The Surety Relationship in the Agricultural Commodity Storage Context and Grain Indemnity Funds: a Jurisdictional Survey

JurisdictionUnited States,Federal
CitationVol. 40
Publication year2022

40 Creighton L. Rev. 41. THE SURETY RELATIONSHIP IN THE AGRICULTURAL COMMODITY STORAGE CONTEXT AND GRAIN INDEMNITY FUNDS: A JURISDICTIONAL SURVEY

Creighton Law Review


Vol. 40


PETER E. KARNEY & JOHN F. FATINO(fn*)


I. INTRODUCTION

The following Article discusses the federal and subject state jurisdictions'(fn1) statutory schemes for the regulation of those engaged in the storage of grain and related agricultural commodities and the requirements each of the jurisdictions imposes concerning surety bonds or other types of surety arrangements for such transactions. Each of the jurisdictions treats these matters differently both in terms of applicable statutory regulations and scope/types of coverage required. Each jurisdiction's statute is somewhat unique; albeit case law from other jurisdictions can enlighten counsel and the courts when interpreting a particular statute or surety relationship in a given situation.

This Article will analyze the materials based upon an introduction and an examination of the applicable federal statutes and regulations. Finally, the subject state jurisdictions' statutes and case law will be examined.

A. THE CASE FOR COMMENTARY

The topic is worthy of scholarly commentary as the courts, practitioners, producers, and the community alike can find themselves dealing with the ramifications of a failed agricultural storage facility. It has been estimated that at any one time at least five percent of all grain storage facilities are experiencing financial difficulties.(fn2) The "ripple effect" of a grain storage facility failure can easily cause related failure of other producers. As grain storage is generally deemed to be "open storage," - i.e., the same types of grain from multiple producers are commingled in common bins - hundreds of other producers are impacted by the failure and concomitant delay when a facility fails.(fn3) This same causation would apply to any agricultural commodity that is stored by a party other than the producer.

While a myriad of causes exist for the failure of a grain storage facility, a discussion of each of those causes is beyond the scope of this Article. Suffice it to say, however, that the primary reason why such facilities fail is poor record keeping.(fn4) In the long run, poor record keeping contributes to a net shortage of grain from which a financially strapped operator cannot recover.(fn5) Thus, grain shortages are the "primary symptom of elevator insolvency."(fn6) Given the impact on the com-munity as a whole, it would appear that the exercise of the state's police powers would be appropriate in this arena.(fn7)

In addition, counsel must contemplate the actual nature of the relationship between the producer and the facility. Generally speaking, a storage facility may provide two separate services to producers. The first service is where the facility acts as a grain dealer wherein the operator engages in certain transactions such as cash or credit sales and commodity futures.(fn8) However, this depends upon a particular jurisdiction's regulatory scheme.

The other service involves holding the commodity for the producer as a warehouse. For instance, some state statutes contemplate that a sale has not taken place between the producer and the facility; instead, grain storage contracts are considered "true bailments . . . and the depositors are thereby considered tenants in common of the commingled grain held in open storage."(fn9) The same result could be reached under the case law as well.(fn10) The latter category of service is called a "commercial bailment agreement."(fn11) Those jurisdictions that regulate grain banks treat the relationship between a grain bank and a depositor as controlled by the common law of bailment.(fn12)

Similar problems are experienced by those who have sold grain but have not been paid before the facility shuts down. The problems are largely those of proof and lack of sufficient funds to pay all of the depositors. If the facility agreed to purchase the grain directly, the "sales 'contract' may be written or oral, and may be based upon nothing more than a telephone conversation with the depositor. When the shutdown or bankruptcy finally arrives, many depositors that sold to the elevator may be unpaid or may have been paid with checks that later are dishonored."(fn13)

These problems are compounded by the fact that the operator of a facility must also secure a line of operating capital. Needless to say, the commodity itself is the operator's greatest asset because, generally speaking, the operator's fixed assets would be insufficient to collateralize a loan.(fn14) In turn, the operator's lenders will not finance the operation without "receiving warehouse receipts covering sufficient grain to secure a loan."(fn15)

