DAN DE FARMS INC V STERLING FARM SUPPLY INC
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STATE OF MICHIGAN
COURT OF APPEALS
DAN DE FARMS, INC.,
FOR PUBLICATION
January 12, 2001
9:00 a.m.
Plaintiff-Appellant,
v
STERLING FARM SUPPLY, INC.,
DEPARTMENT OF AGRICULTURE and
MICHIGAN MILLERS MUTUAL INSURANCE
COMPANY,
Defendants-Appellees.
No. 217413
Arenac Circuit Court
LC No. 98-006139-CZ
Updated Copy
March 16, 2001
Before: Gage, P.J., and Gribbs and Sawyer, JJ.
SAWYER, J.
Plaintiff appeals as of right from an order of the circuit court granting summary
disposition to defendants on plaintiff 's action to recover under a bond obtained by a grain dealer
pursuant to the Grain Dealers Act, MCL 285.61 et seq.; MSA 12.119(1) et seq. We affirm.
Plaintiff is a Michigan farm corporation operating in Unionville. Sterling Farm Supply,
Inc., was a licensed grain dealer operating from at least 1981 to 1997. Between 1991 and 1995,
plaintiff sold over $330,000 worth of beans to Sterling for which plaintiff was not paid. Plaintiff
sued, seeking to recover $250,000 from a $50,000 bond acquired by Sterling and issued by
Michigan Millers Mutual Insurance Company pursuant to § 7a of the Grain Dealers Act, MCL
285.67a; MSA 12.119(7.1). The Department of Agriculture was made a party to the action
because that agency is the listed beneficiary on the bond. Although the bond was for $50,000,
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plaintiff sought $250,000 on the basis that the full $50,000 was available for each of the five
years Sterling Farm Supply allegedly violated the Grain Dealers Act.
Between 1991 and 1995, plaintiff transferred over $330,000 worth of beans to Sterling.
Apparently before November 1995, Sterling issued no paperwork for these transactions.
However, on November 22, 1995, Sterling issued a series of "delayed payment agreements" that
covered the beans. Each agreement identified the amount of beans covered, the crop that the
agreement covered (e.g., the 1991-92 navy bean crop), the price to be paid, and the date payment
was to be made. Apparently Sterling made some payments on these agreements, which were
characterized as interest.
In April 1996, Sterling filed for chapter 11 bankruptcy protection, but the petition was
later converted to a chapter 7 liquidation bankruptcy. Plaintiff originally sought recovery under
this bond in the bankruptcy court, which claim was ultimately dismissed for lack of subjectmatter jurisdiction by the bankruptcy court. Plaintiff then filed the instant action.
In the instant action, plaintiff alleged that Sterling was a licensed grain dealer and
principal on a bond obtained from Michigan Millers. Plaintiff further alleged that Sterling
violated the Grain Dealers Act and, therefore, plaintiff is entitled to recovery under the bond
issued by Michigan Millers. Specifically, plaintiff argues that it is entitled to recover $50,000
(the face amount of the bond) for each of the five years that the violations occurred, for a total of
$250,000.
Ultimately, the trial court granted summary disposition to defendants, concluding that the
bonding provisions of the Grain Dealers Act only covered warehouse-receipted produce and that
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this case involved credit sales with promissory notes, not warehouse receipts for bailed grain.
The court also granted summary disposition in favor of Michigan Millers on the grounds that
plaintiff was not a third-party beneficiary on the bond.
Plaintiff first argues that the trial court erred in holding that the bond provision of MCL
285.67a(1); MSA 12.119(7.1)(1) applies only to warehouse receipt holders. We disagree. At the
times relevant to this case, that statute provided as follows:
An application for a grain dealer's license shall be made on a form
provided by the director, shall be filed 30 days in advance of a license expiration
date if there is an outstanding license, and shall be accompanied by a sufficient
bond on a form provided by the director or an irrevocable letter of credit on a form
provided by the director in favor of the department of agriculture which fulfills the
requirements of subsection (4). The bond shall run to the department of
agriculture with sufficient surety conditioned for the faithful performance of the
duties of a grain dealer and compliance with all laws of this state relating to grain
dealers. The amount of the bond for a grain dealer who is a bailee of farm
produce or who issues warehouse receipts shall be $15,000.00 for the first 10,000
bushels of storage capacity of the grain dealer, plus $5,000.00 for each additional
10,000 bushel capacity or fraction of that capacity used for the storage of
warehouse receipted farm produce. The amount of the bond for a grain dealer
who does not own a farm produce storage or handling facility or does not own a
vehicle used to transport farm produce shall be $50,000.00.
The quoted version of the statute reflects the wording of the statute from 1982 until 1998.1 It
does not appear to be disputed that, before the 1982 amendments, the Grain Dealers Act would
not support plaintiff 's position. The pre-1982 version of the statute specifically provided that "a
grain dealer need not be bonded if he is not a bailee of farm produce or does not issue warehouse
receipts." That would clearly suggest that the bond was designed to protect those two types of
farmers: bailors of grain and holders of warehouse receipts.
