Petition for Writ of Certiorari — Baumann-Furrie v. Commodity Credit Corp.

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—— — ——

86 1837 )

VAY 18 wer:

No. JOSEPH F. SPANIOL, JR;

CLERK

Iu the —

Supreme Court of the United States

October Term, 1987

BAUMANN-FURRIE & COMPANY,

Petitioner,

VS.

COMMODITY CREDIT CORPORATION,

UNITED STATES DEPARTMENT OF

AGRICULTURE, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Of Counsel:

L. H. May, Jr. Lynn G. Truesdell, III

3550 Multifoods Tower 3550 Multifoods Tower

33 South Sixth Street 33 South Sixth Street

Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402

(612) 333-3000 (612) 333-3000

Counsel of Record

1987 — Bachman Printing, 835 Secoad Avenue So., Mpls., MN 55402 — (612) 339-9518

QUESTION PRESENTED

Does 7 CFR §102.6(c), which requires

a grain warehouseman licensed under the

United States Warehouse Act (7 U.S.C.

§241-273) to file with the Secretary of

Agriculture prescribed financial

statements audited or reviewed by an

independent public accountant with the

understanding that the warehouseman will

be subject to an additional on-site

examination and audit by the Secretary,

grant the Secretary discretion to perform

those examination and audit functions

before he accepts the financial

statements in compliance with the

Warehouse Act?

LIST OF PARTIES

The parties to the proceedings below

were Gary W. Koch as trustee in

bankruptcy for Ghent Grain and Feed,

Inc., a Minnesota corporation; plaintiff

in an action for negligent

misrepresentation against petitioner

Baumann-Furrie & Company, a partnership.

James Welsh, Kent Welsh, Thomas

Welsh, John Doe and Mary Roe were

officers, directors and shareholders of

Ghent Grain & Feed, Inc. and named by

petitioner as third-party defendants

below. Gary W. Koch was also named,

individually, as a third-party defendant

below as was Tri-State Insurance Company

of Minnesota. Commodity Credit

Corporation, and United States Department

of Agriculture, were named third-party

defendants by petitioner below and are

respondents before this Court and the

parties in this proceeding whose judgment

is sought to be reviewed. It is believed

that the other named parties have no

interest in these proceedings.

iii

TABLE OF CONTENTS

Question Presented ...........

ee we ere

OPINLOMS BOLOW 046 caccsccrcocs

TUREMRAGEIOE 666s bbcode e ravens

Statute Involved ..........:0.

Regulation Involved ..........

Statement of Case .....cccccee

Reasons for Granting the Writ

1. The term "will be

subject to" is not dis-

cretionary in meaning

under the regulation in

the absence of legal pre-

cedent or legislative in-

COE 664 660 en baw ee ee eee

2. The decision that the

term "will be subject to"

is a grant of discretion

raises important questions

Ser CHAS GOMES wc ciccusec

Conclusion eeseesoeeeeeeeeeseeeeeee

Appendix (Opinion and Judgment

of Court of Appeals and Memor-

andum Decision of District

4 reer re eT eee Te TT ere eee

TABLE OF AUTHORITIES

Cases: Page

Alabama Power Company v. Costle,

636 F.2d 323 (D.C. Cir. 1980)

Block v. Neal, 646 F.2d 1678

(6th Cif. 1981) eeee3#ee#s#2e?#2e#88 @ a5,

Chandler v. Hjelle, 126 N.W.2d

141 (N.D. 1964) @eeeeeee#ee#es#8s#e#€e?@*@

Homan v. Employer's Insurance

Corp., 30 Mo. 560, 136 S.W.2d

289 (1939) @eee<ecest¢eecesee#s#8e#es#e#eee?es?é@

Interway, Inc. v. Alagna, 407

N.E.2d 615, 41 Ill. Dec. 117

85 Ill. App. 3d 1094 (1980)

Isler v. Burman, 252 N.W.2d 818

(MN. 1975) eeeesee*ee7e2eoetve#enee#esteeeee#

Renner v. Chrisman, 80 S.D. 532,

127 N.W.20 717 (1964) 2... 24,

State of Hawaii v. Willburn,

48 Ha. 651, 426 P.2d 626 (1967)

United States v. S.A. Empresa

de Vicao Aerea Rio Grandense

(Varig Airlines), 467 U.S. 797,

104 S. Ct. 2755 (1984) ... 15, 27,

Statutes:

7 U.S.C. §§$241-273 wee cece enee 6,

4 GeBeQe §251 @eee0ene<e*e7e2e#e9?8eee#esseeeeee

7 U.S.C.

7 U~.S.C.

28 U.S.C.

§255

§259

§260

§267

§158 (a)

§158 (da)

§1254(1)

§1346(b)

§2680(a)

Regulation:

7 oC eF eRe

7 C.F.R.

7 C«.F.R.

7 C.F.R.

§102.6(a)

§102.6(b)

§102.6(c)

§102.14

§102.39

Federal Register:

46 F.R.

1981

47 F.R.

30620, June 9,

23910, June l,

10, 15,

1981 .

59930, December 7,

1982

27,

10,

24,

33,

17,

25,

Miscellaneous:

Codification of Statements and

Standards for Accounting and

Review Services, Numbers 1 to

5, Commerce Clearing House,

INC. 1983 cccsccccccccsscsccses

Grain Elevator Task Force Re-

port to the Secretary of Agri-

culture, USDA, August 18,

19Bl wccccccese 16, 18, 19, 21,

S.A.S. No. 43, A.I.C.P.A.,

Omnibus Statement of Auditing

Standards, A.I.U. §1010.03

(August 1982) ..ccccrcccccvces

Statement by John R. Blocx,

Secretary of Agriculture, before

the Court's Subcomittee of the

Senate Judiciary Committee,

ApEil 6, 1981 cccccccccccccese

vii

23,

IN THE SUPREME COURT OF

THE UNITED STATES

OCTOBER TERM, 1987

BAUMANN-FURRIE & COMPANY,

Petitioner,

vs.

COMMODITY CREDIT CORPORATION, UNITED

STATES DEPARTMENT OF AGRICULTURE, et

al.,

Respondents.

The Petitioner, Baumann-Furrie &

Company, respectfully prays that a Writ

of Certiorari issue to review the

judgment and opinion of the United States

Court of Appeals for the Eighth Circuit,

entered in the above-entitled proceeding

on February 18, 1987.

OPINIONS BELOW

The Opinion and Judgment of the

Court of Appeals for the Eighth Circuit

has not been reported and is reprinted in

the Appendix hereto at Page A-1l, infra.

The Memorandum Decisions of the

United States District Court for the

District of Minnesota, Third Division

(Magnuson, D.J.) have not been reported

and are reprinted in the Appendix hereto

at Page A-22, infra.

| JURISDICTION

Petitioner was named a party Defend-

ant in an action for negligent misrepre-

sentation brought in the Bankruptcy Court

for the District of Minnesota, Third

Division, und2r 28 USC §158(a). Peti-

tioner joined the UNITED STATES DEPART-

MENT OF AGRICULTURE and COMMODITY CREDIT

CORPORATION as Third Party Defendants

therein under 28 U.S.C. 1346(b). On

September 25, 1985 the Bankruptcy Court

recommended the granting of those third

party defendants' Motion to Dismiss

because of lack of subject matter juris-

diction. The District Court granted that

Motion under the discretionary function

exception of 28 U.S.C. 2680(a) and other

relief by orders dated March 21, 1986 and

May 7, 1986, respectively.

