North Dakota Public Service Com'n v. Valley Farmers Bean Ass'n

• Decision Date: 27 March 1985
• Docket Number: 10769,Nos. 10768,s. 10768
• Citation: 365 N.W.2d 528
• Parties: 40 UCC Rep.Serv. 1847 NORTH DAKOTA PUBLIC SERVICE COMMISSION, Petitioner, v. VALLEY FARMERS BEAN ASSOCIATION, Respondent. STATE of North Dakota ex rel. NORTH DAKOTA PUBLIC SERVICE COMMISSION as Trustee for the Benefit of Outstanding Receipt Holders of Valley Farmers Bean Association, Plaintiff and Appellee, v. MILLERS NATIONAL INSURANCE COMPANY, Defendant, Third Party Plaintiff and Appellant, v. Joseph F. LARSON, Myron Brieland and Norman Erickson, Third Party Defendants and Appellants, First State Bank of Buxton, Buxton, North Dakota, First and Farmers Bank, Portland, North Dakota, and Bank of North Dakota, Bismarck, North Dakota, Appellants. Civ., and 10789.
• Court: North Dakota Supreme Court

Page 528

365 N.W.2d 528

40 UCC Rep.Serv. 1847

NORTH DAKOTA PUBLIC SERVICE COMMISSION, Petitioner, v. VALLEY FARMERS BEAN ASSOCIATION, Respondent.

STATE of North Dakota ex rel. NORTH DAKOTA PUBLIC SERVICE

COMMISSION as Trustee for the Benefit of

Outstanding Receipt Holders of Valley

Farmers Bean Association, Plaintiff and Appellee, v. MILLERS NATIONAL INSURANCE COMPANY, Defendant, Third Party Plaintiff and Appellant, v. Joseph F. LARSON, Myron Brieland and Norman Erickson, Third

Party Defendants and Appellants,

First State Bank of Buxton, Buxton, North Dakota, First and

Farmers Bank, Portland, North Dakota, and Bank of

North Dakota, Bismarck, North Dakota, Appellants.

Civ. Nos. 10768, 10769, and 10789.

Supreme Court of North Dakota.

March 27, 1985.

Conmy, Feste, Bossart, Hubbard & Corwin, Fargo, for Millers Nat. Ins. Co.; argued by Wickham Corwin, Fargo.

Bruce E. Bohlman, Grand Forks, for Joseph F. Larson, Myron Brieland and Norman Erickson.

Jerald L. Engelman, of Vinje & Engelman, Mayville, and Damon E. Anderson, Grand Forks, for First State Bank of Buxton, Buxton; First and Farmers Bank, Portland; and Bank of N.D., Bismarck; argued by Damon E. Anderson, Grand Forks.

Daniel S. Kuntz, Asst. Atty. Gen., Public Service Com'n, Bismarck, for Public Service Com'n.

ERICKSTAD, Chief Justice.

These are consolidated appeals from a judgment and amended judgment entered by the District Court of Traill County in connection with insolvency proceedings commenced by the North Dakota Public Service Commission [PSC] against Valley Farmers Bean Association [VFBA]. The district court found VFBA to be an insolvent grain warehouseman under the provisions of Chapter 60-04, N.D.C.C., ¹ and appointed the PSC to serve as trustee of a trust fund created for the benefit of outstanding receipt holders. The district court directed the PSC as trustee to pay approximately 114 claims of persons who delivered dry edible beans to VFBA but did not receive redelivery or payment for the beans. The appeals in this case relate to the district court's granting of summary judgment against the surety and approval of the trustee's report on the marshaling of trust fund assets.

The surety, Millers National Insurance Company [Millers], and appellants Joseph F. Larson, Myron Brieland, and Norman Erickson, former members of the board of directors of VFBA [Directors], ² challenge the district court's determination that Millers is liable for $171,337, which represents the deficiency between VFBA's inventory on the date of insolvency and the amount

represented by outstanding receipts. Appellants First State Bank of Buxton; First and Farmers Bank, Portland; and Bank of North Dakota [Banks] challenge the district court's denial of their claim for $2,172,345, which represents the unpaid principal and interest due on a loan made by the Banks to VFBA. We affirm the judgment and amended judgment of the district court.

BACKGROUND

From August 1, 1981, to July 31, 1982, VFBA was a licensed public warehouseman which specialized in the storage and sale of dry edible beans and operated elevators at Portland, Buxton and Gilby. Millers is the surety under three North Dakota warehouseman's bonds naming VFBA as principal and containing a combined penal sum of $450,000.

During the spring of 1981, VFBA executed a number of "Dry Edible Pinto Bean Grower Agreement[s]" [grower agreements] with producers. Under the grower agreements, each producer contracted to grow a designated quantity of pinto beans during the 1981 season for delivery to VFBA at the time of harvest. VFBA agreed to pay a specified price per hundred weight for the beans in three installments following delivery. The grower agreements contained delivery dates of October 30, 1981; October 31, 1981; or November 1, 1981.

