Summary of a Recent
Judicial Development in
Perishable Agricultural Commodities

Prejudgment Interest Awarded in PACA Action

Harrison M. Pittman
Staff Attorney

In an action brought by a produce seller against another produce seller and an insolvent produce supplier under the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. §§ 499a-499t, the United States District Court for the District of Columbia has awarded the plaintiff-produce seller prejudgment interest on the disgorged funds after holding in a previous action, Fresh Kist Produce, LLC v. Choi Corp. Inc., 223 F.Supp.2d 1 (D.D.C 2002), that the other produce seller illegally withdrew funds from the PACA trust after the buyer became insolvent. Fresh Kist Produce, LLC v. Choi Corp., Inc., No. 01-1834, 2003 WL 1089300, *4-5 (Mar. 10, 2003).

Fresh Kist Produce, LLC ("Fresh Kist"), and J.C. Watson ("Watson") sold perishable agricultural commodities to Washington Wholesale Produce Company ("WWP"). See id. at *1. In an action that preceded the present case, Watson recovered trust funds from Washington Wholesale Produce Company ("WWP"). See id. The facts of the present case are intertwined with those of the previous action. See id.

In the previous action, Watson claimed that WWP owed it $70,946.00 as payment for perishable agricultural commodities that it delivered to WWP. See id. (citation omitted). Watson asserted in its complaint that WWP was insolvent. See id. WWP subsequently paid $59,189.40 to Watson as part of a settlement agreement between them. See id.

On August 28, 2001, Fresh Kist brought an action seeking "a temporary restraining order and an order establishing a non-party PACA claims procedure." Id. The district court issued a temporary restraining order that froze WWP's PACA trust funds. See id. The court also ordered WWP to pay $11,757.50 into the court's registry, which was the amount it still owed to Watson. See id. Fresh Kist then filed a motion for summary judgment, arguing that Watson "violated applicable laws by taking WWP's PACA trust funds once it knew it was insolvent." See id. (citation omitted). The court ruled that Fresh Kist was "a qualified PACA trust beneficiary" and that Watson "breached and dissipated the PACA trust," did not "enhance the value of the trust," and was required to return the $59,189.40 it had received from WWP. Id. (citation omitted).

Fresh Kist then filed a motion requesting that the court amend its judgment by ordering Watson "to pay pre-judgment interest on the disgorgement amount-the $59,189.40 it accepted from WWP in violation of PACA." Id. at *2. (citation omitted). Fresh Kist argued that prejudgment interest should be awarded because it was needed to compensate PACA trust beneficiaries for the interest that would have accrued had WWP promptly paid them as required by the PACA. See id. (citation omitted). It also argued that prejudgment interest should be calculated from the date that Watson's complaint alleged that WWP was insolvent, which was June 5, 2001, through the date the district court ordered Watson to disgorge the received funds, which was July 31, 2002. See id. The present case involved this motion. See id.

The court explained that although the PACA is silent with respect to the issue of prejudgment interest, the Ninth Circuit has ruled that "district courts have the discretion to award reasonable pre-judgment interest to PACA claimants when the award is needed to protect the interests of PACA claimants." Id. (citing Middle Mountain Land & Produce, Inc. v. Sound Commodities Inc., 307 F.3d 1220, 1226 (9th Cir. 2002)). It also explained that "[c]ourts have consistently awarded pre-judgment interest to compensate . . . produce sellers where . . . produce buyers failed to make adequate payments." Id. (citations omitted). The court stated that to determine whether prejudgment interest should be awarded it had to consider "(1) the need to make the plaintiff whole, (2) the degree of wrongdoing on the part of the defendant, (3) the availability to the plaintiff of investment opportunities, (4) whether [the] plaintiff delayed in bringing the action, and (5) other considerations of fairness." Id. at *4 (citation omitted).

With respect to the first factor, the court determined that prejudgment interest was needed to make the Fresh Kist whole. See id. It noted that while Watson had the $59,189.40, the other PACA beneficiaries were prevented from earning interest on the funds. See id. Not only were the other beneficiaries denied their pro rata share of the $59,189.40 improperly held by Watson, the court explained, they were also denied the interest their pro rata shares would have earned had the funds remained in the statutory trust. See id.

The court determined that the degree of wrongdoing on Watson's part was low. See id. It noted that although Watson knew that WWP was insolvent when it accepted the $59,189.40, in violation of the PACA, there was no reason to believe that Watson acted in bad faith. See id. The court did not analyze the third factor because the record did not reflect any evidence pertaining to investment possibilities available to Fresh Kist. See id.

With respect to the fourth factor, the court determined that Fresh Kist did not delay in bringing its action. See id. It noted that Fresh Kist brought the current action less than two months after Watson's PACA violation, which was within the permissible timeframe recognized in In re W.L. Bradley Co., 78 B.R. 92, 94 (Bankr. E.D. Pa. 1987). In Bradley, the bankruptcy court "found no inequity when the plaintiff waited eight months to file a claim under PACA." Id. (citation omitted).

Finally, the court determined that fairness required an award of prejudgment interest. See id. at *5. It stated that the PACA was enacted "'to increase the legal protection for unpaid sellers and suppliers of perishable agricultural commodities until full payment of sums due have been received by them'" and "to remedy the failure of buyers to pay for goods and to do so in a timely manner." Id. (citations omitted). It ruled that "[a]n award of prejudgment interest effectively remedies the harm caused by payment delays by providing to the plaintiff the amount of interest it would have earned had the payment occurred without delay." Id.

The court concluded that Fresh Kist was "entitled to prejudgment interest from the date of the PACA violation through the date of entry of the court's judgment. [Watson] must pay interest on all funds received from WWP on or after June 5, 2001 . . . up to July 31, 2002, . . . and shall be paid at the statutory rate" set forth in general federal interest statute, 28 U.S.C. § 1961. Id. (citations omitted).

The case was decided on March 10, 2003; this summary was posted May, 2003