On Petitioner's appeal, the Eighth

Circuit, under the jurisdiction granted

in 28 U.S.C. §158(da), affirmed the order

of the District Court. No petition for

re-hearing was sought.

Jurisdiction of this Court to review

the Judgment of the Eighth Circuit is

invoked under 28 U.S.C. §1254(1).

STATUTE INVOLVED

28 U.S.C. §2680 exceptions:

The provisions of this chapter and

section 1346(b) of this title (Federal

Tort Claims Act) shall not apply to:

-3-

(a) Any claim based upon an act or

ommission of an employee of the

government exercising due care, in

the execution of a statute or regu-

lation, whether or not such statute

or regulation be valid, or based

upon the exercise or performance or

the failure to exercise or perform a

discretionary function or duty on

the part of the Federal agency or an

employee of the government, whether

or not the discretion involved be

abused.

REGULATION INVOLVED

7 C.F.R. §102.6 (a), (b) and (c),

financial requirements:

(a) Each warehouseman conducting a

warehouse licensed, or for which

application for license has been

made under the regulations in this

part, shall maintain complete,

accurate and current financial

records.

(b) Each warehouseman conducting a

warehouse for which application for

license is made shall provide with

this application and each ware-

houseman licensed under these regu-

lations annually, or more frequently

if required, shall furnish the

Secretary financial statements from

the records required in paragraph

(a) of this section prepared accord-

ing to generally accepted accounting

principles. Such statements shall

include but not limited to (1)

-4-

balance sheet, (2) statement of

income (profit and loss), (3) state-

ment of retained earnings, and (4)

statement of changes in financial

position. The chief executive

officer of the warehouseman shall

certify under penalties of perjury

that the statements as prepared

accurately reflect the financial

condition of the warehouseman as of

the date named and fairly represent

the results of operations for the

period named.

warehouse licensed under these

regulations shall have the financial

statements required in paragraph (b)

audited by an independent certified

public accountant. Alternatively,

financial statements audited or

reviewed by an independent public

account will be accepted with the

understanding that the warehouseman

will be subject to an additional on-

site examination by the Secretary

and to an audit by the Secretary.

Audits and reviews by independent

certified public accounts and inde-

pendent public accounts specified in

this section shall be made in

accordance with the standards estab-

lished by the American Institute of

Certified Public Accountants. The

accountants certification, assur-

ances, opinion, comments, and notes

on such statements, if any, shall be

furnished along with the statements.

Licensees who cannot immediately

meet these requirements may apply to

the Secretary for a temporary waiver

-5-

of this provision. The Secretary

may grant such waiver for a tempor-

ary period not to exceed 180 days if

the licensee can furnish evidence of

good and substantial reasons there-

fore.

(Underlining supplied).

STATEMENT OF CASE

Ghent Grain and Feed, Co., Inc.

(hereinafter Ghent) is a corporation

organized and existing under the laws of

the State of Minnesota and was engaged in

business as a grain warehouseman, buying

and storing oats, corn, wheat and

soybeans for and from farmer-producers in

its geographical area. It was licensed

under the United States Warehouse Act (7

U.S.C. 241-273) and was an approved

depository for grain storage by the

Commodity Credit Corporation. James

Welsh, Kent Welsh and Thomas Welsh are

its sole officers, directors and share-

holders. Tri-State Insurance Company of

-6-

Minnesota acted as the warehouseman's

bondsman under the provisions of 7 C.F.R.

§102.14 for the relevant period and Gary

W. Koch is its bankruptcy trustee.

Petitioner, a Minnesota Partnership,

is a licensed independant public account-

ing firm that provided various accounting

services to Ghent for over a ten (10)

year period terminating in March of 1983.

These services included the preparation

of corporate income tax returns, unaud-

ited and "review" financial statements!

1 The Codification of Statements on

Standards for Accounting and Review

Services, No.'s 1 to 5, Commerce

Clearing House, Inc. (1983) AR

§100.04 at Page 7, provides:

A review of financial statements.

Performing inquiry and analytical

procedures that provide the

accountant with a reasonable basis

for expressing limited assurance

that there are no material

modifications that should be made to

the statements in order for them to

be in conformity with generally

accepted accounting principles or,

and TW-51 "financial statement" reports

required by, and filed with, the United

if applicable, with other

comprehensive basis of accounting.

(The accountant might consider it

necessary to compile the financial

statements, or to perform other

accounting services to enable him to

perform a review. See paragraph 28)

The objective of a review differs

significantly from the objective of

a compilation. The inquiry and

analytical procedures performed in a

review should provide the accountant

with a reasonable basis for

expressing limited assurance that

there are no material modifications

that should be made to the financial

statements. No expression of

assurance is contemplated in a

compilation. The objective of a

review also differs significantly

from the objective of an examination

of financial statements in

accordance with generally accepted

auditing standards. The objective

of an audit is to provide a

reasonable basis for expressing an

opinion regarding the financial

statements taken as a whole. A

review does not provide a basis for

the expression of such an opinion

because a review does not.

contemplate a study and evaluation

of internal accounting control,

tests of accounting records and of

responses to inquiries by obtaining

and corraborating evidential matter

-8-

States Department of Agriculture (herein-

after USDA) and the Commodity Credit

Corporation (hereinafter CCC) in connec-

tion with its warehouse license and

depository approval prior to July l,

1982.

Petitioner prepared a review finan-

cial statement for Ghent for the fiscal

year ending June 30, 1982. This review

statement was subsequently filed with the

U.S.D.A. pursuant to 7 C.F.R. §102.6(c)

on November 17, 1982. It represented

that Ghent owned (as opposed to stored)

certain grain inventories indicated

through inspection, observation or

confirmation, and certain other

procedures ordinarily performed

during an audit. A review may bring

to the accountant's attention

significant matters affecting the

financial statements, but it does

not provide assurance that the

accountant will become aware of all

significant matters that would be

disclosed in an audit.

therein as located off-site at what were

designated as the "Cargill" and

"Continental" terminal warehouses.

On January 3, 1983, USDA and CCC,

through its agent, Agricultural Marketing

Service, operating under the provisions 7

U.S.C. §267 of the United States Ware-

house Act and 7 C.F.R. §102.39, conducted

an inspection and physical measurement of

the grain, warehouse receipts and daily

position records of the storage

facilities at Ghent.2 That examination

2 7U.S.C. § 267 provides:

That the Secretary of Agriculture is

authorized through officials,

employees or agents of the

Department of Agriculture designated

by him to examine all books,

records, papers and accounts of

warehouses licensed under this act

and of the warehouseman conducting

such warehouses relating thereto.

§102.39 Inspections: examination of

warehouse.

Each warehouseman shall permit any

-10-

was primarily to determine the

sufficiency of grain on-site to cover the

warehouseman's obligations evidenced by

the warehouse receipts issued and did not

seek to verify the existence of the

inventory stored at the "Cargill" and

"Continental" warehouses.

On March 9, 1983, during the course

of a subsequent accounting examination,

the Petitioner determined that the

officers, directors and shareholders of

officer or agent of the Department,

authorized by the Secretary, or his

designated representative, for the

purpose, to enter and inspect or

examine on any business day during

the usual hours of business, any

warehouse for the conduct of which

such warehouseman holds a license,

the office thereof, the books,

records, papers, and accounts

relating thereto, and the contents

thereof and such warehouseman shall

furnish such officer or agent the

assistance necessary to enable him

to make any inspection or

examination under this section.

