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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1987
- **Citation:** 484 U.S. 819

## Text

—— — ——

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

ii

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 ...........
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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

iv

27

39

aS

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

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=

5

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

4.
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

I

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
(c) (2), abstention is mandatory. See In

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

(c) (1). See In re Aaronics Equipment

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

A-22

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

A-23

proceeding and this matter is hereby

dismissed without prejudice.

Dated: May 7, 1986.

/s/ Paul A. Magnuson
United States District
Judge

A-24

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

A-25

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.

A-26

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

ul
Ul

(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

A-30

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).

A-31

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.

A-32

a

considering the merits of this adversary

proceeding.

Dated: March 21, 1986.

/s/ Paul A. Magnuson
United States District
Judge

A-33

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0253%3A1. Public record. Not legal advice.