Summary of a Recent
Judicial
Development in
Perishable Commodities
Summary Judgment Motions In PACA Action
Denied In Part, Granted In Part
Harrison M. PittmanStaff Attorney
In an action brought pursuant to the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499a-499t, a plaintiff sought to disgorge the funds from several beneficiaries of a PACA trust that were received from an insolvent produce dealer. Fresh Kist Produce, L.L.C. v. Choi Corp., Inc., No. Civ. A. 01-1834, 2002 WL 1803723 (D.D.C. July 31, 2002). The United States District Court for the District of Columbia granted in part, and denied in part, a motion for summary judgment filed by the plaintiff and denied a cross-motion for summary judgment filed by one of the defendants. See id. at *2-10. The court ruled that one of the beneficiaries of the PACA trust was required to disgorge $59,189.40 received from the insolvent produce dealer so that the funds could be distributed pro rata among all of the PACA trust beneficiaries. See id. at *7. The court based its determination on the fact that the particular beneficiary had knowledge of the produce dealer's insolvency or near insolvency at the time he received the payments. See id. at *7.
The Perishable Agricultural Commodities Act was enacted to provide certain protections to the sellers and producers of perishable agricultural commodities. See id. at *1. The PACA "creates a nonsegregated 'floating' trust when a seller of perishable agricultural commodities (fruits and vegetables) sells them to a buyer (usually a store or distributor)." Id. at *4 (citing 7 U.S.C. § 499e(c)(1) and 7 C.F.R. § 46.46(d)(1) and In re Lombardo Fruit & Produce Co., 12 F.3d 806, 809 (8th Cir. 1993)). The PACA "requires produce dealers to maintain proceeds from produce sales in floating trusts so that if the dealer becomes insolvent, the produce sellers can claim a pro rata share of the trust before other creditors can claim them." Id. at *1 (citing 7 U.S.C. §§ 499a-499t).
The district court explained that when a buyer "becomes bankrupt with existing receivables, she must hold produce-related receivables from the commodities in trust until she pays all qualified sellers in full." Id. at *4 (citing Boulder Fruit Exp. v. Transp. Factoring, Inc., 251 F.3d 1268, 1271 (9th Cir. 2001)). The court stated that "[i]f the buyer commingles produce related assets with other funds, all funds will become part of the PACA trust unless the buyer proves that the particular assets did not derive from produce sales." Id. (citing Sanzone-Palmisano Co. v. M. Seaman Enterprises, 986 F.2d 1010, 1013-14 (6th Cir. 1993)). When a buyer is unable to prove that certain assets did not derive from produce sales, "a PACA beneficiary may recover any of the buyer's assets (until the buyer is paid in full) ahead of other creditors should the buyer become bankrupt." Id. (citing In re Gotham Provision Co., 669 F.2d 1000, 1010 (5th Cir. 1982)).
Fresh Kist Produce ("Fresh Kist"), plaintiff, was a seller of perishable agricultural commodities. The defendants, J.C. Watson ("Watson"), Norfolk Banana ("Norfolk"), and Berkley Tomato ("Berkley"), were also sellers of perishable agricultural commodities. See id. Washington Wholesale Produce Company ("Washington Wholesale"), defendant, also known as the Choi Corporation, was "an insolvent produce dealer or buyer and PACA trustee." Id. The defendants each supplied Washington Produce with perishable agricultural commodities. See id. This action began when Washington Produce failed to make payments, due to insolvency, to the various parties that supplied perishable agricultural commodities to Washington Produce. See id.
On June 5, 2001, Watson brought an action against Washington Produce for breach of contract and breach of trust. See id. Watson alleged that Washington Produce owed him $70,946.90 that derived from several transactions in which he supplied perishable agricultural commodities to Washington Produce. See id. Washington Produce subsequently agreed to tender weekly payments of $4,729.80 to Watson until the entire amount owed was paid off. See id. After making $59,189.40 in payments, Washington Produce defaulted. See id. On August 6, 2001, Watson filed an amended complaint demanding that Washington Produce pay the balance of the amount owed. See id. The court ordered Washington Produce to make the remaining payments to Watson soon thereafter, thus resolving the conflict between the two parties. See id.