-ll-

Ghent had misrepresented to it the exis-

tence of those off-site inventories. The

effect of this was to render Ghent insol-

vent and in violation of both the USDA

licensing and CCC net worth requirements.

Upon receiving notice of this change

in financial condition, the USDA conduc-

ted subsequent financial examinations of

the elevator in August and September of

1983, resulting in the suspension of

Ghent's warehouse license and its removal

from the approved list of storage facili-

ties by the CCC. Ghent declared volun-

tary bankruptcy on or about November 3,

1983. The creditor claims filed exceeded

its assets by over One Million Dollars.

On August 31, 1984, Respondent Gary

W. Koch, trustee in bankruptcy for Ghent,

commenced an action in the Federal

District Court against petitioner for

-12=<

negligent misrepresentation of Ghent's

financial condition as represented in the

respective review financial statements

for six month periods commencing December

31, 1980 through June 30, 1982. The

Trustee alleged that the petitioner, in

the exercise of due care, should have

known that the represented inventories at

the Cargill and Continental warehouses

were fictitious and should not have

included that representation in Ghent's

financial statements. 2

3 On February 19, 1985, a comparable

action was commenced in the District

Court for Lyon County, Minnesota by

83 farmer-depositors against

Petitioner. The plaintiffs were

Claimants in the bankruptcy

proceeding. That matter was

initially removed to the Federal

District Court for the District of

Minnesota, but later remanded to

Lyon County. That action was tried,

in part, during January of 1987,

resulting in a Judgment pursuant to

stipulation between the plaintiffs

and petitioner whereby liability was

admitted but recovery limited to the

-13-

Petitioner defended on the grounds

that the existence of those outside

inventories were specifically represented

to it, in writing, by Ghent's officers,

directors and shareholders and that it

was not required, within the scope of its

review engagement, to verify the exis-

tence of those inventories as it would

have been within audit standards.4

proceeds of the insurance policy

carried by Petitioner. A second

action is now in process to

determine whether or not Plaintiff

will recover any funds pursuant to

their judgment.

That judgment has rendered the

abstention question presented to the

Eighth Circuit moot.

4 The auditing standards of the

American Institute of Certified

Public Accountants, specifically

referred to in the cited regulation,

require direct confirmation of

inventories kept in public

warehouses. See S.A.S. No. 43,

A.I.C.P.A., Omnibus Statement of

Auditing Standards, AU §1010.03

(August 1982).

-14-

Petitioner contended that the Secre-

tary of Agriculture is specifically

charged to conduct an audit of Ghent's

review financial statements under the

provisions of 7 CFR 102.6(c) and amended

its third party complaint to include such

claims against USDA and ccc. The

government moved to dismiss on various

grounds, including the cited

discretionary function exemption. The

Bankruptcy Court recommended dismissal

and the District Court, in its order of

March 21, granted the Motion, citing

United States v. S.A. Empresa de Viacao

Aerea Rio Grandense (Varig Airlines), 467

U.S. 797, 104 S. Ct. 2755 (1984) as

authority. The Eighth Circuit, by its

Order dated and filed February 18, 1987,

affirmed the District Court's ruling,

looking again to Varig Airlines as

controlling.

-15-

United States Warehouse Act (Title

7, USC 241-273) was enacted by Congress

in 1916 to improve the country's agricul-

tural warehousing industry. Grain Eleva-

tor Task Force Report to the Secretary of

Agriculture, USDA, August 18, 1981, Page

1. Its primary objectives were to (1)

protect producers and others who store

their property in public warehouses; (2)

assure the integrity of warehouse

receipts as documents to title to be used

as collateral for loans, and to facili-

tate trading in interstate commerce of

agricultural commodities; and (3) set and

maintain a standard for sound warehouse

operations. 46 FR 59930, December 7,

1981. To effect these ends, The Secre-

tary of Agriculture conducted those

examinations provided for in 7 U.S.C.

§267 and 7 CFR §102.39 (See Footnote 3).

-16-

The warehouseman's regulated services

were to store grain for farmers, the CCC

or other depositors. He would also

provide a market by buying and selling

grain for cash. The income from these

services was the storage charges received

from the depositors and whatever profit

could be made from the resale of the

elevator grain purchased. The basic

legal relationship between the warehouse-

man and the storage customer was that of

Bailor-Bailee. The depositor maintained

ownership of the grain evidenced by the

warehouse receipt issued to him. This

relationship began to change with the

advent of the Delayed Price Agreement. >

5 Delayed price and deferred payment

contracts are defined on Page 41 of

the Task force Report as:

"The usual marketing relationships

have been complicated by another

kind of transaction conmmonly known

as price-later or deferred pricing

-17=

There, the farmer became an unsecured

creditor of the warehouse when his

commodity was delivered and sold to the

warehouse, not fer cash, but for payment

to be completed at some future time.

Grain Elevator Task Force Report at Page

The on-site examinations conducted

by the Secretary prior to July l, 1982,

were reflective of the bailor-bailee

or delayed price grain. Such a

transaction may be described as a

sales contract that constitutes a

bonfied sale and change of ownership

from the seller to the buyer, but

which permits the seller to fix the

price of the grain at a later date

as a pre-agreed formula for

determining such price. The seller

may continue to have some control of

the pricing of his grain, but he has

no physical claim. Generally, no

advance payment is made to the

seller. The buyer has only a grain

payable position with the seller.

The seller has only money receivable

position, a consumer creditor

status."

-18-

relationship; to determine that the

commodities for which the warehousemen

had issued warehouse receipts were

actually available in sufficient quantity

and quality to cover those obligations.

In 1981, in the wake of some 177

grain elevator bankruptcies, the Secre-

tary of Agriculture appointed a USDA Task

Force, "to review current grain warehouse

laws and regulations."

I have asked the Task Force to tell

me what needs to be done to safe-

guard the interests of all farmers,

consumers, and those with financial

stake--in the event of elevator

bankruptcies.

Statement by John R. Block, Secretary of

Agriculture, before the Court's Subcom-

mittee of the Senate Judiciary Committee,

April 6, 1981. What the Task Force told

the Secretary was that a basic change in

the legal-business relationship between

the warehouseman and his customer had

-19=<

taken place. It was no longer primarily

that of a bailor-bailee, but to a large

extent had become debtor-unsecured credi-

tor:

In the last several years, the risks

for producers in dealing with grain

warehouses have shifted from the

storage to the marketing operation.

Almost all elevators which store

grain, will buy grain. The use of

delayed price and deferred payment

contracts has lessened the amounts

of grain stored and increased grain

payable accounts contributing to

this high loss risk. The business

of storing and marketing cannot be

segregated. These situations create

continuous, dual and, at times,

uncertain obligations. USDA has

considered for some time regulations

which would offer some protection to

users of Federally licensed ware-

houses to deposit their grain for

other than storage purposes...They

are aimed at extending the use of

good business practices. When these

regulations are in effect, a measure

of protection is afforded to users

of Federally licensed warehouses who

deposit their grain for marketing as

well as those who deposit for

storage.

(At pages 18 and 19 of the Grain Task

-Force Report).

