Grain buyers, warehouses and insolvency
BISMARCK, N.D. -- With three active insolvency proceedings being administered by the North Dakota Public Service Commission, and another North Dakota grain elevator in dire straits, it seems a good time to revisit some of the basic laws related t...
BISMARCK, N.D. -- With three active insolvency proceedings being administered by the North Dakota Public Service Commission, and another North Dakota grain elevator in dire straits, it seems a good time to revisit some of the basic laws related to grain elevator and buyer insolvencies. While the laws related to these insolvencies can be complex, there are a few basic issues that farmers should be aware of.
Generally speaking, all grain buyers and public warehouses doing business in North Dakota are regulated by the 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 almost always are dealing with a grain buyer or warehouse that is regulated by the PSC. The PSC's authority includes commencing and administering 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. The situation is slightly different, however, if you enter into a "credit-sale contract." Under a credit-sale contract, the sale price for the grain may be paid more than 30 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 payment from an indemnity fund created specifically for credit-sale contracts. The indemnity fund will pay a farmer the lesser of 80 percent of the amount owed, or $280,000. In many cases, the farmers who sold under a credit-sale contract are better off when an elevator becomes insolvent than those who made cash sales.
The PSC usually institutes insolvency proceedings to gather and administer the bond and any assets of the insolvent buyer or elevator when it receives a written complaint from a farmer. The PSC is required to place a notice in the newspaper in the county where the warehouse or grain buyer is located, and also must send notice to holders of grain receipts. The PSC will marshal the assets of the statutory trust fund, which includes grain in the warehouse of a warehouseman or grain held in storage by an insolvent licensee, certain accounts receivable, the bond and several other items. Once these assets are marshaled, the PSC will issue a report designating claims and the amounts to be paid on each claim.
It is important for farmers to have legal counsel and to be involved in every step of this process, and it is often best to have legal counsel involved before making a claim with the PSC.
Editor's Note: Derrick Braaten is a partner in Baumstark Braaten Law Partners of Bismarck, N.D. He welcomes input and comments on his columns. He can be reached at his office at 701-221-2911 or by email