Court rules in favor of GPC in long-running court battle

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Corn field

By Reed Anfinson
Publisher, Monitor-News

After an eight-day court trial in Swift County 8th Judicial District Court Judge Charles Glasrud found decisively in favor of Murdock-based grain cooperative Glacial Plains Cooperative in his Aug. 16 decision.

He also sharply criticized the Chippewa Valley Ethanol Company’s (CVEC) past general manager and management for the problems that have led to the persistent legal battles between the two companies.

The court found that CVEC was in breach of its grain handling agreement with Glacial Plains Cooperative (GPC) and ordering that it “shall continue to perform its duties and obligations under the terms of the grain handling agreement.”

For seven long years the two local agricultural cooperatives have been involved in a series of civil lawsuits costing their shareholders hundreds of thousands in legal fees and lost profits. Many of those investors, an estimated 60 to 70 percent, are members of both cooperatives and paying double for the legal battle.

“This was a long-fought fight for Glacial Plains,” Jason Lina, GPC attorney with the Morris law firm of Fluegel, Anderson, McLaughlin and Brutlag said. “Throughout, Glacial Plains has simply been trying to do what the parties originally intended back in 1994 - work cooperatively for the benefit of the members of both entities.”

While Glacial Plains issued a news release about the court decision, CVEC was terse in its reply when contacted by the Monitor-News.

“CVEC is certainly disappointed with the decision but is not in a position to discuss the case in a public forum at this time,” General Manager Chad Friese stated in an email to the Monitor-News. “CVEC is evaluating its options and is in discussions with GPC management at this time.”

The lawsuit stemmed from CVEC’s breaking its grain-handling contract with Glacial Plains in June 2014. GPC had sought damages for 26 months of lost revenues because of CVEC’s decision to handle its own grain. However, Glasrud said that because of the “many variable and uncertainties that come into play” the court couldn’t accurately determine what GPC’s damages would be due to losses due to CVEC’s breach of the contract.

“Specific performance is by far the better and fairer remedy here than an attempt to assign money damages,” Glasrud wrote. In other words, adhering to the contract would benefit Glacial Plains. However, Glasrud does allow for a chance for GPC to recover damages once the two start working together again.
 

Background

As CVEC was gathering the financial support in 1994 it would need to build its plant west of Benson, it turned to what was then United Farmers Elevator for financial assistance in two key ways: First, it would finance the construction of the grain handling facility that would supply the ethanol plant with its corn – a multi-million investment. Second, it would invest $400,000 cash into the construction of CVEC through the purchase of 200,000 shares.

“Of all the elevators, GPC invested the most,” the court decision said. “Its assistance was essential to the speed with which CVEC was formed, if not to the very fact of its formation.”

For that investment it would get the exclusive grain handling rights for the ethanol plant “in perpetuity, so long as it met its contractual obligations.” This phrasing would become the crux of the court battle as CVEC tried to free itself from its agreement with Glacial Plains.

CVEC started operations in 1996 with Glacial Plains supplying it with corn. For the service, it would receive a grain-handling fee. “GPC’s gamble on the new ethanol plant turned to have been a good choice, and it saw a number of benefits from the arrangement, some direct and some indirect,” the court wrote.

“GPC received a handling fee under the contract. It received revenue for the storage of corn. It profited by the margin on corn sales, when called upon to sell corn to CVEC; since it had a conveyor attached to CVEC, it had no expenses for loading or shipping,” the decision pointed out.

It also capitalized on its ability to blend better quality corn with lower quality corn and still achieve the requirement of delivering Number 2 yellow corn to CVEC that had less than 15 percent moisture and had 3 percent or less foreign material in it.

Glacial Plains was able to dock sellers of wet grain or grain with high foreign material content, then blend it with high quality corn, and then turn around and sell it at higher price to CVEC giving the company an even higher rate of return on its contract with the ethanol company. “GPC’s blend benefit was substantial, as compared to what an elevator might normally receive,” the court said.

GPC also benefited by establishing relationships with CVEC shareholders who were delivering corn to meet their delivery requirement to the ethanol plant.

When CVEC started up in April 1996, there were 330 shareholders in Chippewa Valley Agrafuels Cooperative (CVAC) owning 4 million shares and supplying just over 4 million bushels of corn to the 15 million gallon plant.

However, multiple expansions in capacity over the years have it now producing over 49 million gallons of ethanol annually. It has 950 shareholders with 15.8 million shares. Those shareholders supply the company nearly 16 million bushels of corn. One bushel of corn can produce 2.6 to 2.8 gallons of ethanol.

The arrangement worked well through the first 12 years of CVEC’s operation. Then, in 2009 a series of legal actions began.
 

Relationship sours

In 2009, Mike Jerke became CVEC’s general manager and “almost immediately upon his arrival the parties’ relationship seemed to sour,” the court writes. Complaints about GPC’s service increased and there was a lessening of respect for the grain handling company, Judge Glasrud writes.