-20-

This debtor-creditor relationship

arose through a series of transactions.

The farmer-producer would raise the grain

and sell it to the warehouseman under a

delayed price contract at a price to be

set later by the farmer. In this manner,

the farmer did not have to store the

grain in anticipation of a rise in market

prices, but could clear his storage

facilities and still benefit by any

upward movement in its price.

The warehouseman would take title to

the grain and most often sell it immedi-

ately toa grain terminal (Cargill;

Continental) at the day's cash price.

The terminal would remit that amount to

the warehouseman upon delivery of the

grain, but the warehouseman did not pay

the farmer. He would state on account

payable to the farmer and use the money

in the operation of his business. If

-2l1-

the operation of his business. If there

was subsequent rise in the market price,

the warehouseman could sustain a loss

when the farmer priced the grain. If

there was a reduction in price, he could

realize a gain. Unless the warehouseman

hedged the transaction, or stored the

grain for sale until the time the grain

was priced by the farmer, the warehouse-

man could be at substantial risk of loss.

(Ghent used the farmers' ograin proceeds

to repay its bank loans and commodity

losses.)

In order to deal with this problem,

the Task Force recommended that audited

financial statements from independent

certified public acountants be required

of licensed warehouses. (Task Force

Report, Page ii). In this way the USDA

would know that the warehouseman had

-22-

verified assets on hand sufficient to

cover the amount of accounts payable

outstanding, as well as adequate grain to

meet its storage obligations.

It urged:

Protection already in effect for

storage customers must be main-

tained, but the bond for marketing

(where the greater risk to producers

is) should be more than tha® for

storage. Bonds for marketing are

extremely difficult to obta.n and

are costly ($10.00 per 10,000). The

"slack" must be taken up in added

administrative and supervisory

requirements such as the frequency

of examinations and extended scope

of such examinations which may

include additional financial repor-

ting requirements.

(Grain Task Force Report, Pages 20 and

21).

This recommendation produced a

regulation that would require that each

warehouseman "shall provide the Secretary

with an annual financial statement which

has been audited by a Certified Public

-23-

Accountant in accordance with generally

accepted accounting standards and such

other interim financial statements or

information as the Secretary deems neces-

sary." 46 FR 59930, December 7, 1981.

The proposal met with a number of

objections, among them (1) the limitation

of auditing by Certified Public

Accountants and (2) higher costs for

warehousemen due to auditing procedures.

47 FR 23910, June l, 1982.

In adopting the present regulation,

the USDA concluded:

The limitation of an audit using

Certified Public Accountants exclu-

sively has been revised. .. State-

ments may now be "reviewed" or

"audited" by an independent public

accountant as well as an audit by a

certified public accountant, if the

warehouseman subjects himself to an

additional on-site examination by

the secretary and to an audit by the

Secretary.

47 CFR 23910, June 1, 1982 (underlining

supplied).

-24-

No additional on-site examination or

audit was conducted by the USDA or CCC of

the financial statements or books and

records of Ghent after July 1, 1982, the

effective date of regulation.

Petitioner has claimed throughout

these proceedings that the language of

the regulation requiring the second

examination and audit is operational, not

discretionary. Once in place, that

requirement brings the Secretary of

Agriculture within the "Good Samaritan"

doctrine under both Federal and Minnesota

law. Block v. Neal, 646 F.2d 1178 (6th

Circuit, 1981); Isler v. Burman, 232

N.W.2d 818 (1975)."6

6 ,,.One who undertakes an act, even

though gratutiously, is required to

act carefully and with the exercise

of due care and will be liable for

the injuries proximately caused by

failure to use such care." Block v.

Neal, cited supra, p. 1092.

=-25<

REASONS FOR GRANTING THE WRIT

THE TERM "WILL BE SUBJECT TO" IS NOT

DISCRETIONARY IN MEANING UNDER THE

REGULATION IN THE ABSENCE OF LEGAL

PRECEDENT OR LEGISLATIVE INTENT.

The sole basis for the Eighth

Circuit's ruling is its holding that the

words "will be subject to" are in and of

themselves words of discretion and do not

require the Secretary of Agriculture to

audit review financial statements

submitted in accordance with 7 CFR

102.6(c). Only by so holding is that

Court able to analogize those

requirements to the “spot check" language

of United States v. Varig Airlines, cited

supra, in order to bring this decision

within that.

Such construction, in light of the

"plain reading" of the regulation, the

absence of supporting legislative

-26-

history, legal precedent or any record of

such intent, is not warranted. The

comparable language found in Sections 14,

17 and 18 of the United States Warehouse

Act (7 USC §255, 259 and 260), requiring

agricultural products be stored,

transferred and receipted "subject to"

the Act, its rules and regulations,

presents a fundamental inconsistency of

interpretation within the same body of

law.

The clear meaning of this phrase is

to allow acceptance of "review" financial

statements for licensing purposes

"conditioned upon" the performance of a

second examination and audit by the

Secretary. The audit function is the

verification process adopted to protect

the unsecured creditors of the

warehouseman correspondent to the

-27<

nitrile

Secretary's physical "measure-up" of the

stored grain used to protect his storage

customers.

Had discretion been intended, it

would have been a small matter to indi-

cate. The change of the word "will" as

used in "will be subject to" to "may"

could suffice. Instead, the only indi-

cation given by the Secretary to that

construction is that:

Statements may now be "reviewed" or

"audited" by an independent public

accountant, as well as an audit by a

certified public accountant, if the

warehouseman subjects himself to an

additional onsite examination by the

Secretary and to an audit by the

Secretary.

47 FR 23910, dated June 1, 1982 (under-

lining supplied).

"Subject to" is a term of qualifi-

cation. Renner v. Chrisman, 80 S.D. 532,

127 N.W.2d 717 (1964). It has been

variously defined in the case law as

-28-

meaning “liable", "subordinate to",

"subservient to", "inferior", "obedient

to", "limited by", "charged with",

"conditioned upon", "controlled by",

"bound or obligated in law or equity",

"regulated by", "responsible" and

"answerable". Chandler v. Hjelle, 126

N.W.2d 141, 147 (N.D. 1964); Renner v.

Chrisman, cited supra at page 721;

Interway, Inc. v. Alagna, 407 N.E.2d 615,

619, 41 Ill. Decs. 117, 121, 85 Ill.

App. 3rd 1094 (1980); Homan v. Employer's

Insurance Corp., 345 Mo. 650, 136 S.W.2d

289 (1939); State of Hawaii v. Willburn,

49 Ha. 651, 426 P.2d 626 (1967). It is

not a discretionary term.

More in point, the Eighth Circuit's

ruling here is contrary to legislative

intent. The comment to the proposed

regulation makes this clear:

-29—

Consequently, there are risks for

producers who sell deposited grain

as well as producers who store such

grain. It therefore becomes consis-

tent with the objectives of the Act

to define the various marketing

transactions for licensed grain

warehousemen which are the regula-

tory concerns of the Secretary under

the terms of the Act.

46 FR 30620, June 9, 1981.

In order to provide this necessary

protection to the grain sellers, the

Grain Task Force report called for the

preparation and filing of audited

financial statements prepared by a

certified public accountant. A review

financial statement is substantially less

than an audit and does not provide such

protection. (See footnote 1) It is

essentially a compilation of financial

information upon which the accountant

performs certain inquiry and analytical

procedures. These procedures consist of

a determination of the entity's

-30-

accounting principals and practices, its

procedures for recording, the comparison

of financial statements with statements

of comparable prior periods or for

anticipated results (budgets or

forecasts) and the application of certain

ratios. Codification of Statements and

Standards for Accounting and Review

Services, Numbers 1 to 5, § 100.27,

Commerce Clearing House, Inc., 1983, at

page 14.

