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

Supreme Court of Minnesota
309 N.W.2d 285 (1981)

ELI5:

Rule of Law:

A creditor becomes a principal, with liability for the debtor's contracts, when it assumes de facto control over the debtor's business beyond the normal course of a creditor-debtor relationship.

Facts:

Warren Grain & Seed Co. (Warren), a local grain elevator, entered into a financing agreement with Cargill, Inc. (Cargill) in 1964.
The agreement gave Cargill a right of first refusal on Warren's grain and required Warren to get Cargill's consent for capital improvements over $5,000, declaring dividends, or selling stock.
Cargill had the right to access and inspect Warren's books and provided Warren with business forms imprinted with both companies' names.
An internal Cargill memo stated that Warren needed "very strong paternal guidance."
Over time, Cargill's involvement intensified, with Cargill making constant recommendations by phone and having a regional manager work with Warren on a day-to-day basis.
Cargill financed all of Warren’s grain purchases and operating expenses, and Warren sold approximately 90% of its market grain to Cargill.
In 1977, Warren collapsed financially, owing $3.6 million to Cargill and $2 million to 86 local farmers for grain contracts it could not honor.
During Warren's final days, Cargill sent an official to supervise the elevator's disbursements and income.

Procedural Posture:

Eighty-six farmers (plaintiffs) sued Cargill and Warren in Marshall County District Court (trial court) to recover losses from Warren's default on grain contracts.
The trial was bifurcated, with the court first determining the amount of damages owed to each farmer.
In the second phase, a jury considered the issue of Cargill's liability for Warren's indebtedness.
The jury found that Cargill's conduct had made it Warren's principal and therefore liable for the contracts.
The trial court entered a judgment in favor of the plaintiffs.
Cargill (appellant) appealed the judgment to the Supreme Court of Minnesota.

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

Does a creditor become a principal, and thus liable for the debtor's contracts, when it exercises substantial control over the debtor's business operations?

Opinions:

Majority - Peterson, Justice

Yes. A creditor becomes a principal when it exercises substantial control over the debtor's business operations. The court found that an agency relationship existed because all three required elements—consent, acting on behalf of the principal, and control—were present. Cargill manifested consent by directing Warren to implement its recommendations, and Warren acted on Cargill's behalf by procuring grain, which was essential to Cargill's business. Crucially, Cargill exerted de facto control over Warren's business through its extensive oversight, financial power, and interference in internal affairs, transforming the relationship from a standard debtor-creditor arrangement into a principal-agent one, thereby making Cargill liable for Warren's debts.

Analysis:

This case significantly expands the scope of lender liability by demonstrating that a creditor's deep involvement in a debtor's operations can create an unintended principal-agent relationship. It establishes that control is the critical factor, and that a totality of the circumstances test will be used to distinguish legitimate protection of a security interest from assuming de facto management. The decision serves as a major precedent, cautioning lenders that exercising excessive control over a borrower's business can expose them to liability for all of the borrower's obligations incurred in the normal course of business.

Gunnerbot

AI-powered case assistant

Loaded: A. Gay Jenson Farms Co. v. Cargill, Inc. (1981)

Try: "What was the holding?" or "Explain the dissent"