When a Family-Owned Elevator Goes Belly Up: Adding Insult to Injury
In the second installment of this four-part series, the First Security Bank – Sleepy Eye, Minnesota, takes farmers to court to recoup outstanding feed bills after the Porter Elevator files for bankruptcy.
When the Porter Elevator in Porter, Minnesota, closed its doors on December 10, 2015, it not only affected nearly every farmer in this small community but also its employees, suppliers, and vendors.
“I started a trucking business five years ago to supplement my income,” says Austin Muhl, of Muhl Farms Trucking. “Porter Elevator became one of my clients three years ago.”
When the elevator went into lockdown, Muhl was owed over $3,000 for two weeks’ worth of grain he’d hauled for the corporation. “I actually received a check for the first week. I deposited it a couple of days before the elevator closed, and I got an email from my bank saying the check had bounced. I never got a chance to invoice them for the second week because they’d already gone out of business. I also had a load of grain on my truck the day the elevator closed,” he recalls.
The 29-year-old, who farms with his father and raises cattle, was also a customer of the elevator.
“I bought feed for my livestock from Porter,” Muhl says. “When the elevator closed, I owed roughly $1,200 on my account.”
The bank that held the operating loan and line of credit for the elevator wasn’t going to let that bill go unpaid.
“The First Security Bank – Sleepy Eye initiated lawsuits against approximately 18 farmers in the three-county area around Porter to collect those accounts receivables,” says Greg Bucher, an attorney with Stoneberg, Giles and Stroup in Marshall, Minnesota. “For the cases our firm handled, the amount of the feed bills as alleged by First Security Bank are $1,200; $10,500; $22,000; $24,000; and $27,000. In some of those cases, we found that payments farmers had made had not yet been credited to the alleged balance, which is being sorted out on a case-by-case basis.”
The remaining lawsuits fell under the jurisdiction of small claims court because the amount owed on each was under $15,000. In total, if you consider the highest possible amount owed in small claims court, the First Security Bank was looking to collect – at most – $280,000. That does not take into account any credit inaccuracies.
The majority being sued were in the same situation as Muhl.
“Like me, the elevator owed many of them more money than what they were being sued for,” he says. “I have no problem admitting I owe that money and have always paid my bills. In theory, I really hauled that grain for the bank, but they don’t think they have to pay me. Yet, the bank expects me to give them money. It’s just not right.”
Rather than pay the feed bill, Muhl hired Bucher to fight the lawsuit. “A $1,200 feed bill is going to end up costing me double that if I include my legal costs,” Muhl says. “But it’s a matter of principle.”
“In answering the complaint against Austin, we asserted a right of setoff saying let’s take what is owed to him and subtract what he owes you,” says Bucher.
The U.S. Bankruptcy Code has two sections that permit setoff – sections 553 and 558. The purpose of a setoff is to allow entities that owe each other money to apply their mutual debts against each other, which would avoid making A pay B when B owes A.
“In order for a setoff to happen, there has to be a mutual obligation,” explains Muhl. “The bank argued that there was not a mutual obligation because I bought feed under Muhl Farms but hauled grain under Muhl Trucking. Yet, the name on the checking account that pays for the feed is Muhl Farms Trucking.”
The bank also argued he was hired by Porter Elevator to haul grain, which meant the bank was not responsible for any outstanding debt owed Muhl. However, once he charged feed at the elevator, the bank asserted that he entered into a security agreement with them.
“I didn’t realize, even without my knowledge, I entered into an agreement with that business’s lender once I open up a line of credit. I don’t think many farmers do,” he says.
Based on those assumptions, the bank concluded that because the two were not connected they didn’t owe Muhl any money and the right to setoff didn’t apply.
If that wasn’t enough to frustrate Muhl, a court rule would. Because he owed less than $15,000, the case fell under the jurisdiction of small claims court. “In that court, as an individual, I am not allowed to be represented by a lawyer unless a judge determines it’s necessary,” says Muhl. “I’m a farm kid going up against a bank and their high-priced lawyers who clearly know the legal system far better than I do. How is that a fair fight?”
Bucher filed a letter on behalf of Muhl asking for permission to be represented. “The judge responded saying that he would decide at the court date whether or not I needed representation,” Muhl says.
Ultimately, he settled out of court but still had to pay the First Security Bank – Sleepy Eye an undisclosed amount to resolve the claim.
Because Muhl was an unsecured creditor who provided a service, he couldn’t make a claim against the $125,000 bond the elevator had through the state.
“That bond is only for grain, not for hired work,” says Muhl.
In the end, he was never paid for the trucking service he provided. While he could have sued the Porter Elevator what he was owed, the odds of a favorable settlement were minimal, since its liabilities clearly outweighed its assets.
“I don’t want to be one of those people who say things aren’t fair, but this situation is really not fair,” he says. “I’m not mad anymore about the money I lost hauling grain. It’s the principle of the situation I’m upset about. When you’re an individual who’s owed money and it far exceeds the amount of money you owe, a bank shouldn’t be able to sue you. Something needs to change.”
In part three of this four-part series, we look at the Minnesota legislation introduced in the aftermath of the Porter Elevator bankruptcy, which is designed to offer farmers a larger safety net.
HOW WE REPORTED THE STORY
Laurie Bedord, Advanced Technology Editor, first learned about the Porter Elevator bankruptcy in February 2016. At the time, farmers were hesitant to talk because the investigation was ongoing and it was still a very sensitive subject in the community. Nine months later, she began contacting farmers who did business with the elevator, a vendor hired by the elevator, two attorneys who offered legal advice to some of the parties affected, as well as a representative from the Minnesota Department of Agriculture and USDA officials involved in the case.
Bedord also interviewed a Minnesota state representative working to change the legislation affecting elevator insolvencies. In addition, she spoke with the North Dakota Public Service Commission to compare the legislation it has in place with Minnesota to protect farmers in an elevator bankruptcy situation.
Hundreds of pages of court documents provided detailed information on the financial situation of the family-owned elevator as well as the names of the numerous farmers, suppliers, and vendors affected by the bankruptcy.
Attempts to reach the president of the Porter Elevator for comment were unsuccessful.