A review does not require a physical

counting or examination of inventory,

confirmation of accounts receivable and

payable, or the other evidentiary

procedures commonly made part of the

audit. Its cost is substantially less,

perhaps as much as one-half.

Had the Secretary determined that he

would accept review statements in satis-

-3l-

faction of the financial requirements of

7 CFR 102.6(c), without more, it is

Clearly within his discretion to do so.

But he conditioned that acceptance in

order to afford the selling producer the

same relative protection historically

given by him to the storage producer, a

verification of the existence of the

assets necessary to meet the

warehouseman's obligations.

The Secretary knows that the

licensed warehouseman most in need of

regulation would not provide an audit.

Its cost would drain otherwise needed

funds and the verification of financial

difficulties the warehouseman might

otherwise seek to conceal would

jeopardize his license. The cost of the

additional inspection and audit by the

Secretary would be passed on to the

-32-

warehouseman and consumer under the

provisions of 7 U.S.C. §251.

Both the District and Appellate

Courts looked exclusively to United

States v. Varig Airlines to justify their

ruling against Petitioner. Although

alike in the initial reporting

requirements, the Federal Drietion Act

(Varig) and United States Warehouse Act

are distinguished by the respective

duties required of the government in

their administration.

Under Varig, contention was made the

the FAA had been negligent in failing to

inspect certain elements of aircraft

design before certification. This

circumstance, it was claimed, led to

destruction of the aircraft and loss of

substantial life. Called into question

was the FAA's “spot check" system of

-33-

compliance review and its application in

the FAA's failure to determine the exis-

tence of inflammable materials and negli-

gent design before certification.

There, it was the government's

contention that the basic responsibility

for satisfying its safety standards

rested with the manufacturer of the

aircraft; that the government's function

was only to police the manufacturer in

its compliance with its regulations. The

monitoring mechanism specifically called

for a — check" program wherein the

FAA consciously did not inspect all parts

of the aircraft certified to be |

airworthy, and varied in degree what

examination it did conduct upon the

experience of the manufacturer.

In denying jurisdiction, the Varig

Court noted the substantial and specific

-34-

:; |

detail of that program provided in the

FAA handbooks and manuals developed for

use in the compliance procedures. These

specifically set forth the discretion

given to the F.A.A. examiner and allowed

the Court to conclude that the "spot

check" program and its application to be

well within the Secretary's intention.

The USDA program is comparable only

in that it requires the warehousemen to

provide books, records and financial

statements as a condition of its license.

It varies dramatically, however, in the

"monitoring" procedure. Unlike the

F.A.A. inspectors, the USDA examiner goes

physically onto the warehouse premises,

personally examines and audits the daily

position records and documents kept there

to determine the on-site inventory

status, reviews the warehouse receipts

=-35-

issued to reflect the grain stored and

then physically samples and "measures up"

the grain on hand to determine whether it

covers the warehouse receipts

outstanding. If a deficiency is

determined, the warehouseman is placed on

notice and given a specified time to

correct without suspension and/or

eventual cancellation of its license.7

The warehouseman filed TW-51 financial

statement report forms with the Secretary

7 A recent decision, Alabama Power

Company v. Costle, 636 F.2d 323

(D.C. Cir. 1980), dealt with the

requirements of the Clean’ Air Act

(42 USC §7475) to determine which

pollutants were "subject to" the

best available control technology

for each pollutant "subject to"

regulation under this chapter...."

The suggestion that "subject to" as

used in the statute might be

discretionary was not considered nor

requested to be considered. The

ruling there was that the pollutant

came within the statute because it

was made expressly "subject to."

-36-

to establish that he had met the minimum

net worth requirements under the law

($25,000.00) and for purposes of setting

his bond (20 cents per bushel for the

first 1,000,000 bushels).

The government has provided no

regulation, legislative history, handbook

or manual in support of its contention

that the second examination and audit

prescribed by 7 CFR §102.6(c) is

discretionary. To the contrary, its

handbooks and manuals detail audit and

inspection procedures of storage

verification. The requirement that the

Secretary must examine and audit review

financial statements is clearly

consistent with his procedures to examine

and audit stored grain and, as was

indicated in the Task Force Report, is

the only real protection given selling

-37=

producers who market their grain under

delayed pricing agreements.

II.

THE DECISION THAT THE TERM "WILL BE

SUBJECT TO" IS A GRANT OF DISCRETION

RAISES IMPORTANT QUESTIONS FOR THIS

COURT.

The ruling here is contrary to the

Secretary's clear intent, unsupported by

legal precedent or legislative history,

and flies in the face of the plain and

accepted meaning of the term "subject

to." It serves only to protect the

administrators of the law, not those for

whom that protection was intended.

If the Eighth Circuit is correct on

the basis of the record before it, what

then isn't discretionary? The clear

effect of the decision is an arbitrary

revisiting of geversnentel immunity.

The potential impact of the decision

is widespread. A LEXIS search indicates

-38=

that the word "subject" appears 10,518

times in the United States Code, 118,060

times in the Federal Register and Code of

Federal Regulations (after July 1, 1980).

The word "will" used within five words of

"subject" appears 107 times in the Code

and 15,010 times in the Federal Register

and C.F.R. Its use in conveyances,

contracts and other documents, rules,

ordinances and regulations is no doubt

countless.

The immediate impact is on the

agricultural community. As of October l,

1980 there were 228 cotton warehouses,

1808 grain elevators and 74 warehouses

storing other agricultural products

licensed under the U.S. Warehouse Act.

These represented 54% of the commercial

cotton storage and 43% of commercial

grain storage facilities in the country

(Grain and Task Force Report, page l).

=-39—

The bankruptcy of the elevator at

Ghent, with only a 243,000 bushel

capacity and an approximate $6,000,000

dollar volume per year, left over a

million dollar financial impact on the

small and otherwise economically

depressed community that it served.

The need for review is twofold.

First, some specific definition of

discretion is required under the Federal

Tort Claims Exemption. As Varig Airlines

has been applied here, litigants are

without any meaningful precedent. This

Court must provide some boundaries ;

whereby the government and counsel can ;

evaluate the claims submitted with more

certainty. In an arena of ever- )

expanding, complex, business-oriented )

litigation, the administrative claims

procedure under the Federal Tort Claims

-40-

Act will serve no purpose without such

guidance.

Second, a substantial portion of the

Producers in the agricultural community

have been left essentially as they were

found, despite repeated calls by the

Secretary's Task Force for regulation and

protection. Review financial statements

do not provide the verification of an

audit. There is no suggestion that the

equivalent audit procedures conducted by

the Secretary as to stored commodities is

discretionary. Yet, it has been

determined by the appellate court that

the marketing function of the

warehouseman's business, the function

pin-pointed as giving rise to the

bankruptcy onslaught, should go

effectively unregulated on the single

proposition that "subject to" is

discretionary language.

-4l-

CONCLUSION

The Court should reverse the Eighth

Circuit's Opinion for the reasons stated

and remand the matter to the District

Court for further proceedings. Failing

this, the petition for certiorari should

be granted.

