If an individual customer had moved out of the cooperative's service area or had gone out of business, he would have as much right to demand retirement of his capital credits as would the former shareholders of Richardson Flooring.

566 S.W.2d at 784.

Upon our examination of the foregoing authority, we conclude the holdings in Great Plains and Schill are inapposite to the facts of the present case. In both Great Plains and Schill, the statutes interpreted by the court explicitly stated that there was to be no discrimination between a corporation and a natural person. Those Iowa sections governing the cooperative's patronage stock do not prohibit a cooperative, through bylaws duly passed by the board of directors, from placing natural persons in a higher priority than a corporation when making payments from the...