However, on August 28, 2001, Fresh Kist brought the current action in the U.S. District Court for the District of Columbia seeking "(1) a temporary restraining order and (2) entry of an order establishing a non-party PACA claims procedure." Id. at *2. The district court issued a temporary restraining order that "effectively froze" Washington Produce's PACA trust assets. See id. The court's order required Washington Produce to pay $11,757.50 into the court's registry until the action was resolved. See id.
On September 24, 2001, the district court issued "an order establishing a PACA trust and a claims procedure for the beneficiaries ("PACA Claims Order") pursuant to which a number of companies who sold produce to [Washington Produce] for which they had not received payment filed PACA claims against [Washington Produce]." Id. Fresh Kist and Watson subsequently filed motions for summary judgment. Although there were other parties involved in this action, Fresh Kist and Watson were the only parties that filed motions for summary judgment, the only matters considered in the current action. See id.
Fresh Kist asserted in its motion for summary judgment that the defendants--Watson, Norfolk, and Berkley--received funds from Washington Produce after they had knowledge that Washington Produce was insolvent, thereby violating the PACA. See id. at *1. Thus, Fresh Kist argued that the district court should disgorge the funds that were paid to the defendants so that the funds could be distributed pro rata to all of the beneficiaries of the Washington Produce PACA trust. See id. Fresh Kist argued that Watson knew of Washington Produce's insolvency on June 5, 2001 because Watson asserted in his complaint against Washington Produce that Washington Produce was insolvent. See id. Fresh Kist also claimed that the payments made by Washington Produce to Watson "depleted the trust assets to such an extent that other claimants will receive nothing, thereby making those payments to [Watson] a breach of the trust." Id.
Watson argued in his motion for summary judgment that Fresh Kist's claims were not supported by the law because he did not dissipate the trust; Fresh Kist had the burden of proving that the funds received by Watson derived from the sale of produce; and he could not be forced to disgorge the funds he received from Washington Produce because he was a bona fide purchaser of the trust assets. See id.
The district court granted in part and denied in part Fresh Kist's motions for summary judgment. See id. at *2-10. The court denied Watson's motion for summary judgment. See id. The court granted the portion of Fresh Kist's motion for summary judgment that requested $59,189.40 be disgorged from Watson. See id. at * 2. The court denied the portion of Fresh Kist's motion that argued that Watson lost its PACA trust beneficiary status. See id. The court also denied Fresh Kist's argument that Berkley and Norfolk were required to disgorge the funds they received from Washington Produce. See id. With respect to Watson's motion for summary judgment, the court denied it and specifically rejected Watson's assertions that he did not breach or dissipate the PACA trust, that the burden was on Fresh Kist to prove that the funds paid to Watson by Washington Produce derived from the sale of produce, and that Watson was a bona fide purchaser of the PACA trust assets. See id. at *7-9.
The district court agreed with Fresh Kist's argument that Watson was required to disgorge the trust funds received from Washington Produce for a pro rata distribution among the PACA beneficiaries. See id. at *4. The court explained that PACA trusts are governed by general trust principles. Id. (citing Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d. Cir. 1995)). The court also explained that "[u]nder trust law, co-beneficiaries are in a fiduciary relationship with each other so that one beneficiary may not secretly secure for himself a special advantage in the trust administration." Id. (citing GEORGE GLEASON BOGERT & GEORGE TAYLOR BOGERT, THE LAW OF TRUSTS AND TRUSTEES, Sec. 191 at 478 (2nd rev.ed. 1979)). The court stated that the assets of a PACA trust are to be distributed among its beneficiaries in a pro rata fashion when that PACA trust becomes insolvent. Id. (citing In re Milton Poulos, Inc., 947 F.2d 1351, 1352 (9th Cir. 1991)).