Respectfully Submitted,

Of Counsel: -Om KF pa Lele

L. H. May, Jr. Lyan G. Truesdell III

3550 Multifoods Tr. 3550 Multifoods Tr.

33 South 6th St. 33 South 6th St.

Mpls., MN 55402 Mpls., MN 55402

(612) 333-3000 (612) 333-3000

Counsel of Record

-42-

APPENDIX

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 86-5205

In Re: Ghent Grain and Feed,

Inc.,

Debtor,

Gary W. Koch, Panel Trustee,

Vv.

Baumann-Furrie and Company,

Appellant,

Vv.

James Welsh, Kent Welsh, Thomas

Welsh, John Doe and Mary Roe,

whose full and true names are

unknown,

Commodity Credit Corporation, U.S.

Department of Agriculture, Gary

R. Koch, trustee,

Appellees,

and Tri-State Insurance Company

of Minnesota.

APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE DISTRICT OF MINNESOTA

A-1

Submitted: December 11, 1986

Filed: February 18, 1987

Before McMILLIAN, Circuit Judge, BRIGHT,

Senior Circuit Judge, and BOWMAN, Circuit

Judge

Baumann-Furrie & Co. appeais from a

final order entered in the District Court

[the Honorable Paul A. Magnuson, United

States District Judge for the District of

Minnesota] for the District of Minnesota

dismissing with prejudice its third-party

complaint against the United States

Department of Agriculture (USDA) and one

of its subordinate agencies, the

Commodity Credit Corp. (CCC), and

abstaining from deciding and dismissing

without prejudice the merits of the

adversary proceeding. In re Ghent Grain

& Feed, Inc., No. 3-85-1792 (D. Minn.

Mar. 21, 1986) (order); id. (May 7, 1986)

(order). For reversal Baumann-Furrie

argues the district court erred in (1)

dismissing its third-party complaint

against the USDA and the CCC as barred by

the discretionary function exception of

the Federal Tort Claims Act (FTCA), 28

U.S.C. §2680(a) and (2) abstaining "in

the interest of justice" from deciding

the merits of the adversary proceeding

pursuant to 28 U.S.C. §1334(c)(1). For

the reasons discussed below, we affirm

the order of the district court.

This case involves the bankruptcy of

a grain elevator, Ghent Grain & Feed,

Inc. (Ghent Grain). Ghent Grain, a

Minnesota corporation, was a federally

licensed grain warehouse facility,

Federal Warehouse License Act, 7 U.S.C.

§§241-273, and pursuant to the Uniform

Grain Storage Agreement, 7 C.F.R.

§1421.5551 et seq., a CCC-approved

warehouse facility. Ghent Grain had

hired Baumann-Furrie, a licensed public

accounting firm, to provide accounting

services, including preparation of

certain review financial statements

required by the USDA and the ccc. In

November 1982 Baumann-Furrie submitted a

review financial statement for the first

six months of 1982 that showed Ghent

Grain had a positive balance of more than

$253,000. However, in March 1983

Baumann-Furrie submitted a revised review

financial statement that showed a deficit

of more than $148,000, a net change of

more than $400,000. The difference was

due to missing or non-existent grain

inventories purchased under delayed

=e agreements.

The in August 1983 a "pencil" draft

of the review financial statement for the

A-4

first six months of 1983 was sent

anonymously to the Warehouse Inspection

Division Office in Minneapolis,

Minnesota. On August 22, 1983, the

Warehouse Examiner's Office, Warehouse

Division, of the USDA's Agricultural

Marketing Service (AMS), conducted a

special on-site inspection of Ghent

Grain's facilities and discovered the

corn inventory was "short" and the

soybean inventory had been "overshipped."

Also on August 22, 1983, Kellogg

Commission, a major grain terminal, cut

off Ghent Grain's line of credit.

On August 25, 1983, Ghent Grain was

removed from the list of CCC-approved

grain warehouse facilities. The next

day, the Warehouse Division conducted a

second special inspection and suspended

Ghent Grain's warehouse license. On

September 9, 1983, the grain elevator

closed. On September 12, 1983, there was

a third special inspection and a scale

ticket audit of warehouse receipts

between August 22 and 26, 1983. (The

grain in storage was subsequently sold by

the trustee, pursuant to an order of the

bankruptcy court and the proceeds, over

$773,000.00, deposited in a bank account

pending distribution to creditors.)

On November 1, 1983, Ghent Grain

filed a voluntary Chapter 7 bankruptcy

petition. Apellee Gary W. Koch is the

trustee. On August 31, 1984, the trustee

filed an adversary proceeding against

Baumann-Furrie charging Baumann-Furrie

with professional malpractice in the

preparation of review financial

statements for Ghent Grain. The trustee

alleged that Baumann-Furrie had

negligently failed to discover

overstatements of grain inventories that

had been carried as off-site inventories.

On November i6, 1984, Baumann-Furrie

filed a third-party complaint against the

Welshes (the owners of Ghent Grain) and

others, and, in June 1985, an amended

third-party complaint against the USDA,

the CCC, the trustee, and Tri-State

Insurance Co. of Minnesota (the surety

for the warehouse bond). Baumann-Furrie

Claimed that the USDA and the CCC were

liable for contribution under the

Minnesota "Good Samaritan" rule for

failure to inspect and verify the off-

site grain inventories and failure to

audit the review financial statements

submitted by Ghent Grain.

On February 19, 1985, some eighty

farmers who had sold grain to Ghent Grain

filed a professional malpractice action

against Baumann-Furrie in state court.

The trustee joined the state case as a

party plaintiff. In March 1985 Baumann-

Furrie filed a third-party complaint

against the same parties who were third-

party defendants in the adversary

proceeding, except the USDA and the CCC,

and removed the case to federal district

court, alleging that the USDA and the CCC

were necessary and indispensable parties

and that there was federal jurisdiction

pursuant ot the FTCA, 28 U.S.C.

§1346(b).

In July 1985 the UDSA and the CCC

filed in bankruptcy court motions to

dismiss Baumann-Furrie's third-party

complaint. In September 1985, the

federal district court quashed Baumann-

Furrie's petition for removal and

remanded the farmers' professional

malpractice case to state court. (During

oral argument of this appeal in December

1986, counsel for the trustee informed

the court that the case was scheduled for

trial in state court in January 1987).

Also in September 1985 the bankruptcy

court transferred the adversary

proceeding to the district court and,

pursuant to 28 U.S.C. § 157(c)(1), issued

its report and recommendation that the

district court grant and abstain from

further consideration of the adversary

proceeding. The district court conducted

a de novo review and adopted the report

and recommendation of the bankruptcy

court. The district court dismissed the

third-party complaint against the USDA

and the CCC as barred by the

discretionary function exception of the

FTCA and abstained from considering the

merits of the adversary proceeding and

dismissed the adversary proceeding

without prejudice. In re Ghent Grain &

Feed, Inc., No. 3-85-1792 (D. Minn. Mar.

21, 1986) (order); id. (May 7, 1986)

(order). This appeal followed.

Discretionary Function Exception

Baumann-Furrie argues the district

court erred in holding its third-party

complaint against the USDA and the CCC

was barred by the discretionary function

exception of the FTCA, 28 U.S.C.