Two years after Jerke arrived on the scene, CVEC began exploring the use of a new genetically modified corn developed by Syngenta. Called “Enogen,” the corn contained an alpha amylase trait that “…helps an ethanol plant significantly reduce the viscosity of its corn mash and eliminates the need to add a liquid form of the enzyme,” the company says. “This breakthrough reduction can lead to unprecedented levels of solids loading, which directly contributes to increased throughput and yield, as well as critical cost savings from reduced natural gas, energy, water and chemical usage.”

In June 2011, Jerke emailed GPC General Manager Tom Traen asking for his “thoughts” on it being able to supply Enogen corn to CVEC. “A host of factors will determine the feasibility and any possible extra costs,” Traen told Jerke.

Then in July 2011, Traen told Jerke it would be possible to supply Enogen corn, but at an additional cost. Jerke rejected the possibility of a cost increase for corn delivery, according to court documents.

Considering Jerke had to know there would be additional costs in securely handling a genetically modified corn, the court said his position “necessarily evidenced a fundamental unwillingness on Jerke’s part to be reasonable with GPC any longer.”

Strict handling of genetically modified grains is required to keep them from “contaminating” the traditional grain supply. Enogen has no benefit to the nation’s corn-for-food supply and contamination of the general corn storage facility could lead to none of its grain being approved for shipping overseas.

To ensure secure handling of Enogen would have required additional facilities and handling procedures for GPC and its employees – both at an ongoing cost to the company, the court points out.

Still, in August 2011 Traen outlined for CVEC that GPC would handle Enogen corn and what additional costs would be charged.  CVEC’s response was a lawsuit attempting to terminate GPC’s grain handling contract.

The court points out that CVEC couldn’t have started using Enogen in 2011 because it wasn’t approved for use in the region in 2014 or 2015. It would be nearly two years before CVEC would contact Syngenta about Enogen corn use and it still had made no move to use it in its process as of July 2016.

Further, the court says, “CVEC has not worked with GPC in good faith to allow it to learn about the requirements to handle Enogen and prepare itself to do so, because CVEC did not want to continue to partner with GPC for handling any corn, whether or not Enogen was involved….”

“CVEC instead wanted to use Enogen as a wedge to manufacture a basis under which it could escape its obligations under a contract it felt no longer to its economic advantage,” Judge Glasrud adds. This conclusion is underscored by an email sent by CVEC’s attorney Jan. 14, 2013. It says, “…our position (is) that we need to be done with existing contract one way or the other. That has always been our objective.”

As discussions continued on the use of Enogen, and general corn-handling issues, “Jerke now became antagonistic and got irrationally ‘picky’ with GPC in their day-to-day relationship,” the court writes. It observes that the problems were worsening because, “It was Jerke, not GPC’s performance, that had changed the relationship between the parties.”

CVEC moves to unilaterally terminate contract

Despite court and arbitration cases in earlier years that had found GPC was full-filling its contractual obligations in the supply of corn to CVEC, the ethanol company notified GPC in June 2014 that it would terminate its contract at the end of July 2014.

GPC sued and sought an injunction against CVEC’s action. However, the court denied the injunction. It also sought a “declaratory judgment that CVEC had breached the contract through its wrongful termination; a permanent injunction directing CVEC to follow the terms of the contract; and damages for CVEC’s breach prior to an injunction being enforced….”

As CVEC had tried to break its contract with GPC, it had constructed its own grain handling and storage facilities.
 

Court decision

Glasrud found that CVEC was motivated to break its contract with GPC not because of any failure on the company’s part, but because of its desire to get out of the contract.

“Once it became an established, successful and expanding business, CVEC began not to need its business partner GPC as it had at first,” Glasrud wrote. “It could save money, it concluded, by handling corn itself.”

To get out of its contract, “It took actions which it calculated would ultimately allow it to escape its contractual obligations, by rending GPC performance impossible.”

In its arguments for dissolving the contract, CVEC also argued that their bitter relationship meant the two could no longer work together and implied it was useless to try continue with the current agreement. Glasrud disagreed laying the blame squarely on CVEC.

“It is suggested this contractual relationship is like a dead marriage, and if one party wants out you might as well allow it because the two are never going to get along. The parties are just ‘two scorpions in a bottle’ and you can’t mend the relationship,” he wrote.

“Institutionally, CVEC can learn from (its) mistakes, chart a new course, behave efficiently and purge itself of any individuals who would continue to play the ‘scorpion.’ CVEC was the only scorpion ever in this particular bottle,” Glasrud said.

“Ongoing strife and litigation will cause many of these overlapping members/shareholders effectively to be paying attorneys fees on both sides,” Judge Glasrud states. “This is a special incentive to behave reasonably – and if management does not get the message, those affected producers can make a change and fix that.”
 

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