refunds to nonmembers computed at a lower rate than those paid to members.49 Some State statutes, however, provide that although associations. may do nonmember business, patronage refunds may be paid only to members or that patronage refunds to nonmembers must be computed at a lower rate than such refunds paid to members.

While it would seem on principle that an association from a cooperative standpoint should accord the same treatment to all patrons regardless of whether they are members, some associations feel that if nonmember patrons receive the same treatment as member patrons there is no particular incentive for a nonmember to become a member of the association. In order to modify this situation the bylaws of many associations provide that the patronage refunds which accrue to the credit of an eligible nonmember patron shall be applied first toward the purchase of a membership or a share of stock. In the case of agricultural cooperatives which limit their membership to producers, it may happen that some business may be transacted for persons who are ineligible for membership. This is particularly true in the case of associations performing farm business services. As brought out in the discussion of Federal income taxes, an association may not do more than 15 percent of its farm supply business with patrons who are neither members nor producers, if it is to be eligible for an "exempt" status under the Federal income tax law.

Control of Crops by Landlord

HE statutes of a number of States contain a provision reading as fol

Tlows:

In any action upon such marketing agreements, it shall be conclusively presumed that a landowner or landlord or lessor is able to control the delivery of products produced on his land by tenants or others, whose tenancy or possession or work on such land or the terms of whose tenancy or possession or labor thereon were created or changed after execution by the landowner or landlord or lessor, of such a marketing agreement; and in such actions, the foregoing remedies for nondelivery or breach shall lie and be enforceable against such landowner, landlord or lessor.5

50

Entirely independent of the conclusive-presumption provision just quoted, may an association require that crops grown under the share-lease plan be marketed through it? An association could include a provision in its marketing contract requiring a member, if he leased his farm or any part thereof after signing the marketing contract, to include a provision in the lease stipulating that all crops grown on the farm should be marketed through the association. In addition, a provision could be included requiring the landlord to pay liquidated damages for his failure to have the share of the crops belonging to his tenant marketed through the association.51 If a lease provides for a share tenancy, then, regardless of the time that it is entered into, the association clearly would be entitled to receive at least the landlord's share of the crop for marketing, because he has legal control over that portion of the crop.

52

In the cases just cited it appeared that the tenants had the right to sell the landlord's part of the cotton crop, but it was held in each case that

49 See Federal Income Taxes, p. 195.

50 See sec. 18 of Bingham Cooperative Marketing Act of Kentucky, p. 305 of Appendix.

Dark Tobacco Growers' Coop. Association v. Daniels, 215 Ky. 67, 284 S. W. 399. See Liquidated Damages, p. 139.

52

Long v. Texas Farm Bureau Cotton Association, 270 S. W. 561 (Tex. Civ. App.);

Main v. Texas Farm Bureau Cotton Association, 271 S. W. 178 (Tex. Civ. App.).

this fact was immaterial, as the leases provided that the landlord receive a part of the crop as his rent.

In North Carolina it was held that a landlord was not liable for damages to the association because of the failure of his tenant to market his share of the crop through the association.53 The North Carolina cooperative statute does not contain the conclusive-presumption provision.

In the absence of a provision in the marketing contract requiring a landlord to have the share of the crops belonging to his tenants marketed through an association and in the absence of a conclusive-presumption provision in the cooperative act of the State, it would appear that there is no basis for holding a landlord liable on account of the fact that the share of the crops of his tenants is not marketed through the association, nor would there be a basis for holding the tenants liable unless they are parties to the

contract.

Crop Mortgages

O OBTAIN a valid lien statutory requirements must be met and, if the statute requires verification under oath, an acknowledgment is insufficient.54 In taking a crop lien or other mortgage, care should be taken to identify clearly the property covered and the indebtedness secured, otherwise the lien may fail.55

Generally, a person who takes a crop mortgage or other lien on commodities occupies a position virtually identical with that of a purchaser of the commodities involved. In other words, in determining the rights of the holder of a crop mortgage to avail himself of the products covered thereby, the rules that would be applicable if he had purchased the crop involved are applicable. As it is the general rule that any interest which a person has in property may be mortgaged, a person entitled to a share of the crop may give a mortgage thereon covering his interest. 56