§2680(a). Baumann-Furrie argues that

federal warehouse licensing regulations,

7 C.F.R. §102.6(c) (now in 7 C.F.R.

§736.6(c) (1986)), affirmatively required

the UDSA to inspect and verify Ghent

Grain's inventories and to audit its

review financial statements. (Under 7

A-10

C.F.R. §1421.555, federally licensed

warehouses are excepted from applicable

CCC warehouse standards.) Baumann-Furrie

emphasizes that because it prepared only

review, not audited, financial statements

for Ghent Grain, its accountants were not

required by established accounting

principles to independently verify Ghent

Grain's inventories and did not do so.

- Baumann-Furrie argues that if the USDA

and the CCC had in fact properly audited

Ghent Grain's review financial statements

as required by federal regulations, Ghent

Grain's true financial condition would

have been discovered and the losses

prevented or reduced. Baumann-Furrie

acknowledges that the USDA's decision to

require verification of review financial

statements by audit is a regulatory

action protected by the discretionary

A-1l

function exception, but argues that the

discretionary function exception does not

apply to actual performance of the

required audit, citing Aslakson v. United

States, 790 F.2d 688, 692-94 (8th Cir.

1986).

Although we accept Baumann-Furrie's

distinction between regulatory decision-

making and actual performance in

compliance with regulations, we cannot

agree with Baumann-Furrie's reading of 7

C.F.R. §102.6(c) to affirmatively require

the USDA to audit review financial

statements submitted by federally

licensed warehouses. Under 7 C.F.R.

§102.6(c) the required financial

statements are to be “audited by an

independent certified public accountant

-ee- [Or,] [a]lternatively, financial

statements audited or reviewed by an

A-12

independent public accountant will be

accepted with the understanding that the

warehouseman will be subject to an

additional on-site examination by the

‘Secretary [of the USDA] and to an audit

by the Secretary." The regulation does

not mandate audits of review financial

statements by the USDA; it provides only

that financial statements reviewed by

independent public accountants are

acceptable but, unlike financial

statements audited by independent

certified public accountants, “will be

subject" to additional verification by

on-site examination and audit by the

USDA.

In addition, the USDA's decision to

make certain financial statements

"subject" to additional verification, but

not to require on-site examination or

A-13

audits, is precisely the kind of agency

action protected by the discretionary

function exception of the FTCA. See

United States v. Varig Airlines, 467 U.S.

797, 813-14 (1984). In that case, the

Court held that the Federal Aviation

Administration's decision to review

manufacturer compliance with safety

standards by "spot-checking" was

protected by the discretionary function

exception. Id. at 819-20. Here, the

USDA has decided not to inspect and audit

every federally licensed warehouse and

instead has determined that a program of

placing the primary responsibility for

maintaining "complete, accurate and

current financial records" upon the

warehouseman and making review financial

statements subject to additional

examination and auditing best accomodates

A-14

the goal of financial responsibility and

the reality of limited agency resources.

The possibility of additional examination

and auditing by the USDA is comparable to

the FAA's "spot-check" system. "When an

agency determines the extent to which it

will supervise the safety procedures [or,

in this case, the financial records] of

private individuals, it is exercising

discretionary regulatory authority of the

most basic kind." Id.

Abstention

Baumann-Furrie next argues the

district court erred in abstaining from

deciding the merits of the adversary

proceeding. Although the district court

cited 28 U.S.C. §1334(c)(1), Baumann-

Furrie argues the reasons stated by the

district court in support of its

abstention decision are those set forth

A-15

in 28 U.S.C. §1334(c) (2), a statutory

provision that was not applicable to

adversary proceedings pending on July 10,

1984. Baumann-Furrie also argues the

district court abused its discretion in

abstaining under 28 U.S.C. §1334(c) (1).

The trustee argues that this court lacks

appellate jurisdiction to review the

abstention decision because the

prohibition against appellate review in

28 U.S.C. §1334(c) (2) applies to

abstention decisions under 28 U.S.C.

§1334(c)(1) as well. (The court of

appeals denied the trustee's motion to

dismiss the appeal without prejudice on

July 11, 1986.)

We hold that we have appellate

jurisdiction to review the district

court's decision to abstain. The

prohibition against review of abstention

A-16

decisions was contained in 28 U.S.C.

§1471(d), which was enacted as part of

the Bankruptcy Reform Act of 1978, Pub.

L. No. 95-598, §241(a), 92 Stat. 2668,

and provided:

Subsection (b) or (c) of this

section does not prevent a district

court or bankruptcy court, in the

interest of justice, from abstaining

from hearing a particular proceeding

arising under title 11 or arising in

or related to a case under title li.

Such abstention, or a decision not

to abstain, is not reviewable by

appeal or otherwise.

Before the Supreme Court held the broad

grant of jurisdiction to the bankruptcy

court in §1471 was unconstitutional in

Northern Pipeline Construction Co. v.

Marathon Pipe Line Co., 458 U.S. 50

(1982) (Northern Pipeline), in June 1982,

this court had held that abstention

decisions were not subject to appellate

review pursuant to 28 U.S.C. §1471(d).

See In re Med General, Inc., 672 F.2d

A@-17

716, 718-20 (8th Cir. 1982); accord In re

Covey, 650 F.2d 877, 880 (7th Cir.

1981).

However, following Northern

Pipeline, §1471(d) was repealed by the

Bankruptcy Amendments and Federal

Judgeship Act of 1984 (1984 Amendments),

Pub. L. No. 98-353, §113, 98 Stat. 343.

Section 101(a) of the 1984 Amendments

added subsection (c) to 28 U.S.C. §1334.

title 28 U.S.C. §1334(c) provides:

(1) Nothing in this section

prevents a district court in the

interest of justice, or in the

interest of comity with State courts

or respect for State law, from

abstaining from hearing a particular

proceeding arising under title 11 or

arising in or related to a case

under title 1l.

(2) Upon timely motion of a

party in a proceeding based upon a

State law claim or State law cause

of action, related to a case under

title 11 but not arising under title

11 or arising in a case under title

1l, with respect to which an action

could not have been commenced in a

court of the United States absent

A-18

jurisdiction under this section, the

district court shall abstain from

hearing such proceeding if an action

is commenced, and can be timely

adjudicated, in a State forum of

appropriate jurisdiction. Any

decision to abstain made under this

subsection is not reviewable by

appeal or otherwise. This

subsection shall not be construed to

limit the applicability of the stay

provided for by section 362 of title

11, United States Code, as such

section applies to an action

affecting the property of the estate

in bankruptcy.

Under subsection (c)(1), abstention is

discretionary; however, under subsection

re Bobroff, 766 F.2d 797, 802 n.3 (3a

Cir. 1985); In re White Motor Credit, 761

F.2d 270, 272 (6th Cir. 1985).

The §1471(d) prohibition against

appellate review of abstention decisions

is now contained in §1334(c)(2). The

prohibition against appellate review of

decisions to abstain in subsection (c) (2)

arguably also applies to subsection

A-19

Rentals & Sales, Inc., 14 Collier Bankr.

Cases 2d (MB) 332, 335-36 (Bankr. M.D.

