North Dakota Public Service Com'n v. Jamestown Farmers Elevator, Inc.

• Decision Date: 18 April 1988
• Docket Number: No. 870214,870214
• Citation: 422 N.W.2d 405
• Parties: NORTH DAKOTA PUBLIC SERVICE COMMISSION, Petitioner and Appellee, v. JAMESTOWN FARMERS ELEVATOR, INC., Respondent, Farmland Mutual Insurance Company, Respondent and Appellant. Civ.
• Court: North Dakota Supreme Court

Page 405

422 N.W.2d 405

NORTH DAKOTA PUBLIC SERVICE COMMISSION, Petitioner and Appellee, v. JAMESTOWN FARMERS ELEVATOR, INC., Respondent Farmland Mutual Insurance Company, Respondent and Appellant.

Civ. No. 870214.

Supreme Court of North Dakota.

April 18, 1988.

Lynn Lee Schloesser (argued), Public Service Com'n, State Capitol, Bismarck, for petitioner and appellee.

Lamb, McNair, Larson & Carlson, Ltd., Fargo, for respondent and appellant; argued by Bruce H. Carlson.

MESCHKE, Justice.

Farmland Mutual Insurance Company (Farmland), the surety on a warehouseman's bond for Jamestown Farmers Elevator, Inc. (JFE), appealed from a judgment making $41,634.12 payable to the North Dakota Public Service Commission (PSC) for disbursement to the Commodity Credit Corporation (CCC). We reverse.

JFE, a public grain warehouse licensed by the PSC, filed for liquidation as a bankrupt under Chapter 7 of the Bankruptcy Code on January 21, 1983. A trustee of the bankruptcy estate was appointed on February 22, 1983.

At bankruptcy, JFE held a substantial quantity of grain in storage, for which it had issued warehouse receipts. CCC held the warehouse receipts, which were pledged as collateral by farmers for their loans from CCC. The bankruptcy trustee attempted to sell the stored grain in August 1983, but did not do so until after March 29, 1984, when the bankruptcy court resolved a dispute as to ownership of the stored grain and warehouse receipts in favor of CCC. ¹ When the grain was sold, CCC assigned its warehouse receipts to the purchaser of the grain.

At bankruptcy, the stored grain was in good condition. After that date, no one took any significant steps to preserve the grain and it deteriorated in quality due to heat, moisture, and insect damage. When the grain was sold in April 1984, its worth had decreased from deterioration in quality. The bankruptcy trustee eventually paid CCC $472,084.41, as the net proceeds from sale of the stored grain.

Thereafter, CCC wrote the PSC, asserting a claim for $192,583.23 against JFE's bond. CCC calculated its claimed loss by subtracting the $472,084.41 paid to it by the bankruptcy trustee from $664,667.64, which CCC attributed as the value of the grain. The PSC asked the bankruptcy court to modify the automatic stay, which the bankruptcy court did on November 13, 1985. Then, the PSC applied to the state district court for appointment as trustee under Ch. 60-04, N.D.C.C. ² The trial court appointed the PSC as statutory trustee.

The trial court held that the grain "must be valued at the market price on the date of insolvency," January 21, 1983. Curiously, the trial court ruled that "CCC's claim under State insolvency law" and the "accrued liability of the surety [Farmland]" were both "suspended by exercise of exclusive jurisdiction of the bankruptcy court," but went on to hold Farmland liable for the loss from deterioration of the quality of the grain during the bankruptcy.

The trial court calculated the loss as $41,634.12, by determining that the market value of the grain on January 21, 1983 was $573,632.17, and deducting the entire proceeds from sale of the grain, $531,998.05, rather than the net distribution to CCC of $472,084.41. In effect, this disallowed as part of the loss $59,913.64 paid for administrative expenses of the trustee in bankruptcy. The trial court ordered Farmland to pay PSC the $41,634.12 deficit, plus interest, and ordered the PSC to disburse those funds, less expenses of $2,691.21, to CCC. Farmland appealed from the judgment.