Marketing contracts sometimes provide that, if the member places a crop mortgage upon any of his crops during the term of the contract, the association has the right to take delivery of the crop and to pay off all or any part of the crop mortgage for the account of the grower. Such provisions are at least binding on the member and the association.57

In a Mississippi case 58 it was held that, where an association had agreed with a member that the proceeds arising from the sale of the commodities. covered by its marketing contract would be turned over to the holder of a mortgage on the commodities until the mortgage was fully satisfied, this agreement operated to prevent a creditor of the member from successfully maintaining garnishment proceedings against the association.

In Kansas,59 Kentucky,60 and Tennessee,61 it has been held independent 53 Tobacco Growers' Coop. Association v. Bissett, 187 N. C. 180, 121 S. E. 446. 54 Reeves v. Kansas Cooperative Wheat Marketing Association, 136 Kan. 306, 15 P. 2d 446.

Dingfelder v. Georgia Peach Growers Exchange, 184 Ga. 569, 192 S. E. 188. 56 Merriman v. Martin, 113 Cal. App. 167, 298 P. 95.

58

57 Lennox v. Texas Cotton Coop. Association, 55 S. W. 2d 543 (Tex. Com. App.). Cole-McIntyre-Norfleet Company v. DuBard, 135 Miss. 20, 99 So. 474; Myers v. Bushmiaer, 201 Ark. 564, 145 S. W. 2d 722.

59 Kansas Wheat Growers' Association v. Floyd, and Kansas Wheat Growers' Association v. Robben, 116 Kan. 522, 227 P. 336.

60

Redford v. Burley Tobacco Growers' Coop. Association, 205 Ky. 515, 266 S. W. 24; Feagain v. Dark Tobacco Growers' Coop. Association, 202 Ky. 801, 261

S. W. 607.

61 Dark Tobacco Growers' Coop. Association v. Dunn, 150 Tenn. 614, 266 S. W. 308. See also Oregon Growers' Coop. Association v. Lentz, 107 Ore. 561, 212 P. 811; Monte Vista Potato Growers' Coop. Association v. Bond, 80 Colo. 516, 252 P. 813.

of statute that the person who takes a mortgage on a crop with knowledge of the fact that it is covered by a marketing contract may be compelled by injunction to market the crop through the association, which in turn after making the deductions authorized by the contract must account to the person holding the mortgage before making any payments to the member.

In North Carolina, 62 Alabama,63 and Louisiana,64 it has been held that even though the party taking the mortgage has knowledge at the time that the crop is covered by a marketing contract, his rights are superior to those of the association, and the association cannot compel the delivery of the crop to it for marketing. It is believed that the holdings in the North Carolina, Alabama, and Louisiana cases were based, to a large extent at least, on the mandatory character of the statutes of those States defining the superiority of recorded liens and mortgages.

In a Texas case in which a chattel mortgage was taken on a crop of rice with knowledge that the mortgagor had contracted to deliver the rice to a cooperative, it was held that the rights of the association and of a buyer of such rice from the association were junior to those of the mortgagee.

65

Another factor which should be considered in all these cases is the exact character of the purchase-and-sale contract of the association. If the contract is merely an executory contract to sell,66 then the rights of the association may be different from what they would be if the contract were one for a present sale of future crops.

In North Carolina, the fact that the crop is covered by a mortgage does not prevent the association from enjoining the member from disposing of his crop outside the association subject to the right of the holder of the mortgage to demand a sufficient amount of the crop to satisfy his mortgage, but it is otherwise in Alabama.68

67

In Kansas," it was held that where a producer signed a marketing contract which in effect stated that there were no encumbrances of any kind against his crop, he was liable for liquidated damages to the association if delivery of his crop was prevented by a mortgage executed prior to the signing of the marketing contract, and in all cases liquidated damages may be recovered by an association (if the contract contains no exception), although delivery of the crop is prevented by a crop mortgage.70

If a cooperative in any State receives a crop on which a third person has a superior claim, the association runs a risk in receiving and handling the crop. If the person having a superior claim consents to having the association handle the crop, then there is no danger. In all cases in which an association receives a crop on which there is a lien or crop mortgage, great

62 Tobacco Growers' Coop. Association v. Harvey & Son Co., 189 N. C. 494, 127 S. E. 545, 47 A. L. R. 928; Tobacco Crowers' Coop. Association v. Patterson, 187 N. C. 252, 121 S. E. 631.