La. 1985). However, regardless of the

scope of subsection (c) (2), that

subsection does not apply to cases which

were pending when the 198/ Amendments

were enacted on July 10, 1984. 1984

Amendments, Pub. L. No. 98-353, §122(b),

98 Stat. 346; see In re American Pouch

Foods, Inc., 769 F.2d 1190, 1198 (7th

Cir. 1985), cert. denied, 106 S. Ct. 1459

(1986); In re Bobroff, 766 F.2d at 802

n.3. Because this case was pending on

July 10, 1984, §1334(c) (2), including the

prohibition against appellate review of

abstention decisions, does not apply.

On the merits we find no abuse of

discretion in the district court's

decision to abstain. As noted by the

district court, a state action involving

the same state law issues presented in

the adversary proceeding is now pending

in state court.

Accordingly, we affirm the order of

the district court.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS,

EIGHTH CIRCUIT.

A-21

UNITED STATED DISTRICT COURT

DISTRICT OF MINNESOTA

THIRD DIVISION

Civil File No. 3-85-1792

In re: Ghent Grain and Feed, Inc.,

Debtor,

Gary W. Koch, Trustee,

Plaintiff,

Vv.

Baumann-Furrie and Company,

Defendant and

Third-Party Plaintiff,

Vv.

James Welsh, et al.,

Third-Party Defendants.

ORDER

The court, by its own initiative,

finds that an amendment to its Order

dated March 21, 1986 is appropriate under

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Rule 60(a) of the Federal Rules of Civil

Procedure to correct an omission in that

Order and clarify the disposition of this

matter. Accordingly, IT IS ORDERED

that:

The Order of this court dated March

21, 1986 is amended to read as follows:

1. The motion to dismiss for

failure to state a claim upon which

relief can be granted of Third-Party

Defendants, Commodity Credit Corporation

and United States Department of

Agriculture, is granted and the third-

party claims against these third-party

defendants are hereby dismissed with

prejudice.

2. Pursuant to 28 U.S.C.

§1334(c)(1), the court abstains from

considering the merits of this adversary

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proceeding and this matter is hereby

dismissed without prejudice.

Dated: May 7, 1986.

/s/ Paul A. Magnuson

United States District

Judge

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UNITED STATED DISTRICT COURT

DISTRICT OF MINNESOTA

THIRD DIVISION

Civil File No. 3-85-1792

In re: Ghent Grain and Feed, Inc.,

Debtor,

Gary W. Koch, Trustee,

Plaintiff,

Vv.

Baumann-Furrie and Company,

Defendant and

Third-Party Plaintiff,

Vv.

James Welsh, et al.,

Third-Party Defendants.

ORDER

This matter comes before the court

on Objections filed by defendant and

third-party plaintiff, Baumann-Furrie and

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Company, to the Recommendation of the

Bankruptcy Court dated September 26,

1985. The Bankruptcy Court, in

entertaining a motion to dismiss of

third-party defendants Commodity Credit

Corporation and United States Department

of Agriculture, issued its Recommendation

Regarding Disposition pursuant to 28

U.S.C. §157(c)(1). The Bankruptcy Court

recommended that the District Court grant

the motion to dismiss of third-party

defendants Community [sic.] Credit

Corporation and the United States

Department of Agriculture. In addition,

the Bankruptcy Court recommended that the

District Court abstain from further

consideration on the entire proceeding.

Defendant and third-party plaintiff,

Baumann-Furrie and Company, objects to

such Recommendation.

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When a party files objections to the

Recommendation of the Bankruptcy Court,

the court must conduct a de novo review

of those portions of the Recommendation

to which the party specifically objects.

28 U.S.C. §157(c)(1). Based upon an

independent review of the files and

records in this case, and the memoranda

of counsel, and after conducting a de

novo review of those portions of the

Recommendation Regarding Disposition of

the Bankruptcy Court dated September 26,

1985.

In so ruling, the court rejects

Baumann-Furrie's contention that the

Bankruptcy Court erred in determining

that the claims asserted against

Commodity Credit Corporation and United

States Department of Agriculture were

precluded under the discretionary

function exception of the Federal Tort

Claims Act, 28 U.S.C. §2680(a). The

alleged tortious conduct on the part of

the federal agencies arises out of the

performance of their regulatory and

monitoring functions with respect to the

bankrupt, Ghent Grain and Feed, Inc.

Such functions concern the agencies’

decision as to the extent they will

supervise the warehouse's duties to

provide accurate financial statements and

meet the minimum net asset requirements.

Under such circumstances, the agencies'

alleged negligence in failing to discover

the warehouse's noncompliance is subject

to the discretionary function exception

under United States v. S. A. Empresa de

Viacoa Aerea Rio Grandense Varig

Airlines), U.S. » 206 8. CB. 27

(1984).

In Varig Airlines, the Supreme Court

held that the discretionary function

exception barred a tort action against

the government based on the Federal

Aviation Administration's (FAA) adoption

and implementation of a "spot-checking"

program to ensure that aircraft complied

with FAA safety regulations. The Court

found that the FAA's development of a

system for enforcing compliance with

safety standards was "plainly

discretionary". Id., 104 S. Ct. at 2768.

The court further held that the acts of

the FAA employees in conducting spot-

checks were also protected as

discretionary activity. Id.

Like the FAA in Varig Airlines, the

federal agencies in this action placed

primary responsibility on the warehouses,

requiring the warehouses to provide

accurate financial statements and meet

the minimum net asset requirements. The

agencies monitored the warehouse's

compliance with the regulations by

providing for periodic audits and on-site

examinations. Under the rule announced

in Varig Airlines, the agencies' actions

in this respect are protected by the

discretionary function exception of 28

U.S.C. §2860(a). The third-party action

against Commodity Credit Corporation and

the United States Department of

Agriculture is therefore dismissed.1

The court also concludes that

abstention under 28 U.S.C. §1334(c) (1) 2

1 The court does not specifically

address Baumann-Furrie's additional

claim for conversion, but adopts the

determination of the Bankruptcy

Court on that issue.

2 Section 1334(c)(1) provides, in

pertinent part:

"Nothing in this section prevents a

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is appropriate under the circumstances.

There is currently pending a state court

action involving substantially similar

issues. That action will be timely

adjudicated before a court familiary with

the case and the legal issues presented,

legal issues wholly involving state law.

Further federal court involvement would

result in a duplicative and uneconomical

use of scarce judicial resources. In the

interests of justice, abstention is thus

warranted in this case.

In concluding, the court notes that

the parties have filed various motions

unrelated to the Recommendation of the

Bankruptcy Court. Given the court's

district court in the interests of

justice, or in the interests of

comity with State courts or respect

for State law, from abstaining from

hearing a particular proceeding."

28 U.S.C. §1334(c) (1).

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determination in this matter, those

motions are not appropriately before this

court and the court declines ruling on

such motions. 3

Accordingly, IT IS ORDERED that:

1. The motion to dismiss for

failure to state a claim upon which

relief can be granted of Third-Party

Defendants, Commodity Credit Corporation

and United States Department of

Agriculture, is granted and the third-

party claims against these third-party

defendants are hereby dismissed with

prejudice.

2. Pursuant to 28 U.S.C.

§1334(c)(1), the court abstains from

3 Such motions include: (1) Baumann-

Furrie's Motion for Stay of Review;

(2) Baumann-Furrie's Motion for

Leay2 to Conduct Further Discovery;

and (3) Trustee's Motion for

Dismissal Without Prejudice.

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considering the merits of this adversary

proceeding.

Dated: March 21, 1986.

/s/ Paul A. Magnuson

United States District

Judge

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