VFBA accepted delivery of beans from farmers in excess of their contract amounts and also accepted delivery of beans from farmers who had not entered into grower agreements. Some contracted beans were delivered to VFBA after the grower agreement delivery dates; however, VFBA was unable to accept delivery of beans from some growers because its elevators were full.

Upon receipt of the beans, VFBA issued scale tickets showing the quantity and grade of the beans and the warehouse location, but the scale tickets were not subsequently converted to storage tickets or cash tickets. Most of the people who entered into grower agreements were paid for the beans in accordance with the agreement.

During January 1982, VFBA executed a promissory note and a discretionary line of credit agreement with the First State Bank of Buxton for the sum of $3,400,000. The First State Bank of Buxton was the lead member in a loan participation arrangement involving the First and Farmers Bank, Portland and the Bank of North Dakota. As security for the loan, VFBA executed two security agreements giving the Banks a security interest in all of VFBA's personal property, including inventory, accounts, and contract rights. Financing statements were filed with the Traill County Register of Deeds and the Secretary of State.

As VFBA periodically drew against its line of credit, "warehouse receipts" were prepared and delivered to the Banks. Each receipt stated that a quantity of beans had been "[r]eceived in store of First State Bank of Buxton." Written notations on the receipts stated that they were "non-negotiable" and were either "collateral" or "security" for a "seasonal line of credit of $3.4 million."

In early 1982, VFBA attempted to compile a list of all deliveries made by producers during the fall of 1981 which were not made pursuant to grower agreements. On May 5, 1982, VFBA sent those producers a letter which stated in relevant part:

"Our records reflect that you currently have on storage at our facilities the quantity of pinto beans as set forth at the end of this letter.

"The Board of Directors has authorized the management to give you three choices with respect to these pinto beans:

"The Association offers to purchase your pinto beans by paying $10 per hundred weight, less one-half of the applicable storage as set by North Dakota law, with payment to be made as soon as feasible, but in no event later than June 30, 1982, and an unsecured promissory note, bearing no interest due and payable in 20 years, less the other one-half of the applicable storage as set by North Dakota law, so that the net amount of your payment and promissory note would be as indicated below. Grade of beans other than No. 1 reduces the price accordingly.

"Alternately, you may elect to continue your pinto beans on storage, at rates as currently established by North Dakota, with further directions and instructions concerning the marketing of said commodity to be given by you in the future as you desire.

"You may elect to have your pinto beans returned to you. In that case they will be cleaned and bagged for which the Association will charge $3.15 per hundred weight less storage as currently established by North Dakota law, with return delivery dates to be set in the order they are received. Said delivery would be approximately during the month of July 1982.

"We must have your election of one of the three choices set forth above in our possession by no later than Monday, May 17, 1982. If we do not hear from you by then we will assume that you wish to continue to have us hold your beans on storage pursuant to your further instructions as you might direct in the future." [Emphasis in original.]

Most of the producers who received the letter, which has commonly become known as the "10/10" contract or letter, chose the first option proposal. While most of the producers signed and returned the 10/10 letter in accordance with its terms, some producers did not sign or return the letter, some signed and returned it without selecting an option, and others did not sign or return it until after May 17, 1982. None of the producers received a cash payment, a promissory note or redelivery of their beans in accordance with the terms of the 10/10 letter.

In August 1982, the PSC filed an application for appointment as trustee of a trust fund for the benefit of outstanding receipt holders of VFBA. Following a hearing, the district court determined that VFBA was an insolvent grain warehouseman as defined in Chapter 60-04, N.D.C.C., and granted the PSC's application. On November 16, 1982, VFBA filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On January 24, 1983, the bankruptcy court lifted the automatic stay and authorized the PSC to continue to act as trustee under state law.

The PSC published notice to holders of unredeemed receipts, and claims from the Banks and from 114 persons were filed. The PSC liquidated VFBA's inventory for which it received $271,400. On October 25, 1983, the PSC filed with the district court its report recommending that all of the claims be paid from the trust fund, with the exception of the Banks' claim. The PSC recommended that disbursements from the trust fund be made first from the proceeds of the sale of VFBA inventory and then from funds received from Millers, the surety on the three warehouseman's bonds.

The PSC filed a complaint against Millers seeking deposit of the penal sums of the bonds into the trust fund, and Millers filed a third party complaint against the Directors of VFBA seeking indemnification. The district court consolidated the PSC's action against Millers with the insolvency proceeding and severed Millers' third party action against the Directors.

The district court directed Millers to prepare a motion for summary judgment on the legal issues and directed the PSC and the Banks to categorize claims "based upon the type of transaction leading to the claim." Following a hearing, the district court dismissed the Banks' claim, ordered Millers to pay the balance necessary to satisfy the other claims, and directed the PSC to file a final report on the proposed...