Similarly, in amendments adopted in 1998, the act once again clearly provides that the
bond shall "apply only to warehouse receipt transactions." However, we are not dealing with
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either the pre-1982 or post-1998 versions of the statute. Rather, at issue is the effect of the 1982
amendments on this case.
The 1982 amendments modified the statute in a number of ways. Most relevant to this
case is the fact that the amendments deleted the provision that a grain dealer need not be bonded
if he is not a bailee of farm produce or does not issue warehouse receipts. Specifically, it deleted
the following phrase: "except that a grain dealer need not be bonded if he is not a bailee of farm
produce or does not issue warehouse receipts." On the surface, this amendment would suggest
that the Legislature intended to extend the bond requirements to all grain dealers, not just those
who are bailees and issuers of warehouse receipts, thus extending the protection of the bonds to
sellers of grain, not just bailors of grain.
Indeed, it is tempting to say that, whether the
Legislature so intended or not, that is what it achieved.
However, there is some evidence to suggest that the Legislature did not intend to make
such a change. First, the Department of Agriculture argues that it has consistently interpreted the
Grain Dealers Act to require bonding only by dealers who bail grain and issue warehouse
receipts. The department argues that the courts should give due deference to its interpretation of
the act. This interpretation is further supported by the fact that the bond, apparently supplied by
the Department of Agriculture, is entitled "Grain Dealers Bond for Warehouse Receipted Farm
Produce."
Second, the Department of Agriculture argues, very convincingly, that deletion of the
sentence stating that grain dealers who are not bailees or issuers of warehouse receipts need not
be bonded merely was replaced by a different phrase in the 1982 version of the statute. In the
pre-1982 version of the statute, the provisions for the amount of the bond was introduced with
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the phrase "[t]he amount of the bond shall be . . . ." In the 1982 version, that phrase was rewritten to read: "The amount of the bond for a grain dealer who is a bailee of farm produce or
issues warehouse receipts shall be . . . ." Thus, it is not so much that the Legislature deleted the
provision that only bailees and issuers of warehouse receipts had to be bonded as it is that it
streamlined the statute by combining two sentences into one.
This analysis does not completely address the fact that the 1982 amendment also added a
provision that a grain dealer who does not own a farm produce storage or handling facility or a
vehicle used to transport farm produce must post a $50,000 bond. At first blush, it would appear
that this provision would extend the bond requirements beyond bailees and issuers of warehouse
receipts because those grain dealers who do bail grain would, of necessity, have to have storage
facilities. However, Michigan Millers supplies a credible rationale. That requirement was added
to cover grain dealers who accept bailed grain and issue warehouse receipts, but physically store
the produce at a location owned by someone else. That is, someone who is essentially a broker
for grain storage. Under the prior statute, such a dealer could escape the bonding requirement.
Third, under the 1982 amendment, the amount of the bond was based on the storage
"capacity used for the storage of warehouse receipted farm produce." This factor reinforces the
idea that the bonding requirement was intended to apply only to bailed produce. The reason is
demonstrated by this example: Assume that a grain dealer has a storage capacity of 100,000
bushels. If all that capacity is designated for the storage of bailed or warehouse-receipted grain,
then the dealer would be obligated to post a $60,000 bond. However, under the formula in the
statute, if the dealer did not bail grain or issue warehouse receipts, and used that storage capacity
solely for grain he had purchased (either as a cash sale or under a price later agreement), the
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amount of bond required would be zero. Accordingly, we conclude that the bonding requirement
does not cover grain purchased under either a cash sale (with delayed payment) or under a price
later agreement.
Fourth, it is not at all clear that the legislative intent behind the 1982 amendments was to
extend the bond protections to grain sale transactions. In reviewing the Legislative Service
Bureau's analysis of the bill that became 1982 PA 33, there is little to suggest that it was the clear
intent to extend the bonding requirement to protect sellers of grain on credit. Although the
analysis notes that the amendment would delete the "provision exempting grain dealers from
bonding if they are not bailees or do not issue warehouse receipts," it does not clearly state why
that deletion was made (which would be consistent with the idea above that the provision was
included elsewhere in the statute and, thus, there was no change in law meriting discussion).