63

Bishop v. Alabama Farm Bureau Cotton Association, 215 Ala. 388, 110 So. 711. 64 Louisiana Farm Bureau Cotton Growers' Coop. Association v. Clark, 160 La. 294, 107 So. 115.

65

Beaumont Rice Mills v. Dishman, 72 S. W. 2d 365 (Tex. Civ. App.).

Tobacco Growers' Coop. Association v. Harvey & Son Co., 189 N. C. 494, 127 S. E. 545, 47 A. L. R. 928.

68

Tobacco Growers' Coop. Association v. Patterson, 187 N. C. 252, 121 S. E. 631. Bishop v. Alabama Farm Bureau Cotton Association, 215 Ala. 388, 110 So. 711. 69 Kansas Wheat Growers' Association v. Leslie, 126 Kan. 694, 271 P. 284.

70 Kansas Wheat Growers' Association v. Ast, 118 Kan. 247, 234 P. 963; North Carolina Cotton Growers' Coop. Association v. Bullock, 191 N. Č. 464, 132 S. E. 154, 47 A. L. R. 924; Lennox v. Texas Farm Bureau Cotton Association, 16 S. W. 2d 413 (Tex. Civ. App.).

412528°-58-10

137

care should be exercised to account to the holder of the lien or mortgage before making any payments to the grower. This is true whether or not the claim of the association is superior to the claim of the holder of the lien or mortgage.

An association is liable for conversion if it handles and sells a crop on which a third person has a superior lien, without the consent of that person."

Where the mortgagee expressly or impliedly consents to the sale, however, the usual rule is that he thereby waives the lien of his mortgage and the purchaser is not liable for conversion.72

Even though the claim of the association is superior, if the association has knowledge of the crop lien or mortgage, then it should account to the holder thereof before making payment to the grower. An association ordinarily is free to take a mortgage on any property of a member including a crop to secure it for advances made or to be made.

If there is a lien on commodities the fact that they are shipped from another State is, generally speaking, immaterial because an association is charged by law with knowledge of a chattel mortgage that is duly filed of record in that State.73

The fact that delivery of commodities to an association is effected by the delivery of warehouse receipts therefor does not operate to improve the position of the association if the member did not have title to the commodities, or if a third person had a lien thereon.74 But where warehouse receipts which under State statute the issuing warehouseman had an absolute duty to take up and cancel upon delivery of the commodity to the holder of the receipt were dishonestly used by the warehouseman's agent to obtain funds from a cooperative, it was held that the cooperative was an innocent purchaser and could recover from the warehouseman.

75

In order to protect itself, an association may refuse to pay over the sales proceeds of a crop to a mortgagee where other lienors are questioning the right of the mortgagee to such funds, unless a suitable bond is furnished."

76

If a member of an association suffers a loss by reason of the fact that the association has paid money, derived from the sale of his products, to a person on the false assumption that that person had a chattel mortgage on the products, the association is liable therefor."

It should not be assumed that because an association does work upon commodities which it has received and which are covered by a chattel

71

"Producers' Livestock Marketing Association v. Livingston, 216 Iowa 1257, 250 N. W. 602; Mississippi Cooperative Cotton Association v. Walker, 186 Miss. 870, 192 So. 303; Mason City Production Credit Association v. Sig Ellingson & Company, 205 Minn. 537, 286 N. W. 713, certiorari denied 308 U. S. 599, 60 S. Ct. 130, 84 L. Ed. 501; Alexandria Production Credit Association v. Horn, 199 So. 430 (La. App.).

