Elevator Insolvencies and Bankruptcy Proceedings

I recently received a call from a farmer regarding a grain elevator insolvency, and thought this would be a good time to review some of the laws related to elevator insolvencies.  As Mikkel Pates pointed out in March, in the past few years we have seen several significant elevator insolvencies.

Generally, grain buyers and public warehouses doing business in North Dakota are regulated by the Public Service Commission (“PSC”).  Seed sellers and certain other categories of merchants are excluded from this jurisdiction.  There are separate provisions for grain buyers and public warehouses, although these provisions largely parallel each other.

Farmers who sell grain to their local elevator are almost always dealing with a grain buyer or warehouse that is regulated by the PSC.  The PSC’s authority includes proceedings triggered by the insolvency of a grain buyer.  A grain buyer is insolvent when it “refuses, neglects, or is unable upon proper demand to make payment for grain purchased or marketed…or is unable to make redelivery upon proper demand.”  In other words, if the elevator cannot pay you promptly or give you back your grain, it is insolvent.  There are options available to protect you from loss.  If you discover an elevator is insolvent, you probably have the right to refuse to deliver under your contract. If the elevator has received grain on credit while insolvent, you may reclaim the goods within ten days of delivery.  If the elevator has represented in writing that it is solvent, the ten day restriction probably will not apply.  It is important to act quickly upon discovering that a grain buyer is insolvent to protect yourself from loss.

A “credit-sale contract,” allows for payment more than thirty days after delivery of the grain.  For a grain sale to be a legal credit-sale contract, the contract must be in writing, contain a number of required items such as the price per unit, date payment is to be made, and most significantly, a clear and prominent notice that the sale is not protected by the bond coverage which is intended to protect farmers making cash sales.

For cash sales, grain buyers are required to file a bond with the PSC for the benefit of “all persons selling grain to or through the grain buyer.”  Public warehousemen must also file a bond for the benefit of “all persons storing or selling grain in such warehouse.”  Unfortunately, these bonds typically cover an insignificant fraction of the total claims in an insolvency proceeding.  Farmers who sell under a credit-sale contract are not entitled to the proceeds of the bond, but are entitled to a partial payment from an indemnity fund created specifically for credit-sale contracts. 

When an insolvent grain buyer files for bankruptcy, things become even more complicated.  If there is any grain in the inventory of a warehouse, including grain that farmers sold directly to the elevator, it will immediately become an asset administered by the bankruptcy trustee.  If the grain is only being stored by the elevator, however, it is considered a “bailment,” and the farmer who is storing it there will likely have the ability to recover that asset.    The PSC is obligated as trustee to protect and act on behalf of the unpaid farmers. There have been disputes in the past, however, regarding the PSC’s actions or inactions as trustee.

For these reasons, it is important for farmers to have legal counsel involved in every step of this process. It is best to involve counsel immediately upon discovery of an insolvent grain buyer to be aware of all the options available to you.

(Posted by Derrick Braaten)

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