Western Consol. Coop. v. Pew

• Decision Date: 09 March 2011
• Docket Number: No. 25327.,25327.
• Citation: 2011 S.D. 9,795 N.W.2d 390
• Parties: WESTERN CONSOLIDATED COOPERATIVE, Plaintiff and Appellee,v.Lynn PEW and Lynette Pew, Defendants,andLaBolt Farmers Grain Company, Defendant and Appellant.
• Court: South Dakota Supreme Court

795 N.W.2d 390
2011 S.D. 9

WESTERN CONSOLIDATED COOPERATIVE, Plaintiff and Appellee,
v.
Lynn PEW and Lynette Pew, Defendants,andLaBolt Farmers Grain Company, Defendant and Appellant.

No. 25327.

Supreme Court of South Dakota.

Argued Feb. 17, 2010.Decided March 9, 2011.

[795 N.W.2d 392]

Richard L. Russman, Kimberly A. Dorsett of Richardson, Wyly, Wise, Sauck & Hieb, LLP, Aberdeen, South Dakota, Attorneys for plaintiff and appellee.Greg L. Peterson, Melissa E. Neville of Bantz, Gosch & Cremer, LLC, Aberdeen, South Dakota, Attorneys for defendant and appellant.

[795 N.W.2d 393]

GILBERTSON, Chief Justice.

[¶ 1.] Western Consolidated Cooperative (WestCon) sued Lynn Pew for conversion of grain he stole and sold to LaBolt Farmers Grain Company (LaBolt). WestCon also sued LaBolt for conversion for its role in purchasing the stolen grain from Pew. After discovery, WestCon's motion for summary judgment was granted and the circuit court ordered judgment jointly and severally against Pew and LaBolt. LaBolt appeals, arguing that its lack of knowledge about Pew's theft provided it with a defense against liability, or in the alternative, served to reduce proportionally its share of the damages payable to WestCon. LaBolt also argues that WestCon failed to mitigate its damages. We affirm in part and reverse in part and remand.

FACTS

[¶ 2.] WestCon is a Minnesota cooperative with a grain elevator in Milbank, South Dakota. WestCon purchased the grain elevator from Harvest States in January 2003. In the final three years Harvest States owned the elevator, it employed Pew on a contract basis to be its lead grain hauler. Pew would make one or more trips from the elevator a day using his own semi-truck. When the elevator was sold to WestCon, Pew lost that job because WestCon had its own truckers. Pew never worked for the grain elevator after ownership was assumed by WestCon.

[¶ 3.] Beginning in mid-January 2003, after the sale to WestCon, and through January 2005, Pew surreptitiously stole grain from the WestCon grain elevator one truckload at a time and sold it in his name. Pew was able to steal the grain during the early morning hours when the elevator was unattended. Pew testified that when he stole the grain he would pull up to the elevator early in the morning around 5:30 a.m., fill his semi-truck, and leave. Given his prior relationship with Harvest States, the sight of Pew filling his semi-truck with grain was nothing out of the ordinary. Also due to that relationship, Pew was skilled at loading his semi-truck from the storage facility. Pew testified he could fill his semi-truck in a few minutes and be on his way.

[¶ 4.] Pew stated he found the grain elevator unlocked all but about a dozen times during the two years he stole grain.¹ By the time Pew was apprehended, the shortage totaled 89,000 bushels taken in approximately 100 loads during the two-year period he perpetrated the thefts. By taking the grain one truckload at a time (approximately 950 bushels per truckload), during this two-year time period, Pew was able to avoid alerting WestCon to outside theft as the source of its losses.

[¶ 5.] WestCon became aware of shortages at its Milbank facility in January 2003. Chad Syltie, WestCon's credit manager who was assigned the task of determining the cause of the shortages, originally thought it was due to shrinkage or a miscount until March 2003 when the shortage grew to an estimated 22,000 bushels of grain. Early in the two-year scheme, WestCon did not identify outside theft as the source of the shortages because of the amount taken each time and because it had standard procedures in place to detect

[795 N.W.2d 394]

such thefts. Those policies were, according to Syltie's testimony, common for area silos.

[¶ 6.] WestCon's theft and shortage detection procedures included conducting a physical inventory each month and locking the gravity chutes on its two silos. It also maintained a running total for the grain in the silos using daily computer-generated position reports based on daily purchases and outbound shipments. Because grain has a shrinkage factor of two-to-three percent at any given time, the shortages in the first three months did not alert WestCon to any irregularities.

[¶ 7.] Once WestCon's management realized shrinkage was not the source of the shortages, its next theory was that the inventory it purchased in January 2003 from Harvest States was either miscalculated or understated. Over the course of a few months, Syltie was able to verify that Harvest States had measured its inventory correctly before the time of the sale and that no understatement had occurred.