12 East Central Fruit Growers Production Credit Association v. Zuritsky, 346 Pa. 335, 30 A. 2d 133; Prichard v. Farmers Coop. Soc. No. 1 of Merkel, 183 S. W. 2d 240 (Tex. Civ. App.); Producers' Livestock Marketing Association v. John Morrell & Co., 220 Iowa 948, 263 N. W. 242; Farmers National Grain Corporation v. Kirkendall, 183 Okla. 17, 79 P. 2d 570.

73 Mason City Production Credit Association v. Sig Ellingson & Company, 205 Minn. 537, 286 N. W. 713, certiorari denied 308 U. S. 599, 60 S. Ct. 130, 84 L. Ed. 501.

74 Gillon v. Martin, 15 La. App. 366, 131 So. 598; Four County Agricultural Credit Corporation v. Satterfield, 218 N. C. 298, 10 S. E. 2d 914.

American Cotton Coop. Association v. U. C. and Ware Co., 193 Miss. 43, 7 So. 2d 537.

76 Farmers Cooperative Elevator Company v. Schweigert-Ewald Lumber Company, 60 N. D. 236, 233 N. W. 902.

White v. Lone Star Wool-Mohair Cooperative Association, 95 S. W. 2d 178 (Tex. Civ. App.).

mortgage, that the association will be entitled to reimbursement therefor. In a Massachusetts case 78 in which a chattel mortgage was taken in good faith and without knowledge of the fact that the mortgagor was obligated to deliver the tobacco to an association which functioned on an agency basis, the rights of the mortgagees were prior to those of the association. Following the foreclosure of the mortgage on the tobacco, the association sold the tobacco and deducted certain expenses pursuant to an agreement between the parties, but as the remaining proceeds were no more than sufficient to pay the mortgagees it was held that the association had no right to deduct for indebtedness of the mortgagor to it on account of expenses incurred by the association, in sorting and curing the tobacco without authority from the mortgagees.

When commodities are delivered to a market agency with the consent of the holder of a lien thereon, the market agency has a factor's lien on the commodities and the proceeds derived therefrom for its reasonable commissions and expenses incident to the sale of the commodities.79

In many jurisdictions if a mortgagor is permitted to retain proceeds arising from the sale of mortgaged chattels without applying the proceeds on the indebtedness secured by the mortgage, the mortgage is invalid insofar as other creditors and subsequent purchasers in good faith are concerned.80 An association which held a chattel mortgage on hay took a bill of sale on the hay and later attempted to foreclose its mortgage; but the court said: 81

When appellant took complete title, it merged the mortgage in the title. Appellant cannot stand in both positions, mortgagee and owner.

In many of the States it is a crime for a mortgagor to sell mortgaged property without the consent of the mortgagee.

LIQUID

82

Liquidated Damages

IQUIDATED damages are damages the amount of which has been determined in advance by agreement between the parties. Long before the days of Blackstone, parties inserted in their contracts provisions that one should pay a certain sum, in case he breached the contract, to the other as satisfaction for the loss sustained because of the breach. One of the most common expressions used in discussing the term "liquidated damages" is "penalty." And it is frequently said that a penalty cannot be recovered, but that liquidated damages may be. A penalty may, in this connection, be defined as an amount fixed by the parties to a contract to be paid by one of them in case of breach, which is greatly or perhaps grossly in excess of the damages which may actually be suffered from such a breach. When the amount fixed is held to be a penalty, such amount cannot be recovered but only the actual damages suffered.

A case which well illustrates this view is one in which the defendant entered into a bond to pay $10,000 in case he failed to secure releases, within a year, from certain parties having claims against him. One of the claims

78 West Springfield Trust Company v. Hinckley and the Hampden County Tobacco Growers' Association, 258 Mass. 157, 154 N. E. 580.

Wenatchee Production Credit Association v. Pacific Fruit & Produce Company, 199 Wash. 651, 92 P. 2d 883.

80 Turk v. Kramer, 138 Okla. 35, 280 P. 266, 73 A. L. R. 229.

81 Northwest Hay Association v. Slayton, 137 Wash. 248, 242 P. 354, 356.

82 Beaumont Rice Mills v. Dishman, 72 S. W. 2d 365 (Tex. Civ. App.); Burns v. Clarksdale Production Credit Association, 189 Miss. 34, 195 So. 588; 11 C. J. 638.