Failure to Obtain Written Contract or File Lien is Cause of Feeding Company’s Financial Woes

January 24, 2012 | Erika Eckley

 

In this federal case, a hog feeding company sued a livestock marketing and lending service under several tort theories to seeking more than $920,000 in unpaid bills for the costs of feeding hogs. There was no written agreement between the plaintiff (the feeding company) and the defendant (lending service). Instead, a veterinarian, who was not a party to the suit, entered into an oral agreement with the lending service for the acquisition of hogs to be raised from weaned pigs to market weight. Under the agreement, the lender would advance seventy percent of the projected value of each hog and pay feed bills as long as the veterinarian maintained a thirty percent equity requirement. In turn, the veterinarian made a “handshake agreement” with the feeding company to feed, grow, and deliver the pigs to market that the veterinarian purchased and owned.   There were no written contracts memorializing any of the agreements.

During the agreement period, the feeding company billed both the veterinarian and the lending service for the cost of the feeding and management of the pigs. Once the hogs reached market weight, the lending service sold the hogs, collected payment, and forwarded proceeds to the feeding company. The lending service paid the bills without incident until mid-2008.

In 2008, a substantial decline in the value of market hogs coincided with an increased cost of feed. Despite payments made to the feeding company for the sale of hogs during this time, the outstanding bills owed to the feeding company continued to mount. In addition, the veterinarian failed to provide his thirty percent share of funding to the lending service as required under their agreement, which further exasperated funding issues. The lending service communicated with the feeding company regarding the veterinarian’s deficiencies in financing and the status of the feeding company’s outstanding bills.

The feeding company sued the lending service alleging that the lending service made oral and written representations to the feeding company that the lending service would pay the feeding company’s bills in full. As a result of these representations, the feeding company alleged it continued to send the money from the hog sales to the lending service despite the feeding company’s outstanding bills. At the crux of the lawsuit was the allegation that, despite the representations, the lending service became aware in fall 2008 that it would be paid its share, but the feeding company could not possibly be fully reimbursed. The feeding company claimed that it was never informed of this disparity despite the lending service’s knowledge of the circumstances. The feeding company claimed that the continued misrepresentations by the lending service that the feeding company would be paid in full induced the feeding company to forego filing an agricultural supply dealer’s lien under Iowa Code Ch. 570A to protect its interest.

The trial court granted summary judgment on each of the lending service’s claims. The court found the feeding company had failed to produce evidence regarding the necessary elements of each tort claim alleged: fraudulent misrepresentation, fraudulent nondisclosure; negligent misrepresentation, and unjust enrichment. The feeding company appealed.

The feeding company first alleged fraudulent misrepresentation by the lending service. In order to establish this claim, the feeding company  needed to provide evidence that:  (1) a representation was made by the lending service to the feeding company; (2) the representation was false; (3) the representation was material; (4) the lending service knew the representation was false; ( 5) the lending service intended to deceive the feeding company; (6) the feeding company justifiably relied on the truth of the representations; (7) the representations were the cause of the feeding company’s damages; and (8) that  damages were sustained.

The feeding company’s sole evidence of the misrepresentation by the lending service was that the feeding company believed that it would be paid in full when the lending service got paid for the hogs. The feeding company established this belief from its interpretation of statements made by the lending service. The evidence, however, showed there was no statement that the feeding company would be paid “in full” or that there were any misrepresentations. The lending service communicated with the feeding company that the service was at its lending limits and was not able to pay the outstanding bills, but was expecting money from the veterinarian or from the sale of hogs to enable payment of some of the feed bills.  The court found that none of the statements were false because payments were made toward the outstanding balance during the time the statements were made.

The court also rejected the feeding company’s claim that the lending service had to know the statements it made to the feeding company  were false because 2008 was “one of the worst hog marketing periods in history” and the lending service should have known from this environment, it would be unable to generate enough proceeds to pay the outstanding bills. The court, however, reminded the feeding company that it had the same knowledge, which established that there could be no justifiable reliance by the feeding company on the representations from this fact.

The feeding company also alleged that even if no false representations were made, the lending service knew it would not be able to pay all of the outstanding bills to the feeding company, but failed to disclose this fact. The failure to disclose a material fact can constitute fraud under Iowa law. There must be, however, a legal duty to disclose a known material fact through a relationship of trust or inequality of condition and knowledge. The duty can arise in a business transaction when one party has superior knowledge dealing with an inexperienced person. The court found, however, there was no duty under these circumstances because the business transaction was between two parties who were veteran business entities and did not comply with the type of business transaction involving an inequity as contemplated by the Iowa law.

The court also found there was no evidence of any negligent misrepresentation made by the defendant. To succeed at this claim, Iowa law requires a duty only when a defendant is in the business of supplying information to others in arms-length transactions. It also applies only when the information provided to the plaintiff harmed the plaintiff in transactions with third parties. In this situation, the evidence showed that the lending service was not the type of business that supplies information and had no duty to provide information to the feeding company in their arms–length dealings.

The feeding company’s final tort claim was for unjust enrichment.  The court also agreed that there was no evidence to establish this claim. Unjust enrichment requires evidence that the defendant was enriched by the receipt of a benefit at the expense of the plaintiff. It also requires that circumstances show that it would be unjust to allow the defendant to retain the benefit. The court found that there was no enrichment in this situation at the expense of the feeding company.  The feeding company could have protected its interests through filing a lien or by having a written contract. The feeding company’s failure to do either did not make the lending service’s actions in retaining the payment of fees for the hogs sold unjust.  Consequently, the trial court’s grant of summary judgment was affirmed on all points.  Lakeside Feeders Inc. v. Producers Livestock Marketing Association, No. 11-1347, 2012 WL 171381 (8th Cir. Jan. 23, 2012), aff’g, No. 1:09-cv-00046-JEG, 2011 WL 6072143 (S.D. Iowa Jan. 10, 2011).