Contending that it "insured the acts of the warehouseman which, after the filing of the bankruptcy petition, had neither the legal authority nor capacity to care for the grain," Farmland argued that: (1) CCC had no claim against the bond because it had assigned the warehouse receipts to the buyer of the grain; (2) CCC breached a duty to care for the grain and to mitigate its damages; and (3) the bankruptcy trustee was CCC's agent in caring for the grain. The PSC responded that: (1) CCC's claim was valid; (2) the bankruptcy trustee, but not CCC, had a duty to care for the grain; and (3) the bankruptcy trustee was obligated to fulfill the duties of a bonded warehouseman for which Farmland was liable.

The PSC also argued that the trial court erred in failing to allow the bankruptcy trustee's expenses as part of the claim. The PSC, however, "did not cross-appeal and may not seek a more favorable result on appeal than it received in the trial court." Board of County Comm'rs, McLean County v. Peterson Excavating, Inc., 406 N.W.2d 674, 677 (N.D.1987).

We assess Farmland's central thesis that it only "insured the acts of the warehouseman which, after the filing of the bankruptcy petition, had neither the legal authority nor capacity to care for the grain."

Section 60-02-09, N.D.C.C., required that a public warehouseman file a bond to:

"3. Run to the state of North Dakota for the benefit of all persons storing or selling grain in such warehouse;

"4. Be conditioned:

"a. For the faithful performance of his duties as public warehouseman or track buyer;

"b. For compliance with the provisions of law and the rules and regulations of the commission relating to the storage and purchase of grain by such warehouseman or track buyer; ..."

The warehouseman's duty was set by Sec. 60-02-22, N.D.C.C.: "A public warehouseman shall be liable to the owner for the delivery of the kind, grade, and quantity of grain called for by the warehouse receipt."

Chapter 60-04, N.D.C.C., established an insolvency procedure "designed to provide a prompt method for receipt holders to recover their claims." North Dakota Pub. Serv. Comm'n v. Valley Farmers Bean Ass'n, supra, 365 N.W.2d 528, 547 (N.D.1985). Section 60-04-02, N.D.C.C., said:

"Insolvency of warehouseman--Trust fund established.--Whenever any warehouseman, ..., shall refuse or neglect, ..., to redeem any receipt issued by him, such warehouseman shall be deemed to be insolvent within the meaning of this chapter, and a trust fund for the redemption of outstanding storage receipts of such warehouseman shall consist of the following:

"1. All the grain in said warehouse;

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"3. The cause of action for damages upon any bond given by said warehouseman to the state of North Dakota to insure faithful performance of his duties as a warehouseman; ..."

These statutes framed JFE's obligation and Farmland's liability as its surety. "A surety's liability on a statutory bond could not be extended to cover duties of the warehouseman other than those defined in the statutes...." 9A Appleman, Insurance Law and Practice Sec. 5752, pp. 538- 539 (1981). See also Republic Underwriters v. Tillamook Bay Fish Co., 127 S.W.2d 219 (Tex.Civ.App.1937). Thus, Farmland's liability as surety on JFE's bond should not extend beyond that created by pertinent statutes.

From the filing of the bankruptcy petition, the grain was in the exclusive custody of the bankruptcy court ("custodia legis"). Acme Harvester Co. v. Beekman Lumber Co., 222 U.S. 300, 32 S.Ct. 96, 56 L.Ed. 208 (1911); Red Carpet Corp. v. Miller, 708 F.2d 1576 (11th Cir.1983). 11 U.S.C. Sec. 521(3) required JFE to "surrender to the trustee all property of the estate," which, under 11 U.S.C. Sec. 541(a)(1), is comprised of "all legal or equitable interests of the debtor."

Both the bankruptcy trustee and CCC knew that the quality of the grain was deteriorating. The trustee took no significant steps to protect grain quality and CCC did not request him to do so. The trustee of a bankrupt grain warehouseman has an "obligation to protect the...