[¶ 8.] On May 5, 2003, Mick Johnson, WestCon's manager, reported the shortage to the Milbank Police Department during an investigation into an unrelated break-in of WestCon's office area. According to Police Chief Tim Kwasniewski, Johnson laid out a scenario similar to the one used by Pew in which Johnson theorized that the grain could be stolen one truckload at a time using the gravity fed chutes on the silos. According to Kwasniewski, Johnson stated that all the thief would need was the key to the padlock on the silo chutes. Kwasniewski would later attest that it was his impression that Johnson suspected something criminal in nature was occurring. Kwasniewski agreed to have patrol cars make additional checks on the WestCon elevator after hours. Kwasniewski's affidavit did not identify whether Johnson suspected an internal or external thief was at work. However, according to Syltie's testimony, WestCon still continued to suspect employee theft or fraud as of May 2003. As a result, WestCon did not request additional police intervention. Instead, it continued to direct employees to lock the silo chutes at night.

[¶ 9.] Syltie next focused his investigation on an employee who had transitioned from Harvest States to WestCon after the sale and then abruptly quit a few months later. That employee's background, work, and role at the facility were investigated. However, the employee was found to have no role in the shortages. Other employees were also considered during the on-going investigation, but none were determined to be involved.

[¶ 10.] WestCon subsequently theorized that perhaps one or more of its customers were either miscalculating or purposely understating inbound loads. When that did not provide any answers, WestCon investigated its outbound truckers who transported all of its grain from Milbank to Minnesota for loading onto railcars. Again, no thefts or discrepancies were found.

[¶ 11.] All of WestCon's efforts to ascertain the source of the shortages were unsuccessful and each took several months to resolve. WestCon did not originally consider an outside thief due to the location of the Milbank facility. The elevator, located inside city limits, had no history of prior thefts according to Harvest States. As Syltie testified: “[they had] never [had] a theft like this before, and it took everyone by surprise.” He also testified that he was unaware of any other security measures taken by other elevators in the area to protect against this kind of loss apart from those utilized by WestCon.

[¶ 12.] Finally, after the elimination of the other possible causes of the shortages,

[795 N.W.2d 395]

WestCon concluded in summer 2004 that the source of the losses was likely a thief external to its operation. Thereafter, WestCon changed the locks on the silos on a monthly basis. When the shortages continued to mount, it changed the locks weekly in November and early December. ² In fall 2004, WestCon contacted the police department to conduct still camera surveillance. In early December, the police department's camera photographed a suspect. However, the camera was not at the right angle to identify the thief. WestCon changed the locks once again and the camera was repositioned.

[¶ 13.] On January 10 and January 18, 2005, Pew was caught on camera loading grain. Pew was apprehended in the process of accessing the elevator for a third time on January 19, 2005. Pew was charged criminally in federal court and eventually pleaded guilty.³

[¶ 14.] WestCon's total losses were estimated at $726,000. Defendant LaBolt purchased 82,370.87 bushels of WestCon grain from Pew between March 1, 2003, and December 7, 2004. LaBolt's check register for this period showed it paid Pew $424,334.05 for the grain. LaBolt did not inquire as to the ownership of the grain sold by Pew. LaBolt also had no way of knowing to whom the grain belonged at the time of purchase.

[¶ 15.] In addition to the 82,370.87 bushels sold to LaBolt, Pew estimated that he sold 30% of all the WestCon grain he stole to Wheaton–Dumont, and 10,500 bushels of stolen corn to Northern Lights Ethanol, LLC. In addition, David Hanson, a friend of Pew's and his part-time employer, reported a shortage of 9,000 bushels of grain from his silos to the Milbank police. Hanson suspected Pew had stolen the grain while working on Hanson's property.

[¶ 16.] Upon Pew's arrest, WestCon recovered $51,093.36 in soybeans from LaBolt's facility. WestCon also recovered a cashier's check for $6,850 for stolen grain sold by Pew. In addition, WestCon recovered various items of personal property from Pew and his wife, Lynette Pew, valued at approximately $85,255.

[¶ 17.] WestCon sued Pew for conversion of the grain. WestCon moved to join LaBolt and Lynette Pew. WestCon amended its complaint to allege LaBolt was liable to WestCon for conversion by purchasing WestCon's grain from Pew. WestCon also claimed that Lynette Pew was liable to WestCon for conversion because she retained proceeds from the sale of stolen grain. LaBolt filed a cross-claim against Pew and Lynette Pew for indemnity and contribution.

[¶ 18.] WestCon moved for summary judgment against all defendants. LaBolt objected and asserted genuine issues of material fact existed on the issue of damages and LaBolt's defenses. After a hearing, the circuit court ordered summary...