Accordingly, this Article will examine the federal statutory scheme for grain warehouses and operators of packing and stock yard facilities.(fn16) Further, this Article will examine the various jurisdictions' approaches to the imposition of a surety relationship on those entities which engage in the storage of grain and other agricultural commodities.(fn17)

B. AN OVERVIEW OF THE RULES OF SALES AND WAREHOUSING

Before embarking on a case that involves a dispute concerning the storage of agricultural commodities and bonds written in connection with the endeavor, counsel will want to closely examine her state's adopted version of the Uniform Commercial Code concerning the requirement of a writing for the sale of goods.(fn18) Counsel should also study when title passes to goods.(fn19) A purchaser acquires all of the interest held by the transferor unless there was a transfer of a limited interest.(fn20) After all, a commodity is a good within the meaning of the Uniform Commercial Code,(fn21) and whether a transaction is covered by the Uniform Commercial Code is a question of law.(fn22)

Further, in the absence of contrary statutory language that regulates the warehousing of agricultural commodities, the Uniform Commercial Code will most likely govern the transaction under the warehousing provisions of Article Seven.(fn23) Needless to say, counsel will also want to examine the subject statute and any written evidence of a surety relationship.

At the same time, a short discussion concerning "warehouse law" or "documents of title" as described by the drafters of the Uniform Commercial Code is warranted. Ordinarily, a warehouse is liable for damage to goods in its possession only if the warehouse fails to use ordinary care, that is, a "failure to exercise care . . . that a reasonably careful person would exercise under similar circumstances."(fn24) If the damages could not have been avoided even if reasonable care was used, the warehouse is not liable.(fn25) Also, damages may be limited under the warehouse receipt or the parties' storage agreement.(fn26) However, under no circumstances may the warehouse limit its liability for conversion.(fn27) Similarly, specifications may be placed in the warehouse receipt concerning "reasonable" provisions for the "time and manner of presenting claims and commencing actions based on the bailment . . . ."(fn28)

The Uniform Commercial Code also contains provisions concerning the purchase of a document of title, which represents goods held by the warehouse. The Uniform Commercial Code provides that when a document of title, other than a bill of lading, is purchased in good faith, the purchaser may recover "damages caused by the nonreceipt or misdescription of the goods" unless "the document conspicuously indicates that either the issuer does not know" the contents or the purchaser has notice of the fact.(fn29)

Like the provisions for the sale of goods, Article Seven of the Uniform Commercial Code contains a provision for the essential terms of a warehouse receipt.(fn30) However, in the case of agricultural commodities stored under a statute that requires a bond, "a receipt issued for the goods is deemed to be a warehouse receipt even if issued by a person that is the owner of the goods and is not a warehouse."(fn31)

Iowa's adoption of section 7-202 of the Uniform Commercial Code contains additional provisions that are noteworthy. First, if applicable, the receipt must reflect in its printed or written terms that the "receipt is issued for goods of which the warehouse operator is owner, either solely or jointly or in common with others . . . ."(fn32) Second, the receipt must contain a "statement of the amount of advances made and of liabilities incurred for which the warehouse operator claims a lien or security interest."(fn33) Moreover, a "warehouse operator may insert in the receipt any other terms which are not contrary to the provisions of this chapter and do not impair the warehouse operator's obligation of delivery . . . or duty of care."(fn34)

Furthermore, the Uniform Commercial Code addresses the negotiable nature of the warehouse receipt. According to the 2001 and prior versions of section 7-104 of the Uniform Commercial Code, "a warehouse receipt, bill of lading or other document of title is negotiable" if the goods are deliverable to the bearer or the "order of a named person" or when the instrument concerns international trade and the instrument runs to a person so named or its assign.(fn35) It is against this back drop that the various statutory schemes set out to change the paradigm regarding...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT