Hog Processor States Claim for Breach and Unjust Enrichment in Hog Ledger Contract Case

March 5, 2007 | Roger McEowen

 

In the late 1990s, hog prices collapsed and resulted in significant economic trauma for hog farmers. Preceding the collapse, the plaintiff (along with other meat packers) offered hog producers hog ledger contracts. Under a hog ledger contract, the producer receives the contract price even if the market price for hogs is less. In that situation, the producer builds up a negative “ledger balance” with the packer. When the contract terminates, the producer must pay off any outstanding negative balance. Conversely, when the market price for hogs is above the contract price, the producer receives the lower contract price and builds up a positive ledger balance on the contract.

In this case, the plaintiff entered into three ledger contracts with several entities that were signed by an individual under a power of attorney. While the contracts were in effect, the hog market collapsed. The plaintiff continued to pay the contract price as the negative ledger balances continued to rise, but became concerned about the hog producers’ ability to eventually pay the negative ledger balances. As a result, the plaintiff sent a letter to the producers stating that the plaintiff would give any of the plaintiffs the chance to bring their negative ledger balance current, allow them to market their hogs when market price was below the contract price without increasing the negative ledger balance, or terminate the contract after paying any existing negative account balance. Few of the producers took advantage of the offer, and the negative ledger balances continued to rise. As the end of the term of the contracts approached, the plaintiff grew increasingly concerned about the producers’ ability to repay the ledger balances. So, the plaintiff sought assurance from the producers that they intended to repay the deficits, which had reached $1,852,575.66. When the producers’ refused, the plaintiff interpreted that as a repudiation of the contracts and terminated the contracts, which triggered a requirement that the producers pay the outstanding ledger balance in 30 days. That didn’t happen, and the plaintiff sued for breach of contract and unjust enrichment.

The court first determined that South Dakota law applied to the dispute, as provided for in the contract. The court also determined that the defendants breached the contracts because the contracts were signed on their behalf by an individual that they had vested the power in to enter into contracts, and they had actual knowledge that the contracts had been entered into on their behalf. The court also held that the plaintiff had successfully made out an unjust enrichment claim – the plaintiff bestowed a benefit on the producers by paying them in excess of the market hog price; the producers knew they were receiving in excess of the market price; and it would be unfair for the producers to retain the excess amounts. As such, the court held that the plaintiff was also entitled to an accounting. John Morrell & Co. v. Halbur, et al., No. C06-3023-MWB, 2007 U.S. Dist. LEXIS 15537 (N.D. IowaMar. 5, 2007).