The district court also relied on two cases, Finest Fruits, Inc. v. Korean Produce Corp., No. 87 CIV. 6579, 1998 WL 96028 (S.D.N.Y. Sept. 6, 1998), and In re. Milton Poulos, Inc., 947 F.2d 1351 (9th Cir. 1991), to support its decision that Watson was required to disgorge the trust funds. See id. at *5. The district court stated that in Finest Fruits, a beneficiary of a PACA trust "attempted to claim the trust benefits of two co-beneficiaries who filed complaints after the plaintiff on a 'first in time, first in right' theory." Id. The district court stated that the court in Finest Fruits "explained that the purpose of PACA is to protect all unpaid sellers or suppliers of agricultural commodities and Congress intended that trustees distribute assets pro rata among beneficiaries when the trust amount is insufficient to pay all unpaid sellers" and that "'[a] race to the courthouse with winner take all does not seem to accord with this purpose.'" Id. (quoting Finest Fruits at *2-3) (citing 49 Fed. Reg. 45735-36 (1984)). The district court added that "[l]ikewise, the court in Milton Poulos held that a PACA beneficiary's failure to participate in a bankruptcy proceeding did not preclude the beneficiary's priority above other creditors." Id. (citing Milton Poulos, 947 F.2d at 1353). The district court determined that these two cases "indicate that a PACA trust beneficiary who has perfected his claim is entitled to a pro rata distribution of an insolvent trust regardless of whether the PACA trust beneficiary arrived at the courthouse before or after a co-beneficiary." Id.
Moreover, the court noted an Eleventh Circuit holding stating that:
Upon a showing that the [PACA] trust is being dissipated or threatened with dissipation, a district court should require the PACA debtor to escrow its proceeds from produce sales, identify its receivables, and inventory its assets. It should then require the PACA debtor to separate and maintain these produce-related assets as the PACA trust for the benefit of all unpaid sellers having a bona fide claim. Each beneficiary would then be entitled to its pro rata share.
Id. at *6 (quoting Frio Ice, S.A. v. Sunfruit, Inc., 918 F.2d 154, 159 (11th Cir. 1990) (citing 7 U.S.C.A. § 499e(c)(3)).
The district court stated that "allowing one beneficiary to obtain a judgment for greater than its pro rata share of an insolvent trust would be contrary to both the duty of co-beneficiaries in trust law and judicial interpretation of PACA." Id.
The court noted that Watson knew, evidenced by his June 5, 2001 complaint against Washington Produce, that the Washington Produce trust was insolvent at the time it sought and accepted funds from the trust. See id. The complaint stated, in relevant part, that "'[p]laintiff alleges that Defendants have failed to maintain the trust assets and keep them available . . . in that Defendant [Washington Produce] is now insolvent, or is on the verge of insolvency.'" Id. (quoting Watson's Compl. ¶ 19 (C.A. No. 01-1225) (emphasis supplied)).
The court concluded that "the undisputed evidence indicates that at least by June 5, 2001 [Watson] knew that [Washington Produce] was insolvent, and [Watson] nevertheless enforced its PACA beneficiary rights by receiving money from [Washington Produce] after June 5, 2001." Id. at *7 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). Thus, the court granted this portion of Fresh Kist's motion for summary judgment and ordered Watson to disgorge $59,189.40 that he received from the Washington Produce PACA trust "on or after June 5, 2001 for pro rata distribution among all of [Washington Produce's] PACA creditors." Id. The court added that it intended this holding to be interpreted narrowly and to only apply "to situations in which a beneficiary knows that a PACA trustee is insolvent or nearly so and the remedies prescribed by the court reflect the rights among beneficiaries that already exist when a trustee becomes bankrupt." Id.