Rather, the legislative analysis suggests that the primary impetus for the 1982
amendments was two-fold. First, to increase the record-keeping requirements of grain dealers so
that the Department of Agriculture could more easily and quickly recognize that a grain dealer
was in financial trouble and headed for bankruptcy. Second, the amendments were intended to
curb abuses of price later agreements by increasing the security required for such agreements.2
What is lacking in the legislative analysis is any strong indication of an intent to protect
farmers who sold to grain dealers on credit, such as the case at bar. Indeed, the very opening of
the analysis indicates that the act covers three types of transactions: "cash sales; transactions in
which a dealer issues a warehouse receipt to a farmer for produce accepted for storage in the
dealer's facilities; and transactions involving price later agreements which allow dealers to take
possession of grain without paying for it with the stipulation that the farmer can receive payment
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when market prices are more favorable than those that prevail at the time of delivery—harvest
time—when prices are often at their lowest." The transaction in the case at bar does not fit any
of those categories. This was a sale on credit.3
For that matter, as discussed above, the bonding requirements do not cover price later
agreements. Rather, subsection 2 of the statute establishes separate security requirements for
price later agreements. Those provisions include keeping the grain in the dealer's inventory by
storing it at the dealer's facility, bailing it at another dealer's facility (with a warehouse receipt),
or selling it to another dealer under a price later agreement. For grain not maintained in the
dealer's inventory, the dealer must maintain cash or other secured investments to cover eighty
percent of the grain not in inventory (along with a purchase commitment covering the grain
deficiency). This latter requirement suggests the purpose behind the security requirements for
price later agreements, i.e., to provide an assurance that the dealer can meet the price of the grain
when it comes time under the price later agreement to set the price. How is this ensured? By
requiring the grain dealer to either keep the grain in storage (in his own facility or elsewhere, but
with title retained), have his own price later agreement with another dealer, or by procuring a
futures contract to ensure the ability to repurchase the grain (and allow for it to be sold at the
market price when the price is set under the price later agreement).
However, while the statute imposes obligations on a dealer to protect against unfavorable
price changes, it does not impose a bonding requirement to ensure that the dealer does, in fact,
retain the grain or otherwise comply with the provisions of the statute. How, then, would a
farmer under a price later agreement be protected? In 1984, the statute was amended to add a
provision, currently found in subsection 6, requiring a grain dealer to grant a security interest in
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the grain upon demand of the farmer selling under a price later agreement—the traditional way a
seller is protected in a credit sale.
Finally, we note that the legislative analysis for the 1998 amendment of the statute (1998
PA 388) is helpful. This amendment added to subsection 1 the provision that the bond would
apply "only to warehouse receipt transactions." The legislative analysis of the bill identified the
reason for the amendment as being to address a problem of a difference between how the
Department of Agriculture applied the bonding requirement and how some courts (apparently the
bankruptcy court in particular) interpreted the statute.
It could be argued that the 1998 amendment indicates that the 1982 amendment did, in
fact, inadvertently extend the bonding requirement (and therefore the protections of the bonds) to
all grain transactions. We think, however, that the better view is that the 1998 amendment
merely clarified the consistent intent of the Legislature that the bonding requirement apply only
to warehouse receipt transactions (for the reasons discussed earlier). The 1998 amendment
served not to change the meaning of the statute, but to make its existing meaning clearer in light
of misinterpretation by the bankruptcy court.4
With all due respect to the federal bankruptcy court, our view is that MCL 285.67a; MSA
12.119(7.1) imposes only, and ever did impose only, a bonding requirement to cover warehouse
receipt transactions for bailed grain. Because the case at bar does not involve a warehouse
receipt transaction, it does not come within the coverage of the bond. Accordingly, the decision
of the trial court is affirmed.
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The resolution of the above issue renders it unnecessary to consider plaintiff 's other issue,
whether plaintiff had the right to enforce the bond as either a direct or third-party beneficiary or
whether plaintiff is entitled to a remand to amend its complaint to seek mandamus directing the
department to seek recovery under the bond.
Affirmed. Defendants may tax costs.
Gage, P.J., concurred.
/s/ David H. Sawyer
/s/ Hilda R. Gage
Gribbs, J. I concur in the result only.
/s/ Roman S. Gribbs
1
The quoted version reflects amendments made in 1988 and 1992.
however, do not materially affect the issue under consideration here.
Those amendments,
2
The situation with the price later agreement is, briefly, as follows. Farmers would deliver grain
to an elevator at harvest time. Because there is, obviously, a huge increase in supply of the
produce at harvest time, that is the time of the year when prices are at their lowest.
Consequently, under price later agreements, while the grain is delivered at harvest time and the
dealer takes title to the grain, the price is not actually set until sometime in the future when grain
prices are more favorable to the farmer. Apparently, the problem lay in the fact that grain dealers
did not adequately guard against unfavorable price changes or made speculative investments in
the commodities futures market, rendering them unable to meet their obligations to the grower
when the time came to settle up the sale. The 1982 amendments were designed to increase the
security a grain dealer had to have on deposit to ensure his ability to meet his obligations to the
farmers.
3
We note that plaintiff characterizes this case as involving a price later agreement, as does the
Department of Agriculture. It is not clear to us that that is the case. The documentation referred
to in support of this claim is referred to as a "Delayed Payment Agreement." Those agreements
are not price later agreements because the price is fixed in those agreements. In fact, some of
those agreements cover produce from harvests three or four years before the date of the
agreement. Therefore, it is not clear whether the produce was originally sold under a price later
agreement or not. In any event, it would appear that the date for setting the price, even if the
sales were originally under price later agreements, had arrived by the time of the execution of the
Delayed Payment Agreements and, therefore, the transactions were no longer price later sales and
were now credit sales.
4
Note, such a bankruptcy court ruling can be found in In re Mayville Feed & Grain, Inc, 96
Bankr 755 (ED Mich, 1989).
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