Friday, October 12, 2012

A. Gay Jenson Farms Co. v. Cargill, Inc. case brief

309 N.W.2d 285 (1981)

PROCEDURAL POSTURE: Plaintiffs, 86 individuals, partnerships, or corporate farmers, brought an action against defendant creditor and defendant debtor to recover losses sustained when the debtor defaulted on contracts made with the farmers for the sale of grain. After a trial by jury, the Marshall County District Court (Minnesota) entered judgment in favor of the farmers. The creditor appealed.

-Warren Grain & Seed Co. operated a grain elevator whereby it purchased and stored grain from A. Gay Jenson Farms Co. (P) and other local farmers for resale on the Minneapolis Grain Exchange. Seeking financial assistance, Warren entered into a financing agreement with Cargill, Inc. (D) to loan Warren money for its operations.
-Pursuant to the agreement, Warren paid its operating expenses with checks drawn from Cargill's (D) bank account, but in both Warren's and Cargill's (D) names.
-In return, proceeds from Warren's grain sales would be deposited in Cargill's bank account. Cargill (D) was also appointed Warren's agent for transacting with the Commodity Credit Corp., and Cargill (D) had a right of first refusal to purchase the grain Warren sold on the grain market. The contract was later renegotiated to require Warren to provide Cargill (D) annual financing statements so that Cargill (D) could audit Warren's accounts.
-Warren was also precluded from making capital improvements, extending mortgages or other security interests on its capital assets, declaring dividends, or buying or selling stock without Cargill's (D) permission.
-Shortly after the parties executed the renegotiated contract, Cargill (D) executives visited Warren's facility to examine its annual statement, accounts receivables, inventory, and other financial data, informing Warren that Cargill (D) would give it periodic recommendations concerning expected improvements.
-Three years later, Cargill (D) entered into a separate contract with Warren, whereby Warren would serve as Cargill's (D) agent for developing a new type of wheat.
-Warren entered into contracts on Cargill's (D) behalf with farmers who would agree to grow the wheat and would be paid directly by Cargill (D).
-A year later, Warren arranged a similar contract for sunflower seeds. Over the next few years, the parties modified the agreement to increase the loan from Cargill (D) to Warren.
-At that time, Warren was selling approximately ninety percent of its grain exclusively to Cargill (D). -Nonetheless, Warren's debts continued to exceed its Cargill (D) credit line. Cargill (D) notified Warren that because it was using Cargill's (D) funds, Cargill (D) was exercising its right to make drastic changes in Warren's operations. Cargill (D) assigned a regional manager to work with Warren on a daily basis and opened a separate checking account in Warren's name with funds drawn from Cargill's (D) bank account.
-When Warren began experiencing severe financial problems, several farmers who had sold Warren grain were assured by Cargill (D) that Warren's checks would be honored.
-Eventually, Warren's operations succumbed to financial problems.

ISSUE: May an agreement result in the creation of an agency relationship even though the parties did not intend the legal consequences of that relationship to result?

HOLDING: An agreement may result in the creation of an agency relationship even though the parties did not intend the legal consequences of that relationship to result.

-"Agency is the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act."
-Agency need not arise from a formal contract between the principal and agent and need not be understood as an agency at the time both parties give their consent. Instead, once one party gives its consent to another to permit control over one's activities, an agency is created and the principal is liable for the agent's debts.
-Cargill (D) indicated its consent to Warren when it insisted that Warren implement its recommendations for Warren's operations and internal affairs, establishing Cargill's (D) control. "A creditor who assumes control of his debtor's business may become liable as principal for the acts of the debtor in connection with the business." However, control over a business's purchases and sales is not sufficient to establish agency. De facto control over the management is determinative.
-Here, Cargill's (D) consistent recommendations to Warren, its rights of first refusal, its power to inspect and audit Warren's financial statements, and its prohibition of mortgages, stock purchases, or dividend declarations indicate Cargill's (D) control over Warren's operations. Warren sold nearly all of its incoming grain to Cargill (D), indicating that the two were not Separate enterprises.
-If Cargill (D) was merely a financier rather than an active participant in Warren's business operations, Cargill (D) would not be liable as a principal. However, because Cargill (D) exercised control over Warren's business decisions, the relationship transcends that of a debtor and creditor. Cargill (D) is liable as Warren's principal. Affirmed.

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