The court denied the portion of Fresh Kist's summary judgment that argued that Watson had lost his status as a PACA beneficiary, thereby disallowing him the right to share in the pro rata distributions of the PACA trust. See id. at *8. Without an elaborate discussion, the court stated that Watson "is a proper PACA beneficiary with perfected rights to its benefits, and thus denies Fresh Kist's request for a judgment to the contrary . . . . Consequently, this court holds that [Watson] must share the trust benefits it obtained with other beneficiaries of similar standing." Id.
The district court next examined Watson's argument that even if Fresh Kist had a valid claim to the PACA benefits that he received from Washington Produce, he was a bona fide purchaser. See id. Thus, according to Watson, the court was not allowed to force him to disgorge his benefits in the trust. See id. The court stated that "[i]t is settled law that a bona fide purchaser of trust assets 'receives the assets free of any claim by the trust beneficiaries.'" Id. (quoting Endico Potatoes, 67 F.3d at 1067). The court also recognized that some PACA trust cases involving the issue of a bona fide purchaser have held that the PACA creditors could not force the bona fide purchaser to disgorge proceeds from the receivables. Id. (citing Boulder Fruit, 251 F.3d at 1269). The court noted, however, that these cases involve disputes between bankruptcy creditors and PACA beneficiaries, whereas "the instant case involves a dispute between two beneficiaries." Id.
The court stated that "[a] beneficiary who receives trust assets pursuant to a PACA judgment, as [Watson] did, is a beneficiary for purposes of obtaining the judgment. Id. (citing 7 U.S.C. § 499e). The court explained that for Watson "to then become a bona fide purchaser to protect against the claims of other beneficiaries would be illogical." Id. The court concluded that while Watson "was entitled to payment for the commodities it provided to [Washington Produce], it obtained the assets in question pursuant to trust obligations and thereby dissipated the trust assets. Thus, the bona fide purchaser defense is unavailable for [Watson]." Id. (emphasis supplied).
The court also rejected Watson's argument that Fresh Kist had the burden of proving that the funds received by Watson from Washington Produce derived from produce sales. See id. The court stated that "[i]f a bankruptcy trustee cannot prove which of her assets derived from PACA receivables, all of her assets are treated as part of the PACA trust and applied to the claims of PACA beneficiaries prior to other creditors." Id. (citing In re Lombardo Fruit & Produce Co., 12 F.3d 806, 809 (8th Cir. 1993) and Sanzone-Palmisano, 986 F.2d at 1014)). The court explained that "placing the burden of tracing on PACA beneficiaries would make recovery of benefits nearly impossible." Id. (citing In re Lombardo, 12 F.3d at 809 and Sanzone-Palmisano, 986 F.2d at 1014)). The court also explained that "[b]ankrupt debtors must first pay PACA claims from pooled assets if they cannot prove the assets did not derive from the sale of a particular beneficiary's products. Thus, actual monies paid by a PACA debtor quite possibly may derive from sources other than the sale of the beneficiary's produce." Id. at *9 (citing Sanzone-Palmisano, 986 F.2d at 1014).
The district court concluded that because the funds Watson received from Washington Produce resulted from litigation which arose pursuant to the PACA, those funds necessarily constitute trust benefits. See id. The court added that because of this, "Fresh Kist has no burden to prove the origin of those monies and [Watson] should return $59,189.48 to the [Washington Produce] PACA trust for pro rata distribution to the PACA beneficiaries." Id.
Finally, the court rejected Fresh Kist's argument that Norfolk and Berkley were required to disgorge the payments they received from the PACA trust. See id. The court reasoned that neither Berkley or Norfolk were required to disgorge "because the plaintiff has shown no evidentiary basis on which the court could find that Norfolk or Berkley knew of [Washington Produce's] insolvency." Id.
The case was decided on July 31, 2002; this summary was prepared in September, 2002.